17466 Federal Register / Vol. 76, No. 60 / Tuesday, March 29, 2011 / Notices 

21 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. 53103 

(January 11, 2006), 71 FR 3144. 

4See letters to Nancy M. Morris, Secretary, 

Commission, from Thomas Peterffy, Chairman, and 

David M. Battan, Vice President, Interactive Brokers 

Group, dated February 10, 2006 (‘‘IB Letter’’) and 

Adam C. Cooper, Senior Managing Director & 

General Counsel, Citadel, dated February 27, 2006 

(‘‘Citadel Letter’’), incorporating by reference a letter 

from Adam C. Cooper, Senior Managing Director & 

General Counsel, Citadel, dated January 11, 2006 

(‘‘Citadel Letter II’’). 

In reviewing this proposed rule change, the 

Commission also considered a comment letter by 

the American Stock Exchange in response to a 

proposed rule change submitted by the ISE to 

amend ISE Rule 811 to allow the identity of a firm 

entering a Directed Order to be disclosed to a DMM 

on a temporary basis, which became immediately 

effective upon filing with the Commission. See 

Securities Exchange Act Release No. 53104 (January 

11, 2006), 71 FR 3142 January 19, 2006 (SR–ISE– 

2006–02). See also letter to Nancy M. Morris, 

Secretary, Commission, from Neal L. Wolkoff, 

Chairman & Chief Executive Officer, American 

Stock Exchange, dated February 3, 2006 (‘‘Amex 

Letter’’) and February 7, 2006 (‘‘Amex Letter II’’). 

5See Securities Exchange Act Release No. 52331 

(August 24, 2005), 70 FR 51856 (August 31, 2005) 

(SR–ISE–2004–16). 6See ISE Rule 723. 7See Securities Exchange Act Release No. 53104 

(January 11, 2006), 71 FR 3142 (January 19, 2006) 

(rule change was effective until June 30, 2006). The 

Commission received three comment letters 

regarding the temporary system change. See IB 

Letter, Amex Letter, and Amex Letter II, supra note 

4. 

8See Securities Exchange Act Release Nos. 53104 

(January 11, 2006), 71 FR 3142 January 19, 2006 

(SR–ISE–2006–02); 54083 (June 30, 2006), 71 FR 

38920 (July 10, 2006) (SR–ISE–2006–35); 54542 

(September 29, 2006), 71 FR 59170 (October 6, 

2006) (SR–ISE–2006–57); 55144 (January 22, 2007), 

72 FR 3890 (January 26, 2007) (SR–ISE–2007–05); 

56155 (July 27, 2007), 72 FR 43306 (August 3, 2007) 

(SR–ISE–2007–67); 59176 (January 24, 2008), 73 FR 

5615 (January 30, 2008) (SR–ISE–2008–08); 59276 

(January 22, 2009), 74 FR 5007 (January 28, 2009) 

(SR–ISE–2009–02); 59943 (May 20, 2009), 74 FR 

25296 (May 27, 2009) (SR–ISE–2009–28); 60956 

(November 6, 2009), 74 FR 58674 (November 13, 

2009) (SR–ISE–2009–93); and 63357 (November 22, 

2010), 75 FR 73144 (November 29, 2010) (SR–ISE– 

2010–110). 

9Citadel argues that this proposal facilitates anticompetitive behavior and therefore violates Section 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–CBOE–2011–024 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington DC 

20549–1090. 

All submissions should refer to File 

Number SR–CBOE–2011–024. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of such filing 

also will be available for inspection and 

copying at the principal office of the 

Exchange. All comments received will 

be posted without change; the 

Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File No. SR–CBOE– 

2011–024 and should be submitted on 

or before April 19, 2011. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.21

Cathy H. Ahn, 

Deputy Secretary. 

[FR Doc. 2011–7264 Filed 3–28–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–64115; File No. SR–ISE– 

2006–01] 

Self-Regulatory Organizations; 

International Securities Exchange, Inc. 

