Federal Register / Vol. 69, No. 240 / Wednesday, December 15, 2004 / Notices 75093

3 15 U.S.C. 78f(b).

4 15 U.S.C. 78f(b)(5). 5 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Letter from Michael Simon, Senior Vice 

President and General Counsel, ISE, to Nancy 

Sanow, Assistant Director, Division of Market 

Regulation (‘‘Division’’), Commission, dated 

February 24, 2004 (‘‘Amendment No. 1’’). In 

Amendment No. 1, the ISE replaced the proposed 

rule text in its entirety.

4See Securities Exchange Act Release No. 49323 

(February 26, 2004), 69 FR 10087 (‘‘Notice’’).

5See Letter from Kenneth R. Leibler, Chairman 

and Chief Executive Officer, Boston Stock 

Exchange, Inc. (‘‘BSE’’) to Jonathan G. Katz, 

Secretary, Securities and Exchange Commission, 

dated March 24, 2004 (‘‘Comment Letter’’). A 

discussion of the Comment Letter is provided below 

in Section IV, Discussion and Commission 

Findings.

6See Letter from Michael Simon, Senior Vice 

President and General Counsel, ISE, to Nancy J. 

Sanow, Assistant Director, Division, Commission, 

dated June 23, 2004 (‘‘Amendment No. 2’’). As 

noted below, in Amendment No. 2, the ISE 

proposes to clarify its rules to address issues raised 

by the Comment Letter and Commission staff.

7See Letter from Michael J. Simon, Senior Vice 

President and General Counsel, ISE, to Jonathan G. 

Katz, Secretary, Commission, dated June 23, 2004 

(‘‘Response Letter’’).

broker in the execution of that order. 

The Exchange believes that this is the 

current practice on the Exchange and in 

the industry. 

2. Statutory Basis 

The Exchange believes that restricting 

a DPM from unnecessarily charging 

brokerage commission for agency orders 

will benefit both investors and will 

preserve the competitiveness of the 

Exchange. The Exchange believes that 

the proposed rule change is consistent 

with section 6(b) of the Act 3 in general 

and furthers the objectives of section 

6(b)(5) of the Act 4 in particular in that 

it is designed to promote just and 

equitable principles of trade, to remove 

impediments to and perfect the 

mechanism of a free and open market, 

and to protect investors and the public 

interest.

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The Exchange believes that 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. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants or Others 

No written comments were solicited 

or received with respect to the proposed 

rule change. 

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. 

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–2004–73 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

450 Fifth Street, NW., Washington, DC 

20549–0609. 

All submissions should refer to File 

Number SR–CBOE–2004–73. 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 inspection and copying in 

the Commission’s Public Reference 

Section, 450 Fifth Street, NW., 

Washington, DC 20549. Copies of such 

filing also will be available for 

inspection and copying at the principal 

office of the CBOE. 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 Number SR–CBOE–2004–73 and 

should be submitted on or before 

January 5, 2005.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.5

J. Lynn Taylor, 

Assistant Secretary.

[FR Doc. E4–3649 Filed 12–14–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50819; File No. SR–ISE–

2003–06] 

Self-Regulatory Organizations; Order 

Granting Approval of Proposed Rule 

Change and Amendment No. 1 Thereto 

and Notice of Filing and Order 

Granting Accelerated Approval to 

Amendments No. 2 and 3 Thereto by 

the International Securities Exchange, 

Inc. To Establish Rules Implementing a 

Price Improvement Mechanism 

December 8, 2004. 

I. Introduction 

On February 25, 2003, the 

International Securities Exchange, Inc. 

(‘‘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 

establish rules implementing a Price 

Improvement Mechanism (‘‘PIM’’). On 

February 25, 2004, the ISE submitted 

Amendment No. 1 to the proposed rule 

change.3 The proposed rule change, as 

amended, was published for comment 

in the Federal Register on March 3, 

2004.4 The Commission received one 

comment letter with respect to the 

proposal and Amendment No. 1.5 On 

June 24, 2004, the ISE filed Amendment 

No. 2 to the proposed rule change,6 and 

a written response to the Comment 

Letter.7 On October 28, 2004, the ISE 

75094 Federal Register / Vol. 69, No. 240 / Wednesday, December 15, 2004 / Notices 

8See Letter from Michael Simon, Senior Vice 

President and General Counsel, ISE, to Nancy J. 

Sanow, Assistant Director, Division, Commission, 

dated October 14, 2004 (‘‘Amendment No. 3’’). In 

Amendment No. 3, the ISE proposed to add new 

Supplemental Material .06 to proposed ISE Rule 

723, to clarify that paragraphs (c)(5), (d)(5), and 

(d)(6) of ISE Rule 723 will be effective for a pilot 

period expiring on July 18, 2005. Supplemental 

Material .06 to proposed ISE Rule 723 also would 

state that during the pilot period, the Exchange will 

submit certain data on a confidential basis relating 

to the frequency with which the exposure period is 

terminated by unrelated orders.

9See proposed ISE Rule 723(b). The Counter-Side 

Order may represent interest for the EAM’s own 

account, or interest the EAM has solicited from one 

or more other parties, or a combination of both. See

Amendment No. 2, supra note 6.

10See proposed ISE Rule 723(b)(1). A PIM could 

not be initiated unless there are at least three ISE 

Market Makers quoting in the series. Moreover, 

there could be only one PIM ongoing in a series at 

any given time. Therefore, a PIM could not be 

initiated during an ongoing PIM in the same series. 

See proposed ISE Rule 723, Supplementary 

Material .04.

11The broadcast message would include the 

series, price, and size of the Agency Order and 

whether it is to buy or sell. See proposed ISE Rule 

723(c); see also Amendment No. 2, supra note 6.

12See proposed ISE Rule 723(c)(1). The ISE 

would broadcast Improvement Orders to all 

Members. Crossing Transactions and Improvement 

Orders would not be displayed in the ISE BBO and 

would not be disseminated to the Options Price 

Reporting Authority.

13See proposed ISE Rule 723(c)(2).

14See proposed ISE Rule 723(c)(4); see also

Amendment No. 2, supra note 6.

15See proposed ISE Rule 723(d). This sized-based 

allocation formula for the remainder of the order 

would be the same formula the Exchange applies 

in its regular market, without any special allocation 

rights for the ISE Primary Market Maker. See ISE 

Rule 713, Supplementary Material .01.

16See proposed ISE Rule 723(c)(5).

17 Id. Under such circumstances: (1) the PIM 

would be concluded; (2) the Agency Order 

executed; and (3) the non-marketable limit order 

would be displayed on the ISE book.

18See Amendment No. 1, supra note 3.

