[Federal Register Volume 69, Number 24 (Thursday, February 5, 2004)]
[Notices]
[Pages 5625-5627]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-2329]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49141; File No. SR-ISE-2001-22]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1, 2, and 3 Thereto by the International 
Securities Exchange, Inc., To Establish a Solicited Order Mechanism

January 28, 2004.
    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 July 26, 2001, the International Securities Exchange, Inc. (``ISE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On 
January 4, 2002, ISE filed Amendment No. 1 to the proposed rule 
change.\3\ On June 26, 2002, ISE filed Amendment No. 2 to the proposed 
rule change.\4\ On January 6, 2004, ISE filed Amendment No. 3 to the 
proposed rule change.\5\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division 
of Market Regulation (``Division''), Commission, dated January 3, 
2002.
    \4\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division, 
Commission, dated June 25, 2002.
    \5\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division, 
Commission, dated January 5, 2004. Amendment No. 3 replaced the 
initial filing and Amendment Nos. 1 and 2 entirely. The changes 
proposed in Amendment No. 3 are incorporated in this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE is proposing to amend its rules regarding solicited orders 
to establish a Solicited Order Mechanism for matching a member's 
unsolicited agency orders with orders the member solicits from other 
broker-dealers. The text of the proposed rule change, as amended, is 
set forth below. Brackets indicate material to be deleted. Italics 
indicate material to be added.

Rule 716. Block and Solicited Trades

* * * * *
    (e) Solicited Order Mechanism. The Solicited Order Mechanism is a 
process by which an Electronic Access Member can attempt to execute 
orders of 500 or more contracts it represents as agent (the ``Agency 
Order'') against contra orders that it solicited. Each order entered 
into the Solicited Order Mechanism shall be designated as all-or-none.
    (1) Upon entry of both orders into the Solicited Order Mechanism at 
a proposed execution price, a broadcast message will be sent to Crowd 
Participants, which will be given an opportunity to enter Responses 
with the prices and sizes at which they would be willing to participate 
in the execution of the Agency Order.
    (2) At the end of the period given Crowd Participants to enter 
Responses, the Agency Order will be automatically executed in full or 
cancelled.
    (i) If at the time of execution there is insufficient size to 
execute the entire Agency Order at an improved price (or prices), the 
Agency Order will be executed against the solicited order at the 
proposed execution price so long as, at the time of execution: (A) the 
execution price is equal to or better than the best bid or offer on the 
ISE, and (B) there are no Public Customer orders on the Exchange that 
are priced equal to the proposed execution price. If there are Public 
Customer orders on the Exchange on the opposite side of the Agency 
Order at the proposed execution price and there is sufficient size to 
execute the entire size of the Agency Order, the Agency Order will be 
executed against the bid or offer, and the solicited order will be 
cancelled. The aggregate size of all orders, quotes and Responses at 
the bid or offer will be used to determine whether the entire Agency 
Order can be executed. Both the solicited order and Agency Order will 
be cancelled if an execution would take place at a price that is 
inferior to the best bid or offer on the ISE, or if there is a Public 
Customer on the book at the proposed execution price but there is 
insufficient size on the Exchange to execute the entire Agency Order.
    (ii) If at the time of execution there is sufficient size to 
execute the entire Agency Order at an improved price (or prices), the 
Agency Order will be executed at the improved price(s), subject to the 
condition in (i)(A), and the solicited order will be cancelled. The 
aggregate size of all orders, quotes and Responses at each price will 
be used to determine whether the entire Agency Order can be executed at 
an improved price (or prices).
    (iii) When executing the Agency Order against the bid or offer in 
accordance with paragraph (i) above, or at an improved price in 
accordance with

[[Page 5626]]

paragraph (ii) above, Public Customer orders will be executed first. 
Non-Customers participate in the execution of the Agency Order based 
upon the percentage of the total number of contracts available at the 
best price that is represented by the size of the Non-Customer 
interest.
    (3) Prior to entering Agency Orders into the Solicited Order 
Mechanism on behalf of a customer, EAMs must deliver to the customer a 
written notification informing the customer that its order may be 
executed using the ISE's Solicited Order Mechanism. Such written 
notification must disclose the terms and conditions contained in this 
Rule and must be in a form approved by the Exchange.

