[Federal Register Volume 69, Number 208 (Thursday, October 28, 2004)]
[Notices]
[Pages 62925-62926]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2875]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50562; SR-BSE-2004-14; SR-CBOE-2004-41; SR-ISE-2004-01; 
SR-PCX-2004-84; SR-Phlx-2004-16]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change and Amendment No. 1 by the Boston Stock Exchange, Inc.; a 
Proposed Rule Change by the Chicago Board Options Exchange, Inc.; a 
Proposed Rule Change and Amendments No. 1 and 2 by the International 
Securities Exchange, Inc.; a Proposed Rule Change by the Pacific 
Exchange, Inc.; and a Proposed Rule Change and Amendment No. 1 by the 
Philadelphia Stock Exchange, Inc. Relating to Minimum Size Guarantees 
for Linkage Orders

October 19, 2004.

I. Introduction

    On January 13, 2004, February 13, 2004, April 6, 2004, July 7, 
2004, and September 1, 2004, the International Securities Exchange, 
Inc. (``ISE''), the Philadelphia Stock Exchange, Inc. (``Phlx''), the 
Boston Stock Exchange, Inc. (``BSE''), the Chicago Board Options 
Exchange, Inc. (``CBOE''), and the Pacific Exchange, Inc. (``PCX'') 
(collectively, the ``options exchanges''), respectively, 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\ proposed rule changes to modify the 
definitions of Firm Customer Quote Size (``FCQS'') and Firm Principal 
Quote Size (``FPQS'') contained in their Exchange rules by changing 
certain minimum size guarantees for Linkage Orders to accommodate the 
``natural size'' of quotations.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The options exchanges have also filed an amendment to the 
Plan for the Purpose of Creating and Operating an Intermarket Option 
Linkage (``Linkage Plan'') that corresponds to the proposed rule 
changes, described herein. (``Joint Amendment No. 13''). See 
Securities Exchange Act Release No. 50211 (August 18, 2004), 69 FR 
52050 (August 26, 2004) (File No. 4-429).
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    BSE submitted BSE Amendment No. 1 to its proposed rule change on 
June 9, 2004.\4\ ISE submitted ISE Amendment No. 1 to its proposed rule 
change on May 10, 2004,\5\ and ISE Amendment No. 2 to its proposed rule 
change on July 30, 2004.\6\ Phlx submitted Phlx Amendment No. 1 to its 
proposed rule change on August 11, 2004.\7\
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    \4\ See Letter from John Boese, BSE, to Nancy Sanow, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated June 8, 2004 (``BSE Amendment No. 1''). In BSE Amendment No. 
1, the BSE amended the proposed rule text to clarify that the 
general requirement that the BSE's FCQS and FPQS be at least 10 
contracts would not apply if the BSE were disseminating a quotation 
of fewer than 10 contracts. In that case, the BSE explained that it 
may establish a FCQS or FPQS equal to its disseminated size.
    \5\ See Letter from Michael J. Simon, Senior Vice President and 
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division, 
Commission, dated May 7, 2004 (``ISE Amendment No. 1''). In ISE 
Amendment No. 1, the ISE amended the proposed rule text to clarify 
that the general requirement that the ISE's FCQS and FPQS be at 
least 10 contracts would not apply if the ISE were disseminating a 
quotation of fewer than 10 contracts. In that case, the ISE 
explained that it may establish a FCQS or FPQS equal to its 
disseminated size.
    \6\ See Letter from Michael J. Simon, Senior Vice President and 
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division, 
Commission, dated July 28, 2004 (``ISE Amendment No. 2''). In ISE 
Amendment No. 2, the ISE submitted a new Form 19b-4, which replaced 
and superseded the original filing in its entirety.
    \7\ See Letter from Richard S. Rudolph, Director and Counsel, 
Phlx, to Deborah Lassman Flynn, Assistant Director, Division, 
Commission, dated August 10, 2004 (``Phlx Amendment No. 1''). In 
Phlx Amendment No. 1, the Phlx amended the proposed rule text to 
clarify that the general requirement that the Phlx's FCQS and FPQS 
be at least 10 contracts would not apply if the Phlx were 
disseminating a quotation of fewer than 10 contracts. In that case, 
the Phlx explained that it may establish a FCQS or FPQS equal to its 
disseminated size.
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    Notice of BSE's proposed rule change, as amended, was published in 
the Federal Register on September 16, 2004.\8\ Notice of CBOE's 
proposed rule change was published in the Federal Register on September 
16, 2004.\9\
    Notice of ISE's proposed rule change, as amended, was published in 
the Federal Register on September 16, 2004.\10\ Notice of PCX's 
proposed rule change was published in the Federal Register on September 
16, 2004.\11\ Notice of Phlx's proposed rule change, as amended, was 
published in the Federal Register on September 16, 2004.\12\ No 
comments were received on the proposed rule changes. This order 
approves the proposed rule changes, as amended.\13\
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    \8\ Securities Exchange Act Release No. 50341 (September 9, 
2004), 69 FR 55850 (September 16, 2004) (SR-BSE-2004-14).
    \9\ Securities Exchange Act Release No. 50340 (September 9, 
2004), 69 FR 55852 (September 16, 2004) (SR-CBOE-2004-41).
    \10\ Securities Exchange Act Release No. 50339 (September 9, 
2004), 69 FR 55853 (September 16, 2004) (SR-ISE-2004-01).
    \11\ Securities Exchange Act Release No. 50346 (September 10, 
2004), 69 FR 55857 (September 16, 2004) (SR-PCX-2004-84).
    \12\ Securities Exchange Act Release No. 50342 (September 9, 
2004), 69 FR 55864 (September 16, 2004) (SR-Phlx-2004-16).
    \13\ The Commission notes that the American Stock Exchange LLC 
(``Amex''), filed a comparable proposed rule change with the 
Commission on August 3, 2004, and Amendment No. 1 thereto on 
September 10, 2004. Notice of Amex's proposed rule change, as 
amended, was published in the Federal Register on September 23, 
2004. See Securities Exchange Act Release No. 50394 (September 16, 
2004), 69 FR 57110 (SR-Amex-2004-63). Section 19(b)(2) of the Act 
provides that the Commission may not approve any proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of the filing thereof, unless the Commission finds good cause 
for so doing and publishes its reasons for so finding. The 
Commission has determined to wait until the requisite thirty days 
has passed before acting on the Amex's filing.
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II. Description of the Proposals

