

[Federal Register: June 7, 2006 (Volume 71, Number 109)]
[Notices]               
[Page 33019-33021]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07jn06-142]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53921; File No. SR-ISE-2006-28]

 
Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing and Order Granting Accelerated Approval of a 
Proposed Rule Change To Extend the Pilot Period for Preferenced Orders

June 1, 2006.
    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 May 18, 2006, 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 and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and is approving the 
proposal on an accelerated basis, for a pilot period through June 10, 
2007.
---------------------------------------------------------------------------

    \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 Exchange is proposing to extend the pilot program for 
Preferenced Orders until June 10, 2007. The text of the proposed rule 
change is set forth below. Brackets indicate deletions; italics 
indicates new text.
* * * * *

Rule 713. Priority of Quotes and Orders

    (a) through (f) no change.

Supplementary Material to Rule 713

    .01 through .02 no change.
    .03 Preferenced Orders. For a pilot period ending [June 10, 2006] 
June 10, 2007, an Electronic Access Member may designate a ``Preferred 
Market Maker'' on orders it enters into the System (``Preferenced 
Orders'').
    (a) through (c) 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 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 III 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
    According to the Exchange, the purpose of the proposed rule change 
is to extend, until June 10, 2007, the pilot period for preferenced 
orders as provided in paragraph .03 of the Supplementary Material to 
ISE Rule 713. The proposal amends ISE's procedure for allocating trades 
among market makers and non-customer orders under ISE Rule 713 to 
provide an enhanced allocation to a ``Preferred Market Maker'' when it 
is quoting at the national best bid or offer (``NBBO''). Specifically, 
under the proposal, an Electronic Access Member may designate any 
market maker appointed to an options class to be a Preferred Market 
Maker on orders it enters into the Exchange's system (``Preferenced 
Orders''). If the Preferred Market Maker is not quoting at the NBBO at 
the time

[[Page 33020]]

the Preferenced Order is received, the Exchange's existing allocation 
and execution procedures will be applied to the execution.\3\ The 
proposed rule is subject to a pilot program that is currently set to 
expire on June 10, 2006.\4\
---------------------------------------------------------------------------

    \3\ Marketable customer orders are not automatically executed at 
prices inferior to the NBBO. If the ISE best bid or offer is 
inferior to the NBBO, it is handled by the Primary Market Maker 
according to ISE Rule 803(c).
    \4\ See Securities Exchange Act Release No. 52066 (July 20, 
2005), 70 FR 43479 (July 27, 2005).
---------------------------------------------------------------------------

    Under the proposal, if a Preferred Market Maker is quoting at the 
NBBO at the time a Preferenced Order is received, the allocation 
procedure is modified so that the Preferred Market Maker (instead of 
the Primary Market Maker \5\) would receive an enhanced allocation 
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 
of the contracts to be allocated if there is only one other Non-
Customer Order or market maker quotation at the best price and forty 
percent if there are two or more other Non-Customer Orders and/or 
market maker quotes at the best price.\6\ Unexecuted contracts 
remaining after the Preferred Market Maker's allocation would be 
allocated pro-rata based on size as described above.
---------------------------------------------------------------------------

    \5\ A Primary Market Maker may be the Preferenced Market Maker, 
in which case such market maker would receive the enhanced 
allocation for Preferenced Market Makers.
    \6\ All allocations are automatically performed by the 
Exchange's system.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change is a necessary 
competitive response to the preferencing rules adopted by other options 
exchanges and would help the ISE attract and retain order flow. The 
Exchange believes that this order flow would add depth and liquidity to 
the Exchange's markets and enable the Exchange to continue to compete 
effectively with other options exchanges.
2. Statutory Basis
    The Exchange believes that the proposed rule change 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 the 
proposed rule change 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. The Exchange also 
believes that extension of the pilot program would allow the Exchange 
and the Commission to evaluate the rule change over an additional one-
year period.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that 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 the proposed rule change.

III. 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 and whether the pilot time frame is 
appropriate. 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-2006-28 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 SR-ISE-2006-28. 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. Copies of such 
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-2006-28 and should be submitted on or before June 
28, 2006.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    The Exchange has asked the Commission to approve the proposed rule 
change on an accelerated basis for an additional year in order to avoid 
disruption in the operation of the market. After careful consideration, 
the Commission finds that the proposed rule change is consistent with 
the requirements of section 6 of the Act \9\ and the rules and 
regulations thereunder applicable to a national securities 
exchange,\10\ and, in particular, the requirements of section 6(b)(5) 
of the Act.\11\ Section 6(b)(5) requires, among other things, 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. The 
Commission notes that the current pilot was approved for a total of one 
year \12\ to give the Commission an opportunity to evaluate the impact 
of the pilot program on the options markets to determine whether it 
would be beneficial to customers and to the options markets as a whole 
before approving any request for permanent approval of the pilot 
program. The Commission believes that a one-year extension of the pilot 
period would provide the Commission with additional

[[Page 33021]]

time to continue to evaluate the Exchange's Preferenced Order program.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f.
    \10\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ The Commission initially approved the Exchange's 
Preferenced Order program on a six week pilot basis while the 
Commission sought comment on the proposed rule change. See 
Securities Exchange Act Release No. 51818 (June 10, 2006), 70 FR 
35146 (June 16, 2006). The Commission subsequently extended to the 
pilot period until June 10, 2006, which was one year from the date 
the Commission first approved the Exchange's Preferenced Order 
program on a pilot basis. See Securities Exchange Act Release No. 
52066 (July 20, 2005), 70 FR 43479 (July 27, 2005).
---------------------------------------------------------------------------

    The Exchange has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of notice thereof in the Federal Register. The Commission 
believes that granting accelerated approval of the proposed rule change 
would allow the pilot program to continue without disruption while the 
Commission and the Exchange continue to review the pilot program's 
impact on the options market. Accordingly, the Commission finds good 
cause, consistent with section 19(b)(2) of the Act,\13\ for approving 
the proposed rule change prior to the thirtieth day after publication 
of notice thereof in the Federal Register.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-ISE-2006-28), which 
institutes the pilot program through June 10, 2007, is hereby approved 
on an accelerated basis.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-8804 Filed 6-6-06; 8:45 am]

BILLING CODE 8010-01-P
