5694 Federal Register / Vol. 74, No. 19 / Friday, January 30, 2009 / Notices 

12 15 U.S.C. 78s(b)(2). 

13 In approving the proposed rule change, the 

Commission considered the proposal’s impact on 

efficiency, competition and capital formation. 15 

U.S.C. 78c(f). 

14 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. 57254 

(February 1, 2008), 73 FR 7345 (February 7, 2008) 

(‘‘Notice’’). 

4See letters from Abe Lampert, dated May 25, 

2006 (‘‘Lampert Letter’’); Charles B. Cox III, dated 

May 26, 2006 (‘‘Cox Letter I’’); B. Thomas Rule, 

dated May 28, 2006 (‘‘Rule Letter’’); Bryan 

Weisberg, dated May 31, 2006 (‘‘Weisberg Letter’’); 

Andrea Schneider, dated June 18, 2006 (‘‘A. 

Schneider Letter’’); Gerald Schneider, dated 

February 6, 2008 (‘‘G. Schneider Letter’’); Andrew 

Carr, dated March 4, 2008 (‘‘Carr Letter’’); Charles 

B. Cox III, dated March 4, 2008 (‘‘Cox Letter II’’); 

Charles B. Cox III, dated April 16, 2008 (‘‘Cox Letter 

III’’); and Securities Industry and Financial Markets 

Association (‘‘SIFMA’’), dated July 23, 2008 

(‘‘SIFMA Letter’’). 

5 In Amendment No. 2, ISE deleted proposed 

changes to ISE Rules 715 and 723 (d)(2). These 

revisions clarify that the proposed rule change 

would not limit a Public Customer’s access to the 

Exchange’s Price Improvement Mechanism (‘‘PIM’’). 

See infra note 75. 

6See letter from Michael J. Simon, Secretary, ISE, 

to Florence Harmon, Acting Secretary, Commission, 

dated January 12, 2009 (‘‘ISE Response Letter’’). 7A ‘‘Public Customer’’ is defined in ISE’s rules 

as ‘‘a person that is not a broker or dealer in 

securities.’’ A ‘‘Public Customer Order’’ is defined 

as ‘‘an order for the account of a Public Customer.’’ 

ISE Rules 100(a)(38) and (39). 8A ‘‘Non-Customer’’ is defined in ISE’s rules as 

‘‘a person or entity that is a broker or dealer in 

securities.’’ A ‘‘Non-Customer Order’’ is defined as 

‘‘any order that is not a Public Customer Order.’’ 

ISE Rules 100(a)(27) and (28). 

9For example, Public Customer Orders currently 

incur fees for certain transactions in ‘‘Premium 

Products’’ (defined in the ISE Schedule of Fees) and 

Complex Orders that take liquidity on the 

Exchange’s complex order book. In addition, 

transaction fees are charged for Public Customer 

Orders entered in response to special order 

broadcasts, such as Facilitation orders, Solicitation 

orders, Block orders, and orders entered in the 

Exchange’s PIM. Public Customer Orders also are 

subject to fees for order cancellations. See ISE 

Schedule of Fees. 

10See Notice, supra note 3, at 73 FR 7346. 

11See Notice, supra note 3, at 73 FR 7346 n.7. 

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–DTC–2008–15. 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, 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 DTC and on 

DTC’s Web site at http://www.dtcc.com/ 

downloads/legal/rule_filings/2008/dtc/ 

2008–15.pdf. 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–DTC– 

2008–15 and should be submitted on or 

before February 20, 2009. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,12 that the 

proposed rule change (File No. SR– 

DTC–2008–15) be and hereby is 

approved.13

For the Commission by the Division of 

Trading and Markets, pursuant to delegated 

authority.14

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–1983 Filed 1–29–09; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59287; File No. SR–ISE– 

2006–26] 

Self-Regulatory Organizations; 

International Securities Exchange, 

LLC; Notice of Filing of Amendment 

No. 2 and Order Granting Accelerated 

Approval of the Proposed Rule 

Change, as Modified by Amendment 

Nos. 1 and 2 Thereto, Relating to 

Professional Account Holders 

January 23, 2009. 

I. Introduction 

On May 5, 2006, the International 

Securities Exchange, LLC (‘‘ISE’’ or 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’) a proposed rule change 

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

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder 2 to 

amend ISE rules to give certain nonbroker-dealer orders, identified as 

‘‘professional orders,’’ the priority given 

broker-dealer orders and market maker 

quotes rather than the priority currently 

given all public customer orders and to 

charge the same transaction fees for 

professional orders as charged for the 

orders of broker-dealers and market 

makers. On January 25, 2008, the 

Exchange filed Amendment No. 1 to the 

proposed rule change. The proposed 

rule change, as modified by Amendment 

No. 1, was published for comment in 

the Federal Register on February 7, 

2008.3 The Commission received ten 

comment letters on the proposal.4 The 

Exchange filed Amendment No. 2 to the 

proposed rule change on June 17, 2008,5

and submitted a response to the SIFMA 

Letter on January 12, 2009.6 This order 

provides notice of Amendment No. 2 

and approves the proposal, as modified 

by Amendment Nos. 1 and 2, on an 

accelerated basis. 

II. Description of ISE’s Proposal 

Currently, ISE grants certain 

advantages to Public Customer Orders 7

over Non-Customer Orders.8 In 

particular, Public Customer Orders 

receive priority over Non-Customer 

Orders and market maker quotes at the 

same price. In addition, subject to 

certain exceptions, Public Customer 

Orders do not incur transaction 

charges.9 The ISE states that the 

purpose, generally, of providing these 

marketplace advantages to Public 

Customer Orders is to attract retail 

investor order flow to the Exchange by 

leveling the playing field for retail 

investors over market professionals and 

providing competitive pricing.10

According to the Exchange, market 

professionals have access to 

sophisticated trading systems that 

contain functionality not available to a 

retail customer, including things such as 

continuously updated pricing models 

based upon real-time streaming data, 

access to multiple markets 

simultaneously, and order and risk 

management tools.11

With respect to the marketplace 

advantages of priority in trading and 

waiver of fees, the Exchange does not 

believe at this time that the definitions 

of Public Customer and Non-Customer 

properly distinguish between the kind 

of non-professional retail investors for 

whom these advantages were intended 

and certain professionals. The Exchange 

believes that distinguishing solely 

between registered broker-dealers and 

non-broker-dealers with respect to these 

mstockstill on PROD1PC66 with NOTICES

Federal Register / Vol. 74, No. 19 / Friday, January 30, 2009 / Notices 5695 

12The Exchange also maintains that, under its 

current rules, retail investors are prevented from 

fully benefiting from the priority advantage when 

professional account holders are afforded the same 

Public Customer Order priority that retail investors 

enjoy. See Notice, supra note 3, at 73 FR 7346. 

13 Id. 

14The Exchange states that 390 orders is equal to 

the total number of orders that a person would 

place in a day if that person entered one order every 

minute from market open to market close. 

According to ISE, a study of one of the largest retailoriented options brokerage firms indicated that on 

a typical trading day, options orders were entered 

with respect to each of 5,922 different customer 

accounts. There was only one order entered with 

respect to 3,765 of the 5,922 different customer 

accounts on this day, and there were only 17 

customer accounts with respect to which more than 

10 orders were entered. The highest number of 

orders entered with respect to any one account over 

the course of an entire week was 27. In addition, 

many of the largest retail-oriented electronic 

brokers offer lower commission rates to customers 

they define as ‘‘active traders.’’ The Exchange 

reviewed the publicly available information from 

the Web sites for Charles Schwab & Co., Inc.; 

Fidelity Investments; TD Ameritrade, Inc.; and 

optionsXpress, Inc., and found all of them define 

an ‘‘active trader’’ as someone who executes only 

a relatively small number of options trades per 

month. The highest required trading activity to 

qualify as an active trader among these four firms 

was 35 trades per quarter. See Notice, supra note 

3, at 73 FR 7347 n.10–11. 

15Members would be required to represent as 

Professional Orders for the next calendar quarter 

the orders for any customer that had an average of 

more than 390 orders per day during any month of 

a calendar quarter. See proposed Text of Regulatory 

Circular filed by ISE as part of the proposed rule 

change (‘‘Proposed Regulatory Circular’’). 

16See Notice, supra note 3, at 73 FR 7346–47. 

17See Proposed Regulatory Circular, supra note 

15. 

18See Chapter 19 of the ISE Rules. 

19See Chapter 6 of the ISE Rules. Telephone 

conversation between Nancy Burke-Sanow, 

Assistant Director, Division of Trading and Markets 

(‘‘Division’’), Commission, et al., and Katherine 

Simmons, Deputy General Counsel, ISE, on March 

3, 2008. 

20See, e.g., Nina Mehta, Options Maker-Taker 

Markets Gain Steam, TRADERSmagazine.com, 

October 2007, http://www.tradersmagazine.com/

issues/20071004/2933–1.html. 

advantages is no longer appropriate in 

today’s marketplace, because some nonbroker-dealer individuals and entities 

have access to information and 

technology that enables them to trade 

listed options in the same manner as a 

broker or dealer in securities. The 

Exchange maintains that these 

individual traders and entities 

(collectively, ‘‘professional account 

holders’’) have the same technological 

and informational advantages as brokerdealers trading for their own accounts, 

which enables professional account 

holders to compete effectively with 

broker-dealer orders and market maker 

quotes for execution opportunities in 

the ISE marketplace.12 The Exchange 

therefore does not believe that it is 

consistent with fair competition for 

these professional accounts holders to 

continue to receive the same 

marketplace advantages that retail 

investors have over broker-dealers 

trading on the ISE.13

ISE thus proposes to create two new 

order types: Priority Customer Orders 

and Professional Orders. Priority 

Customer Orders would be orders for 

the account of a Priority Customer, 

which would be defined as a person or 

entity that is not a broker-dealer in 

securities and that does not place more 

than 390 orders 14 in listed options per 

day on average during a calendar month 

for its own beneficial account(s). 

