
[Federal Register: January 30, 2009 (Volume 74, Number 19)]
[Notices]               
[Page 5694-5704]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30ja09-103]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59287; File No. SR-ISE-2006-26]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Amendment No. 2 and Order Granting Accelerated 
Approval of the Proposed Rule Change, as Modified by Amendment Nos. 1 
and 2 Thereto, Relating to Professional Account Holders

January 23, 2009.

I. Introduction

    On May 5, 2006, the International Securities Exchange, LLC (``ISE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder \2\ to amend ISE rules to give certain non-broker-dealer 
orders, identified as ``professional orders,'' the priority given 
broker-dealer orders and market maker quotes rather than the priority 
currently given all public customer orders and to charge the same 
transaction fees for professional orders as charged for the orders of 
broker-dealers and market makers. On January 25, 2008, the Exchange 
filed Amendment No. 1 to the proposed rule change. The proposed rule 
change, as modified by Amendment No. 1, was published for comment in 
the Federal Register on February 7, 2008.\3\ The Commission received 
ten comment letters on the proposal.\4\ The Exchange filed Amendment 
No. 2 to the proposed rule change on June 17, 2008,\5\ and submitted a 
response to the SIFMA Letter on January 12, 2009.\6\ This order 
provides notice of Amendment No. 2 and approves the proposal, as 
modified by Amendment Nos. 1 and 2, on an accelerated basis.
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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. 57254 (February 1, 
2008), 73 FR 7345 (February 7, 2008) (``Notice'').
    \4\ See letters from Abe Lampert, dated May 25, 2006 (``Lampert 
Letter''); Charles B. Cox III, dated May 26, 2006 (``Cox Letter 
I''); B. Thomas Rule, dated May 28, 2006 (``Rule Letter''); Bryan 
Weisberg, dated May 31, 2006 (``Weisberg Letter''); Andrea 
Schneider, dated June 18, 2006 (``A. Schneider Letter''); Gerald 
Schneider, dated February 6, 2008 (``G. Schneider Letter''); Andrew 
Carr, dated March 4, 2008 (``Carr Letter''); Charles B. Cox III, 
dated March 4, 2008 (``Cox Letter II''); Charles B. Cox III, dated 
April 16, 2008 (``Cox Letter III''); and Securities Industry and 
Financial Markets Association (``SIFMA''), dated July 23, 2008 
(``SIFMA Letter'').
    \5\ In Amendment No. 2, ISE deleted proposed changes to ISE 
Rules 715 and 723 (d)(2). These revisions clarify that the proposed 
rule change would not limit a Public Customer's access to the 
Exchange's Price Improvement Mechanism (``PIM''). See infra note 75.
    \6\ See letter from Michael J. Simon, Secretary, ISE, to 
Florence Harmon, Acting Secretary, Commission, dated January 12, 
2009 (``ISE Response Letter'').
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II. Description of ISE's Proposal

    Currently, ISE grants certain advantages to Public Customer Orders 
\7\ over Non-Customer Orders.\8\ In particular, Public Customer Orders 
receive priority over Non-Customer Orders and market maker quotes at 
the same price. In addition, subject to certain exceptions, Public 
Customer Orders do not incur transaction charges.\9\ The ISE states 
that the purpose, generally, of providing these marketplace advantages 
to Public Customer Orders is to attract retail investor order flow to 
the Exchange by leveling the playing field for retail investors over 
market professionals and providing competitive pricing.\10\ According 
to the Exchange, market professionals have access to sophisticated 
trading systems that contain functionality not available to a retail 
customer, including things such as continuously updated pricing models 
based upon real-time streaming data, access to multiple markets 
simultaneously, and order and risk management tools.\11\
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    \7\ A ``Public Customer'' is defined in ISE's rules as ``a 
person that is not a broker or dealer in securities.'' A ``Public 
Customer Order'' is defined as ``an order for the account of a 
Public Customer.'' ISE Rules 100(a)(38) and (39).
    \8\ A ``Non-Customer'' is defined in ISE's rules as ``a person 
or entity that is a broker or dealer in securities.'' A ``Non-
Customer Order'' is defined as ``any order that is not a Public 
Customer Order.'' ISE Rules 100(a)(27) and (28).
    \9\ For example, Public Customer Orders currently incur fees for 
certain transactions in ``Premium Products'' (defined in the ISE 
Schedule of Fees) and Complex Orders that take liquidity on the 
Exchange's complex order book. In addition, transaction fees are 
charged for Public Customer Orders entered in response to special 
order broadcasts, such as Facilitation orders, Solicitation orders, 
Block orders, and orders entered in the Exchange's PIM. Public 
Customer Orders also are subject to fees for order cancellations. 
See ISE Schedule of Fees.
    \10\ See Notice, supra note 3, at 73 FR 7346.
    \11\ See Notice, supra note 3, at 73 FR 7346 n.7.
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    With respect to the marketplace advantages of priority in trading 
and waiver of fees, the Exchange does not believe at this time that the 
definitions of Public Customer and Non-Customer properly distinguish 
between the kind of non-professional retail investors for whom these 
advantages were intended and certain professionals. The Exchange 
believes that distinguishing solely between registered broker-dealers 
and non-broker-dealers with respect to these

[[Page 5695]]

advantages is no longer appropriate in today's marketplace, because 
some non-broker-dealer individuals and entities have access to 
information and technology that enables them to trade listed options in 
the same manner as a broker or dealer in securities. The Exchange 
maintains that these individual traders and entities (collectively, 
``professional account holders'') have the same technological and 
informational advantages as broker-dealers trading for their own 
accounts, which enables professional account holders to compete 
effectively with broker-dealer orders and market maker quotes for 
execution opportunities in the ISE marketplace.\12\ The Exchange 
therefore does not believe that it is consistent with fair competition 
for these professional accounts holders to continue to receive the same 
marketplace advantages that retail investors have over broker-dealers 
trading on the ISE.\13\
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    \12\ The Exchange also maintains that, under its current rules, 
retail investors are prevented from fully benefiting from the 
priority advantage when professional account holders are afforded 
the same Public Customer Order priority that retail investors enjoy. 
See Notice, supra note 3, at 73 FR 7346.
    \13\ Id.
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    ISE thus proposes to create two new order types: Priority Customer 
Orders and Professional Orders. Priority Customer Orders would be 
orders for the account of a Priority Customer, which would be defined 
as a person or entity that is not a broker-dealer in securities and 
that does not place more than 390 orders \14\ in listed options per day 
on average during a calendar month for its own beneficial account(s). 
Professional Orders would be defined as orders for the account of a 
person or entity that is not a Priority Customer, and would include 
proprietary orders of ISE members and non-member broker-dealers.\15\ 
Priority Customer Orders would have priority over Professional Orders 
at the same price. Thus, Public Customers who now have priority over 
market makers and broker-dealers at the same price would be on parity 
with market markers and broker-dealers at the same price, if those 
Public Customers placed more than 390 orders in listed options per day 
on average during a calendar month. These Professional Orders also 
would be assessed the same fees that ISE charges for broker-dealer 
transactions.
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    \14\ The Exchange states that 390 orders is equal to the total 
number of orders that a person would place in a day if that person 
entered one order every minute from market open to market close. 
According to ISE, a study of one of the largest retail-oriented 
options brokerage firms indicated that on a typical trading day, 
options orders were entered with respect to each of 5,922 different 
customer accounts. There was only one order entered with respect to 
3,765 of the 5,922 different customer accounts on this day, and 
there were only 17 customer accounts with respect to which more than 
10 orders were entered. The highest number of orders entered with 
respect to any one account over the course of an entire week was 27. 
In addition, many of the largest retail-oriented electronic brokers 
offer lower commission rates to customers they define as ``active 
traders.'' The Exchange reviewed the publicly available information 
from the Web sites for Charles Schwab & Co., Inc.; Fidelity 
Investments; TD Ameritrade, Inc.; and optionsXpress, Inc., and found 
all of them define an ``active trader'' as someone who executes only 
a relatively small number of options trades per month. The highest 
required trading activity to qualify as an active trader among these 
four firms was 35 trades per quarter. See Notice, supra note 3, at 
73 FR 7347 n.10-11.
    \15\ Members would be required to represent as Professional 
Orders for the next calendar quarter the orders for any customer 
that had an average of more than 390 orders per day during any month 
of a calendar quarter. See proposed Text of Regulatory Circular 
filed by ISE as part of the proposed rule change (``Proposed 
Regulatory Circular'').
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    The Exchange believes that the use of these new terms in the 
execution rules and fee schedule would result in professional account 
holders participating in the ISE's allocation process on equal terms 
with broker-dealer orders and market maker quotes. It would also result 
in members paying the same transaction fees for the execution of orders 
for a professional account as they do for broker-dealer orders. The 
Exchange believes that identifying professional account holders as 
participants who place more than one order per minute on average per 
day during a calendar month is an appropriately objective approach that 
would reasonably distinguish such persons and entities from retail 
investors. The Exchange proposes the threshold of 390 orders per day on 
average over a calendar month because it believes this amount far 
exceeds the number of orders that are entered by retail investors in a 
single day, while being a sufficiently low number of orders to cover 
the professional account holders that are competing with broker-dealers 
in the ISE marketplace. ISE further notes that basing the standard on 
the number of orders that are entered in listed options for a 
beneficial account(s) assures that professional account holders could 
not inappropriately avoid the purpose of the rule by spreading their 
trading activity over multiple exchanges, and using an average number 
over a calendar month would prevent gaming of the 390 order 
threshold.\16\
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    \16\ See Notice, supra note 3, at 73 FR 7346-47.
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    ISE's proposal would require Electronic Access Members (``EAMs'') 
to indicate whether Public Customer Orders are Priority Customer Orders 
or Professional Orders. EAMs would be required to review their 
customers' activity on at least a quarterly basis to determine whether 
orders that are not for the account of a broker or dealer should be 
represented as Priority Customer Orders or Professional Orders. Members 
would be required to make any appropriate changes to the way in which 
they are representing orders within five days after the end of each 
calendar quarter. If during a calendar quarter the Exchange identified 
a customer for which orders are being represented as Priority Customer 
Orders, but that customer has averaged more than 390 orders per day 
during a month, the Exchange would notify the member and the member 
would be required to change the manner in which it is representing the 
customer's orders within five days.\17\
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    \17\ See Proposed Regulatory Circular, supra note 15.
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    All Public Customers would continue to be treated in the same 
manner under all ISE rules, other than those rules for priority and 
transaction fees. For example, ISE rules relating to the Intermarket 
Linkage affecting Public Customers \18\ would continue to apply to all 
customers who are not broker-dealers--even those customers whose orders 
are identified as Professional Orders. Similarly, rules regarding 
customer suitability and other protections for customers would continue 
to apply with respect to all customers who are not broker-dealers.\19\
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    \18\ See Chapter 19 of the ISE Rules.
    \19\ See Chapter 6 of the ISE Rules. Telephone conversation 
between Nancy Burke-Sanow, Assistant Director, Division of Trading 
and Markets (``Division''), Commission, et al., and Katherine 
Simmons, Deputy General Counsel, ISE, on March 3, 2008.
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III. Commission Findings and Order Granting Accelerated Approval to the 
Proposed Rule Change as Modified by Amendment Nos. 1 and 2

