[Federal Register Volume 69, Number 121 (Thursday, June 24, 2004)]
[Notices]
[Pages 35406-35408]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-14283]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49866; File No. SR-ISE-2004-14]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to a Proposed Rule Change by the 
International Securities Exchange, Inc. Relating to Limitations on End-
of-Day Trade-Through Liability

June 15, 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 May 14, 2004, 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 and 
II below, which Items have been prepared by the ISE. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons, and to grant accelerated approval to the 
proposed rule change.
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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 two changes to the current limitations on 
Trade-Through \3\ liability during the last seven minutes of the 
trading day pursuant to the Linkage Plan. First, the limit on Trade-
Through liability would be raised from 10 contracts to 25 contracts per 
Satisfaction Order as of July 1, 2004. Second, the pilot program that 
implemented a limitation on liability would be extended to January 31, 
2005.
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    \3\ A ``Trade-Through'' is defined as a transaction in an 
options series at a price that is inferior to the national best bid 
or offer in an options series calculated by a Participant. See 
Section 2(29) of the Plan for the Purpose of Creating and Operating 
an Intermarket Option Linkage (``Linkage Plan''). A ``Participant'' 
is defined as an Eligible Exchange whose participation in the 
Linkage Plan has become effective pursuant to Section 4(c) of the 
Linkage Plan. See Section 2(24) of the Linkage Plan. Currently, the 
Participants in the Linkage Plan are the ISE, the American Stock 
Exchange LLC, the Chicago Board Options Exchange, Inc., the Pacific 
Exchange, Inc., the Philadelphia Stock Exchange, Inc. and the Boston 
Stock Exchange, Inc.
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    The text of the proposed rule change is available at the Exchange 
and at the Commission.

[[Page 35407]]

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 III 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 the proposed rule change is to amend ISE Rule 1902 
(Order Protection) to correspond to proposed Joint Amendment No. 12 to 
the Linkage Plan,\4\ which would, among other things, amend the 
limitation on end-of-day Trade Through liability.\5\ By way of 
background, the Linkage Plan requires Participants to impose liability 
on their members who trade at prices inferior to those displayed on 
competing exchanges. Among other things, in the event that a member 
trades through a customer limit order on another market, the exchange 
that is traded through can send a Satisfaction Order,\6\ requiring the 
member to fill the customer limit order. Generally, the member is 
liable for the entire size of the customer order (up to the size of the 
Trade-Through). However, because it may be difficult for a member to 
hedge a position it acquires at the end of the day when filling a 
Satisfaction Order, the Participants currently limit this liability to 
10 contracts per Satisfaction Order for the last seven minutes of 
options trading.\7\
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    \4\ The ISE has separately filed Joint Amendment No. 12 to the 
Linkage Plan to implement substantially the same change to the 
Linkage Plan. See Securities Exchange Act Release No. 49692 (May 12, 
2004), 69 FR 29956 (May 19, 2004) (Notice of Joint Amendment No. 
12). The Commission previously approved the pilot to implement a 
limitation on Trade-Through liability during the last seven minutes 
of the trading day on a 120-day temporary basis on January 31, 2003. 
See Securities Exchange Act Release No. 47298, 68 FR 6524 (February 
7, 2003). On June 18, 2003, the Commission approved the pilot until 
January 31, 2004. See Securities Exchange Act Release No. 48055, 68 
FR 37869 (June 25, 2003) (Order approving Joint Amendment No. 4). 
The Commission subsequently extended the pilot until June 30, 2004. 
See Securities Exchange Act Release No. 49146 (January 29, 2004), 69 
FR 5618 (February 5, 2004) (Order approving Joint Amendment No. 8).
    \5\ Telephone conversation among Michael Simon, Senior Vice 
President and General Counsel, ISE, Timothy Fox, Attorney-Advisor, 
Division of Market Regulation, Commission and Geraldine Idrizi, 
Attorney-Advisor, Division, Commission on May 25, 2004.
    \6\ A ``Satisfaction Order'' is defined as an order sent through 
the Options Intermarket Linkage to notify a member of another 
Participant of a Trade-Through and to seek satisfaction of the 
liability arising from that Trade-Through. See Section 2(16) of the 
Linkage Plan.
    \7\ See supra note 4.
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    The 10-contract limit is a temporary pilot program that is 
scheduled to expire on June 30, 2004.\8\ The Participants are working 
with the Commission to determine whether to make a limitation on Trade-
Through liability during the last seven minutes of the trading day 
permanent, and the Commission has requested that the Participants 
provide data justifying the continuation of the exemption. Pending this 
review of the exemption, along with the other Participants, the ISE is 
proposing to extend the exemption through January 31, 2005, and raise 
the limit on liability from 10 contracts to 25 contracts per 
Satisfaction Order.
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    \8\ See Order approving Joint Amendment No. 8, supra note 4.
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2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) of the Act \9\ that an exchange have 
rules that are designed to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, 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. In particular, the proposed 
rule change would implement a provision in the Linkage Plan, providing 
a common limitation on liability for all participants in the options 
market.
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    \9\ 15 U.S.C. 78f(b)(5).
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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 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. 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. 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-2004-14 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-2004-14. 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. 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-2004-14 and should be submitted on or before July 
15, 2004.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    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

[[Page 35408]]

exchange.\10\ In particular, the Commission finds that the proposed 
rule change is consistent with the requirements of Section 6(b)(5) of 
the Act,\11\ which requires, among other things, that the rules of a 
national securities exchange 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 to protect 
investors and the public interest. The Commission believes that 
extending the pilot will enable Participants to continue to compile the 
data necessary for the Commission to determine whether permanent 
approval of the proposed rule change is appropriate and in the public 
interest. The Commission further believes that raising the limitation 
in liability for Satisfaction Orders during the last seven minutes of 
the trading day from 10 contracts to 25 contracts for this pilot period 
should help to protect investors and promote the public interest.
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    \10\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of the 
notice thereof in the Federal Register. As noted above, the proposed 
rule change incorporates changes into ISE Rules that correspond to 
changes made to the Linkage Plan through Joint Amendment No. 12, which 
was published for public comment in the Federal Register on May 19, 
2004.\12\ The Commission received no comments in response to 
publication of Joint Amendment No. 12. The Commission believes that no 
new issues of regulatory concern are being raised by ISE's proposed 
rule change. The Commission believes, therefore, that granting 
accelerated approval of the proposed rule change is appropriate and 
consistent with Sections 6 and 19(b) of the Act.\13\
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    \12\ See supra note 4.
    \13\ 15 U.S.C. 78f and 78s(b).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-ISE-2004-14) is approved on 
an accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-14283 Filed 6-23-04; 8:45 am]
BILLING CODE 8010-01-P