Federal Register / Vol. 74, No. 166 / Friday, August 28, 2009 / Notices 44425 

22 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. 60014 

(June 1, 2009), 74 FR 27224 (‘‘Notice’’). 

4Amendment No. 1 clarified that this proposed 

rule change will become effective upon the 

Exchange’s withdrawal from the Plan for the 

Purpose of Creating and Operating an Intermarket 

Option Linkage and the effectiveness of the Options 

Order Protection and Locked/Crossed Market Plan. 

Because the amendment only provided clarification 

and did not affect the substance of the rule filing, 

the amendment did not require notice and 

comment. 

5The Plan is a national market system plan 

proposed by the seven existing options exchanges 

and approved by the Commission. See Securities 

Exchange Act Release No. 59647 (March 30, 2009), 

74 FR 15010 (April 2, 2009) (File No. 4–546) (‘‘Plan 

Notice’’) and 60405 (July 30, 2009), 74 FR 39362 

(August 6, 2009) (File No. 4–546) (‘‘Plan 

Approval’’). The seven options exchanges are: 

Chicago Board Options Exchange, Incorporated 

(‘‘CBOE’’); The NASDAQ Stock Market LLC 

(‘‘Nasdaq’’); NASDAQ OMX BX, Inc. (‘‘BOX’’); 

NASDAQ OMX PHLX, Inc. (‘‘Phlx’’); NYSE Amex 

LLC (‘‘NYSE Amex’’); NYSE Arca, Inc. (‘‘NYSE 

Arca’’); and ISE (each exchange individually a 

‘‘Participant’’ and, together, the ‘‘Participating 

Options Exchanges’’). 

6On July 28, 2000, the Commission approved the 

Old Plan as a national market system plan for the 

purpose of creating and operating an intermarket 

options market linkage proposed by the American 

Stock Exchange LLC (n/k/a NYSE Amex), CBOE, 

and ISE. See Securities Exchange Act Release No. 

43086 (July 28, 2000), 65 FR 48023 (August 4, 

2000). Subsequently, Philadelphia Stock Exchange, 

Inc. (n/k/a Phlx), Pacific Exchange, Inc. (n/k/a 

NYSE Arca), Boston Stock Exchange, Inc. (n/k/a 

BOX), and Nasdaq joined the Linkage Plan. See 

Securities Exchange Act Release Nos. 43573 

(November 16, 2000), 65 FR 70851 (November 28, 

2000); 43574 (November 16, 2000), 65 FR 70850 

(November 28, 2000); 49198 (February 5, 2004), 69 

FR 7029 (February 12, 2004); and 57545 (March 21, 

2008), 73 FR 16394 (March 27, 2008). 

7Section 8(c) of the Old Plan. 

8The Linkage Hub is a centralized data 

communications network that electronically links 

the Participating Options Exchanges to one another. 

The Options Clearing Corporation (‘‘OCC’’) operates 

the Linkage Hub. 

9Section 2(16) of the Old Plan. 

10Section 7(a)(i)(C) of the Old Plan. 

11See Securities Exchange Act Release No. 60360 

(July 21, 2009) 74 FR 37265 (July 28, 2009) (File No. 

4–429). 

12 17 CFR 242.608. 

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–NYSE–2009–87 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–NYSE–2009–87. 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 publicly available. All 

submissions should refer to File 

Number SR–NYSE–2009–87 and should 

be submitted on or before September 18, 

2009. 

For the Commission, by the Division 

of Trading and Markets, pursuant to 

delegated authority.22

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–20821 Filed 8–27–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60559; File No. SR–ISE– 

2009–27] 

Self-Regulatory Organizations; 

International Securities Exchange, 

LLC; Order Granting Approval of a 

Proposed Rule Change as Modified by 

Amendment No. 1 Thereto To Adopt 

Rules Implementing the Options Order 

Protection and Locked/Crossed Market 

Plan 

I. Introduction 

On May 11, 2009, the International 

Securities Exchange, LLC (‘‘ISE’’ or 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

amend and adopt rules to implement 

the Options Order Protection and 

Locked/Crossed Market Plan. The 

proposed rule change was published for 

comment in the Federal Register on 

June 8, 2009.3 On June 10, 2009, the 

Exchange filed Amendment No. 1 to the 

proposed rule change.4 The Commission 

received no comments on the proposal. 

This order approves the proposed rule 

change, as modified by Amendment No. 

1. 

II. Description of the Proposal 

The Exchange proposes to amend and 

adopt new ISE rules to implement the 

Options Order Protection and Locked/ 

Crossed Market Plan (‘‘Plan’’).5

Specifically, the Exchange proposes to 

completely replace Chapter 19 of its 

rules with new rules implementing the 

Plan, amend other Exchange rules to 

reflect the Plan, and delete rules 

rendered unnecessary by the Plan. 