(n/k/a the International Securities 

Exchange, LLC); Order Approving a 

Proposed Rule Change To Amend 

Exchange Rule Governing Directed 

Orders 

March 23, 2011. 

I. Introduction 

On January 5, 2006, the International 

Securities Exchange, Inc. (n/k/a 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 proposal to amend ISE 

Rule 811 to allow the identity of a firm 

entering a Directed Order to be 

disclosed to a Directed Market Maker 

(‘‘DMM’’). The proposed rule change was 

published for comment in the Federal 

Register on January 19, 2006.3 The 

Commission received comment letters 

from the Interactive Brokers Group 

supporting the proposal, and from 

Citadel opposing the proposal.4 This 

order approves the proposed rule 

change. 

II. Description of the Proposal 

The Exchange currently operates a 

Directed Order system in which 

Electronic Access Members (‘‘EAMs’’) 

can send an order to a DMM for possible 

price improvement.5 If a DMM accepts 

Directed Orders generally, that DMM 

must accept all Directed Orders from all 

EAMs. Once such a DMM receives a 

Directed Order, it either (i) must enter 

the order into the Exchange’s Price 

Improvement Mechanism (‘‘PIM’’) 

auction and guarantee its execution at a 

price better than the ISE best bid or offer 

(‘‘ISE BBO’’) by at least a penny and 

equal to or better than the National Best 

Bid and Offer (‘‘NBBO’’) 6 or (ii) must 

release the order into the Exchange’s 

limit order book, in which case there are 

certain restrictions on the DMM 

interacting with the order. 

On January 5, 2006, ISE filed a 

proposed rule change, which became 

immediately effective upon filing with 

the Commission, to alter its existing 

Directed Order system on a temporary 

basis so that the system would disclose 

the identity of the firm entering a 

Directed Order to a DMM.7 The rule 

permitting the ISE system to identify to 

DMMs the firm from which a Directed 

Order originates continues to operate on 

a pilot basis through May 31, 2011.8 ISE 

proposes in this filing to amend ISE 

Rule 811 to permit the identity of an 

EAM that enters a Directed Order to be 

made available to the DMM and thus to 

make permanent its rule change that has 

been operating on a pilot basis for the 

past five years. 

III. Discussion 

After careful review of the proposal 

and of the comment letters, 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 9 and, in 


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Federal Register / Vol. 76, No. 60 / Tuesday, March 29, 2011 / Notices 17467 

3(f) of the Act. See Citadel Letter II, supra note 4, 

at 6. Section 3(f) of the Act requires the Commission 

to consider or determine whether this proposed rule 

change is necessary or appropriate in the public 

interest and, in addition to the protection of 

investors, will promote efficiency, competition, and 

capital formation. In approving this proposed rule 

change, the Commission has considered the 

proposed rule’s impact on efficiency, competition, 

and capital formation. As discussed below, the 

Commission does not believe the proposal is anticompetitive. 15 U.S.C. 78c(f). 

10 15 U.S.C. 78f. 

11 15 U.S.C. 78f(b)(5). 

12See Citadel Letter II, supra note 4, at 4–5. 

13 15 U.S.C. 78f(b)(5). See Citadel Letter II, supra 

note 4, at 5; and Amex Letter, supra note 4, at 2. 

14See also Chapter V, Section 18 of the Boston 

Options Exchange Rules (Price Improvement 

Period) and Rule 6.74A of the Chicago Board 

Options Exchange, Incorporated (Automated 

Improvement Mechanism). 

15Specialists and other market makers may 

establish payment for order flow relationships with 

firms on a discretionary basis. A specialist or 

market maker may pay varying amounts for order 

flow received from different firms or different 

customers within firms. Unlike payment for order 

flow, which principally benefits intermediaries and, 

indirectly, their customers through possibly lower 

fees and better services, customers’ orders executed 

through the PIM auction directly benefit customers 

with the opportunity for an improved price. 

16See Citadel Letter II, supra note 4, at 8–9. 

