[Federal Register Volume 67, Number 85 (Thursday, May 2, 2002)]
[Notices]
[Page 22143]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-10811]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45823; File No. SR-ISE-2001-32]


Self-Regulatory Organizations; International Securities Exchange 
LLC; Order Granting Approval to Proposed Rule Change and Amendment Nos. 
1 and 2 Thereto Relating to a Pilot Program To Increase the Minimum 
Quote Size for Certain Option Classes

April 25, 2002.
    On November 16, 2001, the International Securities Exchange LLC 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt a three-month pilot 
program establishing greater size requirements for certain quotations 
in specified options. The ISE amended its proposal on February 13, 2002 
\3\ and on March 13, 2002.\4\ The proposed rule change, as amended, was 
published for comment in the Federal Register on March 22, 2002.\5\ The 
Commission received no comments on the proposal, as amended.
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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 proposed to 
replace the original rule filing in its entirety and specified 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 proposed 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.
    \5\ See Securities Exchange Act Release No. 45568 (March 15, 
2002), 67 FR 13388.
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    The Commission finds that the proposed rule change and Amendment 
Nos. 1 and 2 are consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange,\6\ and in particular, the requirements of Section 6 of the 
Act \7\ and the rules and regulations thereunder. Specifically, the 
Commission finds that the proposal 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 is consistent with section 6(b)(5) of the Act \8\ because it is 
designed to promote just and equitable principals of trade, 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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    \6\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the increased minimum size for quotes for 
PMMs would be 100 contracts for customers and 50 contracts for broker-
dealers.\9\ For Competitive Market Makers, the size requirements would 
be half of the PMM requirement: 50 contracts for customers and 25 
contracts for broker-dealers. However, the enhanced broker-dealer size 
would not apply to executions against other market makers, where the 
minimum size would continue to be one contract. Furthermore, these 
enhanced size requirements would apply only to the options series in 
the three months closest to expiration, and the pilot would not apply 
to ``deep-in-the-money'' options \10\ or an option in the last three 
days of that option's trading.
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    \9\ 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 ten contracts when the quotation consists, in part, of a 
customer order for less than ten contracts.
    \10\ The proposed rule change defined ``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.
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    The Commission believes that the larger size requirements may help 
the Exchange attract more order flow. In addition, the Commission 
believes that limiting the pilot program to the specified options 
should permit the Exchange to monitor the effects of the proposal on 
the quality of the ISE's market before implementing the proposal across 
the Exchange. In this regard, the Commission notes that the included 
options represent 19 of the 22 options with the highest trading volume 
in the industry, and thus, may be the most liquid options. The 
Commission also believes that limiting the program to the specified 
options on a three-month pilot basis should minimize any potential 
adverse effects of the proposal. The Commission expects the ISE, and 
the Exchange represents that it intends, to monitor the effects of the 
pilot program closely.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and rules and regulations thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\11\, that the proposed rule change and Amendment Nos. 1 and 2 (File 
No. SR-ISE-2001-32) be, and it hereby is, approved, as a pilot program, 
to expire on July 25, 2002.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-10811 Filed 5-1-02; 8:45 am]
BILLING CODE 8010-01-P