Professional Orders would be defined as 

orders for the account of a person or 

entity that is not a Priority Customer, 

and would include proprietary orders of 

ISE members and non-member brokerdealers.15 Priority Customer Orders 

would have priority over Professional 

Orders at the same price. Thus, Public 

Customers who now have priority over 

market makers and broker-dealers at the 

same price would be on parity with 

market markers and broker-dealers at 

the same price, if those Public 

Customers placed more than 390 orders 

in listed options per day on average 

during a calendar month. These 

Professional Orders also would be 

assessed the same fees that ISE charges 

for broker-dealer transactions. 

The Exchange believes that the use of 

these new terms in the execution rules 

and fee schedule would result in 

professional account holders 

participating in the ISE’s allocation 

process on equal terms with brokerdealer orders and market maker quotes. 

It would also result in members paying 

the same transaction fees for the 

execution of orders for a professional 

account as they do for broker-dealer 

orders. The Exchange believes that 

identifying professional account holders 

as participants who place more than one 

order per minute on average per day 

during a calendar month is an 

appropriately objective approach that 

would reasonably distinguish such 

persons and entities from retail 

investors. The Exchange proposes the 

threshold of 390 orders per day on 

average over a calendar month because 

it believes this amount far exceeds the 

number of orders that are entered by 

retail investors in a single day, while 

being a sufficiently low number of 

orders to cover the professional account 

holders that are competing with brokerdealers in the ISE marketplace. ISE 

further notes that basing the standard on 

the number of orders that are entered in 

listed options for a beneficial account(s) 

assures that professional account 

holders could not inappropriately avoid 

the purpose of the rule by spreading 

their trading activity over multiple 

exchanges, and using an average 

number over a calendar month would 

prevent gaming of the 390 order 

threshold.16

ISE’s proposal would require 

Electronic Access Members (‘‘EAMs’’) to 

indicate whether Public Customer 

Orders are Priority Customer Orders or 

Professional Orders. EAMs would be 

required to review their customers’ 

activity on at least a quarterly basis to 

determine whether orders that are not 

for the account of a broker or dealer 

should be represented as Priority 

Customer Orders or Professional Orders. 

Members would be required to make 

any appropriate changes to the way in 

which they are representing orders 

within five days after the end of each 

calendar quarter. If during a calendar 

quarter the Exchange identified a 

customer for which orders are being 

represented as Priority Customer 

Orders, but that customer has averaged 

more than 390 orders per day during a 

month, the Exchange would notify the 

member and the member would be 

required to change the manner in which 

it is representing the customer’s orders 

within five days.17

All Public Customers would continue 

to be treated in the same manner under 

all ISE rules, other than those rules for 

priority and transaction fees. For 

example, ISE rules relating to the 

Intermarket Linkage affecting Public 

Customers 18 would continue to apply to 

all customers who are not brokerdealers—even those customers whose 

orders are identified as Professional 

Orders. Similarly, rules regarding 

customer suitability and other 

protections for customers would 

continue to apply with respect to all 

customers who are not broker-dealers.19

III. Commission Findings and Order 

Granting Accelerated Approval to the 

Proposed Rule Change as Modified by 

Amendment Nos. 1 and 2 

After careful consideration of the 

proposed rule change, as well as the 

comment letters and the ISE Response 

Letter, the Commission finds that the 

proposed rule change is consistent with 

the Act. As the options markets have 

become more electronic and more 

competitive over the last several years, 

the Commission believes that the 

distinction between a professional who 

is registered as a broker-dealer and a 

public customer who is not so 

registered, but who may trade to the 

same extent as a broker-dealer, has 

become blurred.20 Moreover, the 

mstockstill on PROD1PC66 with NOTICES

5696 Federal Register / Vol. 74, No. 19 / Friday, January 30, 2009 / Notices 

21 Id. 

22The Commission notes that one of the 

commenters, discussing the proposed rule change 

before the Exchange filed Amendment No. 1, stated 

that she placed an average of 170 orders per day. 

See A. Schneider Letter supra note 4. Under the 

proposed rule change, as amended, a Public 

Customer that places this number of orders would 

be substantially short of the proposed threshold of 

more than 390 orders per day and thus would not 

be affected by the rule. 

23 15 U.S.C. 78f(b). 

24 In approving the proposed rule change, the 

Commission notes that it has considered the 

proposed rule’s impact on efficiency, competition, 

and capital formation. See 15 U.S.C. 78c(f). See also 

infra notes 50–71 and accompanying text. 

25 15 U.S.C. 78f(b)(4). 

26 15 U.S.C. 78f(b)(5). 

27 15 U.S.C. 78f(b)(8). 

28 15 U.S.C. 78k(a). See infra Section III.A.1. 

29See, e.g., Securities Exchange Act Release Nos. 

21695 (January 28, 1985), 50 FR 4823 (February 1, 

1985) (in considering Chicago Board Options 

Exchange’s (‘‘CBOE’’) proposal to implement a 

retail automatic execution system (‘‘RAES’’) pilot 

program, the Commission referred to ‘‘the 

traditional priority accorded to public customer 

orders’’); and 22610 (November 8, 1985), 50 FR 

47480 (November 18, 1985) (in considering a 

proposal by the American Stock Exchange 

(‘‘Amex’’) to implement an automatic execution 

feature of its AUTOAMOS system on a pilot basis, 

the Commission stated that the pilot ‘‘ensures the 

traditional priority accorded public customer 

orders’’). In each of these instances, the 

Commission was referring specifically to public 

customer orders that are placed on the book. Such 

placements may affect the application of priority 

principles. See, e.g., infra Section III.A.3. 

30See, e.g., Securities Exchange Act Release No. 

22817 (January 21, 1986), 51 FR 3547 (January 28, 

1986) (notice of CBOE’s proposal to implement 

RAES on a permanent basis for options on the 

Standard and Poor’s 100 Index (‘‘OEX’’) (SR–CBOE– 

85–32) and to extend RAES to selected classes of 

individual stock options on a six-month pilot basis 

(SR–CBOE–85–16) (‘‘January 1986 Release’’). See 

also infra note 40. 

31See infra notes 41–44 and accompanying text. 

32 15 U.S.C. 78k(a). 

33See, e.g., Securities Exchange Act Release No. 

27205 (August 31, 1989), 54 FR 37180 (September 

7, 1989) (Commission order approving a proposal 

of the Philadelphia Stock Exchange (‘‘Phlx’’) 

relating to the crossing of agency orders). See also, 

e.g., Securities Exchange Act Release No. 33708 

(March 3, 1994), 59 FR 11339 (March 10, 1994) 

(Commission order approving a proposal of the 

Midwest Stock Exchange, Inc. relating to agency 

crosses between the disseminated exchange 

market). 

34Section 11(a)(1)(A). 

35 17 CFR 240.11a2–2(T). 

category of public customer today 

includes sophisticated algorithmic 

traders including former market makers 

and hedge funds that trade with a 

frequency resembling that of brokerdealers.21 The Commission believes that 

the Act does not require the ISE to treat 

those customers who meet the high 

level of trading activity established in 

the proposal identically to customers 

who do not meet that threshold.22

Specifically, the Commission finds 

that the proposed rule change is 

consistent with Section 6(b) 23 of the Act 

and the rules thereunder,24 and in 

particular with: 

Section 6(b)(4) of the Act, which 

requires exchanges to provide for the 

equitable allocation of reasonable dues, 

fees, and other charges among its 

members and issuers and other persons 

using its facilities; 25

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

requires that the rules of a national 

securities exchange, among other things, 

be designed 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; and not be designed to 

permit unfair discrimination between 

customers, issuers, brokers, or 

dealers; 26 and 

Section 6(b)(8) of the Act, which 

requires the rules of an exchange not to 

impose any burden on competition not 

necessary or appropriate in furtherance 

of the Act.27

In addition, the Commission finds 

that the proposed rule change is 

consistent with Section 11(a) of the 

Act.28

A. Customer Priority on the Options 

Exchanges 

Currently, the ISE accords priority to 

all Public Customer Orders at the best 

bid or offer on the basis of price-time 

priority before allocating any remaining 

contracts among Non-Customer Orders 

and market maker quotes at the same 

best price. ISE now proposes that only 

Priority Customer Orders, as defined 

above, would receive such priority. 

In considering this aspect of the 

proposal, the Commission examined the 

basis upon which exchanges have 

granted priority to public customers in 

the past. The Commission further 

considered the threshold question of 

when and whether the orders of public 

customers must be entitled to priority 

over the orders of broker-dealers. 

In certain contexts, the Commission 

has characterized an exchange’s practice 

of according priority to public 

customers’ orders as a matter of 

‘‘tradition.’’ 29 Alternatively, the 

Commission has referred to public 

customer priority as ‘‘the generally 

accepted auction trading principle of 

priority of public limit orders over 

member proprietary orders at the same 

price.’’ 30

These references in Commission 

releases support the Commission’s view 

that the customer priority rule under 

discussion was not a matter of public 

customer entitlement derived from the 

Act, but rather a matter of convention to 

accommodate public customer orders, 

or an auction principle applied as a 

matter of longstanding practice by 

exchanges. In addition, public customer 

orders are a source of liquidity in the 

market, and exchanges have sought to 

attract such orders by providing public 

customers certain guarantees that their 

orders would be executed even in the 

face of competition from broker-dealers. 

The Commission previously has 

approved exchange rules that apply this 

‘‘traditional priority’’ as consistent with 

the Act but, as discussed below, has 

approved exchange rules that do not 

accord priority to public customer 

orders.31 In analyzing the concept of 

public customer priority, the 

Commission has considered whether 

public customer priority, or the absence 

of such priority, is consistent with 

Section 11(a) of the Act, the agency 

obligations of the specialist, the 

protection of investors and the public 

interest, and the Act, in general. 

