[Federal Register Volume 69, Number 240 (Wednesday, December 15, 2004)]
[Notices]
[Pages 75093-75100]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-27395]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50819; File No. SR-ISE-2003-06]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change and Amendment No. 1 Thereto and Notice of Filing 
and Order Granting Accelerated Approval to Amendments No. 2 and 3 
Thereto by the International Securities Exchange, Inc. To Establish 
Rules Implementing a Price Improvement Mechanism

December 8, 2004.

I. Introduction

    On February 25, 2003, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') 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\ a proposed rule change to establish rules implementing a 
Price Improvement Mechanism (``PIM''). On February 25, 2004, the ISE 
submitted Amendment No. 1 to the proposed rule change.\3\ The proposed 
rule change, as amended, was published for comment in the Federal 
Register on March 3, 2004.\4\ The Commission received one comment 
letter with respect to the proposal and Amendment No. 1.\5\ On June 24, 
2004, the ISE filed Amendment No. 2 to the proposed rule change,\6\ and 
a written response to the Comment Letter.\7\ On October 28, 2004, the 
ISE

[[Page 75094]]

filed Amendment No. 3 to the proposed rule change.\8\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division 
of Market Regulation (``Division''), Commission, dated February 24, 
2004 (``Amendment No. 1''). In Amendment No. 1, the ISE replaced the 
proposed rule text in its entirety.
    \4\ See Securities Exchange Act Release No. 49323 (February 26, 
2004), 69 FR 10087 (``Notice'').
    \5\ See Letter from Kenneth R. Leibler, Chairman and Chief 
Executive Officer, Boston Stock Exchange, Inc. (``BSE'') to Jonathan 
G. Katz, Secretary, Securities and Exchange Commission, dated March 
24, 2004 (``Comment Letter''). A discussion of the Comment Letter is 
provided below in Section IV, Discussion and Commission Findings.
    \6\ See Letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Nancy J. Sanow, Assistant Director, 
Division, Commission, dated June 23, 2004 (``Amendment No. 2''). As 
noted below, in Amendment No. 2, the ISE proposes to clarify its 
rules to address issues raised by the Comment Letter and Commission 
staff.
    \7\ See Letter from Michael J. Simon, Senior Vice President and 
General Counsel, ISE, to Jonathan G. Katz, Secretary, Commission, 
dated June 23, 2004 (``Response Letter'').
    \8\ See Letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Nancy J. Sanow, Assistant Director, 
Division, Commission, dated October 14, 2004 (``Amendment No. 3''). 
In Amendment No. 3, the ISE proposed to add new Supplemental 
Material .06 to proposed ISE Rule 723, to clarify that paragraphs 
(c)(5), (d)(5), and (d)(6) of ISE Rule 723 will be effective for a 
pilot period expiring on July 18, 2005. Supplemental Material .06 to 
proposed ISE Rule 723 also would state that during the pilot period, 
the Exchange will submit certain data on a confidential basis 
relating to the frequency with which the exposure period is 
terminated by unrelated orders.
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    This order approves the proposed rule change, as amended by 
Amendment No. 1, publishes notice of Amendments No. 2 and 3 to the 
proposed rule change, and grants accelerated approval of Amendments No. 
2 and 3.

