
[Federal Register: July 3, 2008 (Volume 73, Number 129)]
[Notices]               
[Page 38263-38265]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03jy08-109]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58041; File No. SR-ISE-2007-94]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change as Modified by Amendments 
No. 1 and 3 Thereto Relating to Reduction of the Order Handling and 
Exposure Periods

June 26, 2008.
    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 5, 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 
December 4, 2007, ISE filed Amendment No. 1 to the proposed rule 
change. On May 22, 2008, ISE filed Amendment No. 2 to the proposed rule 
change.\3\ On June 23, 2008, ISE filed Amendment No. 3 to the proposed 
rule change. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 2 was withdrawn on May 29, 2008.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange is proposing to reduce the order handling and exposure 
periods contained in Exchange Rules 716 (Block Trades), 717 
(Limitations on Orders), 723 (Price Improvement Mechanism for Crossing 
Transactions), and 811 (Directed Orders) from three seconds to one 
second.
    The text of the proposed rule change is available on the Exchange's 
Web site (http://www.iseoptions.com), at the principal office of 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, ISE 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. 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 purpose of the proposed rule change is to reduce the order 
handling and exposure periods contained in Exchange Rules 716 (Block 
Trades), 717 (Limitations on Orders), 723 (Price Improvement Mechanism 
for Crossing Transactions), and 811 (Directed Orders) from three 
seconds to one second.
    Rule 716 contains the requirements applicable to the execution of 
orders using the Block Order Mechanism, Facilitation Mechanism, and 
Solicited Order Mechanism. The Block Order Mechanism allows members to 
obtain liquidity for the execution of a block-size order, whereas the 
Facilitation and Solicited Order Mechanisms allow members to enter 
block-size cross transactions. Rule 723 contains the requirements 
applicable to the execution of orders using the Price Improvement 
Mechanism (``PIM''). The PIM allows members to enter cross transactions 
of any size. Orders entered into any of these mechanisms 
(``Mechanisms'') currently are exposed to all market participants for 
three seconds, giving participants an opportunity to enter additional 
trading interest before the orders are automatically executed. Under 
the proposal, the exposure period for all four Mechanisms would be 
reduced to one second.
    Rule 717 requires members to expose agency orders to the 
marketplace before executing them as principal \4\ or executing them 
against orders solicited from other members.\5\ Under Rule 717, an 
order can be exposed either by entering it onto the Exchange and 
waiting at least three seconds before entering the contra-side 
proprietary or solicited order, or by utilizing the various mechanisms 
that have an exposure period built into the functionality as described 
above. Under the proposal, the exposure period for orders entered onto 
the Exchange would be reduced to one second.\6\
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    \4\ Rule 717(d).
    \5\ Rule 717(e). The Exchange proposes to make a non-substantive 
clean-up of Rule 717(e) to specify that members can use the 
Facilitation Mechanism to execute solicited crosses. The 
Facilitation Mechanism rule was amended earlier this year to allow 
members to enter solicited crosses, and Rule 717(e) should have been 
updated at that time. See Securities Exchange Act Release No. 55557 
(March 29, 2007), 72 FR 16838 (April 5, 2007).
    \6\ Under Rule 717(d), a member may enter an agency order that 
would execute against a pre-existing proprietary order on the 
Exchange if such proprietary order was entered at least three 
seconds prior to receipt of the agency order. Under the proposal, 
this time period would also be reduced to one second.
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    Rule 811 contains the requirements applicable to the handling and 
execution of Directed Orders. A Directed Order is an order routed from 
an Electronic Access Member to an Exchange Market Maker (the ``Directed 
Market Maker'') through the Exchange's system.\7\ A Directed Market 
Maker is required to enter Directed Orders into the PIM or release the 
order to the Exchange's limit order book within three seconds of 
receipt.\8\ Under the proposal, this time period would be reduced to 
one second.
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    \7\ Rule 811(a)(1).
    \8\ Rule 811(c)(3). If the Directed Market Maker fails to do so 
within three seconds, the Exchange's system automatically releases 
the order. Rule 811(c)(3)(ii).
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    Additionally, there are three instances when a Directed Order is 
exposed to all market participants for three seconds after being 
released to the Exchange's limit order book: (i) Before a Directed 
Order is matched against the Directed Market Maker at the NBBO; \9\ 
(ii) before