1. Section 11(a) of the Act 

Section 11(a) of the Act prohibits any 

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 unless an 

exception applies.32 Thus, in some 

contexts, the Commission has cited 

Section 11(a) of the Act as a basis for 

exchange rules that accord customer 

orders priority, referring to ‘‘the 

traditional auction market concepts of 

customer priority embodied in Section 

11(a) of the Act.’’ 33

Section 11(a)(1) contains a number of 

exceptions for principal transactions by 

members and their associated persons. 

One such exception, set forth in 

subparagraph (G) of Section 11(a)(1) and 

in Rule 11a1–1(T), permits any 

transaction for a member’s own account 

provided, among other things, that the 

transaction yields priority, parity, and 

precedence to orders for the account of 

persons who are not members or 

associated with members of the 

exchange. Exchange rules, therefore, 

may require members to yield priority to 

the orders of public customers to satisfy 

this exception to Section 11(a). Another 

exception permits market makers to 

effect transactions on exchanges in 

which they are members.34

In addition to the exceptions noted 

above, Rule 11a2–2(T) under the Act 35

provides exchange members with an 

exception from the prohibitions in 

Section 11(a). Rule 11a2–2(T), known as 

the ‘‘effect versus execute’’ rule, permits 

an exchange member, subject to certain 

mstockstill on PROD1PC66 with NOTICES

Federal Register / Vol. 74, No. 19 / Friday, January 30, 2009 / Notices 5697 

36The member, however, may participate in 

clearing and settling the transaction. See Securities 

Exchange Act Release No. 14563 (March 14, 1978), 

43 FR 11542 (March 17, 1978). 37 17 CFR 240.11a2–2(T). 38See, e.g., Securities Exchange Act Release No. 

51666 (May 9, 2005), 70 FR 25631 (May 13, 2005). 39The Commission notes that, first, all orders are 

electronically submitted to the ISE through remote 

terminals. Second, because a member relinquishes 

control of its order after it is submitted to the 

system, the member does not receive special or 

unique trading advantages. Third, although the 

effect-versus-execute rule contemplates having an 

order executed by an exchange member who is not 

affiliated with the member initiating the order, the 

Commission recognizes that this requirement is 

satisfied when automated exchange facilities are 

used. (In considering the operation of automated 

execution systems operated by an exchange, the 

Commission has noted that while there is no 

independent executing exchange member, the 

execution of an order is automatic once it has been 

transmitted into the systems. Because the design of 

these systems ensures that members do not possess 

any special or unique trading advantages in 

handling their orders after transmitting them to the 

exchange, the Commission has stated that 

executions obtained through these systems satisfy 

the independent execution requirement of Rule 

11a2–2(T). See Securities Exchange Act Release No. 

15533 (January 29, 1979).) Finally, to the extent that 

ISE members rely on Rule 11a2–2(T) for a managed 

account transaction, they must comply with the 

limitations on compensation set forth in the rule. 

See id., at note 20. 

40For example, in January 1986, in publishing for 

public comment two proposed rule changes relating 

to the operation of RAES, see supra note 30, the 

Commission raised the question of whether the 

proposals were inconsistent with the provision in 

Section 6(b)(5) of the Act relating to the protection 

of investors and the public interest. The 

Commission also asked whether RAES was 

inconsistent with Section 11A of the Act, which 

states that it is in the public interest and 

appropriate for the protection of investors to assure 

‘‘economically efficient execution of securities 

transactions,’’ ‘‘the practicability of brokers 

executing investors’ orders in the best market,’’ and 

‘‘an opportunity * * * for investors’ orders to be 

executed without the participation of a dealer.’’ 15 

U.S.C. 78k–1(a)(1)(C)(i), (iv) and (v). On August 1, 

1986, the Commission approved the proposal to 

make the RAES pilot program in OEX options 

permanent and a modified version of the pilot 

proposal for RAES in equity options, concluding 

that the proposed rule changes were consistent with 

the requirements of the Act, and, in particular, with 

Sections 6 and 11A of the Act. See Securities 

Exchange Act Release No. 23490 (August 1, 1986), 

51 FR 28788 (August 11, 1986). In its approval 

order, the Commission stated that it was ‘‘cognizant 

of the substantial benefits provided by RAES to 

public customers of OEX and firms using the 

system’’ and noted that RAES had increased the 

efficiencies of the OEX market and added to the 

confidence of public customers. The Commission 

indicated that it expected CBOE to modify RAES for 

OEX options in the future, although it stated that 

its approval of the rule change was not tied to this 

expectation. Noting the technical impediments to 

modifying the system for such options, the 

Commission expressed its belief that ‘‘on balance, 

the benefits of RAES for the market in OEX weigh 

in favor of permanent approval.’’ 

41CBOE had proposed alternative priority 

methodologies for its SBT system including public 

customer priority, market turner priority, and trade 

participation rights for Designated Primary Market 

Makers (‘‘DPMs’’) and Lead Market Makers. See 

Securities Exchange Act Release No. 47628 (April 

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

order approving rules for CBOEdirect). 

42 In 2005, the Commission approved a proposal 

by the CBOE to eliminate the requirement that 

DPMs act as the agent in the options in which it 

is registered as the DPM on the Exchange. See 

Securities Exchange Act Release No. 52798 

(November 18, 2005), 70 FR 71344 (November 28, 

2005) (Commission order approving removing 

agency responsibilities of DPMs). 

43The Commission stated that the ‘‘contention 

that all existing options exchanges provide strict 

customer priority is an overstatement.’’ The 

Commission noted that several options exchanges 

had rules to permit market makers to be on parity 

with customer orders in certain circumstances. See 

Securities Exchange Act Release No. 49068 (January 

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

44See Securities Exchange Act Release No. 54238, 

(July 28, 2006), 71 FR 44758 (August 7, 2006) 

(Commission order approving NYSE Arca’s OX 

Trading Platform). 

conditions, to effect transactions for its 

own account, the account of an 

associated person, or an account with 

respect to which it or an associated 

person thereof exercises investment 

discretion (collectively, ‘‘covered 

accounts’’) by arranging for an 

unaffiliated member to execute the 

transactions on the exchange. 

To comply with the ‘‘effect versus 

execute’’ rule’s conditions, a member: (i) 

Must transmit the order from off the 

exchange floor; (ii) may not participate 

in the execution of the transaction once 

it has been transmitted to the member 

performing the execution; 36 (iii) may 

not be affiliated with the executing 

member; and (iv) with respect to an 

account over which the member has 

investment discretion, neither the 

member nor its associated person may 

retain any compensation in connection 

with effecting the transaction except as 

provided in the rule.37

The Commission previously has 

found that the manner of operation of 

ISE’s Facilitation Mechanism enables 

Exchange members to meet the 

conditions of the effect versus execute 

rule and thereby avail themselves of the 

exception that the rule provides from 

the prohibitions of Section 11(a).38

Similarly, the Commission believes that 

the manner of operation of ISE’s overall 

electronic trading system, not only the 

Facilitation Mechanism, enables 

members to meet the four conditions of 

the effect versus execute rule and would 

continue to do so under the proposal.39

For this reason, the Commission 

believes that the proposed rule change, 

which would permit orders of ISE 

members to be executed under certain 

circumstances even if a Professional 

Order is on the ISE’s book, is consistent 

with the requirements of Section 11(a) 

of the Act and Rule 11a2–2(T) 

thereunder. 

2. Protecting Investors and the Public 

Interest 

In analyzing the merits of exchange 

proposals affecting public customer 

order priority, the Commission has 

considered whether the proposed rule 

change is consistent with Section 6(b)(5) 

of the Act, which requires that the rules 

of an exchange, among other things, be 

designed ‘‘to protect investors and the 

public interest.’’ 40

The Commission does not believe that 

this provision of Section 6(b)(5) requires 

that ISE give priority to Public 

Customers whose orders would be 

considered Professional Orders under 

the proposal. The Commission has 

indicated in the past that it does not 

believe that priority for public customer 

orders is an essential attribute of an 

exchange. In particular, the Commission 

has approved options exchanges’ 

trading rules that do not give priority to 

orders of public customers that are 

priced no better than the orders of other 

market participants. 

For example, in approving proposed 

rules governing CBOEdirect, CBOE’s 

electronic screen-based trading system 

(‘‘SBT’’), the Commission concluded 

that it was consistent with the Act for 

the CBOEdirect rules not to provide 

priority to public customer orders over 

market maker quotes and orders in all 

instances.41 Significantly, the 

Commission noted in its approval order 

for the SBT rules that, in the rules 

governing trades on CBOE’s floor, 

customer orders displayed on the limit 

order book are given priority over 

broker-dealer orders and market maker 

quotes, but distinguished the operation 

of CBOEdirect. On the floor, the 

Commission noted, the priority of 

booked customer limit orders was 

essential because (at the time) the DPM 

was the agent for orders resting in the 

limit order book and, therefore, 

consistent with general agency law 

principles, CBOE’s rules accorded 

priority to those resting limit orders.42

In contrast, an SBT market maker was 

not required to act as agent with respect 

to a limit order entered into CBOEdirect. 

Furthermore, on the Boston Options 

Exchange (‘‘BOX’’), the options facility 

of the Boston Stock Exchange, Inc., 

orders generally are executed according 

to price-time priority, with no 

distinctions made with regard to 

account designation (Public Customer, 

Broker/Dealer or Market Maker).43 On 

the options facility of NYSE Arca, Inc. 

(‘‘NYSE Arca’’), all non-marketable limit 

orders and quotes also are ranked in an 

electronic limit order file and matched 

for execution according to price-time 

priority.44 On these exchanges, all 

options orders at the best price are 

executed based on the time the order 

was entered. In approving these 

mstockstill on PROD1PC66 with NOTICES

5698 Federal Register / Vol. 74, No. 19 / Friday, January 30, 2009 / Notices 

45 Id. 

46On several options exchanges, including BOX 

and CBOE, the exchange market makers have no 

responsibility for executing book orders, do not 

receive any fees for execution of book orders, and, 

accordingly, have no agency responsibilities for 

book orders. See e.g., BOX Rules, Chapter V and 

CBOE Rules Chapter VIII. 