19See proposed ISE Rule 723(d)(5); see also

Amendment No. 2, supra note 6. 20See proposed ISE Rule 723(d)(6); see also

Amendment No. 2, supra note 6. 21 Id.

22 Id.

23 Id.

24 Id.

filed Amendment No. 3 to the proposed 

rule change.8

This order approves the proposed rule 

change, as amended by Amendment No. 

1, publishes notice of Amendments No. 

2 and 3 to the proposed rule change, 

and grants accelerated approval of 

Amendments No. 2 and 3. 

II. Description of the Proposal 

The ISE proposes to establish an 

auction, known as the PIM, that would 

allow an ISE Electronic Access Member 

(‘‘EAM’’) to enter matched trades 

(‘‘Crossing Transactions’’). A Crossing 

Transaction would be comprised of an 

order that the EAM represents as agent 

(‘‘Agency Order’’) and an order that is 

executable against the Agency Order for 

the full size of the Agency Order (the 

‘‘Counter-Side Order’’).9 A Member 

must enter the Crossing Transaction at 

a price at least one cent better than the 

national best bid and offer (‘‘NBBO’’).10

The ISE would broadcast the Crossing 

Transaction to all ISE Members.11

During a three-second auction, all ISE 

Members could enter ‘‘Improvement 

Orders,’’ in penny increments, to 

improve the price of the Agency 

Order.12 Improvement Orders may be 

for the account of a Public Customer or 

for the Member’s own account.13 During 

the exposure period, the aggregate size 

of the best prices, including the 

Counter-Side Order, Improvement 

Orders, and any change to either, would 

continually be updated and broadcast to 

all Members.14

After three seconds, the ISE would 

execute the Agency Order against the 

best prices as follows: (1) All Public 

Customer Improvement Orders and 

unrelated Public Customer orders on the 

book at the best price would be 

executed first; (2) all unrelated agency 

orders on the book for the account of a 

non-Member broker-dealer would then 

be executed; (3) if the entering EAM is 

at the best price, it would then execute 

against the greater of one contract or 40 

percent of the Agency Order; and (4) the 

remainder of the order would be 

allocated to all other interest, which 

includes Improvement Orders and 

unrelated orders on the book for the 

account of an ISE Member (including 

ISE market makers), at the best price 

based on size.15

The PIM exposure period would be 

terminated immediately, prior to the 

expiration of the three-second exposure 

period, upon the receipt of certain 

orders in the regular Exchange market 

(‘‘unrelated orders’’). Specifically, the 

PIM would terminate when a market or 

marketable limit order is received in the 

same series 16 or when a non-marketable 

limit order on the same side of the 

market as the Agency Order is received 

that would cause the price of the 

Crossing Transaction to be outside of 

the best bid or offer on the Exchange.17

Under proposed ISE Rule 723(d)(5), as 

originally proposed and published in 

the Notice, in the case where an 

unrelated market or marketable limit 

order on the opposite side of the market 

from the Agency Order is received, the 

order would execute against the Agency 

Order at a price that is mid-way 

between the best Counter-Side interest 

and the bid or offer on the Exchange.18

The Exchange proposes to change this 

provision to state that when a market 

order or marketable limit order on the 

opposite side of the market from the 

Agency Order ends the exposure period, 

it would participate in the execution of 

the Agency Order at the price that is 

mid-way between the best Counter-Side 

interest and the NBBO, so that both the 

unrelated order and the Agency Order 

receive price improvement.19

When a market order or marketable 

limit order on the same side of the 

market from the Agency Order ends the 

exposure period, the unrelated order 

would execute against any unexecuted 

interest in the PIM after the Agency 

Order is executed in full to provide the 

unrelated order with the opportunity for 

price improvement.20 In Amendment 

No. 2, the ISE proposes to clarify that in 

such instances, executions in the PIM 

would be handled such that at a given 

price, Public Customer interest is 

executed in full before any nonCustomer interest.21 After Public 

Customer interest at a given price, 

agency orders for the account of nonMember broker-dealers would be 

executed in full before any proprietary 

interest of Members.22 Finally, Member 

proprietary interest would participate in 

the execution of the Agency Order upon 

the percentage of the total number of 

contracts available at the price that is 

represented by the size of the nonCustomer’s interest.23 In Amendment 

No. 2, the Exchange also proposes to 

clarify that when an unrelated order on 

the same side of the market from the 

Agency Order ends the exposure period, 

and the Counter-Side Order is at the 

same price as Member interest, the 

Counter-Side Order would not be 

allocated the greater of one contract or 

forty percent of the initial size of the 

Agency Order before other Member 

interest is executed.24

As originally proposed, Supplementary Material .01 to proposed ISE 

Rule 723 provided that it would be 

considered conduct inconsistent with 

just and equitable principles of trade for 

any Member to enter orders, quotes, 

Agency Orders, Counter-Side Orders or 

Improvement Orders for the purpose of 

disrupting or manipulating the PIM. In 

Amendment No. 2, the ISE proposes to 

clarify that such conduct would 

include, but not be limited to, engaging 

in a pattern of conduct where the 

Member submitting an Agency Order 

into the PIM breaks up the Agency 

Order into separate orders for two or 

fewer contracts for the purpose of 

gaining a higher allocation percentage 

than the Member would have otherwise 

received in accordance with the 

allocation procedures established for the 

situation in which

Federal Register / Vol. 69, No. 240 / Wednesday, December 15, 2004 / Notices 75095

25See proposed ISE Rule 723, Supplementary 

Material .01; see also Amendment No. 2, supra note 

6.

26See proposed ISE Rule 723, Supplementary 

Material .05; see also Amendment No. 2, supra note 

6.

27See proposed ISE Rule 723, Supplementary 

Material .06; see also Amendment No. 3, supra note 

8.

28 Id.

29 In approving this proposal, the Commission has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). 30 15 U.S.C. 78f. 31 15 U.S.C. 78f(b)(5).

32See Comment Letter, supra note 5, at pp. 1–6.

33See Comment Letter, supra note 5, at p. 11.

34 ‘‘Block’’-size is defined under the ISE Rules as 

orders for at least 50 contracts. See ISE Rule 716(a).

the Counter-Side Order is at the same 

price as Member interest.25 Also, the ISE 

proposes to clarify that ISE Rule 717(f), 

which places limitations on electronic 

orders, would not apply to transactions 

executed pursuant to ISE Rule 723.26

Finally, the ISE proposes in 

Amendment No. 2 to amend the text of 

ISE Rule 400 regarding solicited orders. 

The proposed addition to ISE Rule 400 

would clarify that nothing in the 

Supplementary Material .01 to ISE Rule 

400 is intended to prohibit a member 

from soliciting interest to execute 

against an order it represents as agent, 

the execution of which is governed by 

ISE Rule 717(e) (Solicitation Orders), 

and Supplementary Material .02 to ISE 

Rule 717. 