The Old Plan 

Each of the Participating Options 

Exchanges are signatories to the Plan for 

the Purpose of Creating and Operating 

an Intermarket Option Linkage (‘‘Old 

Plan’’).6 In pertinent part, the Old Plan 

generally requires its participants to 

avoid trading at a price inferior to the 

national best bid or offer (‘‘tradethrough’’), although it provides for a 

number of exceptions to trade-through 

liability.7 The Participating Options 

Exchanges comply with this 

requirement of the Old Plan by utilizing 

a stand alone system (‘‘Linkage Hub’’) to 

send and receive specific order types,8

namely Principal Acting as Agent 

Orders (‘‘P/A Orders’’), Principal 

Orders, and Satisfaction Orders.9 The 

Old Plan also provided that 

dissemination of ‘‘locked’’ or ‘‘crossed’’ 

markets should be avoided, and 

remedial actions that should be taken to 

unlock or uncross such market.10 Each 

of the Participating Options Exchanges, 

including the Exchange, has submitted 

an amendment to the Old Plan to 

withdraw from such Plan.11 The 

withdrawals will be effective upon 

approval by the Commission of such 

amendments pursuant to Rule 608 of 

Regulation NMS under the Act 

(‘‘Regulation NMS’’).12

The Plan 

The Plan does not require a central 

linkage mechanism akin to the Old 

Plan’s Linkage Hub. Instead, the Plan 

includes the framework for routing 


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13See Securities Exchange Act Release No. 51808 

(June 9, 2005), 70 FR 37496 (June 29, 2005) (File 

No. S7–10–04); 17 CFR 242.600 et seq. For 

discussions of the similarities between the 

provisions of Regulation NMS and the provisions in 

the Plan, see the Plan Notice and Plan Approval, 

supra note 5. 

14Under the Plan, a ‘‘Trade-Through’’ is generally 

defined as a transaction in an option series, either 

as principal or agent, at a price that is lower than 

a Protected Bid or higher than a Protected Offer.’’ 

See Section 2(21) of the Plan. A ‘‘Protected Bid’’ 

and ‘‘Protected Offer’’ generally means a bid or offer 

in an option series, respectively, that is displayed 

by a Participant, is disseminated pursuant to the 

Options Price Reporting Authority (‘‘OPRA’’) Plan, 

and is the Best Bid or Best Offer. See Section 2(17) 

of the Plan. A ‘‘Best Bid’’ or ‘‘Best Offer’’ means the 

highest bid price and the lowest offer price. Section 

(2)(1) of the Plan. ‘‘Protected Bid’’ and ‘‘Protected 

Offer,’’ together are referred to herein as ‘‘Protected 

Quotation.’’ See Section 2(18) of the Plan. 

15Section 5(a)(ii) of the Plan. 

16Section 5(b) of the Plan. 

17Subparagraphs (ii), (vii), and (viii), 

respectively, of Section 5(b) of the Plan. 

18Subparagraphs (i), (iii), (vi), (ix), (xi), and (iv)– 

(v), respectively, of Section 5(b) of the Plan. 

19Subparagraph (x) of Section 5(b) of the Plan. 

20Section 6 of the Plan. The Plan also contains 

provisions relating to the operation of the Plan 

including, for example, provisions relating to the 

entry of new parties to the Plan; withdrawal from 

the Plan; and amendments to the Plan. 

21A more detailed description of the Exchange’s 

proposed rule change may be found in the Notice, 

supra note 3. 

22Proposed ISE Rule 1900. 

23Proposed ISE Rule 1901(a). 

24Proposed ISE Rule 1901(b)(1)–(10). In addition, 

the Exchange proposes to add ISOs as a new type 

of order under proposed ISE Rule 715(b)(5). 

25A ‘‘locked market’’ is defined as a quoted 

market in which a Protected Bid is equal to a 

Protected Offer. Proposed ISE Rule 1900(i). A 

‘‘crossed market’’ is defined as a quoted market in 

which a Protected Bid is higher than a Protected 

Offer. Proposed ISE Rule 1900(e). 

26Proposed ISE Rule 1902(a). 

27Proposed ISE Rule 1902(b)(1)–(4). 

28 ISE noted that it can envision a customer 

authorizing a lock when the fees associated with 

trading against the locked market make the 

execution price uneconomical to the customer. See 

Notice, supra note 3, at 27226. 

29Proposed ISE Temporary Rule 1903. 

orders via private linkages that exist for 

NMS stocks under Regulation NMS.13

The Plan requires the Participating 

Options Exchanges to adopt rules 

‘‘reasonably designed to prevent TradeThroughs.’’14 Participating Options 

Exchanges are also required to conduct 

surveillance of their respective markets 

on a regular basis to ascertain the 

effectiveness of the policies and 

procedures to prevent Trade-Throughs 

and to take prompt action to remedy 

deficiencies in such policies and 

procedures.15 As further described 

below, the Plan incorporates a number 

of exceptions to trade-through 

liability.16 Some of these exceptions are 

carried over from the Old Plan, 

including exceptions for trading 

rotations, non-firm quotes, and complex 

trades.17 Others are substantially similar 

to exceptions available for NMS stocks 

under Regulation NMS, such as 

exceptions for systems issues, crossed 

markets, quote flickering, customer 

stopped orders, benchmark trades and, 

notably, intermarket sweep orders 

(‘‘ISOs’’).18 In addition, the Plan 

contains a new exception for stopped 

orders and price improvement.19

The Plan also requires each 

Participant to establish, maintain, and 

enforce written rules that: Require its 

members reasonably to avoid displaying 

locked and crossed markets; assure the 

reconciliation of locked and crossed 

markets; and prohibit its members from 

engaging in a pattern or practice of 

displaying locked and crossed markets; 