II. Description of the Proposal

    The ISE proposes to establish an auction, known as the PIM, that 
would allow an ISE Electronic Access Member (``EAM'') to enter matched 
trades (``Crossing Transactions''). A Crossing Transaction would be 
comprised of an order that the EAM represents as agent (``Agency 
Order'') and an order that is executable against the Agency Order for 
the full size of the Agency Order (the ``Counter-Side Order'').\9\ A 
Member must enter the Crossing Transaction at a price at least one cent 
better than the national best bid and offer (``NBBO'').\10\
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    \9\ See proposed ISE Rule 723(b). The Counter-Side Order may 
represent interest for the EAM's own account, or interest the EAM 
has solicited from one or more other parties, or a combination of 
both. See Amendment No. 2, supra note 6.
    \10\ See proposed ISE Rule 723(b)(1). A PIM could not be 
initiated unless there are at least three ISE Market Makers quoting 
in the series. Moreover, there could be only one PIM ongoing in a 
series at any given time. Therefore, a PIM could not be initiated 
during an ongoing PIM in the same series. See proposed ISE Rule 723, 
Supplementary Material .04.
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    The ISE would broadcast the Crossing Transaction to all ISE 
Members.\11\ During a three-second auction, all ISE Members could enter 
``Improvement Orders,'' in penny increments, to improve the price of 
the Agency Order.\12\ Improvement Orders may be for the account of a 
Public Customer or for the Member's own account.\13\ During the 
exposure period, the aggregate size of the best prices, including the 
Counter-Side Order, Improvement Orders, and any change to either, would 
continually be updated and broadcast to all Members.\14\
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    \11\ The broadcast message would include the series, price, and 
size of the Agency Order and whether it is to buy or sell. See 
proposed ISE Rule 723(c); see also Amendment No. 2, supra note 6.
    \12\ See proposed ISE Rule 723(c)(1). The ISE would broadcast 
Improvement Orders to all Members. Crossing Transactions and 
Improvement Orders would not be displayed in the ISE BBO and would 
not be disseminated to the Options Price Reporting Authority.
    \13\ See proposed ISE Rule 723(c)(2).
    \14\ See proposed ISE Rule 723(c)(4); see also Amendment No. 2, 
supra note 6.
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    After three seconds, the ISE would execute the Agency Order against 
the best prices as follows: (1) All Public Customer Improvement Orders 
and unrelated Public Customer orders on the book at the best price 
would be executed first; (2) all unrelated agency orders on the book 
for the account of a non-Member broker-dealer would then be executed; 
(3) if the entering EAM is at the best price, it would then execute 
against the greater of one contract or 40 percent of the Agency Order; 
and (4) the remainder of the order would be allocated to all other 
interest, which includes Improvement Orders and unrelated orders on the 
book for the account of an ISE Member (including ISE market makers), at 
the best price based on size.\15\
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    \15\ See proposed ISE Rule 723(d). This sized-based allocation 
formula for the remainder of the order would be the same formula the 
Exchange applies in its regular market, without any special 
allocation rights for the ISE Primary Market Maker. See ISE Rule 
713, Supplementary Material .01.
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    The PIM exposure period would be terminated immediately, prior to 
the expiration of the three-second exposure period, upon the receipt of 
certain orders in the regular Exchange market (``unrelated orders''). 
Specifically, the PIM would terminate when a market or marketable limit 
order is received in the same series \16\ or when a non-marketable 
limit order on the same side of the market as the Agency Order is 
received that would cause the price of the Crossing Transaction to be 
outside of the best bid or offer on the Exchange.\17\
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    \16\ See proposed ISE Rule 723(c)(5).
    \17\ Id. Under such circumstances: (1) the PIM would be 
concluded; (2) the Agency Order executed; and (3) the non-marketable 
limit order would be displayed on the ISE book.
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    Under proposed ISE Rule 723(d)(5), as originally proposed and 
published in the Notice, in the case where an unrelated market or 
marketable limit order on the opposite side of the market from the 
Agency Order is received, the order would execute against the Agency 
Order at a price that is mid-way between the best Counter-Side interest 
and the bid or offer on the Exchange.\18\ The Exchange proposes to 
change this provision to state that when a market order or marketable 
limit order on the opposite side of the market from the Agency Order 
ends the exposure period, it would participate in the execution of the 
Agency Order at the price that is mid-way between the best Counter-Side 
interest and the NBBO, so that both the unrelated order and the Agency 
Order receive price improvement.\19\
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    \18\ See Amendment No. 1, supra note 3.
    \19\ See proposed ISE Rule 723(d)(5); see also Amendment No. 2, 
supra note 6.
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    When a market order or marketable limit order on the same side of 
the market from the Agency Order ends the exposure period, the 
unrelated order would execute against any unexecuted interest in the 
PIM after the Agency Order is executed in full to provide the unrelated 
order with the opportunity for price improvement.\20\ In Amendment No. 
2, the ISE proposes to clarify that in such instances, executions in 
the PIM would be handled such that at a given price, Public Customer 
interest is executed in full before any non-Customer interest.\21\ 
After Public Customer interest at a given price, agency orders for the 
account of non-Member broker-dealers would be executed in full before 
any proprietary interest of Members.\22\ Finally, Member proprietary 
interest would participate in the execution of the Agency Order upon 
the percentage of the total number of contracts available at the price 
that is represented by the size of the non-Customer's interest.\23\ In 
Amendment No. 2, the Exchange also proposes to clarify that when an 
unrelated order on the same side of the market from the Agency Order 
ends the exposure period, and the Counter-Side Order is at the same 
price as Member interest, the Counter-Side Order would not be allocated 
the greater of one contract or forty percent of the initial size of the 
Agency Order before other Member interest is executed.\24\
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    \20\ See proposed ISE Rule 723(d)(6); see also Amendment No. 2, 
supra note 6.
    \21\ Id.
    \22\ Id.
    \23\ Id.
    \24\ Id.
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    As originally proposed, Supple- mentary Material .01 to proposed 
ISE Rule 723 provided that it would be considered conduct inconsistent 
with just and equitable principles of trade for any Member to enter 
orders, quotes, Agency Orders, Counter-Side Orders or Improvement 
Orders for the purpose of disrupting or manipulating the PIM. In 
Amendment No. 2, the ISE proposes to clarify that such conduct would 
include, but not be limited to, engaging in a pattern of conduct where 
the Member submitting an Agency Order into the PIM breaks up the Agency 
Order into separate orders for two or fewer contracts for the purpose 
of gaining a higher allocation percentage than the Member would have 
otherwise received in accordance with the allocation procedures 
established for the situation in which

[[Page 75095]]

the Counter-Side Order is at the same price as Member interest.\25\ 
Also, the ISE proposes to clarify that ISE Rule 717(f), which places 
limitations on electronic orders, would not apply to transactions 
executed pursuant to ISE Rule 723.\26\
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    \25\ See proposed ISE Rule 723, Supplementary Material .01; see 
also Amendment No. 2, supra note 6.
    \26\ See proposed ISE Rule 723, Supplementary Material .05; see 
also Amendment No. 2, supra note 6.
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    Finally, the ISE proposes in Amendment No. 2 to amend the text of 
ISE Rule 400 regarding solicited orders. The proposed addition to ISE 
Rule 400 would clarify that nothing in the Supplementary Material .01 
to ISE Rule 400 is intended to prohibit a member from soliciting 
interest to execute against an order it represents as agent, the 
execution of which is governed by ISE Rule 717(e) (Solicitation 
Orders), and Supplementary Material .02 to ISE Rule 717.
    In Amendment No. 3, the ISE proposes new Supplemental Material .06 
to proposed ISE Rule 723 to establish that paragraphs (c)(5), (d)(5), 
and (d)(6) of ISE Rule 723 would be effective for a pilot period 
expiring on July 18, 2005.\27\ The ISE also proposes in new 
Supplemental Material .06 that the Exchange would submit data relating 
to the frequency with which the exposure period is terminated by 
unrelated orders.\28\
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    \27\ See proposed ISE Rule 723, Supplementary Material .06; see 
also Amendment No. 3, supra note 8.
    \28\ Id.
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendments No. 2 and 3, including whether 
Amendments No. 2 and 3 are 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 e-mail to [email protected]. Please include File 
Number SR-ISE-2003-06 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-2003-06. 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 Section, 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-
2003-06 and should be submitted on or before January 5, 2005.