47The Commission recognizes that ISE’s rules 

mandate that a Public Customer Order be 

represented by an agent in a discrete situation. ISE 

Rule 803(c) requires Primary Market Makers 

(‘‘PMMs’’), as soon as practical, to address Public 

Customer Orders that are not automatically 

executed because there is a displayed bid or offer 

on another exchange trading the same option 

contract that is better than the best bid or offer on 

the Exchange. In such cases, PMMs are required to 

execute at a price that matches the best price 

displayed on another exchange and/or send a 

Linkage Order. However, ISE Rule 803(c), which 

pertains to Intermarket Linkage, would not be 

affected by the proposed rule change. As noted 

above, ISE rules relating to the Intermarket Linkage 

affecting Public Customers would continue to apply 

to all Public Customers—even those customers 

whose orders are identified as Professional Orders. 

See supra note 18 and accompanying text. 

48See supra note 4. 

49See SIFMA Letter, supra note 4. 

50See, e.g., Cox Letter I supra note 4 and 

Weisberg Letter supra note 4. 

51See, e.g., Carr Letter supra note 4, G. Schneider 

Letter supra note 4 and Rule Letter supra note 4. 

52See, e.g., Carr Letter supra note 4, Cox Letter 

II supra note 4 and Rule Letter supra note 4. 

53See Section 11(a) of the Act, 15 U.S.C. 78k(a), 

and the rules thereunder. 

54A ‘‘specialist entitlement’’ as used here is an 

options exchange rule that under certain 

circumstances guarantees a specialist (or designated 

primary market maker) the right to trade ahead of 

other participants in the trading crowd with a 

certain percentage of every order—when the 

specialist is quoting at the best price—even when 

the specialist has not otherwise established priority. 

See, e.g., ISE Rule 713, Supplementary Material 

.01(b); Amex Rule 935–ANTE(a)(5); CBOE Rule 

8.87; NYSE Arca Rule 6.82(d)(2); Phlx Rule 

1014(g)(ii). 

55A ‘‘facilitation guarantee’’ as used here is an 

options exchange rule that under certain 

circumstances guarantees an order entry firm that 

has submitted a public customer order for execution 

on the exchange to trade with a certain percentage 

of that public customer order itself, ahead of other 

participants in the trading crowd that are prepared 

to trade at the same price. See, e.g., ISE Rule 716(d); 

Amex Rule 950–ANTE, Commentary .02; CBOE 

Rule 6.74(b); NYSE Arca Rule 6.47(b); A ‘‘solicited 

order guarantee’’ is an options exchange rule that 

entitles a broker or firm that has solicited an order 

from a third party to trade against its customer’s 

order to execute a certain percentage of the 

customer’s order against the solicited order ahead 

of other participants in the trading crowd that are 

prepared to trade at the same price. See, e.g., ISE 

Rule 716(e) (Solicited Order Mechanism). 

exchanges’ rules, the Commission found 

them to be consistent with the Act. 

The Commission believed that the 

BOX’s and NYSE Arca’s rules, which 

accord no priority to any public 

customer orders, are consistent with the 

Act’s requirement that exchange rules 

be designed to protect investors and the 

public interest. 45 Similarly, the 

Commission believes that the ISE’s 

proposal, which reasonably eliminates 

priority treatment of Professional Orders 

of Public Customers, is consistent with 

the statutory requirement. 

3. Agency Obligations 

In approving the proposed rule 

change, the Commission notes that, 

historically, exchange specialists have 

had substantial agency responsibilities 

in obtaining executions for customer 

limit orders. A specialist’s responsibility 

to a customer in his or her role as agent 

for the limit order book was based on 

common law notions of fiduciary duty 

and incorporated in the rules of some 

exchanges. As exchanges increasingly 

have implemented automated trading 

systems, however, the specialist’s role 

in handling limit orders has 

diminished.46 On the ISE, market 

makers do not act as agent for incoming 

orders that are executable on the 

exchange. Orders submitted to the ISE 

are matched by an automated trading 

system and generally are not 

represented by a specialist acting as 

agent.47

The Commission’s approval of ISE’s 

proposal to no longer accord priority to 

Professional Orders is based solely on 

its determination that this proposed rule 

change is consistent with the Act and 

the rules and regulations thereunder 

applicable to a national securities 

exchange. The Commission is making 

no determination as to whether the 

failure of any market participant (e.g., a 

specialist managing an exchange’s order 

book) to accord priority, as appropriate, 

to any order entrusted to that 

participant as an agent is consistent 

with the federal securities laws or any 

other applicable law. Accordingly, the 

Commission’s approval of ISE’s 

proposal does not affect fiduciary 

obligations under the federal securities 

laws or agency law principles. 

B. Issues Raised by Commenters 

As noted above, the Commission has 

received ten comment letters regarding 

the proposed rule change. 48 Nine of 

these commenters opposed the 

proposal. One commenter endorsed the 

ultimate goal of the proposal, but 

expressed concerns regarding its 

implementation.49 The Commission 

acknowledges the arguments and 

concerns that have been raised by the 

commenters, but believes that the 

arguments and concerns do not support 

the conclusion that the proposal is 

inconsistent with the Act. 

The commenters raise essentially five 

main issues: (1) That the proposal is 

anti-competitive; (2) that it unfairly 

discriminates against certain Public 

Customers who no longer would have 

priority over Non-Customers; (3) that it 

raises technical and operational issues 

for firms; (4) that it is vague and 

therefore unenforceable; and (5) that the 

imposition of transaction fees for the 

execution of Professional Orders is 

unfair. In its review of the proposal, the 

Commission has carefully considered 

these issues and has evaluated them in 

light of the Act’s provisions, as 

discussed below. 

1. ISE’s Proposal Does Not Impose an 

Unnecessary or Inappropriate Burden 

on Competition 

Some commenters believed that the 

proposed rule change would thwart 

competition by treating the orders of 

certain Public Customers on a par with 

orders of broker-dealers, despite the 

inability of those customers to 

participate in the market on an equal 

footing with broker-dealers and market 

makers.50 These commenters argued 

that broker-dealers and market makers 

have substantial marketplace advantages 

over Public Customers, including lower 

margin and commission rates, better 

access to information, and superior 

technology,51 and, in the case of market 

makers, the ability to stream quotes 

electronically on both sides of the 

market.52

As discussed above, the Act does not 

require that the order of a public 

customer or any other market 

participant be granted priority. The 

objective of promoting competition and 

the requirement that the rules of an 

exchange not impose an unnecessary or 

inappropriate burden upon competition 

do not necessarily mandate that a 

Professional Order be granted priority 

while the order of a broker-dealer 

should not be granted the same right. 

As a general matter, in developing 

their trading and business models, 

exchanges have adopted rules, with 

Commission approval, that grant 

priority to certain participants over 

others, or to waive fees or provide 

discounts for certain kinds of 

transactions, in order to attract order 

flow or create more competitive 

markets. 

The Act itself recognizes that the 

operation of a marketplace can warrant 

exceptions to general allocation 

principles, for example, by exempting 

specialists and market makers from the 

requirement that a member of an 

exchange yield to the order of a nonmember.53 ‘‘Specialist entitlements’’ 54

and facilitation and solicited order 

guarantees,55 adopted by exchanges 

with Commission approval, also are 

instances in which the need to attract 

mstockstill on PROD1PC66 with NOTICES

Federal Register / Vol. 74, No. 19 / Friday, January 30, 2009 / Notices 5699 

56See, e.g., CBOE Rule 6.74(f) (Open Outcry 

SizeQuote Mechanism). 

57 In the past, options exchanges that generally 

operated on an open-outcry trading model adopted 

systems that automatically executed orders of 

public customers below a certain size without 

exposing them to the auction on the floor. These 

systems were designed to give investors speed, 

efficiency, and accuracy in the execution of their 

small orders, which were executed at the 

exchange’s disseminated quotation on a rotational 

basis against the accounts of participating market 

makers. Auto-ex orders were thus not executed 

according to auction principles and priority rules, 

but were allocated to market makers on the system 

by turn, regardless of who was first to bid or offer 

the disseminated price. For descriptions of such 

systems, see, e.g., Securities Exchange Act Release 

Nos. 48975 (December 23, 2003), 68 FR 75667 

(December 31, 2003) (Amex); 44829 (September 21, 

2001), 66 FR 49730 (September 28, 2001) (Phlx); 

41823 (September 1, 1999), 64 FR 49265 (September 

10, 1999) (Pacific Exchange); and 44104 (March 26, 

2001), 66 FR 18127 (April 5, 2001) (CBOE). 

58See, e.g., Securities Exchange Act Release Nos. 

50469 (September 29, 2004), 69 FR 59628 (October 

5, 2004) (CBOE reduction of public customer 

transaction fees on options on ETFs and HOLDRs); 

49957 (July 1, 2004), 69 FR 41318 (July 8, 2004) (ISE 

waiver of surcharge on public customer transactions 

in certain licensed products); 44654 (August 3, 

2001), 66 FR 42574 (August 13, 2001) (CBOE waiver 

of fees for public customer transactions in options 

on Standard & Poor’s 100 European-style index). 

See also infra, note 101. 

