[Federal Register Volume 71, Number 157 (Tuesday, August 15, 2006)]
[Notices]
[Pages 46947-46952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-13335]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54287; File No. SR-ISE-2006-48]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing of Proposed Rule Change Relating to the Adoption 
of Rules To Govern its Electronic Trading System for Equities

August 8, 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 August 4, 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\ 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 ISE proposes to adopt rules and amend existing ISE rules to 
govern its new electronic trading system for equities, the ISE Stock 
Exchange, LLC (``ISE Stock Exchange''), which will be an equity 
exchange facility of the ISE. In addition, the ISE proposes to apply 
certain of its options rules to the trading of equity securities on the 
ISE Stock Exchange. The proposed rules address the electronic trading 
of equities under Regulation NMS under the Act, and the rules and 
regulations thereunder. The text of the proposed rules is available on 
the Commission's Web site at http://www.sec.gov (under Self-Regulatory 
Organization Rulemaking and National Market System Plans), on the ISE 
Web site at http://www.iseoptions.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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
    Background. The Exchange is proposing to adopt a series of rules in 
connection with its ISE Stock Exchange. The ISE Stock Exchange consists 
of a new electronic trading system developed to trade equities 
(``System''), which will be a facility of the ISE. The System will 
provide for the electronic execution and display of orders as well as a 
midpoint matching system. The class of members who will be eligible to 
trade on the ISE Stock Exchange are electronic access members 
(``EAMs'') that the ISE specifically authorizes to trade in the System 
(``Equity EAMs''). Orders will be ranked in price-time priority 
regardless of the identity of the entering Equity EAM. Executions on 
the ISE Stock Exchange will take place automatically and immediately 
upon order entry if trading interest is available. The System will 
provide a routing service for orders when trading interest is not 
present on the ISE Stock Exchange. The ISE Stock Exchange will not have 
any market makers, only Equity EAMs who will provide liquidity to the 
Exchange. The ISE Stock Exchange will be an order-driven marketplace. 
There will be no market makers that are required to provide quotes.
    The proposed rules incorporate the trade-through rule of Regulation 
NMS \3\ by requiring that, for any execution to occur on the Exchange 
during regular trading hours,\4\ the price must be equal to, or better 
than, any ``protected quotation'' within the meaning of Regulation NMS 
(``Protected Bid or Protected Offer''), unless an exception to Rule 611 
of Regulation NMS is available.\5\ ISE Stock Exchange proposes to 
direct to away markets for execution all or a portion of the orders 
that cannot be executed at the Protected Bid or Protected Offer on the 
Exchange.\6\
    The Exchange previously filed with the Commission pursuant to Rule 
19b-5 under the Act a Form PILOT to

[[Page 46948]]

commence operation of the Exchange's MidPoint Match System.\7\ Included 
within the Form PILOT filing are rules governing trading in the 
MidPoint Match System. The rules filed under Form PILOT, which have not 
been approved by the Commission, are included in this filing for 
Commission approval.
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    \3\ 17 CFR 242.611.
    \4\ The hours of business during which transactions may be made 
on the ISE Stock Exchange are set forth in proposed ISE Rule 2102 
and are referred to herein as ``regular trading hours.''
    \5\ See proposed ISE Rule 2107(c).
    \6\ See proposed ISE Rule 2107(d).
    \7\ See Form PILOT ISE-2006-01 (July 28, 2006).
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    The Exchange has filed with the Commission pursuant to Rule 19b-4 
under the Act a proposed rule change to establish the ISE Stock 
Exchange, LLC as a facility (as defined in Section 3(a)(2) of the Act) 
\8\ of the Exchange.\9\
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    \8\ 15 U.S.C. 78c(a)(2).
    \9\ See Securities Exchange Act Release No. 54273 (August 3, 
2006) (SR-ISE-2006-46).
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    Trading Rules. The ISE proposes to adopt new Chapter 21, which will 
be added to the Exchange's Rules, and to amend other rules to 
accommodate the proposed new System. Although certain aspects of the 
Exchange's Rules are incorporated by reference, as noted below, the 
majority of the rules contained in proposed Chapter 21 are new.
