[Federal Register Volume 68, Number 58 (Wednesday, March 26, 2003)]
[Notices]
[Pages 14728-14729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7119]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47532; File No. SR-ISE-2001-15]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the International Securities Exchange LLC Relating to a Pilot 
Program for Quotation Spreads

March 19, 2003.

I. Introduction

    On May 25, 2001, the International Securities Exchange LLC (``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 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change 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 (the ``Pilot Options'') will 
be $5, regardless of the price of the bid.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The ISE's pilot program will include only equity options and 
not index options. Telephone conversation between Mike Simon, Senior 
Vice President and General Counsel, ISE, and Yvonne Fraticelli, 
Special Counsel, Division of Market Regulation (``Division''), 
Commission, on February 25, 2003.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on November 27, 2002.\4\ No comments were received regarding 
the proposal. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 46860 (November 20, 
2002), 67 FR 70988.
---------------------------------------------------------------------------

II. Description

    Currently, the ISE's rules contain maximum quotation spread 
requirements that generally vary from $.25 to $1, depending on the 
price of the option. Specifically, ISE Rule 803(b)(4) requires options 
market makers to bid and offer so as to create differences of no more 
than $.25 between the bid and offer for each options contract for which 
the bid is less than $2; no more than $.40 where the bid is at least $2 
but does not exceed $5; no more than $.50 where the bid is more than $5 
but does not exceed $10; no more than $.80 where the bid is more than 
$10 but does not exceed $20; and no more than $1 where the bid is $20 
or greater. The bid/offer differentials do not apply to in-the-money 
options series when the spread in the underlying securities market is 
wider than the differentials set forth above. For such series, ISE Rule 
803(b)(4) permits the bid/ask differential to be as wide as the 
quotation on the primary market of the underlying security.
    The ISE proposes to expand the allowable spread to $5 in up to 50 
Pilot Options (up to five per each of the ISE's ten options bins). The 
ISE represents that it will monitor the quotation quality of the Pilot 
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.

III. Discussion

    The Commission finds that, due to the ISE's market structure, 
discussed in greater detail below, the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\5\ 
Specifically, the Commission finds that the proposal, which will allow 
ISE market makers to widen their quotations for Pilot Options when they 
believe that market conditions require wider spreads, is consistent 
with section 6(b)(5) of the Act \6\ 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 and, 
in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \5\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes generally that maximum quotation spread 
parameters in the options market are important safeguards to ensure 
that market maker quotes in options are not unnecessarily wide. The 
Commission nevertheless believes that the ISE provides sufficiently 
strong incentives for market makers to disseminate competitive quotes 
without maximum quotation spread parameters. Specifically, each ISE 
market maker uses an automatic quotation system to quote independently, 
customers and professional traders can enter limit orders on the ISE's 
book, and market makers are only allocated trades when they are quoting 
at the best price. Moreover, the larger the size of a market maker's 
quote, the larger portion of a trade it is allocated. The Commission 
believes that these attributes and rules of the ISE provide strong 
market incentives for market makers to

[[Page 14729]]

maintain narrow and competitive quotation spreads. Consequently, the 
Commission believes that the ISE's proposal to establish a $5 maximum 
spread on a pilot basis in 50 options classes is consistent with the 
Act.
    The ISE is implementing the proposal on a six-month pilot basis. 
Prior to the conclusion of the pilot program, the ISE has agreed to 
submit a report to the Commission assessing the operation of the pilot 
program and, in particular, the quality of the quotations for the Pilot 
Options.\7\ The report will include: (1) The identity of the Pilot 
Options; (2) information concerning the frequency with which quotations 
for the Pilot Options were narrower than the current quote spread 
parameters for options at that price, at the current quote spread 
parameters for options at that price, and wider than the current quote 
spread parameters for options at that price; (3) the average quotation 
spread for each Pilot Option during each month of the pilot program; 
(4) the widest and narrowest quote spreads for each Pilot Option during 
each month of the pilot program; (5) any problems that developed during 
the pilot program and how the ISE addressed those problems; and (6) any 
additional information that would help the Commission assess the pilot 
program.
---------------------------------------------------------------------------

    \7\ Telephone conversation between Mike Simon, Senior Vice 
President and General Counsel, ISE, and Yvonne Fraticelli, Special 
Counsel, Division, Commission, on March 19, 2003.
---------------------------------------------------------------------------

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposal 
is consistent with the requirements of the Act and rules and 
regulations thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-ISE-2001-15) is approved as a 
six-month pilot program to expire on September 19, 2003.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78s(b)(2).

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

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-7119 Filed 3-25-03; 8:45 am]
BILLING CODE 8010-01-P