
[Federal Register Volume 77, Number 87 (Friday, May 4, 2012)]
[Notices]
[Pages 26590-26591]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-10753]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66880; File No. SR-ISE-2012-16]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Approving a Proposed Rule Change Relating to Procedures for 
Executing the Stock Leg(s) of Stock-Option Orders

April 30, 2012.

I. Introduction

    On February 29, 2012, the International Securities Exchange, LLC 
(``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend ISE Rule 722, ``Complex 
Orders,'' to modify its procedures for executing the stock leg(s) of 
stock-option orders. The proposed rule change was published for comment 
in the Federal Register on March 19, 2012.\3\ The Commission received 
no comment letters regarding the proposed rule change. This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 66582 (March 13, 
2012), 77 FR 16106 (``Notice'').
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II. Description of the Proposal

    Currently, ISE Rule 722, Supplementary Material .02 allows ISE 
members to elect to have ISE electronically transmit the stock leg(s) 
of a stock-option transaction to a designated broker-dealer for 
execution. To participate in this automated process, ISE members must 
enter into a brokerage agreement with the designated broker-dealer.\4\ 
Members must enter into a brokerage agreement with ISE's designated 
broker-dealer to ensure that there is at least one common available 
broker-dealer through which the matched stock leg(s) of a stock-option 
transaction may be executed.\5\
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    \4\ ISE members also may choose to execute the stock leg(s) of a 
stock-option trade manually, by transmitting the stock leg(s) to a 
non-ISE market for execution.
    \5\ See Notice, 77 FR at 16107. ISE is not able to execute the 
stock leg(s) of a stock-option transaction unless both members on 
the trade have a brokerage agreement with the broker-dealer to which 
the stock leg(s) are routed. See Notice, 77 FR at footnote 3.
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    The proposal would allow ISE members to enter into brokerage 
agreements with one or more additional broker-dealers to which ISE will 
be able to route stock orders.\6\ ISE will automatically transmit the 
stock leg(s) of a stock-option trade on behalf of a member to one or 
more broker-dealer(s) with which the member has an agreement for 
execution, using routing logic that considers objective factors such as 
execution cost, speed of execution, and fill rates.\7\ Members may 
indicate preferred execution brokers, and these preferences will 
determine order routing priority whenever possible.\8\ ISE will have no 
financial arrangements with the brokers with respect to routing stock 
orders to them,\9\ and ISE receives no fees related to the stock 
portion of a stock-option trade.\10\
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    \6\ See ISE Rule 722, Supplementary Material .02.
    \7\ See id. ISE's routing logic will route the stock leg(s) only 
to a broker-dealer with which a member has a brokerage agreement. 
See Notice, 77 FR at 16107.
    \8\ See ISE Rule 722, Supplementary Material .02.
    \9\ See id.
    \10\ See Notice, 77 FR at 16107.
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    As is the case currently, after ISE routes the stock leg(s) of a 
stock-option trade to a broker-dealer for execution, the broker-dealer 
will be responsible for determining whether the orders may be executed 
in accordance with applicable rules, including the Regulation NMS 
trade-through rules.\11\
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    \11\ See Notice, 77 FR at 16107. See also Securities Exchange 
Act Release No. 49251 (February 13, 2004), 69 FR 8252 (February 23, 
2004) (File No. SR-ISE-2003-37) (stating that the designated broker-
dealer will be responsible for determining whether the stock leg(s) 
of a stock-option transaction may be executed in accordance with all 
of the rules applicable to the execution of equity orders, including 
compliance with applicable short sale, trade-through, and trade 
reporting rules).
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    The proposal eliminates the manual process for executing the stock 
leg(s) of stock-option orders. ISE believes that it is fair, 
reasonable, and not discriminatory to eliminate the manual procedure 
for executing the stock leg(s) of stock option orders because, 
according to ISE, there is no demand from ISE members for the manual 
execution alternative.\12\
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    \12\ See Notice, 77 FR at 16107.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\13\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\14\ which 
requires, among other things, that the rules of a national securities 
exchange be 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 of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
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    \13\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal should enhance the 
processing of stock-option orders by facilitating the automated 
processing of the stock component of a stock-option transaction. In 
addition, the Commission notes that other options exchanges have 
adopted similar requirements in connection with the processing of 
stock-option orders.\15\
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    \15\ See C2 Rule 6.13, Interpretation and Policy .06(a) 
(requiring Permit Holders to enter into a brokerage agreement with 
one or more designated broker-dealers to participate in stock-option 
order automated processing). See also CBOE Rule 6.53C, 
Interpretation and Policy .06(a) (requiring Trading Permit Holders 
to enter into a brokerage agreement with one or more designated 
dealers to participate in stock-option order automated processing); 
and Phlx Rule 1080, Commentary .08(a)(i) (to trade Complex Orders 
with a stock/ETF component, members of FINRA or Nasdaq must have a 
Uniform Service Bureau/Executing Broker Agreement with Nasdaq 
Options Services LLC (``NOS''), the exchange's designated broker-
dealer; firms that are not members of FINRA or Nasdaq must have a 
Qualified Special Representative arrangement with NOS).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-ISE-2012-16) is approved.
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    \16\ 15 U.S.C. 78s(b)(2).
    \17\ 17 CFR 200.30-3(a)(12).


[[Page 26591]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-10753 Filed 5-3-12; 8:45 am]
BILLING CODE 8011-01-P