    After careful consideration of the proposed rule change, as well as 
the comment letters and the ISE Response Letter, the Commission finds 
that the proposed rule change is consistent with the Act. As the 
options markets have become more electronic and more competitive over 
the last several years, the Commission believes that the distinction 
between a professional who is registered as a broker-dealer and a 
public customer who is not so registered, but who may trade to the same 
extent as a broker-dealer, has become blurred.\20\ Moreover, the

[[Page 5696]]

category of public customer today includes sophisticated algorithmic 
traders including former market makers and hedge funds that trade with 
a frequency resembling that of broker-dealers.\21\ The Commission 
believes that the Act does not require the ISE to treat those customers 
who meet the high level of trading activity established in the proposal 
identically to customers who do not meet that threshold.\22\
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    \20\ See, e.g., Nina Mehta, Options Maker-Taker Markets Gain 
Steam, TRADERSmagazine.com, October 2007, http://
www.tradersmagazine.com/issues/20071004/2933-1.html.
    \21\ Id.
    \22\ The Commission notes that one of the commenters, discussing 
the proposed rule change before the Exchange filed Amendment No. 1, 
stated that she placed an average of 170 orders per day. See A. 
Schneider Letter supra note 4. Under the proposed rule change, as 
amended, a Public Customer that places this number of orders would 
be substantially short of the proposed threshold of more than 390 
orders per day and thus would not be affected by the rule.
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    Specifically, the Commission finds that the proposed rule change is 
consistent with Section 6(b) \23\ of the Act and the rules 
thereunder,\24\ and in particular with:
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    \23\ 15 U.S.C. 78f(b).
    \24\ In approving the proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f). See also 
infra notes 50-71 and accompanying text.
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    Section 6(b)(4) of the Act, which requires exchanges to provide for 
the equitable allocation of reasonable dues, fees, and other charges 
among its members and issuers and other persons using its facilities; 
\25\
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    \25\ 15 U.S.C. 78f(b)(4).
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    Section 6(b)(5) of the Act, which requires that the rules of a 
national securities exchange, among other things, be designed 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; and not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers; \26\ and
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    \26\ 15 U.S.C. 78f(b)(5).
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    Section 6(b)(8) of the Act, which requires the rules of an exchange 
not to impose any burden on competition not necessary or appropriate in 
furtherance of the Act.\27\
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    \27\ 15 U.S.C. 78f(b)(8).
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    In addition, the Commission finds that the proposed rule change is 
consistent with Section 11(a) of the Act.\28\
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    \28\ 15 U.S.C. 78k(a). See infra Section III.A.1.
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A. Customer Priority on the Options Exchanges

    Currently, the ISE accords priority to all Public Customer Orders 
at the best bid or offer on the basis of price-time priority before 
allocating any remaining contracts among Non-Customer Orders and market 
maker quotes at the same best price. ISE now proposes that only 
Priority Customer Orders, as defined above, would receive such 
priority.
    In considering this aspect of the proposal, the Commission examined 
the basis upon which exchanges have granted priority to public 
customers in the past. The Commission further considered the threshold 
question of when and whether the orders of public customers must be 
entitled to priority over the orders of broker-dealers.
    In certain contexts, the Commission has characterized an exchange's 
practice of according priority to public customers' orders as a matter 
of ``tradition.'' \29\ Alternatively, the Commission has referred to 
public customer priority as ``the generally accepted auction trading 
principle of priority of public limit orders over member proprietary 
orders at the same price.'' \30\
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    \29\ See, e.g., Securities Exchange Act Release Nos. 21695 
(January 28, 1985), 50 FR 4823 (February 1, 1985) (in considering 
Chicago Board Options Exchange's (``CBOE'') proposal to implement a 
retail automatic execution system (``RAES'') pilot program, the 
Commission referred to ``the traditional priority accorded to public 
customer orders''); and 22610 (November 8, 1985), 50 FR 47480 
(November 18, 1985) (in considering a proposal by the American Stock 
Exchange (``Amex'') to implement an automatic execution feature of 
its AUTOAMOS system on a pilot basis, the Commission stated that the 
pilot ``ensures the traditional priority accorded public customer 
orders''). In each of these instances, the Commission was referring 
specifically to public customer orders that are placed on the book. 
Such placements may affect the application of priority principles. 
See, e.g., infra Section III.A.3.
    \30\ See, e.g., Securities Exchange Act Release No. 22817 
(January 21, 1986), 51 FR 3547 (January 28, 1986) (notice of CBOE's 
proposal to implement RAES on a permanent basis for options on the 
Standard and Poor's 100 Index (``OEX'') (SR-CBOE-85-32) and to 
extend RAES to selected classes of individual stock options on a 
six-month pilot basis (SR-CBOE-85-16) (``January 1986 Release''). 
See also infra note 40.
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    These references in Commission releases support the Commission's 
view that the customer priority rule under discussion was not a matter 
of public customer entitlement derived from the Act, but rather a 
matter of convention to accommodate public customer orders, or an 
auction principle applied as a matter of longstanding practice by 
exchanges. In addition, public customer orders are a source of 
liquidity in the market, and exchanges have sought to attract such 
orders by providing public customers certain guarantees that their 
orders would be executed even in the face of competition from broker-
dealers.
    The Commission previously has approved exchange rules that apply 
this ``traditional priority'' as consistent with the Act but, as 
discussed below, has approved exchange rules that do not accord 
priority to public customer orders.\31\ In analyzing the concept of 
public customer priority, the Commission has considered whether public 
customer priority, or the absence of such priority, is consistent with 
Section 11(a) of the Act, the agency obligations of the specialist, the 
protection of investors and the public interest, and the Act, in 
general.
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    \31\ See infra notes 41-44 and accompanying text.
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1. Section 11(a) of the Act
    Section 11(a) of the Act prohibits any member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises discretion unless an 
exception applies.\32\ Thus, in some contexts, the Commission has cited 
Section 11(a) of the Act as a basis for exchange rules that accord 
customer orders priority, referring to ``the traditional auction market 
concepts of customer priority embodied in Section 11(a) of the Act.'' 
\33\
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    \32\ 15 U.S.C. 78k(a).
    \33\ See, e.g., Securities Exchange Act Release No. 27205 
(August 31, 1989), 54 FR 37180 (September 7, 1989) (Commission order 
approving a proposal of the Philadelphia Stock Exchange (``Phlx'') 
relating to the crossing of agency orders). See also, e.g., 
Securities Exchange Act Release No. 33708 (March 3, 1994), 59 FR 
11339 (March 10, 1994) (Commission order approving a proposal of the 
Midwest Stock Exchange, Inc. relating to agency crosses between the 
disseminated exchange market).
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    Section 11(a)(1) contains a number of exceptions for principal 
transactions by members and their associated persons. One such 
exception, set forth in subparagraph (G) of Section 11(a)(1) and in 
Rule 11a1-1(T), permits any transaction for a member's own account 
provided, among other things, that the transaction yields priority, 
parity, and precedence to orders for the account of persons who are not 
members or associated with members of the exchange. Exchange rules, 
therefore, may require members to yield priority to the orders of 
public customers to satisfy this exception to Section 11(a). Another 
exception permits market makers to effect transactions on exchanges in 
which they are members.\34\
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    \34\ Section 11(a)(1)(A).
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    In addition to the exceptions noted above, Rule 11a2-2(T) under the 
Act \35\ provides exchange members with an exception from the 
prohibitions in Section 11(a). Rule 11a2-2(T), known as the ``effect 
versus execute'' rule, permits an exchange member, subject to certain