    Operating Hours. Proposed ISE Rule 2102 provides for the ISE Stock 
Exchange to operate during regular trading hours. Specifically, the 
System will accept orders each day prior to the opening. ISE Stock 
Exchange will open for trading each day for NYSE and Amex securities 
once the primary market in that security opens on a primary trade 
followed by a NBBO quote.\10\ The ISE Stock Exchange will open for 
trading each day for Nasdaq securities with the first received NBBO 
after 9:30 a.m. The ISE Stock Exchange will close at the same time as 
the close of the regular trading session on the primary market.
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    \10\ Proposed ISE Rule 2106(c) defines the primary market as the 
listing market for a security. If a security is traded on both the 
NYSE and the Amex, the primary market would be considered the NYSE. 
If a security is listed on both the NYSE and Nasdaq, the NYSE would 
be considered the primary market.
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    Opening. ISE Stock Exchange will open based upon the opening of the 
primary market for a security. When the primary market is either the 
NYSE or the Amex, the opening trade will be executed at the midpoint of 
the first reported NBBO subsequent to a reported trade on the primary 
market. When the primary market is Nasdaq, the opening trade will be 
executed at the midpoint of the first reported NBBO. All orders 
eligible to trade at the midpoint will be processed in time sequence, 
beginning with the oldest order. Matches will occur until there is no 
remaining volume or there is an imbalance of orders. Following the 
opening execution process in an individual security, all orders 
remaining will be executed in accordance with the proposed ISE Rules, 
discussed in more detail below. All other orders will be displayed on 
the order book, canceled, or routed to other Trading Centers in 
accordance with proposed ISE Rule 2107(d).
    Re-openings will be handled in the same manner as the opening, as 
discussed above.
    Regular Trading Session. Once the opening occurs for individual 
securities, ISE Stock Exchange will operate during regular trading 
hours. All displayed orders will be automatically matched following 
price and time priority as soon as they are entered in the order book. 
Except as provided below, incoming orders will be executed at or within 
the NBBO.
    Closing. The ISE Stock Exchange will cease accepting and executing 
orders at the time the primary market closes.
    Newly Defined Terms. The Exchange is proposing to adopt new terms 
as part of proposed Chapter 21 to accommodate the trading of equities 
under Regulation NMS. In addition to the adoption of general terms 
governing equity trading, the Exchange proposes to adopt terms specific 
to Regulation NMS and trading thereunder.\11\ Specifically, the 
Exchange is proposing to adopt the following definitions, each of which 
has the same meaning as contained in Regulation NMS: ``Automated 
Quotation,'' ``Automated Trading Center,'' ``Manual Quotation,'' 
``Protected Bid or Protected Offer,'' ``Protected Quotation,'' ``Trade-
Through,'' and ``Trading Center.''
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    \11\ See proposed ISE Rule 2100(c).
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    Eligible Securities and Eligible Orders. As set forth in proposed 
ISE Rule 2101(a), the ISE Stock Exchange will trade equity securities 
only pursuant to unlisted trading privileges (``UTP''). While the 
proposed rules would allow the ISE Stock Exchange to trade common 
stock, Commodity-Based Trust Shares, Currency Trust Shares, Partnership 
Units, Trust Issued Receipts including those based on Investment 
Shares, and Investment Company Units by either listing and/or trading 
pursuant to UTP, in order to list equity securities on the Exchange, 
the Exchange would first need to seek Commission approval and amend its 
rules to comply with Rule 10A-3 under the Act and to incorporate 
qualitative listing criteria.
    For orders entered into the ISE Stock Exchange, the minimum price 
variation (``MPV'') is $0.01, with the exception of securities that are 
priced less than $1.00 for which the MPV for order entry is 
$0.0001.\12\
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    \12\ The Exchange has committed to amend its proposed MPV rule 
to conform with the language of Rule 612 of Regulation NMS under the 
Act. The amended rule would read as follows: ``The minimum price 
variation (``MPV'') for bids, offers, and orders that are displayed, 
ranked or accepted on the ISE Stock Exchange is $0.01, with the 
exception of bids, offers, and orders that are priced less than 
$1.00, for which the MPV is $0.0001.'' Telephone conversation 
between Laura Clare, Assistant General Counsel, ISE, and Nancy 
Sanow, Assistant Director, Division of Market Regulation, 
Commission, on August 7, 2006.
