[Federal Register Volume 69, Number 130 (Thursday, July 8, 2004)]
[Notices]
[Pages 41320-41321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15488]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49956; File No. SR-ISE-2004-19]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the International Securities Exchange, Inc. Relating To 
Electronically Generated Orders

July 1, 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 27, 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, II 
and III below, which Items have been prepared by the Exchange. On June 
30, 2004, the ISE filed Amendment No. 1 to the proposed rule change.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change 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, Commission, dated June 29, 2004 (``Amendment 
No. 1''). In Amendment No. 1, the Exchange clarified certain 
language in the purpose section. The substance of Amendment No. 1 
has been incorporated into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE proposes to amend Rule 717(f) to allow electronically 
generated market orders, immediate-or-cancel limit orders, and fill-or-
kill limit orders. The text of the proposed rule change is as follows, 
with additions indicated in italics:

Rule 717. Limitations on Orders

* * * * *
    (f) Electronic Orders.
    Members may not enter, nor permit the entry of, orders created and 
communicated electronically without manual input (i.e., order entry by 
Public Customers or associated persons of Members must involve manual 
input such as entering the terms of an order into an order-entry screen 
or manually selecting a displayed order against which an off-setting 
order should be sent), unless such orders are (1) non-marketable limit 
orders to buy (sell) that are priced higher (lower) than the best bid 
(offer) on the Exchange (i.e., limit orders that improve the best price 
available on the Exchange), (2) limit orders that are designated as 
fill-or-kill or immediate-or-cancel, or (3) market orders. Nothing in 
this paragraph, however, prohibits Electronic Access Members from 
electronically communicating to the Exchange orders manually entered by 
customers into front-end communications systems (e.g., Internet 
gateways, online networks, etc.).
* * * * *

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. ISE 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
    Currently, under ISE Rule 717(f), Electronic Access Members 
(``EAMs'') are not permitted to enter orders that are generated and 
communicated electronically without human intervention unless such 
orders are non-marketable limit orders that improve the Exchange's best 
bid or offer. The Exchange represents that one purpose of this rule is 
to limit the ability of non-market makers to effectively make markets 
on the Exchange using automated systems that place and cancel orders in 
a manner that is similar to quoting.\4\
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    \4\ The ISE represents that, while most of the options exchanges 
currently maintain a similar prohibition on electronically generated 
orders (see, e.g., American Stock Exchange Rule 934, Chicago Board 
Options Exchange Rule 6.8A, and Pacific Exchange Rule 6.88), the 
Philadelphia Stock Exchange has removed its limitations on 
electronically generated orders. See Securities Exchange Act Release 
No. 48648 (October 16, 2003) 68 FR 60762 (October 23, 2003) 
(approving SR-Phlx-2003-37).
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    As a general matter, the Exchange believes that maintaining the 
prohibition on electronically generated orders is important to prevent 
EAMs from acting like market makers without also being subject to the 
responsibilities of market makers. However, the Exchange believes that 
certain types of electronically-generated orders do not raise these 
concerns. Specifically, the Exchange proposes to allow the electronic 
generation of orders that are not eligible to rest on the limit order 
book, as the Exchange believes that these types of orders do not 
present the same ``market making'' potential as resting limit orders. 
Such orders include market orders, fill-or-kill limit orders, and 
immediate-or-cancel limit orders.\5\ By allowing these types of orders, 
which are not eligible to rest on the limit order book, but maintaining 
the prohibition on other electronically generated limit orders, the 
Exchange believes the right balance will be achieved.
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    \5\ These order types are defined in ISE Rule 715.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \6\ in general and furthers the objectives 
of section 6(b)(5) of the Act \7\ in particular, because it is 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 of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest. In particular, the Exchange believes that the proposed rule 
change will benefit investors by allowing them to electronically 
generate additional types of orders.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

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(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 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-2004-19 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-2004-19. 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 Exchange. 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-2004-19 and should be submitted on or before July 
29, 2004.

    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. 04-15488 Filed 7-7-04; 8:45 am]
BILLING CODE 8010-01-P