
[Federal Register: March 31, 2008 (Volume 73, Number 62)]
[Notices]
[Page 16916-16917]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31mr08-115]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57553; File No. SR-ISE-2007-76]


Self-Regulatory Organizations; International Securities Exchange,
LLC; Order Approving a Proposed Rule Change, as Modified by Amendment
Nos. 1 and 2 Thereto, Relating to Voluntary Professionals

March 25, 2008.

I. Introduction

    On August 24, 2007, the International Securities Exchange, LLC
(``ISE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') a proposed rule change pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule
19b-4 thereunder \2\ to allow Public Customers to elect to become
``Voluntary Professionals,'' and thereby to have their orders treated
like Non-Customer Orders with respect to the Exchange's priority rules
and transaction fees.\3\ On January 25, 2008, ISE filed Amendment No. 1
to the proposed rule change. The proposed rule change, as modified by
Amendment No. 1, was published for comment in the Federal Register on
February 7, 2008.\4\ The Commission received one comment letter on the
proposal.\5\ On March 24, 2008, ISE filed Amendment No. 2 to the
proposed rule change.\6\ This order approves the proposed rule change,
as modified by Amendment Nos. 1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ A ``Public Customer'' is defined in ISE's rules as ``a
person that is not a broker or dealer in securities.'' ISE Rule
100(a)(38). A ``Non-Customer'' is defined as ``a person or entity
that is a broker or dealer in securities,'' and a ``Non-Customer
Order'' is ``an order for the account of a Non-Customer.'' ISE Rules
100(a)(27) and (28).
    \4\ See Securities Exchange Act Release No. 57255 (February 1,
2008), 73 FR 7348.
    \5\ See letter from Rachel J. Rich, St. Paul, MN, to Nancy M.
Morris, Secretary, Commission, dated February 7, 2008 (``Rich
Letter'').
    \6\ In Amendment No. 2, ISE stated that it would issue a
circular informing members of the process to properly mark the
orders of Voluntary Professionals. The Commission considers
Amendment No. 2 a technical amendment not subject to notice and
comment.
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II. Description of the Proposal

    Currently, ISE grants certain advantages to Public Customer Orders
\7\ over Non-Customer Orders. In particular, Public Customer Orders
receive priority over Non-Customer Orders and market maker quotes at
the same price. In addition, subject to certain exceptions,\8\ Public
Customer Orders do not incur transaction fees, but may incur
cancellation fees.\9\ Non-Customer Orders incur transaction fees, but
are not subject to cancellation fees.
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    \7\ A ``Public Customer Order'' is defined as ``an order for the
account of a Public Customer.'' ISE Rule 100(a)(39). For the
definition of ``Public Customer,'' see supra note 3.
    \8\ For example, Public Customer Orders currently incur fees for
certain transactions in ``Premium Products'' (defined in the ISE
Schedule of Fees) and Complex Orders that take liquidity on the
Exchange's complex order book. In addition, transaction fees are
charged for Public Customer Orders entered in response to special
order broadcasts, such as Facilitation orders, Solicitation orders,
Block orders, and orders entered in the Exchange's Price Improvement
Mechanism. See ISE Schedule of Fees.
    \9\ The Exchange imposes a cancellation fee, currently $1.75 per
cancellation, on a clearing EAM that cancelled at least 500 Public
Customer orders in a month for itself or for an introducing broker,
for each order cancellation in excess of the total number of orders
executed for itself or for such introducing broker that month. The
cancellation fee does not apply to the cancellation of Public
Customer Orders that improve ISE's disseminated quote at the time
the orders were entered.
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    ISE proposes to add a new term, ``Voluntary Professional,'' to the
list of definitions in Exchange Rule 100. A Voluntary Professional
would be defined as ``any Public Customer that elects, in writing, to
be treated in the same manner as a broker or dealer in securities for
purposes of Rules 713, 716, 722, and 723 as well as the Exchange's
schedule of fees.'' \10\ ISE proposes further to amend its definition
of Non-Customer to include Voluntary Professionals.\11\ Thus, the
orders of Voluntary Professionals would be Non-Customer Orders. Public
Customers would be required to instruct Electronic Access Members
(``EAMs'') in writing to designate their orders as Non-Customer Orders.
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    \10\ ISE Rules 713 (Priority of Quotes and Orders), 716 (Block
Trades), 722 (Complex Orders), and 723 (Price Improvement Mechanism
for Crossing Transactions) contain provisions concerning priority in
the allocation of orders. The Commission notes that the orders of
Voluntary Professionals would still be treated as Public Customer
Orders with respect to the rules governing Customer Participation
Orders as set forth in ISE Rule 715 (Types of Orders).
    \11\ ISE Rule 100(a)(21) would be amended to state: ``The term
`Non-Customer' means a person or entity that is a broker or dealer
in securities and Voluntary Professionals.''
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    As a result of ISE's proposal, the orders of Voluntary
Professionals would be treated in ISE's allocation process on equal
terms with the orders of broker-dealers, and the orders of other Public
Customers would have priority over the orders of Voluntary
Professionals. The orders of Voluntary Professionals, when executed,
also would incur the same transaction fees that are charged to broker-
dealers.
    In explaining the purpose of the proposal, the Exchange states that
its members have indicated that certain of their non-broker-dealer
customers, who employ sophisticated trading strategies that involve
cancelling a large percentage of their orders before the orders are
executed, would prefer to have their orders categorized as Non-Customer
Orders. By electing to become Voluntary Professionals, such customers
would not be subject to the Exchange's cancellation fees.\12\
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    \12\ See supra note 9 and accompanying text.
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    ISE further states that the Voluntary Professional designation
otherwise would not affect non-broker-dealer individuals and entities
with respect to all other ISE rules. For example, ISE

