[Federal Register Volume 73, Number 213 (Monday, November 3, 2008)]
[Notices]
[Pages 65432-65435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-26107]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58861; File No. SR-ISE-2008-78]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change Relating to Quoting 
Obligations for Competitive Market Makers

October 27, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 21, 2008, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission the proposed rule change, as described in Items I, 
II, and III below, which items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE proposes to amend ISE Rules 713, 804 and 805 to establish a 
new quoting obligation for the Exchange's Competitive Market Makers 
(``CMMs''). The text of the proposed rule change is as follows, with 
deletions in [brackets] and additions italicized:

Rule 713. Priority of Quotes and Orders

    (a) through (f) no change.

[[Page 65433]]

Supplementary Material to Rule 713

    .01 and .02 no change.
    .03 Preferenced Orders. An Electronic Access Member may designate a 
``Preferred Market Maker'' on orders it enters into the System 
(``Preferenced Orders'').
    (a) A Preferred Market Maker may be the Primary Market Maker 
appointed to the options class or any Competitive Market Maker 
appointed to the options class.
    (b) If the Preferred Market Maker is not quoting at a price equal 
to the NBBO at the time the Preferenced Order is received, the 
allocation procedure contained in paragraph .01 shall be applied to the 
execution of the Preferenced Order.
    (c) If the Preferred Market Maker is quoting at the NBBO at the 
time the Preferenced Order is received, the allocation procedure 
contained in paragraph .01 shall be applied to the execution of the 
Preferenced Order except that the Primary Market Maker will not receive 
the participation rights described in paragraphs .01(b) and (c), and 
instead the Preferred Market Maker shall have participation rights 
equal to the greater of:
    (i) the proportion of the total size at the best price represented 
by the size of its quote, or
    (ii) sixty percent (60%) of the contracts to be allocated if there 
is only one (1) other Non-Customer Order or market maker quotation at 
the best price and forty percent (40%) if there are two (2) or more 
other Non-Customer Orders and/or market maker quotes at the best price.
    (d) Preferred Competitive Market Makers are subject to enhanced 
quoting requirements as provided in Rule 804(e)(2)(ii).
    .04 No change.
* * * * *

Rule 804. Market Maker Quotations

    (a) through (d) no change.
    (e) Continuous Quotes. A market maker must enter continuous 
quotations for the options classes to which it is appointed pursuant to 
the following:
    (1) Primary Market Makers. Primary Market Makers must enter 
continuous quotations and enter into any resulting transactions in all 
of the series listed on the Exchange of the options classes to which he 
is appointed on a daily basis.
    (2) Competitive Market Makers. (i) On any given day, a Competitive 
Market Maker must participate in the opening rotation and make markets 
and enter into any resulting transactions on a continuous basis in 
[all] at least 60% of the series listed on the Exchange of at least 
sixty percent (60%) of the options classes for the Group to which the 
Competitive Market Maker is appointed or [60] 40 options classes in the 
Group, whichever is lesser.
    (ii) Whenever a Competitive Market Maker enters a quote in an 
options class to which it is appointed, it must maintain continuous 
quotations for [all] that series and at least 60% of the series of the 
options class listed on the Exchange until the close of trading that 
day[.]; provided, however, that a Competitive Market Maker shall be 
required to maintain continuous quotations for that series and at least 
90% of the series of any options class in which it receives Preferenced 
Orders (see Supplementary Material .03 to Rule 713 regarding 
Preferenced Orders).
    (iii) A Competitive Market Maker may be called upon by an Exchange 
official designated by the Board to submit a single quote or maintain 
continuous quotes in one or more of the series of an options class to 
which the Competitive Market Maker is appointed whenever, in the 
judgment of such official, it is necessary to do so in the interest of 
fair and orderly markets.
    (f) and (g) no change.

Supplementary Material to Rule 804

    [.01 Notwithstanding ISE Rules 804(e)(2)(i)-(ii), for a pilot 
period that commences on September 20, 2007 and expires on September 
19, 2008, and limited to options classes overlying no more than twenty 
(20) individual stocks as specifically designated by the Exchange 
(``Pilot Program Securities''), a Competitive Market Maker must 
participate in the opening rotation and make markets and enter into any 
resulting transactions on a continuous basis in only sixty percent 
(60%) of the series of the options classes overlying the Pilot Program 
Securities. Whenever a Competitive Market Maker enters a quote in a 
series of the options classes of the Pilot Program Securities, it must 
maintain continuous quotations in that series until the close of 
trading that day.]

