[Federal Register Volume 73, Number 236 (Monday, December 8, 2008)]
[Notices]
[Pages 74545-74548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-28956]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59021; File No. SR-ISE-2008-91]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Relating to Complex Orders

November 26, 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 November 25, 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.
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    \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 amend its Rule 722 regarding Complex Orders. 
The text of the proposed rule change is as follows, with deletions in 
[brackets] and additions in italics:
Rule 722. Complex Orders
    (a) Definitions. [Complex Orders Defined. A complex order is any 
order for the same account as defined below:]
    (1) Complex Order. A complex order is any order involving the 
simultaneous purchase and/or sale of two or more different options 
series in the same underlying security, for the same account, in a 
ratio that is equal to or greater than one-to-three (.333) and less 
than or equal to three-to-one (3.00) and for the purpose of executing a 
particular investment strategy.
    [(1) Spread Order. A spread order is an order to buy a stated 
number of option contracts and to sell the same number of option 
contracts, of the same class of options.
    (2) Straddle Order. A straddle order is an order to buy (sell) a 
number of call option contracts and the same number of put option 
contracts on the same underlying security which contracts have the same 
exercise price and expiration date (e.g., an order to buy two XYZ July 
50 calls and to buy two XYZ July 50 puts).

[[Page 74546]]

