[Federal Register Volume 73, Number 97 (Monday, May 19, 2008)]
[Notices]
[Pages 28846-28847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-11035]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57812; File No. SR-ISE-2008-28]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Amendment No. 1 to the Proposed Rule Change 
and Order Granting Accelerated Approval of Proposed Rule Change, As 
Modified by Amendment No. 1 Thereto, Relating to the Exposure of Public 
Customer Orders

May 12, 2008.

I. Introduction

    On March 18, 2008, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') 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 expose public customer orders that are not 
executable on the Exchange before sending an order through the 
intermarket linkage system (a ``Linkage Order'') on behalf of the 
public customer. The proposed rule change was published for comment in 
the Federal Register on March 31, 2008.\3\ The Commission received one 
comment letter regarding the proposal.\4\ ISE filed Amendment No. 1 to 
the proposed rule change on May 7, 2008.\5\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as modified by Amendment No. 1, from interested persons and is 
simultaneously approving the proposed rule change, as modified by 
Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57551 (March 25, 
2008), 73 FR 16917.
    \4\ See letter from Lisa J. Fall, General Counsel, Boston 
Options Exchange (``BOX''), to Nancy M. Morris, Secretary, 
Commission, dated May 2, 2007 (``BOX Comment'').
    \5\ In Partial Amendment No. 1, the Exchange: (1) Amended the 
rule text to add subsection (e) to Supplementary Material .02 to 
Rule 803 to state that a ``pattern or practice of submitting 
unrelated orders that cause an exposure period to conclude early 
will be deemed conduct inconsistent with just and equitable 
principles of trade and a violation of Rule 400 and other Exchange 
Rules''; and (2) confirmed that the obligation of primary market 
makers under existing Rule 803(c)(2)(ii) to address public customer 
orders that are not automatically executed because there is a better 
price on another exchange includes the handling of the balance of an 
order that initially receives a partial execution on the Exchange.
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II. Description of the Proposal

    As described in the proposal, the ISE will not automatically 
execute a customer's options order when the ISE's best bid or offer 
(``BBO'') is inferior to the national best bid or offer (``NBBO'').\6\ 
Under ISE Rule 803(c)(2)(ii), the primary market maker (``PMM'') is 
obligated to address public customer orders that are not automatically 
executed because there is a better price on another exchange.\7\ Rule 
803(c) specifies that the PMM can either execute the order or send a 
Linkage Order to any other exchange displaying the best price in an 
attempt to get the better price for the public customer.\8\ Under the 
current procedure, if the PMM does not execute the public customer 
order, it sends a Linkage Order(s) to a competing exchange(s) even 
though there may be other ISE market makers who would be willing to 
execute the public customer order at the better price.\9\
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    \6\ See ISE Rule 714.
    \7\ The Exchange noted in Amendment No. 1 that this obligation 
of the PMM to address these public customer orders includes the 
handling of the balance of an order that initially receives a 
partial execution on ISE.
    \8\ ISE Rules, Chapter 19 (Intermarket Linkage Rules).
    \9\ When a PMM sends a Linkage Order to another exchange, it is 
charged the other exchange's execution fee.
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    Under the proposal, before the PMM sends a Linkage Order on behalf 
of a public customer, the public customer order will be exposed at the 
NBBO price for a period established by the Exchange not to exceed one 
second.\10\ During the exposure period, Exchange market makers may 
enter responses up to the size of the order being exposed in the 
regular trading increment applicable to the option. If at the end of 
the exposure period, the order is executable at the then-current NBBO 
and ISE is not quoting at the then-current NBBO, the order will be 
executed against responses that equal or better the then-current 
NBBO.\11\ The exposure period will be terminated if the exposed order 
becomes executable on the ISE at the prevailing NBBO or if the Exchange 
receives an unrelated order that could trade against the exposed order 
at the prevailing NBBO price.\12\ If, after an order is exposed, the 
order cannot be executed in full on the Exchange at the then-current 
NBBO or better, and it is marketable against the then-current NBBO, the 
PMM will send a Linkage Order on the customer's behalf for the balance 
of the order as provided in Rule 803(c)(2)(ii). If the balance of the 
order is not marketable against the then-current NBBO, it will be 
placed on the ISE book.
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    \10\ The Exchange will issue a Circular to inform members of the 
time period. The Exchange clarified in Amendment No. 1 that this 
exposure process will apply to the balance of an order that received 
a partial execution on ISE. See supra note 7.
    \11\ Executions will be allocated pro-rata based on size (i.e., 
the percentage of the total number of contracts available at the 
same price that is represented by the size of a market maker's 
response).
    \12\ The order will be executed against orders and quotes on the 
book and responses received during the exposure period in price 
priority. At the same price, customer orders will be executed first 
in time priority and then all other interest (orders, quotes and 
responses) will be allocated pro-rata based on size.
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    Immediate-or-cancel orders are cancelled if they cannot be executed 
on the ISE upon entry. Therefore, such orders are not handled by the 
PMM under Rule 803(c)(2)(ii) and will not be exposed under this 
proposal.
    The Commission received one comment letter regarding the proposed 
rule change.\13\ The commenter believes that ISE's proposal is not 
consistent with Rule 602 of Regulation NMS (``Quote Rule''),\14\ which 
``requires a responsible broker-dealer to execute an order at its quote 
when that order is presented.'' \15\ Specifically, the commenter 
believes that, if a PMM or CMM is at the ISE best bid or offer on the 
opposite side of the market at the time the public customer order is 
received, that public customer order has been ``presented'' to the PMM 
or CMM under the Quote Rule.\16\ As a result, the commenter concludes 
that the proposal is inconsistent with the Quote Rule because it would 
permit public customer orders to be executed after the exposure period 
at a price or size inferior to the price or size on ISE at order 
presentment.\17\ The commenter also requests clarification of the 
handling of the balance of a public customer order, a portion of which 
is automatically executed on ISE at the NBBO. In that scenario, the 
commenter was unclear whether the balance of the order would be routed 
as Linkage Orders or handled under the proposed exposure period. In 
this regard, ISE

