

[Federal Register: March 13, 2006 (Volume 71, Number 48)]
[Notices]               
[Page 12758-12759]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13mr06-93]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53419; File No. SR-ISE-2005-50]

 
Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Order Approving Proposed Rule Change, and Amendment No. 1 
Thereto, To Amend ISE Rule 803 To Provide for a Back-Up Primary Market 
Maker

March 6, 2006.

I. Introduction

    On October 14, 2005, the International Securities Exchange, Inc. 
(``Exchange'' or ``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 proposed rule change to amend ISE Rule 803 to provide 
for a Back-Up Market Maker. On January 12, 2006, the Exchange filed 
Amendment No. 1 to the proposed rule change.\3\ The proposed rule 
change was published for comment in the Federal Register on January 30, 
2006.\4\ The Commission received no comment letters regarding the 
proposal. This order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1, which replaced the original filing in its 
entirety, made technical and clarifying changes to the proposed rule 
change.
    \4\ See Securities Exchange Act Release No. 53164 (January 20, 
2006), 71 FR 4949 (January 30, 2006) (``Notice'').
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II. Description of Proposed Rule

    The Exchange proposes to amend ISE Rule 803 to provide for a Back-
Up Primary Market Maker and to correct an inconsistency in the 
Exchange's Rules. Specifically, the Exchange proposes to enhance the 
ISE System to allow Competitive Market Makers that are also Primary 
Market Makers on the Exchange to voluntarily act as Back-Up Primary 
Market Makers when the appointed Primary Market Maker experiences 
technical difficulties that interrupt its participation in the market. 
Under the proposal, only Competitive Market Makers that are also 
Primary Market Makers on the Exchange would be eligible to be 
designated as a Back-Up Primary Market Maker because, according to the 
Exchange, these members are readily able to assume all of the 
responsibilities of a Primary Market Maker on the Exchange, such as 
handling customer orders when an away market has a better price.

[[Page 12759]]

    Under the proposed rule change, the ISE System would automatically 
switch a Competitive Market Maker quoting in the affected options 
series to an active Back-Up Primary Market Maker if the appointed 
Primary Market Maker stops quoting as a result of technical 
difficulties.\5\ The ISE System would automatically switch back to the 
appointed Primary Market Maker when it re-establishes its quotes in the 
series, but the Back-Up Primary Market Maker would continue to be 
responsible for any outstanding unexecuted orders it is handling. 
During the period that the services of the Back-Up Primary Market Maker 
are required, it would assume most of the responsibilities and 
privileges of a Primary Market Maker under the ISE Rules with respect 
to any series in which the appointed Primary Market Maker fails to have 
a quote in the ISE System.\6\
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    \5\ If there is more than one eligible member quoting in the 
series, the ISE System would automatically switch to the member with 
the largest offer in the series.
    \6\ A Competitive Market Maker would not become subject to the 
requirement in ISE Rule 804(e)(1) to enter continuous quotations in 
all of the series of all of the options classes to which it is 
appointed, as opposed to only 60% of the options classes under ISE 
Rule 804(e)(2), by acting as a Back-Up Primary Market Maker.
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    The Exchange also proposes to correct an inconsistency in its 
rules. In April 2004, the Exchange received Commission approval of a 
proposed rule change that allowed it to disseminate a quotation for 
less than ten contracts.\7\ Because the options intermarket linkage 
plan and the Exchange's rules continued to require the Exchange to 
guarantee that the Firm Customer Quote Size (``FCQS'') and Firm 
Principal Quote Size (``FPQS'') would be at least 10 contracts, ISE 
Rule 803(c)(1) was amended to provide that the Primary Market Maker had 
the obligation to buy or sell the number of contracts necessary to 
provide an execution of at least 10 contracts to incoming linkage 
orders when the Exchange's disseminated market quotation was for less 
than 10 contracts.\8\
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    \7\ See Exchange Act Release No. 49602 (April 22, 2004), 69 FR 
23841 (April 30, 2004) (the ``Real Size Filing'').
    \8\ See id.
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    In August 2004, the intermarket linkage plan was amended to provide 
that the 10 contract minimum FCQS and FPQS does not apply when the 
Exchange is disseminating a quotation of fewer than 10 contracts.\9\ In 
October 2004, the Exchange, and all of the other options exchanges, 
received approval for changes to their linkage rules to implement this 
change to the intermarket linkage plan.\10\ Accordingly, the Primary 
Market Maker no longer is required to guarantee a minimum of 10 
contracts to an incoming linkage order when the Exchange's disseminated 
market quotation is for less than 10 contracts. However, the Exchange 
neglected to remove the language in ISE Rule 803(c)(1) at the time the 
changes to the linkage rules were approved, thereby creating an 
inconsistency in the ISE Rules. The Exchange now proposes to delete the 
language in ISE Rule 803(c)(1) as a purely non-substantive clean-up of 
the ISE Rules.
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    \9\ See Exchange Act Release No. 50211 (August 18, 2004), 69 FR 
52050 (August 24, 2004).
    \10\ See Exchange Act Release Nos. 50562 (October 19, 2004), 69 
FR 62925 (October 28, 2004) and 50587 (October 25, 2004), 69 FR 
63417 (November 1, 2004).
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\11\ In particular, the Commission finds that the 
proposal is consistent with the requirements of Section 6(b)(5) of the 
Act,\12\ which requires, among other things, that the rules of a 
national securities exchange 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 to protect 
investors and the public interest.
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    \11\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal should help to ensure 
that the functions of the Primary Market Maker are performed in an 
uninterrupted fashion even when a Primary Market Maker experiences 
difficulties that cause it to remove its quotes from the market. In 
particular, the Commission believes that the proposed rule change 
should help to ensure that the Back-Up Primary Market Makers would 
provide continuous quotations in all of the series of the options 
classes in a manner consistent with the obligations of the Primary 
Market Maker, set forth in ISE Rule 803. Further, this proposed rule 
change should reduce the number of non-firm quotes or ``fast market'' 
states disseminated by the ISE.\13\
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    \13\ The Commission notes that the Exchange represents that most 
interruptions in Primary Market Maker quoting are very brief in 
duration. Telephone conversation between Katherine Simmons, Deputy 
General Counsel, ISE, Marc F. McKayle, Special Counsel, Division of 
Market Regulation (``Division''), Commission and Johnna B. Dumler, 
Attorney, Division, Commission on November 2, 2005.
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    The ISE proposal to indicate that a Primary Market Maker is not 
required to guarantee a minimum of 10 contracts to an incoming linkage 
order when the Exchange's disseminated market quotation is less than 10 
contracts is of a clarifying and technical nature. Accordingly, based 
on the foregoing the Commission believes that the proposal is 
consistent with the requirements of the Act and the rules and 
regulations thereunder.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-ISE-2005-50) is approved, as 
amended.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-3492 Filed 3-10-06; 8:45 am]

BILLING CODE 8010-01-P
