

[Federal Register: October 16, 2006 (Volume 71, Number 199)]
[Notices]               
[Page 60781-60782]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16oc06-108]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54580; File No. SR-ISE-2006-40]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Approving Proposed Rule Change and Amendment No. 1 Thereto 
Relating to the Establishment of the Second Market

 October 6, 2006.

I. Introduction

    On July 5, 2006, the International Securities Exchange, LLC (f/k/a 
the International Securities Exchange, Inc.) (``ISE'' or ``Exchange'') 
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 proposal to establish a 
``Second Market'' for the listing and trading of low-volume option 
classes. On August 16, 2006, ISE filed Amendment No. 1 to the proposed 
rule change.\3\ The proposed rule change, as amended, was published for 
comment in the Federal Register on August 29, 2006.\4\ The Commission 
received no comments 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    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
    \4\ See Securities Exchange Act Release No. 54340 (August 21, 
2006), 71 FR 51240.
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II. Description of the Proposal

    The ISE proposes to adopt rules for the listing and trading of low-
volume option classes that qualify for listing under existing Exchange 
standards in a ``Second Market.'' Historically, the Exchange has 
elected to refrain from trading many option classes that qualify for 
trading on the ISE, but are characterized by low average daily trading 
volumes (``ADVs'') on the other option exchanges.

A. Listing in the Second Market

    Under the proposal, the Exchange would be able to list in the 
Second Market equity option classes (excluding options on exchange 
traded funds) that trade on other option exchange(s) that are 
characterized by an ADV below 500 contracts over the previous six-month 
period. The proposed rules would allow the Exchange to list equity 
option classes with an ADV of over 1,500 contracts only in the existing 
market (the ``First Market''), and would trade such classes pursuant to 
existing ISE rules. The Exchange would be able to list option classes 
with an ADV between 500 and 1,500 contracts initially in either market. 
Starting one year after the Exchange initiates trading in the Second 
Market, the Exchange would review the market in which option classes 
are listed every three months, and option classes would be moved from 
the First to the Second Market when their ADV in the prior six-month 
period falls below 300 contracts, and moved from the Second to the 
First Market when their ADV in the prior six-month period exceeds 750 
contracts.

B. Participation as Market Makers in the Second Market

    Under the proposal, all members approved to operate ISE market 
maker memberships would be eligible to be Competitive Market Makers in 
the Second Market (``SMCMMs''). In addition, members that are only 
approved as Electronic Access Members (``EAMs'') may also register as 
SMCMMs.\5\ Only Primary Market Makers in the First Market may be 
Primary Market Makers in the Second Market (``SMPMMs'').
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    \5\ Under the proposed rules, members that are only EAMs that 
want to become SMCMMs would be required to complete the same market 
maker application and meet the same standards that are applied to 
Competitive Market Makers under the Exchange's existing rules. 
Members that are only EAMs are not eligible to be SMPMMs.
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    As in the First Market, a primary market maker would be appointed 
for each class traded in the Second Market. SMPMMs would be subject to 
all the same obligations in their appointed options as Primary Market 
Makers in the First Market, including, among other things, entering 
continuous quotations in each series of every option class to which 
they are appointed and satisfying requirements related to the Plan for 
Creating and Operating an Intermarket Option Linkage. Similar to 
Primary Market Makers in the First Market, SMPMMs would be permitted to 
execute no more than 10% of their volume in Second Market option 
classes to which they are not assigned.
    For purposes of existing Exchange rules relating to market maker 
obligations, SMCMMs will be considered ``appointed'' to all option 
classes listed in the Second Market and will be able to choose whether 
to make markets in any option class listed in the Second Market on a 
daily basis. Unlike Competitive Market Makers in the First Market, 
SMCMMs would not be required to enter continuous quotations in a 
minimum number or percentage of assigned option classes. An SMCMM will 
be required to continuously quote

[[Page 60782]]

all of the series of any options class in which it chooses to make a 
market. If an SMCMM chooses to make markets in one or more options 
classes in the Second Market, it must participate in the opening 
rotation and make markets and enter into any resulting transactions on 
a continuous basis in all series of the options class until the close 
of trading that day. SMCMMs may not initiate quoting in an options 
class intraday. In addition, an SMCMM would undertake all the 
obligations that a Competitive Market Maker in the First Market assumes 
in appointed option classes for any option class(es) in which the SMCMM 
elects to make a market on a given day. SMCMMs will be permitted to 
execute no more than 25% of their volume in Second Market option 
classes in which they are not contemporaneously making markets.

C. Proposed Fees in the Second Market

    The Exchange proposes several changes to its fee schedule to 
accommodate introduction of the Second Market as follows: (1) Members 
would be charged an execution fee of $.05 per contract for public 
customer orders; (2) a $.10 per contract surcharge would be applied to 
transactions executed by market makers that do not own or lease an ISE 
market maker membership (i.e., EAMs that make markets in the Second 
Market); (3) market makers would be excluded from the $0.65 per 
contract payment for order flow fee for Second Market options; (4) all 
market makers in the Second Market would be charged a $2,000 per month 
access fee (there would be no additional access fee for EAMs to send 
orders to the Second Market); and (5) firms that are only market makers 
in the Second Market (i.e., EAMs that make markets in the Second 
Market) would be charged the same $5,000 annual regulatory fee paid by 
Competitive Market Makers in the First Market.

III. Discussion

    After careful consideration, 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 \6\ and, in particular, the requirements of Section 
6 of the Act.\7\ Specifically, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\8\ which 
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.
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    \6\ In approving this proposed rule change, as amended, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the ISE proposed market maker 
obligations for SMPMMs and SMCMMs are consistent with the Act. Market 
Makers are accorded certain benefits under the securities laws and ISE 
rules. The Commission believes the obligations of Market Makers in the 
Second Market justify these benefits.
    The Commission also believes that the proposal is consistent with 
Section 6(b)(4) of the Act,\9\ which requires that the rules of a 
national securities exchange provide for the equitable allocation of 
reasonable dues, fees, and other charges among the Exchange's members 
and issuers and other persons using its facilities. The Exchange 
currently assesses no execution fee for public customer order, but 
proposes to assess a $0.05 per contract execution fee for public 
customer orders executed in the Second Market. The Commission believes 
that this assessment is reasonable. The proposed rule change also 
appears to be reasonably designed to avoid duplicative charges to 
market makers already assessed certain fees, such as transaction and 
regulatory fees. The surcharge for Second Market transactions and the 
market maker regulatory fee will apply only to SMCMMs that are not also 
Market Makers in the First Market.
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    \9\ 15 U.S.C. 78f(b)(4).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (File No. SR-ISE-2006-40), as 
amended, is hereby approved.
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    \10\ 15 U.S.C. 78s(b)(2).
    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
Nancy M. Morris,
Secretary.
[FR Doc. E6-17083 Filed 10-13-06; 8:45 am]

BILLING CODE 8011-01-P