In Amendment No. 3, the ISE 

proposes new Supplemental Material 

.06 to proposed ISE Rule 723 to 

establish that paragraphs (c)(5), (d)(5), 

and (d)(6) of ISE Rule 723 would be 

effective for a pilot period expiring on 

July 18, 2005.27 The ISE also proposes 

in new Supplemental Material .06 that 

the Exchange would submit data 

relating to the frequency with which the 

exposure period is terminated by 

unrelated orders.28

III. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning Amendments No. 

2 and 3, including whether 

Amendments No. 2 and 3 are consistent 

with the Act. 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 e-mail to

rule-comments@sec.gov. Please include 

File Number SR-ISE–2003–06 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

450 Fifth Street, NW., Washington, DC 

20549–0609. 

All submissions should refer to File 

Number SR-ISE–2003–06. 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 inspection and copying in 

the Commission’s Public Reference 

Section, 450 Fifth Street, NW., 

Washington, DC 20549. Copies of such 

filing also will be available for 

inspection and copying at the principal 

office of the ISE. 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 Number SR–ISE–

2003–06 and should be submitted on or 

before January 5, 2005.

IV. Discussion and Commission 

Findings 

After careful review of the amended 

proposal and consideration of the 

Comment Letter and Response Letter, 

the Commission finds that the proposed 

rule change to establish rules for the 

implementation of the ISE PIM is 

consistent with the requirements of the 

Act and the rules and regulations 

thereunder applicable to a national 

securities exchange 29 and, in particular, 

the requirements of section 6 of the 

Act.30 Specifically, as discussed in 

greater detail below, the Commission 

finds that the proposal is consistent 

with section 6(b)(5) of the Act,31 which 

requires, in part, that the rules of an 

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. 

Section 6(b)(5) also requires that the 

rules of an exchange not be designed to 

permit unfair discrimination among 

customers, issuers, brokers, or dealers.

Specifically, the Commission believes 

that approving the ISE’s proposal to 

establish the PIM should confer 

important benefits to the public by 

increasing competition between and 

among the options exchanges, resulting 

in better prices and executions for 

investors. The Comment Letter argues 

that because the ISE market structure 

does not include many of the elements 

of the Boston Options Exchange 

(‘‘BOX’’) market structure, the ISE PIM 

lacks basic customer protections and 

will discourage price competition and 

aggressive bidding.32 The Commission 

does not agree with these objections, 

and notes that market structures need 

not be identical to be consistent with 

the Act; in fact, such a policy would 

likely result in less competition between 

markets and fewer innovations.

The Commission believes that the 

proposed ISE PIM provides limitations 

on internalization comparable to the 

other exchanges’ rules that guarantee 

members the right to internalize their 

customers’ orders. In particular, as 

discussed below, the ISE’s proposal 

would require an EAM seeking to utilize 

the PIM to expose its Customer Order 

before trading with that order and 

would further require a minimum of 

three ISE market makers to be quoting 

in a particular series before a PIM could 

be initiated. The Commission also 

believes that the access to the PIM for 

those who may wish to compete for an 

Agency Order should be sufficient to 

provide opportunities for a meaningful, 

competitive auction. 

The Commission therefore finds that, 

for the reasons discussed more fully 

below, the ISE’s proposal is consistent 

with the Act. 

A. Need for Both PIM and ISE 

Facilitation Mechanism 

In the Comment Letter, BSE argues 

that the ISE should have only one 

facilitation process in its system.33 The 

Comment Letter notes that ISE Rule 

716(d) currently provides for a 

facilitation mechanism (‘‘ISE 

Facilitation Mechanism’’) by which an 

EAM can facilitate block-size 34 Public 

Customer orders. According to the 

Comment Letter, the election of a PIM 

75096 Federal Register / Vol. 69, No. 240 / Wednesday, December 15, 2004 / Notices 

35See ISE Rule 716, Supplementary Material .01.

36A broker-dealer’s duty of best execution derives 

from common law agency principals and fiduciary 

obligations and is incorporated both in the rules of 

the self-regulatory organization, and through 

judicial and Commission decisions, in the antifraud 

provisions of the federal securities laws. See

Securities Exchange Act Release No. 37619A 

(September 6, 1996), 61 FR 48290 (September 12, 

1996) (‘‘Order Handling Rules Release’’), note 348 

and accompanying text.

37See id.

38See proposed ISE Rule 723(b)(1); see also BOX 

Rules Chapter V, Sec. 18(e).

39See Securities Exchange Act Release No. 49068 

(January 13, 2004), 69 FR 2775 (January 20, 2004) 

(Order approving the BOX as an options trading 

facility of the BOX).

40See proposed ISE Rule 723(a).

41See Comment Letter, supra note 5.

42 ISE Rule 717(g) prohibits an EAM from causing 

the entry of orders for the account of an ISE Market 

Maker.

43 15 U.S.C. 78s(b).

44See Comment Letter, supra note 5, at pp. 11–

15.

45See Amendment No. 2, supra note 6; see also

proposed ISE Rule 723(c)(4).

46The PIM would end prior to the expiration of 

the three-second exposure period under certain 

circumstances. See proposed ISE Rule 723(c)(5). See 

also infra notes 49–57 and accompanying text for 

a more detailed discussion.

47See supra note 40.

48The Commission notes that the ISE offers a 

facilitation mechanism through which an EAM can 

facilitate Public Customer orders of 50 contracts or 

more. The ISE facilitation mechanism currently 

employs an exposure period of ten seconds. See ISE 

Rule 716(d) and Supplemental Material .02 to ISE 

Rule 716.

49With respect to the same series, no PIM will 

run simultaneously with another PIM, nor will 

PIMs be permitted to queue or overlap in any 

manner. See proposed ISE Rule 723, Supplementary 

Material .04.

by an EAM to facilitate a Customer 

Order would always be better for the 

Customer than the election of the ISE 

Facilitation Mechanism, whereas the 

election of the ISE Facilitation 

Mechanism would always be better for 

the EAM than the election of the PIM. 

The Comment Letter maintains that for 

orders of over 50 contracts, EAMs 

would have an incentive to seek first to 

facilitate an order through the ISE 

Facilitation Mechanism and, if it 

appeared that the EAM would lose its 

guaranteed allocation, the EAM would 

cancel the facilitation order and elect 

the PIM.