[[Page 28847]]

confirmed in Amendment No. 1 that the exposure period will apply to the 
balance of a public customer order that has received partial execution 
on ISE.
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    \13\ See BOX Comment, supra note 4.
    \14\ 17 CFR 242.602.
    \15\ See BOX Comment, supra note 4, at 2.
    \16\ See generally BOX Comment, supra note 4, at 2 to 6.
    \17\ Id at 6.
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 1, 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-2008-28 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 ISE-2008-28. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of 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-2008-28 and should be 
submitted on or before June 9, 2008.

IV. Discussion and Commission Findings

    After carefully considering the proposal and the comment submitted, 
the Commission finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\18\ In particular, the Commission finds that the proposal is 
consistent with Section 6(b)(5) of the Act,\19\ which requires, in 
part, that the rules of a national securities exchange be 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. 
Specifically, the proposal will expose public customer orders that are 
not executable on the Exchange before sending a Linkage Order on behalf 
of the public customer. The Commission notes that exposing public 
customer orders before the PMM sends a Linkage Order on the public 
customer's behalf will give additional ISE participants an opportunity 
to provide public customer orders an execution at the NBBO (or better) 
on ISE and may reduce PMM costs by reducing the number of Linkage 
Orders sent to other exchanges. Thus, the Commission believes that the 
exposure rules outlined above will allow ISE to provide more efficient 
and competitive executions for these orders, subject to priority 
principles.
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    \18\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78f(b)(5).
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    The Commission also believes that the proposal is consistent with 
the Quote Rule.\20\ The Quote Rule, among other things, requires a 
responsible broker or dealer to execute orders presented to it by 
another broker or dealer, at a price at least as favorable as the 
responsible broker or dealer's published bid or offer, unless an 
exception applies. The Commission believes that when an order is 
received on ISE that a responsible broker or dealer is not permitted to 
execute pursuant to ISE's rules or the Linkage Plan,\21\ and the 
submitting member has chosen to allow ISE to expose the order to other 
additional interest rather than submitting an immediate-or-cancel 
(``IOC'') order,\22\ the order is not ``presented'' under the Quote 
Rule. The Commission therefore does not believe it is necessary for ISE 
to ``stop'' a public customer order against the existing best priced 
quotes and orders on ISE's book at the beginning of the exposure period 
to comply with the Quote Rule.
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    \20\ 17 CFR 242.602.
    \21\ The Plan for the Purpose of Creating and Operating an 
Options Intermarket Linkage and ISE's rules contain provisions 
restricting the ability of an ISE member to trade-through certain 
prices on away markets. ISE has represented that it does not 
automatically execute a customer's order when ISE is not at the 
NBBO. In addition, public customer orders will be exposed under 
ISE's proposal only when ISE is not at the NBBO.
    \22\ ISE has represented that IOC orders are cancelled if they 
cannot be executed on ISE upon entry, and are not handled by the PMM 
under Rule 803(c)(2)(ii) and will not be exposed under this 
proposal. Therefore, public customers may avoid the proposed 
exposure period by submitting IOC orders.
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    The Commission finds good cause to approve the proposal prior to 
the thirtieth day after the proposal was published for comment in the 
Federal Register. The Commission believes that the change made in 
Amendment No. 1 generally strengthens the proposal. In Amendment No. 1, 
ISE made explicit that a pattern or practice of submitting unrelated 
orders that cause an exposure period to conclude early will be deemed 
conduct inconsistent with just and equitable principles of trade and a 
violation of ISE Rule 400 and other Exchange rules. This addition will 
provide guidance to market participants regarding compliance with the 
requirements of ISE's rules, and is consistent with the rules of 
another options exchange.\23\ Further, this provision will help limit 
potential ``gaming'' of the exposure period. For these reasons, the 
Commission finds good cause, consistent with Section 19(b)(2) of the 
Act,\24\ to grant accelerated approval of the proposed rule change, as 
modified by Amendment No. 1.
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    \23\ See CBOE Rule 6.14.01.
    \24\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (File No. SR-ISE-2008-28), as 
modified by Amendment No. 1, is approved on an accelerated basis.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-11035 Filed 5-16-08; 8:45 am]
BILLING CODE 8010-01-P