59The Commission previously has articulated its 

position regarding its application of Section 6 of the 

Act in evaluating distinctions among market 

participants proposed by exchanges and the leeway 

granted to an exchange to set an appropriate level 

of advantages and responsibilities of persons in its 

marketplace. See Securities Exchange Act Release 

No. 50484 (October 1, 2004), 69 FR 60440 (October 

8, 2004), stating, inter alia: 

[Section (b)(5)] sets forth the purposes or 

objectives that the rules of a national securities 

exchange should be designed to achieve. Those 

purposes or objectives, which take the form of 

positive goals, such as to protect investors and the 

public interest, or prohibitions, such as to not 

permit unfair discrimination among customers, 

issuers, brokers or dealers or to not permit any 

unnecessary or inappropriate burden on 

competition, are stated as broad and elastic 

concepts. They afford the Commission considerable 

discretion to use its judgment and knowledge in 

determining whether a proposed rule change 

complies with the requirements of the Act. 

Furthermore, the subsections of Section 6(b) of the 

Act must be read with reference to one another and 

to other applicable provisions of the Act and the 

rules thereunder. Within this framework, the 

Commission must weigh and balance the proposed 

rule change, assess the views and arguments of 

commenters, and make predictive judgments about 

the consequences of approving the proposed rule. 

(citations omitted) 

60See infra Section III.B.2 for a discussion of 

whether ISE’s proposal is unfairly discriminatory. 

61See ISE Rule 803. 

62For example, pursuant to ISE Rule 803(b), a 

market maker on ISE has a continuous obligation 

to engage, to a reasonable degree under the existing 

circumstances, in dealings for the market maker’s 

own account when there exists, or it is reasonably 

anticipated that there will exist, a lack of price 

continuity, a temporary disparity between the 

supply of and demand for a particular options 

contract, or a temporary distortion of the price 

relationships between options contracts of the same 

class. Public Customers, including customers who 

seek to compete with market makers, have no such 

obligations. Under ISE’s proposal, Public Customers 

who submit Professional Orders would not be 

subject to market maker obligations. 

63The Exchange charges a cancellation fee, 

currently $2.00 per cancellation, on each clearing 

EAM that cancels at least 500 Public Customer 

orders in a month for itself or for an introducing 

broker, for each cancelled order in excess of the 

total number of orders executed for itself or for such 

introducing broker that month. The cancellation fee 

does not apply to the cancellation of Public 

Customer Orders that improve ISE’s disseminated 

quote at the time the orders were entered. There 

currently are no fees for the cancellation of NonCustomer Orders, and Professional Orders would 

not incur such fees under the proposed rule change. 

64The Commission notes that, contrary to the 

apparent belief of some commenters, the proposal 

would not impose cancellation fees on Professional 

Orders. See Cox Letter II supra note 4 and Carr 

Letter supra note 4. 

65See, e.g., A. Schneider Letter supra note 4 and 

Weisberg Letter supra note 4. 

66See, e.g., Lampert Letter supra note 4. 

order flow or provide incentives to one 

group of participants based on their role 

in the marketplace has been viewed as 

a valid reason to adjust the otherwiseestablished priority principles of an 

exchange. Other examples include 

options trading rules that adjust 

allocation principles under certain 

condition in the execution of larger 

orders 56 and the small order automatic 

execution systems created by options 

exchanges in the past.57 Notably, in 

some prior proposals to waive or reduce 

customer fees, exchanges cited their 

need to remain competitive and attract 

order flow.58

The Commission believes that ISE’s 

proposal to grant priority only to 

Priority Customers and no longer to 

waive fees for transactions involving 

Professional Orders likewise does not 

necessarily place an inappropriate 

burden on competition and should most 

reasonably be viewed as within the 

discretion of the Exchange,59 so long as 

these changes do not unfairly 

discriminate among participants.60 In 

fact, the ISE’s proposal simply restores 

the treatment of Professional Orders to 

a base line where no special priority 

benefits and fee waivers are granted. 

Moreover, with respect to 

commenters’ contention that brokerdealers have substantial marketplace 

advantages over Public Customers, it 

should be noted that broker-dealers, 

unlike Public Customers, pay significant 

sums for registration and membership in 

self-regulatory organizations (‘‘SROs’’), 

and incur significant costs to comply, 

and ensure that their associated persons 

comply, with the Act and the rules 

thereunder and SRO rules. Moreover, 

Public Customers who would not be 

Priority Customers on ISE because they 

place options orders on the scale 

contemplated by the proposal could 

choose to become registered brokerdealers and receive the same 

advantages. 

With regard to commenters’ 

contentions relating to market-maker 

advantages, the Commission notes that 

ISE market makers have obligations that 

customers who seek to compete with 

them do not have, including the 

responsibility to make continuous 

markets; to engage in a course of 

dealings reasonably calculated to 

contribute to the maintenance of a fair 

and orderly market; and not to make 

bids or offers or enter into transactions 

that are inconsistent with such a course 

of dealings.61 Generally, the advantages 

of market makers noted by commenters, 

such as the ability to stream quotes on 

two sides of the market, are granted by 

exchanges as the quid pro quo for the 

market makers’ assumption of these 

obligations, in addition to the 

application of other rules and 

restrictions relating to their activities.62

In addition, the proposal could 

provide an advantage to Public 

Customers who would not be Priority 

Customers. Under the proposed rule 

change, Professional Orders would not 

be subject to cancellation fees,63 which 

could result in partially reduced costs 

for those customers who place orders on 

an average of one order per minute and 

frequently cancel such orders.64

Several commenters stated that active 

traders provide valuable liquidity to the 

market and pose significant competition 

to market makers. According to some 

commenters, the proposed rule change 

would punish these customers who 

contribute liquidity,65 and would force 

such traders from the market.66

The Commission acknowledges that 

Public Customers, including 

sophisticated algorithmic traders, 

provide valuable liquidity to the options 

markets and compete with market 

makers. In the Commission’s view, 

however, the contribution of these 

participants to the market does not 

mean that their orders are entitled to 

favorable priority and fee treatment, 

even if—as commenters argue—they 

would not be able to supply this 

liquidity without being granted such 

priority and fee advantages. Market 

makers and broker-dealers also provide 

valuable liquidity to the marketplace 

and do not have priority. Thus, the 

Commission believes that it is 

consistent with the Act for the ISE to 

amend its rules so that Professional 

Orders, like the orders of broker-dealers 

and market makers, are not granted 

special priority. 

Two commenters appeared to 

acknowledge that customers who enter 

orders on the scale that the proposed 

rule change would establish likely have 

mstockstill on PROD1PC66 with NOTICES

5700 Federal Register / Vol. 74, No. 19 / Friday, January 30, 2009 / Notices 

67See, e.g., Carr Letter supra note 4 and Cox 

Letter II supra note 4. 

68See Carr Letter supra note 4. The commenter 

believed that the proposal, as a result, would 

require retail customers who forego technology to 

‘‘wander into the marketplace blind and helpless.’’ 

69See Notice, supra note 3, at 73 FR 7346. 

70See Cox Letter III supra note 4. The commenter 

stated further: ‘‘ * * * I fail to see how the ISE can 

request trading information from a person or entity 

trading from another exchange, particularly when 

other exchanges have business models that promote 

order entry: the exact behavior the ISE is attempting 

to punish with its rule.’’ 

71Confirmed in telephone conversation between 

Ira Brandriss, Special Counsel, Division, 

Commission, and Katherine Simmons, Deputy 

General Counsel, ISE, on April 29, 2008. See also 

supra note 17 and accompanying text. See also ISE 

Rules 401, 706, and 712. 

72See, e.g., G. Schneider Letter supra note 4, 

Lampert Letter supra note 4, Rule Letter supra note 

4, Cox Letter II supra note 4 and Cox Letter III supra 

note 4. 

73See Notice, supra note 3, at 73 FR 7346. 

74 15 U.S.C. 78f(b)(5). See also Securities 

Exchange Act Release No. 50484, supra note 59. 

75 In this regard, the Commission notes that ISE 

amended the proposal to remove the changes it had 

originally proposed to ISE Rules 715 and 723(c), 

which would have prevented access by all Public 

Customers to the Exchange’s PIM. See Amendment 

No. 2, supra note 5. 

information and technology that allows 

them to compete in a sophisticated 

manner.67 However, they argued that 

the proposal’s creation of the category of 

Professional Orders suggests that ‘‘any 

person who wishes to consider 

themselves a retail customer [must] 

forego any type of trading technology, 

which of course is widely available in 

today’s market.* * *’’ 68

The Commission disagrees with this 

contention. The proposed rule does not 

ask Public Customers to forego 

technology and does not limit the 

technology that Public Customers who 

would not be Priority Customers can use 

to access the ISE’s marketplace. Rather, 

it establishes that customers who place 

orders at the level proposed by the 

ISE—irrespective of their use of trading 

technology—are engaged in a course of 

active trading that need not be accorded 

the special deference paid to those 

customers who do not place orders as 

frequently. 

In support of its proposal, the ISE 

contends that traders who place orders 

on the scale set forth in the proposal 

have the same technological and 

informational advantages over retail 

investors as broker-dealers trading for 

their own account—which enables them 

to compete effectively with brokerdealer orders and market maker quotes 

for execution opportunities in the ISE 

marketplace.69 The Commission, 

however, does not believe that access to 

or use of sophisticated technology is the 

key issue in considering whether it is 

consistent with the Act for ISE to treat 

Professional Orders in the same manner 

as broker-dealer orders in specified 

circumstances. Instead, the Commission 

believes that the pivotal issue is 

whether, under the Act, the exchange 

can grant certain advantages, which it 

initially established for all public 

customers, to only those public 

customers who place no more than 390 

orders per day. 

The Commission notes that currently 

customers who are positioned to place 

orders in the number and frequency 

specified in the proposed rule change 

are treated on a par with customers who 

may not have this ability, or even if they 

have this ability, do not place orders on 

the average of one order per minute per 

over the trading day. Under the 

Exchange’s proposal, customers who 

place orders less frequently would be 

advantaged by the Exchange’s grant of 

priority over Non-Customer Orders and 

market maker quotes at the same price, 

even if they have access to sophisticated 

options trading technology. Further, the 

Commission disagrees with the 

argument that customers would have to 

forego using trading technology under 

the Exchange’s proposal. The ISE’s 

proposal does not limit, prohibit, or 

proscribe the type of technology any 

customer uses. Customers could still use 

sophisticated technology to trade 

options and their orders would not be 

considered Professional Orders, as long 

as those customers placed fewer than 

one order per minute per day on average 

during a calendar month for their own 

beneficial account(s). 

