[Federal Register Volume 69, Number 12 (Tuesday, January 20, 2004)]
[Notices]
[Pages 2798-2800]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1080]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49056; File No. SR-ISE-2003-07]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by International Securities 
Exchange, Inc., Relating to Pricing of Block and Facilitation Trades

January 12, 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 February 25, 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 December 18, 2003, the Exchange amended the 
proposed rule change. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE is proposing to provide for the entry and execution of 
block and facilitation trades at the midpoint between the standard 
trading increments. The text of the proposed rule change is set forth 
below. Proposed new language is in italics; proposed deletions are in 
[brackets].
* * * * *

Rule 716. Block Trades

* * * * *
    (a) Block-Size Orders. Block-size orders are orders for fifty (50) 
contracts or more.
    (b) For purposes of this Rule, a ``broadcast message'' means an 
electronic message that is sent by the Exchange to all Members, and a 
``Response'' means an electronic message that is sent by Members in 
response to a broadcast message [the term ``Crowd Participants'' means 
the market makers appointed to an options class under Rule 803, as well 
as other

[[Page 2799]]

Members with proprietary orders at the inside bid or offer for a 
particular series].
    (c) Block Order Mechanism. The Block Order Mechanism is a process 
by which a Member can obtain liquidity for the execution of block-size 
orders.
    (1) Upon the entry of an order into the Block Order Mechanism, a 
broadcast message will be sent and Members [to the Crowd Participants, 
which] will be given an opportunity to enter Responses [respond to the 
broadcast message (a ``Response'')] with [indications of] the prices 
and sizes at which they would be willing to trade with a block-size 
order.
    (2) At the conclusion of the time given [Crowd Participants] 
Members to enter Responses, either an execution will occur 
automatically, or the order will be cancelled.
    (i) No change.
    (ii) No change.
    (iii) No change.
    (d) Facilitation Mechanism. The Facilitation Mechanism is a process 
by which an Electronic Access Member can facilitate block-size Public 
Customer Orders. Electronic Access Members must be willing to 
facilitate the entire size of orders entered into the Facilitation 
Mechanism.
    (1) Upon the entry of an order into the Facilitation Mechanism, a 
broadcast message will be sent [to the crowd Participants, which] and 
Members will be given an opportunity to enter Responses with the prices 
and sizes at which [indicate whether] they want to participate in the 
facilitation of the [Public Customer] order [at the facilitation price 
(an ``Indication'')].
    (2) [Indications] Responses may be priced at the price of the order 
to be facilitated or at a better price[, so long as such better price 
is to buy (sell) at a price that is below (above) the ISE best bid 
(offer),] and must not exceed the size of the order to be facilitated.
    [(3) Crowd Participants may indicate a willingness to facilitate an 
order at an improved price that is equal to or higher (lower) than the 
best bid (offer) on the Exchange by entering orders or changing their 
quotes, as applicable.]
    [(4)] (3) At the end of the period given for the entry of Responses 
[Indications], the facilitation order will be automatically executed in 
full.
    (i) Unless there is sufficient size to execute the entire 
facilitation order at a better price, Public Customer bids (offers) [on 
the Exchange] at the time the facilitation order is executed that are 
priced higher (lower) than the facilitation price will be executed at 
the facilitation price. Non-Customer bids (offers) [on the Exchange] at 
the time the facilitation order is executed that are priced higher 
(lower) than the facilitation price will be executed at their stated 
price, thereby providing the order being facilitated a better price for 
the number of contracts associated with such higher bids (lower 
offers).
    (ii) The facilitating Electronic Access Member will execute at 
least forty percent (40%) of the original size of the facilitation 
order, but only after better-priced orders and quotes, as well as 
Public Customer Orders at the facilitation price are executed. 
[Indications] Responses, quotes and Non-Customer Orders at the 
facilitation price will participate in the execution of the 
facilitation order based upon the percentage of the total number of 
contracts available at the best price that is represented by the size 
of the Non-Customer Order or quote.

Supplementary Material to Rule 716

    .01 It will be a violation of a Member's duty of best execution to 
its customer if it were to cancel a facilitation order to avoid 
execution of the order at a better price. The availability of the 
Facilitation Mechanism does not alter a Member's best execution duty to 
get the best price for its customer. Accordingly, while facilitation 
orders can be canceled during the time period given for the entry of 
[Indications] Responses, if a Member were to cancel a facilitation 
order when there was a superior price available on the Exchange and 
subsequently re-enter the facilitation order at the same facilitation 
price after the better price was no longer available without attempting 
to obtain that better price for its customer, there would be a 
presumption that the Member did so to avoid execution of its customer 
order in whole or in part by other brokers at the better price.
    .02 Responses represent non-firm interest that can be canceled at 
any time prior to execution. Responses are not displayed to any market 
participants.
    .03 Responses may not be entered for the account of an options 
market maker from another options exchange.
    .04 The time given to [Crowd Participants] Members to enter 
Responses under paragraph (c)(1) shall be thirty (30) seconds, and for 
[Indications] Responses entered under paragraph (d)(1) shall be ten 
(10) seconds.
    .05 Split Prices. Orders and Responses may be entered into the 
Block, Solicited Order and Facilitation Mechanisms and receive 
executions at the mid-price between the standard minimum trading 
increments for the options series (``Split Prices''). This means that 
orders and Responses for options with a minimum increment of 5 cents 
may be entered into the Block, Solicited Order and Facilitation 
Mechanisms and receive executions in 2.5 cent increments (e.g., $1.025, 
$1.05, $1.075, etc.), and that orders and Responses for options with a 
minimum increment of 10 cents may be entered into the Block, Solicited 
Order and Facilitation Mechanism and receive executions at 5 cent 
increments (e.g., $4.05, $4.10, $4.15, etc.). Orders and quotes in the 
market that receive the benefit of the block execution price under 
paragraph (c)(2)(i) and facilitation price under paragraph (d)(2)(i) 
may also receive executions at Split Prices.
* * * * *