17See Robert Battalio, ‘‘Third Market BrokerDealers: Cost Competitors or Cream Skimmers?’’ 

Journal of Finance, 1997; and Robert Battalio, 

Robert Jason Greene, and Robert Jennings, ‘‘How Do 

Competing Specialists and Preferencing Dealers 

Affect Market Quality?’’ Review of Financial 

Studies, 1997. 

18See Securities Exchange Act Release No. 60405 

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

particular, the requirements of Section 6 

of the Act.10 Specifically, as discussed 

below, the Commission finds that the 

proposed rule change is consistent with 

Section 6(b)(5) of the Act,11 which 

requires, among other things, that the 

rules of a national securities exchange 

be designed to prevent fraudulent and 

manipulative acts and practices, to 

promote just and equitable principles of 

trade, to foster cooperation and 

coordination with persons engaged in 

regulating, clearing, settling, and 

processing information with respect to, 

and facilitating transactions in 

securities, 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 are 

not designed to permit unfair 

discrimination among customers, 

issuers, brokers, or dealers. 

A. Proposal is Not Unfairly 

Discriminatory 

Under the proposal, the ISE system 

would provide the identity of an EAM 

that enters a Directed Order to the DMM 

to whom the order is directed. Citadel 

argues that the lack of anonymity of 

Directed Orders allows the DMM 

receiving such orders to discriminate in 

its determination regarding for which 

orders the DMM would provide an 

opportunity for price improvement 

through the ISE’s PIM auction.12 The 

principal criticism of ISE’s proposal is 

that it is inconsistent with the 

requirement in Section 6(b)(5) of the Act 

that the rules of an exchange not be 

‘‘designed to permit unfair 

discrimination between customers, 

issuers, brokers, or dealers.’’ 13 Section 

6(b)(5) of the Act prohibits an exchange 

from establishing rules that treat these 

market participants in an unfairly 

discriminatory manner. Section 6(b)(5) 

of the Act does not prohibit exchange 

members or other broker-dealers from 

discriminating, so long as their activities 

are otherwise consistent with the 

Federal securities laws. Nor does 

Section 6(b)(5) of the Act require 

exchanges to preclude discrimination by 

broker-dealers. Broker-dealers 

commonly differentiate between 

customers based on the nature and 

profitability of their business. 

Currently under ISE’s rules, an EAM 

may provide an opportunity for price 

improvement to a customer order by 

submitting it to the PIM. An EAM may 

decide who to accept as its customers 

and further choose to provide an 

opportunity for price improvement to 

some customer orders, but not others, by 

exercising discretion as to whether it 

chooses to send a particular order to the 

PIM auction.14 An EAM would know 

the identity of its customer in deciding 

whether to provide this opportunity for 

price improvement. A DMM may also 

provide an opportunity for price 

improvement to Directed Orders by 

submitting them to the PIM. The 

proposed rule change would enable a 

DMM to consider the identity of the 

EAM directing the order when deciding 

whether to provide an opportunity for 

price improvement.15 Thus, the 

proposal will provide information to 

DMMs that is the same information 

available to other ISE members when 

they decide whether to provide price 

improvement to a particular order. 

While customer anonymity may be 

valuable in ensuring that broker-dealers 

comply with legal obligations in a 

variety of circumstances, such as market 

makers’ firm quote obligations, 

customer anonymity is not required of 

exchanges, particularly when disclosure 

of customer identity could provide 

benefits to certain customers beyond 

those required by the Federal securities 

laws or exchange rules. In particular, 

market makers may be willing to offer 

better execution prices to certain 

customers’ orders (e.g., retail customers’ 

orders). The Commission does not 

believe that it would be inconsistent 

with the Federal securities laws for the 

Exchange to provide, under the 

circumstances set forth in this proposal, 

the means for DMMs to differentiate 

between customers in providing price 

improvement or other non-required 

advantages to certain customers. The 

Exchange’s proposal treats all DMMs the 

same and establishes no requirements 

for which orders a DMM chooses to 

provide an opportunity for price 

improvement. The Commission does not 

believe that the absence of Exchange 

rules specifying which orders a DMM 

may execute at prices better that its 

public quote is unfairly discriminatory. 

