

[Federal Register: November 10, 2005 (Volume 70, Number 217)]
[Notices]               
[Page 68485-68486]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10no05-161]                         


[[Page 68485]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52729; File No. SR-ISE-2005-48]

 
Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing of Proposed Rule Change and Amendments No. 1 and 
No. 2 Thereto Relating to Market Maker Quote Interaction

November 3, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 3, 2005, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. On October 21, 2005, the ISE submitted Amendment No. 1 to the 
proposed rule change.\3\ On November 3, 2005, the ISE submitted 
Amendment No. 2 to the proposed rule change.\4\ 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.
    \3\ See Form 19b-4 dated October 21, 2005, which replaced the 
original filing in its entirety (``Amendment No. 1'').
    \4\ See partial amendment dated November 3, 2005, which 
corrected a minor omission in the current rule text and a 
typographical error in the filing (``Amendment No. 2'').
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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 rules regarding a delay of up to one 
second before two market maker quotations interact. The text of the 
proposed rule change is as follows. Proposed new language is in 
italics; proposed deletions are in [brackets].
* * * * *

Rule 804. Market Maker Quotations

* * * * *
    (d) Firm Quotes. (1) Market maker bids and offers are firm for 
orders and Exchange market maker quotations both under this Rule and 
Rule 602 of Regulation NMS[11Ac1-1] under the Exchange Act (``Rule 602 
of Reg NMS[11Ac1-1]'') for the number of contracts specified according 
to the requirements of paragraph (b) above. Market maker bids and 
offers are not firm under this Rule and Rule 602 of Reg NMS[11Ac1-1] 
if:
    (i) A system malfunction or other circumstance impairs the 
Exchange's ability to disseminate or update market quotes in a timely 
and accurate manner;
    (ii) The level of trading activities or the existence of unusual 
market conditions is such that the Exchange is incapable of collecting, 
processing, and making available to quotation vendors the data for the 
option in a manner that accurately reflects the current state of the 
market on the Exchange, and as a result, the market in the option is 
declared to be ``fast'' pursuant to Rule 704;
    (iii) During trading rotations; or
    (iv) Any of the circumstances provided in paragraph (c)(3) of Rule 
602 of Reg NMS[11Ac1-1] exist.
    (2) Notwithstanding Paragraph (1) above, if a market maker's bid 
(offer) can trade with the offer (bid) of another market maker, the 
Exchange shall have the authority to implement a delay so that no 
execution shall occur between such quotations for a period of no more 
than one second. During such [this] period, the System will update 
quotations that may be received; provided however, that during such 
[this] period all quotations shall otherwise remain firm and the System 
shall [will] automatically execute all incoming orders against such 
quotations.
* * * * *

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 Exchange 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 Exchange 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
    In June 2004, the Commission approved a proposed rule change by the 
Exchange adopting a delay of up to one second before two market maker 
quotations at the same price would trade.\5\ As represented in the June 
2004 Filing, the ISE treats orders and quotations differently, with ISE 
Rule 804(a) stating that only market makers may enter quotations on the 
ISE. Market makers use quotations to input and update prices on 
multiple series of options at the same time. Quotations generally are 
based on pricing models that rely on various factors, including the 
price and volatility of the underlying security. The ISE states that as 
these variables change, a market maker's pricing model automatically 
updates quotations for some or all of an option's series. In contrast, 
an order is an interest to buy a stated number of contracts of one 
specific options series. The ISE states that all ISE members, including 
ISE market makers, can enter orders.\6\
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    \5\ See Securities Exchange Act Release No. 49931 (June 28, 
2004), 69 FR 40696 (July 6, 2004) (``June 2004 Filing'').
    \6\ ISE Rule 717 imposes various limitations on orders that 
Electronic Access Members may enter on the ISE, while ISE Rule 805 
governs market maker orders.
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    The ISE states that the purpose of the one-second delay adopted by 
the June 2004 Filing was to allow a market maker to update its 
quotation to reflect price changes in an underlying stock before 
another market maker's quotation would ``hit'' its quote. During this 
brief period, market maker quotations remain firm for all orders the 
ISE receives. This includes orders from customers, broker-dealers and 
even other market makers. The only exclusion is for executions against 
other market maker quotes.
    However, as the ISE trading system and its market maker members' 
quoting systems continue to advance technologically, the ISE believes 
that, at some point, providing this one-second delay may no longer be 
necessary. Thus, in order to have the flexibility to remove this delay 
at that point, the ISE proposes to amend this rule to specify that this 
is a functionality that the ISE can, but is not required, to use. 
Additionally, if the Exchange determines to remove the one-second delay 
entirely, this proposed rule change would give ISE the ability to 
reinstate the one-second delay, if needed, due to, for example, such 
removal resulting in a disruption to the market or other unintended 
consequences. In making any determination to remove the delay, the 
Exchange would take into consideration input from its market maker 
members, particularly through the Exchange's Market Maker Advisory 
Committee.
    The Exchange notes that any change made to this functionality would 
be implemented in a uniform, market-wide basis (as opposed to, for 
example, a class-by-class basis). The Exchange would inform its members 
of any changes made to this functionality by

[[Page 68486]]

distributing a Regulatory Information Circular prior to the 
implementation of any change.
2. Statutory Basis
    The Exchange believes the proposal is consistent with Section 6(b) 
of the Act \7\, in general, and furthers the objectives of Section 
6(b)(5) of the Act,\8\ in particular, in that it is designed to promote 
just and equitable principles of trade, remove impediments to and 
perfect the mechanisms of a free and open market and a national market 
system, and, in general, to protect investors and the public interest 
in that it would promote efficient interaction of market maker 
quotations.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes 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

    No written comments were solicited or received by the Exchange on 
this proposal.

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 the 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, as amended 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 rule-comments@sec.gov. Please include 

File Number SR-ISE-2005-48 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-ISE-2005-48. 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. Copies of the 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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-2005-48 and should be submitted on or before 
December 1, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 05-22416 Filed 11-9-05; 8:45 am]

BILLING CODE 8010-01-P
