[Federal Register Volume 67, Number 212 (Friday, November 1, 2002)]
[Notices]
[Pages 66693-66695]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-27809]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46723; File No. SR-ISE-2002-24]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the International Securities Exchange, Inc. Relating to 
Quotation Size

October 25, 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 October 11, 2002, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``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 that all ISE's quotations would be firm for 
all incoming orders for their full disseminated size. The ISE would 
retain a one-contract minimum size for quotations when they interact 
with quotations entered by other ISE market makers. The proposed rule 
change would be implemented when the Commission approves the proposal 
and grants the Exchange an exemption from Rule 11Ac1-1 (the ``Firm 
Quote Rule'') under the Act, and when the Exchange implements technical 
enhancements to its system necessary to support this change. Below is 
the text of the proposed rule change. Additions are italicized. 
Brackets indicate deletions.
* * * * *

Rule 804.--Market Maker Quotations

    (a) Options Classes. A quotation only may be entered by a market 
maker, and only in the options classes to which the market maker is 
appointed under Rule 802.
    (b) Size Associated with Quotes. A market maker's bid and offer for 
a series of options contracts shall be accompanied by the number of 
contracts at that price the market maker is willing to buy [from] or 
sell (i) upon receipt of an order (``Order Execution Size'') and (ii) 
upon interaction with a quotation entered by another market maker on 
the Exchange (``Quotation Execution Size'') [to (i) Public Customers 
(the ``Public Customer Size'') and (ii) Non-Customers (the ``Non-
Customer Size'')]. Unless the Exchange has declared a fast market 
pursuant to Rule 704, a market maker may not initially enter an Order 
Execution Size [a bid or offer with a Public Customer] of less than ten 
(10) contracts. Where the size associated with a market maker's bid or 
offer falls below ten (10) contracts due to executions at that price 
and consequently the size of the best bid or offer on the Exchange 
would be for less than ten (10) contracts, the market maker shall enter 
a new bid or offer for at least ten (10) contracts, either at the same 
or a different price. Every market maker bid or offer must have a 
Quotation Execution [a Non-Customer] Size of at least one (1) contract.
    (c) Two-Sided Quotes. A market maker that enters a bid (offer) on 
the Exchange must enter an offer (bid) within the spread allowable 
under Rule 803(b)(4).
    (d) Firm Quotes. (1) Market maker bids and offers are firm for 
orders and Exchange market maker quotations [Public Customer Orders and 
Non-Customer Orders] both under this Rule and Rule 11Ac1-1 under the 
Exchange Act (``Rule 11Ac1-1'') for the number of contracts specified 
[for each] according to the requirements of paragraph (b) above. Market 
maker bids and offers are not firm under this Rule and Rule 11Ac1-1 if:
    (i) a system malfunction or other circumstance impairs the 
Exchange's ability to disseminate or update market quotes in a timely 
and accurate manner;
    (ii) the level of trading activities or the existence of unusual 
market conditions is such that the Exchange is incapable of collecting, 
processing, and making available to quotation vendors the data for the 
option in a manner that accurately reflects the current state of the 
market on the Exchange, and as a result, the market in the option is 
declared to be ``fast'' pursuant to Rule 704;
    (iii) during trading rotations; or
    (iv) any of the circumstances provided in paragraph (c)(3) of Rule 
11Ac1-1 exist.
    (2) Within thirty seconds of receipt of an order [a Public Customer 
Order (Non-Customer Order)] to buy or sell an option in an amount 
greater than the Order Execution Size, or within thirty seconds of 
another Exchange market maker entering a quotation at a price 
executable against the market maker's quotation [Public Customer Size 
(Non-Customer Size)], that portion of the order equal to the Order 
Execution Size, or the Quotation Execution Size, as the case may be, 
[Public Customer Size

[[Page 66694]]

(Non-Customer Size)] will be executed and the bid or offer price will 
be revised.
[Supplementary Material to Rule 804
    .01 Notwithstanding the provisions of paragraph (b), for the 
``Enhanced Size Pilot'' described in .02 below, a Primary Market Maker 
may not initially enter a bid or offer for a Public Customer of less 
than 100 contracts, and a bid or offer for Non-Customers (except for 
other market makers) of less than 50 contracts. Also for the purposes 
of the Enhanced Size Pilot, a Competitive Market Maker may not 
initially enter a bid or offer for a Public Customer of less than 50 
contracts, and a bid or offer for Non-Customers (except for other 
market makers) of less than 25 contracts. Where the size associated 
with a market maker's bid or offer falls below such specified size, the 
market maker shall enter a new bid or offer for at least the specified 
size, either at the same or a different price.
    .02 The Enhanced Size Pilot shall operate as follows:
    (1) The Enhanced Size Pilot shall operate until October 31, 2002;
    (2) Securities included in the Enhanced Size Pilot are options on: 
Nasdaq 100 Trust; Sun Microsystems; EMC Corp.; Qualcomm; Wells Fargo 
&Co. Oracle; Lucent; Juniper Networks; Intel; AOL Time Warner; Tyco; 
Citigroup; Cisco; Applied Materials; Microsoft; General Electric; 
Broadcom; Nokia; Siebel Systems; 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 Packard; and
    (3) The size requirements in the Enhanced Size Pilot will not 
apply:
    (a) To options that expire beyond the nearest three expiration 
months;
    (b) To ``Deep-in-the-Money'' options; or
    (c) On an option's last three trading days prior to expiration.
    03. For the purpose of this Rule, ``Deep-in-the-Money'' means all 
options with strike prices that are in the money by 12 percent or more 
in relation to the at-the-money strike price.]
* * * * *

