Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / Notices 11533 

1See Securities Exchange Act Release No. 60147 

(June 19, 2009), 74 FR 30651 (June 26, 2009). 

2See Securities Exchange Act Release No. 60584 

(August 28, 2009), 74 FR 45663 (September 3, 

2009). 

3 17 CFR § 201.431(e). 

4See Securities Exchange Act Release Nos. 60988 

and 60989. 

5See Securities Exchange Act Release No. 61722. 

6See Securities Exchange Act Release No. 62523 

(July 16, 2010), 75 FR 43211 (July 23, 2010). 

7See letter from Michael J. Simon, Secretary and 

General Counsel, ISE, to Elizabeth M. Murphy, 

Secretary, Commission, dated July 14, 2010. 

8 17 CFR 201.431(a). 

9The Commission has this day issued a separate 

order approving SR–ISE–2010–73. 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 62523 

(July 16, 2010), 75 FR 43211 (‘‘Notice’’). 

4See Letters from Anthony J. Saliba, Chief 

Executive Officer, LiquidPoint, LLC, to Elizabeth M. 

Murphy, Secretary, Commission dated, July 30, 

2010 (‘‘LiquidPoint Letter 2’’); William J. Brodsky, 

Chairman and Chief Executive Officer, Chicago 

Board Options Exchange, Incorporated (‘‘CBOE’’), to 

Elizabeth M. Murphy, Secretary, Commission, dated 

August 9, 2010 (‘‘CBOE Letter 1’’); Ben Londergan 

and John Gilmartin, Co-Chief Executive Officers, 

Group One Trading, LP, to Elizabeth M. Murphy, 

Secretary, Commission, dated August 9, 2010 

(‘‘Group One Letter 2’’); Janet M. Kissane, Senior 

Vice President—Legal and Corporate Secretary, 

NYSE Euronext, to Elizabeth M. Murphy, Secretary, 

Commission, dated August 9, 2010 (‘‘NYSE Letter 

2’’); Thomas Wittman, President, NASDAQ OMX 

PHLX, Inc. (‘‘Phlx’’), to Elizabeth M. Murphy, 

Secretary, Commission, dated August 13, 2010 

(‘‘Phlx Letter 2’’); J. Micah Glick, Chief Compliance 

Officer, Cutler Group LP to Elizabeth M. Murphy, 

Secretary, Commission, dated September 3, 2010 

(‘‘Cutler Letter’’); Janet L. McGinness, Senior Vice 

President—Legal and Corporate Secretary, NYSE 

Euronext, to Elizabeth M. Murphy, Secretary, 

Commission, dated October 21, 2010 (‘‘NYSE Letter 

3’’); and Gerald D. O’Connell, Chief Compliance 

Officer, Susquehanna International Group, LLP, to 

Elizabeth M. Murphy, Secretary, Commission, dated 

October 22, 2010 (‘‘Susquehanna Letter 2’’). 

5See Letter from Michael J. Simon, Secretary and 

General Counsel, ISE, to Elizabeth M. Murphy, 

Secretary, Commission, dated, August 25, 2010 

(‘‘ISE Response’’). 

of the Commission (Public 

Representative) to represent the 

interests of the general public in this 

proceeding. 

3. Comments by interested persons in 

this proceeding are due no later than 

March 3, 2011. 

4. The current contract filed in Docket 

No. CP2010–22 for International 

Business Reply Service Competitive 

Contract 2 is authorized to continue in 

effect through March 31, 2011. 

5. The Secretary shall arrange for 

publication of this order in the Federal 

Register. 

By the Commission. 

Shoshana M. Grove, 

Secretary. 

[FR Doc. 2011–4684 Filed 3–1–11; 8:45 am] 

BILLING CODE 7710–FW–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 63954; File No. SR–ISE–2009– 

35] 

Securities Exchange Act of 1934; In the 

Matter of Chicago Board Options 

Exchange, Incorporated, 400 South 

LaSalle Street, Chicago, IL 60605; 

Order Setting Aside the Order by 

Delegated Authority Approving SR– 

ISE–2009–35 and Dismissing CBOE’s 

Petition for Review 

February 24, 2011. 

On June 15, 2009, the International 

Securities Exchange, LLC (‘‘ISE’’) filed a 

proposed rule change with the 

Commission seeking to establish a 

Qualified Contingent Cross (‘‘QCC’’) 

Order. The proposed rule change was 

published for comment on June 26, 

2009.1 On August 28, 2009, the 

Commission approved, by authority 

delegated to the Division of Trading and 

Markets, the proposed rule change 

(‘‘Approval Order’’).2 On September 4, 

2009, the Chicago Board Options 

Exchange (‘‘CBOE’’) filed a notice of 

intention to file a petition for review of 

the Approval Order and, on September 

14, 2009, CBOE filed a petition for 

review with the Commission (‘‘Petition 

for Review’’). Under the Commission’s 

Rules of Practice, the filing of CBOE’s 

Petition for Review automatically stayed 

the Approval Order.3 On September 11, 

2009, ISE filed a motion to lift the 

automatic stay. On November 12, 2009, 

the Commission granted CBOE’s 

Petition for Review and denied a motion 

filed by ISE to lift the automatic stay.4

On March 17, 2010, the Commission 

approved the placement in the public 

file of a memorandum by its Division of 

Risk, Strategy, and Financial Innovation 

(‘‘RiskFin’’) analyzing certain data 

relating to ISE’s proposed rule change 

(‘‘RiskFin Memo’’). At the same time that 

the Commission approved placement of 

the RiskFin Memo in the public file, the 

Commission also issued an order 

extending the time to file statements in 

support of or in opposition to the 

Approval Order to give the public an 

opportunity to review the data and 

analysis in the RiskFin Memo.5

On July 14, 2010, ISE filed a new 

proposed rule change to modify the 

requirements for QCC Orders (file 

number SR–ISE–2010–73). The 

Commission published for public 

comment the modified proposal.6 Also 

on July 14, 2010, ISE submitted a letter 

requesting that the Commission vacate 

the Approval Order concurrently with 

the approval of the new proposed rule, 

SR–ISE–2010–73.7

We have determined to construe ISE’s 

request as a petition to vacate the 

Approval Order pursuant to 

Commission Rule of Practice 431(a), 

which permits us to ‘‘affirm, reverse, 

modify, set aside or remand for further 

proceedings, in whole or in part, any 

action made pursuant to’’ delegated 

authority.8 We find that, in light of the 

filing of ISE’s modified proposal 

regarding the QCC Orders,9 it is 

appropriate to grant ISE’s request and 

set aside the Approval Order. We also 

find that, given this disposition of the 

Approval Order, CBOE’s petition for 

review of that order has become moot. 

Accordingly, it is ordered that the 

August 28, 2009 order approving by 

delegated authority ISE’s proposed rule 

change number SR–ISE–2009–35, be, 

and it hereby is, set aside; and 

It is further ordered that the petition 

for review, filed by the Chicago Board 

Options Exchange on September 14, 

2009, of the August 28, 2009 order 

approving by delegated authority ISE’s 

proposed rule change number SR–ISE– 

2009–35 be, and it hereby is, dismissed. 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2011–4575 Filed 3–1–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–63955; File No. SR–ISE– 

2010–73] 

Self-Regulatory Organizations; 

International Securities Exchange, 

LLC; Order Granting Approval of a 

Proposed Rule Change To Modify 

Qualified Contingent Cross Order 

Rules 

February 24, 2011. 

I. Introduction 

On July 14, 2010, the International 

Securities Exchange, LLC (‘‘ISE’’ or 

‘‘Exchange’’) 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 

modify rules for Qualified Contingent 

Cross (‘‘QCC’’) Orders. The proposed 

rule change was published for comment 

in the Federal Register on July 23, 

2010.3 The Commission received eight 

comment letters on the proposed rule 

change 4 and a response letter from ISE.5


emcdonald on DSK2BSOYB1PROD with NOTICES
11534 Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / Notices 

6See Securities Exchange Act Release No. 51808 

(June 9, 2005), 70 FR 37496 (June 29, 2005). 

7See 17 CFR 242.611. An ‘‘NMS stock’’ means any 

security or class of securities, other than an option, 

for which transaction reports are collected, 

processed, and made available pursuant to an 

effective transaction reporting plan. See 17 CFR 

242.600(b)(46) and (47). 

8 17 CFR 242.611(d). See also 15 U.S.C. 

78mm(a)(1) (providing general authority for the 

Commission to grant exemptions from provisions of 

the Act and the rules thereunder). 

9See Securities Exchange Act Release No. 54389 

(August 31, 2006), 71 FR 52829 (September 7, 2006) 

(‘‘Original QCT Exemption’’). The Securities 

Industry Association (‘‘SIA,’’ n/k/a Securities 

Industry and Financial Markets Association) 

requested the exemption. See Letter to Nancy M. 

