[Federal Register Volume 67, Number 129 (Friday, July 5, 2002)]
[Notices]
[Pages 44905-44906]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16772]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46129; File No. SR-ISE-2002-17]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the International Securities 
Exchange, Inc. To Extend Its Enhanced Size Pilot

June 26, 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 June 19, 2002, the International Securities Exchange, Inc. (``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 ISE. 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 proposes to extend its ``Enhanced Size Pilot'' (the 
``Pilot'') until October 31, 2002. The Exchange also proposes to add 17 
new options to the Pilot and to amend the definition of ``deep-in-the-
money'' options that are excluded from the Pilot. The text of the rule 
change is available at the Office of the Secretary of the Exchange 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 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
    The purpose of the proposed rule change is to extend and expand the 
Exchange's Enhanced Size Pilot. On April 25, 2002, the Commission 
approved the Pilot, requiring market makers to quote in larger size for 
19 of the 25 most-actively-traded options.\3\ This is currently a 
three-month Pilot scheduled to expire on July 25, 2002. The initial 
analysis of trading pursuant to the Pilot indicates: the average size 
of the ISE's quotations in these options has increased; there has been 
no adverse effect on quotation spreads; and ISE market share has 
increased in these options.
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    \3\ Securities Exchange Act Release No. 34-45823 (April 25, 
2002); 67 FR 22143 (May 2, 2002) (File No. SR-ISE-20010-23).
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    Based on these initial, though limited results, the Exchange 
proposes to extend the Pilot for an additional three months, through 
October 31, 2002. ISE also proposes to increase the Pilot to include 17 
additional options out of the 50 most-active options: Banc of America; 
Ciena; Dell; Fannie Mae; Motorola; Merrill Lynch; Nvidia; Xilinx; 
Amazon.com; Halliburton; Nextel Communications; J.P. Morgan Chase; ADC 
Telecommunication; Best Buy; Calpine; General Motors; and Hewlett

[[Page 44906]]

Packard. We have determined to include these particular options in the 
Pilot based on recommendations by our market makers.
    In all other respects, except one, the Pilot will remain unchanged. 
For Primary Market Makers (``PMMs''), the minimum size for quotes will 
continue to be 100 contracts for customers and 50 contracts for broker-
dealers, although 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. For Competitive 
Market Makers, the size requirements will continue to be half of the 
PMM requirement: 50 contracts for customers, 25 contracts for broker-
dealers. The enhanced broker-dealer size will not apply to executions 
against other market makers, where the minimum size would continue to 
be one contract.
    These enhanced size requirements will apply only to the options 
series in the three months closest to expiration. Moreover, the pilot 
will not apply to ``deep-in-the-money'' options, or an option in the 
last three days of that option's trading (that is, the pilot will not 
apply for the last three days of trading during an option series' 
expiry week). In the one change to the Pilot, ISE proposes to amend the 
definition of ``deep-in-the-money.'' Currently, the rule excludes 
options that are deep-in-the-money, with the definition based on the 
number of pricing intervals a strike is from the at-the-money strike. 
ISE proposes to change this by defining ``deep-in-the-money'' to mean 
options with strike prices that are in the money by 12 percent or more 
in relation to the price of the underlying stock. This change to the 
definition is based on market makers' experience trading under the 
Pilot today, and ISE believes that this amended definition will reduce 
market makers' exposure to risk, while continuing to apply the Pilot to 
options representing over two-thirds of all trading volume.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \4\ that an exchange have rules that 
are designed 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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    \4\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The ISE believes that the proposed rule change does not 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

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

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

    Because the foregoing rule change: (i) Does not significantly 
affect the protection of investors or the public interest; (ii) does 
not impose any significant burden on competition; (iii) does not become 
operative for 30 days from the date of filing; and (iv) the Exchange 
provided the Commission with notice of its intent to file the proposed 
rule change at least five days prior to the filing date, the proposed 
rule change has become effective pursuant to section 19(b)(3)(A) of the 
Act \5\ and Rule 19b-4(f)(6) \6\ thereunder.
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    \5\ 15 U.S.C. 78s(b)(3)(A).
    \6\ 17 CFR 240.19b-4(f)(6).
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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 in the 
Commission's Public Reference Room. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
ISE. All submissions should refer to File No. SR-ISE-2002-17 and should 
be submitted by July 26, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-16772 Filed 7-3-02; 8:45 am]
BILLING CODE 8010-01-P