subject to exceptions as may be 

contained in the rules of the Participant, 

as approved by the Commission.20

The Exchange’s Proposal 

To implement the Plan, the Exchange 

proposes to replace its current rules 

relating to the Old Plan with new rules 

relating to the Plan, and makes 

amendments to other rules as necessary 

to conform to the requirements of the 

Plan.21 As such, the Exchange proposes 

to adopt all applicable definitions from 

the Plan into the Exchange’s rules.22

In addition, the Exchange proposes to 

prohibit its members from effecting 

Trade-Throughs, unless an exception 

applies.23 Consistent with the Plan, the 

Exchange also proposes exceptions to 

the prohibition on trade-throughs 

relating to: System issues; trading 

rotations; crossed markets; intermarket 

sweep orders; quote flickering; non-firm 

quotes; complex trades; customer 

stopped orders; stopped orders and 

price improvement; and benchmark 

trades.24

The Exchange also proposes a rule to 

address locked and crossed markets, as 

required by the Plan.25 Specifically, the 

Exchange proposes that, except for 

quotations that fall within a stated 

exception, members shall reasonably 

avoid displaying, and shall not engage 

in a pattern or practice of displaying, 

any quotations that lock or cross a 

Protected Quote.26

The Exchange proposes four 

exceptions to the prohibition against 

locked and crossed markets: When the 

Exchange is experiencing a failure, 

material delay, or malfunction of its 

systems or equipment; when the locking 

or crossing quotation was displayed at 

a time where there is a crossed market; 

when an Exchange member 

simultaneously routes an ISO to execute 

against the full displayed size of any 

locked or crossed Protected Bid or 

Protected Offer; and, with respect to a 

locking quotation, when the order 

entered on the Exchange that will lock 

a Protected Bid or Protected Offer, is (i) 

not a customer order, and the Exchange 

can determine via identification 

available pursuant to the OPRA Plan 

that such Protected Bid or Protected 

Offer does not represent, in whole or in 

part, a customer order; or (ii) a customer 

order, and the Exchange can determine 

via identification available pursuant to 

the OPRA Plan that such Protected Bid 

or Protected Offer does not represent, in 

whole or in part, a customer order, and, 

on a case-by-case basis, the customer 

specifically authorizes the member to 

lock such Protected Bid or Protected 

Offer.27 The Exchange believes that, in 

most cases, locked market maker quotes 

are good for the investing public, but 

recognizes that the benefits of a locked 

market become more complicated when 

one or both of the locking quotations 

represent a customer order. Where there 

is market interest willing to trade with 

a customer, the Exchange believes that 

the customer order should be filled. 

Thus, the Exchange proposes that it 

would not exempt from the locked 

market prohibition situations involving 

customer orders unless the customer 

entering the locking order specifically 

authorizes the lock on a case-by-case 

basis.28 As a result, its members would 

not be permitted to lock another 

Participant’s quotation unless the 

Exchange can establish that the 

quotation on the other Participant’s 

market is not for the account of a 

customer. 

The Exchange also proposes rules to 

permit it to continue to accept P/A 

Orders and Principal Orders from 

Participating Options Exchanges that are 

not able to send ISOs in order to avoid 

Trade-Throughs.29 The Exchange noted 

that, even upon the approvals of the 

Plan and the implementing rules of the 

various Participating Options 

Exchanges, it is possible that not all the 

Participants will be functionally able to 

operate pursuant to the Plan. Thus, the 

Exchange has proposed to retain certain 

rules governing the receipt of P/A 

Orders and Principal Orders until such 

time that all Participating Options 

Exchanges are operating pursuant to the 

Plan. 

The Exchange also proposes changes 

to its rules relating to an ISE Primary 

Market Maker’s (‘‘PMM’’) obligation to 

address customer orders when there is 

a better market displayed on another 

exchange. The Exchange proposes 

changes to ISE Rule 803(c) and the 

Supplementary Material to Rule 803 to 

specify that ISE will discharge its 

obligations under the Plan to ‘‘establish, 


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30Section 5(a) of the Plan. 

31Proposed ISE Rule 803(c)(2)(ii). ISE noted that 

the routing of public customer orders to another 

exchange when the ISE is not at the best price is, 

in effect, voluntary. See Notice, supra note 3, at 

27227. ISE stated that a customer could avoid such 

routing by entering an Immediate or Cancel order 

(‘‘IOC’’) or Fill or Kill (‘‘FOK’’) order. See ISE Rule 

715(b)(3) and ISE Rule 715(b)(2) respectively. If ISE 

cannot immediately execute such orders, it would 

cancel all of the order (FOK orders) or the 

unexecuted portion of the order (IOC orders) 

without routing such orders to another exchange. 

See Notice, supra note 3, at 27227. 

32Proposed ISE Rule 803(c)(2). 

33 15 U.S.C. 78(f)(b)(4) and (5). 

34Proposed ISE Rule 803, Supplementary 

Material, .04. 

35Proposed ISE Rule 803, Supplementary 

Material, .05. 

36Proposed ISE Rule 810. 

37The Exchange stated that, because other 

options exchanges have not adopted a distinction 

between Priority Customer and Professional Orders, 

ISE does not believe it is practical or appropriate 

to require ISOs representing customer orders sent 

from other exchanges to be marked as Professional 

Orders. See Notice, supra note 3, at 27227. 

38 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

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

39 15 U.S.C. 78f(b)(5). 

40 17 CFR 242.608(c). Section 1 of the Plan 

provides in pertinent part that, ‘‘The Participants 

will submit to the [Commission] for approval their 

respective rules that will implement the framework 

of the Plan.’’ 

41See supra note 5. 

