[Federal Register Volume 70, Number 24 (Monday, February 7, 2005)]
[Notices]
[Pages 6481-6482]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-473]



[[Page 6481]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51111; File No. SR-ISE-2005-08]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change and Amendment No. 1 Thereto Relating to Limitations on End-of-
Day Trade-Through Liability

January 31, 2005.
    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 January 26, 2005, 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. On 
January 28, 2005, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ The Exchange has filed the proposal as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A) of the 
Act,\4\ and Rule 19b-4(f)(6) thereunder,\5\ which renders the proposal 
effective upon filing with the Commission.\6\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Partial Amendment dated January 28, 2005 (``Amendment 
No. 1''). In Amendment No. 1, the Exchange corrected a typographical 
error in the rule text included in the original rule filing.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
    \6\ The ISE asked the Commission to waive the 30-day operative 
delay. See Rule 19b-4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).
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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 liability at the end of the trading day. First, the limit 
on liability is being raised to 50 contracts as of February 1, 2005. 
Second, this limit will be a pilot program, which expires on January 
31, 2006. The text of the proposed rule change is available on the 
ISE's Web site (www.iseoptions.com), at the ISE's Office of the 
Secretary, and at the Commission's Public Reference Room.

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 ISE 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. 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 the limitation 
on end-of-day trade-through liability. By way of background, the Plan 
for the Purpose of Creating and Operating an Intermarket Option Linkage 
(``Linkage Plan'') requires participating exchanges (``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,'' requiring the member to fill a Linkage order 
sent on behalf of the aggrieved customer.\7\ 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, all Participants currently limit this liability to 
25 contracts during the last seven minutes of options trading.
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    \7\ See Section 2(16)(c) of the Linkage Plan.
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    The 25-contract limit is a pilot program that is scheduled to 
expire on January 31, 2005. The ISE is proposing to extend the 
exemption through January 31, 2006 and to raise the limit on liability 
to 50 contracts. The Participants currently are considering Linkage 
Plan amendments that, if proposed and approved, could obviate the need 
for this limitation of liability. Specifically, the amendments would 
increase the ability for members of Participants to receive automatic 
execution of P/A Orders and would provide tools to avoid trade-through 
liability generally, including at the end of the day. The Exchange 
anticipates that these amendments could be in effect within a year. At 
that time, the Participants would either allow the pilot to lapse, or, 
if they believed that a continuation of the limitation was appropriate, 
would discuss the matter further with the Commission staff.
3. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b)(5) of the Act,\8\ which requires 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 of 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 of the Linkage Plan, providing 
a common limitation on liability for all participants in the options 
market.
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    \8\ 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 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 neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing rule change: (1) Does not significantly 
affect the protection of investors or the public interest; (2) does not 
impose any significant burden on competition; and (3) does not become 
operative for 30 days from the date on which it was filed, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A) of the Act 
\9\ and Rule 19b-4(f)(6) thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \11\ normally 
does not become operative prior to 30 days after the date of filing. 
However, Rule 19b-

[[Page 6482]]

4(f)(6)(iii) permits the Commission to designate a shorter time if such 
action is consistent with the protection of investors and the public 
interest. The Exchange has requested that the Commission waive the 
five-day pre-filing requirement and the 30-day operative delay, as 
specified in Rule 19b-4(f)(6)(iii), and designate the proposed rule 
change immediately operative.
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    \11\ 17 CFR 240.19b-4(f)(6).
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    The Commission believes that waiving the five-day pre-filing 
provision and the 30-day operative delay is consistent with the 
protection of investors and the public interest.\12\ By waiving the 
pre-filing requirement and accelerating the operative date, the Pilot 
Program can continue without interruption. The Commission believes that 
allowing the pilot to continue will allow Participants to either gather 
sufficient information to justify the need for the pilot program or 
determine that the exemption from trade-through liability is no longer 
necessary. Increasing the maximum number of contracts to be satisfied 
with respect to Satisfaction Orders in the last seven minutes of 
trading in options to 50 contracts will enhance customer order 
protection.
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    \12\ For purposes of accelerating the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.\13\
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    \13\ For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change under 
Section 19(b)(3)(C) of the Act, the Commission considers the period 
to commence on January 28, 2005, the date the Exchange filed 
Amendment No. 1 to the proposed rule change. See 15 U.S.C. 
78s(c)(3)(C).
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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-2005-08 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-2005-08. 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 the 
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 SR-ISE-2005-08 and should be submitted on or before February 28, 
2005.
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    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E5-473 Filed 2-4-05; 8:45 am]
BILLING CODE 8010-01-P