[Federal Register Volume 69, Number 103 (Thursday, May 27, 2004)]
[Notices]
[Pages 30352-30354]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12025]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49754; File No. SR-ISE-2003-22]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the International Securities 
Exchange, Inc., Relating to Permanent Approval of the Pilot Program for 
Quotation Spreads

May 21, 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 September 24, 2003, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the ISE.\3\ On May 20, 2004, the ISE filed Amendment No. 1 to 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.
    \3\ See letter from Michael J. Simon, Senior Vice President and 
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division 
of Market Regulation (``Division''), Commission, dated May 19, 2004 
and accompanying Form 19b-4 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    On March 19, 2003, the Commission approved an ISE proposal to 
establish a pilot program permitting the allowable quotation spread for 
options on up to 50 equity securities to be $5, regardless of the price 
of the bid (``Pilot Program'').\4\ The Pilot Program was extended 
several times, most recently until June 29, 2004, and expanded to 
include all equity options trading on the ISE.\5\ The ISE proposes to 
make the Pilot Program permanent and to expand the Pilot Program to 
include index options as well as equity options. The text of the 
proposed rule change appears below. Additions are italicized; deletions 
are bracketed.
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    \4\ See Securities Exchange Act Release No. 47532, 68 FR 14728 
(March 26, 2003) (order approving File No. SR-ISE-2001-15) (``Pilot 
Program Approval Order'').
    \5\ See Securities Exchange Act Release Nos. 48514 (September 
22, 2003), 68 FR 55685 (September 26, 2003) (notice of filing and 
immediate effectiveness of File No. SR-ISE-2003-21) (extending the 
Pilot Program through January 31, 2004); 49149 (January 29, 2004) 69 
FR 05627 (notice of filing and immediate effectiveness of File No. 
SR-ISE-2004-02) (extending the Pilot Program through March 31, 
2004); and 49509 (March 31, 2004) 69 FR 18411 (April 7, 2004), 
(notice of filing and immediate effectiveness of File No. SR-ISE-
2004-10) (extending the Pilot Program through June 29, 2004, and 
expanding the Pilot Program to include all equity options listed on 
the ISE) (``Pilot Expansion Notice'').
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* * * * *

Rule 803. Obligations of Market Makers

* * * * *
    (b) Appointment. With respect to each options class to which a 
market maker is appointed under Rule 802, the market maker has a 
continuous obligation to engage, to a reasonable degree under the 
existing circumstances, in dealings for his own account when there 
exists, or it is reasonably anticipated that there will exist, a lack 
of price continuity, a temporary disparity between the supply of and 
demand for a particular options contract, or a temporary distortion of 
the price relationships between options contracts of the same class. 
Without limiting the foregoing, a market maker is expected to perform 
the following activities in the course of maintaining a fair and 
orderly market:
* * * * *
    (4) To price options contracts fairly by, among other things, 
bidding and offering so as to create differences of no more than $5 
between the bid and offer following the opening rotation in an equity 
or index options contract. Prior to the opening rotation, spread 
differentials shall be no more than \1/4\ of $1 between the bid and 
offer for each options contract for which the bid is less than $2, no 
more than \3/8\ of $1 where the bid is at least $2 but does not exceed 
$5, no more than \1/2\ of $1 where the bid is more than $5 but does not 
exceed $10, no more than \3/4\ of $1 where the bid is more than $10 but 
does not exceed $20, and no more than $1 where the bid is $20 or 
greater, provided that the Exchange may establish differences other 
than the above for one or more options series. The bid/offer 
differentials stated above shall not apply to in-the-money options 
series where the underlying securities market is wider than the 
differentials set forth above. For these series, the bid/ask 
differential may be as wide as the quotation on the primary market of 
the underlying security.
* * * * *

Supplementary Material to Rule 803

    [.01 Pursuant to paragraph (b)(4) of Rule 803, during a pilot 
period expiring on June 29, 2004, all options classes may be quoted 
with a difference not to exceed $5 between the bid and offer regardless 
of the price of the bid.]
    [.02] .01 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 ISE 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 ISE has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

[[Page 30353]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The ISE's rules contain maximum quotation spread requirements that 
vary from $.25 to $1.00, depending on the price of the option. On March 
19, 2003, the Commission approved a proposal to establish a six-month 
Pilot Program in which the allowable quotation spread for options on up 
to 50 underlying equity securities would be $5, regardless of the price 
of the bid.\6\ The Pilot Program has been extended several times, most 
recently until June 29, 2004, and has been expanded to include all 
equity options listed on the ISE.\7\
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    \6\ See Pilot Program Approval Order, supra note 4.
    \7\ See Pilot Expansion Notice, supra note 5.
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    As required by the Pilot Program Approval Order, the ISE submitted 
to the Commission a report detailing the ISE's experience with the 
Pilot Program, which provided data regarding the 50 options initially 
included in the Pilot Program (``Initial Pilot Report''). The ISE will 
provide the Commission with an updated Pilot Program report that covers 
all of the equity options classes in the expanded Pilot Program by June 
15, 2004.
    The ISE believes that the Pilot Program has been successful. The 
ISE notes that its Initial Pilot Report provides all of the information 
the Commission requested in the Pilot Program Approval Order. The 
Initial Pilot Report lists the Pilot Program options, details the 
quotation spreads in these options during the initial six-month Pilot 
Program period, and discusses the ISE's overall experience during the 
Pilot Program, as well as any problems the ISE experienced during the 
Pilot Program. According to the ISE, the Initial Pilot Report indicates 
that quotation spreads in the 50 equity options initially included in 
the Pilot Program were virtually unchanged when compared to pre-Pilot 
Program trading. When compared to non-Pilot Program options, the ISE 
notes that the options included in the Pilot Program actually had 
relatively narrower spreads during the Pilot Program compared to the 
pre-Pilot Program period.
    The purpose of the proposal is to make the Pilot Program permanent 
and to apply the relaxed spread requirements to all ISE-listed equity 
and index options. The one adjustment that the ISE is proposing to the 
structure of the Pilot Program is to apply the Pilot Program's relaxed 
spread requirements only after the opening in an option to assure fair 
and orderly markets at the opening. The ISE states that during the 
operation of the Pilot Program the ISE observed some indications that 
the relaxed spread requirements were having a negative effect on the 
quality of the ISE's market opening. Accordingly, the ISE issued a 
Regulatory Information Circular (``RIC'') informing market makers that, 
for the Pilot Program options, they should quote pursuant to the 
traditional spread requirements for the opening.\8\ Consistent with 
this position, the relaxed quotation requirements in the proposal would 
become operative immediately following the opening rotation.
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    \8\ See ISE RIC 2003-08, ``Bid/Ask Spreads--$5 Maximum Pilot 
Program Policy Change.''
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2. Statutory Basis
    The ISE believes that the proposed rule change is consistent with 
the requirement under section 6(b)(5) of the Act that an exchange have 
rules that are designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, 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.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The ISE believes that 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 ISE has not solicited, and does not intend to solicit, comments 
on the proposed rule change. The ISE 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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-ISE-2003-22 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-ISE-2003-22. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
ISE. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-ISE-
2003-22 and should be submitted on or before June 17, 2004.


[[Page 30354]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-12025 Filed 5-26-04; 8:45 am]
BILLING CODE 8010-01-P