42The Commission notes that the Exchange’s 

proposed definition of ‘‘Complex Trade’’ under 

proposed ISE Rule 1900(d) is identical to the 

definition of ‘‘Complex Trade’’ under old ISE Rule 

1900(3), which is being deleted. 

maintain and enforce written policies 

and procedures * * * reasonably 

designed to prevent Trade-Throughs’’ 30

by requiring PMMs to address customer 

orders when there is a better market 

away via the use of ISOs.31 ISE proposes 

that a PMM could comply with their 

obligation either by (i) executing a 

customer order at a price that at least 

matches the best price displayed or (ii) 

sending ISO(s) as agent for the customer 

to any other exchange(s) displaying a 

superior price and, with respect to any 

remaining portion of the customer 

order, either (a) releasing the remaining 

portion of the order for execution in the 

Exchange’s auction market or (b) 

executing the remaining portion of the 

order at a price superior to the best price 

in the Exchange’s auction market.32

ISE further proposes that, in 

addressing customer orders that are not 

automatically executed because there is 

a displayed bid or offer on another 

exchange trading the same option that is 

better than the best bid or offer on the 

Exchange, ISE would act in compliance 

with its rules and with the provisions of 

the Act and the rules thereunder, 

including, but not limited to, the 

requirements in Section (6)(b)(4) and (5) 

of the Act 33 that the rules of national 

securities exchange provide for the 

equitable allocation of reasonable dues, 

fees, and other charges among its 

members and issuers and other persons 

using its facilities, and not be designed 

to permit unfair discrimination between 

customers, issuers, brokers, or dealers.34

ISE also proposes to make clear that all 

orders entered on ISE and routed by the 

PMM to another exchange via an ISO 

pursuant to proposed ISE Rule 803(c)(2) 

and that result in an execution are 

binding on the member that entered 

such orders.35

The Exchange also proposes changes 

to ISE Rule 810, which governs 

‘‘informational barriers’’ that ISE market 

makers must maintain within their 

firms. ISE stated that these barriers 

restrict the flow of information between 

personnel handling market making 

activities on the one hand, and 

personnel performing other functions, 

including acting as agent for customer 

orders, on the other hand. ISE noted 

that, under the Old Plan, when there 

was a better market on another 

exchange, a PMM could send a P/A 

Order to that exchange in an attempt to 

access that better price for the customer. 

ISE believes that this was consistent 

with Rule 810 under the Old Plan 

because a P/A Order is a principal 

order, and a firm is permitted to send 

such an order from the market-making 

side of the information barrier. Under 

the Plan and ISE’s proposed rules, 

PMMs would send ISOs representing 

the underlying customer orders, rather 

than P/A Orders, when there is a better 

market away. Because these ISOs would 

be orders on behalf of a public 

customer, ISE notes that current ISE 

Rule 810 would prohibit a PMM from 

sending such an order. The Exchange 

therefore proposes a carve-out to Rule 

810 that would permit a PMM to send 

ISOs solely to comply with its 

obligation under Rule 803 to address 

public customer orders when there is a 

better market on another exchange. ISE 

states that PMMs would act as agent in 

these circumstances, and would send 

the ISOs from the market making side of 

the information barrier. The Exchange 

represents that, in all other respects, 

PMMs would be subject to proposed 

Rule 810.36

Pursuant to Rule 811(b), which 

governs Directed Orders, ISE market 

makers may act as agent for customer 

orders only when handling such orders. 

ISE proposes to amend that rule to 

reflect the ability of PMMs to act as 

agent when sending ISOs under 

proposed ISE Rule 803(c)(2). The 

Exchange also proposes a rule to clarify 

that all public customer ISOs entered by 

an Electronic Access Member (‘‘EAM’’) 

on behalf of another options exchange 

shall be represented on the Exchange as 

Priority Customer Orders, defined in ISE 

Rule 100(37B), and that an EAM does 

not have an obligation to determine 

whether the public customer for whom 

such other exchange is routing an ISO 

meets the definition of a Priority 

Customer.37

The Exchange proposes to amend 

certain other rules to reflect the Plan 

and its related terms. In particular, the 

Exchange proposes to amend Rule 714 

to reflect terminology under the Plan. 

The Exchange is also proposing to 

delete provisions that are no longer 

applicable under the Plan. Specifically, 

ISE is deleting current ISE Rule 

701(a)(5), which relates to the sending 

of P/A Orders through the Linkage Hub 

during the opening, and is deleting 

Supplemental Material .07 to current 

ISE Rule 716, relating to block trades 

and away market prices. 

II. Discussion and Commission’s 

Findings 

After careful review, the Commission 

finds that the proposed rule change, as 

amended, is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

a national securities exchange.38 In 

particular, the Commission finds that 

the proposal is consistent with Section 

6(b)(5) of the Act 39 which requires, 

among other things, that the rules of a 

national securities exchange be 

designed to promote just and equitable 

principles of trade, to remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest. The Commission also 

finds that the proposal is consistent 

with Rule 608(c) of Regulation NMS 

under the Act, which requires that each 

exchange comply with the terms of any 

effective national market system plan of 

which it is a participant.40 Finally, the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Plan.41

Proposed ISE Rule 1900 would define 

applicable terms in a manner that is 

substantively identical to the defined 

terms of the Plan.42 As such, the 

Commission finds that proposed ISE 

Rule 1900 is consistent with the Act and 

the Plan. 

Proposed ISE Rule 1901(a) would 

prohibit members from effecting TradeThroughs unless an exception applies. 

