[Federal Register Volume 70, Number 233 (Tuesday, December 6, 2005)]
[Notices]
[Pages 72684-72686]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-6887]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52856; File No. SR-ISE-2005-46]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing of Proposed Rule Change Relating to the 
Operation of Primary Market Maker Memberships

November 30, 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 September 27, 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, II, and III below, which Items have been prepared by ISE. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules to raise from two to three 
the number of Primary Market Maker (``PMM'') memberships an ISE member 
may operate.
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in [brackets].
* * * * *
Rule 303. Approval to Operate Multiple Memberships
    (a) An applicant to become a Member or an approved Member may seek 
approval to exercise trading privileges associated with more than one 
Membership in the form and manner prescribed by the Exchange.
    (b) An applicant or approved Member will be denied approval with 
respect to a particular Membership if (together with any of its 
affiliates) approval would result in the applicant or approved Member 
being approved to exercise the trading privileges associated with more 
than one (1) Primary Market Maker Membership or more than ten (10) 
Competitive Market Maker Memberships. This requirement may be waived by 
the Board for good cause shown, but in no event shall the Board waive 
this requirement if such waiver would result in the applicant or 
approved Member (together with any of its affiliates) being approved to 
exercise trading privileges associated with more than 30% [20%] of the 
outstanding Primary Market Maker Memberships or more than 20% of the 
outstanding Competitive Market Maker Memberships.
Supplementary Material to Rule 303
    .01 When making its determination whether good cause has been shown 
to waive the limitations contained in Rule 303(b), the Board will 
consider whether an operational, business or regulatory need to exceed 
the limits has been demonstrated. In those cases where such a need is 
demonstrated, the Board also will consider any operational, business or 
regulatory concerns that might be raised if such a waiver were granted. 
The Board only will waive such limitations when, in its judgment, such 
action is in the best interest of the Exchange.
    .02 In approving any Primary Market Maker to exercise the trading 
privileges associated with more than 20% of the outstanding Primary 
Market Maker Memberships, the Board will not approve any arrangement in 
which such Primary Market Maker would gain ownership or voting rights 
in excess of those permitted under the Exchange's Certificate of 
Incorporation or Constitution.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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 Exchange proposes to amend its rules to increase the number of 
PMM memberships that an ISE member may operate from two to three.\3\ A 
PMM membership manifests itself as a share of ISE Class B Common Stock, 
Series B-1, of which there are 10 shares authorized and outstanding. 
ISE's Certificate of Incorporation (``Certificate'') currently 
prohibits a member from owning (or voting the shares representing) more 
than 20 percent of the class of any ISE stock, thus limiting any one 
person from owning more than two PMM memberships.\4\ Similarly, ISE's 
rules prohibit a member from operating more than 20 percent of a class 
of market maker memberships.\5\ The result is that no one person can 
own, vote or operate more than two PMMs.
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    \3\ A PMM serves a function similar to that of a specialist on 
other exchanges. Among other things, a PMM must provide continuous 
quotations in all assigned options classes and must address customer 
orders when another exchange is displaying a better price. See ISE 
Rule 803(c).
    \4\ See Sections III(a)(ii) and (b) of ISE's Certificate.
    \5\ See ISE Rule 303(b).
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    Due to the continued concentration and specialization in the 
options market making community, ISE is proposing to raise the limit on 
the number of PMMs one firm can operate from two to three. ISE believes 
this change is part of the natural evolution of the markets. 
Specifically, as competition inside and between exchanges increases, 
there continues to be consolidation and contraction of market makers. 
ISE believes that this evolution will result in a smaller number of 
strong, competitive market makers that will provide the Exchange with 
excellent market making capabilities. ISE believes that this is similar 
to the concentration of specialist units on the major equity exchanges, 
such as the New York Stock Exchange (``NYSE''), where there currently 
are only seven specialist units, down from over three dozen.\6\
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    \6\ As of December 31, 1992 there were 40 specialist firms on 
the NYSE; as recently as December 31, 1997 there were 37 specialist 
firms. See Shawn A. Corwin, Specialist Portfolios, Specialist 
Performances, and New Listing Allocations on the NYSE 7-8 
(University of Georgia, Working Paper, 1999).

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[[Page 72685]]

    The Exchange is concerned that, as the number of strong market 
makers decreases, there may not be a sufficient number of members 
qualified to be PMMs if it retains the current two-PMM limit. ISE 
currently has seven PMMs operating the 10 PMM memberships, with three 
PMMs operating two such memberships and four PMMs operating one. While 
there is a constant entry and exit into options market making, ISE 
believes that if there is further contraction in the market making 
community, the Exchange may find itself with an insufficient number of 
PMMs to cover all ten memberships.
    In addition, the options markets are highly competitive, and each 
exchange actively seeks to attract order flow by disseminating tight 
and liquid markets and by providing a high level of customer 
satisfaction. Ensuring that the Exchange has high quality PMMs is 
critical in this competitive battle. By limiting a member to operating 
two PMM memberships, the Exchange believes it could be forced to 
approve the operation of a PMM by a weaker member while a stronger PMM 
operating two such memberships also would be willing to operate such 
membership.
    The Exchange recognizes that increasing the number of PMM 
memberships a member can operate could raise issues regarding 
concentration of market making expertise. In this regard, the proposal 
is only for an enabling rule. The ISE Board would need to approve any 
member application to operate three PMMs and would need to find ``good 
cause'' to do so. Thus, the Board will need to weigh each potential 
application on its own merits, balancing the potential benefits of 
allowing a member to operate three PMM memberships against any 
potential concentration concerns.
    This proposed rule change would not amend the current prohibitions 
in the Certificate against a member owning or voting more than two such 
memberships. Thus, the only way a member could operate a third PMM 
membership would be to lease such membership, with the lease providing 
that the lessor retains all voting rights.\7\ The proposed 
Supplementary Material .02 to Rule 303 makes this point clear. However, 
the Exchange believes it may be appropriate to permit a member to own 
and vote three PMM memberships. Thus, upon approval of this proposed 
rule change, the ISE Board would consider an additional proposed change 
to the Certificate regarding ownership and voting limitations. If the 
ISE Board approves such a change the Exchange would need to seek 
stockholder approval of that change before submitting it to the 
Commission for its consideration.
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    \7\ ISE has confirmed that (i) it will not approve any leasing 
arrangements under this proposed rule change unless the lessor/owner 
retains all voting rights and (ii) the voting limitations contained 
in the Certificate supersede any of the lessor/owner's rights to 
transfer voting rights. Telephone call between Nancy Sanow, 
Assistant Director, Commission; Leah Mesfin, Special Counsel, 
Commission; Rahman Harrison, Attorney, Commission; and Michael 
Simon, General Counsel and Secretary, ISE on November 18, 2005.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \8\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \9\ in particular, in that it 
is designed to promote just and equitable principles of trade and to 
remove impediments to and perfect the mechanisms of a free and open 
market and a national market system. In particular, the proposed rule 
change would provide the Exchange with greater flexibility in ensuring 
that strong PMMs operate on ISE.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 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 would 
impose any burden on competition that is 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 not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any written comments from members or other interested parties.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which ISE consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2005-46 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-ISE-2005-46. 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 such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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 publicly available. All submissions should refer to 
File Number SR-ISE-2005-46 and should be submitted on or before 
December 27, 2005.


[[Page 72686]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-6887 Filed 12-5-05; 8:45 am]
BILLING CODE 8010-01-P