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    The System will not execute odd lot orders. The System will accept 
round lot orders and partial round lot (``PRL'') orders for execution. 
Round lot orders will be executed in full when contra side interest is 
present. The round lot portions of a PRL order will be executed when 
contra side interest is present; the odd lot portion of the PRL order 
will be cancelled upon completion of the last round lot execution of 
the PRL order.
    To be eligible to enter routable orders into the ISE Stock 
Exchange, Equity EAMs must, among other things, enter into a routing 
agreement with the Outbound Routing Facility, as described below.\13\ 
Despite the existence of a routing agreement, if Equity EAMs do not 
want certain orders routed to away Trading Centers, they may prohibit 
routing by entering orders that are not eligible for routing by virtue 
of the order type, as discussed below.
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    \13\ See proposed ISE Rule 2105(d).
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    The following order types are eligible for execution on the ISE 
Stock Exchange:\14\
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    \14\ See proposed ISE Rule 2104.
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    The ISE Stock Exchange will accept Market Orders. A Market Order is 
an order to buy or sell a stated amount of a security that is to be 
executed immediately and automatically at the best available price(s) 
when the order reaches the ISE Stock Exchange to the greatest extent 
possible without causing a Trade-Through. Any unexecuted shares of a 
Market Order may be routed in whole or in part to other Trading Centers 
with Protected Quotations.
    The ISE Stock Exchange will accept a number of types of limited 
priced orders. The System will accept Limit Orders. Limit Orders are 
one-sided orders to buy or sell a stated quantity of a security at a 
specified price or better. The System will also accept Reserve Orders. 
Reserve Orders are limit orders with a portion of the size that is to 
be displayed and a reserve portion of the size at the same price that 
is not to be displayed, but is to be used to refresh the displayed size 
when the displayed size is executed in full. Limit Orders and Reserve 
Orders will be routable

[[Page 46949]]

unless otherwise marked as discussed below by an Equity EAM.
    Other limited-price orders include Fill-or-Kill (``FOK'') Orders, 
Immediate-or-Cancel (``IOC'') Orders and Intermarket Sweep Orders 
(``ISO''). IOC Orders are executed immediately and automatically 
against existing orders on the System to the greatest extent possible 
without causing a Trade-Through, and any unexecuted balance will be 
canceled. Any Equity EAM may use an IOC Order to immediately and 
automatically execute against the full size of the displayed quotation 
on the System (including any undisplayed or reserve size available at 
the price of the displayed quotation). As with all executions on the 
ISE Stock Exchange, the System will immediately and automatically 
transmit a response to the Equity EAM who sent the IOC Order indicating 
the action taken with respect to the IOC Order. Additionally, the 
System will immediately and automatically update its quotation as a 
result of the execution.
    ISOs are executed immediately and automatically against existing 
orders on the System at their executable price, in order of their 
ranking, and the shares of the ISO not so executed will be 
cancelled.\15\ An ISO will be executed on the ISE Stock Exchange 
without regard to any Protected Quotations.
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    \15\ The ISE Stock Exchange intends the ISO Order to be 
equivalent to the Intermarket Sweep Order defined in Rule 600(b)(30) 
of Regulation NMS under the Act.
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    The System will accept the following orders to be handled on the 
ISE Stock Exchange, without routing to another Trading Center: IOC 
Order, FOK Order, Not Routable Order and Post Only Order.\16\ FOK 
Orders are to be executed in their entirety or cancelled upon receipt. 
Not Routable Orders are limit orders that are to be executed in whole 
or in part upon receipt, and if not fully executed, displayed on the 
ISE Stock Exchange, as long as the order would not be executable 
against a Protected Quotation.\17\ Post Only Orders are limit orders 
that are to be displayed on the ISE Stock Exchange upon receipt or 
cancelled if they are executable upon entry, either on the ISE Stock 
Exchange or at another Trading Center.
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    \16\ See proposed ISE Rules 2107(b)(2)(i), (ii), (iii), (iv), 
respectively.
    \17\ See proposed ISE Rule 2112.
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    The System also will accept Pegged Orders.\18\ Pegged Orders are 
limit orders to buy or sell a stated amount of a security at a 
displayed price set to track the current NBBO. The tracking of the 
relevant NBBO for Pegged Orders will occur on a real-time basis. If the 
calculated price for the Pegged Order would exceed its limit price, it 
will no longer track and will remain displayed at its limit price.