[[Page 38264]]

executing a Directed Order against the Directed Market Maker's 
Guarantee; \10\ and (iii) before being given to the Primary Market 
Maker for handling where the Directed Market Maker is also the Primary 
Market Maker.\11\ Under the proposal, these three exposure periods 
would be reduced to one second.
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    \9\ If a Directed Market Maker is quoting at the NBBO at the 
time it releases a Directed Order, the Directed Market Maker is last 
in priority, and the order is exposed to all market participants 
before the Directed Order is executed against the Directed Market 
Maker's quote.
    \10\ If the Directed Market Maker is quoting at the NBBO on the 
opposite side of the market from a Directed Order at the time the 
Directed Order is received by the Directed Market Maker, and the 
Directed Order is marketable, the Exchange's system will 
automatically guarantee execution of the Directed Order against the 
Directed Market Maker at the price and the size of the Directed 
Market Maker's quote. Rule 811(d).
    \11\ As provided in Rule 714, when the Exchange's best bid or 
offer is inferior to another exchange, incoming marketable customer 
orders are handled by the Primary Market Maker pursuant to Rule 
803(c), which requires the Primary Market Maker to either execute 
the order at a price that matches the NBBO or attempt to obtain the 
better price for the customer according to the Linkage rules 
contained in Chapter 19.
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    Finally, if a Directed Order is placed on the Exchange's limit 
order book, the Directed Market Maker is not permitted to enter a 
proprietary order to execute against the Directed Order during the 
three seconds following the release of the Directed Order. This 
limitation would be reduced to one second under the proposal.
    In adopting the various three-second order handling and exposure 
periods, ISE recognized that three seconds would not be long enough to 
allow human interaction with the orders. Rather, market participants 
had become sufficiently automated that they could react to these orders 
electronically. In this context, ISE recognizes that it is in all 
market participants' best interest to minimize the exposure period to a 
time frame that continues to allow adequate time for market 
participants to electronically respond, as both the order being exposed 
and the participants responding to the order are subject to market risk 
during the exposure period. In this respect, ISE's experience with the 
three-second time period indicates one second would provide an adequate 
response time. Indeed, most members wait until the end of the last 
second of the three-second period before responding to exposed orders. 
Accordingly, the Exchange does not believe it is necessary or 
beneficial to the orders being exposed to continue to subject them to 
market risk for a full three seconds.
    Recently, the Exchange distributed a survey to members that 
regularly participate in orders executed through the Mechanisms that 
would be affected by the proposal. To substantiate that its members 
could receive, process, and communicate a response back to the Exchange 
within one second, the survey asked members to identify how many 
milliseconds it took for (i) a broadcast from ISE to reach their 
systems; (ii) their systems to generate responses; and (iii) their 
responses to reach the ISE. The survey results indicate that the time 
it takes a message to travel between the Exchange and its members 
typically is not more than fifty milliseconds each way.\12\ The survey 
also indicated that it takes not more than ten milliseconds for member 
systems to process the information and generate a response. Thus, the 
survey indicated that it typically takes, at most, 110 milliseconds for 
members to receive, process, and respond to broadcast messages related 
to the various Mechanisms. Additionally, members indicated that 
reducing the exposure period to one second would not impair their 
ability to participate in orders executed through the Mechanisms.\13\ 
The Exchange believes that this information provides additional support 
for its assertion that reducing the exposure periods from three seconds 
to one second will continue to provide members with sufficient time to 
ensure effective interaction with orders.
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    \12\ Eleven firms responded to the survey. Eight of the eleven 
responded to the specific timing questions. Half of these members 
communicate to the Exchange from Chicago. The others are located in 
New York City, or operate from both New York City and Chicago.
    \13\ All of the eight members that responded to the specific 
timing questions, and two of the three members that did not answer 
the specific timing questions, indicated that reducing the crossing 
exposure timer to one second would not impair their ability to 
participate in ISE crossing orders. One member responded that it 
could not measure the specific times and indicated that it would 
prefer to keep the exposure periods at three seconds.
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    When approving the existing three-second order handling and 
exposure periods, the Commission concluded that three seconds was 
sufficient to afford electronic crowds sufficient time to compete for 
orders.\14\ In reaching this conclusion, the Commission stated that the 
critical issue is determining whether the three-second timeframe would 
give participants in a fully automated marketplace sufficient time to 
respond, compete and provide price improvement for orders, and whether 
electronic systems were available to ISE members that would allow them 
to respond in a meaningful way within the proposed timeframe.\15\ The 
Commission noted that the ISE is a fully electronic exchange where 
participants interact by electronic means, and that electronic systems 
were readily available, if not already in place, that would allow ISE 
members to respond.\16\
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    \14\ See Securities Exchange Act Release No. 50819 (December 8, 
2004), 69 FR 75093 (December 15, 2004) (order approving PIM with 
three-second order handling and exposure periods); Securities 
Exchange Act Release No. 52711 (November 1, 2005), 70 FR 67508 
(November 7, 2005) (reduction of exposure period for Facilitation 
and Solicited Order Mechanisms from ten seconds to three seconds); 
Securities Exchange Act Release No. 53850 (May 23, 2006), 71 FR 
30703 (May 30, 2006) (reduction of exposure period for orders 
entered on the Exchange under Rule 717(d) and (e) from thirty 
seconds to three seconds); Securities Exchange Act Release No. 54531 
(September 28, 2006), 71 FR 58649 (October 4, 2006) (reduction of 
exposure period for Block Order Mechanism from thirty seconds to 
three seconds).
    \15\ See Securities Exchange Act Release No. 50819 (December 8, 
2004), 69 FR 75093 at 75096 (December 15, 2004) (order approving PIM 
with three-second order handling and exposure periods).
    \16\ Id.
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    The Exchange believes reducing order handling and exposure periods 
as discussed above from three seconds to one second would benefit all 
market participants. Since members react to these orders 
electronically, and generally only at the tail end of the three-second 
period, reducing the time periods would continue to provide sufficient 
time to ensure effective interaction with orders. At the same time, 
reducing the time periods to one second would allow the Exchange to 
provide investors and other market participants with more timely 
executions, thereby reducing market risk.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) of the Act \17\ that an exchange have 
rules that are 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 for a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. In particular, ISE believes that the proposal will 
benefit market participants by providing more timely executions.
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    \17\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not 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