[[Page 5697]]

conditions, to effect transactions for its own account, the account of 
an associated person, or an account with respect to which it or an 
associated person thereof exercises investment discretion 
(collectively, ``covered accounts'') by arranging for an unaffiliated 
member to execute the transactions on the exchange.
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    \35\ 17 CFR 240.11a2-2(T).
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    To comply with the ``effect versus execute'' rule's conditions, a 
member: (i) Must transmit the order from off the exchange floor; (ii) 
may not participate in the execution of the transaction once it has 
been transmitted to the member performing the execution; \36\ (iii) may 
not be affiliated with the executing member; and (iv) with respect to 
an account over which the member has investment discretion, neither the 
member nor its associated person may retain any compensation in 
connection with effecting the transaction except as provided in the 
rule.\37\
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    \36\ The member, however, may participate in clearing and 
settling the transaction. See Securities Exchange Act Release No. 
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978).
    \37\ 17 CFR 240.11a2-2(T).
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    The Commission previously has found that the manner of operation of 
ISE's Facilitation Mechanism enables Exchange members to meet the 
conditions of the effect versus execute rule and thereby avail 
themselves of the exception that the rule provides from the 
prohibitions of Section 11(a).\38\ Similarly, the Commission believes 
that the manner of operation of ISE's overall electronic trading 
system, not only the Facilitation Mechanism, enables members to meet 
the four conditions of the effect versus execute rule and would 
continue to do so under the proposal.\39\ For this reason, the 
Commission believes that the proposed rule change, which would permit 
orders of ISE members to be executed under certain circumstances even 
if a Professional Order is on the ISE's book, is consistent with the 
requirements of Section 11(a) of the Act and Rule 11a2-2(T) thereunder.
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    \38\ See, e.g., Securities Exchange Act Release No. 51666 (May 
9, 2005), 70 FR 25631 (May 13, 2005).
    \39\ The Commission notes that, first, all orders are 
electronically submitted to the ISE through remote terminals. 
Second, because a member relinquishes control of its order after it 
is submitted to the system, the member does not receive special or 
unique trading advantages. Third, although the effect-versus-execute 
rule contemplates having an order executed by an exchange member who 
is not affiliated with the member initiating the order, the 
Commission recognizes that this requirement is satisfied when 
automated exchange facilities are used. (In considering the 
operation of automated execution systems operated by an exchange, 
the Commission has noted that while there is no independent 
executing exchange member, the execution of an order is automatic 
once it has been transmitted into the systems. Because the design of 
these systems ensures that members do not possess any special or 
unique trading advantages in handling their orders after 
transmitting them to the exchange, the Commission has stated that 
executions obtained through these systems satisfy the independent 
execution requirement of Rule 11a2-2(T). See Securities Exchange Act 
Release No. 15533 (January 29, 1979).) Finally, to the extent that 
ISE members rely on Rule 11a2-2(T) for a managed account 
transaction, they must comply with the limitations on compensation 
set forth in the rule. See id., at note 20.
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2. Protecting Investors and the Public Interest
    In analyzing the merits of exchange proposals affecting public 
customer order priority, the Commission has considered whether the 
proposed rule change is consistent with Section 6(b)(5) of the Act, 
which requires that the rules of an exchange, among other things, be 
designed ``to protect investors and the public interest.'' \40\
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    \40\ For example, in January 1986, in publishing for public 
comment two proposed rule changes relating to the operation of RAES, 
see supra note 30, the Commission raised the question of whether the 
proposals were inconsistent with the provision in Section 6(b)(5) of 
the Act relating to the protection of investors and the public 
interest. The Commission also asked whether RAES was inconsistent 
with Section 11A of the Act, which states that it is in the public 
interest and appropriate for the protection of investors to assure 
``economically efficient execution of securities transactions,'' 
``the practicability of brokers executing investors' orders in the 
best market,'' and ``an opportunity * * * for investors' orders to 
be executed without the participation of a dealer.'' 15 U.S.C. 78k-
1(a)(1)(C)(i), (iv) and (v). On August 1, 1986, the Commission 
approved the proposal to make the RAES pilot program in OEX options 
permanent and a modified version of the pilot proposal for RAES in 
equity options, concluding that the proposed rule changes were 
consistent with the requirements of the Act, and, in particular, 
with Sections 6 and 11A of the Act. See Securities Exchange Act 
Release No. 23490 (August 1, 1986), 51 FR 28788 (August 11, 1986). 
In its approval order, the Commission stated that it was ``cognizant 
of the substantial benefits provided by RAES to public customers of 
OEX and firms using the system'' and noted that RAES had increased 
the efficiencies of the OEX market and added to the confidence of 
public customers. The Commission indicated that it expected CBOE to 
modify RAES for OEX options in the future, although it stated that 
its approval of the rule change was not tied to this expectation. 
Noting the technical impediments to modifying the system for such 
options, the Commission expressed its belief that ``on balance, the 
benefits of RAES for the market in OEX weigh in favor of permanent 
approval.''
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    The Commission does not believe that this provision of Section 
6(b)(5) requires that ISE give priority to Public Customers whose 
orders would be considered Professional Orders under the proposal. The 
Commission has indicated in the past that it does not believe that 
priority for public customer orders is an essential attribute of an 
exchange. In particular, the Commission has approved options exchanges' 
trading rules that do not give priority to orders of public customers 
that are priced no better than the orders of other market participants.
    For example, in approving proposed rules governing CBOEdirect, 
CBOE's electronic screen-based trading system (``SBT''), the Commission 
concluded that it was consistent with the Act for the CBOEdirect rules 
not to provide priority to public customer orders over market maker 
quotes and orders in all instances.\41\ Significantly, the Commission 
noted in its approval order for the SBT rules that, in the rules 
governing trades on CBOE's floor, customer orders displayed on the 
limit order book are given priority over broker-dealer orders and 
market maker quotes, but distinguished the operation of CBOEdirect. On 
the floor, the Commission noted, the priority of booked customer limit 
orders was essential because (at the time) the DPM was the agent for 
orders resting in the limit order book and, therefore, consistent with 
general agency law principles, CBOE's rules accorded priority to those 
resting limit orders.\42\ In contrast, an SBT market maker was not 
required to act as agent with respect to a limit order entered into 
CBOEdirect.
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    \41\ CBOE had proposed alternative priority methodologies for 
its SBT system including public customer priority, market turner 
priority, and trade participation rights for Designated Primary 
Market Makers (``DPMs'') and Lead Market Makers. See Securities 
Exchange Act Release No. 47628 (April 3, 2003), 68 FR 17697 (April 
10, 2003) (Commission order approving rules for CBOEdirect).
    \42\ In 2005, the Commission approved a proposal by the CBOE to 
eliminate the requirement that DPMs act as the agent in the options 
in which it is registered as the DPM on the Exchange. See Securities 
Exchange Act Release No. 52798 (November 18, 2005), 70 FR 71344 
(November 28, 2005) (Commission order approving removing agency 
responsibilities of DPMs).
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    Furthermore, on the Boston Options Exchange (``BOX''), the options 
facility of the Boston Stock Exchange, Inc., orders generally are 
executed according to price-time priority, with no distinctions made 
with regard to account designation (Public Customer, Broker/Dealer or 
Market Maker).\43\ On the options facility of NYSE Arca, Inc. (``NYSE 
Arca''), all non-marketable limit orders and quotes also are ranked in 
an electronic limit order file and matched for execution according to 
price-time priority.\44\ On these exchanges, all options orders at the 
best price are executed based on the time the order was entered. In 
approving these