The Commission does not agree with 

the Comment Letter’s assertions for 

several reasons. First, the ISE rules 

specifically provide that it would be a 

violation of an ISE Member’s duty of 

best execution to its Customer if the 

Member were to cancel a facilitation 

order to avoid execution of the order at 

a better price.35 Therefore, the BSE’s 

argument that an EAM could exploit the 

availability of both the Facilitation 

Mechanism and the PIM by simply 

canceling its facilitation order after it 

has been entered into the ISE 

Facilitation Mechanism to avoid losing 

its allocation guarantee is not accurate, 

as such conduct would be a violation of 

Exchange rules.

Second, the Commission notes that 

ISE Members have an obligation of best 

execution with respect to their 

Customer Orders. The Commission has 

long held the view that in satisfying its 

duty of best execution,36 which requires 

a broker to seek the most favorable 

terms reasonably available under the 

circumstances for a customer’s 

transaction, a broker must periodically 

assess the quality of competing markets 

to assure that order flow is directed to 

markets providing the most beneficial 

terms for their customers’ orders.37 The 

Commission believes that this obligation 

would require an EAM to evaluate 

whether the PIM or Facilitation 

Mechanism would provide better 

execution to customers’ orders.

B. Three Market Maker Requirement 

Proposed ISE Rule 723 would require 

that there be at least three Market 

Makers quoting in a relevant series at 

the time an EAM submits its Crossing 

Transaction into the PIM.38 The 

Commission believes that this 

requirement will improve the 

opportunity for an Agency Order to be 

exposed to a competitive auction.39

C. Solicitation Process 

The ISE’s proposal would permit an 

ISE EAM to solicit interest from other 

parties to participate in the CounterSide Order in the PIM.40 In its Comment 

Letter, BSE argues that it is unclear 

whether ISE market makers may be 

solicited to participate in the CounterSide Order.41 The Commission notes, 

however, that an EAM would be 

prohibited from soliciting an order from 

an ISE Market Maker, pursuant to ISE 

Rule 717(g).42 Furthermore, the 

Commission emphasizes that a blanket 

exemption from ISE Rule 717(g) would 

not be permitted without Commission 

approval of a proposed rule change 

submitted by the Exchange under 

section 19(b) of the Act.43

D. Three-Second PIM 

1. Content of Broadcast Message 

Under the ISE proposal, upon entry of 

a Crossing Transaction into the PIM, a 

broadcast message would be sent to all 

ISE members to begin the exposure 

period. The BSE suggests that the only 

information provided to ISE members in 

the PIM broadcast would be the 

aggregate size of the best-priced 

Improvement Orders (not improved 

Counter-Side Orders) and that this 

would be insufficient information for 

market participants to make fullyinformed decisions about how to 

compete for the Agency Order.44 In 

response to the Comment Letter, the ISE 

proposes in Amendment No. 2 to clarify 

that the broadcast message would 

include the series, price, and size of the 

Agency Order, and whether the Agency 

Order is a buy or sell order. The ISE also 

proposes to clarify that during the 

exposure period, the aggregate size of 

the best prices, (including the CounterSide Order, Improvement Orders, and 

any changes to either) would 

continually be updated and broadcast to 

all ISE Members.45

The Commission believes that the 

proposed content of the broadcast 

message at the initiation of the PIM 

should provide sufficient information to 

permit interested market participants to 

participate in the auction. In addition, 

the Commission does not believe that it 

is necessary for the ISE to provide 

information about prices and sizes 

below the best price. 

2. Duration of the PIM

The ISE proposes that the duration of 

each PIM be three seconds.46 The 

Commission believes that a threesecond PIM should afford electronic 

crowds sufficient time to compete for 

Agency Orders submitted by an EAM. In 

reaching this conclusion, the 

Commission believes that the 

timeframes necessary for exposure and 

execution of orders be adjudged in light 

of the ISE’s market structure. The 

Commission reiterates that the critical 

issue is determining whether the 

proposed three-second timeframe gives 

participants in a fully automated 

marketplace sufficient time to respond 

to a PIM broadcast to compete and 

provide price improvement for Agency 

Orders and whether electronic systems 

are available to ISE members that would 

allow them to respond to PIM 

broadcasts in a meaningful way within 

the proposed timeframe.47 The 

Commission notes that the ISE is a fully 

electronic exchange where crowd 

members interact by electronic means. 

The Commission also notes that 

electronic systems are readily available 

to ISE members—if not already in 

place—to allow them to respond to PIM 

broadcasts.48

3. Premature Termination of the PIM 

As proposed, the PIM would end 

prematurely under certain 

circumstances: 49 (1) Upon the receipt of 

a market or marketable limit order on 

Federal Register / Vol. 69, No. 240 / Wednesday, December 15, 2004 / Notices 75097

50See proposed ISE Rule 723(c)(5)(ii).

51 Id.

52See proposed ISE Rule 723(c)(5)(iii).

53See supra notes 16–23 and accompanying text.

54The Commission notes that under the BOX 

rules, the BOX Price Improvement Period (‘‘PIP’’) 

auction can be terminated prior to the three-second 

period only in cases where an executable unrelated 

order is submitted to BOX on the same side as the 

customer order that was initially entered into the 

PIP. See BOX Rules, Chapter V, Section 18(i). The 

BOX rules, unlike the ISE proposal, do not permit 

the unrelated order to be executed against 

unexecuted interest in the PIP after the facilitated 

customer order is executed in full.

55See proposed ISE Rule 723, Supplementary 

Material .01. See also Amendment No. 2, supra note 

6.

56 In addition, the ISE has provided Commission 

staff with details regarding its proposed PIM 

surveillance procedures. See Letter to Nancy 

Sanow, Assistant Director, Division, Commission, 

from Michael J. Simon, Senior Vice President & 

General Counsel, ISE, dated October 14, 2004. The 

Commission notes that as a matter of Commission 

policy, surveillance programs and procedures are 

generally kept confidential. Disclosure of specific 

surveillance procedures could provide market 

participants with information that could aid 

attempts at avoiding regulatory detection of 

inappropriate trading activity.

57The ISE’s surveillance plan and procedures are 

subject to inspection by the Commission, to ensure 

that the ISE adequately monitors its market and its 

members, and enforces its rules and the federal 

securities laws, including the anti-fraud provisions.

58See proposed ISE Rule 723(c).

59 Id.

60See Comment Letter, supra note 5, at p. 16.

61See Response Letter, supra note 7, at pp. 4–5.

62See Comment Letter, supra note 5, at p. 19.

63See Amendment No. 2, supra note 6. See also

proposed ISE Rule 723, Supplementary Material 

.05. In its Response Letter, the ISE stated that ISE 

Rule 717(f) was not intended to be applied to orders 

entered into the PIM. See Response Letter, supra

note 7, at p. 5.

64See Comment Letter, supra note 5, at pp. 6–8.

65See Securities Exchange Act Release Nos. 

