16464 Federal Register / Vol. 76, No. 56 / Wednesday, March 23, 2011 / Notices 

21Pursuant to the Regulatory Contract, both 

FINRA and the Exchange will collect and maintain 

all alerts, complaints, investigations and 

enforcement actions in which NES (in its capacity 

as a facility of Nasdaq routing orders to the 

Exchange) is identified as a participant that has 

potentially violated applicable Commission or 

Exchange rules. The Exchange and FINRA will 

retain these records in an easily accessible manner 

in order to facilitate any potential review conducted 

by the Commission’s Office of Compliance 

Inspections and Examinations. See Notice, supra 

note 3, 76 FR at 8391, n.10 

22See Notice, supra note 3, 76 FR at 8392. 

23See BX Equity Rule 2140(c). See also Notice, 

supra note 3, 76 FR at 8392. 

24See Notice, supra note 3, 76 FR at 8392. The 

Commission notes that the original pilot period of 

twelve months was approved and began on 

December 23, 2008, but was extended several times. 

See Notice, supra note 3, 76 FR at 8391, n.6 and 

accompanying text. 

25See Notice, supra note 3, 76 FR at 8392. 

26See, e.g., Securities Exchange Act Release Nos. 

54170 (July 18, 2006), 71 FR 42149 (July 25, 2006) 

(SR–NASDAQ–2006–006) (order approving 

Nasdaq’s proposal to adopt Nasdaq Rule 2140, 

restricting affiliations between Nasdaq and its 

members); 53382 (February 27, 2006), 71 FR 11251 

(March 6, 2006) (SR–NYSE–2005–77) (order 

approving the combination of the New York Stock 

Exchange, Inc. and Archipelago Holdings, Inc.); 

58673 (September 29, 2008), 73 FR 57707 (October 

8, 2008) (SR–Amex–2008–62) (order approving the 

combination of NYSE Euronext and the American 

Stock Exchange LLC); 59135 (December 22, 2008), 

73 FR 79954 (December 30, 2008) (SR–ISE–2009– 

85) (order approving the purchase by ISE Holdings 

of an ownership interest in DirectEdge Holdings 

LLC); and 59281 (January 22, 2009), 74 FR 5014 

(January 28, 2009) (SR–NYSE–2008–120) (order 

approving a joint venture between NYSE and BIDS 

Holdings L.P.). 

27This oversight will be accomplished through 

the 17d–2 Agreement between FINRA and the 

Exchange and the Regulatory Contract. 

28 15 U.S.C. 78s(b)(2). 

29 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 63761 

(January 25, 2011), 76 FR 5412 (‘‘Notice’’). 

4An IXPMM is defined in new ISE Rule 2013(a) 

as a primary market maker in Eligible Index 

Options traded on the Exchange pursuant to new 

ISE Rule 2013. 

5An IXCMM is defined in new ISE Rule 2013(a) 

as a competitive market maker in Eligible Index 

Options traded on the Exchange pursuant to new 

ISE Rule 2013. 

retains ultimate responsibility for 

enforcing its rules with respect to NES. 

• Second, FINRA will monitor NES 

for compliance with the Exchange’s 

trading rules, and will collect and 

maintain certain related information.21

• Third, FINRA will provide a report 

to the Exchange’s chief regulatory 

officer (‘‘CRO’’), on a quarterly basis, 

that: (i) Quantifies all alerts (of which 

FINRA is aware) that identify NES as a 

participant that has potentially violated 

Commission or Exchange rules, and (ii) 

