[Federal Register Volume 73, Number 62 (Monday, March 31, 2008)]
[Notices]
[Pages 16916-16917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-6545]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57553; File No. SR-ISE-2007-76]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Approving a Proposed Rule Change, as Modified by Amendment 
Nos. 1 and 2 Thereto, Relating to Voluntary Professionals

March 25, 2008.

I. Introduction

    On August 24, 2007, the International Securities Exchange, LLC 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder \2\ to allow Public Customers to elect to become 
``Voluntary Professionals,'' and thereby to have their orders treated 
like Non-Customer Orders with respect to the Exchange's priority rules 
and transaction fees.\3\ On January 25, 2008, ISE filed Amendment No. 1 
to the proposed rule change. The proposed rule change, as modified by 
Amendment No. 1, was published for comment in the Federal Register on 
February 7, 2008.\4\ The Commission received one comment letter on the 
proposal.\5\ On March 24, 2008, ISE filed Amendment No. 2 to the 
proposed rule change.\6\ This order approves the proposed rule change, 
as modified by Amendment Nos. 1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ A ``Public Customer'' is defined in ISE's rules as ``a 
person that is not a broker or dealer in securities.'' ISE Rule 
100(a)(38). A ``Non-Customer'' is defined as ``a person or entity 
that is a broker or dealer in securities,'' and a ``Non-Customer 
Order'' is ``an order for the account of a Non-Customer.'' ISE Rules 
100(a)(27) and (28).
    \4\ See Securities Exchange Act Release No. 57255 (February 1, 
2008), 73 FR 7348.
    \5\ See letter from Rachel J. Rich, St. Paul, MN, to Nancy M. 
Morris, Secretary, Commission, dated February 7, 2008 (``Rich 
Letter'').
    \6\ In Amendment No. 2, ISE stated that it would issue a 
circular informing members of the process to properly mark the 
orders of Voluntary Professionals. The Commission considers 
Amendment No. 2 a technical amendment not subject to notice and 
comment.
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II. Description of the Proposal

    Currently, ISE grants certain advantages to Public Customer Orders 
\7\ over Non-Customer Orders. In particular, Public Customer Orders 
receive priority over Non-Customer Orders and market maker quotes at 
the same price. In addition, subject to certain exceptions,\8\ Public 
Customer Orders do not incur transaction fees, but may incur 
cancellation fees.\9\ Non-Customer Orders incur transaction fees, but 
are not subject to cancellation fees.
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    \7\ A ``Public Customer Order'' is defined as ``an order for the 
account of a Public Customer.'' ISE Rule 100(a)(39). For the 
definition of ``Public Customer,'' see supra note 3.
    \8\ For example, Public Customer Orders currently incur fees for 
certain transactions in ``Premium Products'' (defined in the ISE 
Schedule of Fees) and Complex Orders that take liquidity on the 
Exchange's complex order book. In addition, transaction fees are 
charged for Public Customer Orders entered in response to special 
order broadcasts, such as Facilitation orders, Solicitation orders, 
Block orders, and orders entered in the Exchange's Price Improvement 
Mechanism. See ISE Schedule of Fees.
    \9\ The Exchange imposes a cancellation fee, currently $1.75 per 
cancellation, on a clearing EAM that cancelled at least 500 Public 
Customer orders in a month for itself or for an introducing broker, 
for each order cancellation in excess of the total number of orders 
executed for itself or for such introducing broker that month. The 
cancellation fee does not apply to the cancellation of Public 
Customer Orders that improve ISE's disseminated quote at the time 
the orders were entered.
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    ISE proposes to add a new term, ``Voluntary Professional,'' to the 
list of definitions in Exchange Rule 100. A Voluntary Professional 
would be defined as ``any Public Customer that elects, in writing, to 
be treated in the same manner as a broker or dealer in securities for 
purposes of Rules 713, 716, 722, and 723 as well as the Exchange's 
schedule of fees.'' \10\ ISE proposes further to amend its definition 
of Non-Customer to include Voluntary Professionals.\11\ Thus, the 
orders of Voluntary Professionals would be Non-Customer Orders. Public 
Customers would be required to instruct Electronic Access Members 
(``EAMs'') in writing to designate their orders as Non-Customer Orders.
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    \10\ ISE Rules 713 (Priority of Quotes and Orders), 716 (Block 
Trades), 722 (Complex Orders), and 723 (Price Improvement Mechanism 
for Crossing Transactions) contain provisions concerning priority in 
the allocation of orders. The Commission notes that the orders of 
Voluntary Professionals would still be treated as Public Customer 
Orders with respect to the rules governing Customer Participation 
Orders as set forth in ISE Rule 715 (Types of Orders).
    \11\ ISE Rule 100(a)(21) would be amended to state: ``The term 
`Non-Customer' means a person or entity that is a broker or dealer 
in securities and Voluntary Professionals.''
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    As a result of ISE's proposal, the orders of Voluntary 
Professionals would be treated in ISE's allocation process on equal 
terms with the orders of broker-dealers, and the orders of other Public 
Customers would have priority over the orders of Voluntary 
Professionals. The orders of Voluntary Professionals, when executed, 
also would incur the same transaction fees that are charged to broker-
dealers.
    In explaining the purpose of the proposal, the Exchange states that 
its members have indicated that certain of their non-broker-dealer 
customers, who employ sophisticated trading strategies that involve 
cancelling a large percentage of their orders before the orders are 
executed, would prefer to have their orders categorized as Non-Customer 
Orders. By electing to become Voluntary Professionals, such customers 
would not be subject to the Exchange's cancellation fees.\12\
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    \12\ See supra note 9 and accompanying text.
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    ISE further states that the Voluntary Professional designation 
otherwise would not affect non-broker-dealer individuals and entities 
with respect to all other ISE rules. For example, ISE