[[Page 5698]]

exchanges' rules, the Commission found them to be consistent with the 
Act.
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    \43\ The Commission stated that the ``contention that all 
existing options exchanges provide strict customer priority is an 
overstatement.'' The Commission noted that several options exchanges 
had rules to permit market makers to be on parity with customer 
orders in certain circumstances. See Securities Exchange Act Release 
No. 49068 (January 13, 2004), 69 FR 2775 (January 20, 2004).
    \44\ See Securities Exchange Act Release No. 54238, (July 28, 
2006), 71 FR 44758 (August 7, 2006) (Commission order approving NYSE 
Arca's OX Trading Platform).
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    The Commission believed that the BOX's and NYSE Arca's rules, which 
accord no priority to any public customer orders, are consistent with 
the Act's requirement that exchange rules be designed to protect 
investors and the public interest.\ 45\ Similarly, the Commission 
believes that the ISE's proposal, which reasonably eliminates priority 
treatment of Professional Orders of Public Customers, is consistent 
with the statutory requirement.
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    \45\ Id.
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3. Agency Obligations
    In approving the proposed rule change, the Commission notes that, 
historically, exchange specialists have had substantial agency 
responsibilities in obtaining executions for customer limit orders. A 
specialist's responsibility to a customer in his or her role as agent 
for the limit order book was based on common law notions of fiduciary 
duty and incorporated in the rules of some exchanges. As exchanges 
increasingly have implemented automated trading systems, however, the 
specialist's role in handling limit orders has diminished.\46\ On the 
ISE, market makers do not act as agent for incoming orders that are 
executable on the exchange. Orders submitted to the ISE are matched by 
an automated trading system and generally are not represented by a 
specialist acting as agent.\47\
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    \46\ On several options exchanges, including BOX and CBOE, the 
exchange market makers have no responsibility for executing book 
orders, do not receive any fees for execution of book orders, and, 
accordingly, have no agency responsibilities for book orders. See 
e.g., BOX Rules, Chapter V and CBOE Rules Chapter VIII.
    \47\ The Commission recognizes that ISE's rules mandate that a 
Public Customer Order be represented by an agent in a discrete 
situation. ISE Rule 803(c) requires Primary Market Makers 
(``PMMs''), as soon as practical, to address Public Customer Orders 
that are not automatically executed because there is a displayed bid 
or offer on another exchange trading the same option contract that 
is better than the best bid or offer on the Exchange. In such cases, 
PMMs are required to execute at a price that matches the best price 
displayed on another exchange and/or send a Linkage Order. However, 
ISE Rule 803(c), which pertains to Intermarket Linkage, would not be 
affected by the proposed rule change. As noted above, ISE rules 
relating to the Intermarket Linkage affecting Public Customers would 
continue to apply to all Public Customers--even those customers 
whose orders are identified as Professional Orders. See supra note 
18 and accompanying text.
---------------------------------------------------------------------------

    The Commission's approval of ISE's proposal to no longer accord 
priority to Professional Orders is based solely on its determination 
that this proposed rule change is consistent with the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange. The Commission is making no determination as to whether the 
failure of any market participant (e.g., a specialist managing an 
exchange's order book) to accord priority, as appropriate, to any order 
entrusted to that participant as an agent is consistent with the 
federal securities laws or any other applicable law. Accordingly, the 
Commission's approval of ISE's proposal does not affect fiduciary 
obligations under the federal securities laws or agency law principles.

B. Issues Raised by Commenters

    As noted above, the Commission has received ten comment letters 
regarding the proposed rule change.\ 48\ Nine of these commenters 
opposed the proposal. One commenter endorsed the ultimate goal of the 
proposal, but expressed concerns regarding its implementation.\49\ The 
Commission acknowledges the arguments and concerns that have been 
raised by the commenters, but believes that the arguments and concerns 
do not support the conclusion that the proposal is inconsistent with 
the Act.
---------------------------------------------------------------------------

    \48\ See supra note 4.
    \49\ See SIFMA Letter, supra note 4.
---------------------------------------------------------------------------

    The commenters raise essentially five main issues: (1) That the 
proposal is anti-competitive; (2) that it unfairly discriminates 
against certain Public Customers who no longer would have priority over 
Non-Customers; (3) that it raises technical and operational issues for 
firms; (4) that it is vague and therefore unenforceable; and (5) that 
the imposition of transaction fees for the execution of Professional 
Orders is unfair. In its review of the proposal, the Commission has 
carefully considered these issues and has evaluated them in light of 
the Act's provisions, as discussed below.
1. ISE's Proposal Does Not Impose an Unnecessary or Inappropriate 
Burden on Competition
    Some commenters believed that the proposed rule change would thwart 
competition by treating the orders of certain Public Customers on a par 
with orders of broker-dealers, despite the inability of those customers 
to participate in the market on an equal footing with broker-dealers 
and market makers.\50\ These commenters argued that broker-dealers and 
market makers have substantial marketplace advantages over Public 
Customers, including lower margin and commission rates, better access 
to information, and superior technology,\51\ and, in the case of market 
makers, the ability to stream quotes electronically on both sides of 
the market.\52\
---------------------------------------------------------------------------

    \50\ See, e.g., Cox Letter I supra note 4 and Weisberg Letter 
supra note 4.
    \51\ See, e.g., Carr Letter supra note 4, G. Schneider Letter 
supra note 4 and Rule Letter supra note 4.
    \52\ See, e.g., Carr Letter supra note 4, Cox Letter II supra 
note 4 and Rule Letter supra note 4.
---------------------------------------------------------------------------

    As discussed above, the Act does not require that the order of a 
public customer or any other market participant be granted priority. 
The objective of promoting competition and the requirement that the 
rules of an exchange not impose an unnecessary or inappropriate burden 
upon competition do not necessarily mandate that a Professional Order 
be granted priority while the order of a broker-dealer should not be 
granted the same right.
    As a general matter, in developing their trading and business 
models, exchanges have adopted rules, with Commission approval, that 
grant priority to certain participants over others, or to waive fees or 
provide discounts for certain kinds of transactions, in order to 
attract order flow or create more competitive markets.
    The Act itself recognizes that the operation of a marketplace can 
warrant exceptions to general allocation principles, for example, by 
exempting specialists and market makers from the requirement that a 
member of an exchange yield to the order of a non-member.\53\ 
``Specialist entitlements'' \54\ and facilitation and solicited order 
guarantees,\55\ adopted by exchanges with Commission approval, also are 
instances in which the need to attract

[[Page 5699]]

order flow or provide incentives to one group of participants based on 
their role in the marketplace has been viewed as a valid reason to 
adjust the otherwise-established priority principles of an exchange. 
Other examples include options trading rules that adjust allocation 
principles under certain condition in the execution of larger orders 
\56\ and the small order automatic execution systems created by options 
exchanges in the past.\57\ Notably, in some prior proposals to waive or 
reduce customer fees, exchanges cited their need to remain competitive 
and attract order flow.\58\
---------------------------------------------------------------------------

    \53\ See Section 11(a) of the Act, 15 U.S.C. 78k(a), and the 
rules thereunder.
    \54\ A ``specialist entitlement'' as used here is an options 
exchange rule that under certain circumstances guarantees a 
specialist (or designated primary market maker) the right to trade 
ahead of other participants in the trading crowd with a certain 
percentage of every order--when the specialist is quoting at the 
best price--even when the specialist has not otherwise established 
priority. See, e.g., ISE Rule 713, Supplementary Material .01(b); 
Amex Rule 935-ANTE(a)(5); CBOE Rule 8.87; NYSE Arca Rule 6.82(d)(2); 
Phlx Rule 1014(g)(ii).
    \55\ A ``facilitation guarantee'' as used here is an options 
exchange rule that under certain circumstances guarantees an order 
entry firm that has submitted a public customer order for execution 
on the exchange to trade with a certain percentage of that public 
customer order itself, ahead of other participants in the trading 
crowd that are prepared to trade at the same price. See, e.g., ISE 
Rule 716(d); Amex Rule 950-ANTE, Commentary .02; CBOE Rule 6.74(b); 
NYSE Arca Rule 6.47(b); A ``solicited order guarantee'' is an 
options exchange rule that entitles a broker or firm that has 
solicited an order from a third party to trade against its 
customer's order to execute a certain percentage of the customer's 
order against the solicited order ahead of other participants in the 
trading crowd that are prepared to trade at the same price. See, 
e.g., ISE Rule 716(e) (Solicited Order Mechanism).
    \56\ See, e.g., CBOE Rule 6.74(f) (Open Outcry SizeQuote 
Mechanism).
    \57\ In the past, options exchanges that generally operated on 
an open-outcry trading model adopted systems that automatically 
executed orders of public customers below a certain size without 
exposing them to the auction on the floor. These systems were 
designed to give investors speed, efficiency, and accuracy in the 
execution of their small orders, which were executed at the 
exchange's disseminated quotation on a rotational basis against the 
accounts of participating market makers. Auto-ex orders were thus 
not executed according to auction principles and priority rules, but 
were allocated to market makers on the system by turn, regardless of 
who was first to bid or offer the disseminated price. For 
descriptions of such systems, see, e.g., Securities Exchange Act 
Release Nos. 48975 (December 23, 2003), 68 FR 75667 (December 31, 
2003) (Amex); 44829 (September 21, 2001), 66 FR 49730 (September 28, 
2001) (Phlx); 41823 (September 1, 1999), 64 FR 49265 (September 10, 
1999) (Pacific Exchange); and 44104 (March 26, 2001), 66 FR 18127 
(April 5, 2001) (CBOE).
    \58\ See, e.g., Securities Exchange Act Release Nos. 50469 
(September 29, 2004), 69 FR 59628 (October 5, 2004) (CBOE reduction 
of public customer transaction fees on options on ETFs and HOLDRs); 
49957 (July 1, 2004), 69 FR 41318 (July 8, 2004) (ISE waiver of 
surcharge on public customer transactions in certain licensed 
products); 44654 (August 3, 2001), 66 FR 42574 (August 13, 2001) 
(CBOE waiver of fees for public customer transactions in options on 
Standard & Poor's 100 European-style index). See also infra, note 
101.
---------------------------------------------------------------------------

    The Commission believes that ISE's proposal to grant priority only 
to Priority Customers and no longer to waive fees for transactions 
involving Professional Orders likewise does not necessarily place an 
inappropriate burden on competition and should most reasonably be 
viewed as within the discretion of the Exchange,\59\ so long as these 
changes do not unfairly discriminate among participants.\60\ In fact, 
the ISE's proposal simply restores the treatment of Professional Orders 
to a base line where no special priority benefits and fee waivers are 
granted.
---------------------------------------------------------------------------