Morris, Secretary, Commission, from Andrew 

Madoff, SIA Trading Committee, SIA, dated June 

21, 2006. 

10Transactions involving securities of 

participants in mergers or with intentions to merge 

that have been announced would meet this aspect 

of the requested exemption. Transactions involving 

cancelled mergers, however, would constitute 

qualified contingent trades only to the extent they 

involve the unwinding of a pre-existing position in 

the merger participants’ shares. Statistical arbitrage 

transactions, absent some other derivative or merger 

arbitrage relationship between component orders, 

would not satisfy this element of the definition of 

a qualified contingent trade. See Original QCT 

Exemption, supra, note 9. 

11A trading center may demonstrate that an 

Exempted NMS Stock Transaction is fully hedged 

under the circumstances based on the use of 

reasonable risk-valuation methodologies. Id. 

12See 17 CFR 242.600(b)(9) (defining ‘‘block size’’ 

with respect to an order as at least 10,000 shares 

or $200,000 in market value). 

13See Securities Exchange Act Release No. 57620 

(April 4, 2008) 73 FR 19271 (April 9, 2008) (‘‘CBOE 

QCT Exemption’’). The current QCT Exemption (i.e., 

as modified by the CBOE QCT Exemption) is 

referred to herein as the ‘‘NMS QCT Exemption.’’ 

14See Securities Exchange Act Release No. 60405 

(July 30, 2009), 74 FR 39362 (August 6, 2009) (File 

No. 4–546) (‘‘New Linkage Plan’’). ISE also proposed 

revisions to its rules to implement the New Linkage 

Plan (‘‘New Linkage Rules’’). See Securities 

Exchange Act Release No. 60559 (August 21, 2009), 

74 FR 44425 (August 28, 2009) (SR–ISE–2009–27). 

15A trade-through is a transaction in a given 

option series at a price that is inferior to the best 

price available in the market. 

16The former options linkage plan, the Plan for 

the Purpose of Creating and Operating an 

Intermarket Option Linkage (‘‘Former Linkage 

Plan’’), was approved by the Commission in 2000 

and was operative until August 31, 2009, when the 

New Linkage Plan took effect. See Securities 

Exchange Act Release No. 43086 (July 28, 2000), 65 

FR 48023 (August 4, 2000) (File No. 4–429). 

17See Sections 2(3) and 8(c)(i)(C) of the Former 

Linkage Plan and old ISE Rule 1902(d)(2). 

18See Securities Exchange Act Release No. 60147 

(June 19, 2009), 74 FR 30651 (June 26, 2009) (SR– 

ISE–2009–35 Notice). 

19The six requirements are substantively 

identical to the six elements of a QCT under the 

NMS QCT Exemption. See supra notes 9 and 13. 

This order approves the proposed rule 

change. 

II. Background 

A. Regulation NMS and Qualified 

Contingent Trades 

The Commission adopted Regulation 

NMS in June 2005.6 Among other 

things, Regulation NMS addressed 

intermarket trade-throughs of quotations 

in NMS stocks.7 In 2006, pursuant to 

Rule 611(d) of Regulation NMS,8 the 

Commission provided an exemption 9

for each NMS stock component of 

certain qualified contingent trades (as 

defined below) from Rule 611(a) of 

Regulation NMS for any trade-throughs 

caused by the execution of an order 

involving one or more NMS stocks (each 

an ‘‘Exempted NMS Stock Transaction’’) 

that are components of a qualified 

contingent trade. 

The Original QCT Exemption defined 

a ‘‘qualified contingent trade’’ to be a 

transaction consisting of two or more 

component orders, executed as agent or 

principal, where: (1) At least one 

component is in an NMS stock; (2) all 

components are effected with a product 

or price contingency that either has 

been agreed to by the respective 

counterparties or arranged for by a 

broker-dealer as principal or agent; 

(3) the execution of one component is 

contingent upon the execution of all 

other components at or near the same 

time; (4) the specific relationship 

between the component orders (e.g., the 

spread between the prices of the 

component orders) is determined at the 

time the contingent order is placed; 

(5) the component orders 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 since cancelled; 10 (6) the 

Exempted NMS Stock Transaction is 

fully hedged (without regard to any 

prior existing position) as a result of the 

other components of the contingent 

trade; 11 and (7) the Exempted NMS 

Stock Transaction that is part of a 

contingent trade involves at least 10,000 

shares or has a market value of at least 

$200,000.12

In 2008, in response to a request from 

the CBOE, the Commission modified the 

Original QCT Exemption to remove the 

‘‘block size’’ requirement of the 

exemption (i.e., that the Exempted NMS 

Stock Transaction be part of a 

contingent trade involving at least 

10,000 shares or having a market value 

of at least $200,000).13

B. Background of ISE’s Proposal 

In August 2009, the Commission 

approved the Order Protection and 

Locked/Crossed Market Plan 14 which, 

among other things, required the 

options exchanges to adopt written 

policies and procedures reasonably 

designed to prevent trade-throughs.15

Unlike its predecessor plan,16 the New 

Linkage Plan does not include a tradethrough exemption for ‘‘Block Trades,’’ 

defined to be trades of 500 or more 

contracts with a premium value of at 

least $150,000.17 However, because the 

New Linkage Plan does not provide a 

Block Trade exemption, the Exchange 

was concerned that the loss of the Block 

Trade exemption would adversely affect 

the ability of its members to effect large 

trades that are tied to stock. 

Accordingly, the Exchange proposed the 

Original QCC Order (defined below) as 

a limited substitute for the Block Trade 

exemption to facilitate the execution of 

large stock/option combination orders, 

to be implemented contemporaneously 

with the New Linkage Rules. 

C. SR–ISE–2009–35 

1. ISE’s Original Qualified Contingent 

Cross Order Proposal 

In SR–ISE–2009–35,18 ISE proposed a 

new order type, the QCC Order. The 

QCC Order as proposed in SR–ISE– 

2009–35 (‘‘Original QCC Order’’) 

permitted an ISE member to cross the 

options leg of a Qualified Contingent 

Trade (‘‘QCT’’) (as defined below) on ISE 

immediately upon entry, without 

exposure, if the order: (i) Was for at least 

500 contracts; (ii) met the six 

requirements of the NMS QCT 

Exemption; and (iii) was executed at a 

price at or between the national best bid 

or offer (‘‘NBBO’’). Proposed 

Supplementary Material .01 to ISE Rule 

715 defined a QCT as a transaction 

composed of two or more orders, 

executed as agent or principal, where: 

(i) At least one component is in an NMS 

stock; (ii) all components are effected 

with a product or price contingency that 

either has been agreed to by all the 

respective counterparties or arranged for 

by a broker-dealer as principal or agent; 

(iii) the execution of one component is 

contingent upon the execution of all 

other components at or near the same 

time; (iv) the specific relationship 

between the component orders (e.g., the 

spread between the prices of the 

component orders) is determined by the 

time the contingent order is placed; (v) 

the component orders 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 (vi) the 

transaction is fully hedged (without 

regard to any prior existing position) as 

a result of other components of the 

contingent trade.19

On August 28, 2009, the Commission 

approved, by authority delegated to the 


emcdonald on DSK2BSOYB1PROD with NOTICES
Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / Notices 11535 

20See Securities Exchange Act Release No. 60584 

(August 28, 2009), 74 FR 45663 (September 3, 2009) 

(‘‘Original Approval Order’’). 21See Letter from Paul E. Dengel, Counsel for 

CBOE, Schiff Hardin LLP, to Elizabeth M. Murphy, 

Secretary, Commission, dated September 4, 2009. 22See Letter from Joanne Moffic-Silver, General 

Counsel and Corporate Secretary, CBOE, to 

Elizabeth M. Murphy, Secretary, Commission, dated 

September 14, 2009 (‘‘Petition for Review’’). 23See Brief in Support of ISE’s Motion to Lift the 

Commission Rule 431(e) Automatic Stay of 

Delegated Action Triggered by CBOE’s Notice of 

Intention to Petition for Review, dated September 

11, 2009 (‘‘ISE’s Motion’’). 24See Response of CBOE to Motion of ISE to Lift 

Automatic Stay, dated September 17, 2009 

(‘‘Response to Motion’’). 25See Reply in Support of ISE’s Motion to Lift the 

Commission Rule 431(e) Automatic Stay of 

Delegated Action Triggered by CBOE’s Notice of 

Intention to Petition for Review, dated September 

22, 2009 (‘‘ISE Reply’’). 26See Letters from Jeffrey S. Davis, Vice President 

and Deputy General Counsel, NASDAQ OMX 

PHLX, Inc., to Elizabeth M. Murphy, Secretary, 

Commission, dated September 22, 2009 (‘‘Phlx 

Letter’’); Gerald D. O’Connell, Chief Compliance 

Officer, Susquehanna International Group, LLP, to 

Elizabeth M. Murphy, Secretary, Commission, dated 

September 30, 2009 (‘‘Susquehanna Letter’’); Megan 

A. Flaherty, Chief Legal Counsel, Wolverine 

Trading, LLC, to Elizabeth M. Murphy, Secretary, 

Commission, dated October 2, 2009 (‘‘Wolverine 

Letter’’); Janet M. Kissane, Senior Vice President— 

Legal and Corporate Secretary, NYSE Euronext, to 

Elizabeth M. Murphy, Secretary, Commission, dated 

October 5, 2009 (‘‘NYSE Letter’’); Ben Londergan, 

Co-CEO, Group One Trading, L.P., to Elizabeth M. 