IV. Discussion and Commission Findings

    After careful review of the amended proposal and consideration of 
the Comment Letter and Response Letter, the Commission finds that the 
proposed rule change to establish rules for the implementation of the 
ISE PIM is consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities exchange 
\29\ and, in particular, the requirements of section 6 of the Act.\30\ 
Specifically, as discussed in greater detail below, the Commission 
finds that the proposal is consistent with section 6(b)(5) of the 
Act,\31\ which requires, in part, that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices; to 
promote just and equitable principles of trade; to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, and 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. Section 
6(b)(5) also requires that the rules of an exchange not be designed to 
permit unfair discrimination among customers, issuers, brokers, or 
dealers.
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    \29\ 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).
    \30\ 15 U.S.C. 78f.
    \31\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Commission believes that approving the ISE's 
proposal to establish the PIM should confer important benefits to the 
public by increasing competition between and among the options 
exchanges, resulting in better prices and executions for investors. The 
Comment Letter argues that because the ISE market structure does not 
include many of the elements of the Boston Options Exchange (``BOX'') 
market structure, the ISE PIM lacks basic customer protections and will 
discourage price competition and aggressive bidding.\32\ The Commission 
does not agree with these objections, and notes that market structures 
need not be identical to be consistent with the Act; in fact, such a 
policy would likely result in less competition between markets and 
fewer innovations.
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    \32\ See Comment Letter, supra note 5, at pp. 1-6.
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    The Commission believes that the proposed ISE PIM provides 
limitations on internalization comparable to the other exchanges' rules 
that guarantee members the right to internalize their customers' 
orders. In particular, as discussed below, the ISE's proposal would 
require an EAM seeking to utilize the PIM to expose its Customer Order 
before trading with that order and would further require a minimum of 
three ISE market makers to be quoting in a particular series before a 
PIM could be initiated. The Commission also believes that the access to 
the PIM for those who may wish to compete for an Agency Order should be 
sufficient to provide opportunities for a meaningful, competitive 
auction.
    The Commission therefore finds that, for the reasons discussed more 
fully below, the ISE's proposal is consistent with the Act.

A. Need for Both PIM and ISE Facilitation Mechanism

    In the Comment Letter, BSE argues that the ISE should have only one 
facilitation process in its system.\33\ The Comment Letter notes that 
ISE Rule 716(d) currently provides for a facilitation mechanism (``ISE 
Facilitation Mechanism'') by which an EAM can facilitate block-size 
\34\ Public Customer orders. According to the Comment Letter, the 
election of a PIM

[[Page 75096]]

by an EAM to facilitate a Customer Order would always be better for the 
Customer than the election of the ISE Facilitation Mechanism, whereas 
the election of the ISE Facilitation Mechanism would always be better 
for the EAM than the election of the PIM. The Comment Letter maintains 
that for orders of over 50 contracts, EAMs would have an incentive to 
seek first to facilitate an order through the ISE Facilitation 
Mechanism and, if it appeared that the EAM would lose its guaranteed 
allocation, the EAM would cancel the facilitation order and elect the 
PIM.
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    \33\ See Comment Letter, supra note 5, at p. 11.
    \34\ ``Block''-size is defined under the ISE Rules as orders for 
at least 50 contracts. See ISE Rule 716(a).
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    The Commission does not agree with the Comment Letter's assertions 
for several reasons. First, the ISE rules specifically provide that it 
would be a violation of an ISE Member's duty of best execution to its 
Customer if the Member were to cancel a facilitation order to avoid 
execution of the order at a better price.\35\ Therefore, the BSE's 
argument that an EAM could exploit the availability of both the 
Facilitation Mechanism and the PIM by simply canceling its facilitation 
order after it has been entered into the ISE Facilitation Mechanism to 
avoid losing its allocation guarantee is not accurate, as such conduct 
would be a violation of Exchange rules.
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    \35\ See ISE Rule 716, Supplementary Material .01.
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    Second, the Commission notes that ISE Members have an obligation of 
best execution with respect to their Customer Orders. The Commission 
has long held the view that in satisfying its duty of best 
execution,\36\ which requires a broker to seek the most favorable terms 
reasonably available under the circumstances for a customer's 
transaction, a broker must periodically assess the quality of competing 
markets to assure that order flow is directed to markets providing the 
most beneficial terms for their customers' orders.\37\ The Commission 
believes that this obligation would require an EAM to evaluate whether 
the PIM or Facilitation Mechanism would provide better execution to 
customers' orders.
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    \36\ A broker-dealer's duty of best execution derives from 
common law agency principals and fiduciary obligations and is 
incorporated both in the rules of the self-regulatory organization, 
and through judicial and Commission decisions, in the antifraud 
provisions of the federal securities laws. See Securities Exchange 
Act Release No. 37619A (September 6, 1996), 61 FR 48290 (September 
12, 1996) (``Order Handling Rules Release''), note 348 and 
accompanying text.
    \37\ See id.
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B. Three Market Maker Requirement

    Proposed ISE Rule 723 would require that there be at least three 
Market Makers quoting in a relevant series at the time an EAM submits 
its Crossing Transaction into the PIM.\38\ The Commission believes that 
this requirement will improve the opportunity for an Agency Order to be 
exposed to a competitive auction.\39\
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    \38\ See proposed ISE Rule 723(b)(1); see also BOX Rules Chapter 
V, Sec. 18(e).
    \39\ See Securities Exchange Act Release No. 49068 (January 13, 
2004), 69 FR 2775 (January 20, 2004) (Order approving the BOX as an 
options trading facility of the BOX).
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C. Solicitation Process

    The ISE's proposal would permit an ISE EAM to solicit interest from 
other parties to participate in the Counter-Side Order in the PIM.\40\ 
In its Comment Letter, BSE argues that it is unclear whether ISE market 
makers may be solicited to participate in the Counter-Side Order.\41\ 
The Commission notes, however, that an EAM would be prohibited from 
soliciting an order from an ISE Market Maker, pursuant to ISE Rule 
717(g).\42\ Furthermore, the Commission emphasizes that a blanket 
exemption from ISE Rule 717(g) would not be permitted without 
Commission approval of a proposed rule change submitted by the Exchange 
under section 19(b) of the Act.\43\
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    \40\ See proposed ISE Rule 723(a).
    \41\ See Comment Letter, supra note 5.
    \42\ ISE Rule 717(g) prohibits an EAM from causing the entry of 
orders for the account of an ISE Market Maker.
    \43\ 15 U.S.C. 78s(b).
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D. Three-Second PIM