    (3) Strangle Order. A strangle order is an order to buy (sell) a 
number of call option contracts and the same number of put option 
contracts in the same underlying security, which contracts have the 
same expiration date (e.g., an order to buy two ABC June 40 calls and 
to buy two ABC June 35 puts).
    (4) Combination Order. A combination order is an order involving a 
number of call option contracts and the same number of put option 
contracts in the same underlying security and representing the same 
number of shares at option.
    (5) Combination orders with non-equity options legs. One or more 
legs of a complex order may be to purchase or sell a stated number of 
units of another security.
    (i) Stock-Option Order. A stock-option order is an order to buy or 
sell a stated number of units of an underlying stock or a security 
convertible into the underlying stock (``convertible security'') 
coupled with either (A) the purchase or sale of option contract(s) on 
the opposite side of the market representing either the same number of 
units of the underlying stock or convertible security or the number of 
units of the underlying stock necessary to create a delta neutral 
position; or (B) the purchase or sale of an equal number of put and 
call option contracts, each having the same exercise price, expiration 
date, and each representing the same number of units of stock, as and 
on the opposite side of the market from, the stock or convertible 
security portion of the order.]
    (2) Stock-Option Order. A stock-option order is an order to buy or 
sell a stated number of units of an underlying stock or a security 
convertible into the underlying stock (``convertible security'') 
coupled with the purchase or sale of options contract(s) on the 
opposite side of the market representing either (A) the same number of 
units of the underlying stock or convertible security, or (B) the 
number of units of the underlying stock necessary to create a delta 
neutral position, but in no case in a ratio greater than 8 options 
contracts per unit of trading of the underlying stock or convertible 
security established for that series by the Clearing Corporation.
    (3)[(ii)] SSF-Option Order. A SSF-option order is an order to buy 
or sell a stated number of units of a single stock future or a security 
convertible into a single stock future (``convertible SSF'') coupled 
with either (A) the purchase or sale of option contract(s) on the 
opposite side of the market representing either the same number of 
units of stock underlying the single stock future or convertible SSF, 
or the number of units of stock underlying the single stock future or 
convertible SSF necessary to create a delta neutral position; or (B) 
the purchase or sale of an equal number of put and call option 
contracts, each having the same exercise price, expiration date, and 
each representing the same number of units of underlying stock, as and 
on the opposite side of the market from, the stock underlying the 
single stock future or convertible SSF portion of the order.
    [(6) Ratio Order. A spread, straddle or combination order may 
consist of legs that have a different number of contracts, so long as 
the number of contracts differs by a permissible ratio. For purposes of 
this paragraph, a permissible ratio is any ratio that is equal to or 
greater than one-to-three (.333) and less than or equal to three-to-one 
(3.00). For example, a one-to-two (.5) ratio, a two-to-three (.667) 
ratio, or a two-to-one (2.0) ratio is permissible, whereas a one-to-
four (.25) ratio or a four-to-one (4.0) ratio is not.
    (7) Butterfly Spread Order. A butterfly spread order is an order 
involving three series of either put or call options all having the 
same underlying security and time of expiration and, based on the same 
current underlying value, where the interval between the exercise price 
of each series is equal, which orders are structured as either (i) a 
``long butterfly spread'' in which two short options in the same series 
offset by one long option with a higher exercise price and one long 
option with a lower exercise price or (ii) a ``short butterfly spread'' 
in which two long options in the same series are offset by one short 
option with a higher exercise price and one short option with a lower 
exercise price.
    (8) Box Spread Order. A box spread order is an order involving (a) 
a long call option and a short put option with the same exercise price, 
coupled with (b) a long put option and a short call option with the 
same exercise price; all of which have the same underlying security and 
time of expiration.
    (9) Collar Order. A collar order is an order involving the sale of 
a call option coupled with the purchase of a put option in equivalent 
units of the same underlying security having a lower exercise price 
than, and same expiration date as, the sold call option.]
    (b) No Change.
    (1) No Change.
    (2) Complex Order Priority. Notwithstanding the provisions of Rule 
713, a complex order, as defined in paragraph (a)(1) of this Rule, may 
be executed at a total credit or debit price with one other Member 
without giving priority to bids or offers established in the 
marketplace that are no better than the bids or offers comprising such 
total credit or debit; provided, however, that if any of the bids or 
offers established in the marketplace consist of a Public Customer 
limit order, the price of at least one leg of the complex order must 
trade at a price that is better than the corresponding bid or offer in 
the marketplace by at least one minimum trading increment as defined in 
Rule 710. Under the circumstances described above, [the option leg of] 
if a stock-option order, as defined in subparagraph 
(a)(2)[(a)(5)(i)(A)] of this Rule, or SSF-option order as defined in 
subparagraph (a)(3)[(a)(5)(ii)(A)] of this Rule, has one option leg, 
such option leg has priority over bids and offers established in the 
marketplace by Non-Customer orders and market maker quotes that are no 
better than the price of the options leg, but not over such bids and 
offers established by Public Customer Orders. [The option legs of] If a 
stock-option order as defined in subparagraph (a)(2)[(a)(5)(ii)(B)], or 
SSF-option order as defined in subparagraph (a)(3)[(a)(5)(ii)(B)], 
consisting of a combination order with stock or single stock futures, 
as the case may be, has more than one option leg, such option legs may 
be executed in accordance with the first sentence of this subparagraph 
(b)(2).
    (3)-(4) No Change.
Supplementary Material to Rule 722
    .01 A bid or offer made as part of a stock-option order (as defined 
in (a)(2)[(a)(5)(i)] above) or a SSF-option order (as defined in 
(a)(3)[(a)(5)(ii)] above) is made and accepted subject to the following 
conditions: (1) The order must disclose all legs of the order and must 
identify the security (which in the case of a single stock future 
requires sufficient identification to determine the market(s) on which 
the single stock future trades) and the price at which the non-option 
leg(s) of the order is to be filled; and (2) concurrent with the 
execution of the options leg of the order, the initiating member and 
each member that agrees to be a contra-party on the non-option leg(s) 
of the order must either elect to have the stock leg(s) of a stock-
option order electronically communicated to a designated broker-dealer 
for execution as provided in .02 below or take steps immediately to 
transmit the non-option leg(s) to a non-Exchange market(s) for 
execution. Failure to observe these requirements will be considered 
conduct inconsistent with just and equitable principles of trade and a 
violation of Rule 400.
    A trade representing the execution of the options leg of a stock-
option or SSF-

[[Page 74547]]

option order may be cancelled at the request of any member that is a 
party to that trade only if market conditions in any of the non-
Exchange market(s) prevent the execution of the non-option leg(s) at 
the price(s) agreed upon.
    .02 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

