[Federal Register Volume 69, Number 140 (Thursday, July 22, 2004)]
[Notices]
[Pages 43872-43873]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16644]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50015; File No. SR-ISE-2003-22]


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

July 14, 2004.

I. Introduction

    On September 24, 2003, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange''), filed with the Securities and Exchange 
Commission (``SEC'' or ``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 requesting permanent approval of 
a pilot program permitting the allowable market maker quotation spread 
for all options listed on the ISE to be $5, regardless of the price of 
the bid (``Pilot Program''). On May 20, 2004, the ISE filed Amendment 
No. 1 to the proposal.\3\ Amendment No. 1 revised the proposal to 
expressly include in the Pilot Program all index options listed on the 
ISE as well as all equity options listed on the ISE.
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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 May 19, 2004, and 
accompanying Form 19b-4 (``Amendment No. 1'').
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    The proposed rule change and Amendment No. 1 were published for 
comment in the Federal Register on May 27, 2004.\4\ The Commission 
received no comments regarding the proposal. This order approves the 
proposed rule change, as amended.
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    \4\ See Securities Exchange Act Release No. 49754 (May 21, 
2004), 69 FR 30352.
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II. Description

    On March 19, 2003, the Commission approved an ISE proposal to 
establish the Pilot Program on a six-month pilot basis until September 
19, 2003.\5\ The Pilot Program, which initially included options on up 
to 50 equity securities listed on the ISE, was extended several times 
and expanded to include all options listed on the ISE.\6\
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    \5\ See Securities Exchange Act Release No. 47532 (March 19, 
2003), 68 FR 55685 (March 26, 2003) (``Pilot Program Approval 
Order'').
    \6\ 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); 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 options listed on the ISE) (``Pilot 
Expansion Notice''); and 49918 (June 25, 2004), 69 FR 40427 (July 2, 
2004) (notice of filing and immediate effectiveness of File No. SR-
ISE-2004-23) (extending the Pilot Program through July 29, 2004).
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    The Pilot Program permits an ISE market maker to quote any equity 
or index option listed on the ISE with a difference of no more than $5 
between the bid and the offer following the opening rotation.\7\ Prior 
to the opening rotation, the maximum bid/ask differentials range from 
$.25 to $1.00, depending on the price of the option.\8\
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    \7\ See ISE Rule 803(b)(4).
    \8\ Specifically, prior to the opening rotation, ISE Rule 
803(b)(4) requires options market makers to bid and offer so as to 
create differences of no more than $.25 between the bid and offer 
for each options contract for which the bid is less than $2; no more 
than $.40 where the bid is at least $2 but does not exceed $5; no 
more than $.50 where the bid is more than $5 but does not exceed 
$10; no more than $.80 where the bid is more than $10 but does not 
exceed $20; and no more than $1 where the bid is $20 or greater. The 
bid/offer differentials do not apply to in-the-money options series 
when the spread in the underlying securities market is wider than 
the differentials set forth above. For such series, ISE Rule 
803(b)(4) permits the bid/ask differential to be as wide as the 
quotation on the primary market of the underlying security.
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    As required by the Pilot Program Approval Order, the ISE submitted 
a report providing information concerning the quotations in the 50 
equity options initially included in the Pilot Program. In addition, 
following the expansion of the Pilot Program,\9\ the ISE submitted a 
second Pilot Program report providing quotation information concerning 
all of the options included in the ISE's expanded Pilot Program.
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    \9\ See Pilot Expansion Notice, supra note 6.
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III. Discussion

    After careful review, 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.\10\ In particular, the Commission finds that the proposal is 
consistent with Section 6(b)(5) of the Act \11\ in that it is 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 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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    \10\ In approving this proposal, 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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    In the Pilot Program Approval Order,\12\ the Commission noted that 
although the Commission believes generally that maximum quotation 
spread parameters in the options market could provide an important 
safeguard to ensure that market maker quotes in options are not 
unnecessarily wide, the Commission nevertheless believed that the ISE 
provided sufficiently strong incentives for market makers to 
disseminate competitive quotes without maximum quotation spread 
parameters. In this regard, the Pilot Program Approval Order noted that 
each ISE market maker uses an automatic quotation system to quote 
independently, customers and professional traders can enter limit 
orders on the ISE's book, and market makers are only allocated trades 
when they are quoting at the best price. Moreover, the larger the size 
of a market maker's quote, the larger portion of a trade it is 
allocated. The Commission believed that these attributes and rules of 
the ISE provided strong market incentives for market makers to maintain 
narrow and competitive quotation spreads.\13\
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    \12\ See note 5, supra.
    \13\ See Pilot Program Approval Order, supra note 5.
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    The Commission believes that the two Pilot Program reports 
submitted by the ISE indicate that market maker quotation spreads for 
options included in the Pilot Program have not widened significantly 
during the operation of the Pilot Program. Accordingly, the Commission 
believes that permanent approval of the Pilot Program is consistent 
with the Act.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposal, 
as amended, 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,\14\ that the

[[Page 43873]]

proposed rule change (SR-ISE-2003-22), as amended, is approved.
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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. 04-16644 Filed 7-21-04; 8:45 am]
BILLING CODE 8010-01-P