35688 Federal Register / Vol. 65, No. 108 / Monday, June 5, 2000 / Notices

3 15 U.S.C. 78f(b)(5).

4 15 U.S.C. 78f.

5 In approving this rule, the Commission has

considered its impact on efficiency, competition,

and capital formation. 15 U.S.C. 78c(f). 6 15 U.S.C. 78f(b)(5).

7 Id.

8 Id.

9 15 U.S.C. 78f(b)(5).

10 15 U.S.C. 78s(b)(2).

11 17 CFR 200.30–3(a)(12).

6(b)(5) 3 that an exchange have rules that

are designed to prevent fraudulent and

manipulative acts and practices, to

promote just and equitable principles of

trade, to remove impediments to and

perfect the mechanism for a free and

open market and a national market

system, and, in general, to protect

investors and the public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The proposed rule change does not

impose any burden on competition that

is not necessary or appropriate in

furtherance of the purpose of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

The Exchange has not solicited,and

does not intend to solicit, comments on

this proposed rule change. The

Exchange has not received any

unsolicited written comments from

members or other interested parties.

III. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549–0609. 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 at

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the Exchange. All

submissions should refer to File No.

SR–ISE–00–05, and should be submitted

by June 26, 2000.

IV. Commissions’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

The Commission has reviewed

carefully the ISE’s proposed rule change

and finds, for the reasons set forth

below, the proposal is consistent with

the requirements of Section 6 of the

Act 4 and the rules and regulations

thereunder applicable to a national

securities exchange. 5 Specifically, the

Commission finds the proposal is

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

Act. 6

Section 6(b)(5) of the Act 7 requires an

exchange to promulgate rules designed

to prevent fraudulent and manipulative

acts and practice, to promote just and

equitable principles of trade, to remove

impediments to and perfect the

mechanism for a free and open market

and national market system, and, in

general, to protect investors and the

public interest. The Commission finds

that the proposal is consistent with

Section 6(b)(5) of the Act, 8 because the

proposal is designed to enhance

liquidity on the Exchange during its

start-up phase.

The Commission finds that the

proposal is narrowly-tailored, and

provides reasonable standards and

guidelines to be applied in granting

exemptions pursuant to this authority.

In particular, the Commission notes that

the Exchange’s decisions to grant

exemptions would be made on a caseby-case basis, and any exemption

granted would be limited to a term of no

longer than one month. In addition, the

guidelines require that a market maker’s

exemption from the Volume Limitations

would end as soon as the Group to

which the market maker is assigned is

opened for trading, even if only one

options class in that Group has been

listed at that time. Similarly, the

exemption granted to a market maker

holding more than one ISE membership

would be reduced when one or more of

its assigned Groups are opened for

trading.

The Commission also believes that the

proposal may encourage market makers

to begin trading on the Exchange as

soon as they are authorized and able to

do so, which in turn, may benefit

investors by providing liquidity to the

market. The Commission notes that the

proposed standards require market

makers receiving an exemption to

perform market making functions in the

classes in which they trade, which

should also enhance the liquidity of the

market. Because of these potential

improvements to the market, the

Exchange’s authority to grant

exemptions on a case-by-case basis

tailored to the individual situation of

each market maker applying for an

exemption, and the limited duration of

the grant of exemptive authority, the

Commission finds that the proposal is

both reasonable and consistent with the

Act.

The Commission finds good cause for

approving the proposed rule change

prior to the thirtieth day after the date

of publication of notice thereof in the

Federal Register. Having found that the

proposal is both reasonable and

consistent with the Act, and that it

should result in enhancements to the

marketplace during the Exchange’s startup phase, the Commission believes it

would be counterproductive to delay

the implementation of the proposal.

Specifically, the Commission notes that

the ISE intends to commence trading on

May 26, 2000, in a limited number of

options classes. The proposal will

permit ISE PMMs and CMMs that are

ready to begin trading, but have been

assigned to Groups that are not yet open

for trading, to participate in ISE’s

market, thereby increasing liquidity in

the market. The Commission finds,

therefore, that granting accelerated

approval of the proposed rule change is

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

Act.9

It is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,10 that the

proposed rule change (SR–ISE–00–05) is

hereby approved on an accelerated

basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.11

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–13958 Filed 6–2–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42825; File No. SR–ISE–

00–04]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Amendment No. 1 by the International

Securities Exchange LLC Relating to

the Exposure of Orders on the

Exchange

May 25, 2000.