    The Exchange has not solicited, and does not intend to solicit, 
comments on

[[Page 38265]]

this proposed rule change. The Exchange has not received any written 
comments from members or other interested parties, except as described 
below.
    In Amendment No. 3, ISE noted that the Commission received a 
comment letter on another ISE rule proposal related to the price at 
which a transaction may be effected through the PIM (the ``Price 
Proposal''), which asserted that the combined effect of the Price 
Proposal and this proposal to reduce the exposure period to one second 
would be increased internalization rates.\18\ ISE further noted that 
the Commission subsequently approved the Price Proposal, stating that 
it did not agree with the concerns raised by the commenter and that the 
PIM would continue to provide an opportunity for customer orders to 
receive an execution at a price better than the NBBO.\19\ The 
Commission stated in its approval order that the Price Proposal could 
increase the likelihood of members entering agency orders into the PIM 
because the members would only be required to guarantee an execution at 
the NBBO, which would provide additional customer orders an opportunity 
for price improvement. ISE also noted that the Commission mentioned in 
its approval order the potential for the Price Proposal to encourage 
increased participation in a PIM and that increased participation would 
decrease the proportion of an agency order that would be internalized 
by the submitting member.
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    \18\ Letter from Lisa J. Fall, General Counsel, Boston Options 
Exchange, to Nancy M. Morris, Secretary, Commission, dated May 14, 
2008 (commenting on File Number SR-ISE-2008-29).
    \19\ See Securities Exchange Act Release No. 57847 (May 21, 
2008), 73 FR 30987 (May 29, 2008) (order approving File No. SR-ISE-
2008-29).
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    As the Exchange discusses in the Purpose section of this filing, 
and as further supported by the results of the survey discussed above, 
ISE members are able to respond to PIM orders in less than one second, 
and therefore the Exchange does not believe this proposal will 
discourage competition for PIM orders. Rather, ISE believes that this 
rule change, like the Price Proposal, could provide additional customer 
orders an opportunity for price improvement because it would reduce the 
market risk for members that are required to guarantee an execution at 
the NBBO or better.

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 Number SR-ISE-2007-94 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2007-94. 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 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-2007-94 and should be 
submitted on or before July 24, 2008.

    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,
Acting Secretary.
[FR Doc. E8-15101 Filed 7-2-08; 8:45 am]

BILLING CODE 8010-01-P
