[Federal Register Volume 67, Number 223 (Tuesday, November 19, 2002)]
[Notices]
[Pages 69777-69779]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-29243]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46814; File No. SR-ISE-2002-23]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the International Stock 
Exchange, Inc. To Amend Rule 720 Regarding Options Priced Under $3.00

November 12, 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 16, 2002, the International Stock Exchange, Inc. (``ISE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change.
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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 Rule 720 (the ``Obvious Error 
Rule'') as it pertains to transactions in options priced under $3.00. 
The text of the proposed rule change is set forth below. 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[,]:
    (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 of [25] 35 cents or more; 
or
    (ii) 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 of 50 cents or more.
    (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) 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 the proposed rule change and discussed any 
comments it received on the proposed

[[Page 69778]]

rule change. The text of these statements may be examined at the places 
specified in Item IV below. The 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
    On June 25, 2002, the Commission approved an amendment to the ISE 
Rule 720 (``June Amendment''),\3\ which gives the Exchange authority to 
bust or adjust trades that result from an obvious error based upon 
objectives standards for determining the circumstances under which a 
trade should be adjusted or busted. In the June Amendment, the Exchange 
changed the standard for determining the existence of an obvious error 
for options series trading under $3.00. Specifically, the June 
Amendment provided that an obvious error would be deemed to have 
occurred if the difference between the execution price and the 
theoretical price is at least $.25. The June Amendment did not change 
ISE Rule 720 with respect to options trading at or above $3.00, which 
requires the difference between the execution price and theoretical 
price of an option be at lease twice the allowable spread in normal 
market conditions and three times the allowable spread in fast market 
conditions.
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    \3\ See Securities Exchange Act Release No. 46110 (June 25, 
2002), 67 FR 44487 (July 2, 2002).
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    The Exchange's experience since the June Amendment indicates that a 
difference of only $.25 is too low and may allow trades that are not 
obviously erroneous to qualify for obvious error treatment. In 
addition, the June Amendment did not provide for a larger difference 
between the execution price and the theoretical price during fast 
market conditions, as is the case for options price at and above $3.00. 
Accordingly, the Exchange proposes to increase the amount by which the 
execution price of an option priced under $3.00 must differ from the 
theoretical price from $.25 to $.35 in normal market conditions, and to 
provide that the difference must be at least $.50 in fast market 
conditions. This proposal will allow fewer executions to qualify as 
obvious errors, and therefore fewer situations where a trade may be 
busted or adjusted under ISE Rule 720.
    The ISE developed Rule 720 to address the need to handle errors in 
a fully electronic market where orders and quotes are executed 
automatically before an obvious error may be discovered and corrected 
by ISE members. In formulating ISE Rule 720, the Exchange has weighed 
carefully the need to assure that one market participant is not 
permitted to receive a windfall at the expense of another market 
participant that made an obvious error, against the need to assure that 
market participants are not simply being given an opportunity to 
reconsider poor trading decisions. This proposed rule change reflects 
the Exchange's constant evaluation of the obvious error rule and its 
fairness to all market participants.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with section 
6(b) of the Act \4\ in general and furthers the objectives of section 
6(b)(5) \5\ 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 
of a free and open market and a national market system, to protect 
investors and the public interest.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 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 Exchange Act.

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

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

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

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A) of the Act \6\ and Rule 19b-4(f)(6) \7\ thereunder because 
the proposal: (i) Does not significantly affect the protection of 
investors or the public interest; (ii) does not impose any significant 
burden on competition; and (iii) does not become operative prior to 30 
days after the date of filing or such shorter time as the Commission 
may designate if consistent with the protection of investors and the 
public interest. In addition, the Exchange provided the Commission with 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at least 
five business days prior to the date of the filing the proposed rule 
change as required by Rule 19b-4(f)(6). In addition, the Exchange 
provided the Commission with written notice of its intent to file the 
proposed rule change, along with a brief description and text of the 
proposed rule change, at least five business days prior to the date of 
the filing the proposed rule change as required by Rule 19b-4(f)(6). At 
any time within 60 days of the filing of such proposed rule change, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors or otherwise in furtherance 
of the purposes of the Act.
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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4(f)(6).
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    The ISE has requested that the Commission waive the 30-day 
operative delay. The Commission believes waiving the 30-day operative 
delay is consistent with the protection of investors and the public 
interest. The Commission believes that it is reasonable for the ISE, 
based upon its experience in administering the Rule, to amend the Rule 
to state that the standard for determining the existence of an obvious 
error for options series trading at less than $3.00 be whether, in 
regular market conditions, the difference between the execution price 
and the theoretical price for the series is at least $.35, and whether, 
during fast market conditions, the difference between the execution 
price and the theoretical price for the series is at least $.50. The 
Commission notes that the proposal refines the June Amendment, which 
itself was noticed for public comment and received no comment. For 
these reasons, the Commission designates the proposal to be effective 
and operative as of the date of this order.\8\
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    \8\ For purposes only of accelerating the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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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

[[Page 69779]]

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-2002-23 and should be 
submitted by December 10, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\

    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-29243 Filed 11-18-02; 8:45 am]
BILLING CODE 8010-01-U