1. Content of Broadcast Message
    Under the ISE proposal, upon entry of a Crossing Transaction into 
the PIM, a broadcast message would be sent to all ISE members to begin 
the exposure period. The BSE suggests that the only information 
provided to ISE members in the PIM broadcast would be the aggregate 
size of the best-priced Improvement Orders (not improved Counter-Side 
Orders) and that this would be insufficient information for market 
participants to make fully-informed decisions about how to compete for 
the Agency Order.\44\ In response to the Comment Letter, the ISE 
proposes in Amendment No. 2 to clarify that the broadcast message would 
include the series, price, and size of the Agency Order, and whether 
the Agency Order is a buy or sell order. The ISE also proposes to 
clarify that during the exposure period, the aggregate size of the best 
prices, (including the Counter-Side Order, Improvement Orders, and any 
changes to either) would continually be updated and broadcast to all 
ISE Members.\45\
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    \44\ See Comment Letter, supra note 5, at pp. 11-15.
    \45\ See Amendment No. 2, supra note 6; see also proposed ISE 
Rule 723(c)(4).
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    The Commission believes that the proposed content of the broadcast 
message at the initiation of the PIM should provide sufficient 
information to permit interested market participants to participate in 
the auction. In addition, the Commission does not believe that it is 
necessary for the ISE to provide information about prices and sizes 
below the best price.
2. Duration of the PIM
    The ISE proposes that the duration of each PIM be three 
seconds.\46\ The Commission believes that a three-second PIM should 
afford electronic crowds sufficient time to compete for Agency Orders 
submitted by an EAM. In reaching this conclusion, the Commission 
believes that the timeframes necessary for exposure and execution of 
orders be adjudged in light of the ISE's market structure. The 
Commission reiterates that the critical issue is determining whether 
the proposed three-second timeframe gives participants in a fully 
automated marketplace sufficient time to respond to a PIM broadcast to 
compete and provide price improvement for Agency Orders and whether 
electronic systems are available to ISE members that would allow them 
to respond to PIM broadcasts in a meaningful way within the proposed 
timeframe.\47\ The Commission notes that the ISE is a fully electronic 
exchange where crowd members interact by electronic means. The 
Commission also notes that electronic systems are readily available to 
ISE members--if not already in place--to allow them to respond to PIM 
broadcasts.\48\
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    \46\ The PIM would end prior to the expiration of the three-
second exposure period under certain circumstances. See proposed ISE 
Rule 723(c)(5). See also infra notes 49-57 and accompanying text for 
a more detailed discussion.
    \47\ See supra note 40.
    \48\ The Commission notes that the ISE offers a facilitation 
mechanism through which an EAM can facilitate Public Customer orders 
of 50 contracts or more. The ISE facilitation mechanism currently 
employs an exposure period of ten seconds. See ISE Rule 716(d) and 
Supplemental Material .02 to ISE Rule 716.
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3. Premature Termination of the PIM
    As proposed, the PIM would end prematurely under certain 
circumstances: \49\ (1) Upon the receipt of a market or marketable 
limit order on

[[Page 75097]]

the Exchange in the same series on the opposite side of the market from 
the Agency Order; \50\ (2) upon the receipt of a market or marketable 
limit order on the Exchange in the same series on the same side of the 
market as the Agency Order; \51\ (3) upon the receipt of a non-
marketable limit order in the same series on the same side of the 
market as the Agency Order that would cause the price of the Crossing 
Transaction to be outside of the best bid or offer on the Exchange.\52\
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    \49\ With respect to the same series, no PIM will run 
simultaneously with another PIM, nor will PIMs be permitted to queue 
or overlap in any manner. See proposed ISE Rule 723, Supplementary 
Material .04.
    \50\ See proposed ISE Rule 723(c)(5)(ii).
    \51\ Id.
    \52\ See proposed ISE Rule 723(c)(5)(iii).
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    The ISE's proposal would provide these unrelated orders with the 
opportunity for price improvement.\53\ The Commission, however, is 
concerned that this could result in an Agency Order being disadvantaged 
by the premature conclusion of a PIM, in that it would not have 
received the full three second auction exposure period in which to 
receive price improvement.\54\
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    \53\ See supra notes 16-23 and accompanying text.
    \54\ The Commission notes that under the BOX rules, the BOX 
Price Improvement Period (``PIP'') auction can be terminated prior 
to the three-second period only in cases where an executable 
unrelated order is submitted to BOX on the same side as the customer 
order that was initially entered into the PIP. See BOX Rules, 
Chapter V, Section 18(i). The BOX rules, unlike the ISE proposal, do 
not permit the unrelated order to be executed against unexecuted 
interest in the PIP after the facilitated customer order is executed 
in full.
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    The Commission notes that proposed ISE Rule 723, Supplementary 
Material .01 states that it would be considered conduct inconsistent 
with just and equitable principles of trade for any ISE Member to enter 
orders, quotes, Agency Orders, Counter-Side Orders, or Improvement 
Orders for the purposes of disrupting or manipulating the PIM.\55\ The 
Commission believes that this proposed rule should help to address its 
concern, because ISE Members would be prohibited from deliberately 
entering unrelated orders in the ISE system to end the PIM prematurely 
to disrupt or manipulate it.\56\
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    \55\ See proposed ISE Rule 723, Supplementary Material .01. See 
also Amendment No. 2, supra note 6.
    \56\ In addition, the ISE has provided Commission staff with 
details regarding its proposed PIM surveillance procedures. See 
Letter to Nancy Sanow, Assistant Director, Division, Commission, 
from Michael J. Simon, Senior Vice President & General Counsel, ISE, 
dated October 14, 2004. The Commission notes that as a matter of 
Commission policy, surveillance programs and procedures are 
generally kept confidential. Disclosure of specific surveillance 
procedures could provide market participants with information that 
could aid attempts at avoiding regulatory detection of inappropriate 
trading activity.
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    Moreover, the ISE has proposed that those portions of proposed ISE 
Rule 723 relating to the premature termination of the PIM be effective 
on a pilot basis. The Commission believes that approval of these 
provisions on a pilot basis is appropriate and will afford both the 
Exchange and the Commission an opportunity to analyze the impact of 
unrelated orders on the PIM, as well as the ISE's surveillance 
procedures with respect to the PIM.\57\
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    \57\ The ISE's surveillance plan and procedures are subject to 
inspection by the Commission, to ensure that the ISE adequately 
monitors its market and its members, and enforces its rules and the 
federal securities laws, including the anti-fraud provisions.
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E. Competition in the PIM