Accordingly, while the proposal 

would permit a DMM to discriminate 

among customers in providing prices 

better than its quote, the Commission 

does not believe that this discrimination 

is inconsistent with Section 6(b)(5) of 

the Act. 

B. Impact of Proposal on Market Quality 

and Competition 

Citadel argues that the proposal 

would discourage aggressive quoting 

and would be detrimental to price 

improvement.16 The Commission has 

considered this comment and does not 

believe that the rule change proposed by 

ISE would discourage DMMs from 

quoting aggressively. The Commission 

believes that a DMM has an incentive to 

quote aggressively to gain priority with 

respect to orders entered on the limit 

order book. Further, the Commission 

believes that the commenter’s argument 

that the proposal will harm market 

quality rests on a number of premises 

that are unlikely to occur. The 

commenter assumes that ISE’s proposal 

will lead to less aggressive quoting 

across all options exchanges and a 

widening of the NBBO. The 

Commission does not believe that this 

will occur because there is rigorous 

competition for order flow across 

options exchanges so any widening of 

quotes on one market is an opportunity 

for another option market to capture 

order flow.17 In fact, the Options Order 

Protection and Locked/Crossed Market 

Plan provides protection from one 

exchange ignoring better quoted prices 

on another market and will continue to 

promote quote competition across 

options exchanges.18

In addition, allowing a DMM to know 

the identity of firms sending Directed 

Orders may provide further incentive to 

that DMM to provide price 

improvement. A DMM that receives a 

Directed Order would be required to 

decide whether to send the order to the 


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17468 Federal Register / Vol. 76, No. 60 / Tuesday, March 29, 2011 / Notices 

19See Stoll, H. R., ‘‘The supply of dealer services 

in securities of markets,’’ Journal of Finance 33 

(1978), at 1133–51; Glosten, L. and P. Milgrom, ‘‘Bid 

ask and transaction prices in a specialist market 

with heterogeneously informed agents,’’ Journal of 

Financial Economics 14 (1985), at 71–100; and 

Copeland, T., and D. Galai, ‘‘Information effects on 

the bid-ask spread,’’ Journal of Finance 38 (1983), 

at 1457–69. 

20 Id. 

21See Citadel Letter II, supra note 4, at 6. 

22See Securities Exchange Act Release No. 37542 

(August 8, 1996) (File No. 3–8919) (Report Pursuant 

to Section 21(a) of the Securities Exchange Act of 

1934 Regarding the NASD and the Nasdaq Market), 

at 5. 

23See Citadel Letter II, supra note 4, at 6. 

24See Securities Exchange Act Release No. 37542, 

supra note 22, at 59. 

25See ISE Rule 811(e). 

26See Amex Letter, supra note 4, at 2. 

27 Id. 

28 15 U.S.C. 78f(b)(5). 

29 15 U.S.C. 78s(b)(2). 

30 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3A Registered Options Trader (‘‘ROT’’) includes a 

Streaming Quote Trader (‘‘SQT’’), a Remote 

Streaming Quote Trader (‘‘RSQT’’) and a Non-SQT 

ROT, which by definition is neither a SQT or a 

RSQT. A ROT is defined in Exchange Rule 1014(b) 

as a regular member or a foreign currency options 

participant of the Exchange located on the trading 

floor who has received permission from the 

Exchange to trade in options for his own account. 

See Exchange Rule 1014(b)(i) and (ii). 

4A Specialist is an Exchange member who is 

registered as an options specialist pursuant to Rule 

1020(a). 