lists all investigations that identify NES 

as a participant that has potentially 

violated Commission or Exchange 

rules.22

• Fourth, the Exchange has adopted 

BX Equity Rule 2140(c), which requires 

NASDAQ OMX, as the holding 

company owning both the Exchange and 

NES, to establish and maintain 

procedures and internal controls 

reasonably designed to ensure that NES 

does not develop or implement changes 

to its system, based on non-public 

information obtained regarding planned 

changes to the Exchange’s systems as a 

result of its affiliation with the 

Exchange, until such information is 

available generally to similarly situated 

Exchange members, in connection with 

the provision of inbound order routing 

to the Exchange.23

• Fifth, routing of orders from NES to 

the Exchange, in NES’s capacity as a 

facility of Nasdaq, was authorized for a 

pilot period of twelve months.24

The Exchange believes that by 

meeting the above-listed conditions it 

has set up mechanisms that protect the 

independence of the Exchange’s 

regulatory responsibility with respect to 

NES, and has demonstrated that NES 

cannot use any information advantage it 

may have because of its affiliation with 

the Exchange.25

In the past, the Commission has 

expressed concern that the affiliation of 

an exchange with one of its members 

raises potential conflicts of interest, and 

the potential for unfair competitive 

advantage.26 Although the Commission 

continues to be concerned about 

potential unfair competition and 

conflicts of interest between an 

exchange’s self-regulatory obligations 

and its commercial interest when the 

exchange is affiliated with one of its 

members, for the reasons discussed 

below, the Commission believes that it 

is consistent with the Act to permit NES 

to provide inbound routing to the 

Exchange on a permanent basis instead 

of a pilot basis, subject to the other 

conditions described above. 

The Exchange has proposed four 

ongoing conditions applicable to NES’s 

routing activities, which are enumerated 

above. The Commission believes that 

these conditions mitigate its concerns 

about potential conflicts of interest and 

unfair competitive advantage. In 

particular, the Commission believes that 

FINRA’s oversight of NES,27 combined 

with FINRA’s monitoring of NES’s 

compliance with the equity trading 

rules and quarterly reporting to the 

Exchange’s CRO, will help to protect the 

independence of the Exchange’s 

regulatory responsibilities with respect 

to NES. The Commission also believes 

that BX Equity Rule 2140(c) is designed 

to ensure that NES cannot use any 

information advantage it may have 

because of its affiliation with the 

Exchange. 

V. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,28 that the 

proposed rule change (SR–BX–2011– 

007) be, and hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.29

Cathy H. Ahn, 

Deputy Secretary. 

[FR Doc. 2011–6785 Filed 3–22–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–64091; File No. SR–ISE– 

2011–04] 

Self-Regulatory Organizations; 

International Securities Exchange, 

LLC; Order Approving a Proposed 

Rule Change To Establish New 

Classes of Market Makers for Index 

Options 

March 17, 2011. 

I. Introduction 

On January 12, 2011, 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 

amend its rules to establish two new 

classes of market makers for index 

options traded on the Exchange. The 

proposed rule change was published for 

comment in the Federal Register on 

January 31, 2011.3 The Commission 

received no comments regarding the 

proposal. This order approves the 

proposed rule change. 

II. Description of the Proposal 

The Exchange proposed to amend its 

rules to establish the following new 

classes of market makers for certain 

index options traded on the Exchange: 

Index Options Primary Market Makers 

(‘‘IXPMM’’) 4 and Index Options 

Competitive Market Makers 

(‘‘IXCMM’’),5 collectively referred to as 

IXMMs. 

The Exchange’s proposal to separate 

out and introduce a new class of market 

maker trading licenses that are specific 

to index options is intended to allow an 

opportunity for additional market 


jlentini on DSKJ8SOYB1PROD with NOTICES
Federal Register / Vol. 76, No. 56 / Wednesday, March 23, 2011 / Notices 16465 

6See Notice, supra note 3, 76 FR at 5412. An 

IXMM license, by itself, would not allow the holder 

thereof to trade in equity or ETF options traded on 

the Exchange. 

7 IXMM trading licenses will not represent 

ownership of any equity interest in the Exchange. 

8For example, if an index has a trading history 

for just three months in the US market, the prorated 

eligibility threshold applied by ISE would be 20,000 

ADV. 

9The Exchange currently follows this process 

with regards to the listing of all equity (including 

ETF) and index option products traded on the 

Exchange. 

10See new ISE Rule 2013(c)(2). 