Murphy, Secretary, Commission, dated October 5, 

2009 (‘‘Group One Letter’’); Anthony J. Saliba, Chief 

Executive Officer, LiquidPoint, LLC, to Elizabeth M. 

Murphy, Secretary, Commission, dated October 7, 

2009 (‘‘LiquidPoint Letter’’); Kimberly Unger, 

Executive Director, The Security Traders 

Association of New York, Inc., to Elizabeth M. 

Murphy, Secretary, Commission, dated October 29, 

2009 (‘‘STA Letter’’); and Peter Schwarz, Integral 

Derivatives, LLC, to Elizabeth M. Murphy, 

Secretary, Commission, dated November 25, 2009 

(‘‘Integral Derivatives Letter’’). In addition, ISE 

submitted certain market volume and share 

statistics. See E-mail from Michael J. Simon, ISE, to 

Elizabeth King, Associate Director, Division of 

Trading and Markets, Commission, dated 

September 30, 2009. 

27See Commission Order Granting Petition for 

Review and Scheduling Filing of Statements, dated 

November 12, 2009 and Commission Order Denying 

ISE’s Motion to Lift the Commission Rule 431(e) 

Automatic Stay of Delegate Action Triggered by 

CBOE’s Notice of Intention to Petition for Review, 

dated November 12, 2009 (‘‘Order Granting 

Petition’’). 

28See Letters from Michael J. Simon, Secretary, 

ISE, to Elizabeth M. Murphy, Secretary, 

Commission, dated December 3, 2009 (‘‘ISE 

Statement 1’’); from Leonard Ellis, Head of Capital 

Markets, Capstone Global Markets, LLC, to 

Elizabeth Murphy, Secretary, Commission, dated 

December 3, 2009 (‘‘Capstone Statement’’); and 

Michael J. Simon, Secretary, ISE, to Elizabeth M. 

Murphy, Secretary, Commission, dated December 

16, 2009 (‘‘ISE Statement 2’’). 

29See Letters from Joanne Moffic-Silver, 

Executive Vice President, General Counsel & 

Corporate Secretary, CBOE, to Elizabeth M. 

Murphy, Secretary, Commission, dated December 3, 

2009 (‘‘CBOE Statement 1’’); Michael Goodwin, 

Senior Managing Member, Bluefin Trading, LLC, to 

Elizabeth M. Murphy, Secretary, Commission, dated 

December 2, 2009 (‘‘Bluefin Statement’’); John C. 

Nagel, Managing Director and Deputy General 

Counsel, Citadel, to Elizabeth M. Murphy, 

Commission, dated December 3, 2009 (‘‘Citadel 

Statement’’); Janet M. Kissane, Senior Vice 

President—Legal & Corporate Secretary, NYSE 

Euronext, to Elizabeth M. Murphy, Secretary, 

Commission, dated December 3, 2009 (‘‘NYSE 

Statement 1’’); and Angelo Evangelou, Assistant 

General Counsel, CBOE, to Elizabeth M. Murphy, 

Secretary, Commission, dated January 20, 2010 

(‘‘CBOE Statement 2’’). The Commission also 

received a statement from ISE responding to the 

CBOE Statement 2 regarding its statistical claim and 

number of trade-throughs. See Letter from Michael 

J. Simon, Secretary, ISE, to Elizabeth M. Murphy, 

Secretary, Commission, dated March 1, 2010. 

30See e.g., Petition for Review, supra note 22, at 

11. See also CBOE Statement 1, supra note 29, at 

5–6, 15–16. 

31See Petition for Review, supra note 22, at 13. 

See also Bluefin Statement, supra note 29; Citadel 

Statement, supra note 29, at 2; and LiquidPoint 

Letter, supra note 26, at 4. See also Wolverine 

Letter, supra note 26 and CBOE Statement 1, supra 

note 29, at 8. 

32See Petition for Review, supra note 22, at 5, 9, 

13–15. See also Bluefin Statement, supra note 29; 

Citadel Statement, supra note 29, at 2; NYSE 

Statement 1, supra note 29, at 2; Wolverine Letter, 

supra note 26; and LiquidPoint Letter, supra note 

26, at 2. 

33See Petition for Review, supra note 22, at 5, 17. 

CBOE also noted ISE’s investment in an entity that 

CBOE asserted is ‘‘geared towards the nontransparent execution of block size stock-option 

transactions,’’ which CBOE contended would 

benefit from the ISE’s proposal. Id. at 11. See also 

CBOE Statement 1, supra note 29, at 13–14. 

34See Petition for Review, supra note 22, at 15. 

35 Id. at 10, 14. CBOE and some commenters also 

noted their belief that the lack of exposure also 

degrades market transparency, which they believe 

is related to the Commission’s concerns relating to 

dark pools. Id. at 16. See also, e.g., NYSE Statement 

1, supra note 29, at 1, 4. 

Division of Trading and Markets, ISE’s 

Original QCC Order proposal.20 On 

September 4, 2009, CBOE filed with the 

Commission a notice of intention to file 

a petition for review of the 

Commission’s approval by delegated 

authority 21 and, on September 14, 2009, 

CBOE filed a petition for review, which 

automatically stayed the delegated 

approval of the Original QCC Order.22

On September 11, 2009, ISE filed a 

motion to lift the automatic stay.23 On 

September 17, 2009, CBOE filed a 

response to ISE’s Motion.24 On 

September 22, 2009, ISE filed a reply in 

support of its motion to lift the 

automatic stay.25 In addition to the 

submissions from CBOE and ISE, the 

Commission received eight comment 

letters requesting that the Commission 

grant CBOE’s Petition for Review.26

On November 12, 2009, the 

Commission granted CBOE’s Petition for 

Review and denied ISE’s motion to lift 

the automatic stay.27 In connection with 

the Order Granting Petition, the 

Commission received three statements 

in support of the Original Approval 

Order (two of which were submitted by 

ISE) 28 and five statements in opposition 

to the Original Approval Order (two of 

which were submitted by CBOE).29

2. Commenter’s to ISE’s Original QCC 

Order Proposal 

In its Petition for Review and 

statements in support thereof, CBOE 

argued that ISE’s Original QCC Order 

proposal was inconsistent with the 

Act 30 and raised important policy 

concerns that the Commission should 

address, including whether crossing 

straight or complex option orders 

without exposure is appropriate and 

whether permitting a ‘‘clean’’ cross in 

front of public customer orders is 

appropriate. CBOE believed that ISE’s 

proposal was inconsistent with the Act 

because ‘‘it effectively establishes ISE as 

a print facility for large options orders 

rather than an exchange where orders 

are able to interact in an auction 

setting.’’ 31 CBOE and certain 

commenters objected to the Original 

QCC Order proposal because, for crosses 

that satisfy the QCC’s requirements, a 

member of ISE could execute a clean 

cross without exposing the cross to 

other ISE participants, which CBOE 

stated would represent a significant 

change from historical and current 

market practices in the options 

markets.32 CBOE contended that the 

Commission’s policy and practice had 

been to limit the percentage of the 

crossing entitlement to an amount 

below 50% of the order being executed, 

and then only after ensuring that all 

crossing entitlements are exposed and 

yield to public customer orders.33 CBOE 

stated that the policies requiring 

exposure and yielding to public 

customer interest balance ‘‘the desire to 

permit internalization/solicitations to 

some degree while at the same time 

ensuring competition and price 

discovery and, to some degree, 

protecting public customers (including 

retail investors).’’ 34 Without an 

exposure requirement, CBOE contended 

that the proposal would have a major 

adverse impact on options market 

structure, and result in a trading 

environment that is ‘‘sluggish, 

nontransparent, and noncompetitive.’’ 35

CBOE and many of the commenters to 

the Original QCC Order proposal 

believed that the lack of any exposure 

requirement in ISE’s Original QCC 

Order would have a detrimental effect 

on the options market as it would 

provide a disincentive to ISE’s market 

makers to quote competitively, undercut 

their market making function and could 

result in market makers migrating off 

other exchanges that do not offer a QCC 

Order type to ISE, to take advantage of 

potentially wider spreads and where 

greater margins might be available with 


emcdonald on DSK2BSOYB1PROD with NOTICES
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36See CBOE Statement 1, supra note 29, at 8; 

NYSE Statement 1, supra note 29 at 2, 3; and 

LiquidPoint Letter, supra note 26, at 3, 5. See also 

Petition for Review, supra note 22, at 13. 