I. Introduction

On February 25, 2000, the

International Securities Exchange LLC

(‘‘ISE’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’), pursuant to

Federal Register / Vol. 65, No. 108 / Monday, June 5, 2000 / Notices 35689

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

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 42475

(February 29, 2000), 65 FR 11818.

4See letters to Jonathan G. Katz, Secretary, SEC,

from Holly H. Smith, Sutherland, Asbill & Brennan

LLP, dated March 24, 2000 (‘‘SA&B Letter’’); Peter

J. Chepucavage, Fulbright & Jaworski L.L.P., dated

March 28, 2000 (‘‘Phlx Letter’’); and Charles J.

Henry, President and Chief Operating Officer,

Chicago Board Options Exchange, dated March 31,

2000 (‘‘CBOE Letter’’).

5See letter from Katherine Simmons, Vice

President and Associate General Counsel, ISE, to

Deborah Flynn, Senior Special Counsel, Division of

Market Regulation, SEC, dated March 28, 2000

(‘‘Amendment No. 1’’). In Amendment No. 1, the

ISE made minor technical changes to ISE Rule 717,

replacing section headings ‘‘(a)’’ and ‘‘(b)’’ with

‘‘(d)’’ and ‘‘(e),’’ respectively. Because Amendment

No. 1 did not change the substance of the proposal,

there was no need to publish it in the Federal

Register.

6See note 4, supra.

7The Commission notes that commenters also

raised issues related to ISE’s system that were

outside of the scope of the current ISE proposal,

several of which were addressed in the

Commission’s order approving ISE’s registration as

a national securities exchange. See Securities

Exchange Act Release No. 42455 (February 24,

2000), 65 FR 11388 (March 2, 2000). Consequently,

this order addresses only comments regarding those

issues presented by the current proposal.

8See SA&B Letter; Phlx Letter; CBOE Letter.

9 Id.

10See SA&B Letter; Phlx Letter.

11See SA&B Letter; Phlx Letter; CBOE Letter.

12See letter to Jonathan G. Katz, Secretary, SEC,

from Katherine Simmons, Vice President and

Associate General Counsel, ISE, dated May 19, 2000

(‘‘ISE Response Letter’’).

13See ISE Response Letter.

14 Id.

15 Id.

16 Id.

17 Id.

18 Id.

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’),1 and

Rule 19b–4 thereunder,2 a proposed rule

change relating to the exposure of orders

on the Exchange.

The proposed rule change was

published for comment in the Federal

Register on March 6, 2000.3 The

Commission received three comment

letters regarding the proposal.4 On

March 30, 2000, the ISE amended the

proposed rule change.5 This order

approves the proposed rule change, as

amended.

II. Description of the Proposal

The ISE proposes to amend ISE Rule

717 to reduce from two minutes to 30

seconds the amount of time that

Electronic Access Members (‘‘EAMs’’)

are required to expose agency orders on

the Exchange before executing them as

principal or executing them against a

solicited order. According to the ISE, its

order exposure requirements are

intended to assure that agency orders

have an opportunity to interact on the

Exchange before they are executed. The

Exchange proposes to reduce the

exposure time because it believes that

the objective of the exposure rule can be

satisfied by a 30 second exposure

period.