11As of December 31, 2010, the following indexes 

are Legacy Index Options: Mini FTSE 100 (symbol, 

UKX); ISE Semiconductors (BYT); ISE Electronic 

Trading (DMA); ISE-Revere Natural Gas (FUM); ISE 

Water (HHO); ISE Homeland Security (HSX); ISE 

Long Gold (HVY); ISE 250 (IXZ); ISE U.S. Regional 

Banks (JLO); ISE Oil and Gas Services (OOG); ISE 

Integrated Oil and Gas (PMP); ISE BioPharmaceuticals (RND); ISE Homebuilders (RUF); 

ISE SINdex (SIN); ISE Nanotechnology (TNY); ISE 

Revere Wal-Mart Supplier (WMX); KBW Bank 

Index (BKX); KBW Mortgage Finance Index (MFX); 

Morgan Stanley Technology Index (MSH); Morgan 

Stanley Retail Index (MVR); Nasdaq Q–50 Index 

(NXTQ); Mini-Russell 2000 (RMN); Russell 1000 

Index (RUI); S&P Mid Cap 400 Index (MID); 

Standard & Poor’s Small Cap 600 Index (SML). 

12 In other words, the delisting of a Legacy Index 

Option terminates its status as a Legacy Index 

Option for purposes of new ISE Rule 2013. 13See new ISE Rule 2013(c)(3) and (e)(1). 14See new ISE Rule 2013(e)(1). The Board or 

designated committee, however, may suspend or 

terminate any trading license of a market maker 

whenever, in the Board’s or designated committee’s 

judgment, the interests of a fair and orderly market 

are best served by such action. See new ISE Rule 

2013(e)(1). 

15See Securities Exchange Act Release No. 55575 

(April 3, 2007), 72 FR 17963, 17964 (April 10, 2007) 

(SR–ISE–2006–59). 

16See Chapter 17 of ISE Rules. 

17See supra note 14. 

participants, who are not currently 

maker makers on the Exchange’s First 

Market, to trade new index options as 

index-specific market makers.6

Because the Exchange’s proposal 

primarily focuses on newly-listed index 

products, the proposal describes how 

the existing 28 cash-settled indexes 

traded on the Exchange will be treated. 

Specifically, index options listed on the 

Exchange prior to December 31, 2010 

(‘‘Legacy Index Options’’) already have 

an PMM assigned. The proposal does 

not affect those assignments, and such 

PMMs will simply continue to function 

as PMMs (i.e., as an IXPMM) in its 

currently-assigned index option(s). In 

addition, except as provided above, the 

proposal provides that all current and 

future First Market PMMs and CMMs 

may trade (as an IXCMM) all existing 

and future index products, including 

both Legacy Index Options and Eligible 

Index Options without having to 

purchase a separate IXCMM trading 

license. Market participants that are not 

currently a PMM or CMM on the 

Exchange’s First Market will be required 

to purchase a new IXMM license in 

order to trade in index options on the 

Exchange.7

Eligible Index Options. New ISE Rule 

2013(c) defines ‘‘Eligible Index Options’’ 

as: (i) Index options that have a 6-month 

average daily volume of less than 10,000 

contracts in the US market; and (ii) 

index options that have a trading history 

of less than 6 months, in which case the 

eligibility threshold would be prorated 

proportionately over the time that an 

index was listed in the US market.8

Prior to the listing of an Eligible Index 

Option, the Exchange will conduct a 

one-time eligibility test to determine 

whether an index product is an Eligible 

Index Option. The Exchange will 

conduct the eligibility test when an 

index product is qualified for listing 

under ISE rules and prior to its 

certification with the Options Clearing 

Corporation.9 The following index 

products are not Eligible Index Options: 

Russell 2000 Index (‘‘RUT’’), the 

NASDAQ–100 Index (‘‘NDX’’), and the 

Mini-NASDAQ–100 Index (‘‘MNX’’).10

Legacy Index Options. ISE defines 

Legacy Index Options as index options 

listed on the Exchange prior to 

December 31, 2010.11 New ISE Rule 

2013(c)(3) provides that the current First 

Market PMM that has an allocation as 

PMM in a particular Legacy Index 

Option will be deemed to be the IXPMM 

for Legacy Index Options and, 

accordingly, will not need to purchase 

an IXPMM license to continue to trade 

as an IXPMM in that Legacy Index 

Option. In the event a Legacy Index 

Option is de-listed and subsequently relisted, ISE will allocate the IXPMM 

license for that index through the 

auction process described in Rule 

2013.12

There will be one IXPMM per each 

Eligible Index Option and Legacy Index 

Option.13 IXPMM trading licenses shall 

be permanently granted as long as the 

IXPMM meets its stated market quality 

commitments.14 By contrast, all IXCMM 

trading licenses will be for a term of one 

year. 

