[Federal Register Volume 68, Number 25 (Thursday, February 6, 2003)]
[Notices]
[Pages 6232-6233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2949]



[[Page 6232]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47293; File No. SR-ISE-2002-19]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by International Securities Exchange, Inc., Relating to Rules 
Governing the Intermarket Linkage, and Notice of Filing and Order 
Granting Accelerated Approval to Amendment No. 1 Thereto

January 31, 2003.

I. Introduction

    On September 24, 2002, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (the ``Act''),\1\ and rule 19b-4 
thereunder,\2\ a proposed rule change to adopt new Chapter 19 of its 
rules, governing the operation of the intermarket linkage (the 
``Linkage''). The proposed rule change was published for comment in the 
Federal Register on December 26, 2002.\3\ The Commission received no 
comments on the proposed rule change. On January 28, 2003, the Exchange 
filed Amendment No. 1 to the proposed rule change.\4\ This order 
approves the proposed rule change, provides notice of filing of 
Amendment No. 1 and grants accelerated approval to Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 47029 (December 18, 
2002), 67 FR 78834.
    \4\ See letter from Michael J. Simon, Senior Vice President and 
General Counsel, ISE, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation, Commission, dated January 27, 2003 
(``Amendment No. 1''). In Amendment No. 1, the Exchange proposed to 
amend: (1) The definition of ``Linkage Order'' contained in ISE rule 
1900 to state that such orders are immediate or cancel orders; (2) 
ISE rule 1901 to clarify when members may send linkage orders when 
markets are non-firm; (3) ISE rule 1901 to include a provision 
regarding mitigation of damages; (4) ISE rule 1902 to clarify 
language regarding liability for trade-throughs at the end of the 
trading day and to request approval of this provision only for a 
one-year pilot period; and (5) ISE rule 1902 to clarify that members 
may not engage in a pattern or practice of trading through.
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II. Description of Proposal

    In general, the proposed rules contain relevant definitions, 
establish the conditions pursuant to which market makers may enter 
Linkage orders, impose obligations on the Exchange regarding how it 
must process incoming Linkage orders, and establish a general standard 
that members should avoid trade-throughs.\5\ The proposed rules 
establish potential regulatory liability for members who engage in a 
pattern or practice of trading through other exchanges, whether or not 
the exchanges traded through participate in the Linkage, provide 
procedures to unlock and uncross markets, and codify the ``80/20 Test'' 
contained in section 8(b)(iii) of the Plan for the Purpose of Creating 
and Operating an Intermarket Options Linkage (the ``Plan''),\6\ which 
provides that a market maker on an Exchange would be restricted from 
sending principal orders (other than P/A orders, which reflect 
unexecuted customer orders) through the Linkage if the market maker 
effects less than 80 percent of specified order flow on the Exchange. 
The proposed rule change also establishes a fee, which will apply to 
Principal Orders and Principal Acting as Agent Orders. These fees are 
the same fees applicable to ISE market makers.
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    \5\ Trade-throughs occur when broker-dealers execute customer 
orders on one exchange at prices inferior to another exchange's 
disseminated quote.
    \6\ Approved by the Commission in Securities Exchange Act 
Release No. 43086 (July 28, 2000), 65 FR 48023 (August 4, 2000), as 
subsequently amended. See Securities Exchange Act Release No. 44482 
(June 27, 2001), 66 FR 35470 (July 5, 2001) (``Initial Amendment 
Order'') and Securities Exchange Act Release No. 46001 (May 30, 
2002), 67 FR 38687 (June 5, 2002); 47274 (January 29, 2003); and 
47298 (January 31, 2003).
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III. Discussion

    The Commission has reviewed the ISE's proposed rule change and 
finds that the proposal is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange,\7\ and with the requirements of section 6(b).\8\ 
In particular the Commission finds that the proposed rule change is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles 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 for a free and open market and a national market system, and, 
in general, to protect investors and the public interest in accordance 
with section 6(b)(5) of the Act.\9\ The Commission also finds that the 
proposed fee change is consistent with section 6(b)(4) of the Act \10\ 
in that it represents an equitable allocation of reasonable dues, fees 
and other charges among its members and other persons using its 
facilities.
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    \7\ In approving this rule proposal, the Commission notes that 
it has also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78f(b)(4).
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    The Commission believes that the rules proposed by the ISE will 
adequately govern the operation of the Linkage as envisioned in the 
Plan. The Commission believes that these rules will help to ensure that 
the Linkage is operated fairly and effectively, in accordance with the 
principles of the Act and the Plan.
    The Commission also finds good cause for approving proposed 
Amendment No. 1 prior to the 30th day after the date of publication of 
notice of filing thereof in the Federal Register. Amendment No. 1 
proposes several changes to the Exchange's original proposal that are 
designed to conform the Exchange's rules governing linkage more closely 
to the Plan. The provisions of the Plan have already been subject to 
notice and comment, and have been approved by the Commission. The 
changes proposed in Amendment No. 1 do not raise any novel regulatory 
issues, and therefore, it is appropriate for the Commission to 
accelerate approval of Amendment No. 1.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1 to the proposed rule change, 
including whether Amendment No. 1 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 Amendment No. 1 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 Exchange. All submissions should refer 
to File No. SR-ISE-2002-19 and should be submitted by February 27, 
2003.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-ISE-2002-19), be, and hereby 
is, approved, and that Amendment No. 1 to the proposed

[[Page 6233]]

rule change be, and hereby is, approved on an accelerated basis.
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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. 03-2949 Filed 2-5-03; 8:45 am]
BILLING CODE 8010-01-U