
[Federal Register Volume 74, Number 122 (Friday, June 26, 2009)]
[Notices]
[Pages 30651-30653]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-15025]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60147; File No. SR-ISE-2009-35]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change Relating to Qualified 
Contingent Cross Orders

June 19, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\

[[Page 30652]]

notice is hereby given that, on June 15, 2009, the International 
Securities Exchange, LLC (``Exchange'' or the ``ISE'') filed with the 
Securities and Exchange Commission (the ``SEC'' or the ``Commission'') 
the proposed rule change as described in Items I, II, and III below, 
which items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing a Qualified Contingent Cross Order. This 
rule would be effective contemporaneously with the effectiveness of the 
rules implementing the Order Protection and Locked/Crossed Market Plan 
(``Plan'').\3\ The text of the proposed rule change is available on the 
Exchange's Internet Web site at http://www.ise.com, at the Exchange and 
at the Commission's Public Reference Room.
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    \3\ See Filing No. SR-ISE-2009-27 (``Linkage Rules'').
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self regulatory organization 
has prepared summaries, set forth in sections A, B, and C below, of the 
most significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this filing is to provide for Qualified Contingent 
Cross Orders. The Exchange is proposing such an order type in 
conjunction with the Linkage Rules. Those rules, together with the 
underlying Plan, are based on Regulation NMS under the Securities 
Exchange Act of 1934, as amended (``Act''), and the rules implementing 
that regulation. Among other things, the Plan requires that its parties 
``establish, maintain and enforce written policies and procedures * * * 
that are reasonably designed to prevent Trade-Throughs * * *.'' \4\ A 
Trade-Through is a transaction in an options series at a price that is 
inferior to the best price available in the market.\5\ Among other 
things, the Linkage Rules contain provisions designed to prevent Trade-
Throughs.\6\
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    \4\ Section 5(a) of the Plan.
    \5\ Section 2(21) of the Plan.
    \6\ Proposed Rule 1901.
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    The Plan will replace the Plan for the Purpose of Creating and 
Operating an Intermarket Option Linkage (``Old Plan''), and the Linkage 
Rules will replace the ISE's current rules implementing the Old Plan. 
The Old Plan and the ISE's current rules provide a limited Trade-
Through exemption for ``Block Trades,'' defined to be trades of 500 or 
more contracts with a premium value of at least $150,000.\7\ However, 
as with Regulation NMS, the Plan does not provide a Block Trade 
exemption. The Exchange believes that the loss of the Block Trade 
exemption will adversely affect the ability of its members to effect 
large trades that are tied to stock.\8\ Thus, the Exchange is proposing 
the Qualified Contingent Trade Order as a limited substitute for the 
Block Trade exemption, to be implemented contemporaneously with the 
Linkage Rules.
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    \7\ Old Plan Sections 2(3) and 8(c)(i)(C); ISE Rule 1902(d)(2).
    \8\ Both the Old Plan and the Plan have a Trade-Through 
exemption for ``Complex Trades,'' including options trades tied to 
stock. See Old Plan section 7(c)(iii)(G), and Plan section 
5(b)(viii). However, and while not free from doubt, the common 
application of that exemption has been to apply it only to trades 
announced to exchange members as a single trade at a net price. As 
so interpreted, that exemption would cover only trades executed in 
the ISE's ``Complex Order Mechanism.'' See ISE Rule 722.
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    While Regulation NMS does not provide a Block Trade exemption from 
Trade-Through liability, the Commission, by order, has provided Trade-
Through relief for ``Qualified Contingent Trades'' (``QCTs'').\9\ The 
QCT Release provides an exemption from Trade-Through liability in the 
equity market for multi-component, fully-hedged trades where one order 
is contingent on the execution of one or more additional orders. 
Building on this concept, we propose that when an ISE member effects a 
QCT trade in a Regulation NMS Stock that the member be permitted to 
cross the options leg of the trade on the ISE immediately upon entry if 
the order is for at least 500 contracts, is part of a QCT, and is 
executed at a price at least equal to the national best bid or offer 
(``NBBO'').
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    \9\ Release No. 34-57620 (April 4, 2008) (the ``QCT Release''). 
That release superseded a release initially granting the Qualified 
Contingent Trade exemption, Release No. 34-54389 (August 31, 2006).
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    We propose to define a QCT trade substantively identical to the 
Commission's definition in the QCT release. Thus, the trade would have 
to meet the following conditions:
     At least one component must be an NMS Stock;
     All the components must be effected with a product price 
contingency that either has been agreed to by all the respective 
counterparties or arranged for by a broker-dealer as principal or 
agent;
     The execution of one component must be contingent upon the 
execution of all other components at or near the same time;
     The specific relationship between the component orders 
(e.g., the spread between the prices of the component orders) must be 
determined by the time the contingent order is placed;
     The component orders must bear a derivative relationship 
to one another, represent different classes of shares of the same 
issuer, or involve the securities of participants in mergers or with 
intentions to merge that have been announced or cancelled; and
     The transaction must be fully hedged (without regard to 
any prior existing position) as a result of other components of the 
contingent trade.\10\
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    \10\ Consistent with the QCT Release we would require that the 
member demonstrate that the transaction is fully hedged using 
reasonable risk-valuation methodologies. See the QCT Release at note 
9.
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    ISE will adopt policies and procedures to ensure that members use 
the Qualified Contingent Cross Order properly. First, we will require 
members to properly mark all Qualified Contingent Cross Orders as such. 
In addition, we will institute surveillance procedures to identify that 
the member executed the stock leg of the transaction at or near the 
same time as the options leg.
    We believe that the Qualified Contingent Cross Order is necessary 
to facilitate the execution of large stock/options combination orders. 
Broker-dealers can execute these orders in various ways, such as on the 
ISE's complex order book.\11\ However, broker-dealers often seek the 
flexibility to execute the various legs of such orders in different 
markets, and may seek to execute the options leg alone on the ISE. 
Under the Plan, and without a Block Trade exemption, it will be 
extremely difficult for ISE members to effect the execution of the 
options leg on the ISE.
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    \11\ See ISE Rule 722, Supplementary Material .01 and .02.

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[[Page 30653]]

    The Contingent Trade Order will address those concerns by 
permitting the member to provide its customer a net price for the 
entire trade, and then allowing the member to execute the options leg 
of the trade on the ISE at a price at least equal to the NBBO while 
using the CQT [sic] exemption to effect the trade in the equities leg 
at a price necessary to achieve the net price. While there is no 
exposure for price improvement for the options leg of a stock-option 
order with our proposed Qualified Contingent Cross Order, that order 
must be executed at the NBBO or better, [sic]. Moreover, since the 
price of a stock-options order is a net price derived from the price of 
the options leg and the price of the stock leg, we believe it is 
reasonable for any potential improvement of the net price to originate 
from the execution of the stock leg. On balance, we believe that 
providing members with the certainty that they can execute the options 
legs of these large complex orders for their customers, coupled with 
the flexibility members have with respect to the price at which the 
equity legs are executed, will provide customers with the flexibility 
needed to achieve their investment objectives.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) that an exchange have rules that are 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism for a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest. In particular, the proposal will facilitate the ability of 
ISE members to execute large options orders that are tied to stock in 
an efficient manner, while also protecting the national market system 
against trade-throughs.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-ISE-2009-35 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-2009-35. 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 the filing will also be available for 
inspection and copying at the principal office of the self-regulatory 
organization. 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-
2009-35 and should be submitted on or before July 17, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-15025 Filed 6-25-09; 8:45 am]
BILLING CODE 8010-01-P