    The purpose of the proposed rule changes is to amend the 
definitions of FCQS and FPQS provided in each of the options exchange's 
rules \14\ to conform them to the definitions provided in the Linkage 
Plan, as amended by Joint Amendment No. 13.\15\ While the proposed rule 
changes would maintain a general requirement, in each of the options 
exchange's rules, that the FCQS and FPQS be at least 10 contracts, that 
requirement would not apply if, pursuant to its rules, an options 
exchange were disseminating a quotation of fewer than 10 contracts. In 
that case, the options exchange could establish a FCQS or FPQS equal to 
its disseminated size, or ``natural size.''
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    \14\ See Chapter XII, Sections 1(g) & (h) of the Rules of the 
BSE's Boston Options Exchange Facility; CBOE Rules 6.80(9) & (10); 
ISE Rules 1900(7) & (8); PCX Rules 6.92(a)(9) & (10); and Phlx Rules 
1083(g) & (h).
    \15\ See Notice of Joint Amendment No. 13 supra note 3.
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    Under the proposed rule changes, as with Linkage orders today, if 
an order is of a size eligible for automatic execution, the receiving 
options exchange must provide an automatic execution of the Linkage 
order. If this is not the case (for example, the receiving options 
exchange's automatic execution system is not engaged), the receiving 
exchange may allow the order to drop to manual handling. However, the 
receiving options exchange still must provide a manual execution for at 
least the FCQS or FPQS, as appropriate (in this case, the size of its 
disseminated quotation of less than 10 contracts).

III. Discussion

    After careful review, the Commission finds that the proposed rule 
changes, as amended, are consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.\16\ In particular, the Commission finds that the 
proposals, as amended, are consistent with the provisions of

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Section 6(b)(5) of the Act,\17\ which requires, among other things, 
that a national securities exchange's rules be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and to 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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    \16\ In approving these proposals, the Commission has considered 
the proposed rules' impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the options exchanges adopted the current 
definitions of FCQS and FPQS, which impose a ``10-up'' requirement, at 
a time when all the options exchanges had rules requiring that their 
minimum quotation size be for at least 10 contracts. Consequently, an 
exchange receiving a customer limit order for fewer than 10 contracts 
would disseminate the price of the customer limit order with a size of 
10 contracts and the specialist or the trading crowd would be 
responsible to make up the difference. Since implementation of the 
Linkage Plan, several of the options exchanges have modified their 
rules to permit them to disseminate the ``natural size'' of customer 
limit orders that are of a size of less than 10 contracts.\18\ The 
Commission believes that approval of the proposed rule changes, which 
will permit options exchanges to conform their Linkage rules to other 
Exchange rules allowing them to disseminate a customer limit order's 
``natural size,'' should provide greater transparency to investors and 
the marketplace and better reflect the true state of liquidity in the 
marketplace.
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    \18\ 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 40363 (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 75294 (December 30, 2003) 
(SR-Amex-2003-24).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule changes (SR-BSE-2004-14; SR-CBOE-2004-
41; SR-ISE-2004-01; SR-PCX-2004-84; SR-Phlx-2004-16), as amended, are 
approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E4-2875 Filed 10-27-04; 8:45 am]
BILLING CODE 8010-01-P