    \59\ The Commission previously has articulated its position 
regarding its application of Section 6 of the Act in evaluating 
distinctions among market participants proposed by exchanges and the 
leeway granted to an exchange to set an appropriate level of 
advantages and responsibilities of persons in its marketplace. See 
Securities Exchange Act Release No. 50484 (October 1, 2004), 69 FR 
60440 (October 8, 2004), stating, inter alia:
    [Section (b)(5)] sets forth the purposes or objectives that the 
rules of a national securities exchange should be designed to 
achieve. Those purposes or objectives, which take the form of 
positive goals, such as to protect investors and the public 
interest, or prohibitions, such as to not permit unfair 
discrimination among customers, issuers, brokers or dealers or to 
not permit any unnecessary or inappropriate burden on competition, 
are stated as broad and elastic concepts. They afford the Commission 
considerable discretion to use its judgment and knowledge in 
determining whether a proposed rule change complies with the 
requirements of the Act. Furthermore, the subsections of Section 
6(b) of the Act must be read with reference to one another and to 
other applicable provisions of the Act and the rules thereunder. 
Within this framework, the Commission must weigh and balance the 
proposed rule change, assess the views and arguments of commenters, 
and make predictive judgments about the consequences of approving 
the proposed rule. (citations omitted)
    \60\ See infra Section III.B.2 for a discussion of whether ISE's 
proposal is unfairly discriminatory.
---------------------------------------------------------------------------

    Moreover, with respect to commenters' contention that broker-
dealers have substantial marketplace advantages over Public Customers, 
it should be noted that broker-dealers, unlike Public Customers, pay 
significant sums for registration and membership in self-regulatory 
organizations (``SROs''), and incur significant costs to comply, and 
ensure that their associated persons comply, with the Act and the rules 
thereunder and SRO rules. Moreover, Public Customers who would not be 
Priority Customers on ISE because they place options orders on the 
scale contemplated by the proposal could choose to become registered 
broker-dealers and receive the same advantages.
    With regard to commenters' contentions relating to market-maker 
advantages, the Commission notes that ISE market makers have 
obligations that customers who seek to compete with them do not have, 
including the responsibility to make continuous markets; to engage in a 
course of dealings reasonably calculated to contribute to the 
maintenance of a fair and orderly market; and not to make bids or 
offers or enter into transactions that are inconsistent with such a 
course of dealings.\61\ Generally, the advantages of market makers 
noted by commenters, such as the ability to stream quotes on two sides 
of the market, are granted by exchanges as the quid pro quo for the 
market makers' assumption of these obligations, in addition to the 
application of other rules and restrictions relating to their 
activities.\62\
---------------------------------------------------------------------------

    \61\ See ISE Rule 803.
    \62\ For example, pursuant to ISE Rule 803(b), a market maker on 
ISE has a continuous obligation to engage, to a reasonable degree 
under the existing circumstances, in dealings for the market maker's 
own account when there exists, or it is reasonably anticipated that 
there will exist, a lack of price continuity, a temporary disparity 
between the supply of and demand for a particular options contract, 
or a temporary distortion of the price relationships between options 
contracts of the same class. Public Customers, including customers 
who seek to compete with market makers, have no such obligations. 
Under ISE's proposal, Public Customers who submit Professional 
Orders would not be subject to market maker obligations.
---------------------------------------------------------------------------

    In addition, the proposal could provide an advantage to Public 
Customers who would not be Priority Customers. Under the proposed rule 
change, Professional Orders would not be subject to cancellation 
fees,\63\ which could result in partially reduced costs for those 
customers who place orders on an average of one order per minute and 
frequently cancel such orders.\64\
---------------------------------------------------------------------------

    \63\ The Exchange charges a cancellation fee, currently $2.00 
per cancellation, on each clearing EAM that cancels at least 500 
Public Customer orders in a month for itself or for an introducing 
broker, for each cancelled order in excess of the total number of 
orders executed for itself or for such introducing broker that 
month. The cancellation fee does not apply to the cancellation of 
Public Customer Orders that improve ISE's disseminated quote at the 
time the orders were entered. There currently are no fees for the 
cancellation of Non-Customer Orders, and Professional Orders would 
not incur such fees under the proposed rule change.
    \64\ The Commission notes that, contrary to the apparent belief 
of some commenters, the proposal would not impose cancellation fees 
on Professional Orders. See Cox Letter II supra note 4 and Carr 
Letter supra note 4.
---------------------------------------------------------------------------

    Several commenters stated that active traders provide valuable 
liquidity to the market and pose significant competition to market 
makers. According to some commenters, the proposed rule change would 
punish these customers who contribute liquidity,\65\ and would force 
such traders from the market.\66\
---------------------------------------------------------------------------

    \65\ See, e.g., A. Schneider Letter supra note 4 and Weisberg 
Letter supra note 4.
    \66\ See, e.g., Lampert Letter supra note 4.
---------------------------------------------------------------------------

    The Commission acknowledges that Public Customers, including 
sophisticated algorithmic traders, provide valuable liquidity to the 
options markets and compete with market makers. In the Commission's 
view, however, the contribution of these participants to the market 
does not mean that their orders are entitled to favorable priority and 
fee treatment, even if--as commenters argue--they would not be able to 
supply this liquidity without being granted such priority and fee 
advantages. Market makers and broker-dealers also provide valuable 
liquidity to the marketplace and do not have priority. Thus, the 
Commission believes that it is consistent with the Act for the ISE to 
amend its rules so that Professional Orders, like the orders of broker-
dealers and market makers, are not granted special priority.
    Two commenters appeared to acknowledge that customers who enter 
orders on the scale that the proposed rule change would establish 
likely have

[[Page 5700]]

information and technology that allows them to compete in a 
sophisticated manner.\67\ However, they argued that the proposal's 
creation of the category of Professional Orders suggests that ``any 
person who wishes to consider themselves a retail customer [must] 
forego any type of trading technology, which of course is widely 
available in today's market.* * *'' \68\
---------------------------------------------------------------------------

    \67\ See, e.g., Carr Letter supra note 4 and Cox Letter II supra 
note 4.
    \68\ See Carr Letter supra note 4. The commenter believed that 
the proposal, as a result, would require retail customers who forego 
technology to ``wander into the marketplace blind and helpless.''
---------------------------------------------------------------------------

    The Commission disagrees with this contention. The proposed rule 
does not ask Public Customers to forego technology and does not limit 
the technology that Public Customers who would not be Priority 
Customers can use to access the ISE's marketplace. Rather, it 
establishes that customers who place orders at the level proposed by 
the ISE--irrespective of their use of trading technology--are engaged 
in a course of active trading that need not be accorded the special 
deference paid to those customers who do not place orders as 
frequently.
    In support of its proposal, the ISE contends that traders who place 
orders on the scale set forth in the proposal have the same 
technological and informational advantages over retail investors as 
broker-dealers trading for their own account--which enables them to 
compete effectively with broker-dealer orders and market maker quotes 
for execution opportunities in the ISE marketplace.\69\ The Commission, 
however, does not believe that access to or use of sophisticated 
technology is the key issue in considering whether it is consistent 
with the Act for ISE to treat Professional Orders in the same manner as 
broker-dealer orders in specified circumstances. Instead, the 
Commission believes that the pivotal issue is whether, under the Act, 
the exchange can grant certain advantages, which it initially 
established for all public customers, to only those public customers 
who place no more than 390 orders per day.
---------------------------------------------------------------------------

    \69\ See Notice, supra note 3, at 73 FR 7346.
---------------------------------------------------------------------------

    The Commission notes that currently customers who are positioned to 
place orders in the number and frequency specified in the proposed rule 
change are treated on a par with customers who may not have this 
ability, or even if they have this ability, do not place orders on the 
average of one order per minute per over the trading day. Under the 
Exchange's proposal, customers who place orders less frequently would 
be advantaged by the Exchange's grant of priority over Non-Customer 
Orders and market maker quotes at the same price, even if they have 
access to sophisticated options trading technology. Further, the 
Commission disagrees with the argument that customers would have to 
forego using trading technology under the Exchange's proposal. The 
ISE's proposal does not limit, prohibit, or proscribe the type of 
technology any customer uses. Customers could still use sophisticated 
technology to trade options and their orders would not be considered 
Professional Orders, as long as those customers placed fewer than one 
order per minute per day on average during a calendar month for their 
own beneficial account(s).
    One commenter believed that the proposed rule change limited 
competition and was collusive because ``it requires the cooperation of 
other competing exchanges. * * *'' \70\ The Commission notes, however, 
that the proposed rule change requires EAMs to conduct a quarterly 
review of customer activity only as reflected in the EAM's own records. 
The proposal does not require either EAMs or the Exchange to seek 
information from other broker-dealer firms or exchanges regarding a 
customer's activity.\71\
---------------------------------------------------------------------------