Proposed ISE Rule 1901(b) would 


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43Proposed ISE Rule 1901(b)(1)–(10). 

44Proposed ISE Rule 1901(b)(4). 

45See Securities Exchange Act Release No. 59287 

(January 23, 2009), 74 FR 5694 (January 1, 2009) 

(SR–ISE–2006–26). 

46 15 U.S.C. 78f(b)(5). 

47Section 6 of the Plan permits exceptions to the 

Plan’s locked and crossed market rules as may be 

contained in the rules of a Participant approved by 

the Commission. 

provide for ten exceptions to the general 

Trade-Through prohibition, relating to 

systems issues, trading rotations, 

crossed markets, ISOs, quote flickering, 

non-firm quotes, complex trades, 

customer stopped orders, stopped 

orders and price improvement, and 

benchmark trades.43 Aside from the 

proposed exception relating to systems 

issues, each proposed exception would 

be substantively identical to the parallel 

exception under Section 5(b) of the 

Plan. 

The systems issues exception under 

proposed ISE Rule 1901(b)(1) would 

implement the parallel exception 

available under Section 5(b)(i) of the 

Plan and would permit the Exchange to 

bypass the Protected Quotation of 

another Participant if such other 

Participant repeatedly fails to respond 

within one second to incoming orders 

attempting to access its Protected 

Quotations. The Exchange’s rule would 

require the Exchange to notify such nonresponding Participant immediately 

after (or at the same time as) electing 

self-help, and assess whether the cause 

of the problem lies with the Exchange’s 

own systems and, if so, take immediate 

steps to resolve the problem. Finally, 

the Exchange would be required to 

promptly document its reasons 

supporting any such determination to 

bypass a Protected Quotation. The 

Commission believes that this exception 

should provide the Exchange with the 

necessary flexibility for dealing with 

problems that occur on an away market 

during the trading day. At the same 

time, the exception’s requirements to 

immediately notify such away market of 

its determination and also assess its 

own system should help prevent the use 

of this exception when there in fact is 

a problem with the Exchange’s own 

systems, rather than those of an away 

market. 

The Commission notes that included 

among the exception in proposed ISE 

Rule 1901(b) would be an exception for 

certain transactions involving ISOs.44

An order identified as an ISO would be 

immediately executable by the 

Exchange (or any other Plan Participant 

that received such an order) based on 

the premise that the market participant 

sending the ISO has already attempted 

to access all better-priced Protected 

Quotations up to their displayed size. 

The Commission believes that this 

exception should help ensure more 

efficient and faster executions in the 

options markets. 

Finally, proposed Supplementary 

Material .01 to ISE Rule 1901 would 

ensure that all public customer ISOs 

routed from another Participant and 

entered by an Electronic Access Member 

(‘‘EAM’’) would be Priority Customer 

Orders, rather than ‘‘Professional 

Orders,’’ 45 and would not obligate such 

EAM to determine whether the public 

customer for whom the away market is 

routing the ISO meets the definition of 

Priority Customer. The Commission 

believes that this provision clarifies the 

obligations of EAMs for such orders. 

The Commission notes that, in 

addition to these rules regarding TradeThroughs, the Plan requires that each 

Participant establish, maintain and 

enforce written policies and procedures 

that are reasonably designed to prevent 

Trade-Throughs in that Participant’s 

market that do not fall within an 

applicable exception and, if relying on 

such exception, that are reasonably 

designed to assure compliance with the 

terms of the exception. In addition, the 

Commission notes that the Plan requires 

each Participant to conduct surveillance 

of its market on a regular basis to 

ascertain the effectiveness of such 

policies and procedures and to take 

prompt action to remedy any 

deficiencies in such policies and 

procedures. 

Accordingly, the Commission finds 

that proposed ISE Rule 1901 is 

consistent with Section 5 of the Plan 

and Section 6(b)(5) of the Act 46 which 

requires, among other things, that the 

rules of a national securities exchange 

be designed to promote just and 

equitable principles of trade, to remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest. 

Proposed ISE Rule 1902(a) would 

require Exchange members to 

reasonably avoid displaying, and not 

engage in a pattern or practice of 

displaying, any quotation that locks or 

crosses a Protected Quotation, subject to 

certain exceptions delineated in 

proposed ISE Rule 1902(b). The 

Commission recognizes that locked and 

crossed markets may occur accidentally 

and cannot always be avoided. 

However, the Commission believes that 

giving priority to the first-displayed 

Protected Bid or Protected Offer, 

particularly when it includes a public 

customer’s order, will encourage price 

discovery and contribute to fair and 

orderly markets. Therefore, the 

Commission believes that the proposed 

rule, which corresponds to the Plan’s 

language, to require members to 

reasonably avoid displaying, and not 

engaging in a pattern or practice of, 

locks and crosses is appropriate. 

Proposed ISE Rule 1902(b) would 

permit four exceptions to the 

Exchange’s general rule relating to 

locked and crossed markets.47 The first 

three would be similar to analogous 

certain trade-through exceptions under 

proposed ISE Rule 1901(b), and relate to 

when the Exchange is experiencing 

systems issues, when there exists a 

crossed market, and when a member 

simultaneously routes ISOs against the 

full displayed size of any locked or 

crossed Protected Bid or Protected Offer. 