(a) Purpose
    ISE currently has rules governing the trading of ``complex 
orders.'' Specifically, ISE Rule 722 contains definitions of complex 
orders and specifies the standing of such orders on the ISE. They state 
that the legs that comprise a complex order receive neither time-price 
priority nor away market price protection. And similar to the rules of 
the other options exchanges, our rules provide that the legs of a 
complex order may not be executed at prices that are inferior to the 
best prices available on the ISE.
    The Exchange now proposes to amend its Rule 722 regarding complex 
orders. For many years, the options exchanges have recognized that 
strategies involving more than one option series or more than one 
instrument associated with an underlying security are different from 
regular buy and sell orders for a single series, and order to achieve 
such strategies should be defined separately. As the sophistication of 
the industry has grown, so have the strategies, and the options 
exchanges have regularly added new strategies to the list of defined 
complex order types. The investing industry, however, creates new, 
legitimate investment strategies that do not necessarily fit into one 
of the narrow definitions for complex order types that the exchanges 
presently use. These order types are often developed for a particular 
strategy, specific to a particular issue. To attempt to define every 
individual strategy, and file additional rules to memorialize them, 
would be a time consuming and extremely onerous process, and would 
serve only to confuse the investing public. As a result, bona fide 
transactions to limit risk are not afforded the facility of execution 
afforded more common complex orders.
    ISE Rule 722 currently defines at least nine specific complex 
strategies. These are the most comprehensive lists of complex 
strategies defined in a rule set, yet they do not cover all of the 
possibilities of complex orders. To provide for greater flexibility in 
the design and use of complex strategies, ISE proposes to eliminate 
specific complex order types described in Rule 722, and adopt a generic 
definition approved for use for exemption from Trade Through Liability 
by the Options Linkage Authority as described in the ``Plan For The 
Purpose Of Creating And Operating An Intermarket Option Linkage.'' The 
Exchange believes adopting a generic definition of complex orders will 
give investors more flexibility in creating strategies with greater 
accuracy.
    In addition, the Exchange also proposes to amend the definition of 
a Stock-Option Order in ISE Rule 722 to conform the Exchange's 
definition to that of NYSE Arca, Inc. (``NYSE Arca''). Specifically, 
under the proposed new definition, a stock-option order is an order to 
buy or sell a stated number of units of an underlying stock or a 
security convertible into the underlying stock coupled with the 
purchase or sale of options contract(s) on the opposite side of the 
market representing either (A) the same number of units of the 
underlying stock or convertible security, or (B) the number of units of 
the underlying stock necessary to create a delta neutral position, but 
in no case in a ratio greater than 8 options contracts per unit of 
trading of the underlying stock or convertible security.
(b) Basis
    The basis under the Securities Exchange Act of 1934 (``Exchange 
Act'') for this proposed rule change is the requirement under Section 
6(b)(5) \3\ that an exchange have rules that are designed to promote 
just and equitable principles of trade, and 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. ISE believes adopting a generic definition of for [sic] 
complex orders and amending the definition of a stock-option order, as 
proposed in the instant rule change, is appropriate in that complex 
orders and stock-option orders are widely recognized and utilized by 
market participants and are invaluable, both as an investment, and a 
risk management, strategy. The proposed rule change will provide the 
opportunity for a more efficient mechanism for carrying out these 
strategies.
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    \3\ 15 U.S.C. 78f(b)(5).
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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

    This proposed rule change does not significantly affect the 
protection of investors or the public interest, does not impose any 
significant burden on competition, and, by its terms, does not become 
operative for 30 days after the date of the filing, or such shorter 
time as the Commission may designate if consistent with the protection 
of investors and the public interest. The Exchange provided the 
Commission with written notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed rule 
change, at least five business days prior to the date of filing the 
proposed rule change as required by Rule 19b-4(f)(6).\4\ For the 
foregoing reasons, the Exchange believes the proposed rule filing 
qualifies for immediate effectiveness as a ``non-controversial'' rule 
change under paragraph (f)(6) of Rule 19b-4 of the Act.
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    \4\ 17 CFR 240.19b-4(f)(6).
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    The proposed amendment to ISE Rule 722 will allow the Exchange to 
adopt a generic definition for complex orders and amend the definition 
of stock-option orders to give market participants an ability to create 
trading opportunities that may be more closely aligned with their 
investment and/or risk management strategies. This proposed rule change 
adopting a generic

[[Page 74548]]

definition for complex orders and amending the definition of stock-
option orders is identical to the equivalent definitional changes 
adopted in a proposal previously submitted by NYSE Arca.\5\ For the 
foregoing reasons, the Exchange believes the proposed rule change is 
non-controversial, does not raise any new, unique or substantive 
issues, and is beneficial for competitive purposes and to promote a 
free and open market for the benefit of investors.
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    \5\ See Securities Exchange Act Release Nos. 58174 (July 16, 
2008), 73 FR 42640 (July 22, 2008) (Approving SR-NYSEArca-2008-54).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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 No. SR-ISE-2008-91 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-2008-91. 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 Commissions 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 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 the 
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-
2008-91 and should be submitted by December 29, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-28956 Filed 12-5-08; 8:45 am]
BILLING CODE 8011-01-P