[Federal Register Volume 70, Number 173 (Thursday, September 8, 2005)]
[Notices]
[Pages 53403-53405]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4873]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52364; File No. SR-ISE-2005-41]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change Relating to the Price Improvement Mechanism

August 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 August 22, 2005, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange

[[Page 53404]]

Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the ISE. The 
Exchange filed the proposed rule change as a ``non-controversial'' rule 
change under Rule 19b-4(f)(6) under the Act,\3\ which renders the 
proposal effective upon filing with the Commission. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add an order type called the Customer 
Participation Order, which can be used by public customers to 
participate in the Price Improvement Mechanism (``PIM''). Proposed new 
language is italicized; proposed deletions are in [brackets].
* * * * *

Rule 715.

    (a) through (e) no change.
    (f) Customer Participation Orders. A Customer Participation Order 
(``CPO'') is a limit order on behalf of a Public Customer that, in 
addition to the limit order price in standard increments according to 
Rule 710, includes a price stated in one-cent increments (the 
``Participation Interest'') at which the Public Customer wishes to 
participate in trades executed in the same options series in penny 
increments through the Price Improvement Mechanism pursuant to Rule 
723. The Participation Interest price must be higher than the limit 
order price in the case of a CPO to buy, and lower than the limit order 
price in the case of a CPO to sell. The size of the order will be 
automatically decremented when the Public Customer participates in the 
execution of an order at the Participation Interest price.
* * * * *

Rule 723. Price Improvement Mechanism for Crossing Transactions

    (a) through (c) no change.
    (d). Execution. At the end of the exposure period the Agency Order 
will be executed in full at the best prices available, taking into 
consideration orders and quotes in the Exchange's market, Improvement 
Orders, Customer Participation Orders (see Supplementary Material .06 
below) and the Counter-Side Order. The Agency Order will receive 
executions at multiple price levels if there is insufficient size to 
execute the entire order at the best price.
    (d)(1) through (d)(6) no change.

Supplementary Material to Rule 723

    .01 through .05 no change.
    .06. Pursuant to Rule 723(c)(2), Electronic Access Members may 
enter Improvement Orders for the account of Public Customers. Without 
limiting the forgoing, Electronic Access Members may enter Improvement 
Orders with respect to CPOs (as defined in Rule 715(f)). An Improvement 
Order can be entered with respect to a CPO if: (1) the limit order 
price of the CPO is equal to the best bid or offer on the Exchange at 
the time the PIM is initiated; and (2) the CPO is on the same side of 
the market as the Counter-Side Order. The Improvement Order must be 
entered for the existing size of the limit order up to the size of the 
Agency Order and for the price of the Participation Interest.
* * * * *

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 ISE 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, Proposed Rule Change