47959 (May 30, 2003), 68 FR 34441 (June 9, 2003) 

(Order approving the CBOE Hybrid System where, 

pursuant to CBOE Rule 6.45A, the applicable floor 

procedure committee could determine to weight the 

allocation algorithm so that the entire allocation 

would be based on size pro rata); and 46514 

(September 18, 2002), 67 FR 60267 (September 25, 

2002) (Order approving ISE proposal relating to the 

allocation of customer orders on a price/size 

priority basis).

66See Comment Letter, supra note 5, at p. 16.

67See Response Letter, supra note 7 p. 5; see also

proposed ISE Rule 723(c)(3).

68See, e.g., Securities Exchange Act Release No. 

43100 (July 31, 2000), 65 FR 48778 (August 9, 

2000).

the Exchange in the same series on the 

opposite side of the market from the 

Agency Order; 50 (2) upon the receipt of 

a market or marketable limit order on 

the Exchange in the same series on the 

same side of the market as the Agency 

Order; 51 (3) upon the receipt of a nonmarketable limit order in the same 

series on the same side of the market as 

the Agency Order that would cause the 

price of the Crossing Transaction to be 

outside of the best bid or offer on the 

Exchange.52

The ISE’s proposal would provide 

these unrelated orders with the 

opportunity for price improvement.53

The Commission, however, is concerned 

that this could result in an Agency 

Order being disadvantaged by the 

premature conclusion of a PIM, in that 

it would not have received the full three 

second auction exposure period in 

which to receive price improvement.54

The Commission notes that proposed 

ISE Rule 723, Supplementary Material 

.01 states that it would be considered 

conduct inconsistent with just and 

equitable principles of trade for any ISE 

Member to enter orders, quotes, Agency 

Orders, Counter-Side Orders, or 

Improvement Orders for the purposes of 

disrupting or manipulating the PIM.55

The Commission believes that this 

proposed rule should help to address its 

concern, because ISE Members would 

be prohibited from deliberately entering 

unrelated orders in the ISE system to 

end the PIM prematurely to disrupt or 

manipulate it.56

Moreover, the ISE has proposed that 

those portions of proposed ISE Rule 723 

relating to the premature termination of 

the PIM be effective on a pilot basis. The 

Commission believes that approval of 

these provisions on a pilot basis is 

appropriate and will afford both the 

Exchange and the Commission an 

opportunity to analyze the impact of 

unrelated orders on the PIM, as well as 

the ISE’s surveillance procedures with 

respect to the PIM.57

E. Competition in the PIM 

Under the ISE’s proposal, all ISE 

Members would be permitted to 

participate in a PIM.58 Improvement 

Orders entered by ISE members may be 

for their own account or for the account 

of a Public Customer.59 In addition, 

unrelated orders could compete in 

standard increments to trade with the 

Agency Order in the PIM. Such 

unrelated orders could include agency 

orders on behalf of Public Customers, 

market makers on other exchanges, and 

non-ISE member broker-dealers, as well 

as non-Improvement orders submitted 

by ISE members.

The BSE questions how Improvement 

Orders from Public Customers would be 

handled by an EAM.60 In its Response 

Letter, the ISE clarifies that Public 

Customer orders would be handled as 

provided under the current ISE Rules. 

Specifically, there would be no 

limitations on the ability of Public 

Customers to participate in the PIM, and 

ISE members may represent Public 

Customers in a PIM under any type of 

instruction they wish to accept without 

restriction.61 The Commission believes 

that the lack of restrictions on the 

participation of Public Customers in the 

PIM should increase the opportunity for 

them to participate in the PIM.

The BSE also argues that under ISE 

Rule 717, which prohibits customers 

from creating and transmitting orders 

electronically unless such orders are 

non-marketable limit orders to buy (sell) 

that are priced higher (lower) than the 

best ISE bid or offer, Public Customers 

would not be permitted to participate in 

the PIM.62 In response, the ISE, in 

Amendment No. 2, proposes that ISE 

Rule 717(f) would not apply to 

transactions executed pursuant to 

proposed ISE Rule 723.63 The 

Commission believes that Amendment 

No. 2 sufficiently clarifies the 

application of ISE Rule 717.

Finally, the BSE argues that a lack of 

time priority would discourage price 

competition in the PIM.64 The 

Commission disagrees with this 

assertion and, instead, continues to 

believe that allocations based on price/

size priority are consistent with the 

Act.65

F. Improvement Orders 

As discussed above, during the PIM, 

ISE members may submit Improvement 

Orders. Improvement Orders would be 

submitted in penny increments and 

would be valid only in the PIM process. 

The BSE asks whether an ISE Member 

that submits an Improvement Order may 

reduce the size of the Improvement 

Order at the same price.66 In its 

Response Letter, the ISE notes that its 

proposed rules provide that an 

Improvement Order may be modified 

only to increase the size at the same 

price, or improve the price of the 

Improvement Order for any size up to 

the size of the Agency Order.67 The 

Commission believes that the proposed 

ISE rules make clear that ISE Members 

would not be permitted to reduce the 

size of an Improvement Order without 

improving its price.

G. PIM Trade Allocation 

With multiple trading of options, 

individual options markets are under 

significant pressure to attract or retain 

business. One approach to increasing 

business on an exchange is to allow 

members a preference in trading with 

customer orders that they bring to the 

exchange. The Commission, however, 

has expressed its concern that proposals 

by options exchanges that guarantee a 

significant portion of orders to any 

market participant could erode the 

incentive to display aggressively priced 

quotes.68 Thus, the Commission must 

weigh whether the proposed 

75098 Federal Register / Vol. 69, No. 240 / Wednesday, December 15, 2004 / Notices 

69See Securities Exchange Act Release No. 42455 

(February 24, 2000), 65 FR 11388 (March 2, 2000) 

(order approving registration of the ISE as a national 

securities exchange).

70See proposed ISE Rule 723(d).

71See proposed ISE Rule 723(d)(1)-(4).

72See Comment Letter, supra note 5, at p. 9. See 

also BOX Rules, Chapter V, Sec. 18 (f).

73See Securities Exchange Act Release No. 47628 

(April 3, 2003), 68 FR 17697 (April 10, 2003) 

(approving proposal by the Chicago Board Options 

Exchange, Inc. to establish rules for CBOEdirect 

trading system). See also ISE Rule 716(d) (ISE 

Facilitation Mechanism).

74See Comment Letter, supra note 5, at p. 18.

75 15 U.S.C. 78k(a).

76 15 U.S.C. 78k(a)(1)(G).

77 17 CFR 240.11a1–1(T).

