[Federal Register Volume 70, Number 249 (Thursday, December 29, 2005)]
[Notices]
[Pages 77214-77215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-8071]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53007; File No. SR-ISE-2005-48]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Order Granting Approval of a Proposed Rule Change and Amendments 
Nos. 1 and 2 Thereto Relating to Market Maker Quote Interaction

December 22, 2005.

I. Introduction

    On October 3, 2005, 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 amend ISE Rule 804(d) 
regarding a delay of up to one second before two market maker 
quotations interact. On October 21, 2005, the ISE submitted Amendment 
No. 1 to the proposed rule change.\3\ On November 3, 2005, the ISE 
submitted Amendment No. 2 to the proposed rule change.\4\ The proposed 
rule change and Amendments No. 1 and 2 were published for comment in 
the Federal Register on November 10, 2005.\5\ The Commission received 
no comments on the proposal. This order approves the proposed rule 
change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Form 19b-4 dated October 21, 2005, which replaced the 
original filing in its entirety (``Amendment No. 1'').
    \4\ See partial amendment dated November 3, 2005, which 
corrected a minor omission in the current rule text and a 
typographical error in the filing (``Amendment No. 2'').
    \5\ Securities Exchange Act Release No. 52729 (November 3, 
2005), 70 FR 68485 (``Notice'').
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II. Description

    Currently, ISE Rule 804(d) provides for a one-second delay before 
the quotations of ISE market makers

[[Page 77215]]

interact.\6\ As noted in SR-ISE-2004-24, the ISE treats orders and 
quotations differently, with ISE Rule 804(a) stating that only market 
makers may enter quotations on the ISE. Market makers use quotations to 
input and update prices on multiple series of options at the same time. 
Quotations generally are based on pricing models that rely on various 
factors, including the price and volatility of the underlying security. 
The ISE stated that as these variables change, a market maker's pricing 
model automatically updates quotations for some or all of an option's 
series. In contrast, an order is an interest to buy a stated number of 
contracts of one specific options series. The ISE noted that all ISE 
members, including ISE market makers, can enter orders.\7\
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    \6\ See Securities Exchange Act Release No. 49931 (June 28, 
2004), 69 FR 40696 (July 6, 2004) (``SR-ISE-2004-24'').
    \7\ ISE Rule 717 imposes various limitations on orders that 
Electronic Access Members may enter on the ISE, while ISE Rule 805 
governs market maker orders.
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    According to the ISE, the purpose of the one-second delay was to 
allow a market maker to update its quotations to reflect price changes 
in an underlying stock before another market maker's quotation could 
``hit'' the updating market maker's quotation. In SR-ISE-2004-24, the 
ISE represented that it promptly processes quotation updates when it 
receives them, but that there is invariably a lag between the time the 
underlying stock price first changes and the time by which the ISE can 
process all the corresponding quotation changes. In SR-ISE-2004-24, the 
ISE also stated its belief that the one-second delay would allow the 
ISE the time to process quotation updates, without effecting multiple 
executions during the update process. In the Notice, the ISE noted, 
however, that the one-second delay may no longer be necessary as the 
ISE trading system and its market maker members' quoting systems 
continue to advance technologically. Accordingly, the ISE proposes an 
amendment to ISE Rule 804(d) to give the ISE the flexibility to remove 
the one-second delay. In making a determination to remove the one-
second delay, the ISE stated that it would take into consideration 
input from its market maker members, particularly through the ISE's 
Market Maker Advisory Committee. The ISE also noted that any change 
made to the one-second delay would be implemented on a uniform, market-
wide basis (as opposed to, for example, a class-by-class basis). 
Further, the ISE stated that it would inform its members of any changes 
made to the one-second delay by distributing a Regulatory Information 
Circular prior to the implementation of any such change.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange \8\ and, in 
particular, the requirements of Section 6(b) of the Act \9\ and the 
rules and regulations thereunder. Specifically, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\10\ in 
that it 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 public interest.
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    \8\ 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).
    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    In SR-ISE-2004-24, the Commission noted the ISE's belief that, 
without the proposed one-second ``timer'' function, pricing 
inefficiencies would result on the Exchange, and ISE market makers 
would widen their quotations or limit size to avoid multiple executions 
against other market makers.\11\ To the extent the ISE trading system 
and its market maker members' quoting systems continue to advance 
technologically to reduce the likelihood of market maker quotes 
interacting, the one-second delay may no longer be necessary. 
Accordingly, the Commission believes that granting the ISE the 
flexibility to remove the one-second delay in such circumstance is 
consistent with the Act. Additionally, the Commission believes that 
permitting the ISE to determine to reinstate the one-second delay also 
is consistent with the Act, if the reinstatement of the delay is 
necessary to avoid the interaction of market maker quotations. In 
determining whether to remove the one-second delay, the Commission 
understands that the ISE would consult with its market maker members, 
particularly through the Exchange's Market Maker Advisory Committee. 
Regardless of whether the ISE makes any changes to the one-second 
delay, the Commission notes that ISE market makers would be required to 
be firm for their quotations for the same size to customers and broker-
dealer orders, including orders for the account of other ISE market 
makers.
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    \11\ In connection with the approval of SR-ISE-2004-24, the 
Commission granted ISE's request for a limited exemption from Rule 
602 of Regulation NMS under the Act (``Quote Rule''). Specifically, 
the Commission granted ISE market makers an exemption from their 
obligations under paragraph (c)(2) of the Quote Rule with respect to 
trades with matching ISE market maker quotations for no more than 
one second, provided that the quotations are locked or crossed for 
no more than one second, and that such ISE market maker is firm to 
all other customer and broker-dealer orders, including orders for 
the accounts of other ISE market makers. See letter from Robert 
Colby, Deputy Director, Division of Market Regulation, Commission, 
to Michael Simon, Senior Vice President and General Counsel, ISE, 
dated June 24, 2004.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-ISE-2005-48), as amended, is 
approved.
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    \12\ 15 U.S.C. 78f(b)(2).

    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. E5-8071 Filed 12-28-05; 8:45 am]
BILLING CODE 8010-01-P