1. Purpose
    The PIM is a process by which crossing transactions may be exposed 
to the market for price improvement. Under ISE Rule 723, upon the entry 
of a Crossing Transaction, a broadcast message is sent to all Members, 
which then have three seconds to enter Improvement Orders that indicate 
the size and price at which they want to participate in the execution. 
Improvement Orders may be entered by all Members for their own account 
or for the account of a Public Customer in one-cent increments. ISE 
Rule 723 does not limit the circumstances in which Electronic Access 
Members may enter Improvement Orders on behalf of Public Customers.
    The Exchange proposes to implement an additional order type that 
will facilitate the ability of Members to participate in trades in 
penny increments through the PIM, and to amend ISE Rule 723 to specify 
that Members may enter Improvement Orders on behalf of Public Customers 
that utilize the new order type. This additional functionality is 
purely voluntary, and merely supplements the open access currently 
provided in ISE Rule 723. The Exchange believes that some Members may 
wish to provide PIM access to Public Customers in this particular 
manner.\4\
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    \4\ The Boston Options Exchange facility (``BOX'') of the Boston 
Stock Exchange, Inc. (``BSE'') provides access to its price 
improvement process through the use of a similar order type. See 
Chapter V, Section 18(g) of the BOX Rules.
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    The Exchange proposes to define a Customer Participation Order 
(``CPO'') in ISE Rule 715 as a limit order on behalf of a Public 
Customer that, in addition to the limit order price in standard trading 
increments, includes a price stated in one-cent increments (the 
``Participation Interest'') at which the Public Customer wishes to 
participate in trades in the same options series in penny increments 
through the PIM. The Participation Interest price must be higher than 
the limit order price in the case of a CPO to buy, and lower than the 
limit order price in the case of a CPO to sell. The Exchange also 
proposes to amend ISE Rule 723 to specify that an Electronic Access 
Member may enter an Improvement Order with respect to a CPO if: (1) The 
limit order price is equal to the best bid or offer on the Exchange at 
the time the PIM is initiated; and (2) the CPO is on the same side of 
the market as the Counter-Side Order.
    The CPO is an instruction to the member to enter an Improvement 
Order on behalf of the Public Customer at a particular price and size. 
The Improvement Order must be entered for the existing size of the 
limit order up to the size of the Agency Order being executed through 
the PIM, and for the price of the Participation Interest. The CPO does 
not give the member discretion to enter an Improvement Order at any 
lesser size or price, nor to modify the price or size of the 
Improvement Order once it is entered. The size of the CPO will be 
automatically decremented by the execution of a related Improvement 
Order.
2. Statutory Basis
    According to the ISE, the basis under the Act for this proposed 
rule change is found in Section 6(b)(5) of the Act,\5\ in that the 
proposed rule change is designed to promote just and equitable 
principles of trade, remove impediments to and perfect the mechanisms 
of a free and open market and a national market system and, in general, 
to protect investors and the

[[Page 53405]]

public interest. The Exchange believes that the additional 
functionality will increase the ability for Electronic Access Members 
to participate in the PIM on behalf of Public Customers. Accordingly, 
the proposed rule change could result in greater participation in PIM 
executions by Public Customers and greater opportunity for price 
improvement for the orders being executed through the PIM.
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    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The ISE does not believe that the proposed rule change will impose 
any inappropriate 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 ISE neither solicited nor received written comments on the 
proposed rule change.

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

    Because the proposed rule change: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) by its terms, 
does not become operative for 30 days after the date of filing (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 
\6\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\7\ As required 
under Rule 19b-4(f)(6)(iii),\8\ the Exchange provided the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, at 
least five business days prior to the date of the filing of the 
proposed rule change.
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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4(f)(6).
    \8\ 17 CFR 240.19b-4(f)(6)(iii).
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    A proposed rule change filed under Rule 19b-4(f)(6)(iii) normally 
may not become operative prior to 30 days after the date of filing.\9\ 
However, Rule 19b-4(f)(6)(iii) \10\ 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 30-day operative delay and render the proposed 
rule change to become operative immediately. The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest. Waiver of the 30-day 
operative delay would enable the Exchange to implement the proposal as 
quickly as possible. In addition, the Commission notes that the BSE 
uses an order type that is substantially similar to the ISE's proposed 
CPO.\11\ The Commission does not believe that the proposed rule change 
raises new regulatory issues. For the reasons stated above, the 
Commission designates the proposal to become operative immediately.\12\
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    \9\ Id.
    \10\ Id.
    \11\ See Chapter V, Section 18(g) of the BOX Rules (describing 
the Price Improvement Period (``PIP'') and the operation of the BOX 
Customer PIP Order). See also Securities Exchange Act Release No. 
51651 (May 3, 2005), 70 FR 24848 (May 11, 2005) (order approving SR-
BSE-2005-01).
    \12\ For purposes of waiving the operative date of this proposal 
only, the Commission has considered the impact of the proposed rule 
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 the 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 the furtherance of the purposes of the Act.

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-2005-41 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303. All submissions should refer to File Number 
SR-ISE-2005-41. 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. 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-2005-41 and should be 
submitted on or before September 29, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-4873 Filed 9-7-05; 8:45 am]
BILLING CODE 8010-01-P