The fourth exception would permit an 

order entered onto the Exchange to lock 

a Protected Bid or Protected Offer when 

such order is: (1) Not a customer order, 

and the Exchange can determine that 

such Protected Bid or Protected Offer 

does not represent, in whole or in part, 

a customer order; or (2) a customer 

order, and the Exchange can determine 

that such Protected Bid or Protected 

Offer does not represent, in whole or in 

part, a customer order and, on a caseby-case basis, the customer specifically 

authorizes the Exchange’s member to 

lock such Protected Bid or Protected 

Offer. This exception would not protect 

a market maker quote or broker-dealer 

order from being locked. 

The Commission believes that the 

Exchange’s proposed rules relating to 

locked and crossed markets are 

consistent with the Plan and the Act 

and should help ensure that the display 

of locked or crossed markets will be 

limited and that any such display will 

be promptly reconciled. The 

Commission also believes that each of 

the proposed exceptions to locked and 

crossed markets relate to circumstances 

when it is appropriate to permit a 

limited, narrow exception to the general 

locked and crossed market rule. 

In particular, the Commission 

believes that the fourth exception is 

appropriate because it would protect 

customer orders that are Protected Bids 

or Protected Offers from being locked, 

and would only permit a customer order 

entered onto the Exchange to lock a 

Protected Bid or Protected Offer when a 

customer specifically authorizes an 

Exchange member, and only when such 

Protected Bid or Protected Offer itself 

does not represent, in whole or in part, 

a customer order. Because of the 

rapidity with which options quotes are 


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Federal Register / Vol. 74, No. 166 / Friday, August 28, 2009 / Notices 44429 

48 15 U.S.C. 78f(b)(5). 

49See Plan Approval, supra note 5. 

50The Commission notes that any Participating 

Options Exchange that wishes to utilize such order 

types in a manner that would result in a TradeThrough would need to separately request an 

exemption from the Plan for such use. 

51The Commission notes that the rules contained 

in ISE Temporary Rule 1903 are not required by the 

Plan, but rather are rules proposed by the Exchange 

in order to facilitate the participation in the Plan 

of certain exchanges during an initial transition 

period. 

52 15 U.S.C. 78f(b)(5). 

53 15 U.S.C. 78f(b)(5). 

54See Section 5(a) of the Plan. 

55See Notice, supra note 3, at 27227. 

56 15 U.S.C. 78f(b)(4) and (5). 

57See Notice, supra note 3, at 27227. 

58See Securities Exchange Act Release No. 42455 

(February 24, 2000), 65 FR 11388, 11389 (March 2, 

2000) (File No. 10–127). A PMM must have as their 

examining authority designated by the Commission 

pursuant to Rule 17d–1 of the Act, a SRO other than 

ISE. As such, such SRO is responsible for the 

oversight and enforcement of the PMM for 

compliance with the applicable financial 

responsibility rules. 

59See ISE Rule 810(a). 

60See Notice, supra note 3, at 27227. 

often updated today, particularly in 

response to changes in the underlying, 

there is an increasing likelihood that 

market maker quotations will lock each 

other. The proposed exception accounts 

for this dynamic by not prohibiting such 

locking instances. Importantly, the 

proposed exception in the Exchange’s 

rules that the Commission is approving 

would allow non-customer orders to 

lock an away market’s Protected 

Quotation only if the Exchange is able 

to affirmatively determine that the 

Protected Quotation on the away market 

is not, in whole or in part, for the 

account of a customer. If any portion of 

such away market’s Protected Quotation 

is for the account of a customer, such 

Protected Quotation may not be locked. 

In addition, the Commission notes that 

the rule requires that such 

determination be made via 

identification available pursuant to the 

OPRA Plan, which is working with the 

participating options exchanges on a 

method to so identify customer 

quotations through OPRA. The 

Exchange has represented that, absent 

the ability to identify a customer quote 

as part of an exchange’s BBO, the 

Exchange would assume that the quote 

represents, in whole or in part, a 

customer order. As such, the Exchange 

has represented that it would not permit 

its members to avail themselves of this 

exemption unless the away market has 

informed the Exchange that it would 

designate all customer orders as such in 

OPRA and such exchange’s quotation 

does not contain such designation. 

Finally, the Exchange has represented 

that if an exchange chooses not to 

identify its customer quotations, the 

Exchange would treat all of such 

exchange’s quotations as customer 

orders and, absent application of 

another exception, would not permit 

locks of such quotations. 

Therefore, the Commission finds that 

Exchange’s rule regarding locked and 

crossed markets appropriately 

implements Section 6 of the Plan, and 

is consistent with Section 6(b)(5) of the 

Act 48 which requires, among other 

things, that the rules of a national 

securities exchange be designed to 

promote just and equitable principles of 

trade, to remove impediments to and 

perfect the mechanism of a free and 

open market and a national market 

system, and, in general, to protect 

investors and the public interest. 

The Commission also finds that 

proposed ISE Temporary Rule 1903, 

which facilitates the participation of 

certain Participating Options Exchanges 

who may require the use of P/A Orders 

and Principal Orders after 

implementation of the Plan, is 

consistent with the Act. Although the 

Commission has already approved the 

Plan,49 the Commission also recognizes 

that there may be one or more 

Participating Options Exchanges that 

may require a temporary transition 

period during which they may want to 

continue to utilize these order types that 

exist currently under the Old Plan.50

The Exchange and each of the other 

Participating Options Exchanges have 

proposed substantially identical 

temporary provisions to accommodate 

this possibility.51 Thus, the Commission 

finds that the proposed rule relating to 

the Exchange’s receipt and handling of 

P/A Orders and Principal Orders, and 

imposing certain obligations on the 

Exchange with respect to such orders 

that are similar to those that exist under 

the Old Plan, is appropriate and 

consistent with Section 6(b)(5) of the 

Act 52 which requires, among other 

things, that the rules of a national 

securities exchange be designed to 

promote just and equitable principles of 

trade, to remove impediments to and 

perfect the mechanism of a free and 

open market and a national market 

system, and, in general, to protect 

investors and the public interest. 