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 this proposed rule change is to permit the ISE to 
execute and report block and facilitation trades at prices that are 
priced at the midpoint between the standard $.05 and $.10 trading 
increments (a ``Split Price''). The ISE believes that this would 
provide ISE members with greater flexibility in the pricing of their 
block-size trades and allow a greater opportunity for price improvement 
for large-size orders. The ISE also believes that the proposed rule 
change also would provide a mechanism to allow the ISE to be 
competitive with the floor-based exchanges where there are informal 
procedures that permit trades to effectively receive Split Prices.
    Specifically, the Exchange proposes to allow orders to be entered 
into the Block and Facilitation Mechanisms in $.025 increments for 
options with a standard minimum trading increment of $.05 (e.g., 
$1.025, $1.05, $1.075, etc.) and in $.05 increments for options with a 
standard minimum trading increment of

[[Page 2800]]

$.10 (e.g., $4.05, $4.10, $4.15, etc.). In addition, Exchange members 
would be able to respond to a Block or Facilitation broadcast message 
in $.025 increments for options with a minimum trading increment of 
$.05 and in $.05 increments for options with minimum trading increment 
of $.10, whether or not the order is entered at a standard increment. 
For example, if an order to sell 500 contracts were to be entered into 
the Facilitation Mechanism at a price of $4.00, members would be able 
to respond with a price of $4.05. If an order were to be executed at a 
Split Price, the Exchange would report the trade with the Split Price 
to the Options Price Reporting Authority (``OPRA''). The trade would be 
cleared by The Options Clearing Corporation (``OCC'') at the Split 
Price as well.
    In connection with the proposal to allow Split Prices in the Block 
and Facilitation Mechanism, the Exchange also proposes to expand 
participation in the Block and Facilitation Mechanisms. Currently, when 
an order is entered into either Mechanism, a message is sent to ``Crowd 
Participants,'' who are given a certain amount of time to respond if 
they are interested in participating in the block-size trade. ``Crowd 
Participants'' are ISE market makers appointed to the options class and 
other ISE members with proprietary orders at the inside bid or offer 
for a particular series. Instead of limiting the broadcast message to 
the Crowd Participants, the Exchange proposes to send a broadcast 
message to all members and permit all members to respond if they wish 
to participate in the block-size transaction. The Exchange proposes, 
however, to prohibit the entry of a response that is for the account of 
an options market maker from another options exchange. The Exchange 
believes that this narrow limitation is necessary because ISE market 
makers are not given an opportunity to participate in trades executed 
on the floors of the other options exchanges. As a result, ISE believes 
that its market makers would be at a competitive disadvantage if 
options market makers from other exchanges were given such opportunity 
at the ISE.
    The ISE also proposes to eliminate a restriction on the price at 
which members are permitted to respond to an order entered into the 
Facilitation Mechanism. Under the current rule, Crowd Participants are 
only permitted to respond at the proposed facilitation price. If a 
Crowd Participant wants to provide a better price to the order being 
facilitated, it must enter an order or quote into the market. As the 
ISE is only proposing to allow Split Pricing for block-size orders 
executed through the Block and Facilitation Mechanisms, it would be 
necessary to remove this limitation in order to allow members to 
respond at Split Prices.
    Finally, the Exchange proposes to clarify the rule by providing 
definitions of a ``broadcast message'' and a ``Response'' and using 
those terms consistently throughout the rule. In addition, the proposal 
would add language to indicate that the Responses would represent non-
firm interest that would be able to be canceled at any time prior to 
execution, and that Responses would not be displayed to any market 
participants. The ISE states that this has always been the case, but 
was not previously included in the text of the rule.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under section 6(b)(5) \3\ that an exchange have rules that 
are designed 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 believes that 
the proposed rule change would provide investors with greater 
flexibility to execute options orders in the ISE's electronic system at 
the same Split Prices they are able to obtain on the other options 
exchanges. The ISE believes the proposed rule change would also provide 
greater opportunity for price improvement of block-size orders.
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    \3\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    This proposed rule change does not impose any burden on 
competition. Rather, it will allow the ISE to better compete with the 
other options exchanges for block-size orders.

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. 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. Comments may also be submitted electronically at the 
following e-mail address: [email protected]. All comment letters 
should refer to File No. SR-ISE-2003-07. This file number should be 
included on the subject line if e-mail is used. To help the Commission 
process and review comments more efficiently, comments should be sent 
in hardcopy 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 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-2003-07 and should be submitted by February 
10, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1080 Filed 1-16-04; 8:45 am]
BILLING CODE 8010-01-P