

[Federal Register: October 20, 2006 (Volume 71, Number 203)]
[Notices]               
[Page 62024-62026]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20oc06-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54603; File No. SR-ISE-2006-62]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change To Implement a Pilot 
Program To Quote and To Trade Certain Options in Pennies

October 16, 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 October 11, 2006, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') 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 substantially 
prepared by the ISE. 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 is proposing to implement a pilot program to quote and to 
trade

[[Page 62025]]

certain options in pennies. The text of the proposed rule change is 
available on the ISE's Web site at http://www.iseoptions.com, at the 

Exchange's Office of the Secretary, and at the Commission's Public 
Reference Room.\3\
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    \3\ Exhibit 5 to the proposed rule change contains a proposed 
Regulatory Information Circular that also is part of the text of the 
proposed rule change.
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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 ISE 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
    The proposed rule change will implement a pilot program (the 
``Pilot'') for the quoting and trading of specified options contracts 
in $.01 increments. In a letter dated June 7, 2006, Chairman Cox of the 
Commission encouraged the six options exchanges to commence the Pilot. 
ISE proposes the following rule changes and related actions to 
implement the Pilot:
     To amend ISE Rule 710, regarding trading increments, to 
specify that the Exchange: (i) Will participate in the Pilot; and (ii) 
will identify the specific options to be included in the Pilot, as well 
as the increments for the quoting and trading of such options, in 
circulars that the Exchange will file with the Commission as proposed 
rule changes and will distribute to its members.
     To issue the proposed regulatory information circular 
attached as Exhibit 5 to the proposed rule change, identifying the 
initial Pilot options. These options are the NASDAQ 100 Trust, for 
which all series will be quoted and traded in pennies, and 12 other 
options, for which series trading at less than $3.00 will be quoted and 
traded in penny increments, and series trading at $3.00 or more will be 
quoted and traded in nickel increments.
     To amend ISE Rule 716, which currently permits trades in 
the Exchange's Block, Facilitation and Solicitation Mechanisms to be 
effected at ``split prices,'' which are the mid-points of the current 
standard trading increments. The Exchange proposes that options trading 
in penny increments not be eligible for such split pricing.
     To codify certain ISE ``quote mitigation'' actions. In 
proposing the Pilot, Chairman Cox noted that the Pilot ``is almost 
certain to increase demands on all market participants' systems'' and 
that ``it is essential that any exchange proposal also include a 
workable strategy for quote mitigation.'' The Exchange believes that it 
currently has an effective quote mitigation strategy in place. 
Specifically:
     API Fees: The ISE has implemented a fee program that 
requires market makers to purchase more APIs as the market maker 
generates more quotes, providing economic incentives on market makers 
to limit the number of quotations they disseminate.\4\
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    \4\ See Securities Exchange Act Release No. 53522 (March 20, 
2006), 71 FR 14975 (March 24, 2006) (SR-ISE-2006-09).
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     Monitoring: The ISE submits that it actively monitors the 
quotation activity of its market makers. When the Exchange detects that 
a market maker is disseminating significantly more quotes than an 
average market maker, the Exchange contacts that market maker and 
alerts it to such activity. Often such monitoring reveals that the 
market maker may have internal system issues or has incorrectly-set 
system parameters that were not immediately apparent to it. The 
Exchange believes that, even without uncovering problems, alerting a 
market maker to possible excessive quoting usually leads the market 
maker to take steps to reduce the number of its quotes.
     Holdback Timer: The ISE has the systemic ability to limit 
the dissemination of quotations and other changes to the ISE best bid 
and offer according to prescribed time criteria (a ``holdback timer''). 
For example, if there is a change in the price of a security underlying 
an option, multiple market makers likely will adjust the price or size 
of their quotes. Rather than disseminating each individual change, the 
holdback timer permits the Exchange to wait until all market makers 
have adjusted their quotes and then to disseminate a new quotation. 
This helps prevent the ``flickering'' of quotations. The ISE proposes 
to codify the holdback timer in this rule filing. As proposed in ISE 
Rule 804, the ISE will utilize a holdback timer that delays quotation 
updates for no longer than one second.
     Delisting: The ISE has committed to the Commission that it 
will delist options with average daily volume (``ADV'') of less than 20 
contracts.\5\ However, it has been the ISE's policy to be much more 
aggressive in delisting relatively inactive options, thereby 
eliminating the quotation traffic attendant to such listings. 
Currently, it is the ISE's policy to delist options with ADV of less 
than 50, even with the advent of the Exchange's new ``Second Market,'' 
\6\ which provides liquidity for less-active options.
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    \5\ See Securities Exchange Act Release No. 47483 (March 11, 
2003), 68 FR 13352 (March 19, 2003) (SR-ISE-2003-04).
    \6\ See Securities Exchange Act Release No. 54340 (August 21, 
2006), 71 FR 51240 (August 29, 2006)(SR-ISE-2006-40).
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     To submit certain reports. The Commission staff has asked 
the options exchanges to prepare reports regarding the first three 
months' experience under the Pilot and to submit such reports by the 
end of the fourth month of the Pilot. The reports will compare 
quotation and trading activity in the three months prior to the Pilot 
(October 26, 2006 through January 25, 2007), to the first three months 
of the Pilot (January 26, 2007 through April 25, 2007). The ISE will 
submit the following reports to the Commission pursuant to this 
timetable:
    [cir] Quality of Markets: This report will focus on quotation 
spread and size of quotations, as well as a number of other factors, 
including average daily volume.
    [cir] Capacity: This report will focus on the number of quotations 
in the Pilot options and the effect on the ISE's system's capacity.
    [cir] Linkage: This report will focus on trade-throughs, 
Satisfaction orders the ISE sends and receives, the number of Linkage 
Orders that ``time out'' without a response and the flickering of 
quotations.
2. Statutory Basis
    The Exchange believes that its 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, 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. In particular, 
the proposed rule change will permit the pilot quoting and trading of 
certain options in pennies to help determine whether such quoting and 
trading increments benefit investors.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).

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[[Page 62026]]

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

    The Exchange does not believe that the proposed rule change will 
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

    Written comments on the proposed rule change were neither solicited 
nor received.

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 such 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 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 No. SR-ISE-2006-62 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-2006-62. 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 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-2006-62 and should be submitted on or before 
November 13, 2006.

    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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-17564 Filed 10-19-06; 8:45 am]

BILLING CODE 8011-01-P