Rule 805. Market Maker Orders

    (a) no change.
    (b) Options Classes Other Than Those to Which Appointed.
    (1) A market maker may enter all order types permitted to be 
entered by non-customer participants under the Rules to buy or sell 
options in classes of options listed on the Exchange to which the 
market maker is not appointed under Rule 802, provided that:
    (i) the spread between a limit order to buy and a limit order to 
sell the same options contract complies with the parameters contained 
in Rule 803(b)(4); and
    (ii) the market maker does not enter orders in options classes to 
which it is otherwise appointed, either as a Competitive or Primary 
Market Maker.
    (2) Competitive Market Makers. The total number of contracts 
executed during a quarter by a Competitive Market Maker in options 
classes to which it is not appointed may not exceed twenty-five percent 
(25%) of the total number of contracts traded [per each] by such 
Competitive Market Maker [Membership] in classes to which it is 
appointed and with respect to which it was quoting pursuant to Rule 
804(e)(2).
    (3) no change.
* * * * *

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 self-regulatory organization 
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 self-regulatory organization 
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
    The Exchange proposes to amend ISE Rules 713, 804 and 805 to 
establish a new quoting obligation for the Exchange's CMMs. ISE 
currently requires CMMs to participate in the opening and maintain 
continuous quotations in all of the series of at least 60 per cent of 
the options classes in the bin or 60 classes, whichever is lesser. 
Additionally, if a CMM chooses to quote any series of an options class 
above and beyond this minimum requirement, it must then maintain 
continuous quotations in all of the series of the class throughout that 
trading day. Last September, the Exchange initiated a pilot to relax 
the continuous quoting obligations for CMMs in 20 options classes.\3\ 
Under the Pilot, CMMs were

[[Page 65434]]

required to maintain continuous quotations in only 60 per cent of the 
series of an options class overlying the pilot program securities. The 
Pilot recently expired and the Exchange now proposes to establish 
relaxed quoting requirements for CMMs on a permanent basis.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 56444 (September 14, 
2007), 72 FR 54089 (September 21, 2007) (Order Granting Approval of 
SR-ISE-2007-45 Relating to a Quote Mitigation Plan for Competitive 
Market Makers) (the ``Pilot'').
---------------------------------------------------------------------------

    With the explosion of quotation traffic--exacerbated by the penny 
pilot--we continue to seek ways to mitigate the generation of 
quotations. Our experience with the Pilot indicates that relaxing the 
continuous quoting obligation has had no negative effect on the quality 
of our markets. In practice, market makers simply widen their 
quotations when they do not want to trade in a particular series, so 
requiring them to maintain continuous quotations in all series merely 
increases capacity requirements for the market makers. Therefore, ISE 
proposes to adopt the 60 per cent standard for all options series on a 
permanent basis, with one exception related to CMMs that receive 
preferenced order flow. In this circumstance, a CMM receives the 
benefit of enhanced allocation rights similar to, and instead of, a 
Primary Market Maker. Therefore, it is appropriate to apply a higher 
continuous quotation standard on such CMMs, which we propose to be 90 
per cent of the series.\4\
---------------------------------------------------------------------------

    \4\ See CBOE Rule 8.13. The Chicago Board Options Exchange has a 
similar quotation standard for its preferred market makers.
---------------------------------------------------------------------------

    Additionally, ISE proposes to lower the minimum number of options 
classes that a CMM is required to quote from 60 to 40. While as stated 
above there is little benefit to the quality of our markets when CMMs 
are forced to maintain continuous quotations in options classes in 
which they do not want to trade, this requirement discourages some 
potential market participants because it requires too much systems 
capacity relative to the number of classes they are actually interested 
in trading on the ISE. Thus, the Exchange believes lowering the 
requirement would attract additional market making participants on the 
ISE.
    Finally, the Exchange proposes to amend Rule 805 (Market Maker 
Orders) to restrict the percentage of volume a CMM may execute in 
options to which it is not appointed. Specifically, the rule currently 
provides that a CMM may execute up to 25% of its volume in options 
classes to which it is not appointed. Since the Exchange is lowering 
the number of appointed class in which a CMM is required to quote, the 
Exchange believes it is appropriate to base the 25% allowance on volume 
that is executed while a CMM is actually fulfilling its market maker 
quotation obligations.
    Overall, the Exchange believes the proposed rule change is a step 
towards adopting an internal quote mitigation plan that is beneficial 
both to the Exchange and to its members without adversely affecting 
ISE's quality of markets.
2. Statutory Basis
    The basis under the Securities Exchange Act of 1934 (the ``Act'') 
for this proposed rule change is the requirement under Section 6(b)(5) 
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 
for a free and open market and a national market system, and, in 
general, to protect investors and the public interest, by relaxing the 
quoting requirements thereby reducing the number of options quotations 
required to be submitted, which should enable the Exchange to mitigate 
quote traffic and use of capacity without adversely affecting the 
Exchange's quality of markets.

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.

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 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 Exchange 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-2008-78 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2008-78. 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 the filing will also be available for 
inspection and copying at the principal office of the self-regulatory 
organization. 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-
2008-78 and should be submitted on or before November 24, 2008.


[[Page 65435]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\5\
---------------------------------------------------------------------------

    \5\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-26107 Filed 10-31-08; 8:45 am]
BILLING CODE 8011-01-P