
[Federal Register: August 10, 2010 (Volume 75, Number 153)]
[Notices]               
[Page 48395-48397]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10au10-91]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62644; File No. SR-ISE-2010-61]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Related to Crossing Mechanisms

August 4, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 30, 2010, the International Securities Exchange, LLC 
(``ISE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I and II below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt changes to its crossing mechanisms 
to adopt an auto-match feature. The text of the proposed rule change is 
available on the Exchange's Web site (http://www.ise.com), at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

    In its filing with the Commission, the 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 those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

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

1. Purpose
    The Price Improvement Mechanism (``PIM'') and Facilitation 
Mechanism allow members to enter two-sided orders for execution with 
the possibility of the agency order receiving price improvement.\3\ In 
both mechanisms, an agency order is submitted to the ISE by the 
initiating member with a matching guaranteed contra-side order equal to 
the full size of the agency order. The agency side of this two-sided 
order is then exposed to market participants during a one-second 
auction to give them an opportunity to compete so that they may 
participate in the execution of the agency order. Currently, in both 
mechanisms, the contra-side order must represent a single price.
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    \3\ ISE Rule 716(d) (Facilitation Mechanism); and ISE Rule 723 
(Price Improvement Mechanism).
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    The purpose of the proposal is to add step-up-and-match 
functionality (the ``auto-match feature'') to both mechanisms for an 
initiating member to submit a contra-side order that will automatically 
match both the price and size of all competing interest (i.e., auction 
responses, quotes and orders) at any price level achieved during the 
auction or only up to a designated limit price. As is currently the 
case with both mechanisms, the contra-side order specifies the auction 
start price. With the auto-match feature, the contra-side order will 
automatically match the prices set forth by the competing interest from 
other market participants up to a specified limit price (the ``auto-
match limit'') if a limit is specified. After the commencement of the 
auction, the initiating participant would not be able to cancel or 
modify the auto-match instruction. Currently, there is no ability for 
members to match better prices in the Facilitation Mechanism.\4\ With 
respect to PIM, currently members can match better prices received 
during the auction by sending an additional message.\5\ With the auto-
match feature, initiating members will not respond in the PIM auction 
at all, but instead must honor the prices set forth by the competing 
interest. Thus, with respect to both mechanisms, the initiating member 
would not have control over the prices at which it receives an 
allocation at the conclusion of the auction.
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    \4\ The Facilitation Mechanism conducts blind auctions. This is 
also the case with the actions conducted through the CBOE's 
Automated Improvement Mechanism (``AIM''). CBOE Rule 6.74A; Exchange 
Act Release No. 53222 (February 3, 2006), 71 FR 7089 (February 10, 
2006) (Order approving SR-CBOE-2005-60) (``AIM Approval Order'').
    \5\ Responses received during a PIM auction are broadcast to all 
market participants. This is also the case with the Boston Stock 
Exchange's Price Improvement Period. NASDAQ OMX BX Rules, Chapter 
V., Sec. 18.
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    Under the proposal, at the conclusion of a Facilitation Mechanism 
or PIM auction, if an initiating member elects to use the auto-match 
feature, the contra-side of the agency order will be allocated its full 
size at each price level where there are competing quotes or orders, up 
to the auto-match limit if one is specified, until a price level is 
reached where the balance of the agency order can be fully executed. At 
such price level, the contra-side order will be allocated the greater 
of one contract or 40% of the size of the agency order. The following 
examples illustrate how the proposed auto-match feature will operate in 
the Facilitation and PIM auctions.
    Assume the NBBO is $10.60 bid and $10.70 offered. An agency order 
to sell 50 contracts at $10.65 is entered into the Facilitation 
Mechanism or PIM by the initiating member with a contra-side buy order 
that has an auto-match limit of $10.70:
     If one response is received for 10 contracts to buy at 
$10.70, the agency order will receive 20 contracts at $10.70 (10 
against the response and 10 against the contra-side order) and 30 
contracts at $10.65 (against the contra-side order).
     If there is one response for 10 contracts to buy at $10.70 
and two responses each for 5 contracts to buy at $10.65, the agency 
order will receive 20 contracts at $10.70 (10 against the response and 
10 against the contra-side order), and then the balance of the 30 
contracts will be allocated between the contra-side order and the two 
responses at $10.65 as follows: 20 contracts would be allocated to the 
contra-side order (40% of the initial order); and 5