    Under the ISE's proposal, all ISE Members would be permitted to 
participate in a PIM.\58\ Improvement Orders entered by ISE members may 
be for their own account or for the account of a Public Customer.\59\ 
In addition, unrelated orders could compete in standard increments to 
trade with the Agency Order in the PIM. Such unrelated orders could 
include agency orders on behalf of Public Customers, market makers on 
other exchanges, and non-ISE member broker-dealers, as well as non-
Improvement orders submitted by ISE members.
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    \58\ See proposed ISE Rule 723(c).
    \59\ Id.
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    The BSE questions how Improvement Orders from Public Customers 
would be handled by an EAM.\60\ In its Response Letter, the ISE 
clarifies that Public Customer orders would be handled as provided 
under the current ISE Rules. Specifically, there would be no 
limitations on the ability of Public Customers to participate in the 
PIM, and ISE members may represent Public Customers in a PIM under any 
type of instruction they wish to accept without restriction.\61\ The 
Commission believes that the lack of restrictions on the participation 
of Public Customers in the PIM should increase the opportunity for them 
to participate in the PIM.
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    \60\ See Comment Letter, supra note 5, at p. 16.
    \61\ See Response Letter, supra note 7, at pp. 4-5.
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    The BSE also argues that under ISE Rule 717, which prohibits 
customers from creating and transmitting orders electronically unless 
such orders are non-marketable limit orders to buy (sell) that are 
priced higher (lower) than the best ISE bid or offer, Public Customers 
would not be permitted to participate in the PIM.\62\ In response, the 
ISE, in Amendment No. 2, proposes that ISE Rule 717(f) would not apply 
to transactions executed pursuant to proposed ISE Rule 723.\63\ The 
Commission believes that Amendment No. 2 sufficiently clarifies the 
application of ISE Rule 717.
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    \62\ See Comment Letter, supra note 5, at p. 19.
    \63\ See Amendment No. 2, supra note 6. See also proposed ISE 
Rule 723, Supplementary Material .05. In its Response Letter, the 
ISE stated that ISE Rule 717(f) was not intended to be applied to 
orders entered into the PIM. See Response Letter, supra note 7, at 
p. 5.
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    Finally, the BSE argues that a lack of time priority would 
discourage price competition in the PIM.\64\ The Commission disagrees 
with this assertion and, instead, continues to believe that allocations 
based on price/size priority are consistent with the Act.\65\
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    \64\ See Comment Letter, supra note 5, at pp. 6-8.
    \65\ See Securities Exchange Act Release Nos. 47959 (May 30, 
2003), 68 FR 34441 (June 9, 2003) (Order approving the CBOE Hybrid 
System where, pursuant to CBOE Rule 6.45A, the applicable floor 
procedure committee could determine to weight the allocation 
algorithm so that the entire allocation would be based on size pro 
rata); and 46514 (September 18, 2002), 67 FR 60267 (September 25, 
2002) (Order approving ISE proposal relating to the allocation of 
customer orders on a price/size priority basis).
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F. Improvement Orders

    As discussed above, during the PIM, ISE members may submit 
Improvement Orders. Improvement Orders would be submitted in penny 
increments and would be valid only in the PIM process. The BSE asks 
whether an ISE Member that submits an Improvement Order may reduce the 
size of the Improvement Order at the same price.\66\ In its Response 
Letter, the ISE notes that its proposed rules provide that an 
Improvement Order may be modified only to increase the size at the same 
price, or improve the price of the Improvement Order for any size up to 
the size of the Agency Order.\67\ The Commission believes that the 
proposed ISE rules make clear that ISE Members would not be permitted 
to reduce the size of an Improvement Order without improving its price.
---------------------------------------------------------------------------

    \66\ See Comment Letter, supra note 5, at p. 16.
    \67\ See Response Letter, supra note 7 p. 5; see also proposed 
ISE Rule 723(c)(3).
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G. PIM Trade Allocation

    With multiple trading of options, individual options markets are 
under significant pressure to attract or retain business. One approach 
to increasing business on an exchange is to allow members a preference 
in trading with customer orders that they bring to the exchange. The 
Commission, however, has expressed its concern that proposals by 
options exchanges that guarantee a significant portion of orders to any 
market participant could erode the incentive to display aggressively 
priced quotes.\68\ Thus, the Commission must weigh whether the proposed

[[Page 75098]]

participation right would so substantially reduce the ability of other 
market participants to trade with an order that it would reduce price 
competition. As the Commission has noted previously:
---------------------------------------------------------------------------

    \68\ See, e.g., Securities Exchange Act Release No. 43100 (July 
31, 2000), 65 FR 48778 (August 9, 2000).

