
[Federal Register: June 28, 2011 (Volume 76, Number 124)]
[Notices]               
[Page 37863-37866]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jn11-115]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64719; File No. SR-ISE-2011-33]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change Relating to Appointments 
to Competitive Market Makers

June 22, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\

[[Page 37864]]

notice is hereby given that on June 10, 2011, the International 
Securities Exchange, LLC (the ``Exchange'' or the ``ISE'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I 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 revise the manner in which Competitive 
Market Makers are appointed to options classes. The text of the 
proposed rule change is available on the Exchange's Web site http://
www.ise.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

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

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

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

1. Purpose
    The ISE's membership is divided into three categories, Primary 
Market Makers (``PMMs''), Competitive Market Makers (``CMMs'') and 
Electronic Access Members. There are 10 PMM trading rights and 160 CMM 
trading rights (collectively ``market maker rights''). In order to 
access the Exchange as a market maker, a member must own or lease one 
or more market maker rights. EAMs are not required to purchase a 
membership right in order to access the Exchange. Under the current 
structure, options traded on the Exchange are divided into 10 groups, 
with one of the 10 PMM trading right and 16 of the 160 CMM trading 
rights appointed to each group. Thus, each PMM and CMM trading right is 
associated with a specific group of options. This structure has been in 
place since ISE began operations in 2000. The purpose of this proposed 
rule change is to change the manner in which the Exchange appoints 
options classes with respect to CMM trading rights.
    The Exchange proposes to change the structure of CMM appointments 
to give market makers more flexibility to choose the options classes to 
which they are appointed. Under the current structure that associates 
each membership with a particular group of options, a member generally 
must own or lease multiple CMM trading rights in order to gain access 
to the options classes in which it seeks to make markets. Moreover, the 
structure requires market makers to provide continuous quotations in a 
minimum number of options classed in each group, which results in some 
market makers entering in some options classes continuous quotations 
that are away from the national best bid and offer solely to satisfy 
the minimum requirement. While such quotations do not add to the 
quality of the ISE's market or the national market system, they place a 
burden on the Exchange and its members with respect to the need to 
maintain additional systems capacity to handle the quotation traffic.
    To address the issues created by the current CMM structure, the 
Exchange proposes to allow CMMs to seek appointment in the options 
classes listed on the Exchange across the groups of options assigned to 
particular PMMs. Under the proposal, the Exchange will assign points to 
each options class equal to its percentage of overall industry volume 
(not including exclusively-traded index options), rounded down to the 
nearest tenth of a percentage. A CMM will be able to seek appointments 
to options classes that total: (i) 20 points for the first CMM trading 
right it owns or leases; and (ii) 10 points for the second and each 
subsequent CMM trading right it owns or leases.\3\ CMMs will be able to 
change their appointments at any time upon advance notification to the 
Exchange.\4\ This structure is similar to the way in which the Chicago 
Board Options Exchange allows its market makers to choose options to 
which they are appointed.\5\
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    \3\ Under the proposal, CMMs can select the options classes to 
which they seek appointment, but the Exchange retains the authority 
to make such appointments and to remove appointments from CMMs based 
on their performance. In this respect, under the current rule, the 
Board or a committee designated by the Board makes appointments to 
market makers. In consideration of the new process for making CMM 
appointments, the Exchange is proposing to allow the Exchange to 
make appointments to market makers. Under the proposal, either the 
Exchange or a committee designated by the Board will be permitted to 
make appointments. The Board itself has never made market makers 
appointments, and the Exchange does not believe such determinations 
require Board-level consideration.
    \4\ The Exchange will notify CMMs of the procedure for 
requesting changes to their appointments, including the length of 
advance notification required. The Exchange will establish the 
shortest advance notification period that is operationally feasible, 
such as a specific time on the day prior to the intended 
effectiveness of a change in a CMM's appointments, or by a specified 
time prior to the opening on the same trading day.
    \5\ CBOE Rule 8.3 (Appointment of Market Makers).
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    The Exchange believes that this proposal strikes an appropriate 
balance between the Exchange's goal of attracting additional market 
makers to the Exchange and the interests of the current CMMs on the 
Exchange. Under the existing structure, a member is required to own 
and/or lease 10 CMM trading rights (one in each of the 10 options 
groups) in order to have the ability to make markets in all of the 
options classes traded on the Exchange. Moreover, because the number of 
options classes contained in each group varies, CMM trading rights 
currently represent 10 different levels of participation. Under the 
proposal, the level of access gained by owning or leasing a CMM trading 
right will be standardized. Finally, the proposal will make additional 
memberships available, which will provide greater opportunity for more 
market makers to join the Exchange.
    Specifically, by assigning 20 points to the first CMM trading right 
owned or leased by a member and 10 points to each subsequent CMM 
trading right owned or leased by the same member, only 9 CMM trading 
rights will be required to cover the entire ISE market. Accordingly, 
members that currently own or lease 10 CMM trading rights will be able 
to sell or discontinue leasing one of their CMM trading rights. 
Similarly, other market markers on the ISE also will be able to reduce 
the number of CMM trading rights they need to gain access to the 
options classes in which they want to make markets. Thus, the proposal 
will reduce the cost of market making on the ISE and increase the 
supply of available CMM trading rights, which will provide the 
opportunity for more market makers to join the ISE. Moreover, assigning 
the first CMM trading right that is owned or leased by a market maker 
20 points and subsequent CMM trading rights 10 points takes into 
consideration that the CMM trading rights currently are assigned to 
groups with a varying number of options classes. This structure makes 
it less likely that current market makers with CMM trading rights 
primarily in the larger

