[Federal Register Volume 67, Number 84 (Wednesday, May 1, 2002)]
[Notices]
[Pages 21788-21789]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-10713]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45811; File No. SR-ISE-2001-34]


Self Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the International Securities Exchange LLC Amending Its 
Obvious Error Rule

April 24, 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 19, 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 Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange is proposing to amend the definition of the term 
``obvious error'' contained in ISE Rule 720 for options with a 
theoretical price of less than $3.00. With respect to such options, an 
obvious error will be deemed to have occurred when the execution price 
of a transaction is higher or lower than the theoretical price for the 
series by an amount of $0.25 or more. Proposed new language is 
italicized; proposed deletions are in brackets.
* * * * *
Rule 720. Obvious Errors
    The Exchange shall either bust a transaction or adjust the 
execution price of a transaction that results from an Obvious Error as 
provided in this Rule.
    (a) Definition of Obvious Error. For purposes of this Rule only, an 
Obvious Error will be deemed to have occurred when:
    (1) if the Theoretical Price of the option is less than $3.00, the 
execution price of a transaction is higher or lower than the 
Theoretical Price for the series by an amount of 25 cents or more; or
    (2) if the Theoretical Price of the option is $3.00 or higher:
    (i) during regular market conditions (including rotations), the 
execution price of a transaction is higher or lower than the 
Theoretical Price for the series by an amount equal to at least two (2) 
times the maximum bid/ask spread allowed for the option, so long as 
such amount is 50 cents or more; or
    (ii)[(2)] during fast market conditions (i.e., the Exchange has 
declared a fast market status for the option in question), the 
execution price of a transaction is higher or lower than the 
Theoretical Price for the series by an amount equal to at least three 
(3) times the maximum bid/ask spread allowed for the option, so long as 
such amount is 50 cents or more.
* * * * *

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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change 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

[[Page 21789]]

Exchange 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
    ISE Rule 720 gives the Exchange authority to bust or adjust trades 
that result from an obvious error. The rule contains objective 
standards regarding the definition of an ``obvious error,'' the 
circumstances under which a trade should be adjusted or busted, and the 
price to which a trade should be adjusted if adjustment is appropriate. 
The Rule currently defines an obvious error based upon the market 
conditions and the difference between the execution price and the 
``theoretical price'' of the options series. To be an obvious error, 
the difference in execution and theoretical price must be the greater 
of $0.50 or two times the allowable spread in regular market conditions 
(three times the allowable spread in ``fast market'' conditions).
    The current rule does not directly consider the price at which the 
particular options series is trading in determining whether there has 
been an obvious error (although the allowable spread does increase as 
an option's price increases). The ISE represents that in administering 
the Rule, it has found that (1) the price of an option is a significant 
factor in determining when there is an obvious error; and (2) a pricing 
error in an options series trading at less than $3.00 can often be 
significant even if it does not meet the current $0.50 minimum 
requirement. The Exchange thus proposes that the standard for 
determining the existence of an obvious error for options series 
trading at less than $3.00 be whether the difference between the 
execution price and the theoretical price is at least $0.25.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \3\ in general, and furthers the 
objectives of Section 6(b)(5) \4\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism for a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
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    \3\ 15 U.S.C. 78f(b).
    \4\ 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 will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    The Exchange did not solicit or receive written comments on the 
proposed rule change.

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 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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-ISE-2001-34 and 
should be submitted by May 22, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-10713 Filed 4-30-02; 8:45 am]
BILLING CODE 8010-01-P