    It is difficult to assess the precise level at which guarantees 
may begin to erode competitive market maker participation and 
potential price competition within a given market. In the future, 
after the Commission has studied the impact of guarantees, the 
Commission may need to reassess the level of these guarantees. For 
the immediate term, the Commission believes that 40% is not clearly 
inconsistent with the statutory standards of competition and free 
and open markets.\69\
---------------------------------------------------------------------------

    \69\ See Securities Exchange Act Release No. 42455 (February 24, 
2000), 65 FR 11388 (March 2, 2000) (order approving registration of 
the ISE as a national securities exchange).
---------------------------------------------------------------------------

    The ISE PIM proposal would provide that at the conclusion of the 
PIM exposure period, the Agency Order would be executed in full against 
the best-priced orders, including orders and quotes in the Exchange 
market, Improvement Orders, and the Counter-Side Order.\70\ The ISE 
would execute the Agency Order against the best prices as follows: (1) 
All Public Customer Improvement Orders and unrelated Public Customer 
orders on the book at the best price would be executed first; (2) all 
unrelated agency orders on the book for the Account of a non-Member 
broker-dealer would then be executed; (3) if the Counter-Side Order is 
at the best price, it would then be executed against the greater of one 
contract or 40% percent of the Agency Order; and (4) the remainder of 
the order would be allocated to all other interest, which includes 
Improvement Orders and unrelated orders on the book for the account of 
an ISE Member (including ISE market makers), at the best price pro-rata 
based on size.\71\
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    \70\ See proposed ISE Rule 723(d).
    \71\ See proposed ISE Rule 723(d)(1)-(4).
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    The BSE argues that the ISE's proposal to allow a 40% guarantee to 
the Counter-Side Order based on the size of the original order is 
inconsistent with facilitation rules for BOX's PIP auction.\72\ 
However, the Commission believes that the ISE's proposal, which 
entitles (subject to certain exceptions) an EAM who submits the 
Counter-Side Order to 40% of the Agency Order, is not inconsistent with 
the Act. In addition, the Commission notes that the guarantee for the 
EAM bringing an Agency Order to the PIM is consistent with the 
facilitation guarantees in place at other options exchanges.\73\
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    \72\ See Comment Letter, supra note 5, at p. 9. See also BOX 
Rules, Chapter V, Sec. 18 (f).
    \73\ See Securities Exchange Act Release No. 47628 (April 3, 
2003), 68 FR 17697 (April 10, 2003) (approving proposal by the 
Chicago Board Options Exchange, Inc. to establish rules for 
CBOEdirect trading system). See also ISE Rule 716(d) (ISE 
Facilitation Mechanism).
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    The Commission believes that the ISE PIM proposal should promote 
price competition within the PIM by providing ISE Members with a 
reasonable opportunity to compete for a significant percentage of the 
incoming order and, therefore, should protect investors and the public 
interest. The Commission continues to believe that a 40% allocation is 
consistent with the statutory standards for competition and free and 
open markets.
    On a related note, the BSE points out that the proposal does not 
describe the order of priority among the excess Improvement Orders in 
the situation where an unrelated marketable order on the same side of 
the market as the Agency Order terminates the PIM.\74\ In response, the 
ISE proposes in Amendment No. 2 to clarify that these executions would 
follow the same execution priority rules described in proposed ISE Rule 
723(d)(1)-(4).
---------------------------------------------------------------------------

    \74\ See Comment Letter, supra note 5, at p. 18.
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H. Section 11(a) of the Act

    Section 11(a) of the Exchange Act \75\ prohibits a member of a 
national securities exchange from effecting transactions on that 
exchange for its own account, the account of an associated person, or 
an account over which it or its associated person exercises discretion 
(collectively, ``covered accounts'') unless an exception applies. 
Section 11(a)(1)(G) \76\ and Rule 11a1-1(T) \77\ under the Act provide 
an exception to the general prohibition in Section 11(a) on an exchange 
member effecting transactions for its own account. Specifically, a 
member that ``is primarily engaged in the business of underwriting and 
distributing securities issued by other persons, selling securities to 
customers, and acting as broker, or any one or more of such activities, 
and whose gross income normally is derived principally from such 
business and related activities'' \78\ and effects a transaction in 
compliance with the requirements in Rule 11a1-1(T)(a) \79\ may effect a 
transaction for its own account. Among other things, Rule 11a1-1(T)(a) 
requires that an exchange member presenting a bid or offer for its own 
account or the account of another member shall grant priority to any 
bid or offer at the same price for the account of a non-member of the 
exchange.\80\ Because proposed ISE Rule 723 would require EAMs and 
Exchange Market Makers to yield priority in the PIM to all non-Member 
orders, the Commission believes that the proposal is consistent with 
the requirements in section 11(a) and Rule 11a1-1(T) under the Act.
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    \75\ 15 U.S.C. 78k(a).
    \76\ 15 U.S.C. 78k(a)(1)(G).
    \77\ 17 CFR 240.11a1-1(T).
    \78\ 15 U.S.C. 78k(a)(1)(G)(i). Paragraph (b) of Rule 11a1-1(T) 
under the Act provides that a member shall be deemed to meet the 
requirements of Section 11(a)(1)(G)(i) of the Act if during its 
preceding fiscal year more than 50% of its gross revenues was 
derived from one or more of the sources specified in that section. 
In addition to any revenue which independently meets the 
requirements of Section 11(a)(1)(G)(i), revenue derived from any 
transaction specified in paragraph (A), (B), or (D) of Section 
11(a)(1) of the Act or specified in Rule 11a1-4(T) shall be deemed 
to be revenue derived from one or more of the sources specified in 
Section 11(a)(1)(G)(i).
    \79\ 15 U.S.C. 78k(a)(1)(G)(ii).
    \80\ 17 CFR 240.11a1-1(T)(a)(3).
---------------------------------------------------------------------------

    Under the proposal, Public Customer interest in the PIM would be 
executed in full before orders for the account of non-Member broker-
dealers could be executed. The BSE argues that section 11(a) does not 
require Public Customers to be treated preferentially to other non-
Members.\81\ The Commission notes, however, that section 11(a)(1)(G) of 
the Act and the rules thereunder do not prohibit Public Customers from 
being treated preferentially relative to other non-Members. Instead, 
the statute and the rules require only that non-Member orders receive 
priority over Member orders. Under the ISE's proposed rules, Public 
Customer and non-Member broker-dealer orders would receive first 
priority. Therefore, the Commission believes that the proposed ISE PIM 
priority execution rules would comply with section 11(a) of the 
Act.\82\
---------------------------------------------------------------------------

    \81\ See Comment Letter, supra note 5, at p. 19.
    \82\ 15 U.S.C. 78k(a).
---------------------------------------------------------------------------