37See NYSE Statement 1, supra note 29 at 3. 

38 Id. 

39See LiquidPoint Letter, supra note 26, at 3, 5. 

40See NYSE Statement 1, supra note 29, at 2 and 

LiquidPoint Letter, supra note 26, at 3–5. See also 

CBOE Statement 1, supra note 29, at 8. 

41See ISE Statement 1, supra note 28, at 2, 6. 

42 Id. 

43See Capstone Statement, supra note 28, at 2. 

44See Response to Motion, supra note 24, at 4. 

45See Petition for Review, supra note 22, at 13. 

46 Id. at 17. See also CBOE Statement 1, supra 

note 29, at 5, 9. 

47See Bluefin Statement, supra note 29 and NYSE 

Statement 1, supra note 29 at 2. 

48See ISE Statement 1, supra note 28, at 2, 5. 

49See Petition for Review, supra note 22, at 15. 

50 Id. at 18. 

51 Id. 

52 Id. at 19. 

53See ISE Statement 1, supra note 28, at 2, 5. For 

example, ISE pointed to the existing rules of the 

options exchanges that permit the execution of one 

leg of a complex trade at the same price as a public 

customer order on the limit order book if another 

leg of the order is executed at an improved price. 

See CBOE Rule 6.45A. 

54 Id. 

55See CBOE Statement 1, supra note 29, at 7–8 

and Petition for Review, supra note 22, at 13. See 

also Bluefin Statement, supra note 29; Group One 

Letter, supra note 26, at 1–2; and Integral 

Derivatives Letter, supra note 26. 

56See CBOE Statement 1, supra note 29, at 7. 

57See ISE Statement 1, supra note 28, at 2, 6. 

58See id. 

less competitive quoting.36 One 

commenter stated that the Original QCC 

Order, by preventing market makers 

from participating in trades occurring at 

their quoted prices, would cause market 

makers to spread their quotes wider to 

increase their profit margins in 

compensation for the lower volume of 

trading in which they participate.37 This 

commenter further stated that, 

eventually, such market makers might 

very well question the wisdom of 

committing capital to make firm markets 

in the thousands of options series in 

which they have continuous quoting 

obligations.38 Another commenter noted 

that, ultimately, this would ‘‘increase 

the costs and decrease the availability of 

proven, effective risk management 

through derivatives’’ and harm options 

market participants, as their ability ‘‘to 

execute their myriad strategies would 

disappear.’’ 39 Thus, some commenters 

believed that permitting the 

implementation of the QCC Order 

would harm the growth prospects of the 

overall options industry.40

However, ISE argued that the QCC 

Order type would not impact the 

options markets, and that large-size 

contingency orders are executed on 

floor-based exchanges in a manner very 

similar to the new order type proposed 

by ISE. In addition, ISE noted that there 

is no meaningful transparency on floors 

because there is no requirement that 

information on orders presented to the 

floor be announced electronically to all 

exchange members or the public.41 ISE 

also noted that some floor-based options 

exchanges have eliminated the 

requirement that market makers have a 

physical presence on the floor, which it 

believes undermines the claim that 

price discovery and transparency occur 

on the trading floor.42 One commenter 

to the Original QCC Order proposal 

agreed and stated that the exposurerelated concerns of other commenters 

‘‘do not adequately recognize the reality 

of how this business is conducted today 

and seem to simply endorse a manual 

trading environment that prevents 

competition from electronic 

exchanges.’’ 43

In addition to CBOE’s opposition to 

the Original QCC Order because of its 

lack of an exposure requirement, CBOE 

also argued that public customers that 

have previously placed limit orders at 

the execution price of a QCC Order 

would be harmed because those 

customers would lose priority and 

would not receive executions of their 

resting orders.44 CBOE expressed 

concern that, because certain customer 

orders would not receive priority, the 

proposal would create a disincentive to 

placing limit orders.45 CBOE 

maintained that, with respect to intramarket priority in the exchange-listed 

options markets, the long-standing 

industry policy and practice has been to 

require public customer priority for 

simple option orders.46 Two 

commenters also expressed concern that 

the Original QCC Order would cause 

public customers with existing orders to 

be disadvantaged in the executions that 

they receive and would be a direct 

disincentive to market makers and 

would likely encourage wider quoted 

markets.47

ISE disagreed with the commenters’ 

claims that public customers with 

resting limit orders would be harmed by 

its QCC proposal. ISE stated that largesize contingency trades that would 

qualify as QCC Orders are currently 

almost exclusively executed on floorbased exchanges, thus ‘‘the occasional 

customer limit order resting on ISE’s 

book * * * has no opportunity to 

interact with [such orders].’’ 48

In addition, CBOE stated that no 

execution entitlements have been 

permitted thus far, unless there is first 

yielding to public customer interest.49

CBOE contrasted the Original QCC 

Order with the rules of all options 

exchanges relating to net-priced 

complex orders, which require that each 

options leg(s) of the complex order trade 

at or inside the NBBO and, at a 

minimum, price improve public 

customer orders in at least one 

component options leg.50 CBOE also 

noted that, in a stock-option order netpriced package, it has been the 

Commission policy to require that the 

option leg of the stock-option order 

either yield to the same priced public 

customer order represented in the 

individual options series or trade at a 

better price.51 CBOE argued that the 

Original QCC Order, in contrast, would 

be given special priority that goes 

beyond the priority afforded to 

packaged stock-option orders by 

permitting it to be crossed without 

giving priority to public customers.52

In response, ISE noted that there are 

many examples of exception to rules to 

accommodate specific trading 

strategies.53 ISE further argued that 

there is no basis under the Act to 

prevent exchanges from adopting 

market structures and priority rules that 

are tailored for large-size contingent 

orders and that customer priority is not 

required in all circumstances.54

Commenters to the Original QCC 

Order also questioned whether the 

customer involved in the QCC Order 

would be able to receive the best price 

for its order because, without a 

requirement for the order to be exposed, 

the submitting member’s customer 

would not have the opportunity to 

receive price improvement for the 

options leg of the order.55 Specifically, 

CBOE expressed concern that, because 

the QCC Order would eliminate the 

requirement of market exposure, the 

customer whose order is submitted 

through the QCC Order mechanism 

might receive a fill at a price that is 

inferior to the price the customer would 

have received if the full package or even 

the options component had been 

represented to the market.56

ISE responded to these concerns by 

explaining that, when negotiating a 

stock-option order, market participants 

agree to a ‘‘net price,’’ i.e., a price that 

reflects the total price of both the 

options and stock legs of the transaction 

which are executed separately in the 

options and equity markets.57

Accordingly, ISE believed that, for such 

trades, the actual execution price of 

each component is not as material to the 

parties to the trade as is the net price of 

the transaction.58


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59See ISE Reply, supra note 25, at 5. 60See Memorandum Regarding ISE Qualified 

Contingent Cross Proposal from Division of Risk, 

Strategy and Financial Innovation, dated March 1, 

2010 (‘‘RiskFin Analysis’’) (available at http:// 

www.sec.gov/rules/other/2010/sr-ise-2009–35/ 

riskfinmemo030110.pdf). The RiskFin Analysis 

reviewed COATS data from ISE, CBOE and Phlx. 

61For example, ISE notes that the inclusion of 

index options trading in the data distorts the extent 

to which there is ‘‘break-up’’ of large crosses on the 

floor-based exchanges and believes that excluding 

index options from the RiskFin Analysis would 

significantly increase the number of floor-based 

exchanges’ large orders that were executed without 

break-up. See ISE Statement 3, infra note 63, at 2– 

3. 

62See Commission Order Extending Time to File 

Statements, dated March 17, 2010. 

63See Letters from Edward J. Joyce, President and 

Chief Operating Officer, CBOE, to Elizabeth M. 