Supplementary Material to Rule 716

    .02 The time given to Crowd Participants to enter Responses under 
paragraph (c)(1) shall be thirty (30) seconds[,]. The time given to 
Crowd Participants to enter [and for] Indications [entered] under 
paragraph (d)(1) and Responses under paragraph (e)(1) shall be ten (10) 
seconds.
    .03 Under paragraph (e) above, Members may enter contra orders that 
are solicited. The Solicited Order Mechanism provides a facility for 
Members that locate liquidity for their customer orders. Members may 
not use the Solicited Order Mechanism to circumvent Exchange Rule 
717(d) limiting principal transactions. This may include, but is not 
limited to, Members entering contra orders that are solicited from (1) 
affiliated broker-dealers, or (2) broker-dealers with which the Member 
has an arrangement that allows the Member to realize similar economic 
benefits from the solicited transaction as it would achieve by 
executing the customer order in whole or in part as principal.

Rule 717. Limitations on Orders

* * * * *
    (e) Solicitation Orders.
    Electronic Access Members [must expose] may not execute orders they 
represent as agent on the Exchange [for at least thirty (30) seconds 
before such orders may be executed in whole or in part by] against 
orders solicited from Members and non-member broker-dealers to transact 
with such orders unless (i) the unsolicited order is first exposed on 
the Exchange for at least thirty (30) seconds, or (ii) the Member 
utilizes the Solicited Order Mechanism pursuant to Rule 716(e).
* * * * *

Rule 400. Just and Equitable Principles of Trade

* * * * *

Supplemental Material to Rule 400

    .02 It may be considered conduct inconsistent with just and 
equitable principles of trade for any person associated with a Member 
who has knowledge of all material terms and conditions of:
    (i) An order and a solicited order,
    (ii) An order being facilitated, or
    (iii) Orders being crossed;

the execution of which are imminent, to enter, based on such knowledge, 
an order to buy or sell an option for the same underlying security as 
any option that is the subject of the order, or an order to buy or sell 
the security underlying such class, or an order to buy or sell any 
related instrument until (i) the terms of the order and any changes in 
the terms of the order of which the person associated with the Member 
has knowledge are disclosed to the trading crowd, or (ii) the trade can 
no longer reasonably be considered imminent in view of the passage of 
time since the order was received. The terms of an order are 
``disclosed'' to the trading crowd on the Exchange when the order is 
entered into the System, [or into] the Facilitation or Solicited Order 
Mechanisms.

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 ISE 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 Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    Under ISE Rule 717(e), an Electronic Access Member (``EAM'') is 
required to expose an unsolicited agency order (the ``Agency Order'') 
for at least 30 seconds before crossing it against an order that it has 
solicited from other broker-dealers. Currently, an EAM can comply with 
this requirement only by entering the Agency Order on the Exchange, 
waiting 30 seconds, and then entering the solicited order. The Exchange 
states that, due to this 30-second exposure requirement, EAMs have no 
level of assurance that they will be able to pair solicited orders 
against Agency Orders for execution, and thus they take this type of 
business to the other options exchanges, which permit these trades to 
be executed without a 30-second exposure requirement.\6\
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    \6\ See Commentary .03 to American Stock Exchange Rule 950(d); 
Chicago Board Options Exchange Rule 6.9; Pacific Exchange Rule 6.49; 
and Philadelphia Stock Exchange Rule 1064(c).
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    To better compete for solicited transactions, the ISE has developed 
a Solicited Order Mechanism. The proposed rule change would implement 
this functionality, allowing EAMs to enter both sides of a proposed 
solicited cross, where one of the sides was solicited.\7\ Such trades 
would be required to be for at least 500 contracts and would be 
executed only if the price is at or between the ISE best bid or offer 
(``BBO''). Both orders entered into the Solicited Order Mechanism would 
be required to be all-or-none limit orders.
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    \7\ Although orders solicited from public customers are not 
subject to the exposure requirement of Rule 717(a), they would be 
permitted to be entered into the Solicited Order Mechanism should 
Exchange members choose this alternative.
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    When a proposed solicited cross is entered into the Mechanism, the 
Exchange would send a message to the Crowd Participants,\8\ giving them 
ten seconds to respond with a price that would improve the execution 
price for the Agency Order.\9\ The proposed matched trade will be 
executed unless there is sufficient size to execute the entire Agency 
Order at a better price than the proposed cross price, or there is a 
Public Customer order on the book at the proposed cross price. In the 
case where there is one or more Public Customer orders on the book at 
the proposed execution price on the opposite side of the Agency Order, 
the

