[Federal Register Volume 71, Number 14 (Monday, January 23, 2006)]
[Notices]
[Pages 3582-3584]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-666]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53127; File No. SR-ISE-2005-57]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change and Amendment No. 1 Thereto Relating to Payment for Order Flow 
Fee Changes

January 13, 2006.
    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 December 1, 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 the 
Exchange. On December 23, 2005, the ISE submitted Amendment No. 1 to 
the proposed rule change.\3\ The ISE has designated this proposal as 
one changing a fee imposed by the ISE under Section 19(b)(3)(A)(ii) of 
the Act \4\ and Rule 19b-4(f)(2) thereunder,\5\ which renders the 
proposal, as amended, effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1 (``Amendment No. 1''), the ISE: (1) 
Eliminates the proposed $450,000 per firm cap and keeps the current 
cap of $450,000 per group of option classes; (2) states the 
procedures that Competitive Market Makers must follow in order to 
opt out of the payment for order flow program; (3) clarifies that 
the payment for order flow portion of the fee schedule will expire 
when the preferenced market maker program pilot program expires; (4) 
makes minor clarifications to the purpose section; (5) amends the 
rule text to conform it to the amended purpose section; and (6) 
makes technical corrections to the rule text.
    \4\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \5\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE proposes to amend its payment for order flow program to 
allow preferenced Competitive Market Makers to administer payment for 
order flow fees collected by the Exchange.\6\
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    \6\ See Amendment No. 1, supra note 3.
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    Below is the text of the proposed rule change, as amended. Proposed 
new language is in italics; proposed deletions are in [brackets].\7\
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    \7\ Id.

[[Page 3583]]



                                              ISE Schedule of Fees
----------------------------------------------------------------------------------------------------------------
   Electronic market place     Amount         Billable unit               Frequency                 Notes
----------------------------------------------------------------------------------------------------------------
Execution Fees
 
                                                  * * * * * * *
 Payment for Order       $0.55  Contract................  Transaction.............  Applies to market
 Flow.                                                                                       makers only for
                                                                                             each public
                                                                                             customer contract
                                                                                             executed; does not
                                                                                             apply to Complex
                                                                                             Orders; does not
                                                                                             apply to the
                                                                                             execution of a
                                                                                             Public Customer
                                                                                             Order by a Primary
                                                                                             Market Maker if the
                                                                                             Primary Market
                                                                                             Maker executes a
                                                                                             corresponding P/A
                                                                                             trade on another
                                                                                             exchange; does not
                                                                                             apply to a market
                                                                                             maker executing a
                                                                                             Public Customer
                                                                                             Order in the Price
                                                                                             Improvement
                                                                                             Mechanism; does not
                                                                                             apply to
                                                                                             transactions in
                                                                                             HSX, OOG, BYT, HVY,
                                                                                             RUF, JLO, SIN, RND,
                                                                                             IXZ, IXX and IXK.
                                                                                             The Payment for
                                                                                             Order Flow Fee will
                                                                                             be rebated
                                                                                             proportionately to
                                                                                             the members that
                                                                                             paid the fee
                                                                                             [suspended for a
                                                                                             Group of options
                                                                                             established under
                                                                                             Rule 802(b) when]
                                                                                             such that on a
                                                                                             quarterly basis the
                                                                                             Payment for Order
                                                                                             Flow fund balance
                                                                                             administered by a
                                                                                             Primary Market
                                                                                             Maker for [such
                                                                                             Group reaches] a
                                                                                             Group of options
                                                                                             established under
                                                                                             Rule 802(b) does
                                                                                             not exceed $450,000
                                                                                             and the Payment for
                                                                                             Order Flow fund
                                                                                             balance
                                                                                             administered by a
                                                                                             preferenced
                                                                                             Competitive Market
                                                                                             Maker for such a
                                                                                             Group does not
                                                                                             exceed $50,000[,
                                                                                             and shall be
                                                                                             reinstated when any
                                                                                             such fund balance
                                                                                             falls below
                                                                                             $450,000]. With
                                                                                             respect to orders
                                                                                             preferenced to a
                                                                                             Competitive Marker
                                                                                             Maker under Rule
                                                                                             713, a preferenced
                                                                                             Competitive Market
                                                                                             Maker that elects
                                                                                             not to administer a
                                                                                             fund will not be
                                                                                             charged the Payment
                                                                                             for Order Flow fee.
                                                                                             The Payment for
                                                                                             Order Flow fee
                                                                                             administered by
                                                                                             preferenced
                                                                                             Competitive Market
                                                                                             Makers, as
                                                                                             described above,
                                                                                             will be in effect
                                                                                             until June 10,
                                                                                             2006, the date on
                                                                                             which the
                                                                                             Preferenced Orders
                                                                                             pilot program
                                                                                             expires.
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------