One commenter believed that the 

proposed rule change limited 

competition and was collusive because 

‘‘it requires the cooperation of other 

competing exchanges. * * *’’ 70 The 

Commission notes, however, that the 

proposed rule change requires EAMs to 

conduct a quarterly review of customer 

activity only as reflected in the EAM’s 

own records. The proposal does not 

require either EAMs or the Exchange to 

seek information from other brokerdealer firms or exchanges regarding a 

customer’s activity.71

2. ISE’s Proposal Is Not Unfairly 

Discriminatory 

Many of the commenters argued that 

the proposed rule change is unfairly 

discriminatory against those Public 

Customers who would not be Priority 

Customers by denying them priority 

rights and imposing transaction fees on 

their orders.72 In the ISE’s view, public 

customers today range from individuals 

who infrequently place options orders 

to sophisticated algorithmic traders that 

trade many options classes on a daily 

basis.73 ISE proposes to continue to 

grant priority to, and waive transaction 

fees for, individuals who place orders 

below the threshold, as a means to 

encourage their participation. The 

Exchange believes, however, that 

priority rights and fee waivers are no 

longer warranted for market participants 

who place more than one order per 

minute on average during a calendar 

month, a level of activity that it believes 

is akin to that of broker-dealers. The 

Exchange therefore proposes to refrain 

from providing priority and fee 

incentives for such participants. 

The Commission notes that the Act 

does not require that the Exchange’s 

rules be designed to prohibit all 

discrimination, but rather they must not 

permit unfair discrimination.74 With 

regard to public customer priority, the 

Commission has noted above ample 

precedent demonstrating that public 

customer orders are not entitled per se 

to priority treatment over the orders of 

other market participants. The 

Commission similarly believes that the 

ISE’s proposal to grant such priority 

treatment only to Priority Customers is 

consistent with the Act and, in 

particular, is not unfairly 

discriminatory. 

As discussed above, the Commission 

does not believe that the current rules 

of ISE and other exchanges that accord 

priority to all public customers over 

broker-dealers and market makers are 

unfairly discriminatory. Nor does the 

Commission believe that it is unfairly 

discriminatory to accord priority to only 

those customers who on average do not 

place more than one order per minute 

as ISE proposes. 

Because, as discussed in Section 

III.A.1. above, the Commission believes 

that ISE’s proposal is consistent with 

the Act in that it does not impose an 

undue burden on competition, the 

Commission believes that a grant of 

such priority is an exchange’s 

prerogative and within the exchange’s 

business judgment. As such, a decision 

to grant priority—which, after all, is a 

special benefit—to the orders of one 

type of customer (for example, a retail 

customer) and not to the orders of 

another (for example, an institutional 

investor) may be an economic decision 

that an exchange may make to provide 

some customers with incentives and fee 

waivers. In the Commission’s view, 

nothing in the Act requires an exchange 

to provide the same incentives and 

discounts to all market participants 

equally, as long as the exchange does 

not unfairly discriminate among 

participants with regard to access to 

exchange systems.75

mstockstill on PROD1PC66 with NOTICES

Federal Register / Vol. 74, No. 19 / Friday, January 30, 2009 / Notices 5701 

76For example, some exchanges impose different 

fees for different market participants, depending on 

whether the market participant adds liquidity by 

posting a quote or order, or takes liquidity by 

executing against a quote or order that is already 

posted on the exchange. Some exchanges’ 

transaction fees, before additional charges are 

assessed, are identical for market makers and 

member firms, while on other exchanges market 

makers and member firms are charged at different 

rates. Some exchanges provide volume discounts; 

some place a cap on charges to particular 

participants. Some impose transaction fees upon 

certain participants for complex orders; others do 

not. As a result, the fees imposed upon various 

market participants can vary significantly from 

exchange to exchange. Each exchange’s schedule of 

fees is available on the exchange’s Web site. See 

e.g., the fee schedule of CBOE at http:// 

www.cboe.com/AboutCBOE/FeeSchedule.aspx; the 

fee schedule of BOX at http:// 

www.bostonoptions.com/box_regulations/PDF/ 

feeschedjan06.pdf; and the fee schedule of NYSE 

Arca at http://www.nyse.com/futuresoptions/ 

nysearcaoptions/1147128317287.html. 

77Similar to other exchanges, ISE charges 

different fees depending on whether an individual 

is a Public Customer, Non-Member Broker-Dealer, 

EAM, ISE Market Maker or Non-ISE Market Maker. 

For example, ISE charges Public Customers a $0.05 

fee for Non-Premium Products and the $0.03 

Comparison Fee for the orders of Public Customers 

are currently waived while Non-Member BrokerDealers and EAMs pay a $0.15 fee for orders in 

Premium and Non-Premium Products (subject to 

volume discounts) and a $0.03 Comparison Fee. 

Comparatively, ISE market makers are subject to a 

fee for transactions in Premium and Non-Premium 

Products between $0.12–$0.21 (subject to volume 

discounts). The amount of this fee is based on the 

average daily volume of transactions on the 

Exchange, and is currently $0.13 per contract. See 

ISE Schedule of Fees. See also discussion infra note 

105. 

78See SIFMA Letter supra note 4. 

79 Id. 

80See ISE Response Letter supra note 6. 

81 Id. The ISE also stated that it consulted with 

a variety of firms that accept orders directly from 

customers, and that these firms did not believe it 

would be difficult for them to determine, on a 

quarterly look-back basis, whether a customer had 

on average entered more than 390 orders per day 

during any month. Id. 

82See SIFMA Letter supra note 4. 

83 Id. According to the Exchange, an EAM would 

be required to have such procedures in place to 

comply with its obligation under ISE Rule 712(a) to 

properly mark orders. Telephone conversation 

between Katherine Simmons, Deputy General 

Counsel, ISE, and Nancy J. Burke-Sanow, Assistant 

Director, Division, Commission, on December 15, 

2008. 

The Commission believes that the line 

that the ISE seeks to draw between 

Priority Customers and Public 

Customers whose orders would be 

treated as Professional Orders most 

simply reflects a belief—from the point 

of view of operating a marketplace—that 

the orders of a person who submits, on 

average, more than one order every 

minute of the trading day need not (or 

should not) be granted the same benefit 

or incentive that is granted to Public 

Customers who do not utilize the 

marketplace on such a scale. 

The same can be said with regard to 

relief from transaction fees. Exchanges 

can and do have fee structures that vary 

depending on the market participant.76

Various fee structures are permitted 

provided that they are consistent with 

the Act (including the requirement that 

the fees not be unfairly discriminatory). 

Such differing fee structures are based 

on the judgment of those responsible for 

the financial operation of the exchange, 

and are tied to exchange assumptions 

about market participant behavior, the 

impact of incentives and discounts, and 

other factors relating to the specific 

business model adopted by the 

exchange. A decision to waive or 

discount fees for orders of one kind of 

participant and not another, based on 

the extent of their participation in the 

market, is a reasonable decision for an 

exchange, provided it is otherwise 

consistent with the Act.77

3. The Proposal Can Be Implemented on 

a Technical and Operational Level 

One commenter, SIFMA, endorsed the 

underlying goal of the proposed rule 

change, but expressed concern about 

various aspects of the proposal. First, 

SIFMA was concerned that, under the 

proposed rule, EAMs would ‘‘have no 

ability to identify the end-user customer 

and count orders.’’ 78 SIFMA’s comment 

letter noted that EAMs would have to 

rely on the broker-dealers that route 

orders to them and have the customer 

relationship to identify the professional 

customer and code orders correctly. 

Moreover, SIFMA stated that, in general, 

firms do not count the number of orders 

directed by customers under the same 

beneficial owners and do not have the 

ability to break down, by beneficial 

owner, the number of orders placed. 

SIFMA further believed that EAMs 

would need to rely on the Options 

Clearing Corporation (‘‘OCC’’) member 

firm that ultimately clears the 

professional customer to identify such 

accounts. SIFMA stated, however, that 

such reliance would not be possible 

because OCC member clearing firms see 

only the number of cleared contracts at 

the end of the day, and not the number 

of executions. Moreover, SIFMA noted 

the lack of access by clearing firms to 

information regarding a customer’s 

cancellations, replacements, 

modifications, or corrections of orders, 

and the resulting inability of such firms 

to accurately determine the number of 

orders a customer has placed.79

In its response, ISE stated that these 

concerns were based on the erroneous 

assumption that compliance with the 

proposal would require analysis by an 

ISE member’s clearing firm of cleared 

data provided by the OCC to determine 

whether a customer had crossed the 

threshold of placing more than 390 

orders per day, on average, over the 

course of a calendar month.80 ISE 

clarified that only broker-dealers that 

received orders from the ultimate 

customers—not clearing firms—would 

be required under the proposal to 

monitor the number of orders they 

receive from each such customer and to 

mark the orders correctly. ‘‘These types 

of activities are routinely performed by 

broker-dealers who deal directly with 

customers,’’ the ISE maintained, adding 

that broker-dealers have a regulatory 

responsibility to know their customer, 

‘‘and, in fact, do know if they have 

customers that conduct this high level 

of activity.’’ 81

With regard to ISE members that 

submit customer orders to the Exchange 

when those orders were routed to them 

by other, non-ISE-member brokerdealers, SIFMA indicated its concern 

that such members ‘‘will be forced to 

rely on the good faith and effort of its 

broker-dealer client * * * to identify 

the professional customer and code the 

order correctly.’’ 82 In response, the ISE 

noted that the Exchange and all other 

options exchanges currently have a 

variety of order marking requirements 

for which ISE members that route orders 

on behalf of other broker-dealers have 

regulatory responsibility. The ISE 

further noted that its EAMs would need 

to have reasonable procedures in place 

to confirm that their broker-dealer 

customers had implemented the 

appropriate procedures to monitor their 

customers’ trading activity in a way that 

would enable them to code orders 

properly to comply with the proposal.83

The Commission believes that the 

ISE’s response clarifies its proposal and 

addresses the concerns raised by SIFMA 

regarding the counting and marking of 

customer orders. The proposal would 

require any ISE member submitting a 

Public Customer Order to the ISE to 

identify such order as either a Priority 

Customer Order or a Professional 

Customer Order. Based on the ISE’s 

representations, the Commission 

believes that ISE members that directly 

submit their Public Customers’ orders to 

the Exchange for execution can readily 

determine the number of orders that 

their customers place and can mark 

those orders accordingly. The 

Commission notes that the Exchange 

has stated that EAMs would need to 

have reasonable procedures in place to 

confirm that their broker-dealer 

customers have instituted policies and 

procedures to enable them to monitor 

their customers’ trading activity in a 

mstockstill on PROD1PC66 with NOTICES

5702 Federal Register / Vol. 74, No. 19 / Friday, January 30, 2009 / Notices 

84 Id. 

85See SIFMA Letter supra note 4. 

