

[Federal Register: August 29, 2007 (Volume 72, Number 167)]
[Notices]               
[Page 49753-49755]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29au07-103]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56306; File No. SR-ISE-2007-74]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change, as Modified by Amendment 
No. 1, Relating to an Extension of the Penny Pilot Program

August 22, 2007.
    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 August 21, 2007, the International Securities Exchange, LLC (``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 substantially prepared by ISE. On 
August 22, 2007, the Exchange filed Amendment No. 1 to the proposed 
rule change. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
---------------------------------------------------------------------------

    \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 ISE is proposing to expand a pilot program to quote and trade 
certain options in pennies. The text of the proposed rule change is 
available at http://www.ise.com, at the Exchange, and at the 

Commission's Public Reference Room.

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
    On January 24, 2007, the Commission approved ISE's rule filing, SR-
ISE-2006-62, which allowed 13 option classes to quote in penny 
increments in connection with the implementation of an industry-wide, 
six month pilot program (the ``Penny Pilot Program'').\3\ Under the 
Penny Pilot Program, the minimum price variation for all 13 option 
classes, except for the Nasdaq-100 Index Tracking Stock (``QQQQs''), is 
$0.01 for all quotations in option series that are quoted at less than 
$3 per contract and $0.05 for all quotations in options series that are 
quoted at $3 per contract or greater. The QQQQs are quoted in $0.01 
increments for all options series. A recent extension of the Penny 
Pilot Program is scheduled to expire on September 27, 2007.\4\ ISE now 
proposes to expand the Penny Pilot Program in two phases.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 55161 (January 24, 
2007), 72 FR 4754 (February 1, 2007) (SR-ISE-2006-62) (the ``Initial 
Filing'').
    \4\ See Securities Exchange Act Release No. 56151 (July 26, 
2007), 72 FR 42452 (August 2, 2007) (SR-ISE-2007-68).
---------------------------------------------------------------------------

    In both phases, the 13 options classes currently in the Penny Pilot 
Program would continue to be quoted as they are today. In addition, 
Phase I of the expansion would begin on September 28, 2007 and would 
continue for six months. This phase would include the 22 additional 
option classes noted in Exhibit 5. These 22 option classes are among 
the most actively traded, multiply-listed option classes based on 
national average daily volume, and together with the existing 13 option 
classes that are currently in the Penny Pilot Program, represent 
approximately 35% of the total industry volume.
    Phase II of the expansion would begin on March 28, 2008 and 
continue for one year until March 27, 2009. It is currently anticipated 
that an additional 28 option classes would be added to the Penny Pilot 
Program on March 28, 2008, bringing the total number of option classes 
in the Penny Pilot Program to 63. These 28 new option classes would 
also be among the most actively traded, multiply-listed option classes. 
ISE intends to submit a proposed rule change pursuant to section 
(b)(3)(A) of

[[Page 49754]]

the Exchange Act announcing the names of these twenty-eight option 
classes prior to the beginning of Phase II and, pursuant to ISE Rule 
710, intends to disseminate a Regulatory Information Circular.\5\
---------------------------------------------------------------------------

    \5\ Telephone conversation between Samir Patel, Assistant 
General Counsel, ISE, Jennifer Colihan, Special Counsel, Division of 
Market Regulation (``Division''), Commission, and Johnna Dumler, 
Special Counsel, Division, Commission on August 22, 2007.
---------------------------------------------------------------------------

    ISE believes that expanding the Penny Pilot Program as proposed by 
this rule filing would allow the Exchange and the Commission to further 
analyze, and over a longer period of time, the impact of quoting and 
trading option classes in penny increments and the impact of the Penny 
Pilot Program on liquidity, market structure and quote traffic.
    As proposed in the Initial Filing, ISE represents that options 
trading in penny increments would not be eligible for split pricing, as 
permitted under ISE Rule 716. In the Initial Filing, the Exchange also 
referenced quote mitigation strategies that are currently in place and 
proposed to apply them to the Penny Pilot Program. The Exchange 
proposes to continue applying those quote mitigation strategies during 
the extension and expansion of the Penny Pilot Program, as contemplated 
by this rule filing. Specifically, as proposed in ISE Rule 804, ISE 
would continue to utilize a holdback timer that delays quotation 
updates for up to, but not longer than, one second. The Exchange's 
monitoring and delisting policies, as proposed in the Initial Filing, 
would also continue to apply.
    Finally, ISE intends to submit reports to the Commission analyzing 
the Penny Pilot Program for the following time periods:
     May 1, 2007-September 27, 2007.
     September 28, 2007-January 31, 2008.
     February 1, 2008-July 31, 2008.
     August 1, 2008-January 31, 2009.
    The Exchange anticipates its reports will analyze the impact of 
penny pricing on market quality and options system capacity. The 
Exchange will submit each report within one month following the end of 
the period being analyzed.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\6\ in general, and furthers the 
objectives of section 6(b)(5) of the Act,\7\ 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.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange does not believe that the proposed rule change will 
result in 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. The Commission also requests and 
encourages interested persons to submit comments on the following 
specific questions:
     Whether there are circumstances under which options 
classes included in the Penny Pilot should be removed from the Pilot?
     If so, what factors should be considered in making the 
determination to remove an option class from the Penny Pilot?
     Should an objective standard be used? For instance, should 
an option class come out of the Penny Pilot if its trading volume drops 
below a threshold amount? If so, what should that threshold be? Or, 
should an option class come out of the Penny Pilot if it is no longer 
among the most actively traded options? If so, what should be 
considered the most actively traded options? What statistics or 
analysis should be used to support a determination to remove an options 
class?
     Should a more subjective analysis be allowed? If so, what 
factors should be taken into account?
     What concerns might arise by removing an option from the 
Penny Pilot? How could such concerns be ameliorated?
     How frequently should the analysis be undertaken (e.g., 
annually, bi-annually, quarterly), or should the evaluation be an 
automated process?
     If a determination is made that an option should be 
removed from the Penny Pilot, how much notice should be given to market 
participants that the quoting increment will change?
    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-2007-74 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-2007-74. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. 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

[[Page 49755]]

should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-ISE-2007-74 
and should be submitted on or before September 19, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-17081 Filed 8-28-07; 8:45 am]

BILLING CODE 8010-01-P