I. Quote Rule

    The BSE argues that the proposed ISE PIM rules violate Rule 11Ac1-1 
under the Act (the ``Quote Rule''),\83\ because inbound unrelated 
market or marketable limit orders on the same side of the market as the 
Agency Order would be permitted to execute against any unexecuted 
interest in the PIM after the Agency Order is executed in full on a 
pilot basis until July 18, 2005.\84\ In response, the ISE has requested 
an exemption from the Quote Rule for unexecuted interest in the PIM 
auction after the Agency Order has been executed in full.\85\ Under 
separate cover,

[[Page 75099]]

the Commission granted the ISE a limited exemption pursuant to 
paragraph (e) of the Quote Rule from its obligations under paragraph 
(b) of the Quote Rule that permits the Exchange to collect from its 
members the quotation sizes and aggregate quotation sizes communicated 
to the Exchange by responsible brokers or dealers with respect to 
Counter-Side Orders in connection with the PIM without making such 
quotation sizes available to quotation vendors.\86\ The Commission 
believes that the exemption is consistent with the public interest, the 
protection of investors and the removal of impediments to and 
perfection of the mechanism of a national market system because it 
would permit the ISE to execute unrelated orders against trading 
interest priced better than the NBBO.\87\
---------------------------------------------------------------------------

    \83\ 17 CFR 240.11Ac1-1.
    \84\ See Comment Letter, supra note 5, at p. 19.
    \85\ See Letter from Michael J. Simon, Senior Vice President and 
General Counsel, ISE, to Annette Nazareth, Director, Division, 
Commission, dated November 15, 2004.
    \86\ See Letter from Robert L.D. Colby, Deputy Director, 
Division, Commission, to Michael J. Simon, Senior Vice President and 
General Counsel, ISE, dated December 8, 2004.
    \87\ Id.
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J. Trade-Through Issues

    As noted above, the PIM would automatically terminate under certain 
circumstances, including upon the receipt of a non-marketable limit 
order in the same series on the opposite side of the market as the 
Agency Order that would cause the price of the Crossing Transaction to 
be outside of the best bid or offer on the Exchange.\88\ The BSE argues 
that the proposed PIM is inconsistent with the options intermarket 
linkage plan,\89\ because a PIM execution could ``trade through'' \90\ 
another exchange's market in such a case.\91\ In Amendment No. 2, the 
ISE proposes to amend its proposal to state that when a market order or 
marketable limit order on the opposite side of the market from the 
Agency Order ends the exposure period, it would participate in the 
execution of the Agency Order at the price that is mid-way between the 
best counter-side interest and the NBBO.\92\
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    \88\ Under such circumstances, (1) the PIM would be concluded; 
(2) the Agency Order executed; and (3) the non-marketable limit 
order would be displayed on the ISE book.
    \89\ See Securities Exchange Act Release No. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000) (Order approving the Plan for 
the Purpose of Creating and Operating an Intermarket Option Linkage 
or ``Linkage Plan'').
    \90\ A trade-through means a transaction in an options series at 
a price that is inferior to the NBBO. See Linkage Plan, Section 
2(29).
    \91\ See Comment Letter, supra note 5, at p. 18.
    \92\ See Response Letter, supra note 7, at p. 5; see also 
Amendment No. 2, supra note 6.
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    The Commission notes that all orders executed in the PIM are 
``guaranteed'' at a better price than the NBBO at the initiation of the 
PIM. The Commission believes that the trade should be considered to 
have occurred at the time the order is guaranteed at a price at least a 
penny better than the NBBO. Accordingly, the Commission does not 
believe that it should be considered a trade-through if a trade is 
executed through the PIM at a price that is better than the NBBO at the 
commencement of the PIM, but because of a change in the NBBO--inferior 
to the NBBO at the conclusion of the PIM. Therefore, the Commission 
finds that ISE's proposed PIM is consistent with the Linkage Plan. The 
Commission reminds brokers, however, that they must always consider 
their best execution obligations.

K. No Minimum Size Requirement for PIM

    One of the principal differences between the ISE's proposed PIM and 
most other exchanges' rules that guarantee members the right to trade 
with their customer orders is that the PIM would be available for 
orders of fewer than 50 contracts. Under the ISE's proposal, there 
would be no minimum size requirement for orders entered into the PIM, 
for a pilot period expiring on July 18, 2005.\93\
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    \93\ The July 18, 2005, pilot expiration date corresponds to the 
expiration of a similar pilot program for the BOX's PIP, which 
provided that there is no minimum size requirement for orders 
entered into the PIP, encompassing a period of 18 months from 
commencement of the BOX. See BOX Rules, Chapter V, Sect. 18, 
Supplementary Material .01.
---------------------------------------------------------------------------

