[Federal Register Volume 69, Number 84 (Friday, April 30, 2004)]
[Notices]
[Pages 23841-23842]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9793]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49602; File No. SR-ISE-2003-26]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Order Granting Approval to a Proposed Rule Change by the 
International Securities Exchange, Inc. To Amend Its Rules Governing 
Limits on the Entry of Orders of Less Than Ten Contracts and Revising 
the Quotation Size Requirements for Market Makers

April 22, 2004.
    On October 14, 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 repeal the limits on the entry 
of orders and revise the quotation requirements of market makers. On 
January 13, 2004, the ISE filed Amendment No. 1 to the proposed rule 
change.\3\ On January 30, 2004, the ISE filed Amendment No. 2 to the 
proposed rule change.\4\ On March 8, 2004, the ISE filed Amendment No. 
3 to the proposed rule change.\5\ The proposed rule change, as amended, 
was published for comment in the Federal Register on March 17, 2004.\6\ 
The Commission received no comment letters on the proposal. This order 
approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
January 12, 2004 (``Amendment No. 1'').
    \4\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Nancy J. Sanow, Assistant Director, 
Division, Commission, dated January 29, 2004. (``Amendment No. 2'').
    \5\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Nancy J. Sanow, Assistant Director, 
Division, Commission, dated March 5, 2004. (``Amendment No. 3'').
    \6\ See Securities Exchange Act Release No. 49393 (March 10, 
2004), 69 FR 12724.
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    The proposed rule change revises the ISE's restrictions on the 
entry of orders of less than 10 contracts, along with related market 
maker quotation requirements. Specifically, the proposed rule change 
removes the prohibition on Electronic Access Members (``EAMs'') 
submitting orders for non-customers that cause the ISE's best bid and 
offer (``BBO'') to be for less than 10 contracts, and removes the 
prohibition on EAMs entering multiple orders for the same trading 
interest if one or more orders are for less than 10 contracts. Further, 
the proposed rule change repeals the obligation of the Primary Market 
Maker (``PMM'') either to ``trade out'' customer orders of less than 10 
contracts or ``derive'' additional size to maintain a 10-contract 
displayed size. PMMs must continue, however, to ``derive'' size by 
buying or selling the number of contracts needed to maintain a firm 
quote for at least 10 contracts to incoming orders from the Options 
Market Linkage. Finally, the proposed rule change repeals the 
requirement that market makers refresh their quotations if there is an 
execution that results in the size of the ISE's BBO falling below 10 
contracts. The proposed rule change, however, retains the obligation 
that market makers initially enter quotations for a size of at least 10 
contracts, which the ISE believes is a necessary obligation for market 
makers to provide reasonable liquidity to the market place.
    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange \7\ 
and, in particular, the requirements of section 6 of the Act \8\ and 
the rules and regulations thereunder. Specifically, the Commission 
believes that the proposed rule change is consistent with section 
6(b)(5) of the Act,\9\ which, among other things, requires that the 
ISE'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.
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    \7\ In approving this proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed rule change, as amended,

[[Page 23842]]

should provide greater transparency to investors and the marketplace 
and should better reflect the true state of liquidity in the 
marketplace. Specifically, as proposed, the actual size of customer 
limit orders representing the ISE's BBO will be disseminated rather 
than an artificial minimum size. In addition, the Commission notes that 
this aspect of the proposal is similar to rules on other options 
exchanges.\10\ In addition, the proposal will permit non-customer 
orders of less than 10 contracts that improve the ISE BBO to be 
disseminated.
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    \10\ See Securities Exchange Act Release Nos. 46325 (August 8, 
2002), 67 FR 53376 (August 15, 2002) (SR-Phlx-2002-15); 46029 (June 
4, 2002), 67 FR 40362 (June 12, 2002) (SR-PCX-2002-30); 45067 
(November 16, 2001), 66 FR 58766 (November 23, 2001) (SR-CBOE-2001-
56); 47959 (May 30, 2003), 68 FR 34441 (June 9, 2003) (SR-CBOE-2002-
05); and 48957 (December 18, 2003), 68 FR 79254 (December 30, 2003) 
(SR-AMEX-2003-24)
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    Finally, the Commission notes that market makers will be permitted 
to maintain a quote that represents the ISE's BBO for a size less than 
10 contracts when executions have decremented their initial quote to 
less than 10 contracts. However, because market makers will be required 
to initially enter a quote for at least 10 contracts, the Commission 
believes that market makers would still be obligated to add liquidity 
to the market.\11\
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    \11\ The Commission notes that ISE market makers must maintain a 
continuous quote for the options in which they make a market. See 
ISE Rules 803(b) and 804(e).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (File No. SR-ISE-2003-26) is 
hereby approved, as amended.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-9793 Filed 4-29-04; 8:45 am]
BILLING CODE 8010-01-P