78 15 U.S.C. 78k(a)(1)(G)(i). Paragraph (b) of Rule 

11a1–1(T) under the Act provides that a member 

shall be deemed to meet the requirements of 

Section 11(a)(1)(G)(i) of the Act if during its 

preceding fiscal year more than 50% of its gross 

revenues was derived from one or more of the 

sources specified in that section. In addition to any 

revenue which independently meets the 

requirements of Section 11(a)(1)(G)(i), revenue 

derived from any transaction specified in paragraph 

(A), (B), or (D) of Section 11(a)(1) of the Act or 

specified in Rule 11a1–4(T) shall be deemed to be 

revenue derived from one or more of the sources 

specified in Section 11(a)(1)(G)(i).

79 15 U.S.C. 78k(a)(1)(G)(ii).

80 17 CFR 240.11a1–1(T)(a)(3).

81See Comment Letter, supra note 5, at p. 19.

82 15 U.S.C. 78k(a).

83 17 CFR 240.11Ac1–1.

84See Comment Letter, supra note 5, at p. 19.

85See Letter from Michael J. Simon, Senior Vice 

President and General Counsel, ISE, to Annette 

participation right would so 

substantially reduce the ability of other 

market participants to trade with an 

order that it would reduce price 

competition. As the Commission has 

noted previously:

It is difficult to assess the precise level at 

which guarantees may begin to erode 

competitive market maker participation and 

potential price competition within a given 

market. In the future, after the Commission 

has studied the impact of guarantees, the 

Commission may need to reassess the level 

of these guarantees. For the immediate term, 

the Commission believes that 40% is not 

clearly inconsistent with the statutory 

standards of competition and free and open 

markets.69

The ISE PIM proposal would provide 

that at the conclusion of the PIM 

exposure period, the Agency Order 

would be executed in full against the 

best-priced orders, including orders and 

quotes in the Exchange market, 

Improvement Orders, and the CounterSide Order.70 The ISE would execute 

the Agency Order against the best prices 

as follows: (1) All Public Customer 

Improvement Orders and unrelated 

Public Customer orders on the book at 

the best price would be executed first; 

(2) all unrelated agency orders on the 

book for the Account of a non-Member 

broker-dealer would then be executed; 

(3) if the Counter-Side Order is at the 

best price, it would then be executed 

against the greater of one contract or 

40% percent of the Agency Order; and 

(4) the remainder of the order would be 

allocated to all other interest, which 

includes Improvement Orders and 

unrelated orders on the book for the 

account of an ISE Member (including 

ISE market makers), at the best price 

pro-rata based on size.71

The BSE argues that the ISE’s 

proposal to allow a 40% guarantee to 

the Counter-Side Order based on the 

size of the original order is inconsistent 

with facilitation rules for BOX’s PIP 

auction.72 However, the Commission 

believes that the ISE’s proposal, which 

entitles (subject to certain exceptions) 

an EAM who submits the Counter-Side 

Order to 40% of the Agency Order, is 

not inconsistent with the Act. In 

addition, the Commission notes that the 

guarantee for the EAM bringing an 

Agency Order to the PIM is consistent 

with the facilitation guarantees in place 

at other options exchanges.73

The Commission believes that the ISE 

PIM proposal should promote price 

competition within the PIM by 

providing ISE Members with a 

reasonable opportunity to compete for a 

significant percentage of the incoming 

order and, therefore, should protect 

investors and the public interest. The 

Commission continues to believe that a 

40% allocation is consistent with the 

statutory standards for competition and 

free and open markets. 

On a related note, the BSE points out 

that the proposal does not describe the 

order of priority among the excess 

Improvement Orders in the situation 

where an unrelated marketable order on 

the same side of the market as the 

Agency Order terminates the PIM.74 In 

response, the ISE proposes in 

Amendment No. 2 to clarify that these 

executions would follow the same 

execution priority rules described in 

proposed ISE Rule 723(d)(1)-(4).

H. Section 11(a) of the Act 

Section 11(a) of the Exchange Act 75

prohibits a member of a national 

securities exchange from effecting 

transactions on that exchange for its 

own account, the account of an 

associated person, or an account over 

which it or its associated person 

exercises discretion (collectively, 

‘‘covered accounts’’) unless an 

exception applies. Section 11(a)(1)(G) 76

and Rule 11a1–1(T) 77 under the Act 

provide an exception to the general 

prohibition in Section 11(a) on an 

exchange member effecting transactions 

for its own account. Specifically, a 

member that ‘‘is primarily engaged in 

the business of underwriting and 

distributing securities issued by other 

persons, selling securities to customers, 

and acting as broker, or any one or more 

of such activities, and whose gross 

income normally is derived principally 

from such business and related 

activities’’ 78 and effects a transaction in 

compliance with the requirements in 

Rule 11a1–1(T)(a) 79 may effect a 

transaction for its own account. Among 

other things, Rule 11a1–1(T)(a) requires 

that an exchange member presenting a 

bid or offer for its own account or the 

account of another member shall grant 

priority to any bid or offer at the same 

price for the account of a non-member 

of the exchange.80 Because proposed 

ISE Rule 723 would require EAMs and 

Exchange Market Makers to yield 

priority in the PIM to all non-Member 

orders, the Commission believes that the 

proposal is consistent with the 

requirements in section 11(a) and Rule 

11a1–1(T) under the Act.

Under the proposal, Public Customer 

interest in the PIM would be executed 

in full before orders for the account of 

non-Member broker-dealers could be 

executed. The BSE argues that section 

11(a) does not require Public Customers 

to be treated preferentially to other nonMembers.81 The Commission notes, 

however, that section 11(a)(1)(G) of the 

Act and the rules thereunder do not 

prohibit Public Customers from being 

treated preferentially relative to other 

non-Members. Instead, the statute and 

the rules require only that non-Member 

orders receive priority over Member 

orders. Under the ISE’s proposed rules, 

Public Customer and non-Member 

broker-dealer orders would receive first 

priority. Therefore, the Commission 

believes that the proposed ISE PIM 

priority execution rules would comply 

with section 11(a) of the Act.82

I. Quote Rule 

The BSE argues that the proposed ISE 

PIM rules violate Rule 11Ac1–1 under 

the Act (the ‘‘Quote Rule’’),83 because 

inbound unrelated market or marketable 

limit orders on the same side of the 

market as the Agency Order would be 

permitted to execute against any 

unexecuted interest in the PIM after the 

Agency Order is executed in full on a 

pilot basis until July 18, 2005.84 In 

response, the ISE has requested an 

exemption from the Quote Rule for 

unexecuted interest in the PIM auction 

after the Agency Order has been 

executed in full.85 Under separate cover, 

Federal Register / Vol. 69, No. 240 / Wednesday, December 15, 2004 / Notices 75099

Nazareth, Director, Division, Commission, dated 

November 15, 2004.

