
[Federal Register: December 15, 2008 (Volume 73, Number 241)]
[Notices]               
[Page 76080-76081]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15de08-107]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59066; File No. SR-ISE-2008-78]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Approving Proposed Rule Change Relating to Quoting 
Obligations for Competitive Market Makers

December 8, 2008.

I. Introduction

    On October 21, 2008, 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 (the ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change relating to the Exchange's 
quoting obligations for Competitive Market Makers (``CMMs''). The 
proposed rule change was published for comment in the Federal Register 
on November 3, 2008.\3\ The Commission received no comments on the 
proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 58861 (October 27, 
2008), 73 FR 65432 (the ``Notice'').
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II. Description of the Proposal

    The Exchange proposes to amend ISE Rules 713, 804 and 805 to change 
the quoting obligation for the Exchange's CMMs. ISE currently requires 
CMMs to participate in the opening and maintain continuous quotations 
in all of the series of at least 60 per cent of the options classes in 
the bin or 60 classes, whichever is less. In addition, if a CMM chooses 
to quote any series of an options class above and beyond this minimum 
requirement, it must then maintain continuous quotations in all of the 
series of that class throughout that trading day. In September 2007, 
the Exchange initiated a pilot to reduce the quoting obligations for 
CMMs in 20 options classes.\4\ Under the Pilot, CMMs were required to 
maintain quotations in only 60 per cent of the series of an options 
class overlying the pilot program securities. The Pilot recently 
expired and the Exchange now proposes to change the quoting 
requirements for CMMs on a permanent basis.
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    \4\ See Securities Exchange Act Release No. 56444 (September 14, 
2007), 72 FR 54089 (September 21, 2007) (Order Granting Approval of 
SR-ISE-2007-45 Relating to a Quote Mitigation Plan for Competitive 
Market Makers) (the ``Pilot'').
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    The Exchange does not believe that the reduced quoting obligations 
adopted as part of the Pilot have had any negative effect on the 
quality of its markets.\5\ Therefore, ISE proposes to adopt the 60 per 
cent standard for all options series on a permanent basis, except for 
CMMs that receive preferenced order flow. The Exchange proposes that a 
CMM will be required to maintain continuous quotations in at least 90% 
of the series of any option class in which it receives preferenced 
orders.
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    \5\ According to the Exchange, in practice, market makers simply 
widen their quotations when they do not want to trade in a 
particular series, so requiring them to maintain continuous 
quotations in all series merely increases capacity requirements for 
the market makers.
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    The Exchange also proposes to lower the minimum number of options 
classes that a CMM is required to quote from 60 to 40. The Exchange 
believes that lowering the requirement will attract additional market 
making participants on the ISE.
    Finally, the Exchange proposes to amend Rule 805 (Market Maker 
Orders) regarding the percentage of volume a CMM may execute in options 
to which it is not appointed. Specifically, Rule 805 currently provides 
that a CMM may execute up to 25% of its volume in options classes to 
which it is not appointed. Because the Exchange is lowering the number 
of appointed classes in which a CMM is required to quote, the Exchange 
believes it is appropriate to base the 25% allowance on volume that is 
executed while a CMM is actually fulfilling its market maker quotation 
obligations.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\6\ 
In particular, the Commission finds that the proposal is consistent 
with Section 6(b)(5) of the Act,\7\ which requires that an exchange 
have rules 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.
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    \6\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed rule change, which is 
intended to reduce the number of options quotations required to be 
submitted without adversely affecting the quality of the Exchange's 
markets, is consistent with the Act. The Commission notes that the 
Exchange has operated a one-year Pilot program that reduced the quoting 
obligations for CMMs and during the Pilot period the Exchange did not 
observe any adverse effect on its market.\8\ The Commission believes it 
is appropriate to adopt the modified quotation obligations for CMMs on 
a permanent basis. In addition, the Commission believes that it is 
appropriate to reduce the quoting obligations of a CMM because the 
percentage of volume a CMM may

[[Page 76081]]

execute in options classes to which it is not appointed will be based 
on volume that is executed in those options classes in which a CMM 
maintains continuous quotes in fulfillment of its obligations as a 
market maker.
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    \8\ The Commission notes that it has already approved internal 
quote mitigation strategies on other exchanges that relieve some 
market makers of the obligation to quote every series of every class 
to which they are appointed. See Phlx Rule 1014(b)(ii)(D)(1) and 
Amex Rule 994(c)(iv).
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    Finally, the Commission believes that it is appropriate to impose a 
higher continuous quoting requirement on CMMs who receive preferenced 
order flow because such CMMs receive the benefit of enhanced allocation 
rights and therefore should assume an increased obligation to provide 
continuous quotations. The Commission notes that a similar quotation 
standard for preferred market makers was previously adopted on another 
exchange.\9\
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    \9\ See CBOE Rule 8.13(b)(iii) (requiring a preferred market-
maker to provide continuous electronic quotes in at least 90% of the 
series of each class for which it receives preferred market-maker 
orders).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-ISE-2008-78) be, and hereby 
is, approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-29559 Filed 12-12-08; 8:45 am]

BILLING CODE 8011-01-P