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    \18\ See proposed ISE Rule 2104(j).
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    The System will accept Midpoint Match (``MPM'') Orders.\19\ MPM 
Orders are unpriced orders to buy or sell a stated quantity of an 
Equity Security at the midpoint of the NBBO. A MPM Order may be entered 
with a boundary price, and the System will not execute such order 
outside of the boundary price. Any boundary price must be in whole 
penny increments.
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    \19\ See proposed ISE Rule 2128.
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    Order Routing. When the ISE Stock Exchange does not have interest 
at the NBBO, it will offer a routing service for Equity EAMs. Certain 
order types, including Market Orders and Limit Orders, are eligible to 
be routed.\20\
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    \20\ See proposed ISE Rule 2107(d).
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    Market Orders and Limit Orders Executable on the ISE Stock 
Exchange. An IOC or ISO will automatically be sent to one or more 
Trading Centers with a Protected Bid or Protected Offer that is better 
than the ISE Stock Exchange quote for the lesser of the full displayed 
size of the Protected Bid or Protected Offer or the balance of the 
order. Any additional balance of the order will be executed on the ISE 
Stock Exchange simultaneously. If the market is crossed, the order may 
be executed as described below.
    Limit Orders Unexecutable on the ISE Stock Exchange. If display of 
a limit order (or any balance thereof) on the ISE Stock Exchange would 
lock or cross a Protected Bid or Protected Offer, an ISO order will 
automatically be sent to one or more Trading Centers with a Protected 
Bid or Protected Offer that would be locked or crossed by the display 
of the order for up to the full displayed size of the Protected Bid or 
Protected Offer. Any additional balance of the order will be displayed 
on the ISE Stock Exchange immediately.
    Market Orders Unexecutable on the ISE Stock Exchange. An IOC will 
automatically be sent to one or more Trading Centers with a Protected 
Bid or Protected Offer for the full size of the market order that is 
not executable on the ISE Stock Exchange.
    The following order types are, by their terms, never routed: FOK 
Orders, IOC Orders, MPM Orders, Not Routable, and Post Only. The System 
will not route orders to away quotations that are not Protected 
Quotations, unless required by ISE Rules. Additionally, the System may 
trade through the price of away quotations that are not Protected 
Quotations.
    Priority of Orders. The ISE Stock Exchange will rank displayed 
orders on the System in strict price-time priority.\21\ Orders are 
ranked beginning with the highest priced orders to buy and the lowest 
priced orders to sell. For the purposes of ranking, the System uses the 
price at which the order is displayed.\22\ Within each price, orders 
are ranked in time priority based on the time that an order is 
displayed or ``updated'' at that price, except that the undisplayed 
portion of the Reserve Orders will be ranked after all other orders and 
displayed portions of Reserve Orders at the same price. Orders that are 
updated or changed are ranked based on the time of change.
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    \21\ See proposed ISE Rule 2107.
    \22\ According to the Exchange, Equity EAMs can choose to place 
orders into MPM or into the displayed market. Orders placed into the 
displayed market will be eligible, by default, to interact with MPM 
Orders for purposes of gaining price improvement. Optionally, orders 
in the displayed market can bypass MPM by being marked as No MPM. 
The Exchange represented that it will amend the proposed rule change 
to set forth more clearly how orders entered into the displayed 
market would interact with MPM Orders. Telephone conversation among 
Laura Clare, Assistant General Counsel, and Robert Books, ISE, and 
Nancy Sanow, Assistant Director, and David Orlic, Special Counsel, 
Division of Market Regulation, Commission, on August 8, 2006.