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, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. 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 ISE proposes to amend its payment for order flow program to 
allow preferenced Competitive Market Makers to administer payment for 
order flow fees collected by the Exchange. The Commission recently 
approved the Exchange's proposed rule change to permit Electronic 
Access Members (EAMs) to ``preference'' their order flow to specified 
market makers.\8\ The Exchange states that, under this rule, if a 
preferenced market maker, which could be either a Primary Market Maker 
(PMM) or a Competitive Market Maker (CMM), is quoting at the national 
best bid or offer when ISE receives a preferenced order, that market 
maker receives an enhanced allocation of the order. The Exchange also 
operates a payment for order flow (``PFOF'') program as approved by the 
Commission.\9\ The Exchange states that this program is funded through 
a fee paid by Exchange market makers for each customer contract they 
execute. The Exchange represents that, currently, all funds collected 
by the Exchange are administered by the PMM for their group (or 
``bin'') of options classes.
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    \8\ See Exchange Act Release No. 51818 (June 10, 2005), 70 FR 
35146 (June 16, 2005) (SR-ISE-2005-18).
    \9\ See Exchange Act Release No. 43833 (January 10, 2001), 66 FR 
7822 (January 25, 2001) (SR-ISE-2000-10).
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    The Exchange proposes to amend its PFOF program to allow a CMM to 
administer the PFOF funds collected by the Exchange with respect to 
orders preferenced to it in a group of options classes.\10\ Each CMM 
pool would have a ceiling of $50,000.\11\ Preferenced CMMs would be 
able to choose not to administer PFOF pools, in which case the PFOF fee 
collected by the Exchange would go into the PFOF fund administered by 
the PMM in the group of options as it would have had the order not been 
preferenced to the CMM.\12\ A CMM will not be charged the PFOF fee for 
orders preferenced to it if

[[Page 3584]]

it determines not to administer PFOF pools.\13\
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    \10\ As is the case with the PFOF funds administered by the PMM, 
the PFOF fee collected on a preferenced order would be administered 
by the preferenced CMM whether or not the CMM was a party on a 
particular trade.
    \11\ In order to accommodate the introduction of the preferenced 
CMM PFOF pools each having a $50,000 ceiling in addition to the 
existing PMM PFOF fund that has a $450,000 ceiling, the Exchange 
will rebate back to members any balance of a fund that exceeds the 
applicable ceiling for a particular PFOF fund on a quarterly basis.
    \12\ CMMs must notify the Exchange if they elect to opt-out of 
the proposed payment for order flow fee program in writing no later 
than five business days prior to the end of the month for which the 
payment for order flow fee is to be assessed. Once an election not 
to participate has been made by a CMM, no notice to the Exchange is 
required in subsequent months unless there is a change in 
participation status.
    \13\ The Exchange states that the proposed rule change would be 
in effect until June 10, 2006, the date on which the Preferenced 
Orders pilot program expires. See Exchange Act Release No. 52066 
(July 20, 2005), 70 FR 43479 (July 27, 2005) (SR-ISE-2005-35). The 
Exchange notes that allowing a preferenced CMM to administer the 
PFOF fees collected by the Exchange with respect to preferenced 
orders is similar to the Philadelphia Stock Exchange's PFOF program. 
See Exchange Act Release No. 52568 (October 6, 2005), 70 FR 60120 
(October 14, 2005) (SR-Phlx-2005-58).
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2. Statutory Basis
    The Exchange believes that its proposal, as amended, is consistent 
with Section 6(b) of the Act \14\ in general, and furthers the 
objectives of Section 6(b)(4) of the Act \15\ in particular, in that it 
is an equitable allocation of reasonable dues, fees, and other charges 
among ISE members and other persons using its facilities.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will 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

    The foregoing proposed rule change, as amended, has been designated 
as a fee change pursuant to Section 19(b)(3)(A)(ii) of the Act \16\ and 
Rule 19b-4(f)(2) \17\ thereunder, because it establishes or changes a 
due, fee, or other charge imposed by the Exchange. Accordingly, the 
proposal will take effect upon filing with the Commission. At any time 
within 60 days of the filing of such proposed rule change, as amended, 
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.\18\
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    \16\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \17\ 17 CFR 240.19b-4(f)(2).
    \18\ The effective date of the original proposed rule change is 
December 1, 2005, and the effective date of Amendment No. 1 is 
December 23, 2005. For purposes of calculating the 60-day period 
within which the Commission may summarily abrogate the proposal, the 
Commission considers the period to commence on December 23, 2005, 
the date on which the Exchange submitted Amendment No. 1.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-2005-57 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE,, 
Washington, DC 20549-9303.

All submissions should refer to File Number SR-ISE-2005-57. 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, as amended, 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-2005-57 and should be submitted on 
or before February 13, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-666 Filed 1-20-06; 8:45 am]
BILLING CODE 8010-01-P