86See ISE Response Letter supra note 6. 

87See SIFMA Letter supra note 4. 

88See ISE Response Letter supra note 6. 

89See Cox Letter III supra note 4. 

90See SIFMA Letter, supra note 4. 

91See ISE Response Letter supra note 6. 

92See SIFMA Letter supra note 4. 

93See, e.g., Securities Exchange Act Release Nos. 

58546 (September 15, 2008), 73 FR 54440 

(September 19, 2008); 57441 (March 6, 2008), 73 FR 

13267 (March 20, 2008); and 56072 (July 13, 2007), 

72 FR 39867 (July 20, 2007). 

94See SIFMA Letter supra note 4. 

95See ISE Response Letter supra note 6. 

96See SIFMA Letter supra note 4. 

way that would allow them to mark 

their customer orders properly.84

The Commission believes that ISE 

members, as well as non-member 

broker-dealers who accept customer 

orders and route them to EAMs for 

execution on the Exchange, have the 

ability to ascertain for each customer 

account, by beneficial owner, the 

number of orders placed by a customer. 

As the ISE points out, the proposal 

requires the broker-dealer that has a 

relationship with, and knows, the 

ultimate customer to monitor the 

number of orders it is entering on the 

customer’s behalf and to conduct a 

quarterly review to assure that the firm 

is marking the orders appropriately. 

This monitoring is accomplished by the 

ISE member directly in the case of its 

own customers or by the ISE member 

contractually requiring that its brokerdealer customers have reasonable 

procedures in place to ascertain whether 

their customers are submitting orders 

that should be marked as Professional 

Orders. 

Second, SIFMA expressed concern 

that professional customers could 

‘‘ ‘game’ the system and inappropriately 

take advantage and avoid the purpose of 

the rule.’’ SIFMA noted the frequent use 

by Professional Customers of multiple 

firms for execution and clearing 

purposes, which would limit the review 

by any one EAM or OCC clearing 

member of a customer’s activity. SIFMA 

further noted that customers could 

electronically route orders to an 

exchange without a Professional Order 

designation and, due to linkage and best 

execution requirements, these orders 

could be sent to the ISE without the 

proper coding.85 ISE acknowledged that 

customers could place orders at 

multiple firms, such that each 

individual broker-dealer would not 

know the full extent of its customer’s 

trading activity, making it impossible 

for a particular firm to measure the total 

number of orders entered by a particular 

customer through multiple firms. ISE 

stated, however, that it believed that ‘‘it 

might be impractical for a customer to 

conduct professional trading activities 

through multiple broker-dealer 

platforms.’’ The Exchange also stated 

that it would conduct surveillance 

designed to identify any such behavior, 

and that if it does detect such activity, 

it would alert the relevant ISE members. 

In addition, ISE agreed that, through the 

operation of the options linkage rules, 

an order for the account of a customer 

that ISE otherwise would consider a 

Professional Order might be routed to 

other exchanges that do not have the 

same order designation and ultimately 

receive the price available on the ISE 

indirectly.86 The Commission believes 

that the rule change, as proposed, meets 

the Exchange’s aim with regard to those 

customers who do not employ such 

stratagems, and thus the potential for a 

customer to circumvent the proposed 

rule, does not, in this instance, make it 

inconsistent with the Act. 

Third, SIFMA believed that, for the 

proposed rule change to be properly 

implemented, customer trading 

information would need to be 

disseminated across desks within a 

single firm that typically are separated 

by information barriers. Regarding this 

issue, SIFMA requested specific 

guidance on how to implement the 

proposed requirements without 

violating applicable privacy 

regulations.87 ISE responded that 

putting procedures in place to comply 

with its proposal would not result in 

disclosure of information about 

particular orders entered by a customer 

either pre- or post-trade, nor would it 

result in disclosures about any positions 

held by a customer. The Exchange 

stated that it is not aware of any 

information barrier rule or privacy 

regulations that would prevent a firm 

from marking an order as required 

under the proposal.88 The Commission 

agrees with the ISE’s position in this 

regard. The Commission believes that 

the determination of whether a Public 

Customer’s orders are categorized as 

Priority Customer Orders or Professional 

Orders, which would be based on 

information compiled retrospectively 

each quarter, can be made at a level in 

the firm that is ‘‘above’’ the information 

barrier, and in any case does not require 

disclosure of any particular orders 

placed by a customer or any positions 

held by a customer. 

Finally, one commenter expressed the 

concern that the proposal would be 

burdensome because it would require 

EAMs to purchase expensive technology 

to track the number of orders a person 

entered per day.89 Another commenter, 

SIFMA, believed that the ISE’s proposal 

would require broker-dealers to expend 

significant resources to comply with the 

rule and potentially would present large 

retail firms with difficulties in 

implementing a new order origin code 

within the proposal’s timeframe.90

ISE acknowledged that systems 

changes to accommodate new coding of 

orders could be required for some 

broker-dealers, but did not believe that 

such systems changes would be 

particularly costly ‘‘relative to other rule 

changes routinely made by the ISE and 

other exchanges.’’ 91 SIFMA also 

expressed a concern that the proposal 

could require significant revisions to the 

customer option account agreements 

used by firms, because customers could 

be designated as professional 

customers.92 The Commission believes 

that it is within the business judgment 

of the Exchange to accept orders for 

execution in its marketplace contingent 

upon their submission with a particular 

order marking, even when that marking 

may require additional expense on the 

part of member firms. Exchanges 

routinely add new order types 93 and the 

ISE’s proposal is no different in this 

regard. Thus, the Commission believes 

that the new order designations in the 

proposed rule change are consistent 

with the Act, even though they will 

require members to incur costs 

associated with systems changes and 

customer account agreements may need 

to be revised to reflect these new order 

designations. As a general matter, the 

Commission notes that membership in 

an exchange comes with the expectation 

that rule changes will be made by the 

exchange that could require member 

firms to make adjustments in their 

systems and procedures. 

SIFMA further noted that the proposal 

would require additional systemic and 

procedural enhancements for firms to 

track the new fees that would be 

established under the proposal.94 In 

response, the Exchange maintained that 

fees vary widely among exchanges and 

are changed frequently, and that firms 

routinely make changes in their systems 

to accommodate exchange fee 

changes.95 The Commission notes that 

fee changes are commonly introduced 

by exchanges, and members can expect 

that they will need to adjust their 

tracking systems as needed when 

changes are made. 

Finally, SIFMA further expressed a 

concern that the five-day timeframe 

allotted at the end of a quarter for firms 

to start coding for Priority Customer and 

Professional Orders is unrealistic.96 In 

response, the ISE acknowledged that it 

may take more than five days for a 

mstockstill on PROD1PC66 with NOTICES

Federal Register / Vol. 74, No. 19 / Friday, January 30, 2009 / Notices 5703 

97See ISE Response Letter supra note 6. 

98The Exchange stated that it would work with 

its members to assure that there is adequate time 

to implement systems changes as necessary. ISE 

Response Letter, supra note 6, n.6. The Exchange 

further advised that it would issue a notice to its 

members informing them of the implementation 

date of the proposed rule change. Telephone 

conversation between Katherine Simmons, Deputy 

General Counsel, ISE, and Nancy J. Burke-Sanow, 

Assistant Director, Division, Commission, on 

December 15, 2008. 

99See Cox Letter III, supra note 4. 

100See, e.g., Securities Exchange Act Release No. 

50484 (October 1, 2004), 69 FR 60440 (October 8, 

2004). 

101Subsequently, however, some exchanges have 

rescinded transaction fees for manually executed 

equity options orders for public customers. See, 

e.g., Securities Exchange Act Release Nos. 42798 

(May 18, 2000), 65 FR 34239 (May 26, 2000); and 

43343 (September 26, 2000), 65 FR 59243 (October 

4, 2000). 

102For example, the exchanges generally charge 

transaction fees for executions of public customer 

orders in index options. See, e.g., Securities 

Exchange Act Release No. 52983 (December 20, 

2005), 70 FR 76475 (December 27, 2005) 

(Commission notice of filing and immediate 

effectiveness of a proposed rule change adopting a 

flat execution fee for Public Customer Orders in 

premium products). 

103As noted at supra note 9, Public Customer 

Orders incur fees for certain transactions in 

Premium Products and Complex Orders, orders 

entered in response to special order broadcasts, and 

orders entered in PIM. Public Customer Orders also 

are subject to fees for cancellation. 

104See Securities Exchange Act Release Nos. 

