[Federal Register Volume 68, Number 190 (Wednesday, October 1, 2003)]
[Notices]
[Pages 56660-56661]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24866]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48539; File No. SR-ISE-2003-03]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by International Securities 
Exchange, Inc., Relating to Market Maker Obligations

September 25, 2003.
    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 February 19, 2003, the International Securities Exchange, Inc. 
(``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which items have been prepared by the self-
regulatory organization. On September 15, 2003, the Exchange amended 
the proposed rule change.\3\ The Commission is publishing this notice 
to solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Michael J. Simon, Senior Vice President and 
General Counsel, Exchange, to Nancy Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
September 12, 2003 (``Amendment No. 1''). In Amendment No. 1, the 
Exchange amended the proposed rule change to be more specific in the 
obligations of Primary Market Makers in handling customer orders.
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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 ISE Rule 803 to clarify the 
obligations of the ISE's Primary Market Makers (``PMMs'') if they 
receive orders from persons who are not brokers or dealers in 
securities (``Public Customers'') when there is a better price 
available on another exchange. The text of the proposed rule change, as 
amended, is set forth below. Proposed new language is in italics; 
proposed deletions are in [brackets].\4\
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    \4\ At the request of the Exchange, Commission staff has revised 
the text of the proposed rule change set forth in Amendment No. 1 to 
(i) correct a typographical error; and (ii) make a non-substantive 
technical change correcting the numbering of the Supplementary 
Material to Rule 803. The Exchange plans to submit an amendment to 
the Commission to make these technical corrections. Telephone 
conversation among Michael J. Simon, Senior Vice President and 
General Counsel, Exchange, Jennifer Colihan, Special Counsel, 
Division, Commission, and Ann E. Leddy, Attorney, Division, 
Commission on September 24, 2003.
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* * * * *
Rule 803. Obligations of Market Makers
* * * * *
    (c) Primary Market Makers. In addition to the obligations contained 
in this Rule for market makers generally, for options classes to which 
a market maker is the appointed Primary Market Maker, it shall have the 
responsibility to:
    (1) Assure that each disseminated market quotation in each series 
of options is for a minimum of ten (10) contracts, or such other 
minimum number as the Exchange shall set from time to time. When the 
best bid (offer) on the Exchange represents one or more Public Customer 
Orders for less than a total of ten (10) contracts at that price, the 
Primary Market Maker is obligated to buy (sell) at that price the 
number of contracts needed to make the disseminated quote firm for ten 
(10) contracts.
    (2) As soon as practical, [A]address Public Customer Orders that 
are not automatically executed because there is a displayed bid or 
offer on another exchange trading the same options contract that is 
better than the best bid or offer on the Exchange, either (i) by 
executing a Public Customer Order at a price that matches the better 
price displayed or (ii) by sending to any other exchange(s) displaying 
a better price a Linkage Order(s) according to the Rules contained in 
Chapter 19.
* * * * *
Supplementary Material to Rule 803
    .01 No change.
    .02 A Primary Market Maker must act with due diligence in handling 
orders of Public Customers and must accord priority to such orders 
addressed pursuant to paragraph (c) of this Rule over the Primary 
Market Maker's principal orders.
* * * * *

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, 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 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
    The purpose of the proposed rule change is to clarify the 
obligations of PMMs when they receive orders from Public Customers and 
there is a better price available on another exchange. When the ISE 
receives a Public Customer order in this situation, the ISE does not 
provide immediate execution of that order. Rather, the PMM is informed 
that the order is pending, and ISE Rule 803 requires that the PMM 
``address'' such order. In practice, the PMM historically either has 
executed the order at the better price or has attempted to use whatever 
means the PMM had available to access the better market on behalf of 
the customer.
    On January 31, 2003, the intermarket linkage (``Linkage'') between 
the ISE and the other options exchanges became operational. Among other 
things, the Linkage permits PMMs to send Principal Acting as Agent 
Orders (``P/A Orders'') to other exchanges. This is a

[[Page 56661]]

vehicle that provides PMMs with much-improved access to away markets on 
behalf of Public Customer orders they are holding.
    With Linkage in place, the ISE believes that it is appropriate to 
be more specific regarding the PMM's obligations to ``address'' Public 
Customer orders when there is a better price on another market. 
Accordingly, the Exchange proposes to amend ISE Rule 803 to specify 
that the PMM must, as soon as practical, either execute the order at 
the best available price or send a P/A Order through Linkage to obtain 
the best price for the order. Proposed Supplementary Material .02 to 
ISE Rule 803 states that a PMM must act with due diligence in handling 
such Public Customers orders and must accord such orders priority over 
the PMM's principal orders.
2. Statutory Basis
    The ISE believes that the proposed rule change, as amended, is 
consistent with section 6(b) of the Act,\5\ in general, and section 
6(b)(5) of the Act,\6\ in particular, in that it 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.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The ISE does not believe that the proposed rule change, as amended, 
imposes 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 Exchange has not solicited, and does not intend to solicit, 
comments on the proposed rule change, as amended. The Exchange 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 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, as amended, 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 Section, 450 Fifth Street, 
NW, Washington, DC 20549-0609. 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 No. SR-ISE-2003-03 and should 
be submitted by October 22, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-24866 Filed 9-30-03; 8:45 am]
BILLING CODE 8010-01-P