[Federal Register Volume 71, Number 114 (Wednesday, June 14, 2006)]
[Notices]
[Pages 34406-34407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-5370]



[[Page 34406]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53946; File No. SR-ISE-2006-27]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing of Proposed Rule Change Relating to Automatic 
Execution of Non-Customer Orders

June 6, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 
1934, as amended, (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on May 15, 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 Exchange. 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 ISE Rule 714 to provide that 
incoming Non-Customer Orders will not be automatically executed at 
prices that are inferior to the best bid or offer on another national 
securities exchange and to update the rule text with respect to the 
current handling of ``fill-or kill'' orders. The Exchange represents 
that this proposed rule change with respect to the handling of Non-
Customer Orders requires the Exchange to implement a systems change 
that will be implemented by early September 2006. Therefore, this part 
of the proposed rule change will not be operative until such systems 
change is implemented.\3\ The text of the proposed rule change is as 
follows, with deletions in [brackets] and additions in italics.
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    \3\ The Exchange will issue a Regulatory Information Circular 
notifying members at least five days prior to the operative date of 
the rule change. The Exchange clarified that it intends that the 
operative date, rather than the effective date, will be delayed 
until the required systems change can be implemented. The Exchange 
further clarified that the delayed operative data applies only to 
the handling of Non-Customer Orders. These clarifications have been 
reflected in the preceding text pursuant to the request of the 
Exchange. E-mail exchange between Kathy Simmons, Deputy General 
Counsel, Exchange, and Kim Allen, Special Counsel, Commission, 
Division of Market Regulation (``Division''), on June 6, 2006 (``E-
mail exchange'').
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Rule 714. Automatic Execution of [Public Customer] Orders

    (a) [Public Customer Orders to buy or sell options contracts on the 
Exchange] Incoming orders that are executable against orders and quotes 
in the System will be executed automatically by the System; provided 
that such orders will not be automatically executed by the System at 
prices inferior to the best bid or offer on another national securities 
exchange, as those best prices are identified in the System. Public 
Customer Orders that are not automatically executed will be handled by 
the Primary Market Maker pursuant to Rule 803(c). Non-Customer Orders 
that are not automatically executed will be rejected automatically by 
the System.
    (b) Paragraph (a) shall not apply [to fill-or-kill orders or] in 
circumstances where a ``fast market'' in the options series has been 
declared on the Exchange, or where a ``fast market'' in the options 
series has been declared in other markets or where quotations in other 
markets are otherwise not firm.
* * * * *

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 Exchange 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
    Currently, ISE Rule 714 provides that Public Customer Orders \4\ 
will not be automatically executed at a price that is inferior to the 
best bid or offer on another national securities exchange (``NBBO''). 
The Exchange proposes to amend ISE Rule 714 to clarify the language and 
to provide that Non-Customer Orders \5\ also will not be automatically 
executed at prices that are inferior to the NBBO. Under the proposed 
rule change, ISE Rule 714 will also be amended to specify that Public 
Customer orders that are not automatically executed because there is a 
better price on another market will be handled by the Primary Market 
Maker,\6\ while Non-Customer Orders that are not automatically executed 
will be rejected. Finally, the Exchange proposed to delete the 
provision stating that orders marked ``fill-or-kill'' can automatically 
be executed at prices that are inferior to the NBBO. With the adoption 
of the intermarket linkage rules, the Exchange modified its system so 
that a ``fill-or-kill'' condition would not cause orders to be 
automatically executed if there were a better price in another market, 
and this proposed rule change conforms the language of ISE Rule 714 to 
the Exchange's current practice.
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    \4\ Under ISE Rule 100(a)(32) and(33), a ``Public Customer'' is 
any person that is not a broker or dealer in securities, and a 
``Public Customer Order'' is an order for the account of a Public 
Customer. At the Exchange's request, the Division deleted ``or 
entity'' from the preceding sentence, as ``entity'' isn't referred 
to in he Exchange's definition of ``Public Customer.'' E-Mail 
exchange.
    \5\ Under ISE Rule 100(a)(22) and ( 23), a ``Non-Customer'' is 
any person or entity that is a broker or dealer in securities, and a 
``Non-Customer Order'' is an order for the account of a broker or 
dealer.
    \6\ ISE Rule 803(c) provides that a Primary Market Maker must 
address Public Customer Orders that are not automatically executed 
because there is a displayed bid or offer on another exchange 
trading the same options contract that is better than the best bid 
or offer on the Exchange, either (i) by executing a Public Customer 
Order at a price that matches the best price displayed or (ii) by 
sending to any other exchange(s) displaying the bet price a Linkage 
Order(s) according to the rules contained in chapter 19 or (iii) by 
executing a Public Customer Order at a price one minimum quoting 
increment inferior to the NBBO and contemporaneously sending a 
Linkage Order(s) to each exchange(s) disseminating the NBBO 
according to the Rules contained in Chapter 19.
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2. Statutory Basis
    The basis under the Act of this proposed rule change is the 
requirement under section 6(b)(5) of the Act \7\ that an exchange have 
rules that are designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. In particular, the proposal will prevent Non-Customer 
Orders from automatically trading at prices that are inferior to the 
NBBO.
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    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    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.

[[Page 34407]]

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 the self-regulatory organization 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-2006-27 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 20549-1090.
    All submissions should refer to File Number SR-ISE-2006-27. 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 available publicly. All submissions should refer to 
File Number SR-ISE-2006-27 and should be submitted on or before July 5, 
2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 06-5370 Filed 6-13-06; 8:45 am]
BILLING CODE 8010-01-M