Rule 805.--Market Maker Orders

* * * * *
    (c) Limitations on Orders. A market maker shall not enter more than 
one order every fifteen (15) seconds for its own account in options on 
the same underlying security; provided, however, that this shall not 
apply to multiple orders in different series of options on the same 
underlying security if such orders are part of a spread.
    [Exemptive Authority. Until the earlier of (1) one year from the 
date on which the Exchange commences operations or (2) the date on 
which the Exchange opens all options Groups for trading, an Exchange 
official designated by the Board may grant market makers exemptions 
from the requirements of subparagraphs (b)(2) and (3) of this rule, 
subject to the following:
    (1) If a market maker has only one Membership, and thus is assigned 
to only one Group, any exemption would end when the assigned Group is 
open for trading, regardless of the number of options classes that 
begin trading in the assigned Group;
    (2) If a market maker has multiple Memberships, and thus is 
assigned to trading in more than one Group, the exemption would end 
when all the market maker's Groups are open for trading, again 
regardless of the number of options classes that begin trading in the 
assigned Groups; as the market maker's assigned Groups open for 
trading, the amount of trading the market maker would be permitted to 
execute outside of its assigned Groups would be reduced;
    (3) Any exemption would be conditioned on the member performing 
market maker functions in the classes they trade;
    (4) An exemption could be revoked by the Exchange at any time if 
the market maker is not acting in accordance with the terms of the 
exemption; and
    (5) No exemption would have a term of more than one month, but 
would be renewable on a monthly basis until the market maker's group(s) 
was open for trading.]
* * * * *

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 this proposed rule change is to provide that all ISE 
quotations would be firm for all incoming orders for their full 
disseminated size. This would be the first time that any options 
exchange provides non-customers (that is, broker-dealers) with full 
access to the entire disseminated size of the exchange's quotations for 
all their orders. The specifics of the proposal are as follows:
    [sbull] Each ISE Primary Market Maker and Competitive Market Maker 
would enter a quotation with a single size, available in full for all 
incoming orders, whether from customers, broker-dealers, ISE market 
makers or market makers on other exchanges.
    [sbull] Each market maker also would be able to establish a second 
quotation size that would be available when its quotation interacts 
with another ISE market maker quotation. This would limit an ISE market 
maker's exposure when it establishes a quotation at the same price as 
an existing ISE market maker quotation in the system. While this 
interaction of quotations is beneficial from a price-discovery 
standpoint, there is significant risk in this situation because 
execution can occur simultaneously in multiple series. While market 
makers would be able to limit this risk by setting their size to a 
smaller number of at least one contract, ISE market makers would be 
able to access the full size of another market maker's quotation by 
sending an order in that series.\3\
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    \3\ Implementing this aspect of the proposal would require the 
Commission to grant an exemption from the Firm Quote Rule. While 
that rule permits market makers to set smaller sizes for all non-
customer orders, it does not permit different quotation sizes for 
different categories of professionals. Simultaneously with 
submitting this proposed rule change, the ISE submitted a separate 
exemption request.
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    [sbull] The ISE also proposes to prohibit market makers from 
sending more than one order every 15 seconds in options on the same 
underlying security. ISE Rule 717(h) currently imposes this limitation 
on orders that Electronic Access Members send to the Exchange. This 
limitation reduces a market maker's exposure across multiple series of 
options.\4\ This restriction, however, does not currently apply to 
market maker orders since market makers generally have established 
nominal

[[Page 66695]]

quotations for other market makers. Because ISE market makers now would 
be able to enter orders accessing another market maker's full size, ISE 
proposes to extend this 15-second limitation to ISE market maker 
orders.
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    \4\ See Securities Exchange Act Release No.44017 (February 28, 
2001), 66 FR 13820 (March 7, 2001) (File No. SR-ISE-2000-20).
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    [sbull] Finally, the ISE proposes two technical ``clean up'' 
changes to its rules. First, the Exchange proposes to delete language 
from Rule 804 regarding the ``enhanced size pilot'' that would expire 
on October 31, 2002. Second, the Exchange proposes to delete language 
from Rule 805 regarding limited exemptive authority that expired a year 
after the Exchange commenced trading.
2. Statutory Basis
    The basis for this proposed rule change is the requirement under 
section 6(b)(5) of the Act \5\ 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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    \5\ 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

    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 self-regulatory organization 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 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-2002-24 and should 
be submitted by November 22, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-27809 Filed 10-31-02; 8:45 am]
BILLING CODE 8010-01-P