The Commission also finds that the 

amendments to ISE’s rules requiring ISE 

PMMs to execute or route customer 

orders when another exchange is 

displaying a better price are consistent 

with the Act, and in particular with 

Section 6(b)(5) of the Act.53 In this 

regard, ISE proposes to discharge its 

obligations under the Plan to ‘‘establish, 

maintain and enforce written policies 

and procedures * * * reasonably 

designed to prevent Trade-Throughs’’ 54

by requiring its PMMs to address 

customer orders when there is a better 

away market.55 Pursuant to amended 

ISE Rule 803(c)(2), PMMs would be 

required to either: (i) Execute the 

customer’s order at a price that at least 

matches the best price displayed or (ii) 

send ISO(s) as agent for the customer 

order to any exchange(s) displaying a 

better price and, with respect to any 

remaining portion of the customer 

order, either (a) releasing such portion 

for execution on ISE’s auction market or 

(b) executing such portion at a price 

better than the best price available on 

ISE’s auction market. 

In addressing customer orders that are 

not automatically executed because 

there is a better price displayed on 

another exchange, pursuant to proposed 

Commentary .04 to Rule 803, ISE will 

act in compliance with its rules, the Act, 

and the rules thereunder. In particular, 

ISE will act in compliance with Sections 

6(b)(4) and (5) of the Act 56 which 

require the Exchange to: (1) Provide for 

the equitable allocation of reasonable 

dues, fees, and other charges among its 

participants and other persons using its 

facilities; and (2) prohibit unfair 

discrimination among customers, 

issuers, brokers or dealers. Customers 

may choose to avoid having their orders 

routed away by a PMM by entering their 

order with an Immediate or Cancel or 

Fill or Kill designation.57

Any PMM that handles customer 

orders pursuant to ISE Rule 803(c)(2) 

will be subject to oversight and 

enforcement responsibilities of a selfregulatory organization (‘‘SRO’’) other 

than ISE.58 Additionally, ISE Rule 810 

imposes certain restrictions on the 

business activities of ISE market makers, 

including PMMs. These restrictions 

prohibit a PMM from, among other 

things, handling orders as agent on 

behalf of customers unless there is an 

information barrier between its market 

making activities, on the one hand, and 

certain other activities, including 

handling customer orders as agent, on 

the other hand.59 ISE proposes to amend 

ISE Rule 810 to permit PMMs to handle 

public customer orders when ISE is not 

at the best price. ISE represented that, 

under the Old Plan, PMMs were not 

subject to the information barrier 

requirement between market making 

activities and agency activities because 

PMMs sending P/A Orders seeking a 

better market away were sending a 

principal order.60 The Commission 

finds that it is consistent with the Act 

to permit an exception to ISE’s 

information barrier rule when a PMM 


hsrobinson on DSK69SOYB1PROD with NOTICES
44430 Federal Register / Vol. 74, No. 166 / Friday, August 28, 2009 / Notices 

61 15 U.S.C. 78s(b)(2). 

62 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. 60363 

(July 22, 2009), 74 FR 37270 (‘‘Notice’’). 

4The Plan is a national market system plan 

proposed by the seven existing options exchanges 

and approved by the Commission. See Securities 

Exchange Act Release No. 59647 (March 30, 2009), 

74 FR 15010 (April 2, 2009) (File No. 4–546) (‘‘Plan 

Notice’’) and 60405 (July 30, 2009), 74 FR 39362 

(August 6, 2009) (File No. 4–546) (‘‘Plan 

Approval’’). The seven options exchanges are: 

Chicago Board Options Exchange, Incorporated 

(‘‘CBOE’’); International Securities Exchange LLC 

(‘‘ISE’’); NASDAQ OMX BX, Inc. (‘‘BOX’’); The 

NASDAQ Stock Market LLC (‘‘Nasdaq’’); NYSE 

Amex LLC (‘‘NYSE Amex’’); NYSE Arca, Inc. 

(‘‘NYSE Arca’’); and Phlx (each exchange 

individually a ‘‘Participant’’ and, together, the 

‘‘Participating Options Exchanges’’). 

5On July 28, 2000, the Commission approved the 

Old Plan as a national market system plan for the 

purpose of creating and operating an intermarket 

options market linkage proposed by the American 

Stock Exchange LLC (n/k/a NYSE Amex), CBOE, 

and ISE. See Securities Exchange Act Release No. 

43086 (July 28, 2000), 65 FR 48023 (August 4, 

2000). Subsequently, Philadelphia Stock Exchange, 

Inc. (n/k/a Phlx), Pacific Exchange, Inc. (n/k/a 

NYSE Arca), Boston Stock Exchange, Inc. (n/k/a 

BOX), and Nasdaq joined the Linkage Plan. See 

Securities Exchange Act Release Nos. 43573 

(November 16, 2000), 65 FR 70851 (November 28, 

2000); 43574 (November 16, 2000), 65 FR 70850 

(November 28, 2000); 49198 (February 5, 2004), 69 

FR 7029 (February 12, 2004); and 57545 (March 21, 

2008), 73 FR 16394 (March 27, 2008). 