42370 (April 28, 2000), 65 FR 26256 (May 5, 2000) 

(Commission order adopting original ISE Fee 

Schedule), in which the Commission found that the 

fee schedule was ‘‘not unreasonable’’ and ‘‘should 

not discriminate unfairly among market 

participants.’’ See also the current ISE Fee 

Schedule, dated August 12, 2008 and Securities 

Exchange Act Release No. 58139 (July 10, 2008), 73 

FR 41142 (July 17, 2008) (customer fees, except 

those for ‘‘Premium Products,’’ currently waived 

until June 30, 2009). 

105Public Customers—The $0.05 fee for NonPremium Products and the $0.03 Comparison Fee 

for the orders of Public Customers are currently 

waived. Public Customers currently pay a fee of 

$0.15 for certain orders in Premium Products and 

Complex Orders, orders entered in response to 

special order broadcasts and orders entered in PIM. 

Public Customers are also subject to an order 

cancellation fee of $1.75 per order. See supra notes 

9 and 64. 

Non-member Broker-Dealers—Non-member 

broker-dealers pay a $0.15 fee for orders in 

Premium and Non-Premium Products (subject to 

volume discounts) and a $0.03 Comparison Fee. 

Customers whose orders are identified as 

Professional Orders would incur these fees under 

the proposal. 

EAMs—EAMs pay the same fees for orders as 

non-member broker-dealers. In addition to nonmember broker-dealer fees, EAMs also pay a one 

time application fee of $3500, a regulatory fee of 

$5000 per year and a monthly access fee of $500. 

ISE Market Makers—ISE market makers are 

subject to a fee for transactions in Premium and 

Non-Premium Products between $0.12–$0.21 

(subject to volume discounts). The amount of this 

fee is based on the average daily volume of 

transactions on the Exchange, and is currently $0.13 

per contract. See Fee Notice to ISE Members dated 

March 3, 2008, available at http:// 

www.iseoptions.com. In addition, ISE market 

makers pay a $0.03 Comparison Fee, a fee for 

payment for order flow (only for customer orders) 

of $0.65 per contract and $0.10 per contract for 

options on issues that are participating in the Penny 

Pilot (subject to available rebates). 

In addition to these market maker fees, PMMs 

and Competitive Market Makers (‘‘CMMs’’) pay 

additional fees including, but not limited to, the 

fees described below. PMMs have a minimum 

monthly transaction fee of $50,000, a one time 

application fee of $7500, a regulatory fee of $7500 

per year, a monthly access fee of $4000 and an 

inactivity fee of $100,000 per month. CMMs have 

a one time application fee of $5500, a regulatory fee 

of $5000 per year, a monthly access fee of $2000 

and an inactivity fee of $5,000 per month. 

Non-ISE Market Makers—Non-ISE market makers 

pay a $0.37 fee for transactions in Premium and 

Non-Premium Products (subject to volume 

discounts) except for a $0.16 fee for orders entered 

in the Facilitation and Solicitation Mechanisms and 

a $0.03 Comparison Fee. 

broker-dealer to make the system 

changes necessary to accommodate the 

new order code, and stated that it would 

give members at least one full quarter, 

following Commission approval of the 

proposal to make these changes. The 

Exchange stated, however, that once the 

initial systems changes were 

implemented, five days would be 

sufficient to change the order code 

associated with a particular customer 

account.97 The Commission notes that 

the Exchange has committed to working 

with its members to assure that there is 

adequate time to make the initial 

systems changes necessary to 

implement the new coding,98 and 

believes that not less than one full 

quarter is a reasonable amount of time 

to achieve this aim. The Commission, 

however, will monitor whether any 

issues may arise that would require the 

ISE to postpone the proposal’s 

implementation timeframe. 

4. ISE’s Proposal Is Not Vague 

One commenter contended that the 

proposal was vague and 

unenforceable.99 The Commission 

believes that the ISE’s proposed rule 

change is amply clear regarding the kind 

of order that would not receive priority 

at the same price and would incur 

transaction fees as a result of the 

proposal. The proposal sets forth 

specific and objective numeric 

thresholds in its provisions, defining 

‘‘Priority Customer’’ as ‘‘a person or 

entity that (i) is not a broker or dealer 

in securities, and (ii) does not place 

more than 390 orders in listed options 

per day on average during a calendar 

month for its own beneficial 

account(s).’’ It further defines the term 

‘‘Professional Order’’ as ‘‘an order that 

is for the account of a person or entity 

that is not a Priority Customer.’’ The 

Commission believes that these 

definitions are clear and provide notice 

of the parameters of the rule. 

5. Transaction Fees for Professional 

Orders Are Not Inequitable 

As noted above, Section 6(b)(4) of the 

Act requires that the rules of an 

exchange must provide for the equitable 

allocation of reasonable dues, fees, and 

other charges among its members and 

issuers and other persons using its 

facilities. In evaluating whether a 

proposed fee can be considered an 

equitable allocation of a reasonable fee, 

the Commission considers all of the 

relevant factors including, among 

others, the amount of the fee and 

whether the fee is an increase or 

decrease, the classes of persons subject 

to the fee, the basis for any distinctions 

in classes of persons subject to the fee, 

the potential impact on competition, 

and the impact of any disparate 

treatment on the goals of the Act.100

Under the proposed rule change, 

transaction fees would be charged for 

the execution of certain Public 

Customer Orders that currently are not 

subject to such fees. The Commission 

notes, however, that options exchanges 

have charged transaction fees for the 

execution of public customer orders in 

the past,101 and in many cases continue 

to do so when necessary to defray the 

costs of maintaining a market and 

associated expenses for a particular 

product or category of products.102 The 

ISE itself currently imposes fees on 

certain Public Customer Orders.103

Moreover, Public Customer Orders 

that today incur no transaction fees on 

the ISE are not indefinitely excepted 

from such fees. The Exchange’s Fee 

Schedule specifically sets forth 

transaction fees for customer orders, 

while indicating that these fees (other 

than fees for ‘‘Premium Products’’) 

currently are waived.104 The 

Commission notes that different market 

participants pay fees based on their 

status on the Exchange (e.g., Public 

Customer, non-member broker-dealer, 

EAM, non-ISE market maker and ISE 

market maker).105 Under the proposal, 

customers whose orders are identified 

as Professional Orders would pay the 

same fees as non-member brokerdealers. 

The Commission notes that the 

customers who enter more than 390 

orders per day on average during a 

calendar month are using the 

Exchange’s facilities to place 

approximately 8,000 orders, on average 

one order for every minute of every 

trading day, over the course of the 

month and nearly 100,000 orders per 

year. The Commission believes that it is 

consistent with the Act for ISE to 

allocate to customers who participate in 

the market at this level of activity— 

mstockstill on PROD1PC66 with NOTICES

5704 Federal Register / Vol. 74, No. 19 / Friday, January 30, 2009 / Notices 

106 15 U.S.C. 78s(b)(2). 

107See supra note 3. 

108 15 U.S.C. 78s(b)(2). 109 15 U.S.C. 78s(b)(2). 

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

2 17 CFR 240.19b–4. 

3Premium Products is defined in the Schedule of 

Fees as the products enumerated therein. 

which enables them to compete with 

Non-Customers who are registered 

broker-dealers—the same transaction 

fees that it charges to such NonCustomers. 

C. Accelerated Approval of Proposed 

Rule Change, as Modified by 

Amendment Nos. 1 and 2 

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

Act,106 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 the proposed 

rule change, as modified by Amendment 

Nos. 1 and 2, before the 30th day after 

the date of publication of notice of filing 

thereof in the Federal Register.107 The 

Commission notes that the proposal, as 

modified by Amendment No. 1, was 

published for comment in the Federal 

Register on February 7, 2008. The 

revisions made to the proposal in 

Amendment No. 2 deleted proposed 

changes to ISE Rules 715 and ISE Rule 

723(d)(2). These revisions appropriately 

clarify that the proposed rule change 

would not limit a Public Customer’s 

access to the Exchange’s PIM. 

Accordingly, pursuant to Section 

19(b)(2) of the Act,108 the Commission 

finds good cause to approve the 

proposed rule change, as modified by 

Amendment Nos. 1 and 2, on an 

accelerated basis. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change, as modified by Amendment 

Nos. 1 and 2, 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–ISE–2006–26 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–ISE–2006–26. 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 

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 

Number SR–ISE–2006–26 and should be 

submitted on or before February 20, 

2009. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,109 that the 

proposed rule change (SR–ISE–2006– 

26), as modified by Amendment Nos. 1 

and 2, be, and it hereby is, approved on 

an accelerated basis. 

By the Commission. 

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–1979 Filed 1–29–09; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59288; File No. SR–ISE– 

2009–03] 

Self-Regulatory Organizations; 

International Securities Exchange, 

LLC; Notice of Filing and Immediate 

Effectiveness of Proposed Rule 

Change Relating to Fee Changes 

January 23, 2009. 

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

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on January 

15, 2009, the International Securities 

Exchange, LLC (the ‘‘Exchange’’ or the 

‘‘ISE’’) filed with the Securities and 

Exchange Commission the proposed 

rule change, as described in Items I, II, 

and III below, which items have been 

prepared by the self-regulatory 

organization. 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 ISE is proposing to amend its 

Schedule of Fees to establish fees for 

transactions in options on 4 Premium 

Products.3 The text of the proposed rule 

change is available on the Exchange’s 

Web site (http://www.ise.com), at the 

principal office of the Exchange, and at 

the Commission’s Public Reference 

Room. 

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 

self-regulatory organization included 

statements concerning the purpose of, 

and basis for, the proposed rule change 

and discussed any comments it received 

on the proposed rule change. The text 

of these statements may be examined at 

the places specified in Item IV below. 

The self-regulatory organization has 

prepared summaries, set forth in 

sections A, B and C below, of the most 

significant aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose—The Exchange is 

proposing to amend its Schedule of Fees 

mstockstill on PROD1PC66 with NOTICES