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    Anonymity. Except as provided below, transactions executed on the 
ISE Stock Exchange will be processed anonymously.\23\ This means that 
the ISE Stock Exchange transaction reports will indicate the details of 
the transaction, but will not reveal contra party identities.\24\ The 
Exchange believes that post trade anonymity should benefit investors 
because preserving anonymity until and after the settlement of a trade 
should limit the potential market impact

[[Page 46950]]

that disclosing the Equity EAMs identity may have. Specifically, when 
contra party identity is revealed, Equity EAMs may be able to detect 
trading patterns and make assumptions about the potential direction of 
the market based on the Equity EAM's presumed client base. For example, 
if the Equity EAM handles large institutional orders and becomes an 
active buyer in a security, others could anticipate such demand and 
adjust their trading strategy accordingly. The Exchange believes that 
this could result in increased costs. The Exchange believes that post-
trade anonymity should not compromise an Equity EAM's ability to settle 
an erroneous trade, because under proposed ISE Rule 2127, the clearly 
erroneous execution resolution process is coordinated by the Exchange, 
without the need for contra parties to know each other's identities. By 
masking the Equity EAM's identity, the Exchange believes it may help 
Equity EAMs meet their best execution obligations by mitigating market 
impact.\25\
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    \23\ See proposed ISE Rule 2117.
    \24\ The ISE has submitted a request for a limited exemption 
from paragraph (a)(2)(i)(A) of Rule 10b-10 under the Act on behalf 
of Equity EAMs that execute trades on the ISE for their customers 
and a request for no-action relief with respect to the corresponding 
books and records requirements of Rules 17a-3 and 17a-4 under the 
Act. Rule 10b-10, among other things, requires a broker-dealer to 
disclose to its customers the identity of the party the broker-
dealer sold to, or bought from, to fill the customer's order. The 
ISE Stock Exchange will not routinely reveal the identity of the 
actual contra-party when the order is executed against another ISE 
Equity EAM. Therefore, the Equity EAMs will not be able to comply 
with the contra-party identification requirement of Rule 10b-10. To 
permit Equity EAMs to utilize the ISE Stock Exchange without 
violating Rule 10b-10, the Exchange is seeking an exemption, on 
behalf of such Equity EAMs from the contra-party identification 
requirement. Additionally, the Exchange has asked the Commission not 
to recommend enforcement action for violations of the corresponding 
books and records requirements of Rules 17a-3 and 17a-4 if, in lieu 
of making and preserving a separate record, a broker-dealer relies 
on the Exchange's retention of the identities of Equity EAMs that 
execute anonymous trades on the ISE Stock Exchange.
    \25\ See Securities Exchange Act Release No. 49053 (January 12, 
2004), 69 FR 2642, (January 16, 2004) (SR--PCX-2003-63) (notice of 
filing and immediate effectiveness of proposed rule change by the 
Pacific Exchange, Inc. relating to post-trade anonymity to its ETP 
Holders).
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    The Exchange only will reveal the identity of the Equity EAM or the 
Equity EAM's clearing firm in the following circumstances: (1) For 
regulatory purposes or to comply with an order of a court or 
arbitrator; (2) when the National Securities Clearing Corporation 
(``NSCC'') ceases to act for the Equity EAM or the Equity EAM's 
clearing firm and NSCC determines not to guarantee the settlement of 
the Equity EAM's trades; or (3) on risk management reports provided to 
the contra party of the Equity EAM or Equity EAM's clearing firm each 
day after 4 p.m. that discloses trading activity on an aggregate dollar 
value basis. Also, the Exchange will reveal to an Equity EAM, no later 
than the end of the day on the date an anonymous trade was executed, 
when that Equity EAM submits an order that has executed against an 
order submitted by that same Equity EAM.\26\
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    \26\ See proposed ISE Rule 2117(d) and (e).
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    To satisfy the Equity EAM's recordkeeping obligations under Rules 
17a-3(a)(1) \27\ and 17a-4(a) under the Act,\28\ the ISE Stock Exchange 
will, with the exception of those circumstances described below, retain 
for the period specified in Rule 17a-4(a) the identity of each Equity 
EAM that executes an anonymous transaction. In addition, Equity EAMs 
will retain the obligation to comply with Rules 17a-3(a)(1) and 17a-
4(a) whenever they possess the identity of their contra party. In 
either case, the information will be retained in its original form or a 
form approved under Rule 17a-6 under the Act.\29\
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    \27\ 17 CFR 240.17a-3(a)(1).
    \28\ 17 CFR 240.17a-4(a).
    \29\ 17 CFR 240.17a-6.