    The Commission believes that the ISE's proposal may provide small 
customer orders with benefits not available under the rules of most 
other exchanges, and is consistent with the Act. In particular, any 
Agency Order entered into the PIM is guaranteed an execution at the end 
of the auction at a price at least a penny better than the NBBO. In 
addition, the Commission believes that the ISE's proposal provides the 
opportunity for more market participants to compete in its auction. For 
example, the ISE would permit all members and Public Customers to 
participate in the PIM.
    The Commission will evaluate the PIM during the pilot period to 
determine whether it would be beneficial to customers and to the 
options market as a whole to approve any proposal requesting permanent 
approval to permit orders of fewer than 50 contracts to be submitted to 
the PIM. In addition, the Commission will examine the data submitted by 
the ISE with respect to situations in which the PIM is terminated 
prematurely by an unrelated order. To aid the Commission in its 
evaluation, the ISE represents that it will provide the following 
information each month:
    (1) The number of orders of fewer than 50 contracts entered into 
the PIM;
    (2) The percentage of all orders of fewer than 50 contracts sent to 
ISE that are entered into ISE's PIM;
    (3) The percentage of all ISE trades represented by orders of fewer 
than 50 contracts;
    (4) The percentage of all ISE trades effected through the PIM 
represented by orders of fewer than 50 contracts;
    (5) The percentage of all contracts traded on ISE represented by 
orders of fewer than 50 contracts;
    (6) The percentage of all contracts effected through the PIM 
represented by orders of fewer than 50 contracts;
    (7) The spread in the option, at the time an order of fewer than 50 
contracts is submitted to the PIM;
    (8) Of PIM trades, the percentage done at the NBBO plus $.01, plus 
$.02, plus $.03, etc.;
    (9) The number of orders submitted by EAMs when the spread was 
$.05, $.10, $.15, etc. For each spread, specify the percentage of 
contracts in orders of fewer than 50 contracts submitted to ISE's PIM 
that were traded by: (a) The EAM that submitted the order to the PIM; 
(b) ISE Market Makers assigned to the class; (c) other ISE members; (d) 
Public Customer Orders; and (e) unrelated orders (orders in standard 
increments entered during PIM);
    (10) The number of times that a market or marketable limit order in 
the same series on the same side of the market as the Agency Order 
prematurely ended the PIM auction, and the number of times such orders 
were entered by the same (or affiliated) firm that initiated the PIM 
that was terminated;
    (11) The percentage of PIM early terminations due to the receipt of 
a market or marketable limit order in the same series on the same side 
of the market that occurred within a \1/2\ second of the start of the 
PIM auction; the percentage that occurred within one second of the 
start of the PIM auction; the percentage that occurred within one and 
\1/2\ second of the start of the PIM auction; the percentage that 
occurred within 2 seconds of the start of the PIM auction; the 
percentage that occurred within 2 and \1/2\ seconds of the PIM auction; 
and the average amount of price improvement provided to the Agency 
Order where the PIM is terminated early at each of these time periods;
    (12) The number of times that a market or marketable limit order in 
the same series on the opposite side of the

[[Page 75100]]

market as the Agency Order prematurely ended the PIM auction and at 
what time the unrelated order ended the PIM auction, and the number of 
times such orders were entered by the same (or affiliated) firm that 
initiated the PIM that was terminated;
    (13) The percentage of PIM early terminations due to the receipt of 
a market or marketable limit order in the same series on the opposite 
side of the market that occurred within a \1/2\ second of the start of 
the PIM auction; the percentage that occurred within one second of the 
start of the PIM auction; the percentage that occurred within one and 
\1/2\ second of the start of the PIM auction; the percentage that 
occurred within 2 seconds of the start of the PIM auction; the 
percentage that occurred within 2 and \1/2\ seconds of the PIM auction; 
and the average amount of price improvement provided to the Agency 
Order where the PIM is terminated early at each of these time periods;
    (14) The number of times that a non-marketable limit order in the 
same series on the same side of the market as the Agency Order that 
would cause the price of the Crossing Transaction to be outside of the 
best bid or offer on the Exchange prematurely ended the PIM auction and 
at what time the unrelated order ended the PIM auction, and the number 
of times such orders were entered by the same (or affiliated) firm that 
initiated the PIM that was terminated;
    (15) The percentage of PIM early terminations due to the receipt of 
a market or marketable limit order in the same series on the same side 
of the market as the Agency Order that would cause the price of the 
Crossing Transaction to be outside of the best bid or offer on the 
Exchange that occurred within a \1/2\ second of the start of the PIM 
auction; the percentage that occurred within one second of the start of 
the PIM auction; the percentage that occurred within one and \1/2\ 
second of the start of the PIM auction; the percentage that occurred 
within 2 seconds of the start of the PIM auction; the percentage that 
occurred within 2 and \1/2\ seconds of the PIM auction; and the average 
amount of price improvement provided to the Agency Order where the PIM 
is terminated early at each of these time periods; and
    (16) The average amount of price improvement provided to the Agency 
Order when the PIM auction is not terminated early (i.e., runs the full 
three seconds).

VI. Accelerated Approval of Amendments No. 2 and 3

    Pursuant to section 19(b)(2) of the Act,\94\ the Commission may not 
approve any proposed rule change, or amendment thereto, prior to the 
30th 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 hereby finds good cause for 
approving Amendments No. 2 and 3 to the proposal, prior to the 30th day 
after publishing notice of Amendments No. 2 and 3 in the Federal 
Register. The revisions made to the proposal in the ISE's Amendment No. 
2 clarify the operation of the PIM and were provided in response to 
issues raised in the Comment Letter and by Commission staff. In 
addition, the ISE in Amendment No. 3 established that paragraphs 
(c)(5), (d)(5), and (d)(6) of proposed ISE Rule 723 would be effective 
for a pilot period expiring on July 18, 2005. The Commission believes 
that the proposed changes in Amendments No. 2 and 3 are necessary to 
the proper functioning and implementation of the ISE PIM. The 
Commission further believes that Amendments No. 2 and 3 do not raise 
issues of regulatory concern that warrant further delay. Therefore, the 
Commission believes that accelerated approval of Amendments No. 2 and 3 
is appropriate. Accordingly, pursuant to section 19(b)(2) of the 
Act,\95\ the Commission finds good cause to approve Amendments No. 2 
and 3 prior to the 30th day after notice of the Amendment is published 
in the Federal Register.
---------------------------------------------------------------------------

    \94\ 15 U.S.C. 78s(b)(2).
    \95\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VII. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with section 6(b)(5) of the Act.\96\
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\97\ that the proposed rule change (SR-ISE-2003-06) and Amendment 
No. 1 are approved; and that Amendments No. 2 and 3 thereto are 
approved on an accelerated basis, except that provisions relating to 
paragraphs (c)(5), (d)(5), and (d)(6) of ISE Rule 723 are approved on a 
pilot basis until July 18, 2005.
---------------------------------------------------------------------------

    \96\ 15 U.S.C. 78f(b)(5). In connection with the issuance of 
this approval order, neither the Commission or its staff is granting 
any exemptive or no-action relief from the requirements of Rule 10b-
10. Accordingly, a broker-dealer executing a customer order through 
the PIM will need to comply with all applicable requirements of that 
Rule.
    \97\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\98\
J. Lynn Taylor,
Assistant Secretary.
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    \98\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 04-27395 Filed 12-14-04; 8:45 am]
BILLING CODE 8010-01-P