
[Federal Register: August 27, 2008 (Volume 73, Number 167)]
[Notices]               
[Page 50663-50664]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27au08-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58401; File No. SR-ISE-2008-63]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change Relating to the Price 
Improvement Mechanism

August 21, 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 July 31, 2008, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') 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 prepared by the 
Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to modify its Price Improvement Mechanism 
(PIM) auction eligibility requirements to eliminate the requirement 
that there be at least three market makers quoting the relevant series. 
The text of the proposed rule change is available on the Exchange's Web 
site (http://www.ise.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, 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
    In order to provide additional opportunities for price improvement, 
the Exchange proposes to expand the PIM auction process. The Exchange's 
PIM permits Electronic Access Members (``EAMs'') to provide penny price 
improvement for agency orders.\3\ ISE's current rules require, among 
other things, that an EAM enter an order into the PIM only when there 
are at least three market makers quoting in the options series. The 
Exchange is now proposing to eliminate this requirement.
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    \3\ A crossing transaction consists of an order the EAM 
represents as agent and a counter-side order. The counter-side order 
may represent interest for the EAM's own account or interest the EAM 
may have solicited from one or more parties, or both.
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    The Exchange does not believe that orders should be denied the 
benefits of the PIM auction simply because there may be less than three 
ISE market makers quoting in a particular series. The Exchange believes 
this is a reasonable modification designed to provide additional 
flexibility for members to obtain executions on behalf of their 
customers while continuing to provide a meaningful, competitive 
auction.
    In support of its proposal, the Exchange notes the ISE and other 
options exchanges already have provisions within their rules that 
permit price improvement in non-standard increments without a condition 
that there be a minimum number of market makers quoting in the 
particular series. For example, ISE has electronic auction mechanisms 
for crossing agency order with facilitation or solicited orders 
(referred to as the ``Facilitation Mechanism'' and ``Solicited Order 
Mechanism'') in ``split price'' increments (e.g., $1.025, $1.05 and 
$1.075 for series trading in $0.05 increments. The Facilitation and 
Solicited Order Mechanisms do not require that there be any minimum 
number of ISE market makers quoting in the particular series.\4\ 
Further, the Chicago Board Options Exchange (``CBOE'') has an 
electronic auction mechanism for crossing agency orders for 500 
contracts or more with solicited orders (referred to as the 
``Solicitation Auction Mechanism'') in increments as small as $0.01. 
This CBOE Solicitation Auction Mechanism does not require that there be 
any minimum number of CBOE market makers quoting in the particular 
series.\5\ Finally, the NASDAQ Options Market (``NOM'') has a procedure 
that permits a member who enters an agency order in penny increments 
(which is then rounded and displayed at the standard increment price) 
to enter a contra-side order in penny increments after the agency order 
has been exposed at the rounded price for three seconds. This NOM 
crossing procedure does not require that there be any minimum number of 
NOM market makers quoting in the particular series.\6\
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    \4\ See ISE Rule 716.
    \5\ See CBOE Rule 6.74B.
    \6\ When using the NOM crossing procedure to achieve an 
execution in penny increments, there is no requirement that there be 
any NOM market makers quoting the particular series or that they 
even be aware that the initiating NOM member is attempting to cross 
an order in an undisplayed penny increment. For example, a NOM 
member could enter an agency limit order to buy at $1.03 that is 
rounded and displayed at $1.00, wait three seconds, then enter a 
principal or solicited order to sell at $1.03. Although the 
initiating member knows it has entered an agency order to buy at 
$1.03, other market participants would only see the size of the 
agency order displayed on the bid at $1.00. See NOM Chapter IV, 
Section 5, Chapter VI, Sections 7(b) and 10, and Chapter VII, 
Sections 6 and 12. The Exchange understands that NOM's method of 
crossing orders in non-standard increments differs from ISE's PIM in 
so much as PIM will allocate the initiating Member a certain minimum 
participation entitlement if certain conditions are met (e.g., after 
public customer orders, 40% of the order is allocated to the 
initiating Member if its single-price submission equals the best 
price), whereas NOM does not have any such participation 
entitlement. However, the Exchange does not believe this distinction 
is dispositive to our proposal to eliminate the requirement that 
there be a minimum number of quoters for a PIM auction. In this 
regard, we note that participation entitlements already apply to the 
ISE Facilitation and Solicited Order Mechanisms and the CBOE 
Solicitation Auction Mechanism. See ISE Rule 716 and CBOE Rule 
6.74B. The Exchange also notes that an Agency Order displayed 
through ISE's PIM process will receive the benefit of any price 
improvement received during the auction, whereas an agency order 
displayed on NOM generally will not get any price improvement beyond 
its limit price (using the example above, once displayed at the 
rounded price the agency order to buy will generally only execute at 
$1.03, not better).
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    Because these other mechanisms are currently able to offer price 
improvement in a non-standard increment without a minimum quoter 
requirement, the Exchange believes it is essential for competitive 
reasons to be able to offer the same opportunities for price 
improvement on ISE through the PIM.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \7\ in general and furthers the objectives of 
Section 6(b)(5) of the Act \8\ in particular in that it is designed

[[Page 50664]]

to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, 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. In particular, the proposed rule change will allow members to 
guarantee executions and provide additional price improvement 
opportunities to their customer's orders. The Exchange believes this is 
a reasonable modification designed to provide additional flexibility 
for members to obtain executions on behalf of their customers while 
continuing to provide a meaningful, competitive auction.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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 this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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-2008-63 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2008-63. 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 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-
2008-63 and should be submitted on or before September 17, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
Florence E. Harmon,
Acting Secretary.
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    \9\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E8-19821 Filed 8-26-08; 8:45 am]

BILLING CODE 8010-01-P