86See Letter from Robert L.D. Colby, Deputy 

Director, Division, Commission, to Michael J. 

Simon, Senior Vice President and General Counsel, 

ISE, dated December 8, 2004.

87 Id.

88Under such circumstances, (1) the PIM would 

be concluded; (2) the Agency Order executed; and 

(3) the non-marketable limit order would be 

displayed on the ISE book.

89See Securities Exchange Act Release No. 43086 

(July 28, 2000), 65 FR 48023 (August 4, 2000) 

(Order approving the Plan for the Purpose of 

Creating and Operating an Intermarket Option 

Linkage or ‘‘Linkage Plan’’).

90A trade-through means a transaction in an 

options series at a price that is inferior to the NBBO. 

See Linkage Plan, Section 2(29).

91See Comment Letter, supra note 5, at p. 18.

92See Response Letter, supra note 7, at p. 5; see 

also Amendment No. 2, supra note 6.

93The July 18, 2005, pilot expiration date 

corresponds to the expiration of a similar pilot 

program for the BOX’s PIP, which provided that 

there is no minimum size requirement for orders 

entered into the PIP, encompassing a period of 18 

months from commencement of the BOX. See BOX 

Rules, Chapter V, Sect. 18, Supplementary Material 

.01.

the Commission granted the ISE a 

limited exemption pursuant to 

paragraph (e) of the Quote Rule from its 

obligations under paragraph (b) of the 

Quote Rule that permits the Exchange to 

collect from its members the quotation 

sizes and aggregate quotation sizes 

communicated to the Exchange by 

responsible brokers or dealers with 

respect to Counter-Side Orders in 

connection with the PIM without 

making such quotation sizes available to 

quotation vendors.86 The Commission 

believes that the exemption is consistent 

with the public interest, the protection 

of investors and the removal of 

impediments to and perfection of the 

mechanism of a national market system 

because it would permit the ISE to 

execute unrelated orders against trading 

interest priced better than the NBBO.87

J. Trade-Through Issues 

As noted above, the PIM would 

automatically terminate under certain 

circumstances, including upon the 

receipt of a non-marketable limit order 

in the same series on the opposite side 

of the market as the Agency Order that 

would cause the price of the Crossing 

Transaction to be outside of the best bid 

or offer on the Exchange.88 The BSE 

argues that the proposed PIM is 

inconsistent with the options 

intermarket linkage plan,89 because a 

PIM execution could ‘‘trade through’’ 90

another exchange’s market in such a 

case.91 In Amendment No. 2, the ISE 

proposes to amend its proposal to state 

that when a market order or marketable 

limit order on the opposite side of the 

market from the Agency Order ends the 

exposure period, it would participate in 

the execution of the Agency Order at the 

price that is mid-way between the best 

counter-side interest and the NBBO.92

The Commission notes that all orders 

executed in the PIM are ‘‘guaranteed’’ at 

a better price than the NBBO at the 

initiation of the PIM. The Commission 

believes that the trade should be 

considered to have occurred at the time 

the order is guaranteed at a price at least 

a penny better than the NBBO. 

Accordingly, the Commission does not 

believe that it should be considered a 

trade-through if a trade is executed 

through the PIM at a price that is better 

than the NBBO at the commencement of 

the PIM, but because of a change in the 

NBBO—inferior to the NBBO at the 

conclusion of the PIM. Therefore, the 

Commission finds that ISE’s proposed 

PIM is consistent with the Linkage Plan. 

The Commission reminds brokers, 

however, that they must always 

consider their best execution 

obligations.

K. No Minimum Size Requirement for 

PIM 

One of the principal differences 

between the ISE’s proposed PIM and 

most other exchanges’ rules that 

guarantee members the right to trade 

with their customer orders is that the 

PIM would be available for orders of 

fewer than 50 contracts. Under the ISE’s 

proposal, there would be no minimum 

size requirement for orders entered into 

the PIM, for a pilot period expiring on 

July 18, 2005.93

The Commission believes that the 

ISE’s proposal may provide small 

customer orders with benefits not 

available under the rules of most other 

exchanges, and is consistent with the 

Act. In particular, any Agency Order 

entered into the PIM is guaranteed an 

execution at the end of the auction at a 

price at least a penny better than the 

NBBO. In addition, the Commission 

believes that the ISE’s proposal provides 

the opportunity for more market 

participants to compete in its auction. 

For example, the ISE would permit all 

members and Public Customers to 

participate in the PIM. 

The Commission will evaluate the 

PIM during the pilot period to 

determine whether it would be 

beneficial to customers and to the 

options market as a whole to approve 

any proposal requesting permanent 

approval to permit orders of fewer than 

50 contracts to be submitted to the PIM. 

In addition, the Commission will 

examine the data submitted by the ISE 

with respect to situations in which the 

PIM is terminated prematurely by an 

unrelated order. To aid the Commission 

in its evaluation, the ISE represents that 

it will provide the following 

information each month: 

(1) The number of orders of fewer 

than 50 contracts entered into the PIM; 

(2) The percentage of all orders of 

fewer than 50 contracts sent to ISE that 

are entered into ISE’s PIM; 

(3) The percentage of all ISE trades 

represented by orders of fewer than 50 

contracts; 

(4) The percentage of all ISE trades 

effected through the PIM represented by 

orders of fewer than 50 contracts; 

(5) The percentage of all contracts 

traded on ISE represented by orders of 

fewer than 50 contracts; 

(6) The percentage of all contracts 

effected through the PIM represented by 

orders of fewer than 50 contracts; 

(7) The spread in the option, at the 

time an order of fewer than 50 contracts 

is submitted to the PIM; 

(8) Of PIM trades, the percentage done 

at the NBBO plus $.01, plus $.02, plus 

$.03, etc.; 

(9) The number of orders submitted 

by EAMs when the spread was $.05, 

$.10, $.15, etc. For each spread, specify 

the percentage of contracts in orders of 

fewer than 50 contracts submitted to 

ISE’s PIM that were traded by: (a) The 

EAM that submitted the order to the 

PIM; (b) ISE Market Makers assigned to 

the class; (c) other ISE members; (d) 

Public Customer Orders; and (e) 

unrelated orders (orders in standard 

increments entered during PIM); 

(10) The number of times that a 

market or marketable limit order in the 

same series on the same side of the 

market as the Agency Order prematurely 

ended the PIM auction, and the number 

of times such orders were entered by the 

same (or affiliated) firm that initiated 

the PIM that was terminated; 

(11) The percentage of PIM early 

terminations due to the receipt of a 

market or marketable limit order in the 

same series on the same side of the 

market that occurred within a 1⁄2 second 

of the start of the PIM auction; the 

percentage that occurred within one 

second of the start of the PIM auction; 

the percentage that occurred within one 

and 1⁄2 second of the start of the PIM 

auction; the percentage that occurred 

within 2 seconds of the start of the PIM 

auction; the percentage that occurred 

within 2 and 1⁄2 seconds of the PIM 

auction; and the average amount of 

price improvement provided to the 

Agency Order where the PIM is 

terminated early at each of these time 

periods; 

(12) The number of times that a 

market or marketable limit order in the 

same series on the opposite side of the 

75100 Federal Register / Vol. 69, No. 240 / Wednesday, December 15, 2004 / Notices 

94 15 U.S.C. 78s(b)(2).

