[Federal Register Volume 67, Number 229 (Wednesday, November 27, 2002)]
[Notices]
[Pages 70988-70990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-30042]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46860; File No. SR-ISE-2001-15]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the International Securities Exchange LLC, Relating to a 
Pilot Program for Quotation Spreads

November 20, 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 May 25, 2001, the International Securities Exchange LLC (``ISE'' or 
``Exchange'')

[[Page 70989]]

filed with the Securities and Exchange Commission (``Commission'' or 
``SEC'') 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE proposes to amend Supplementary Material .01 to ISE Rule 
803, ``Obligations of Market Makers,'' to establish a six-month pilot 
program in which the allowable quotation spread for options on up to 50 
underlying securities will be $5, regardless of the price of the bid.
    The text of the proposed rule change is available at the ISE 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 establish a six-month 
pilot program to substantially relax the quotation spread requirements 
on the ISE in options on up to 50 underlying securities. Currently, the 
ISE's rules contain maximum quotation spread requirements that vary 
from $.25 to $1, depending on the price of the option. Each ISE market 
maker independently is subject to these requirements. According to the 
ISE, although the primary purpose of the spread requirements is to help 
to maintain narrow spreads, the spread requirements also result in 
individual market makers sometimes quoting at prices that they believe 
are unnecessarily narrow, potentially exposing them to greater risk if 
markets move quickly. The ISE believes that, due to its unique 
electronic competitive market making system, the quotation spread 
requirements may not be necessary to ensure tight and competitive 
quotations on the ISE.
    In this regard, the ISE states that its market structure creates 
strong incentives for competing market makers and other market 
participants to disseminate competitive prices. In the ISE's trading 
system, each market maker quotes independently and customers and 
professional traders can enter limit orders on the ISE's book. The ISE 
automatically collects this trading interest, calculates an ISE best 
bid and offer (``BBO''), and disseminates the BBO to the investing 
public. Furthermore, the ISE allocates trading interest based upon the 
price and size of trading interest. Under the ISE's trading algorithm, 
the ISE allocates volume to trading interest at the best price. The 
larger the size of a person's quote or order at the best price, the 
more trading interest that person receives. The ISE believes that this 
provides strong incentives for market makers and other market 
participants to enter quotes and orders that improve the price and 
depth of the market. The ISE believes that in this model, market forces 
provide sufficient discipline to maintain narrow and competitive 
quotation spreads.
    Accordingly, the ISE proposes to expand the allowable spread in a 
pilot group of up to 50 options (up to five per each of the ISE's ten 
groups of options) to $5.\3\ The ISE states that it will monitor the 
quotation quality of the selected options for a six-month pilot period 
and, based on the results, recommend either relaxing the spread 
requirements for all options, ending the pilot, or adjusting the spread 
requirements.
---------------------------------------------------------------------------

    \3\ At this point, the ISE does not propose to eliminate the 
spread requirements entirely to avoid perception issues about 
extremely wide spreads.
---------------------------------------------------------------------------

(2) Basis
    The ISE believes that the proposed rule change is consistent with 
the requirement under section 6(b)(5) \4\ of the Act that an exchange 
have rules that are 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.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The ISE has not solicited, and does not intend to solicit, comments 
on the proposed rule change. The ISE has not received any unsolicited 
written comments from members or other interested parties.

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 in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
ISE. All submissions should refer to file number SR-ISE-2001-15 and 
should be submitted by December 18, 2002.


[[Page 70990]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
---------------------------------------------------------------------------

    \5\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-30042 Filed 11-26-02; 8:45 am]
BILLING CODE 8010-01-P