[[Page 16917]]

rules relating to the Intermarket Linkage \13\ would continue to apply
to all customers who are not broker-dealers--even those customers whose
orders are identified as Non-Customer Orders because they are Voluntary
Professionals. Similarly, rules regarding customer suitability and
other protections for customers would continue to apply with respect to
all customers who are not broker-dealers.\14\
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    \13\ See Chapter 19 of the ISE Rules.
    \14\ See Chapter 6 of the ISE Rules. Telephone conversation
between Ira Brandriss and Ronesha Butler, Special Counsels, Division
of Trading Markets, Commission, and Katherine Simmons, Deputy
General Counsel, ISE, on March 11, 2008.
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III. Discussion and Commission Findings

    After careful consideration of the proposed rule change, the
Commission finds that the proposed rule change is consistent with
Section 6(b) \15\ of the Act and the rules thereunder.\16\ In
particular, the Commission believes that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\17\ which requires that the
rules of a national securities exchange, among other things, 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, in general, to protect investors and the
public interest; and not be designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.
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    \15\ 15 U.S.C. 78f(b).
    \16\ In approving the proposed rule change, the Commission notes
that it has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change would allow Public Customers to elect to
become Voluntary Professionals by choosing to instruct EAMs to
designate their orders as Non-Customer Orders. Through such an
election, the orders of such customers no longer would be subject to
cancellation fees. The Commission believes that, in view of this
result, the ability to become a Voluntary Professional could represent
significant savings for a Public Customer whose trading strategy
involves placing, and then cancelling, orders frequently.
    By electing to become a Voluntary Professional, a Public Customer
would cede the priority rights normally granted to the orders of Public
Customers, and fees would be incurred on a Voluntary Professional's
transactions. The Commission notes, however, that this result is
determined solely by the choice of the customer. Thus, the proposed
rule change would not introduce any rule that would alter the
preferential treatment accorded to the orders of a Public Customer
against that Public Customer's will.
    The Commission believes that the proposed rule change would not
limit or restrict Public Customers in any way. On the contrary, it
would give Public Customers more flexibility and expand their ability
to participate cost-effectively in ISE's marketplace. The Commission
notes that the one commenter who expressed a view to the Commission
regarding the proposal favored the proposed rule change as ``fair and
just'' and believed that it would promote increased trading
activity.\18\
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    \18\ See Rich Letter supra note 5.
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    The Commission notes further that Voluntary Professionals would
continue to benefit from all the protections afforded to Public
Customers under the rules of the Exchange (other than the advantages
Public Customers have with respect to priority and transaction fees).
In addition, the advantages with respect to priority and fees would be
restored when a Public Customer rescinded its election to be a
Voluntary Professional.
    In sum, the Commission believes that the proposed rule change
appropriately would accommodate Public Customers who employ trading
strategies that involve numerous order cancellations by allowing them
to assess and determine for themselves the most beneficial status and
fee structure for their orders, and to choose accordingly.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change (SR-ISE-2007-76), as modified by
Amendment Nos. 1 and 2, be, and it hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-6545 Filed 3-28-08; 8:45 am]

BILLING CODE 8011-01-P