    \70\ See Cox Letter III supra note 4. The commenter stated 
further: `` * * * I fail to see how the ISE can request trading 
information from a person or entity trading from another exchange, 
particularly when other exchanges have business models that promote 
order entry: the exact behavior the ISE is attempting to punish with 
its rule.''
    \71\ Confirmed in telephone conversation between Ira Brandriss, 
Special Counsel, Division, Commission, and Katherine Simmons, Deputy 
General Counsel, ISE, on April 29, 2008. See also supra note 17 and 
accompanying text. See also ISE Rules 401, 706, and 712.
---------------------------------------------------------------------------

2. ISE's Proposal Is Not Unfairly Discriminatory
    Many of the commenters argued that the proposed rule change is 
unfairly discriminatory against those Public Customers who would not be 
Priority Customers by denying them priority rights and imposing 
transaction fees on their orders.\72\ In the ISE's view, public 
customers today range from individuals who infrequently place options 
orders to sophisticated algorithmic traders that trade many options 
classes on a daily basis.\73\ ISE proposes to continue to grant 
priority to, and waive transaction fees for, individuals who place 
orders below the threshold, as a means to encourage their 
participation. The Exchange believes, however, that priority rights and 
fee waivers are no longer warranted for market participants who place 
more than one order per minute on average during a calendar month, a 
level of activity that it believes is akin to that of broker-dealers. 
The Exchange therefore proposes to refrain from providing priority and 
fee incentives for such participants.
---------------------------------------------------------------------------

    \72\ See, e.g., G. Schneider Letter supra note 4, Lampert Letter 
supra note 4, Rule Letter supra note 4, Cox Letter II supra note 4 
and Cox Letter III supra note 4.
    \73\ See Notice, supra note 3, at 73 FR 7346.
---------------------------------------------------------------------------

    The Commission notes that the Act does not require that the 
Exchange's rules be designed to prohibit all discrimination, but rather 
they must not permit unfair discrimination.\74\ With regard to public 
customer priority, the Commission has noted above ample precedent 
demonstrating that public customer orders are not entitled per se to 
priority treatment over the orders of other market participants. The 
Commission similarly believes that the ISE's proposal to grant such 
priority treatment only to Priority Customers is consistent with the 
Act and, in particular, is not unfairly discriminatory.
---------------------------------------------------------------------------

    \74\ 15 U.S.C. 78f(b)(5). See also Securities Exchange Act 
Release No. 50484, supra note 59.
---------------------------------------------------------------------------

    As discussed above, the Commission does not believe that the 
current rules of ISE and other exchanges that accord priority to all 
public customers over broker-dealers and market makers are unfairly 
discriminatory. Nor does the Commission believe that it is unfairly 
discriminatory to accord priority to only those customers who on 
average do not place more than one order per minute as ISE proposes.
    Because, as discussed in Section III.A.1. above, the Commission 
believes that ISE's proposal is consistent with the Act in that it does 
not impose an undue burden on competition, the Commission believes that 
a grant of such priority is an exchange's prerogative and within the 
exchange's business judgment. As such, a decision to grant priority--
which, after all, is a special benefit--to the orders of one type of 
customer (for example, a retail customer) and not to the orders of 
another (for example, an institutional investor) may be an economic 
decision that an exchange may make to provide some customers with 
incentives and fee waivers. In the Commission's view, nothing in the 
Act requires an exchange to provide the same incentives and discounts 
to all market participants equally, as long as the exchange does not 
unfairly discriminate among participants with regard to access to 
exchange systems.\75\
---------------------------------------------------------------------------

    \75\ In this regard, the Commission notes that ISE amended the 
proposal to remove the changes it had originally proposed to ISE 
Rules 715 and 723(c), which would have prevented access by all 
Public Customers to the Exchange's PIM. See Amendment No. 2, supra 
note 5.

---------------------------------------------------------------------------

[[Page 5701]]

    The Commission believes that the line that the ISE seeks to draw 
between Priority Customers and Public Customers whose orders would be 
treated as Professional Orders most simply reflects a belief--from the 
point of view of operating a marketplace--that the orders of a person 
who submits, on average, more than one order every minute of the 
trading day need not (or should not) be granted the same benefit or 
incentive that is granted to Public Customers who do not utilize the 
marketplace on such a scale.
    The same can be said with regard to relief from transaction fees. 
Exchanges can and do have fee structures that vary depending on the 
market participant.\76\ Various fee structures are permitted provided 
that they are consistent with the Act (including the requirement that 
the fees not be unfairly discriminatory). Such differing fee structures 
are based on the judgment of those responsible for the financial 
operation of the exchange, and are tied to exchange assumptions about 
market participant behavior, the impact of incentives and discounts, 
and other factors relating to the specific business model adopted by 
the exchange. A decision to waive or discount fees for orders of one 
kind of participant and not another, based on the extent of their 
participation in the market, is a reasonable decision for an exchange, 
provided it is otherwise consistent with the Act.\77\
---------------------------------------------------------------------------

    \76\ For example, some exchanges impose different fees for 
different market participants, depending on whether the market 
participant adds liquidity by posting a quote or order, or takes 
liquidity by executing against a quote or order that is already 
posted on the exchange. Some exchanges' transaction fees, before 
additional charges are assessed, are identical for market makers and 
member firms, while on other exchanges market makers and member 
firms are charged at different rates. Some exchanges provide volume 
discounts; some place a cap on charges to particular participants. 
Some impose transaction fees upon certain participants for complex 
orders; others do not. As a result, the fees imposed upon various 
market participants can vary significantly from exchange to 
exchange. Each exchange's schedule of fees is available on the 
exchange's Web site. See e.g., the fee schedule of CBOE at http://
www.cboe.com/AboutCBOE/FeeSchedule.aspx; the fee schedule of BOX at 
http://www.bostonoptions.com/box_regulations/PDF/feeschedjan06.pdf; 
and the fee schedule of NYSE Arca at http://www.nyse.com/
futuresoptions/nysearcaoptions/1147128317287.html.
    \77\ Similar to other exchanges, ISE charges different fees 
depending on whether an individual is a Public Customer, Non-Member 
Broker-Dealer, EAM, ISE Market Maker or Non-ISE Market Maker. For 
example, ISE charges Public Customers a $0.05 fee for Non-Premium 
Products and the $0.03 Comparison Fee for the orders of Public 
Customers are currently waived while Non-Member Broker-Dealers and 
EAMs pay a $0.15 fee for orders in Premium and Non-Premium Products 
(subject to volume discounts) and a $0.03 Comparison Fee. 
Comparatively, ISE market makers are subject to a fee for 
transactions in Premium and Non-Premium Products between $0.12-$0.21 
(subject to volume discounts). The amount of this fee is based on 
the average daily volume of transactions on the Exchange, and is 
currently $0.13 per contract. See ISE Schedule of Fees. See also 
discussion infra note 105.
---------------------------------------------------------------------------

3. The Proposal Can Be Implemented on a Technical and Operational Level
    One commenter, SIFMA, endorsed the underlying goal of the proposed 
rule change, but expressed concern about various aspects of the 
proposal. First, SIFMA was concerned that, under the proposed rule, 
EAMs would ``have no ability to identify the end-user customer and 
count orders.'' \78\ SIFMA's comment letter noted that EAMs would have 
to rely on the broker-dealers that route orders to them and have the 
customer relationship to identify the professional customer and code 
orders correctly. Moreover, SIFMA stated that, in general, firms do not 
count the number of orders directed by customers under the same 
beneficial owners and do not have the ability to break down, by 
beneficial owner, the number of orders placed. SIFMA further believed 
that EAMs would need to rely on the Options Clearing Corporation 
(``OCC'') member firm that ultimately clears the professional customer 
to identify such accounts. SIFMA stated, however, that such reliance 
would not be possible because OCC member clearing firms see only the 
number of cleared contracts at the end of the day, and not the number 
of executions. Moreover, SIFMA noted the lack of access by clearing 
firms to information regarding a customer's cancellations, 
replacements, modifications, or corrections of orders, and the 
resulting inability of such firms to accurately determine the number of 
orders a customer has placed.\79\
---------------------------------------------------------------------------

    \78\ See SIFMA Letter supra note 4.
    \79\ Id.
---------------------------------------------------------------------------

    In its response, ISE stated that these concerns were based on the 
erroneous assumption that compliance with the proposal would require 
analysis by an ISE member's clearing firm of cleared data provided by 
the OCC to determine whether a customer had crossed the threshold of 
placing more than 390 orders per day, on average, over the course of a 
calendar month.\80\ ISE clarified that only broker-dealers that 
received orders from the ultimate customers--not clearing firms--would 
be required under the proposal to monitor the number of orders they 
receive from each such customer and to mark the orders correctly. 
``These types of activities are routinely performed by broker-dealers 
who deal directly with customers,'' the ISE maintained, adding that 
broker-dealers have a regulatory responsibility to know their customer, 
``and, in fact, do know if they have customers that conduct this high 
level of activity.'' \81\
---------------------------------------------------------------------------

    \80\ See ISE Response Letter supra note 6.
    \81\ Id. The ISE also stated that it consulted with a variety of 
firms that accept orders directly from customers, and that these 
firms did not believe it would be difficult for them to determine, 
on a quarterly look-back basis, whether a customer had on average 
entered more than 390 orders per day during any month. Id.
---------------------------------------------------------------------------