Allocations Generally. Traditionally, 

new index products on the Exchange 

have been allocated as part of the 

general allocation to ISE’s ‘‘First 

Market,’’ which is the general market for 

higher-volume equity, ETF and index 

options. The Exchange states that it will 

offer IXMM trading licenses in a manner 

similar to how it offers foreign currency 

(‘‘FX’’) options trading licenses to FX 

market makers.15 IXPMM allocations 

will be based on the same methodology 

ISE currently uses for FXPMMs in its FX 

products, which is based, in part, on 

market quality commitments. 

IXPMM Allocations for Eligible Index 

Options. Current and future First Market 

PMMs/CMMs may acquire an IXPMM 

trading license by participating in an 

auction, which involves the submission 

of a monetary bid and market quality 

commitments. 

IXPMM trading licenses will be sold 

by means of a sealed bid auction 

conducted by the Exchange. A separate 

auction would be conducted for each 

index option for which ISE seeks to 

allocate an IXPMM. The ‘‘winning’’ bid 

at which an IXPMM trading license is 

sold is referred to as the ‘‘Auction Price.’’ 

Together with its bid, a member seeking 

an IXPMM trading license must provide, 

at a minimum, market quality 

commitments regarding: (1) The average 

quotation size it will disseminate in an 

Eligible Index Option; and (2) the 

maximum quotation spread it will 

disseminate in such product at least 

90% of the time. At the end of the 

auction, the Exchange will determine 

the winning bidder for an IXPMM 

trading license based on bid amount and 

market quality commitment, and may 

reject a bid if the Exchange deems a 

market quality commitment to be 

unrealistic or significantly inferior to 

market quality commitments submitted 

by other bidding members. In an auction 

for a trading right for an Eligible Index 

Option, ISE will give preferred 

consideration to a First Market PMM/ 

CMM where bid and quality 

commitments are equal to those 

submitted by a new member who is not 

a First Market PMM/CMM. 

Once allocated, the IXPMM may 

change its market quality commitment 

only to the extent that the new 

commitments are an improvement to its 

existing commitment. Under new Rule 

2013(e)(4), the Exchange will review 

and assess market quality commitments 

on a quarterly basis to ensure IXPMMs 

are in compliance with their stated 

commitments. At the discretion of the 

Exchange and subject to the procedural 

protections provided under the rules of 

the Exchange,16 failure to meet stated 

commitments may result in ISE 

terminating an allocation and 

conducting an auction to reallocate the 

failing IXPMM’s index option.17

IXCMM Allocations. Current and 

future First Market PMMs may request, 

and if requested will be allocated, an 

IXCMM trading license without having 

to pay any additional fee. A member 

who is not a First Market PMM/CMM 

will be required to purchase an IXCMM 

trading license to trade as an IXCMM on 

the Exchange. IXCMM trading licenses 

will be available for purchase at any 


jlentini on DSKJ8SOYB1PROD with NOTICES
16466 Federal Register / Vol. 76, No. 56 / Wednesday, March 23, 2011 / Notices 

18 IXCMM trading licenses sold during a calendar 

year will be prorated to reflect the number of 

trading days in the year. See new ISE Rule 

2013(f)(2). 

19See Notice, supra note 3, 76 FR at 5414. 

20For example, IXPMMs will enjoy privileges that 

include, among other things, participation rights 

and small order execution preference while 

accepting responsibilities that include, among other 

things, the obligation to provide continuous 

quotations in an Eligible Index Option for which it 

has been allocated, to conducting the opening 

rotation on a daily basis for as long as the IXPMM 

retains an allocation in an Eligible Index Option. 

21 15 U.S.C. 78f(b)(5). 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). 

22See supra note 20. 

23See new ISE Rule 2013(e)(3). 

24See new ISE Rule 2013(e)(4). 

25See new ISE Rule 2013(f). 

26 15 U.S.C. 78s(b)(2). 

