[Federal Register Volume 70, Number 168 (Wednesday, August 31, 2005)]
[Notices]
[Pages 51856-51857]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4732]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52331; File No. SR-ISE-2004-16]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Order Granting Approval of Proposed Rule Change and Amendment No. 
1 Thereto Establishing a Directed Order Process

August 24, 2005.
    On May 20, 2004, 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 adopt new ISE Rule 811 to 
allow Exchange market makers to receive Public Customer Orders directed 
to them from Electronic Access Members (``EAMs'') through the 
Exchange's system (``Directed Orders''). On April 26, 2005, the ISE 
filed Amendment No. 1 to the proposed rule change.\3\ The proposed rule 
change, as modified by Amendment No. 1, was published for comment in 
the Federal Register on June 20, 2005.\4\ The Commission received no 
comments on the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
    \4\ Securities Exchange Act Release No. 51835 (June 13, 2005), 
70 FR 35479.
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    Under ISE's proposal, a market maker that wishes to accept Directed 
Orders must systemically indicate that it wishes to receive Directed 
Orders each day, must be willing to accept Directed Orders from all 
EAMs, may receive Directed Orders only through the Exchange's system, 
and may not reject Directed Orders. A market maker receiving a Directed 
Order (``Directed Market Maker'') would have to, within three seconds 
of receipt of the order, either submit the Directed Order to the

[[Page 51857]]

Price Improvement Mechanism (``PIM''), or send the order to the 
Exchange's limit order book. If the market maker submits the order to 
the PIM and is quoting at the national best bid or offer (``NBBO'') on 
the opposite side of the Directed Order, it would be prohibited from 
changing its quotation to a price less favorable than the price 
available at the NBBO or reducing the size of its quotation prior to 
submitting the Directed Order to the PIM, unless such quotation change 
is the result of an automated quotation system that operates 
independently from the existence or nonexistence of a pending Directed 
Order. If the market maker sends the order to the Exchange's limit 
order book (or the Exchange system releases the order to the limit 
order book after three seconds) certain restrictions would apply to a 
market maker's ability to trade with the order depending on whether the 
Directed Order is marketable or not marketable, and whether the 
Directed Market Maker is quoting at the NBBO or not quoting at the 
NBBO. In any case, the Directed Market Maker would be last in priority 
when the Directed Order is matched against contra interest.
    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder that are applicable to a national 
securities exchange.\5\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\6\ 
which requires among other things, 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 transaction in securities, to remove impediments to 
and perfect the mechanism for a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
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    \5\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposal is similar to the Directed 
Order program currently in place on the Boston Options Exchange 
facility (``BOX'') of the Boston Stock Exchange, Inc. (``BSE'').\7\ 
Similar to the program currently in place on BOX, market makers 
receiving Directed Orders must accept all orders directed to them and 
must send such orders only to the PIM or to the Exchange's limit order 
book. In addition, a market maker that receives a Directed Order when 
not quoting at the NBBO as well as when quoting at the NBBO, would have 
to wait three seconds before trading with the Directed Order. The 
Directed Order would be exposed to other market participants to give 
them the first opportunity to trade with the Directed Order. 
Accordingly, the Commission believes that the proposal would not 
provide any disincentive for market makers that receive Directed Orders 
to quote competitively.
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    \7\ See BSE Rules Chapter VI, Section 5(b) and (c), and Section 
10.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-ISE-2004-16) be, and it 
hereby is, approved.
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    \8\ 15 U.S.C. 78s(b)(2).
    \9\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4732 Filed 8-30-05; 8:45 am]
BILLING CODE 8010-01-P