[[Page 48396]]

contracts would be allocated to each of the responding participants.
     Under the current rules, the agency order in both examples 
would sell 10 contracts at $10.70 and 40 contracts at $10.65. Thus, the 
proposed auto-match feature benefits the agency order because it sells 
an additional 10 contracts at the better price.
    Both mechanisms allow for broad participation in their competitive 
auctions by all types of market participants (e.g., public customers, 
broker-dealers and market makers). All market participants are able to 
receive the auction broadcast and may respond by submitting competing 
interest (i.e., responses, orders and quotes). All agency orders 
entered into the mechanisms will continue to be broadly exposed in the 
auction before the initiating member can execute against the agency 
order via the auto-match feature.
    The Exchange notes that when the initiating member selects the 
auto-match feature prior to the start of an auction, the available 
liquidity at improved prices is increased and competitive final pricing 
is out of the initiating member's control. The Exchange believes that 
the proposal, if approved, will increase competition in the auctions, 
will provide more options contracts with price improvement and incent 
market participants to initiate more auctions with the auto-match 
feature. Increases in the number of auctions initiated on the Exchange 
using the mechanisms will directly correlate with an increase in the 
number of agency orders that are provided with the opportunity to 
receive price improvement over the NBBO.
    The Exchange also notes that this auto-match feature has been 
implemented by two other options exchanges with respect to their 
automated price-improvement auction facilities,\6\ and that these 
automated price improvement auction facilities are substantially 
similar to the ISE's mechanisms. The ISE has separately defined 
mechanisms, rather than one crossing rule like the Chicago Board 
Options Exchange's Automated Price Improvement Mechanism (``AIM'') 
because the Exchange developed the electronic auction functionalities 
over time since its launch in 2000.\7\ The CBOE's AIM rule was first 
adopted in 2006 and currently includes characteristics of the ISE's 
Facilitation Mechanism and PIM, with provisions applying to orders 
under 50 contracts similar to the ISE's PIM and provisions applying to 
orders over 50 contracts similar to the ISE's Facilitation 
Mechanism.\8\ The AIM auctions are blind like the ISE's Facilitation, 
whereas the BOX Price Improvement Period broadcasts responses received 
during the auctions as does the ISE's PIM. While there are variations 
among all of these crossing facilities, they all operate on the same 
fundamental principles that crossing orders are broadcast to all (or in 
the case of AIM, a sub-set of) market participants to give them an 
opportunity to participate in the trade and to provide the agency order 
that is being executed an opportunity for price improvement. An auto-
match feature has the same effect of increasing the opportunity for 
price improvement within all of these auction facilities regardless of 
the variations in functionality.
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    \6\ AIM Approval Order, supra note 4; NASDAQ OMX BX Rules, 
Chapter V., Sec. 18 (The Price Improvement Period (``PIP'')); 
Securities Exchange Act Release No. 61805 (March 31, 2010), 75 FR 
17454 (April 6, 2010) (Notice of Filing and Immediate Effectiveness 
of SR-BX-2010-22) (``BOX Auto-Match Release'').
    \7\ The ISE adopted the Facilitation Mechanism in 2000 at the 
time it gained approval of its exchange registration. Securities 
Exchange Act Release No. 42455 (February 24, 2000), 65 FR 11401 
(March 2, 2000) (File No. 10-127) (Order Granting Registration as a 
National Securities Exchange); Securities Exchange Act Release No. 
42455 (February 24, 2000), 65 FR 11388 (March 2, 2000) (File No. 10-
127) (Findings and Opinion of the Commission). The Facilitation 
Mechanism is a facility for crossing block-size orders (i.e., 
greater than 50 contracts) in the standard trading increments. The 
ISE subsequently gained approval of the PIM at the end of 2004. 
Securities Exchange Act Release No. 50819 (December 8, 2004), 69 FR 
75093 (December 15, 2004) (Approving SR-ISE-2003-06). The PIM allows 
for the execution of orders at penny increments even when the 
standard minimum trading increment is greater than one penny and for 
the inclusion of orders that are less than 50 contracts.
    \8\ CBOE Rule 6.74A.
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    The CBOE's AIM was approved with the auto-match feature, which 
applies regardless of the size of the order. In the approval order for 
AIM, the Commission discussed this functionality specifically and found 
that the auto-match feature would not unfairly discriminate against 
other AIM participants, and that the blind auction would not 
necessarily deprive auction participants with information necessary to 
participate in the auctions.\9\ Subsequently, the BOX added an auto-
match feature to its Price Improvement Period.\10\ Even though the BOX 
Price Improvement Period functionality has variations from the AIM 
functionality (such as the auctions not being blind like AIM), the 
Commission permitted the rule change to become effective on filing 
indicating that the variations between AIM and PIP were not relevant to 
the approval of the auto-match feature. In the same fashion, ISE's 
proposal to add an auto-match feature to its crossing mechanisms does 
not raise any new or unique policy issues that were not considered at 
the time the Commission approved AIM.
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    \9\ AIM Approval Order, supra note 4.
    \10\ BOX Auto-Match Release, supra note 6.
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    The Exchange will provide the Commission with the following data: 
(1) The percentage of trades in which the entering member submitted a 
step-up instruction with a limit price and the percentage submitted 
without a limit price; and (2) the average amount of price improvement 
provided to orders when the entering member designated a step-up limit 
and the average amount of price improvement provided to orders when the 
entering member submitted a step-up instruction without a limit versus 
the average versus the average amount of price improvement provided to 
orders when the entering member did not choose to use the step-up 
feature.\11\
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    \11\ Certain aspects of the PIM were approved on as a pilot, 
which has been extended annually since its initial approval in late 
2004. Securities Exchange Act Release No. 52027 (July 13, 2005), 70 
FR 41804 (July 20, 2005) (SR-ISE-2005-30) (Extending PIM Pilot 
Through July 18, 2006); Securities Exchange Act Release No. 54146 
(July 14, 2006), 71 FR 41490 (July 21, 2006) (SR-ISE-2006-39) 
(Extending PIM Pilot through July 18, 2007); Securities Exchange Act 
Release No. 56106 (July 19, 2007), 72 FR 40914 (July 25, 2007) (SR-
ISE-2007-62) (Extending PIM Pilot Through July 25, 2007); Securities 
Exchange Act Release No. 56156 (July 27, 2007), 72 FR 43305 (August 
3, 2007) (SR-ISE-2007-66) (Extending PIM Pilot through July 18, 
2008); and Securities Exchange Act Release No. 58197 (July 18, 
2008), 73 FR 43810 (July 28, 2008) (SR-ISE-2008-60) (Extending PIM 
Pilot through July 17, 2009); and Securities Exchange Act Release 
No. 60333 (July 17, 2009), 74 FR 36792 (July 24, 2009) (SR-ISE-2009-
52) (Extending PIM Pilot through July 17, 2009 [sic]). The 
Commission notes that the PIM pilot was recently extended again 
through July 17, 2011. Securities Exchange Act Release No. 62513 
(July 16, 2010), 75 FR 43221 (July 23, 2010) (SR-ISE-2010-75). The 
Exchange has provided the Commission with monthly data reports 
related to the execution of orders in the PIM since its approval in 
2004.
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    After effectiveness of the proposal, and at least one week prior to 
implementation of the rule change, ISE will issue a notice to members 
informing them of the implementation date of the auto-match feature. 
This will give ISE members an opportunity to make any necessary 
modifications to coincide with the implementation date.
2. Statutory Basis
    The basis under the Exchange Act for this proposed rule change is 
the requirement under Section 6(b),\12\ in general, and Section 6(b)(5) 
\13\ in particular, that an exchange have rules that are designed to 
promote just and equitable principles of trade, and to remove 
impediments to and perfect the mechanism for a free and open market and 
a national market system, and in