[[Page 16917]]

rules relating to the Intermarket Linkage \13\ would continue to apply 
to all customers who are not broker-dealers--even those customers whose 
orders are identified as Non-Customer Orders because they are Voluntary 
Professionals. Similarly, rules regarding customer suitability and 
other protections for customers would continue to apply with respect to 
all customers who are not broker-dealers.\14\
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    \13\ See Chapter 19 of the ISE Rules.
    \14\ See Chapter 6 of the ISE Rules. Telephone conversation 
between Ira Brandriss and Ronesha Butler, Special Counsels, Division 
of Trading Markets, Commission, and Katherine Simmons, Deputy 
General Counsel, ISE, on March 11, 2008.
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III. Discussion and Commission Findings

    After careful consideration of the proposed rule change, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b) \15\ of the Act and the rules thereunder.\16\ In 
particular, the Commission believes that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\17\ which requires that the 
rules of a national securities exchange, among other things, be 
designed 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; and not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
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    \15\ 15 U.S.C. 78f(b).
    \16\ In approving the proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change would allow Public Customers to elect to 
become Voluntary Professionals by choosing to instruct EAMs to 
designate their orders as Non-Customer Orders. Through such an 
election, the orders of such customers no longer would be subject to 
cancellation fees. The Commission believes that, in view of this 
result, the ability to become a Voluntary Professional could represent 
significant savings for a Public Customer whose trading strategy 
involves placing, and then cancelling, orders frequently.
    By electing to become a Voluntary Professional, a Public Customer 
would cede the priority rights normally granted to the orders of Public 
Customers, and fees would be incurred on a Voluntary Professional's 
transactions. The Commission notes, however, that this result is 
determined solely by the choice of the customer. Thus, the proposed 
rule change would not introduce any rule that would alter the 
preferential treatment accorded to the orders of a Public Customer 
against that Public Customer's will.
    The Commission believes that the proposed rule change would not 
limit or restrict Public Customers in any way. On the contrary, it 
would give Public Customers more flexibility and expand their ability 
to participate cost-effectively in ISE's marketplace. The Commission 
notes that the one commenter who expressed a view to the Commission 
regarding the proposal favored the proposed rule change as ``fair and 
just'' and believed that it would promote increased trading 
activity.\18\
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    \18\ See Rich Letter supra note 5.
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    The Commission notes further that Voluntary Professionals would 
continue to benefit from all the protections afforded to Public 
Customers under the rules of the Exchange (other than the advantages 
Public Customers have with respect to priority and transaction fees). 
In addition, the advantages with respect to priority and fees would be 
restored when a Public Customer rescinded its election to be a 
Voluntary Professional.
    In sum, the Commission believes that the proposed rule change 
appropriately would accommodate Public Customers who employ trading 
strategies that involve numerous order cancellations by allowing them 
to assess and determine for themselves the most beneficial status and 
fee structure for their orders, and to choose accordingly.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-ISE-2007-76), as modified by 
Amendment Nos. 1 and 2, be, and it hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-6545 Filed 3-28-08; 8:45 am]
BILLING CODE 8011-01-P