Murphy, Secretary, Commission, dated April 7, 

2010 (‘‘CBOE Statement 3’’); Pia K. Bennett, 

Associate Corporate Secretary, NYSE Euronext, to 

Elizabeth M. Murphy, Secretary, Commission, dated 

April 7, 2010 (‘‘NYSE Statement 2’’); and Michael 

J. Simon, Secretary, ISE, to Elizabeth M. Murphy, 

Secretary, Commission, dated April 7, 2010 (‘‘ISE 

Statement 3’’). 

64See CBOE Statement 3, supra note 63, at 1 and 

4. 

65See ISE Statement 3, supra note 63, at 2. 

66 Id. at 2. 67See NYSE Statement 2, supra note 63, at 1. 68 Id. at 3. 69See Letter from Michael J. Simon, Secretary, 

ISE, to Elizabeth M. Murphy, Secretary, 

Commission, dated July 14, 2010 (‘‘Vacate Letter’’). 70See, e.g., Petition for Review, supra note 22, at 

13, 15, 17. See also Bluefin Statement, supra note 

29; Phlx Letter, supra note 26; Wolverine Letter, 

supra note 26; Group One Letter, supra note 26, at 

1; and Integral Derivatives Letter, supra note 26. 

3. RiskFin Analysis of Large-Size 

Contingency Orders 

In support of the Original QCC Order, 

ISE stated that its proposed QCC Order 

provided an all-electronic alternative to 

the open-outcry execution of large 

stock-option trades on floor-based 

exchanges. While both all-electronic 

exchanges and floor-based exchanges 

have rules that require exposure of an 

order before a member is permitted to 

trade with such order, ISE believes that 

the requirement under ISE’s rules is 

significantly more onerous than the 

similar requirement of floor-based 

exchanges, where such exchanges are 

only required to expose such orders to 

their members on the floor and not 

electronically to all members. 

Accordingly, ISE asserted, among other 

things, that it needed the QCC Order to 

remain competitive with other 

exchanges, particularly floor-based 

exchanges, because although these 

orders are exposed on the floor-based 

exchanges, they are rarely broken up.59

In order to examine ISE’s contention 

with respect to activity on floor-based 

exchanges regarding large-sized 

contingent trades, in October 2009, the 

Commission’s Division of Risk, Strategy 

and Financial Innovation (‘‘RiskFin’’) 

requested Consolidated Options Audit 

Trail System (‘‘COATS’’) data from 

certain options exchanges for each 

Tuesday in August and September of 

2009. On March 17, 2010, RiskFin 

placed in the public file a memorandum 

analyzing the COATS data, in which it 

presented the findings of its analysis of 

ISE’s contention that large-size 

contingency orders on floor-based 

exchanges were never or nearly never 

broken up.60 The RiskFin Analysis 

provided some support for ISE’s 

contention that large orders are broken 

up less frequently on floor-based 

exchanges than on an electronic 

exchange, though it did not definitively 

confirm ISE’s contention. Specifically, 

in examining the percentage of trades 

that are either fully or near-fully 

executed against a single contra-party, 

the RiskFin Analysis showed that, for 

trades with a size of 2,000 contracts or 

more, only 12% were completely 

executed with only one execution on 

ISE, compared to 26% and 29% of 

trades that were filled with only one 

execution on two floor-based exchanges. 

Similarly, the data also showed that for 

orders of 2,000 contacts or more, only 

16% of orders on ISE were 90% filled 

against a single contra-party, while the 

comparable figures for two floor-based 

exchanges were 35% and 37%. 

While the RiskFin Analysis provided 

the percentage of orders on each 

exchange that were filled in a single 

execution versus multiple executions, 

the COATS data used for the analysis 

was not limited to facilitation orders.61

Thus, the RiskFin Analysis was not 

dispositive with respect to ISE’s 

contention because it contained orders 

unrelated to ISE’s proposed order type. 

Concurrently with the placement of the 

RiskFin Analysis in the public file, the 

Commission issued an order extending 

the time to file a statement in support 

of or in opposition to the Original 

Approval Order.62 Subsequently, the 

Commission received three statements 

relating to the RiskFin Analysis.63

Both CBOE and ISE focused on the 

RiskFin Analysis and noted that the 

‘‘analysis did not confirm ISE’s 

contention that large orders are brokenup less frequently on floor-based 

exchanges, though certain data did 

provide support for ISE’s position.’’ 

Although CBOE believed that the 

conclusion was favorable to its opposing 

position on ISE’s QCC Order type, it 

clarified that it did not believe the study 

was necessary and that the policy 

question of exposure and whether it 

would benefit investors or not was the 

critical concern.64

Alternatively, ISE believed that the 

RiskFin Analysis conclusion strongly 

supported ISE’s position that the QCC 

Order type is an appropriate and 

necessary competitive tool for the ISE.65

In support of its belief, ISE noted that 

the most critical statistic in determining 

whether exchange members can affect a 

trade without being broken up is to look 

at how often large trades are executed in 

a single execution. ISE points to the 

RiskFin Analysis data that demonstrates 

that for the largest trades (2,000 or more 

contracts) only 12% of such trades were 

executed without a break-up on the ISE, 

while the percentages for the two floorbased exchanges were more than twice 

as high.66

Another commenter reiterated its 

concern that the proposed QCC Order 

type creates a disincentive to 

competitively quote by limiting price 

discovery opportunities and dampens 

transparency in the options markets.67

In response to the RiskFin Analysis 

data, the commenter stated that the 

crossing of two orders on or within the 

best bid or offer of the options markets, 

with no interference from other 

participants despite exposure to the 

market, indicated that the cross was 

fairly priced as part of the off-exchange 

negotiation and that without exposure, 

there is no such comfort that the best 

possible price was obtained.68

4. Request To Vacate SR–ISE–2009–35 

Original Approval Order 

On July 14, 2010, concurrently with 

the filing of the current proposal to 

modify the rules for QCC Orders (i.e., 

SR–ISE–2010–73), the Commission 

received a letter from ISE requesting the 

Commission to vacate the Original 

Approval Order concurrently with an 

approval of SR–ISE–2010–73.69

Specifically, the Vacate Letter stated 

that ISE submitted its current proposal 

to address the most significant issues 

that commenters raised regarding the 

Original QCC Order. 

D. Description of Current Proposal To 

Modify QCC Order Rules 

As noted above, among their 

objections to ISE’s Original QCC Order, 

CBOE and some commenters argued 

that public customers with limit orders 

resting on ISE’s book at the execution 

price of a QCC Order would be harmed 

because the QCC Order would execute 

ahead of their resting orders and that, 

because certain customer orders would 

not receive priority, the proposal would 

create a disincentive to placing limit 

orders.70 CBOE and some commenters 

also questioned whether the customer 

involved in the QCC Order would be 

able to receive the best price for its 


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71See, e.g., CBOE Statement 1, supra note 29, at 

7–8 and Petition for Review, supra note 22, at 13. 

See also Bluefin Statement, supra note 29; Group 

One Letter, supra note 26, at 1–2; and Integral 

Derivatives Letter, supra note 26. 

72See ISE Statement 1, supra note 28, at 4. See 

also Capstone Statement, supra note 28, at 2. 

73Under ISE Rule 100(37A), a priority customer 

is 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). 

Pursuant to ISE Rule 713, priority customer orders 

are executed before other trading interest at the 

same price. 

74See Vacate Letter, supra note 69, at 1. 

75See supra notes 9 and 13 and accompanying 

text. 

76 If there are Priority Customer orders on ISE’s 

limit order book at the same price, the QCC Order 

would be automatically canceled. See proposed ISE 

Rule 721(b)(1). 

77See Notice, supra note 3. 

78See supra notes 4 and 5. 

79See CBOE Letter 1, supra note 4, at 1, NYSE 

Letter 2, supra note 4, at 7, and Susquehanna Letter 

2, supra note 4, at 1. See also supra notes 44–54 

and accompanying text. 

80See CBOE Letter 1, supra note 4, at 1; Phlx 

Letter 2, supra note 4, at 1; LiquidPoint Letter 2, 

supra note 4, at 1–2; Group One Letter 2, supra note 

4, at 1; NYSE Letter 2, supra note 4, at 1–2, 7–8; 

and Susquehanna Letter 2, supra note 4, at 1. 

81See CBOE Letter 1, supra note 4, at 1–2; Phlx 

Letter 2, supra note 4, at 1; LiquidPoint Letter 2, 

supra note 4, at 1, 2; Group One Letter 2, supra note 

4, at 2; NYSE Letter 2, supra note 4, at 3, 7–8; NYSE 

Letter 3, supra note 4, at 2; and Susquehanna Letter 

2, supra note 4, at 3. 