PIM and guarantee a price better than 

the ISE BBO and equal to or better than 

the NBBO to such order, or to release 

the order to the book. The DMM’s 

decision about whether to choose to 

guarantee a particular order at a price 

better than the ISE BBO and equal to or 

better than the NBBO may be affected by 

this proposal because it provides DMMs 

with information to differentiate 

between orders from informed traders 

(i.e., their competitors) and orders from 

uninformed traders. It is well known in 

academic literature and industry 

practice that prices tend to move against 

market makers after trades with 

informed traders, often resulting in 

losses for market makers.19 Thus, there 

is a strong economic rationale for 

market makers not providing informed 

traders price improvement. Uninformed 

investors end up bearing the cost of 

these market maker losses through 

wider spreads that market makers need 

to quote to uninformed investors due to 

informed order flow.20

Citadel also argues that the 

Commission has previously sought to 

eliminate similar anti-competitive 

practices allowed by self-regulatory 

organizations (‘‘SROs’’) involving lack of 

order anonymity.21 In particular, Citadel 

cites a 1996 investigation of NASD and 

Nasdaq Stock Market in which ‘‘[s]ome 

market makers, without disclosure to 

their customers, shared information 

with each other about their customers’ 

orders, including the size of the order 

and, on occasion, the identity of the 

customer.’’ 22 Citadel asserts that the 

‘‘Commission concluded that this anticompetitive behavior violated the 

antifraud provisions of the Exchange 

Act, among other provisions.’’ 23

The Commission does not believe that 

the proposal will result in market maker 

conduct like that in the NASD case, 

which found that market makers were 

collaborating with other market 

participants against the interests of their 

customers contrary to the fair dealing 

obligations of market makers.24 Unlike 

the NASD case, the interests of the 

DMM’s customers are not harmed by 

this proposal because information 

pertaining to a DMM’s Directed Orders 

is not shared among competing DMMs 

and all orders sent to ISE must be 

executed at a price no worse than the 

NBBO.25

Finally, Amex contends that the 

proposal is anti-competitive because 

providing the identity of an EAM to 

DMMs provides them with the ability to 

enter into anti-competitive customer 

allocation arrangements.26 Amex argues 

that if ISE Market Makers know the 

identities of order flow providers, they 

could agree to allocate those order flow 

providers among themselves and 

provide price improvement to only 

those that each has been allocated.27

There is, however, no evidence that 

customer allocation arrangements exist 

between Market Makers. The 

Commission is today approving only the 

proposed rule change, which permits a 

DMM to determine from which EAM it 

will accept Directed Orders. The 

Commission is not approving any 

customer allocation arrangements 

among Market Makers. 

For the foregoing reasons, the 

Commission finds that the proposed 

rule change is consistent with the Act 

and the rules and regulations 

thereunder applicable to a national 

securities exchange, and, in particular 

with Section 6(b)(5) of the Act.28

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,29 that the 

proposed rule change (SR–ISE–2006–01) 

is approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.30

Cathy H. Ahn, 

Deputy Secretary. 

[FR Doc. 2011–7285 Filed 3–28–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–64113; File No. SR–Phlx– 

2011–36] 

Self-Regulatory Organizations; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change by NASDAQ 

OMX PHLX LLC Relating to the Equity 

Options Monthly Cap 

March 23, 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 17, 

2011, NASDAQ OMX PHLX LLC (‘‘Phlx’’ 

or ‘‘Exchange’’) filed with the Securities 

and Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III 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. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend the 

Exchange’s Fee Schedule to lower the 

monthly cap applicable to Registered 

Options Traders (‘‘ROTs’’) 3 and 

Specialists 4 for equity options 

transactions. The Exchange also 

proposes to assess a $0.05 per contract 

fee on ROTs and Specialists in certain 

circumstances when they have reached 

the monthly cap. 

While changes to the Fee Schedule 

pursuant to this proposal are effective 

upon filing, the Exchange has 

designated these changes to be operative 

on April 1, 2011. 

The text of the proposed rule change 

is available on the Exchange’s Web site 

at http://nasdaqtrader.com/ 

micro.aspx?id=PHLXfilings, at the 

principal office of the Exchange, and at 

the Commission’s Public Reference 

Room. 


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