[[Page 48397]]

general, to protect investors and the public interest. In particular, 
the Exchange believes that the proposal, if approved, will result in 
additional liquidity available at improved prices with competitive 
final pricing out of the initiating member's control, thus increasing 
competition in the crossing auctions and providing more options 
contracts with price improvement. As a result of the increased 
opportunity for price improvement, the Exchange believes that market 
participants will be incented to initiate more crossing actions. 
Increases in the number of auctions will directly correlate with an 
increase in the number of customer orders that are provided with the 
opportunity to receive price improvement over the NBBO.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6) thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \16\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) \17\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange requests 
that the Commission waive the 30-day operative delay because the 
proposed changes will allow immediate increases in the liquidity 
available at improved prices. The Commission believes that waiving the 
30-day operative delay is consistent with the protection of investors 
and the public interest and designates the proposal operative upon 
filing.\18\
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    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within the 60-day period beginning on the date of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-ISE-2010-61 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-2010-61. 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,\19\ 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 Web site 
viewing and printing in the Commission's Public Reference Room, on 
official business days between the hours of 10 a.m. and 3 p.m. Copies 
of the 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-2010-61 and should be submitted on or before August 
31, 2010.
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    \19\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov/ules/sro.shtml.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-19657 Filed 8-9-10; 8:45 am]
BILLING CODE 8010-01-P