82See CBOE Letter 1, supra note 4, at 2–3 and 

Phlx Letter 2, supra note 4, at 1. See also Cutler 

Letter, supra note 4 (stating that without exposure, 

there is no incentive for market makers to display 

liquidity, provide liquidity or offer price 

improvement) and LiquidPoint Letter 2, supra note 

4, at 2 (stating that if market makers are not able 

to participate in all price discovery opportunities, 

they would be left to participate in only price 

discovery opportunities that are less-desirable and 

that the result of this negative selection would be 

‘‘increased risk, a higher probability of unprofitable 

trades and a reticence to post their best markets. See 

also Group One Letter 2, supra note 4, at 2; NYSE 

Letter 2, supra note 4, at 2, 3; and Susquehanna 

Letter 2, supra note 4, at 3. 

83See CBOE Letter 1, supra note 4, at 1, 3–4; 

Group One Letter 2, supra note 4, at 2; and NYSE 

Letter 2, supra note 4, at 2. 

84See CBOE Letter 1, supra note 4, at 3. 

85See CBOE Letter 1, supra note 4, at 3, 5. 

86See NYSE Letter 2, supra note 4, at 3; NYSE 

Letter 3, supra note 4, at 1–2; and CBOE Letter 1, 

supra note 4, at 2. 

87See CBOE Letter 1, supra note 4, at 4–5. See 

also NYSE Letter 2, supra note 4, at 4. 

88See CBOE Letter 1, supra note 4, at 4–5. See 

also Cutler Letter, supra note 4; and NYSE Letter 

2, supra note 4, at 4. 

89See ISE Statement 1, supra note 28, at 3. 

90See ISE Response, supra note 5, at 2. 

order because, without a requirement 

for the order to be exposed, the 

submitting member’s customer would 

not have the opportunity to receive 

price improvement for the options leg of 

the order.71

Though ISE believes that there is 

nothing novel about granting or not 

granting customer priority, that the 

Commission had approved exchange 

rules that do not provide customer 

priority, and that there is no statutory 

requirement that customer orders 

receive priority,72 in SR–ISE–2010–73 

the Exchange proposes to modify the 

Original QCC Order rules to require that 

a QCC Order be automatically cancelled 

if there are any Priority Customer 73

orders on the Exchange’s limit order 

book at the same price. This 

modification thus prohibits QCC Orders 

from trading ahead of Priority Customer 

orders. In addition, in SR–ISE–2010–73, 

ISE proposes to increase the minimum 

size requirement for a QCC Order from 

500 contracts to 1,000 contracts. ISE 

contends that such an increase supports 

the Exchange’s intention to permit the 

crossing of only large-sized institutional 

stock-option orders.74

Thus, as modified, an ISE member 

effecting a trade pursuant to the NMS 

QCT Exemption could cross the options 

leg of the trade on ISE as a QCC Order 

immediately upon entry, without 

exposure, only if there are no Priority 

Customer orders on the Exchange’s limit 

order book at the same price and if the 

order: (i) Is for at least 1,000 contracts; 

(ii) meets the six requirements of the 

NMS QCT Exemption; 75 and (iii) is 

executed at a price at or between the 

NBBO (‘‘Modified QCC Order’’).76 In the 

Notice, ISE stated that the modifications 

to the Original QCC Order (i.e., to 

prevent the execution of a QCC if there 

is a Priority Customer on its book and 

to increase the minimum size of a QCC 

Order) remove the appearance that such 

orders are trading ahead of Priority 

Customer orders or that the QCC Order 

could be used to disadvantage retail 

customers.77

E. Commenters to ISE’s Modified QCC 

Order Proposal 

The Commission received eight 

comment letters opposing ISE’s 

Modified QCC Order proposal and a 

response letter from ISE.78 While some 

commenters noted that ISE had 

addressed their prior objections relating 

to customer priority,79 commenters 

objected to ISE’s modified proposal 

because it remained unchanged from the 

original proposal with respect to 

exposure, in that QCC Orders would 

still be crossed without exposure.80

Commenters noted that exposure is 

especially critical in the options market, 

which is quote-driven and relies on 

market makers to ensure that two-sided 

quotations are available for hundreds of 

thousands of different options series.81

Commenters argued that exposure, in 

addition to allowing for the possibility 

of price improvement, provides market 

makers an opportunity to participate in 

trades, which in turn provides them 

incentives to quote aggressively, thus 

benefiting the market as a whole.82

Relatedly, several commenters 

warned against removing incentives for 

liquidity providers in light of the market 

events of May 6, 2010.83 One 

commenter noted that any tightening of 

market maker obligations could only 

succeed if market maker benefits were 

correspondingly aligned, and argued 

that ISE’s proposal would withdraw 

significant options order flow and, thus, 

the opportunity for market makers to 

interact with that order flow via 

exposure.84

In addition, CBOE stated that order 

exposure and the opportunity for market 

participant interaction was integrally 

related to what constitutes an exchange 

and stressed that the Commission 

should not abandon such long-held 

standards to permit ‘‘print’’ mechanisms 

on options exchanges, which it believed 

the ISE proposal to be.85 CBOE and 

NYSE also noted that the Commission 

has generally not permitted 100% 

participation guarantees, as the QCC 

Order would provide for.86

CBOE also noted that the component 

legs of stock-option orders are exposed 

on options exchanges as a package (e.g., 

through complex order mechanisms) 

with all terms of the complete order 

being transparent to the marketplace.87

This commenter noted that such stockoption orders, while still requiring 

exposure, are granted intermarket tradethrough relief. In contrast, this 

commenter saw no reason why QCC 

Orders should receive any special 

treatment (i.e., not be required to be 

exposed) and noted that they are not 

represented as a package and thus do 

not provide the same transparency as 

stock-option orders, with only upstairs 

parties to these trades aware of the 

complete terms of the total 

transaction.88 In response, ISE reiterated 

its belief that the crossing of large-size 

contingency orders on a floor today is 

not transparent because ‘‘there are very 

few traders (if any) on the floor to hear 

an order ‘announced’’’ and are executed 

with little, if any. interruption.89 ISE 

stated that commenters opposed to its 

proposal were arguing about the 

theoretical benefits of exposure and 

ignoring the realities of what is 

occurring in the markets.90 Further, ISE 

stated that, currently, members arrange 

large stock-option trades upstairs and 

then bring them to an exchange for 

execution. Floor exchanges, ISE argued, 

accommodate these trades by providing 

a market structure where there is little 


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91 Id. 

92See Susquehanna Letter 2, supra note 4, at 4– 

5. 

93See Group One Letter 2, supra note 4, at 1–2. 

See also supra note 55 and accompanying text. 

94See CBOE Letter 1, supra note 4, at 4–5. See 

also NYSE Letter 2, supra note 4, at 3–4 and NYSE 

Letter 3, supra note 4, at 2. 

95See NYSE Letter 2, supra note 4, at 5–7 and 

NYSE Letter 3, supra note 4, at 3. 

96See Cutler Letter, supra note 4. 

97See ISE Response, supra note 5, at 1–2. 

98 Id. at 2. 

99See Susquehanna Letter 2, supra note 4, at 2. 

100 Id. 

101 Id. 

102See Susquehanna Letter 2, supra note 4, at 2. 

103See ISE Response, supra note 5, at 3–4. 

104See ISE Response, supra note 5, at 4. 

105 Id. 

106 Id. 

107 Id. at 5–6. 

108 Id. at 6. 

109 15 U.S.C. 78f(b). 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). 

110 15 U.S.C. 78f(b)(5). 

111 15 U.S.C. 78f(b)(8). 

