[Federal Register Volume 71, Number 209 (Monday, October 30, 2006)]
[Notices]
[Pages 63374-63375]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-18079]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54644; File No. SR-ISE-2004-17]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Order Approving a Proposed Rule Change and Amendment No. 1 
Thereto Relating to Market Maker Orders

October 23, 2006.

I. Introduction

    On May 26, 2004, 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 proposal to eliminate the restriction on Electronic 
Access Members (``EAMs'') representing ISE market maker orders, 
provided that such orders are identified as orders for the account of 
an ISE market maker. The Exchange filed Amendment No. 1 with the 
Commission on August 14, 2006.\3\ The amended proposal was published 
for comment in the Federal Register on September 14, 2006.\4\ The 
Commission received no comments on the proposal. This order approves 
the proposal, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superceded the original filing 
in its entirety.
    \4\ See Securities Exchange Act Release No. 54415 (September 7, 
2006), 71 FR 54321.
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II. Description of the Proposal

    The Exchange proposes to amend ISE Rule 717(g) to eliminate the 
restriction on EAMs representing ISE market maker orders, provided that 
such orders are identified as orders for the account of an ISE market 
maker. Currently, under ISE Rules, EAMs generally are not permitted to 
represent orders for the account of an ISE market maker. In its filing 
with the Commission, the Exchange stated that it initially included 
this restriction in its rules due to a system limitation. Specifically, 
allowing ISE market makers to enter orders through another member 
instead of directly might have created an opportunity for ISE market 
makers to avoid certain limitations on market maker trading contained 
in the Exchange's Rules.\5\
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    \5\ See, e.g., ISE Rule 805 (Market Maker Orders).
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    The Exchange represents that it has developed the capability for 
EAMs to mark orders to show that they are for the account of an ISE 
market maker. A marked order can be tracked through the Exchange's 
surveillance system as if it were directly entered by the market maker. 
Therefore, the Exchange proposes to eliminate the prohibition against 
EAMs entering orders for the account of ISE market makers in most 
circumstances. However, the proposal would continue to prohibit an EAM 
from entering an order solicited from an ISE market maker into the 
Solicited Order Mechanism and the Price Improvement Mechanism--
functionalities that are designed to expose solicited transactions to 
the market--if the market maker is assigned to the options class that 
is the subject of the order.\6\
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    \6\ This limitation on entering orders solicited from market 
makers assigned to the options class was included in a rule change 
by the CBOE (the ``Automated Improvement Mechanism'' or ``AIM'') 
recently approved by the Commission. See Securities Exchange Act 
Release No. 53222 (Feb. 3, 2006), 71 FR 7089 (Feb. 10, 2006). The 
execution of solicited transactions through AIM is similar to the 
execution of orders through the ISE's Price Improvement Mechanism.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the

[[Page 63375]]

requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\7\ In particular, the 
Commission believes that the proposal is consistent with the 
requirements of Section 6(b)(5) of the Act,\8\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transaction in securities; 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.
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    \7\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that ISE's proposal should permit EAMs to 
represent orders of ISE market makers without compromising the 
Exchange's ability to surveil their trading activity. Thus the proposal 
should not impact the Exchange's execution of its regulatory 
obligations. In addition, the proposed provision prohibiting an EAM 
from entering an order solicited from an ISE market maker into the 
Solicited Order Mechanism and the Price Improvement Mechanism in that 
ISE market maker's assigned class would permit those two 
functionalities to remain mechanisms for exposing solicited 
transactions to the competition of the marketplace.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (File No. SR-ISE-2004-17), as 
amended, is approved.
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    \9\ 15 U.S.C. 78s(b)(2).
    \10\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
Nancy M. Morris,
Secretary.
[FR Doc. E6-18079 Filed 10-27-06; 8:45 am]
BILLING CODE 8011-01-P