    With regard to ISE members that submit customer orders to the 
Exchange when those orders were routed to them by other, non-ISE-member 
broker-dealers, SIFMA indicated its concern that such members ``will be 
forced to rely on the good faith and effort of its broker-dealer client 
* * * to identify the professional customer and code the order 
correctly.'' \82\ In response, the ISE noted that the Exchange and all 
other options exchanges currently have a variety of order marking 
requirements for which ISE members that route orders on behalf of other 
broker-dealers have regulatory responsibility. The ISE further noted 
that its EAMs would need to have reasonable procedures in place to 
confirm that their broker-dealer customers had implemented the 
appropriate procedures to monitor their customers' trading activity in 
a way that would enable them to code orders properly to comply with the 
proposal.\83\
---------------------------------------------------------------------------

    \82\ See SIFMA Letter supra note 4.
    \83\ Id. According to the Exchange, an EAM would be required to 
have such procedures in place to comply with its obligation under 
ISE Rule 712(a) to properly mark orders. Telephone conversation 
between Katherine Simmons, Deputy General Counsel, ISE, and Nancy J. 
Burke-Sanow, Assistant Director, Division, Commission, on December 
15, 2008.
---------------------------------------------------------------------------

    The Commission believes that the ISE's response clarifies its 
proposal and addresses the concerns raised by SIFMA regarding the 
counting and marking of customer orders. The proposal would require any 
ISE member submitting a Public Customer Order to the ISE to identify 
such order as either a Priority Customer Order or a Professional 
Customer Order. Based on the ISE's representations, the Commission 
believes that ISE members that directly submit their Public Customers' 
orders to the Exchange for execution can readily determine the number 
of orders that their customers place and can mark those orders 
accordingly. The Commission notes that the Exchange has stated that 
EAMs would need to have reasonable procedures in place to confirm that 
their broker-dealer customers have instituted policies and procedures 
to enable them to monitor their customers' trading activity in a

[[Page 5702]]

way that would allow them to mark their customer orders properly.\84\
---------------------------------------------------------------------------

    \84\ Id.
---------------------------------------------------------------------------

    The Commission believes that ISE members, as well as non-member 
broker-dealers who accept customer orders and route them to EAMs for 
execution on the Exchange, have the ability to ascertain for each 
customer account, by beneficial owner, the number of orders placed by a 
customer. As the ISE points out, the proposal requires the broker-
dealer that has a relationship with, and knows, the ultimate customer 
to monitor the number of orders it is entering on the customer's behalf 
and to conduct a quarterly review to assure that the firm is marking 
the orders appropriately. This monitoring is accomplished by the ISE 
member directly in the case of its own customers or by the ISE member 
contractually requiring that its broker-dealer customers have 
reasonable procedures in place to ascertain whether their customers are 
submitting orders that should be marked as Professional Orders.
    Second, SIFMA expressed concern that professional customers could 
`` `game' the system and inappropriately take advantage and avoid the 
purpose of the rule.'' SIFMA noted the frequent use by Professional 
Customers of multiple firms for execution and clearing purposes, which 
would limit the review by any one EAM or OCC clearing member of a 
customer's activity. SIFMA further noted that customers could 
electronically route orders to an exchange without a Professional Order 
designation and, due to linkage and best execution requirements, these 
orders could be sent to the ISE without the proper coding.\85\ ISE 
acknowledged that customers could place orders at multiple firms, such 
that each individual broker-dealer would not know the full extent of 
its customer's trading activity, making it impossible for a particular 
firm to measure the total number of orders entered by a particular 
customer through multiple firms. ISE stated, however, that it believed 
that ``it might be impractical for a customer to conduct professional 
trading activities through multiple broker-dealer platforms.'' The 
Exchange also stated that it would conduct surveillance designed to 
identify any such behavior, and that if it does detect such activity, 
it would alert the relevant ISE members. In addition, ISE agreed that, 
through the operation of the options linkage rules, an order for the 
account of a customer that ISE otherwise would consider a Professional 
Order might be routed to other exchanges that do not have the same 
order designation and ultimately receive the price available on the ISE 
indirectly.\86\ The Commission believes that the rule change, as 
proposed, meets the Exchange's aim with regard to those customers who 
do not employ such stratagems, and thus the potential for a customer to 
circumvent the proposed rule, does not, in this instance, make it 
inconsistent with the Act.
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    \85\ See SIFMA Letter supra note 4.
    \86\ See ISE Response Letter supra note 6.
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    Third, SIFMA believed that, for the proposed rule change to be 
properly implemented, customer trading information would need to be 
disseminated across desks within a single firm that typically are 
separated by information barriers. Regarding this issue, SIFMA 
requested specific guidance on how to implement the proposed 
requirements without violating applicable privacy regulations.\87\ ISE 
responded that putting procedures in place to comply with its proposal 
would not result in disclosure of information about particular orders 
entered by a customer either pre- or post-trade, nor would it result in 
disclosures about any positions held by a customer. The Exchange stated 
that it is not aware of any information barrier rule or privacy 
regulations that would prevent a firm from marking an order as required 
under the proposal.\88\ The Commission agrees with the ISE's position 
in this regard. The Commission believes that the determination of 
whether a Public Customer's orders are categorized as Priority Customer 
Orders or Professional Orders, which would be based on information 
compiled retrospectively each quarter, can be made at a level in the 
firm that is ``above'' the information barrier, and in any case does 
not require disclosure of any particular orders placed by a customer or 
any positions held by a customer.
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    \87\ See SIFMA Letter supra note 4.
    \88\ See ISE Response Letter supra note 6.
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    Finally, one commenter expressed the concern that the proposal 
would be burdensome because it would require EAMs to purchase expensive 
technology to track the number of orders a person entered per day.\89\ 
Another commenter, SIFMA, believed that the ISE's proposal would 
require broker-dealers to expend significant resources to comply with 
the rule and potentially would present large retail firms with 
difficulties in implementing a new order origin code within the 
proposal's timeframe.\90\
---------------------------------------------------------------------------

    \89\ See Cox Letter III supra note 4.
    \90\ See SIFMA Letter, supra note 4.
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    ISE acknowledged that systems changes to accommodate new coding of 
orders could be required for some broker-dealers, but did not believe 
that such systems changes would be particularly costly ``relative to 
other rule changes routinely made by the ISE and other exchanges.'' 
\91\ SIFMA also expressed a concern that the proposal could require 
significant revisions to the customer option account agreements used by 
firms, because customers could be designated as professional 
customers.\92\ The Commission believes that it is within the business 
judgment of the Exchange to accept orders for execution in its 
marketplace contingent upon their submission with a particular order 
marking, even when that marking may require additional expense on the 
part of member firms. Exchanges routinely add new order types \93\ and 
the ISE's proposal is no different in this regard. Thus, the Commission 
believes that the new order designations in the proposed rule change 
are consistent with the Act, even though they will require members to 
incur costs associated with systems changes and customer account 
agreements may need to be revised to reflect these new order 
designations. As a general matter, the Commission notes that membership 
in an exchange comes with the expectation that rule changes will be 
made by the exchange that could require member firms to make 
adjustments in their systems and procedures.
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    \91\ See ISE Response Letter supra note 6.
    \92\ See SIFMA Letter supra note 4.
    \93\ See, e.g., Securities Exchange Act Release Nos. 58546 
(September 15, 2008), 73 FR 54440 (September 19, 2008); 57441 (March 
6, 2008), 73 FR 13267 (March 20, 2008); and 56072 (July 13, 2007), 
72 FR 39867 (July 20, 2007).
---------------------------------------------------------------------------

    SIFMA further noted that the proposal would require additional 
systemic and procedural enhancements for firms to track the new fees 
that would be established under the proposal.\94\ In response, the 
Exchange maintained that fees vary widely among exchanges and are 
changed frequently, and that firms routinely make changes in their 
systems to accommodate exchange fee changes.\95\ The Commission notes 
that fee changes are commonly introduced by exchanges, and members can 
expect that they will need to adjust their tracking systems as needed 
when changes are made.
---------------------------------------------------------------------------

    \94\ See SIFMA Letter supra note 4.
    \95\ See ISE Response Letter supra note 6.
---------------------------------------------------------------------------

    Finally, SIFMA further expressed a concern that the five-day 
timeframe allotted at the end of a quarter for firms to start coding 
for Priority Customer and Professional Orders is unrealistic.\96\ In 
response, the ISE acknowledged that it may take more than five days for 
a

[[Page 5703]]

broker-dealer to make the system changes necessary to accommodate the 
new order code, and stated that it would give members at least one full 
quarter, following Commission approval of the proposal to make these 
changes. The Exchange stated, however, that once the initial systems 
changes were implemented, five days would be sufficient to change the 
order code associated with a particular customer account.\97\ The 
Commission notes that the Exchange has committed to working with its 
members to assure that there is adequate time to make the initial 
systems changes necessary to implement the new coding,\98\ and believes 
that not less than one full quarter is a reasonable amount of time to 
achieve this aim. The Commission, however, will monitor whether any 
issues may arise that would require the ISE to postpone the proposal's 
implementation timeframe.
---------------------------------------------------------------------------