112 15 U.S.C. 78k–1(a)(1)(C). 

or no chance that members will break 

up the pre-arranged trade.91 Another 

commenter believed that splitting a 

stock-option order into separate 

executions for the individual stock and 

options legs, rather than representing 

the stock-option order as a package, was 

generally not in the best interest of the 

customer from a best execution point of 

view.92

Another commenter reiterated its 

belief that the benefits of price 

discovery and transparency afforded by 

exposure were especially crucial for 

broker facilitated crosses such as QCC 

Orders because of the inherent conflict 

of interest for such orders since a broker 

is ‘‘betting against the customer’’ in such 

trades.93 Commenters also contended 

that ISE’s claim that it needed the QCC 

Order to compete with trading on floorbased exchanges is erroneous and 

disingenuous, and that it ignored the 

broader ramification of QCC Orders that, 

whereas trading floors require exposure 

of orders before any executions can 

occur, the QCC Order would ensure that 

exposure was eliminated altogether.94

With respect to the increase in 

contract size for QCC Orders from 500 

contracts (as originally proposed in SR– 

ISE–2009–35) to 1,000 contracts, NYSE 

questioned whether the change was 

meaningful in limiting the scope of the 

proposed QCC Order type, as it believed 

that market participants could game the 

rule to meet this requirement,95 while 

another commenter believed that the 

1,000 contract requirement was a 

relatively low threshold that would 

permit large broker-dealers to shut out 

other market participants on relatively 

small trades.96

In its response letter, ISE reiterated its 

argument that its QCC Order proposals 

were simply a way for ISE to compete 

against floor-based options exchanges 

for the execution of large stock-option 

orders.97 ISE countered commenters’ 

arguments regarding the lack of 

exposure of QCC Orders by stating that 

the required exposure of orders on floorbased exchanges was nominal and 

theoretical, and ignores the realities of 

what is occurring on those markets.98

One commenter agreed with ISE’s 

assertion that floor-based options 

exchanges enjoy an unfair competitive 

advantage over all-electronic options 

exchanges for executing clean blocks, 

noting that, in its own experience, 

‘‘institutional brokers are much more apt 

to use a trading floor when the primary 

intention is to execute as clean a cross 

as possible.’’ 99 ISE stated its belief that 

floor-based options markets 

accommodate such trades by ‘‘providing 

a market structure in which there is 

little or no chance that members will 

break up the pre-arranged trade’’ by 

structuring their markets to provide 

such trades with the least amount of 

‘‘friction.’’ 100 ISE contended that, if 

floor-based exchanges were serious 

about exposure, they would expose such 

orders to their entire marketplace, rather 

than limiting exposure to ‘‘those few (if 

any) members physically present in the 

floor-based trading crowd.’’ 101 One 

commenter echoed ISE’s contention and 

suggested that a common rule for all 

block crosses on all options exchanges 

should be adopted to require all prenegotiated option block crosses, 

including floor crosses, to be entered 

into an electronic crossing mechanism. 

This commenter believed that such a 

requirement would ensure that market 

makers could compete for such orders 

and thus provide the orders a greater 

chance at price improvement, as well as 

act as a check to ensure that the brokers 

facilitating these orders priced them 

competitively.102

ISE also countered commenters’ 

arguments that the QCC Order proposal, 

because it does not provide for 

exposure, would not allow for price 

improvement by reiterating its prior 

explanation that those parties involved 

in a stock-option order negotiate such 

transactions on a ‘‘net price’’ basis, 

reflecting the total price of both the 

stock and options legs of the trade. 

Thus, ISE argued, the actual execution 

price of each individual component is 

not as material to the parties involved 

as is the net price of the entire 

transaction, which ISE believes means 

that price improvement of the 

individual legs of the trade is not a 

critical issue in the execution of a QCC 

Order.103

In addition, ISE argued that its QCC 

Order proposal has no relevance to the 

market events of May 6, 2010, despite 

commenters’ attempts to link the two. 

ISE again noted that large stock-options 

trades are currently arranged upstairs 

and then shopped among exchanges to 

achieve a clean cross.104 ISE argued 

that, accordingly, large stock-option 

trades today ‘‘rely on the liquidity that 

firms can provide in arranging these 

trades and do not now include 

exchange-provided liquidity.’’ 105 ISE 

believed that the QCC Order type would 

simply provide a competitive electronic 

vehicle for such trades and will have no 

effect on available liquidity.106

In response to NYSE’s contention that 

the QCC Order’s contract size 

requirement could be gamed, ISE noted 

that any member creating ‘‘fake 

customer orders’’ would be 

misrepresenting its order in violation of 

ISE’s rules and expressed confidence 

that its surveillance program would be 

able to catch any such attempt.107 In 

addition, ISE clarified the calculation of 

the 1,000 contract minimum size for a 

QCC Order noting that, in order to meet 

this requirement, an order must be for 

at least 1,000 contracts and could not 

be, for example, two 500 contract orders 

or two 500 contract legs.108

III. Discussion and Commission 

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 and, in particular, 

with Section 6(b) of the Act.109

Specifically, the Commission finds that 

the proposal is consistent with Sections 

6(b)(5) 110 and 6(b)(8),111 which require, 

among other things, that the rules of a 

national securities exchange be 

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 and that the rules of an 

exchange do not impose any burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Act. In addition, the 

Commission finds that the proposed 

rule change is consistent with Section 

11A(a)(1)(C) of the Act,112 in which 

Congress found that it is in the public 


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11540 Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / Notices 

113See Original QCT Exemption, supra note 9, at 

52830. 

114 Id. at 52831. 

115See CBOE QCT Exemption, supra note 13. 

116See Original QCT Exemption, supra note 9, at 

52829 (explaining SIA’s position on the need for the 

Original QCT Exemption). 

117 Id. at 52831. 

118 Id. 

119 Id. 

120See supra notes 70 and 85–94 and 

accompanying text. 

121See supra notes 81–84 and accompanying text. 

122See supra notes 97–100 and accompanying 

text. 

123See ISE Response, supra note 5, at 3. 

124See, e.g., Susquehanna Letter 2, supra note 4, 

at 3 (noting that, in the options market, market 

makers provide over 90% of the liquidity). 

125See supra notes 81–82 and accompanying text. 

126See Original QCT Exemption, supra note 9, at 

52830–52831. 

127 Id. 

interest and appropriate for the 

protection of investors and the 

maintenance of fair and orderly markets 

to assure, among other things, the 

economically efficient execution of 

securities transactions. 

A. Consistency With the NMS QCT 

Exemption 

In approving the Original QCT 

Exemption, the Commission recognized 

that contingent trades can be ‘‘useful 

trading tools for investors and other 

market participants, particularly those 

who trade the securities of issuers 

involved in mergers, different classes of 

shares of the same issuer, convertible 

securities, and equity derivatives such 

as options [italics added].’’ 113 The 

Commission stated that ‘‘[t]hose who 

engage in contingent trades can benefit 

the market as a whole by studying the 

relationships between the prices of such 

securities and executing contingent 

trades when they believe such 

relationships are out of line with what 

they believe to be fair value.’’ 114 As 

such, the Commission stated that 

transactions that meet the specified 

requirements of the NMS QCT 

Exemption could be of benefit to the 

market as a whole, contributing to the 

efficient functioning of the securities 

markets and the price discovery 

process.115

The parties to a contingent trade are 

focused on the spread or ratio between 

the transaction prices for each of the 

component instruments (i.e., the net 

price of the entire contingent trade), 

rather than on the absolute price of any 

single component.116 Pursuant to the 

requirements of the NMS QCT 

Exemption, the spread or ratio between 

the relevant instruments must be 

determined at the time the order is 

placed, and this spread or ratio stands 

regardless of the market prices of the 

individual orders at their time of 

execution. As the Commission noted in 

the Original QCT Exemption, ‘‘the 

difficulty of maintaining a hedge, and 

the risk of falling out of hedge, could 

dissuade participants from engaging in 

contingent trades, or at least raise the 

cost of such trades.’’ 117 Thus, the 

Commission found that, if each stock leg 

of a qualified contingent trade were 

required to meet the trade-through 

provisions of Rule 611 of Regulation 

NMS, such trades could become too 

risky and costly to be employed 

successfully and noted that the 

elimination or reduction of this trading 

strategy potentially could remove 

liquidity from the market.118

The Commission believes that ISE’s 

proposal, which would permit a clean 

cross of the options leg of a subset of 

qualified contingent trades (i.e., a stockoption qualified contingent trade that 

meets the requirements of the NMS QCT 

Exemption), is appropriate and 

consistent with the Act in that it would 

facilitate the execution of qualified 

contingent trades, for which the 

Commission found in the Original QCT 

Exemption to be of benefit to the market 

as a whole, contributing to the efficient 

functioning of the securities markets 

and the price discovery process.119 The 

QCC Order would provide assurance to 

parties to stock-option qualified 

contingent trades that their hedge would 

be maintained by allowing the options 

component to be executed as a clean 

cross. 

B. Exposure and Qualified Contingent 

Trades 

Commenters believed that ISE’s 

modifications to the Original QCC Order 

did not adequately address their main 

objection regarding the QCC Order, 

particularly in that it would continue to 

permit option crosses to occur without 

prior exposure to the marketplace. 

