[Federal Register Volume 69, Number 35 (Monday, February 23, 2004)]
[Notices]
[Pages 8252-8253]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3774]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49251; File No. SR-ISE-2003-37]


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

February 13, 2004.

I. Introduction

    On December 18, 2003, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``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 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 
proposed rule change was published for comment in the Federal Register 
on January 13, 2004.\3\ The Commission received no comments on the 
proposed rule change. This order approves the proposed rule change.
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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. 49023 (January 5, 
2004), 69 FR 2030.
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II. Description of the Proposal

    Under the ISE's current procedure for executing stock-option 
orders, each party to a stock-option trade must take steps to 
immediately transmit the stock leg(s) of a stock-option order to a non-
ISE market for execution. The ISE has proposed to amend Supplementary 
Material .01 to ISE Rule 722 and to adopt Supplementary Material .02 to 
ISE Rule 722 to provide an automated process for executing stock-option 
orders. Under the automated process, an ISE member will be able to 
elect to have the ISE electronically communicate the stock leg(s) of a 
stock-option order to a designated broker-dealer for execution. To 
participate in the automated process, an ISE member must enter into a 
customer agreement with the designated broker-dealer. The ISE member 
will be responsible for fees and other charges the designated broker-
dealer imposes for executing the trades, and the ISE has stated that it 
will not receive any fees

[[Page 8253]]

related to the stock portion of the stock-option trade.
    After the stock leg(s) of the orders are communicated to the 
designated broker-dealer for execution, the designated broker-dealer 
will be responsible for determining whether the orders may be executed 
in accordance with all of the rules applicable to the execution of 
equity orders, including compliance with the applicable short sale, 
trade-through, and trade reporting rules. As with the current 
procedure, the stock-option order will not be executed on the ISE if 
the broker-dealer cannot execute the equity orders at the designated 
price. ISE members will be able to continue using the current manual 
procedure for executing stock-option orders if they choose to do so.
    Because the options leg 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 trade in $.01 increments, the ISE notes that it is not 
always possible to achieve the desired net price for stock-option 
orders. Accordingly, the ISE has proposed to amend ISE Rule 722(b)(1) 
to permit the execution of the option leg(s) of stock-option orders in 
one-cent increments. The options leg(s) of a stock option order will 
continue to be reported through the Options Price Reporting Authority 
(``OPRA'') with a code indicating that the trade was part of a complex 
order. The trade will be reported at its actual price.
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    \4\ See ISE Rule 710.
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III. Discussion

    The Commission finds that 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\ In 
particular, the Commission believes that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\6\ which requires, among 
other things, that the Exchange's rules be designed 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. The 
Commission believes that permitting the execution of the options leg(s) 
of a stock-option order in one-cent increments and allowing ISE members 
to elect to have the ISE electronically communicate the stock leg(s) of 
a stock-option order to a designated broker-dealer for execution should 
facilitate the execution of stock-option orders. The Commission notes 
that an ISE member that elects to have the ISE electronically 
communicate the stock leg(s) of a stock-option order to a designated 
broker-dealer must enter into a customer agreement with the designated 
broker-dealer. In addition, the Commission notes that the ISE's current 
procedure for executing stock-option orders will continue to be 
available to ISE members that choose not to use the automated 
procedure.
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    \5\ In approving the proposed rule change, 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).
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change 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,\7\ that the proposed rule change (SR-ISE-2003-37) is approved.
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    \7\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-3774 Filed 2-20-04; 8:45 am]
BILLING CODE 8010-01-P