
[Federal Register: April 30, 2008 (Volume 73, Number 84)]
[Notices]               
[Page 23517-23518]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30ap08-138]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57706; File No. SR-ISE-2007-77]

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

April 24, 2008.

I. Introduction

    On August 24, 2007, the International Securities Exchange, LLC 
(``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 amend ISE Rule 722, ``Complex Orders,'' to 
provide an opportunity for marketable complex orders to receive price 
improvement and to describe the execution of complex orders on the ISE 
in greater detail. The ISE filed Amendment Nos. 1 and 2 to the proposal 
on November 27, 2007, and March 11, 2008, respectively.\3\ The proposed 
rule change, as modified by Amendment Nos. 1 and 2, was published for 
comment in the Federal Register on March 21, 2008.\4\ The Commission 
received no comments regarding the proposed rule change, as amended. 
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. 2 replaces the original filing in its 
entirety.
    \4\ See Securities Exchange Act Release No. 57507 (March 14, 
2007), 73 FR 15241.
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II. Description of the Proposal

    The ISE proposes to amend ISE Rule 722 to provide an opportunity 
for marketable complex orders to receive price improvement and to 
describe the execution of complex orders on the ISE in greater 
detail.\5\ The ISE proposes to amend ISE Rule 722 to specify that, 
subject to 722(b)(2), a complex order will be executed automatically 
against orders on the complex order book in price priority and in time 
priority at the same price.\6\ A complex order that is not executed 
against another complex order will be executed automatically against 
bids and offers for the individual legs of the complex order, provided 
that the complex order may be executed in full or in a permissible 
ratio by such bids and offers.\7\ The Exchange's system, however, will 
not execute two complex orders against each other if the execution 
price of the options leg(s) would be below the best price available on 
the ISE for the options series, nor will it execute two complex orders 
at a price that matches the best price available on the ISE when there 
is a Public Customer order on the book.\8\
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    \5\ The proposal also deletes ISE Rule 722(b)(5), which contains 
outdated cross-references.
    \6\ See ISE Rule 722(b)(3)(i).
    \7\ See ISE Rule 722(b)(3)(ii).
    \8\ See ISE Rule 722(b)(2).
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    The ISE also proposes to amend ISE Rule 722 to allow members to 
choose to provide complex orders with an opportunity for price 
improvement by marking such orders for price improvement.\9\ Members 
will be able to mark all complex orders for price improvement, 
including stock-option orders. A marketable complex order that has been 
marked for price improvement will be exposed on the ISE's complex order 
book for a period of up to one second before being executed 
automatically against other complex orders, or against bids and offers 
for the individual legs of the order.\10\ Members may view the complex 
orders through an API. During the exposure period, market participants 
will have an opportunity to enter contra-side complex orders.\11\ While 
the ISE will not conduct an auction for the incoming marketable complex 
order (i.e., there will be no messages sent to members specifically 
soliciting interest to trade with the complex order), the exposure 
period will provide an opportunity for

[[Page 23518]]

the order to receive price improvement. Although the exposed order may 
receive price improvement, the order may not be executable at the 
conclusion of the exposure period. In addition, ISE Rules 717(d) and 
(e), which require members to expose agency orders to the market before 
executing them against proprietary or solicited orders, will continue 
to apply to the execution of complex orders.
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    \9\ See ISE Rule 722(b)(3)(iii).
    \10\ See ISE Rule 722(b)(3)(iii). The Exchange will determine 
the length of the exposure period, not to exceed one second, from 
time to time. The ISE will communicate the initial exposure period 
and any subsequent changes to the exposure period to members via an 
Exchange circular.
    \11\ The complex order book is available to all ISE market 
participants. However, the application of ISE Rules 717(d) and (e), 
which require a three-second exposure period before a member may 
execute an agency order against a proprietary order or a solicited 
order, will prohibit the member that entered the complex order from 
entering contra-side principal orders or solicited orders during the 
exposure period.
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III. Discussion

    After careful review, 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.\12\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\13\ which 
requires, in part, 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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    \12\ In approving the proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposal will provide ISE members 
with the option to seek potential price improvement for complex orders. 
Marketable complex orders would be exposed to attract contra-side 
trading interest only if they are marked for price improvement. If 
marked for price improvement, a complex order that would otherwise be 
executable upon entry will be exposed on the ISE's complex order book 
for a period of up to one second thereby providing an opportunity for 
market participants to enter contra-side orders that could provide 
price improvement. Such an order would not be executable by its terms 
until the end of the exposure period. The Commission believes that, 
because of the unique nature of complex orders, it is consistent with 
the Act for ISE's rules to allow members seeking to execute a 
particular complex order strategy to choose to attach an additional 
contingency to their orders that would render such orders unexecutable 
during an exposure period for the purpose of attracting price 
improvement.\14\
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    \14\ Although a complex order is marketable upon entry, it may 
not be executable at the conclusion of the exposure period because 
of changes to ISE's quoted market.
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    In addition, the Commission notes that the requirements of ISE Rule 
722, including the priority requirements of ISE Rule 722(b)(2) 
applicable to public customer orders, will continue to apply. In 
addition, ISE Rules 717(d) and (e), which require members to expose 
agency orders for three seconds before executing them against 
proprietary or solicited orders, will continue to apply to complex 
orders. Thus, a member would not be able to enter a proprietary order, 
or a solicited order, to trade with an agency order during the complex 
order exposure period, which will last for one second or less.\15\
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    \15\ See supra note 11.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-ISE-2007-77), as amended, is 
approved.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-9460 Filed 4-29-08; 8:45 am]

BILLING CODE 8010-01-P