Commenters generally reiterated their 

prior comments that exposing options 

orders promotes price competition, 

increases order interaction, and leads to 

better quality executions for investors 

by providing opportunities for price 

improvement.120 These commenters 

continued to argue that, without 

exposure, the Modified QCC Order 

would cause significant harm to the 

options market because it would 

eliminate valuable incentive for 

dedicated liquidity provider 

participation.121

In response to commenters’ concerns 

that the Modified QCC Order would 

have a detrimental effect on the options 

markets because of the lack of any 

exposure requirement, ISE stated that 

exchange members arrange large stockoption trades upstairs and then bring 

them to an exchange for execution, and 

that exchange floors accommodate the 

trades by providing a market structure 

in which there is little or no chance that 

members will break up the pre-arranged 

trade.122 ISE believed that, rather than 

harming the options markets, the QCC 

proposal would permit fair competition 

to occur between floor-based and allelectronic options exchanges by 

providing an all-electronic execution 

alternative to floor-based executions.123

The Commission recognizes that 

significant liquidity on options 

exchanges is derived from quotations 

submitted by members of an exchange 

that are registered as market makers.124

Pursuant to the options exchanges’ 

rules, market makers generally are 

required to maintain continuous twosided quotations in their registered 

options for a specified percentage of the 

time, or in a specified number of series 

or classes. One of the perceived benefits 

for market makers with such obligations 

is the opportunity to participate in 

transactions through the exposure 

requirement. As noted above, some 

commenters argue that the lack of 

exposure for QCC Orders would act as 

a disincentive for market maker 

participation.125

While the Commission believes that 

order exposure is generally beneficial to 

options markets in that it provides an 

incentive to options market makers to 

provide liquidity and therefore plays an 

important role in ensuring competition 

and price discovery in the options 

markets, it also has recognized that 

contingent trades can be ‘‘useful trading 

tools for investors and other market 

participants, particularly those who 

trade the securities of issuers involved 

in mergers, different classes of shares of 

the same issuer, convertible securities, 

and equity derivatives such as options 

[italics added]’’.126 and that ‘‘[t]hose who 

engage in contingent trades can benefit 

the market as a whole by studying the 

relationships between the prices of such 

securities and executing contingent 

trades when they believe such 

relationships are out of line with what 

they believe to be fair value.’’ 127 As 

such, the Commission stated that 

transactions that meet the specified 

requirements of the NMS QCT 

Exemption could be of benefit to the 

market as a whole, contributing to the 

efficient functioning of the securities 


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Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / Notices 11541 

128See CBOE QCT Exemption, supra note 13, at 

19273. 

129The Commission notes that it has previously 

permitted the crossing of two public customer 

orders, for which no exposure is required on ISE 

and CBOE. See CBOE Rule 6.74A.09 and ISE Rules 

715(i) and 721. 

130The Commission notes that, in its request to 

remove the block-size requirement of the Original 

QCT Exemption, CBOE stated that the NMS QCT 

Exemption’s other requirements would ensure that 

the exemption was narrowly drawn and limited to 

a small number of transactions. See Letter, dated 

November 28, 2007, from Edward J. Joyce, President 

and Chief Operating Officer, CBOE, to Nancy M. 

Morris, Secretary, Commission, at 1, 4. 

131The Commission notes that the requirement 

that clean crosses be of a certain minimum size is 

not unique to the QCC Order. See, e.g., NSX Rule 

11.12(d), which requires, among other things, that 

a Clean Cross be for at least 5,000 shares and have 

an aggregate value of at least $100,000. 

132See supra notes 83–84 and accompanying text. 

133 Id. 

134See Petition for Review, supra note 22, at 15, 

17. See also Bluefin Statement, supra note 29; Phlx 

Letter, supra note 26; Wolverine Letter, supra note 

26; Group One Letter, supra note 26, at 1; and 

Integral Derivatives Letter, supra note 26. 

135See Group One Letter 2, supra note 4, at 1; and 

CBOE Letter 1, supra note 4, at 2. 

136See LiquidPoint Letter 2, supra note 4, at 2. 

137See supra note 103 and accompanying text. 

138See supra note 13. 

139 15 U.S.C. 78f(b). 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). 

140 15 U.S.C. 78f(b)(5). 

141 15 U.S.C. 78f(b)(8). 

142 15 U.S.C. 78k–1(a)(1)(C). 

143 15 U.S.C. 78s(b)(2). 

markets and the price discovery 

process.128

Thus, in light of the benefits provided 

by both the requirement for exposure as 

well as by qualified contingent trades 

such as QCC Orders, the Commission 

must weigh the relative merits of both 

for the options markets.129 The 

Commission believes that the proposal, 

in requiring a QCC Order to be: (1) Part 

of a qualified contingent trade under 

Regulation NMS; (2) for at least 1,000 

contracts; (3) executed at a price at or 

between the national best bid or offer; 

and (4) cancelled if there is a Priority 

Customer Order on ISE’s limit order 

book, strikes an appropriate balance for 

the options market in that it is narrowly 

drawn 130 and establishes a limited 

exception to the general principle of 

exposure and retains the general 

principle of customer priority in the 

options markets. Furthermore, not only 

must a QCC Order be part of a qualified 

contingent trade by satisfying each of 

the six underlying requirements of the 

NMS QCT Exemption, the requirement 

that a QCC Order be for a minimum size 

of 1,000 contracts provides another limit 

to its use by ensuring only transactions 

of significant size may avail themselves 

of this order type.131

As noted above, some commenters 

argue that the concerns regarding the 

impact of the QCC Order on the 

incentives for liquidity providers are 

heightened by the events of May 6, 

2010.132 Specifically, commenters 

argued that in light of the events of May 

6, 2010, the Commission should not 

improve measures that would create 

disincentives for market makers to 

provide liquidity to the markets.133 The 

Commission recognizes the important 

role liquidity providers play, 

particularly in the options markets, 

which tend to be more quote driven 

than the cash equities markets. In 

addition, the Commission is cognizant 

of the concerns raised by some 

commenters with regard to the events of 

May 6, 2010. However, as discussed 

above, the Commission has weighed the 

relative merits of the QCC Order and of 

the exposure of such orders and believes 

that ISE’s proposal is consistent with 

the Act. 

C. Customer Protection 

In response to concerns that the 

Original QCC Order did not provide 

adequate customer protection because 

the QCC Order would have priority over 

resting customer orders on ISE’s 

books,134 ISE proposes to modify the 

QCC Order to provide for automatic 

cancellation of a QCC Order if there is 

a Priority Customer order on the 

Exchange’s limit order book at the same 

price. The Commission believes that 

this modification to yield to a Priority 

Customer order on the book would 

ensure that QCC Orders do not trade 

ahead of Priority Customer orders at the 

same price, and thus should alleviate 

commenters’ concerns regarding the 

Original QCC Order that customers 

would not receive executions of their 

resting orders, which could also create 

a disincentive to placing limit orders. 

Some commenters objected to the 

Modified QCC Order because they 

believed that a customer order 

submitted as a QCC Order risks 

receiving a fill at an inferior price to the 

price it could have received if it has 

been exposed to the market.135 Another 

commenter was concerned that, while 

the option trade would be within the 

NBBO, the stock trade may be priced 

outside of the market and that ‘‘[t]he 

effect is a valuation for the stock/option 

package * * * unrestricted by 

competition * * * . ’’ 136 In response to 

commenters concerns regarding price 

improvement, ISE argued that the actual 

execution price of each component is 

not as material to the parties as is the 

net price of the transaction and 

accordingly, price improvement of the 

individual legs of the trade is not a 

critical issue in executing the QCC 

Order.137

As discussed above, QCC Orders must 

be for 1,000 or more contracts, in 

addition to meeting all of the 

requirements of the NMS QCT 

Exemption. The Commission believes 

that those customers participating in 

QCC Orders will likely be sophisticated 

investors who should understand that, 

without a requirement of exposure for 

QCC Orders, their order would not be 

given an opportunity for price 

improvement on the Exchange. These 

customers should be able to assess 

whether the net prices they are 

receiving for their QCC Order are 

competitive, and who will have the 

ability to choose among broker-dealers if 

they believe the net price one brokerdealer provides is not competitive. 

Further, broker-dealers are subject to a 

duty of best execution for their 

customers’ orders, and that duty does 

not change for QCC Orders. 

IV. Conclusion 

In sum, the Commission believes that 

ISE’s Modified QCC Order is consistent 

with the NMS QCT Exemption, which 

found that qualified contingent trades 

are of benefit to the market as a whole 

and a contribution to the efficient 

functioning of the securities markets 

and the price discovery process.138 In 

addition, the Exchange’s Modified QCC 

Order is narrowly drawn to provide a 

limited exception to the general 

principle of exposure, and retains the 

general principle of customer priority. 

Accordingly, 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 and, in particular, with 

Section 6(b) of the Act.139 Specifically, 

the Commission finds that the proposal 

is consistent with Sections 6(b)(5) 140

and 6(b)(8) of the Act.141 Further, the 

Commission finds that the proposed 

rule change is consistent with Section 

11A(a)(1)(C) of the Act.142

It is therefore ordered, the proposed 

rule change (SR–ISE–2010–73) is 

approved pursuant to Section 19(b)(2) of 

the Act.143

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2011–4574 Filed 3–1–11; 8:45 am] 

BILLING CODE 8011–01–P 


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