[Federal Register Volume 67, Number 56 (Friday, March 22, 2002)]
[Notices]
[Pages 13388-13389]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-6895]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45568; File No. SR-ISE-2001-32]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 Thereto by the International 
Securities Exchange LLC To Increase the Minimum Quote Size for Certain 
Option Classes

March 15, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 16, 2001, the International Securities Exchange LLC 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The ISE amended its proposal on February 13, 2002 \3\ and on 
March 13, 2002.\4\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division 
of Market Regulation (``Division''), Commission, dated February 12, 
2002 (``Amendment No. 1''). In Amendment No. 1, the ISE proposes to 
replace the original rule filing in its entirety and specifies the 
options to be included in the pilot program rather than allowing 
Primary Market Makers (``PMMs'') to choose the options to be 
included in the pilot.
    \4\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division, 
Commission, dated March 12, 2002 (``Amendment No. 2''). In Amendment 
No. 2, the ISE proposes to clarify that, in the pilot program, new 
enhanced size levels would apply to customer and broker-dealer 
orders, but not to the orders of market makers on either the ISE or 
other exchanges.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The ISE proposes to adopt a three-month pilot program establishing 
greater size requirements for certain quotations in specified options. 
The text of the proposed rule change is available at the ISE and at the 
Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the ISE included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The ISE has prepared summaries, set forth 
in Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Currently, ISE market makers must establish and maintain quotations 
that are firm for at least 10 contracts for customers and 1 contract 
for non-customers. The ISE now wishes to adopt a three-month pilot 
program in which ISE market makers would be required to establish and 
maintain quotations of a larger minimum size in a limited number of 
option classes. Specifically, the details of the three-month pilot 
program are as follows:
     The pilot would apply to the following options: \5\ Nasdaq 
100 Trust; Sun Microsystems; EMC Corp.; Qualcomm; Wells Fargo & Co.; 
Oracle; Lucent; Juniper Networks; Intel; AOL

[[Page 13389]]

Time Warner; Tyco; Citigroup; Cisco; Applied Materials; Microsoft; 
General Electric; Broadcom; Nokia; and Siebel Systems.\6\
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    \5\ For the purpose of the three-month pilot program, an 
``option'' refers to all put and call options on the same underlying 
security.
    \6\ See Amendment No. 1, supra note 3.
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     The pilot would last for three months.
     For PMMs, the minimum size for quotes would be 100 
contracts for customers and 50 contracts for broker-dealers.\7\ For 
Competitive Market Makers (``CMMs''), the size requirements would be 
half of the PMM requirement: 50 contracts for customers and 25 
contracts for broker-dealers. The enhanced broker-dealer size would not 
apply to executions against other market makers, where the minimum size 
would continue to be 1 contract.\8\
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    \7\ This enhanced quotation size requirement will not affect the 
PMM's obligation under ISE Rule 803(c)(1) to disseminate a quotation 
of at least 10 contracts when the quotation consists, in part, of a 
customer order for less than 10 contracts.
    \8\ See Amendment No. 2, supra note 4.
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     These enhanced size requirements would apply only to the 
options series in the three months closest to expiration. Moreover, the 
pilot would not apply to ``deep-in-the-money'' options \9\ or an option 
in the last three days of that option's trading. That is, the pilot 
would not apply for the last three days of trading during an option 
series' expiration week.
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    \9\ The proposed rule change defines ``deep-in-the-money'' as 
all options with strike prices that are in the money by four or more 
pricing intervals in relation to the at-the-money strike price. See 
proposed Supplementary Material .03 to ISE Rule 804.
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    The ISE's intent in establishing the pilot program is to help 
determine the potential effect that increased minimum size requirements 
would have on the quality of the ISE's market and on the Exchange's 
ability to attract order flow. The ISE believes that it is likely that 
larger size guarantees would help the Exchange attract more order flow. 
However, the Exchange is concerned that requiring larger size could 
lead to a degradation of the quality of the Exchange's quotation. The 
Exchange believes that limiting the pilot to the specified options 
would tend to limit any adverse effects of the higher minimum size 
requirement. Specifically, the included options represent 19 of the 22 
options with the highest trading volume in the industry, and thus, are 
the most liquid options. The Exchange chose these pilot stocks in 
consultation with its PMMs and CMMs.\10\
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    \10\ Telephone conversation between Michael Simon, Senior Vice 
President and General Counsel, ISE, and Cyndi Nguyen, Attorney, 
Division, Commission, on March 15, 2002.
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    The Exchange intends to monitor the effects of the pilot closely. 
Prior to the expiration of the pilot, the Exchange would determine 
whether to end the pilot or whether to continue an enhanced size 
requirement in this or some other form. If the Exchange determines to 
continue an enhanced size requirement, it would file the appropriate 
rule change with the Commission.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act \11\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act \12\ in particular, 
because it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of change, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change, as amended.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the ISE. All submissions should refer to File No. 
SR-ISE-2001-32 and should be submitted by April 12, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-6895 Filed 3-21-02; 8:45 am]
BILLING CODE 8010-01-P