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    Prevention of Trade-Throughs. The System is designed to 
automatically prevent trade-throughs of Protected Quotations. The 
System will accomplish this in two principal ways: (1) Through the use 
of outbound routing for those orders that will be available to route; 
and (2) by displaying orders at prices that would not cause a trade-
through when executed. Additionally, the System will take advantage of 
various exceptions to Rule 611 of Regulation NMS under the Act.\30\ The 
Exchange has proposed to adopt an exception (``self-help'') to allow 
for the System to trade through a Protected Quotation displayed by a 
Trading Center that is experiencing a failure, material delay, or 
malfunction of its systems or equipment. The System may bypass those 
Protected Quotations by: (1) Notifying the non-responding Trading 
Center immediately after (or at the same time as) electing self-help; 
and (2) assessing whether the cause of the problem lies with its own 
systems and, if so, taking immediate steps to resolve the problem. ISOs 
may, by definition, trade through Protected Quotations when the System 
has simultaneously routed an intermarket sweep order to execute against 
the full displayed size of that Protected Quotation. Additionally, 
transactions executed while the Protected Quotations are crossed are 
permissible.
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    \30\ See proposed ISE Rule 2107(c).
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    Locked and Crossed Markets. The ISE Stock Exchange will not 
intentionally lock or cross any away Protected Quotations on another 
Trading Center,\31\ except in certain circumstances. For instance, the 
System may lock or cross an away Protected Quotation: (1) When a 
Protected Bid is higher than a Protected Offer or (2) if the System has 
first routed an order to that quotation and all better priced 
quotations for their full displayed size.
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    \31\ See proposed ISE Rule 2112.
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    Clearly Erroneous Executions. Pursuant to proposed ISE Rule 2127, 
an Equity EAM that receives an execution on an order that was submitted 
erroneously to the ISE Stock Exchange for its own or customer account 
may request that the Market Control, along with a member of the 
regulatory staff, review the transaction under ISE Rule 2127(b) within 
the time limits described therein. Market Control will review the 
transaction with a view toward maintaining a fair and orderly market 
and the protection of investors and the public interest. A member of 
the regulatory staff will advise and participate in all steps of Market 
Control's review of the transaction. Based upon this review, Market 
Control will decline to ``break'' a disputed transaction if Market 
Control believes that the transaction under dispute is not clearly 
erroneous. However, if Market Control determines the transaction in 
dispute is clearly erroneous, Market Control will declare that the 
transaction is null and void or modify one or more terms of the 
transaction. When adjusting the terms of a transaction, Market Control 
will seek to adjust the price and/or size of the transaction to achieve 
an equitable rectification of the error that would place the parties to 
a transaction in the same position, or as close as possible to the same 
position, as they would have been in had the error not occurred. For 
purposes of the clearly erroneous rule, the terms of a transaction are 
``clearly erroneous'' when there is an obvious error in any term, such 
as price, number of shares or other unit of trading, or identification 
of the security.
    Market Control may, on its own motion, review transactions on the 
ISE Stock Exchange that arose during any disruption or malfunction in 
the use or operation of any electronic communications or trading 
facilities of the ISE Stock Exchange, or extraordinary market 
conditions or other circumstances in which the nullification or 
modification of transactions may be necessary for the maintenance of a 
fair and orderly market or the protection of investors and the public 
interest. Each Equity EAM will be notified as soon as practicable, and 
the Equity EAM aggrieved by the action may appeal such action to the 
Trade Panel.
    Access to the ISE Stock Exchange. The class of members who will be 
eligible to trade on the ISE Stock Exchange are Equity EAMs. There are 
no differences in access offered to different classes of members. 
However, only Equity EAMs that use the Financial Information Exchange 
(``FIX'') Protocol--as opposed to the Common Message Switch (``CMS'') 
Protocol--will be able to receive information regarding Solicitations 
of Interest, as discussed below.
    All current EAMs are eligible to become Equity EAMs. They will need 
to certify that they have operational connectivity to the System. In 
addition, they will have to pay any standard ISE Stock Exchange access 
fees. Any broker-dealer that is not currently an EAM can

[[Page 46951]]

become an Equity EAM first by applying for EAM status through the 
existing membership process and then by connecting to the ISE Stock 
Exchange and paying any applicable fees. Such fees will be the same for 
current and new EAMs seeking to become Equity EAMs. All Equity EAMs 
also will need the ability to clear ISE Stock trades at DTCC, either by 
self-clearing or through the use of a DTCC member.