6Section 8(c) of the Old Plan. 

7The Linkage Hub is a centralized data 

communications network that electronically links 

the Participating Options Exchanges to one another. 

The Options Clearing Corporation (‘‘OCC’’) operates 

the Linkage Hub. 

8Section 2(16) of the Old Plan. 

9Section 7(a)(i)(C) of the Old Plan. 

10See Securities Exchange Act Release No. 60360 

(July 21, 2009) 74 FR 37265 (July 28, 2009) (File No. 

4–429). 

11 17 CFR 242.608. 

12See Securities Exchange Act Release No. 51808 

(June 9, 2005), 70 FR 37496 (June 29, 2005) (File 

No. S7–10–04); 17 CFR 242.600 et seq. For 

discussions of the similarities between the 

provisions of Regulation NMS and the provisions in 

the Plan, see Plan Notice and Plan Approval, supra 

note 4. 

sends an ISO as agent for a customer 

order to comply with its obligations 

under ISE Rule 803(c)(2), because such 

activity is limited by ISE’s rules, as 

described above, and does not provide 

the potential for the type of harm 

against which ISE Rule 810 is intended 

to protect, specifically the inappropriate 

sharing of information that could result 

in market manipulation. The 

Commission also finds that the 

proposed change to ISE Rule 811, 

governing the Exchange’s Directed 

Order program, to permit ISE PMMs that 

also handle Directed Orders on an 

agency basis, to act as agent when 

routing ISOs under ISE Rule 803(c)(2) is 

consistent with the Plan and the Act. 

The Commission finds that ISE’s 

proposed arrangements with respect to 

the handling of customer orders when 

ISE is not at the best price, and related 

amendment to its information barrier 

rules and Directed Order program, are 

designed to comply with its 

responsibility under the Plan to 

establish, maintain and enforce written 

policies and procedures reasonably 

designed to prevent Trade-Through. 

Accordingly, the Commission finds 

ISE’s proposed arrangements consistent 

with the Plan and the Act. 

Finally, the Commission finds that 

ISE’s proposed amendments to certain 

other ISE rules to reflect the provision 

of the Plan, and to delete provisions of 

ISE’s rules rendered unnecessary due to 

the Plan, are appropriate and consistent 

with the Act and the Plan. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,61 that the 

proposed rule change (SR–ISE–2009– 

27), as modified by Amendment No. 1, 

be, and it hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.62

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–20788 Filed 8–27–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60550; File No. SR–Phlx– 

2009–61] 

Self-Regulatory Organizations; 

NASDAQ OMX PHLX, Inc.; Order 

Granting Accelerated Approval of a 

Proposed Rule Change To Adopt Rules 

Implementing the Options Order 

Protection and Locked/Crossed Market 

Plan 

August 20, 2009. 

I. Introduction 

On July 20, 2009, NASDAQ OMX 

PHLX, Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’), pursuant 

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

Exchange Act of 1934 (‘‘Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change to amend and adopt rules to 

implement the Options Order Protection 

and Locked/Crossed Market Plan. The 

proposed rule change was published for 

comment in the Federal Register on July 

28, 2009.3 The Commission received no 

comments on the proposal. This order 

approves the proposed rule change on 

an accelerated basis. 

II. Description of the Proposal 

The Exchange proposes to amend and 

adopt new Phlx rules to implement the 

Options Order Protection and Locked/ 

Crossed Market Plan (‘‘Plan’’).4

Specifically, the Exchange proposes to 

replace the Exchange’s current 

Intermarket Linkage rules (Phlx Rules 

1081 and 1083–1087) with new rules 

implementing the Plan, amend other 

Exchange rules to reflect the Plan, and 

delete or modify provisions rendered 

unnecessary by the Plan. 

The Old Plan 

Each of the Participating Options 

Exchanges are signatories to the Plan for 

the Purpose of Creating and Operating 

an Intermarket Option Linkage (‘‘Old 

Plan’’).5 In pertinent part, the Old Plan 

generally requires its participants to 

avoid trading at a price inferior to the 

national best bid or offer (‘‘tradethrough’’), although it provides for a 

number of exceptions to trade-through 

liability.6 The Participating Options 

Exchanges comply with this 

requirement of the Old Plan by utilizing 

a stand alone system (‘‘Linkage Hub’’) to 

send and receive specific order types,7

namely Principal Acting as Agent 

Orders (‘‘P/A Orders’’), Principal 

Orders, and Satisfaction Orders.8 The 

Old Plan also provided that 

dissemination of ‘‘locked’’ or ‘‘crossed’’ 

markets should be avoided, and 

remedial actions that should be taken to 

unlock or uncross such market.9 Each of 

the Participating Options Exchanges, 

including the Exchange, has submitted 

an amendment to the Old Plan to 

withdraw from such Plan.10 The 

withdrawals will be effective upon 

approval by the Commission of such 

amendments pursuant to Rule 608 of 

Regulation NMS under the Act 

(‘‘Regulation NMS’’).11

The Plan 

The Plan does not require a central 

linkage mechanism akin to the Old 

Plan’s Linkage Hub. Instead, the Plan 

includes the framework for routing 

orders via private linkages that exist for 

NMS stocks under Regulation NMS.12

The Plan requires the Participating 

Options Exchanges to adopt rules 


hsrobinson on DSK69SOYB1PROD with NOTICES