[[Page 5627]]

Agency Order would be executed against the book if there is sufficient 
size available at the bid or offer to execute the entire size of the 
Agency Order.\10\ If there is insufficient size to execute the entire 
Agency Order, the proposed cross would not be executed and would be 
cancelled. Similarly, the transaction would be cancelled if the 
execution price would be inferior to the BBO on the Exchange.
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    \8\ In another proposed rule change on file with the Commission, 
the Exchange proposes to allow all members, rather than the more 
limited Crowd Participants, to participate in Block and Facilitation 
Mechanism trades. See Securities Exchange Act Release No. 49056 
(January 12, 2004), 69 FR 2798 (January 20, 2004) (concerning File 
No. SR-ISE-2003-07). The Exchange notes that if that proposal is 
approved prior to the approval of the instant proposed rule change, 
the Exchange will amend the instant proposed rule change so that all 
members may similarly participate in trades executed through the 
Solicited Order Mechanism.
    \9\ The ISE notes that the Commission previously determined that 
a ten second exposure period in the ISE's electronic marketplace is 
sufficient to provide participants with an opportunity to respond to 
orders entered into the Facilitation Mechanism. See Securities 
Exchange Act Release No. 46514 (September 18, 2002), 67 FR 60267 
(September 25, 2002). The ISE states that the same technology would 
be used by the Solicitation Mechanism, and members would be able to 
respond in exactly the same manner as they do to orders executed 
through the Facilitation Mechanism.
    \10\ When the Agency Order is executed at an improved price or 
at the proposed execution price against the book, Public Customer 
orders are given priority in the execution, and then all other non-
professional interest at the same price would participate pro-rata 
based on size.
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    The proposed rule also would require members to deliver to 
customers a written document describing the terms and conditions of the 
Solicited Order Mechanism prior to executing Agency Orders using the 
Solicited Order Mechanism. Such written document would be required to 
be in a form approved by the Exchange.
    Finally, the proposed rule change specifies in new Supplemental 
Material to Rule 716 that members would be prohibited from using the 
Solicited Order Mechanism to circumvent Rule 717(d) limiting principal 
transactions. The proposed rule change also adds a reference to the 
Solicited Order Mechanism in the Supplemental Material to Rule 400 
(Just and Equitable Principles of Trade) that prohibits anticipatory 
hedging activities prior to the entry of an order on the Exchange.
2. Statutory Basis
    The basis under the Act for the proposed rule change is the 
requirement under section 6(b)(5) of the Act \11\ that an exchange have 
rules that are designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism for a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. The Exchange states that the implementation of the 
Solicited Order Mechanism will allow the Exchange to better compete for 
solicited transactions, while providing an opportunity for price 
improvement for Agency Orders and assuring that public customers on the 
book are protected.
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    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act. The proposed rule change will allow the Exchange to better 
compete for solicited transactions.

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

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

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Comments may also be submitted electronically at the following e-mail 
address: <a href="/cdn-cgi/l/email-protection#5725223b327a34383a3a323923241724323479303821"><span class="__cf_email__" data-cfemail="b8cacdd4dd95dbd7d5d5ddd6cccbf8cbdddb96dfd7ce">[email protected]</span></a>. All comment letters should refer to 
File No. SR-ISE-2001-22. 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, comments should be sent in 
hardcopy or by e-mail but not by both methods. 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 inspection and copying in the Commission's 
Public Reference Room. Copies of the filing will also be available for 
inspection and copying at the principal offices of the ISE. All 
submissions should refer to File No. SR-ISE-2001-22 and should be 
submitted by February 26, 2004. 

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-2329 Filed 2-4-04; 8:45 am]
BILLING CODE 8010-01-P


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