[Federal Register Volume 71, Number 12 (Thursday, January 19, 2006)]
[Notices]
[Pages 3142-3144]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-518]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53104; File No. SR-ISE-2006-02]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Relating to Directed Orders System Change

January 11, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on January 5, 2006, 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 the ISE. 
The proposed rule change has been filed by the ISE as effecting a 
change in an existing order-entry or trading system pursuant to section 
19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(5) thereunder,\4\ 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(5).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE is proposing to change its existing system as it relates to 
``Directed Orders.'' Specifically, the Exchange is proposing to 
identify to a Directed Market Maker (``DMM'') the identity of the firm 
entering a Directed Order. This system change will be effective until 
June 30, 2006, while the Commission considers a corresponding ISE 
proposal to amend its rules to specify that order-entry firm identity 
is disclosed to the DMM. In addition, the Exchange commits that it will 
reverse this system change prior to June 30, 2006, if the Commission 
staff prohibits all options exchanges from disclosing the identity

[[Page 3143]]

of order entry firms in their directed order systems. In that case, the 
Exchange will reverse this system change effective simultaneously with 
all other exchanges enforcing anonymity in their systems.\5\ The text 
of the proposed rule change is available on the ISE's Web site http://www.iseoptions.com/legal/proposed_rule_changes.asp), at the principal 
office of the ISE, and at the Commission's Public Reference Room.
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    \5\ In the event that the issue of anonymity in the Directed 
Order process is not resolved by June 30, 2006, the Exchange intends 
to submit another filing under Rule 19b-4(f)(5) extending this 
temporary system change.
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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, the Proposed Rule Change

1. Purpose
    The Exchange operates a Directed Order system in which Electronic 
Access Members (``EAMs'') can send an order to a DMM for possible price 
improvement.\6\ If a DMM accepts Directed Orders generally, that DMM 
must accept all Directed Orders from all EAMs. Once such a DMM receives 
a Directed Order, it either must enter the order into the Exchange's 
``Price Improvement Mechanism'' (``PIM'') or must release the order 
into the Exchange's limit order book, in which case there are certain 
restrictions on the DMM interacting with the order. While ISE rules do 
not specify that Directed Orders are sent to a DMM on an anonymous 
basis, prior to this filing, the Exchange did not disclose to a DMM the 
identity of the EAM sending a Directed Order.
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    \6\ See Securities Exchange Act Release No. 52331 (August 24, 
2005), 70 FR 51856 (August 31, 2005) (SR-ISE-2004-16).
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    The Boston Options Exchange (``BOX'') operates a system almost 
identical to ISE's Directed Order system, with one important 
distinction. Based on BOX's published rules, ISE believed that BOX's 
system had the same anonymity feature as ISE's system. However, BOX's 
system is not in fact anonymous, and its system provides BOX directed 
market makers with the identity of the firm entering an order.\7\ ISE's 
market makers find this feature very attractive in that it provides a 
DMM with relevant information when deciding whether or not to guarantee 
price improvement for an order. Without ISE also disclosing the 
identity of the order entry firm, ISE's Directed Order system is not 
competitive with the BOX's system. While the Boston Stock Exchange, 
Inc. (``BSE'') has filed a proposed rule change to conform the BOX 
rules to the actual operation of its system,\8\ BOX continues to 
identify firms entering directed orders while the Commission considers 
the pending rule filing.
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    \7\ See Securities Exchange Act Release No. 53015 (December 22, 
2005), 70 FR 77207 (December 29, 2005) (the ``BOX Proposal'').
    \8\ Id.
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    ISE believes that BOX has been non-compliant with its rules and 
that this places the ISE at a significant competitive disadvantage. ISE 
further believes that the only way that ISE can address the immediate 
inequity in the market is to modify ISE's system to disclose the 
identity of the EAM entering a Directed Order on a temporary basis 
while the Commission considers whether to approve the BOX Proposal. 
Thus, the purpose of this filing is to remove the anonymity feature 
from ISE's Directed Order system for a period ending on June 30, 2006. 
This system change is effective on filing under Rule 19b-4(f)(5). The 
ISE has simultaneously filed a proposed rule change, similar to the BOX 
Proposal, to specify in its rules that the identity of the entering 
firm is disclosed to a DMM,\9\ which if approved by the Commission, 
will make the system change permanent (the ``Permanent Rule 
Change'').\10\ The Permanent Rule Change has been filed pursuant to 
section 19(b)(2) of the Act to provide the Commission an opportunity to 
consider both the BOX and ISE proposals contemporaneously.
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    \9\ See Securities Exchange Act Release No. 53103 (January 11, 
2006) (File No. SR-ISE-2006-01).
    \10\ The ISE also enforces anonymity in certain other trading 
systems, such as its Facilitation Mechanism. The Exchange also plans 
to file a proposed rule change eliminating the anonymity provisions 
in certain of these areas.
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    Through this proposal, the ISE will be able to operate on an equal 
competitive basis with BOX while the Commission evaluates whether 
exchanges should be permitted to disclose order flow provider 
identities. The ISE commits that it will submit another rule change 
under Rule 19b-4(f)(5) to reverse this system change prior to June 30, 
2006, if the Commission staff determines not to approve the Permanent 
Rule Change and the BOX Proposal and prohibits all options exchanges 
from disclosing the identity of order entry firms in their directed 
order systems. In that case, the Exchange will reverse this system 
change effective simultaneously with BOX, and all other options 
exchanges having similar systems, enforcing anonymity in their systems.
2. Statutory Basis
    The Exchange believes that the basis under the Act is found in 
section 6(b)(5),\11\ in that the proposed rule change is designed to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts, to 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. In 
particular, the system change will enable the Exchange to remain 
competitive in the market place while the Commission considers 
anonymity issues across all options markets.
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    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change does not 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 unsolicited written comments from members or other interested 
parties.

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

    Because the foregoing proposed rule change effects a change in an 
existing order entry or trading system that (i) does not significantly 
affect the protection of investors or the public interest; (ii) does 
not impose any significant burden on competition; and (iii) does not 
have the effect of limiting access to or availability of the system, it 
has become effective pursuant to section 19(b)(3)(A)(iii) of the Act 
\12\ and Rule 19b-4(f)(5) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \13\ 17 CFR 19b-4(f)(5).

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[[Page 3144]]

    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.

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 No. SR-ISE-2006-02 on the subject line.
    Paper Comments
     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.

    All submissions should refer to File Number SR-ISE-2006-02. 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 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-2006-02 and should be submitted on or before 
February 9, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12)
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-518 Filed 1-18-06; 8:45 am]
BILLING CODE 8010-01-P