95 15 U.S.C. 78s(b)(2).

96 15 U.S.C. 78f(b)(5). In connection with the 

issuance of this approval order, neither the 

Commission or its staff is granting any exemptive 

or no-action relief from the requirements of Rule 

10b–10. Accordingly, a broker-dealer executing a 

customer order through the PIM will need to 

comply with all applicable requirements of that 

Rule.

97 15 U.S.C. 78s(b)(2).

98 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3 17 CFR 240.19b–4(f)(3).

market as the Agency Order prematurely 

ended the PIM auction and at what time 

the unrelated order ended the PIM 

auction, and the number of times such 

orders were entered by the same (or 

affiliated) firm that initiated the PIM 

that was terminated; 

(13) The percentage of PIM early 

terminations due to the receipt of a 

market or marketable limit order in the 

same series on the opposite side of the 

market that occurred within a 1⁄2 second 

of the start of the PIM auction; the 

percentage that occurred within one 

second of the start of the PIM auction; 

the percentage that occurred within one 

and 1⁄2 second of the start of the PIM 

auction; the percentage that occurred 

within 2 seconds of the start of the PIM 

auction; the percentage that occurred 

within 2 and 1⁄2 seconds of the PIM 

auction; and the average amount of 

price improvement provided to the 

Agency Order where the PIM is 

terminated early at each of these time 

periods; 

(14) The number of times that a nonmarketable limit order in the same 

series on the same side of the market as 

the Agency Order that would cause the 

price of the Crossing Transaction to be 

outside of the best bid or offer on the 

Exchange prematurely ended the PIM 

auction and at what time the unrelated 

order ended the PIM auction, and the 

number of times such orders were 

entered by the same (or affiliated) firm 

that initiated the PIM that was 

terminated; 

(15) The percentage of PIM early 

terminations due to the receipt of a 

market or marketable limit order in the 

same series on the same side of the 

market as the Agency Order that would 

cause the price of the Crossing 

Transaction to be outside of the best bid 

or offer on the Exchange that occurred 

within a 1⁄2 second of the start of the 

PIM auction; the percentage that 

occurred within one second of the start 

of the PIM auction; the percentage that 

occurred within one and 1⁄2 second of 

the start of the PIM auction; the 

percentage that occurred within 2 

seconds of the start of the PIM auction; 

the percentage that occurred within 2 

and 1⁄2 seconds of the PIM auction; and 

the average amount of price 

improvement provided to the Agency 

Order where the PIM is terminated early 

at each of these time periods; and 

(16) The average amount of price 

improvement provided to the Agency 

Order when the PIM auction is not 

terminated early (i.e., runs the full three 

seconds). 

VI. Accelerated Approval of 

Amendments No. 2 and 3

Pursuant to section 19(b)(2) of the 

Act,94 the Commission may not approve 

any proposed rule change, or 

amendment thereto, prior to the 30th 

day after the date of publication of 

notice of the filing thereof, unless the 

Commission finds good cause for so 

doing and publishes its reasons for so 

finding. The Commission hereby finds 

good cause for approving Amendments 

No. 2 and 3 to the proposal, prior to the 

30th day after publishing notice of 

Amendments No. 2 and 3 in the Federal 

Register. The revisions made to the 

proposal in the ISE’s Amendment No. 2 

clarify the operation of the PIM and 

were provided in response to issues 

raised in the Comment Letter and by 

Commission staff. In addition, the ISE in 

Amendment No. 3 established that 

paragraphs (c)(5), (d)(5), and (d)(6) of 

proposed ISE Rule 723 would be 

effective for a pilot period expiring on 

July 18, 2005. The Commission believes 

that the proposed changes in 

Amendments No. 2 and 3 are necessary 

to the proper functioning and 

implementation of the ISE PIM. The 

Commission further believes that 

Amendments No. 2 and 3 do not raise 

issues of regulatory concern that 

warrant further delay. Therefore, the 

Commission believes that accelerated 

approval of Amendments No. 2 and 3 is 

appropriate. Accordingly, pursuant to 

section 19(b)(2) of the Act,95 the 

Commission finds good cause to 

approve Amendments No. 2 and 3 prior 

to the 30th day after notice of the 

Amendment is published in the Federal 

Register.

VII. Conclusion 

For the foregoing reasons, the 

Commission finds that the proposed 

rule change, as amended, 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.96

It is therefore ordered, pursuant to 

section 19(b)(2) of the Act,97 that the 

proposed rule change (SR–ISE–2003–06) 

and Amendment No. 1 are approved; 

and that Amendments No. 2 and 3 

thereto are approved on an accelerated 

basis, except that provisions relating to 

paragraphs (c)(5), (d)(5), and (d)(6) of 

ISE Rule 723 are approved on a pilot 

basis until July 18, 2005.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.98

J. Lynn Taylor, 

Assistant Secretary.

[FR Doc. 04–27395 Filed 12–14–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50823; File No. SR–NASD–

2004–168] 

Self-Regulatory Organizations; Notice 

of Filing of and Immediate 

Effectiveness of Proposed Rule 

Change by the National Association of 

Securities Dealers, Inc. Relating to 

Certificate of Designation for Preferred 

Stock of The Nasdaq Stock Market, Inc. 

December 8, 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 November 

1, 2004 the National Association of 

Securities Dealers, Inc. (‘‘NASD’’ or 

‘‘Association’’), through its subsidiary, 

The Nasdaq Stock Market, Inc. 

(‘‘Nasdaq’’), 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 Nasdaq. Pursuant to Rule 

19b–4(f)(3),3 Nasdaq has designated this 

filing as one solely concerned with the 

administration of the self-regulatory 

organization, and as such, the filing is 

immediately effective. 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 

Nasdaq is filing with the Commission 

a Certificate of Designations, Preferences 

and Rights (‘‘Certificate of Designation’’) 

of Series C Cumulative Preferred Stock 

(‘‘Series C Preferred’’) authorized to be 

issued to the NASD. The issuance of the 

Series C Preferred is part of a 

transaction between the NASD and 

Nasdaq whereby 1,338,402 shares of 

Nasdaq’s Series A Cumulative Preferred