[Federal Register Volume 69, Number 8 (Tuesday, January 13, 2004)]
[Notices]
[Pages 2030-2032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-617]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49023; File No. SR-ISE-2003-37]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the International Securities Exchange, Inc. To Amend the 
Procedures for Executing Stock-Option Orders Under ISE Rule 722

January 5, 2004.
    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 December 18, 2003, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') 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 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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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 proposes to revise the procedures for executing stock-
option orders by: (1) automating the transmission of the stock leg(s) 
of a stock-option combination order to a broker-dealer on behalf of 
members; and (2) allowing for the pricing of the options leg(s) of 
stock-option combination orders in penny increments.
    The text of the proposed rule change appears below. New text is in 
italic. Deleted text is in brackets.\3\
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    \3\ With the Exchange's consent, the Commission has made 
technical corrections to the proposed rule text. Telephone 
conversation between Katherine Simmons, Vice President and Associate 
General Counsel, ISE, and Christopher Solgan, Attorney, Division of 
Market Regulation, Commission, on December 30, 2003.

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[[Page 2031]]

Rule 722. Complex Orders
* * * * *
    (b) Applicability of Exchange Rules. Except as otherwise provided 
in this Rule, complex orders shall be subject to all other Exchange 
Rules that pertain to orders generally.
    (1) Minimum Increments. Bids and offers on complex orders may be 
expressed in any decimal price, and the option leg(s) of a stock-option 
order may be executed in one cent increments, regardless of the minimum 
increments otherwise [appropriate] applicable to the individual option 
legs of the order. Complex orders expressed in net price increments 
that are not multiples of the minimum increment are not entitled to the 
same priority under subparagraph (b)(2) of this Rule as such orders 
expressed in increments that are multiples of the minimum increment.
* * * * *
Supplementary Material to Rule 722
    .01 A bid or offer made as part of a stock-option order (as defined 
in (a)(5)(i) above) or a SSF-option order (as defined in (a)(5)(ii) 
above) is made and accepted subject to the following conditions: (1) 
the order must disclose all legs of the order and must identify the 
security (which in the case of a single stock future requires 
sufficient identification to determine the market(s) on which the 
single stock future trades) and the price at which the non-option 
leg(s) of the order is to be filled; and (2) concurrent with the 
execution of the options leg of the order, the initiating member and 
each member that agrees to be a contra-party on the non-option leg(s) 
of the order must either elect to have the stock leg(s) of a stock-
option order electronically communicated to a designated broker-dealer 
for execution as provided in .02 below or take steps immediately to 
transmit the non-option leg(s) to a non-Exchange market(s) for 
execution. Failure to observe these requirements will be considered 
conduct inconsistent with just and equitable principles of trade and a 
violation of Rule 400.
    A trade representing the execution of the options leg of a stock-
option or SSF-option order may be cancelled at the request of any 
member that is a party to that trade only if market conditions in any 
of the non-Exchange market(s) prevent the execution of the non-option 
leg(s) at the price(s) agreed upon.
    .02 Automated Stock-Option Orders. A Member may elect to have the 
Exchange electronically communicate the stock leg(s) of a stock-option 
order to a designated broker-dealer for execution. To make such an 
election, the Member must enter into a brokerage agreement with the 
designated broker-dealer. The Exchange will automatically transmit the 
stock leg(s) of a trade to the designated broker-dealer for execution 
on behalf of the Member. A trade of a stock-option order will be 
automatically cancelled if market conditions prevent the execution of 
the stock or option leg(s) at the prices necessary to achieve the 
agreed upon net price.
* * * * *

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 Exchange proposes to revise the procedures for executing stock-
option orders by: (1) Automating the transmission of the stock leg(s) 
of a stock-option combination order to a broker-dealer on behalf of 
members; and (2) allowing for the pricing of the options leg(s) of 
stock-option combination orders in penny increments.
Automatic Transmission of Stock Legs
    Supplementary Material .01 to ISE Rule 722 currently describes a 
manual procedure by which a stock-option order may be executed on the 
Exchange. This manual procedure requires each party to a stock-option 
trade to take steps immediately to transmit the stock leg(s) of the 
order to a non-Exchange market for execution. The Exchange proposes to 
offer an automated process for the communication of stock-option orders 
by electronically transmitting the orders related to the stock leg(s) 
for execution on behalf of the parties to the trade. To participate in 
this automated process for stock-option orders, an ISE member must 
enter into a customer agreement with the designated broker-dealer. In 
addition, each member will be responsible for whatever fees and other 
charges the designated broker-dealer imposes for executing the trades. 
The Exchange will not receive any fees related to the stock portion of 
the stock-option trade. Members will be able to continue using the 
current manual procedure for execution of stock-option orders if they 
choose.
    The electronic communication of the orders by the Exchange 
eliminates the necessity for each party to the trade to separately 
communicate orders to the broker-dealer for execution, thereby making 
the process more efficient. Once the orders are communicated to the 
broker-dealer for execution, the broker-dealer has complete 
responsibility for determining whether the orders may be executed in 
accordance with all of the rules applicable to execution of equity 
orders, including compliance with the applicable short-sale, trade-
through and trade reporting rules. As with the current manual 
procedure, if the broker-dealer cannot execute the equity orders at the 
designated price, the stock-option combination order will not be 
executed on the Exchange.
Penny Pricing for Options Legs of Stock-Option Orders
    Because the options leg(s) of a stock-option order must be executed 
in $.05 increments (for options trading below $3) and $.10 increments 
(for options trading at or above $3),\4\ while the stock leg(s) of a 
stock-option order trades in $.01 increments, it is not always possible 
to achieve a proposed net price for stock-option orders. For example, 
suppose an investor proposes to buy stock and sell options at a net 
price of $8.50. If the stock is $11.72 bid to $11.74 offered, and the 
option is $3.20 bid to $3.30 offered, a net price of $8.50 cannot be 
achieved without executing the option leg at $3.22, $3.23, or $3.24.\5\ 
Therefore, the Exchange proposes to allow for the execution of the 
option leg(s) of stock-option combination orders in one-cent increments 
to allow investors greater opportunities to receive execution of their 
stock-option orders. The options leg(s) of a stock-option order will 
continue to be reported through the Options Price Reporting Authority 
(``OPRA'') with a code that indicates that the trade was

[[Page 2032]]

part of a complex order. The actual price of the trade will be 
reported.
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    \4\ See ISE Rule 710.
    \5\ To execute the order within the bid and offer for the stock 
and the option, a net price of $8.50 could only be achieved by (1) 
executing the stock at $11.72 and the option at $3.22 ($11.72-
$8.50); (2) executing the stock at $11.73 and the option at $3.23 
($11.73-$8.50); or (3) executing the stock at $11.74 and the option 
at $3.24 ($11.74-$8.50).
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(2) Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the Act in general, and Section 6(b)(5) \6\ in particular. The 
Exchange states that the proposed rule change is intended 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. The Exchange further believes that the automated 
procedure for transmitting the stock leg(s) of a stock-option order 
would provide a more efficient means for members to execute orders, and 
the execution of the options leg(s) of a stock-option order in $.01 
minimum increments would improve investors' ability to receive 
execution of their orders.
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    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    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 Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. 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 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. 
Comments should be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-ISE-2003-37. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your comments more efficiently, comments should be sent in hard 
copy or by e-mail but not by both methods. 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 filings will also be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-ISE-2003-37 and should be 
submitted by February 3, 2004.

    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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-617 Filed 1-12-04; 8:45 am]
BILLING CODE 8010-01-P