27 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

time during a calendar year.18 All 

IXCMM trading licenses will expire at 

the end of the calendar year in which 

they are issued but, upon request by a 

PMM or CMM, will be renewed for 

subsequent years on an annual basis.19

IXMM Duties and Privileges. By 

amending ISE Rule 802(b) to permit the 

allocation of Eligible Index Options, 

subject to new Rule 2013, ISE is 

subjecting market makers in Eligible 

Index Options to the obligations 

imposed on Exchange market makers 

under Chapter 8 of the Exchange’s rules. 

Accordingly, once an IXPMM obtains a 

trading license in an Eligible Index 

Option, the IXPMM will have all of the 

responsibilities and privileges of a PMM 

under the Exchange’s rules.20 Similarly, 

once an IXCMM obtains a trading 

license in an Eligible Index Option, the 

IXCMM will have all the responsibilities 

and privileges under the Exchange’s 

rules. 

After an IXPMM has purchased a 

trading license, the IXPMM may 

terminate its status as IXPMM in an 

index option if the IXPMM is unable to 

meet its obligations, provided the 

IXPMM gives at least 60 days prior 

written notice to the Exchange of such 

termination. In the event the Exchange 

is unable to re-allocate the IXPMM’s 

index option product within the notice 

period and the index option product is 

singly listed on ISE, then the IXPMM 

will be required to continue to fulfill its 

obligations in that product until all 

open interest has been closed. An 

IXCMM may terminate its trading 

license prior to its scheduled expiration 

by providing at least 10 days prior 

written notice to the Exchange. 

III. Discussion 

The Commission finds that the 

proposed rule change is consistent with 

the requirements of Section 6(b)(5) of 

the Act,21 which requires, 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. 

The Commission believes that the 

provisions governing the two new 

classes of market makers that will be 

permitted to trade Eligible Index 

Options and Legacy Index Options on 

the Exchange, IXPMMs and IXCMMs, 

are consistent with the Act. The 

Commission notes that IXPMMs and 

IXCMMs will be subject to identical 

obligations that correspond to the 

market making obligations applicable to 

First Market PMMs and CMMs, 

respectively.22 The Commission notes 

that, to obtain a trading license, 

IXPMMs will be required to provide the 

Exchange with market quality 

commitments 23 and, if an IXPMM 

continuously fails to meet its stated 

market quality commitments, the 

Exchange may terminate its IXPMM 

allocation.24

The Commission believes that the 

procedures under which the Exchange 

proposes to offer IXMM licenses are 

reasonably designed to award such 

allocations in a fair and reasonable 

manner. In particular, the Commission 

believes that provisions governing 

IXCMM trading licenses are designed to 

ensure that market maker trading 

licenses will be widely available 

because the Exchange will make an 

unlimited amount of IXCMM licenses 

available for purchase by members who 

are not PMMs or CMMs on the 

Exchange’s First Market.25 In addition, 

the requirement that bidders provide 

market quality commitment in addition 

to their bid for an IXPMM allocation 

will allow the Exchange to grant IXPMM 

trading licenses in an objective manner 

without awarding a trading license 

solely based on the highest bid. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,26 that the 

proposed rule change (SR–ISE–2011–04) 

be, and hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.27

Cathy H. Ahn, 

Deputy Secretary. 

[FR Doc. 2011–6786 Filed 3–22–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–64095; File No. SR–EDGX– 

2011–06] 

Self-Regulatory Organizations; Notice 

of Filing and Order Granting 

Accelerated Approval of Proposed 

Rule Change by EDGX Exchange, Inc. 

To Delete the Description of and All 

References to Step-Up Orders in EDGX 

Rules 

March 18, 2011. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (‘‘Act’’)1

and Rule 19b–4 thereunder,2 notice is 

hereby given that on March 10, 2011, 

EDGX Exchange, Inc. (‘‘EDGX’’ or 

‘‘Exchange’’) 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, and is 

approving the proposal on an 

accelerated basis. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend its 

Rules 11.5(c)(11) and Rule 11.9(b)(1)(C) 

to delete the description of and all 

references to Step-Up orders. The text of 

the proposed rule change is attached as 

Exhibit 5 and is available on the 

Exchange’s Web site at 

http:/www.directedge.com, at the 

Exchange’s principal office, and at the 

Public Reference Room of the 

Commission. 

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. 


jlentini on DSKJ8SOYB1PROD with NOTICES