    Outbound Routing Facility. In connection with the proposed changes 
to the trading rules described above, the Exchange intends to have a 
contractual relationship with a broker-dealer that will function solely 
as the outbound routing facility (``ORF'') of the Exchange.\32\ ORF 
will be both a member of the NASD and the ISE. ORF will provide an 
optional routing service for the Exchange, in which ORF will route 
orders from the Exchange to Trading Centers with Protected Quotations 
or, when required, Manual Quotations through other brokers (``Access 
Brokers'') that are members or participants of those Trading Centers. 
As an Outbound Router, ORF will receive routing instructions from the 
System, route orders to another Trading Center through an Access Broker 
and be responsible for reporting resulting executions back to the 
System, which in turn will report resulting executions back to the 
Equity EAM. All orders routed through ORF will be subject to the 
Exchange's rules. Use of the ORF is optional for Equity EAMs, as 
discussed above.
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    \32\ ORF is engaged solely in the business of acting as a 
routing agent. Telephone conversation between Laura Clare, Assistant 
General Counsel, ISE, and Nancy Sanow, Assistant Director, Division 
of Market Regulation, Commission, on August 7, 2006.
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    The Outbound Router function of ORF will operate as a facility (as 
defined in Section 3(a)(2) of the Act) of the Exchange.\33\ As such, 
the Outbound Router function of ORF is subject to the Commission's 
continuing oversight. In particular, and without limitation, under the 
Act, the Exchange is responsible for filing with the Commission 
proposed rule changes and fees relating to the ORF Outbound Router 
function, and ORF is subject to exchange non-discrimination 
requirements.\34\
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    \33\ 15 U.S.C. 78c(a)(2).
    \34\ 34 15 U.S.C. 78f(b)(6).
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    Pursuant to Rule 17d-1 under the Act,\35\ where a member of the 
Securities Investor Protection Corporation is a member of more than one 
self-regulatory organization (``SRO''), the Commission will designate 
to one of such organizations the responsibility for examining such 
member for compliance with the applicable financial responsibility 
rules.\36\ The SRO designation by the Commission is referred to as a 
``Designated Examining Authority'' (``DEA''). As noted above, ORF will 
apply to become a member organization of the Exchange, and a member of 
the NASD. The NASD is an SRO not affiliated with the Exchange or its 
affiliates and is a DEA pursuant to Rule 17d-1 under the Act.\37\ The 
Exchange will also enter into a 17d-2 Agreement with the NASD to 
delegate to the NASD all regulatory oversight and enforcement 
responsibilities with respect to ORF pursuant to applicable laws.
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    \35\ 17 CFR 240.17d-1.
    \36\ Pursuant to Rule 17d-1 under the Act, in making such 
designation the Commission will take into consideration the 
regulatory capabilities and procedures of the SROs, availability of 
staff, convenience of location, unnecessary regulatory duplication, 
and such other factors as the Commission may consider germane to the 
protection of investors, the cooperation and coordination among 
SROs, and the development of a national market system for the 
clearance and settlement of securities transactions.
    \37\ 17 CFR 240.17d-1.
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    The Exchange will establish and maintain procedures and internal 
controls to restrict the flow of confidential and proprietary 
information between the Exchange and its ORF and any other entity or 
affiliate of the ORF.\38\ The books, records, premises, officers, 
directors, agents, and employees of the ORF, as a facility of the 
Exchange, shall be deemed to be the books, records, premises, officers, 
directors, agents, and employees of the Exchange for purposes of and 
subject to oversight pursuant to the Act. The books and records of the 
ORF, as a facility of the Exchange, shall be subject at all times to 
inspection and copying by the Exchange and the Commission.
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    \38\ See proposed ISE Rule 2108.
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    MidPoint Match. The MidPoint Match System is a mechanism of the ISE 
Stock Exchange for trading common stocks and similar securities in a 
continuous mid-point matching system.\39\ Equity EAMs will be able to 
enter unpriced orders into the MidPoint Match System.\40\
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    \39\ See proposed ISE Rule 2128.
    \40\ See supra note 22 regarding interaction of orders entered 
into the displayed market with MPM Orders.
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    In entering an order, a member must specify: the security; whether 
it is a buy or sell order; and the number of shares the member seeks to 
buy or sell. Although unpriced, members also may specify a boundary 
price above which they will not buy (or below which they will not 
sell). The System will continuously monitor buy and sell orders in the 
System and will execute orders at the mid-point of the NBBO as long as 
the execution does not violate the boundary price on an order.