[[Page 37865]]

groups will be negatively impacted by the proposed change.\6\
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    \6\ The Exchange will provide members with a transition period 
of 30 to 60 days following approval of the proposed rule change. 
During the transition period, the Exchange will work with existing 
market makers to restructure their appointments within the new 
point-based structure.
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    The Exchange also proposes to adjust its CMM quotation requirements 
to reflect the proposed elimination of specified groups of options 
associated with CMM trading rights. Specifically, under the current 
structure, CMMs are required to participate in the opening and provide 
continuous quotations in a minimum number of options classes in each of 
their assigned groups. Since CMMs will have the flexibility to choose 
the options classes to which they are appointed rather than being 
appointed to a pre-determined group of options, the Exchange proposes 
to modify this requirement to limit the number of appointed options 
classes in which a CMM can initiate intraday quoting to the number of 
options classes in which it participates in the opening rotation.
    Under the current rules, a CMM is required to participate in the 
opening in 60% of the options classes in its appointed group of options 
or 40 options classes, whichever is lesser. If, for example, a CMM is 
appointed to a group with 100 options classes, then it must participate 
in the opening for 40 options classes and may initiate intra-day 
quoting in 60 options classes. Under the proposed structure, a CMM 
appointed to 100 options classes that participates in the opening in 40 
options classes may only initiate intra-day quoting in 40 additional 
classes. There is no minimum number of options classes in which a CMM 
must quote because under the new structure, CMMs presumably will not 
seek appointment to options classes unless they want to quote them. 
Thus, the Exchange believes it is reasonable to adopt a structure that 
is more restrictive with respect to entering quotes after the opening. 
In addition, this requirement currently is in place for options classes 
traded in the Exchange's Second Market,\7\ and the Exchange believes it 
effectively encourages market makers to provide added liquidity during 
the opening.
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    \7\ ISE Rule 904(a).
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    Additionally, under the proposal the Exchange will retain the 
current requirement that once a CMM enters a quotation in an appointed 
options class, it must maintain continuous quotations for that series 
and at least 60% of the series of the options class until the close of 
trading that day.\8\ If a CMM receives Preferenced Orders in an options 
class, it will continue to be required to maintain continuous 
quotations in at least 90% of the series in that class. Finally, the 
Exchange will continue to have the ability under its rules to call upon 
a CMM to submit quotations in one or more series of an options class to 
which the CMM is appointed.\9\
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    \8\ CMMs will continue to be subject to the quotation 
requirements contained in Rule 803 and 804.
    \9\ The proposal also amends Rule 805 to correct a cross-
reference to Rule 804, and amends rule 810 to replace a reference to 
appointment to groups with a reference to appointed options.
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    Finally, the Exchange proposes to terminate its current CMM 
inactivity fee. That fee currently imposes a charge of $25,000 a month 
for CMM trading rights that are not active. The purpose of the fee is 
to help recoup a portion of the income that the Exchange loses when 
market makers do not operate their trading rights and generate 
transaction-based revenue. Under the proposed CMM trading rights 
structure, the Exchange does not believe that the inactivity fee is 
appropriate or necessary, as CMMs will now be able to manage the number 
