
[Federal Register: July 3, 2008 (Volume 73, Number 129)]
[Notices]               
[Page 38261-38263]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03jy08-108]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58038; File No. SR-ISE-2008-50]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Relating to the Exposure of Public Customer Orders to all ISE 
Members

June 26, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 23, 2008, 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 and II below, which Items have been substantially prepared by 
the ISE. The ISE has designated the proposed rule change as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposed rule 
change effective upon filing with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE proposes to amend ISE Rule 803 relating to the exposure of 
public customer orders. The text of the proposed rule change is 
available on ISE's Web site at http://www.ise.com, at ISE's principal 
office, 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 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. 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 purpose of this proposed rule change is to amend ISE Rule 803 
relating to the exposure of public customer orders. Pursuant to 
Commission approval, before a Primary Market Maker (``PMM'') sends a 
public customer order through the intermarket linkage (``Linkage'') 
when ISE is not at the national best bid or offer (``NBBO''), the 
Exchange exposes these customer orders to all its market makers to give 
them an opportunity to match the NBBO.\5\
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    \5\ See Securities Exchange Act Release No. 57812 (May 12, 
2008), 73 FR 28846 (May 19, 2008) (Notice of Filing of Amendment No. 
1 to the Proposed Rule Change and Order Granting Accelerated 
Approval of Proposed Rule Change, As Modified by Amendment No. 1 
Thereto, Relating to the Exposure of Public Customer Orders).
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    Specifically, before the PMM sends a Linkage Order on behalf of a 
public customer, the public customer order is exposed at the NBBO price 
for a period established by the Exchange not to exceed one second. 
During this exposure period, Exchange market makers may enter responses 
up to the size of the order being exposed in the regular trading 
increment applicable to the option. If at the end of the exposure 
period, the order is executable at the then-current NBBO and the ISE is 
not at the then-current NBBO, the order is executed against responses 
that equal or better the then-current NBBO.\6\ The exposure period will 
be terminated if the exposed order becomes executable on the ISE at the 
prevailing NBBO or if the Exchange receives an unrelated order that 
could trade against the exposed order at the prevailing NBBO price.\7\ 
If, after an order is exposed, the order is not executed in full on the 
Exchange at the then-current NBBO or better, and it is marketable 
against the then-current NBBO, the PMM sends a Linkage Order on the 
customer's behalf for the balance of the order as provided in Rule 
803(c)(2)(ii) even though there may be other ISE members who would be 
willing to execute the order at the better price. If the balance of the 
order is not marketable against the then-

[[Page 38262]]

current NBBO, it is placed on the ISE book.
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    \6\ Executions will be allocated pro-rata based on size (i.e., 
the percentage of the total number of contracts available at the 
same price that is represented by the size of a market maker's 
response).
    \7\ The order is executed against orders and quotes on the book 
and responses received during the exposure period in price priority. 
At the same price, customer orders are executed first in time 
priority and then all other interest (orders, quotes and responses) 
are allocated pro-rata based on size.
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    The Exchange notes that when an order is sent to another exchange 
through Linkage, the other exchange charges an execution fee. The cost 
of sending the order through Linkage can be substantial, particularly 
with respect to other options exchanges that have adopted a maker-taker 
fee schedule.\8\ To retain as much order flow as possible on ISE and to 
help reduce costs associated with the number of orders sent through 
Linkage, ISE proposes to expose public customer orders to Electronic 
Access Members in addition to all other market makers, thus permitting 
all members of the Exchange to respond to these public customer orders 
before the orders are sent to another exchange through Linkage. This 
proposal will provide additional opportunities for public customer 
orders to be executed at the NBBO at ISE, and, as noted above, will 
reduce PMM costs by reducing the number of Linkage orders they must 
send to other exchanges.
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    \8\ Several options exchanges have adopted a fee structure in 
which firms receive a rebate for the execution of orders resting in 
the limit order book, i.e., posting liquidity, and pay a fee for the 
execution of orders that trade against liquidity resting on the 
limit order book, i.e., taking liquidity. Taker fees currently range 
up to $0.45 per contract and are charged without consideration of 
the order origin category, including public customer orders. The 
effective price paid by a customer purchasing an option can be 
considerably higher on an exchange that charges a taker fee. Because 
orders cannot be executed at prices inferior to the NBBO, ISE 
members are effectively forced to pay taker fees when an exchange 
with a taker fee structure is at the NBBO and the members' orders 
are directly routed to such an exchange or indirectly routed to such 
an exchange through Linkage (where the fees are passed through).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations under the Act applicable to a 
national securities exchange and, in particular, the requirements of 
Section 6(b) of the Act.\9\ Specifically, the Exchange believes the 
proposed rule change is consistent with Section 6(b)(5) of the Act's 
\10\ requirements that the rules of a national securities exchange be 
designed to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts and, in general, to protect investors 
and the public interest. In particular, the proposed rule change will 
give additional opportunities for public customer orders to be executed 
at the NBBO at ISE and reduce costs by reducing the number of Linkage 
orders sent to other exchanges.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that 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 this proposed rule change. The Exchange has not received 
any written comments from members or other interested parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms does not become operative for 30 days after the 
date of this filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, the proposed rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \11\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\12\ As required under Rule 19b-4(f)(6)(iii),\13\ the 
Exchange provided the Commission with written notice of its intent to 
file the proposed rule change, along with a brief description and text 
of the proposed rule change, at least five business days prior to the 
date of filing of the proposed rule change.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 17 CFR 240.19b-4(f)(6)(iii).
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    A proposed rule change filed under Rule 19b-4(f)(6) \14\ normally 
may not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) \15\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The ISE requests that the Commission 
waive the 30-day operative delay, as specified in Rule 19b-
4(f)(6)(iii),\16\ which would make the rule change effective and 
operative upon filing. The Commission believes that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest. The Commission notes that a waiver of the 30-day 
operative delay will allow the Exchange to implement this proposed rule 
change immediately and, thus, permit all ISE members to respond to 
public customer orders that have been exposed.\17\ Further, the 
Commission notes that another exchange has similar rules that would 
expose in-bound orders that are executable against the NBBO on that 
exchange's book for one second.\18\ Accordingly, the Commission 
designates the proposed rule change operative upon filing with the 
Commission.
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    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ 17 CFR 240.19b-4(f)(6)(iii).
    \16\ Id.
    \17\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \18\ See Chapter V, Section 16(b) of the Rules of the Boston 
Options Exchange.
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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-2008-50 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-2008-50. 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

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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-2008-50 and should be submitted on or before July 
24, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Florence E. Harmon,
Acting Secretary.
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    \19\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E8-15069 Filed 7-2-08; 8:45 am]

BILLING CODE 8010-01-P