    When entering an order, a member can specify what, if any, 
information the system should disseminate:
    (1) The member can specify that the system not disseminate any 
information regarding the order (``Standard Order''); or
    (2) The member can specify that the system disseminate that there 
is a pending order in a particular security, but without identifying 
whether it is a buy or sell order (a ``Solicitation of Interest'' or 
``SOI'').
    The System will reject an SOI (but not a Standard Order) with a 
boundary price that is not then currently executable. Upon arrival of 
an SOI, the System will immediately generate a single broadcast 
internally to all Equity EAMs that have programmed to accept this 
message announcing the arrival of the order. An Equity EAM entering an 
SOI may not cancel that SOI for five seconds. In addition, if an SOI is 
not executed within ten seconds, the SOI will convert into a Standard 
Order.
    Because MPM will execute all trades at the mid-point of the NBBO, 
the MidPoint Match System never will execute a trade outside of the 
NBBO. In addition, the system will not execute a trade if the quotation 
for a security is ``crossed,'' with the best national bid being greater 
than the best national offer; in that situation, the system will 
suspend executions, since both buyers and sellers may be able to 
receive executions in other markets at prices better than the NBBO 
midpoint. If the quotation is ``locked,'' with the best national bid 
equaling the best national offer, the system will execute all trades at 
the locked price.
    Other Rule Changes. Proposed Rules 2122 (Investment Company Unit), 
2123 (Trust Issued Receipts), 2124 (Commodity-Based Trust Shares), 2125 
(Currency Trust Shares), and 2126 (Partnership Units) are proposed 
rules to permit the trading of derivative products on the ISE Stock 
Exchange. While these proposed rules would allow the ISE Stock Exchange 
to trade Commodity-Based Trust Shares, Currency Trust Shares, 
Partnership Units, Trust Issued Receipts including those based on 
Investment Shares, and Investment Company Units by either listing and/
or trading pursuant to UTP, the Exchange will only trade these products 
pursuant to UTP. In order to list such products on the Exchange, the 
Exchange would first need to seek Commission approval and amend its 
applicable rules.

[[Page 46952]]

    Proposed ISE Rule 2117 (Settlement Through Clearing Corporations) 
adds provisions governing the settlement and clearing of equities.
    Proposed ISE Rules 2113 (Long and Short Sales) and 2114 (Doing 
Business With the Public) have been filed separately.\41\
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    \41\ See File Nos. SR-ISE-2006-42 (filed on July 25, 2006) and 
SR-ISE-2006-41 (filed on July 25, 2006), respectively.
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    The following Rules have been incorporated from the Exchange's 
options rules: ISE Rule 100 (Definitions) is being expanded to include 
equities in the following definitions: bid, clearing corporation, offer 
and order; ISE Rule 500 (Designation of Securities) is being amended to 
accommodate for the newly adopted rules in Chapter 21; ISE Rules 702 
and 703 (Trading Halts and Trading Halts Due to Extraordinary Market 
Volatility, respectively) are being amended to account for halting 
trading in equity securities. In addition, the Exchange proposes to 
apply certain of its options rules to the trading of equity securities 
on the ISE Stock Exchange, as set forth in Appendix A to proposed 
Chapter 21 of the ISE Rules.
2. Statutory Basis
    ISE believes the proposal is consistent with the requirements of 
the Act and the rules and regulations promulgated thereunder that are 
applicable to a national securities exchange, and in particular, with 
Section 6(b) of the Act.\42\ ISE believes that the proposal is 
consistent with Section 6(b)(5) of the Act,\43\ in that it is 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 for a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
In particular, the ISE believes that the proposal is designed to enable 
it to promote competition in the trading of equity securities through 
establishing a new marketplace.
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    \42\ 15 U.S.C. 78f(b).
    \43\ 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 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 on this proposal from members, 
participants, or others.

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 Exchange consents, the Commission will:
    A. By order approve the 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-2006-48 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-2006-48. 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 the 
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-2006-48 and should be submitted on or before 
September 5, 2006.
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    \44\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\44\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-13335 Filed 8-14-06; 8:45 am]
BILLING CODE 8010-01-P