of options classes to which they are appointed.\10\ Moreover, we 
believe that there will be increased demand for CMM trading rights, and 
that owners of such rights will have a financial incentive to sell or 
lease any unused trading rights. If this does not turn out to be the 
case, the Exchange will consider reinstituting some form of inactivity 
fee that is appropriate for the new structure.
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    \10\ For example, under the current structure, a CMM that owns 
or leases three CMM trading rights is obligated to continuously 
quote a minimum of 120 options classes. Under the new structure, a 
CMM with three trading rights could seek appointment for only three 
options classes (one for each trading right), thus making the 
inactivity fee ineffective.
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2. Basis
    The basis under the Act for this proposed rule change is found in 
Section 6(b)(5),\11\ in that the proposed change is designed to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general to protect investors and the public interest. 
In particular, the proposal will provide more open access to the 
Exchange for market makers. It will also permit broker-dealer members 
of the ISE to use their CMM trading rights more efficiently, lowering 
their costs of providing liquidity on the Exchange. At the same time, 
because a PMM will continue to be appointed to each options class, 
there will continue to be continuous, two-sided quotations in all 
options listed on the Exchange.\12\ As further required under Section 
6(b)(5) of the Exchange Act, the proposal will not result in unfair 
discrimination between customers, issues, brokers or dealers. Indeed, 
any and all potential market makers will be able to purchase or lease 
newly available CMM trading rights.
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    \11\ 15 U.S.C. 78f(b)(5).
    \12\ Pursuant to Rule 804(a)(2), PMMs have the obligation to 
provide continuous quotations in all of the series of all of the 
options to which they are appointed.
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    Pursuant to Section 6(b)(8) of the Exchange Act,\13\ the proposed 
rule change is designed to foster competition, both with respect to 
exchange competition and broker-dealer competition, as it will 
encourage additional market maker participation. The additional market 
making interest that this will attract to the ISE will make the ISE 
more competitive with other exchanges that have a market making 
structure which is less limited as the ISE's current structure. As to 
broker-dealers, this proposal will permit more broker-dealers to join 
the ISE and disseminate competitive quotations, which will enhance 
competition among market makers.
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    \13\ 15 U.S.C. 78f(b)(8).
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    Finally, the proposal to eliminate the CMM inactivity furthers 
Section 6(b)(4) of the Exchange Act \14\ in that it is an equitable 
allocation of reasonable fees and other charges among Exchange members 
and other persons using its facilities. The Exchange believes that 
eliminating the inactivity will potentially lower costs for members 
providing liquidity on the Exchange. Furthermore, it will apply equally 
to all CMMs and thus is not discriminatory.
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    \14\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

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

[[Page 37866]]

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove the 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-2011-33 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-2011-33. 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 Web site viewing and 
printing 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 ISE. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ISE-2011-33 and should be 
submitted by July 19, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-16033 Filed 6-27-11; 8:45 am]
BILLING CODE 8011-01-P