    \96\ See SIFMA Letter supra note 4.
    \97\ See ISE Response Letter supra note 6.
    \98\ The Exchange stated that it would work with its members to 
assure that there is adequate time to implement systems changes as 
necessary. ISE Response Letter, supra note 6, n.6. The Exchange 
further advised that it would issue a notice to its members 
informing them of the implementation date of the proposed rule 
change. Telephone conversation between Katherine Simmons, Deputy 
General Counsel, ISE, and Nancy J. Burke-Sanow, Assistant Director, 
Division, Commission, on December 15, 2008.
---------------------------------------------------------------------------

4. ISE's Proposal Is Not Vague
    One commenter contended that the proposal was vague and 
unenforceable.\99\ The Commission believes that the ISE's proposed rule 
change is amply clear regarding the kind of order that would not 
receive priority at the same price and would incur transaction fees as 
a result of the proposal. The proposal sets forth specific and 
objective numeric thresholds in its provisions, defining ``Priority 
Customer'' as ``a person or entity that (i) is not a broker or dealer 
in securities, and (ii) does not place more than 390 orders in listed 
options per day on average during a calendar month for its own 
beneficial account(s).'' It further defines the term ``Professional 
Order'' as ``an order that is for the account of a person or entity 
that is not a Priority Customer.'' The Commission believes that these 
definitions are clear and provide notice of the parameters of the rule.
---------------------------------------------------------------------------

    \99\ See Cox Letter III, supra note 4.
---------------------------------------------------------------------------

5. Transaction Fees for Professional Orders Are Not Inequitable
    As noted above, Section 6(b)(4) of the Act requires that the rules 
of an exchange must provide for the equitable allocation of reasonable 
dues, fees, and other charges among its members and issuers and other 
persons using its facilities. In evaluating whether a proposed fee can 
be considered an equitable allocation of a reasonable fee, the 
Commission considers all of the relevant factors including, among 
others, the amount of the fee and whether the fee is an increase or 
decrease, the classes of persons subject to the fee, the basis for any 
distinctions in classes of persons subject to the fee, the potential 
impact on competition, and the impact of any disparate treatment on the 
goals of the Act.\100\
---------------------------------------------------------------------------

    \100\ See, e.g., Securities Exchange Act Release No. 50484 
(October 1, 2004), 69 FR 60440 (October 8, 2004).
---------------------------------------------------------------------------

    Under the proposed rule change, transaction fees would be charged 
for the execution of certain Public Customer Orders that currently are 
not subject to such fees. The Commission notes, however, that options 
exchanges have charged transaction fees for the execution of public 
customer orders in the past,\101\ and in many cases continue to do so 
when necessary to defray the costs of maintaining a market and 
associated expenses for a particular product or category of 
products.\102\ The ISE itself currently imposes fees on certain Public 
Customer Orders.\103\
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    \101\ Subsequently, however, some exchanges have rescinded 
transaction fees for manually executed equity options orders for 
public customers. See, e.g., Securities Exchange Act Release Nos. 
42798 (May 18, 2000), 65 FR 34239 (May 26, 2000); and 43343 
(September 26, 2000), 65 FR 59243 (October 4, 2000).
    \102\ For example, the exchanges generally charge transaction 
fees for executions of public customer orders in index options. See, 
e.g., Securities Exchange Act Release No. 52983 (December 20, 2005), 
70 FR 76475 (December 27, 2005) (Commission notice of filing and 
immediate effectiveness of a proposed rule change adopting a flat 
execution fee for Public Customer Orders in premium products).
    \103\ As noted at supra note 9, Public Customer Orders incur 
fees for certain transactions in Premium Products and Complex 
Orders, orders entered in response to special order broadcasts, and 
orders entered in PIM. Public Customer Orders also are subject to 
fees for cancellation.
---------------------------------------------------------------------------

    Moreover, Public Customer Orders that today incur no transaction 
fees on the ISE are not indefinitely excepted from such fees. The 
Exchange's Fee Schedule specifically sets forth transaction fees for 
customer orders, while indicating that these fees (other than fees for 
``Premium Products'') currently are waived.\104\ The Commission notes 
that different market participants pay fees based on their status on 
the Exchange (e.g., Public Customer, non-member broker-dealer, EAM, 
non-ISE market maker and ISE market maker).\105\ Under the proposal, 
customers whose orders are identified as Professional Orders would pay 
the same fees as non-member broker-dealers.
---------------------------------------------------------------------------

    \104\ See Securities Exchange Act Release Nos. 42370 (April 28, 
2000), 65 FR 26256 (May 5, 2000) (Commission order adopting original 
ISE Fee Schedule), in which the Commission found that the fee 
schedule was ``not unreasonable'' and ``should not discriminate 
unfairly among market participants.'' See also the current ISE Fee 
Schedule, dated August 12, 2008 and Securities Exchange Act Release 
No. 58139 (July 10, 2008), 73 FR 41142 (July 17, 2008) (customer 
fees, except those for ``Premium Products,'' currently waived until 
June 30, 2009).
    \105\ Public Customers--The $0.05 fee for Non-Premium Products 
and the $0.03 Comparison Fee for the orders of Public Customers are 
currently waived. Public Customers currently pay a fee of $0.15 for 
certain orders in Premium Products and Complex Orders, orders 
entered in response to special order broadcasts and orders entered 
in PIM. Public Customers are also subject to an order cancellation 
fee of $1.75 per order. See supra notes 9 and 64.
    Non-member Broker-Dealers--Non-member broker-dealers pay a $0.15 
fee for orders in Premium and Non-Premium Products (subject to 
volume discounts) and a $0.03 Comparison Fee. Customers whose orders 
are identified as Professional Orders would incur these fees under 
the proposal.
    EAMs--EAMs pay the same fees for orders as non-member broker-
dealers. In addition to non-member broker-dealer fees, EAMs also pay 
a one time application fee of $3500, a regulatory fee of $5000 per 
year and a monthly access fee of $500.
    ISE Market Makers--ISE market makers are subject to a fee for 
transactions in Premium and Non-Premium Products between $0.12-$0.21 
(subject to volume discounts). The amount of this fee is based on 
the average daily volume of transactions on the Exchange, and is 
currently $0.13 per contract. See Fee Notice to ISE Members dated 
March 3, 2008, available at http://www.iseoptions.com. In addition, 
ISE market makers pay a $0.03 Comparison Fee, a fee for payment for 
order flow (only for customer orders) of $0.65 per contract and 
$0.10 per contract for options on issues that are participating in 
the Penny Pilot (subject to available rebates).
    In addition to these market maker fees, PMMs and Competitive 
Market Makers (``CMMs'') pay additional fees including, but not 
limited to, the fees described below. PMMs have a minimum monthly 
transaction fee of $50,000, a one time application fee of $7500, a 
regulatory fee of $7500 per year, a monthly access fee of $4000 and 
an inactivity fee of $100,000 per month. CMMs have a one time 
application fee of $5500, a regulatory fee of $5000 per year, a 
monthly access fee of $2000 and an inactivity fee of $5,000 per 
month.
    Non-ISE Market Makers--Non-ISE market makers pay a $0.37 fee for 
transactions in Premium and Non-Premium Products (subject to volume 
discounts) except for a $0.16 fee for orders entered in the 
Facilitation and Solicitation Mechanisms and a $0.03 Comparison Fee.
---------------------------------------------------------------------------

    The Commission notes that the customers who enter more than 390 
orders per day on average during a calendar month are using the 
Exchange's facilities to place approximately 8,000 orders, on average 
one order for every minute of every trading day, over the course of the 
month and nearly 100,000 orders per year. The Commission believes that 
it is consistent with the Act for ISE to allocate to customers who 
participate in the market at this level of activity--

[[Page 5704]]

which enables them to compete with Non-Customers who are registered 
broker-dealers--the same transaction fees that it charges to such Non-
Customers.

C. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2

    Pursuant to Section 19(b)(2) of the Act,\106\ the Commission may 
not approve any proposed rule change, or amendment thereto, prior to 
the 30th day after the date of publication of notice of the filing 
thereof, unless the Commission finds good cause for so doing and 
publishes its reasons for so finding. The Commission hereby finds good 
cause for approving the proposed rule change, as modified by Amendment 
Nos. 1 and 2, before the 30th day after the date of publication of 
notice of filing thereof in the Federal Register.\107\ The Commission 
notes that the proposal, as modified by Amendment No. 1, was published 
for comment in the Federal Register on February 7, 2008. The revisions 
made to the proposal in Amendment No. 2 deleted proposed changes to ISE 
Rules 715 and ISE Rule 723(d)(2). These revisions appropriately clarify 
that the proposed rule change would not limit a Public Customer's 
access to the Exchange's PIM. Accordingly, pursuant to Section 19(b)(2) 
of the Act,\108\ the Commission finds good cause to approve the 
proposed rule change, as modified by Amendment Nos. 1 and 2, on an 
accelerated basis.
---------------------------------------------------------------------------

    \106\ 15 U.S.C. 78s(b)(2).
    \107\ See supra note 3.
    \108\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment Nos. 1 and 2, 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-2006-26 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2006-26. 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 Exchange. 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-2006-26 and should be 
submitted on or before February 20, 2009.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\109\ that the proposed rule change (SR-ISE-2006-26), as modified 
by Amendment Nos. 1 and 2, be, and it hereby is, approved on an 
accelerated basis.
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    \109\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-1979 Filed 1-29-09; 8:45 am]

BILLING CODE 8011-01-P