III. Summary of Comments

The Commission received three

comment letters on the proposal.6 These

commenters opposed ISE’s proposal to

reduce the order exposure time from

two minutes to 30 seconds.7

Commenters argued that the proposed

reduction in response time would make

it easier for ISE members to execute as

principal orders for less than 50

contracts without meaningful

opportunity for price improvement by

competitors.8 The commenters contend

that this would undermine the intended

purpose of having customers’ orders

reasonably exposed to other trading

interest before being executed by the

facilitating ISE member.9 Two

commenters agreed that two minutes is

an appropriate time frame for this

purpose, but that a 30 second exposure

time would make it unlikely that

interested market participants would

have sufficient time to gauge their risk

exposure in other markets and related

positions, and reveal on the ISE their

true ‘‘best’’ price.10

Commenters stated that this proposal

encourages internalization because it

allows an EAM to execute orders as

principal if it utilizes the facilitation

mechanism of ISE Rule 716(d) or has

been bidding or offering on the ISE for

30 seconds. Commenters noted that an

EAM could easily internalize orders by,

upon receiving a customer order,

holding that order until the EAM has

posted a bid or offer at this intended

crossing price for 30 seconds, then

executing the order as principal,

effectively subverting the intent of the

exposure period.11

In response to commenters’ objections

to the proposed reduction in the

exposure period from two minutes to 30

seconds, the ISE states that it believes

30 seconds is a sufficient time for

participants in the ISE market to

respond to an order, noting that the

Commission has approved exposure

times of as few as 15 seconds for certain

equity exchanges.12 With regard to the

sufficiency of the proposed 30 second

exposure time, the ISE contends that a

30 second order exposure time is

especially appropriate in light of the fact

that floor-based exchanges have no

limitation on how long a crowd must

interact with a proposed crossing of

orders, nor do floor-based exchanges

have safeguards preventing a firm from

negotiating with the crowd to execute

against any and all of its customer

orders, regardless of size.13 ISE states

that, because it is an electronic

marketplace, it must define some order

exposure time period.14

In response to the commenters’ claim

that members can subvert the 30 second

requirement, ISE argues that the only

exception to the 30 second exposure

rule is the situation in which an EAM

had disseminated proprietary trading

interest on the ISE for at least 30

seconds prior to the customer order. In

this case, according to ISE, the firm has

disseminated trading interest, available

to all customer orders, at the stated

price, thus putting itself at risk to the

public. Accordingly, ISE believes that

execution of the EAM’s own customer

orders would not deprive the public of

the opportunity to trade at the same

prices.15 Moreover, ISE notes that a

broker would not be permitted, under

its rules, to simply delay entering an

order into the system in order to

circumvent the exposure rule.16

In response to the commenters’

internalization claims, ISE notes that

that there is little opportunity for an

EAM to be assured of executing against

its own customer orders. Once customer

orders are entered into the system, those

limit orders that do not improve upon

the ISE best bid or offer are placed into

the ISE’s electronic limit order book last

in time priority behind any existing

customer orders at the same price. Thus,

the ISE argues, a given EAM would have

no way of knowing whether the

resulting increase in the best bid or offer

(assuming the order matched the ISE

best bid or offer) was due to its’

customer’s order, as opposed to other

customer orders or interest from noncustomers.17 In addition, the ISE

maintains that its proposed amendment

to ISE Rule 717(d) addresses the only

real opportunity for internalization in

its system: The narrow case where an

EAM has a limit order that improves

upon the ISE best bid or offer or a

market order that it is willing to execute

at an improved price. The ISE argues

that the proposed 30 second delay

required by its amendment will remove

the informational advantage that makes

internalization profitable and will

provide other market participants an

opportunity to compete for such

orders.18

Discussion

After careful review, the Commission

find that the proposed rule change is

consistent with the requirements of the

Act and the rules and regulations

35690 Federal Register / Vol. 65, No. 108 / Monday, June 5, 2000 / Notices

19 In approving this rule, the Commission has

considered its impact on efficiency, competition,

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

20 15 U.S.C. 78f(b)(5).

21 Id.

22 Id.

23See SA&B Letter at 8.

24 15 U.S.C. 78f(b)(5).

25 15 U.S.C. 78s(b)(2).

26 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

thereunder applicable to a national

securities exchange.19 In particular, the

Commission finds the proposal is

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

Act.20

Under Section 6(b)(5) of the Act,21 a

registered national securities exchange

must have rules that are designed to

prevent fraudulent and manipulative

acts and practices, to promote just and

equitable principles of trade, to foster

cooperation and coordination with

persons engaged in regulating, clearing,

settling, processing information with

respect to, and facilitating transactions

in securities, to remove impediments to

and perfect the mechanism of a free and

open market and a national market

system, and, in general, to protect

investors and the public interest.

The Commission finds that ISE’s

proposed amendments to ISE Rule

717(d) and (e) reducing the exposure

time (i.e., the amount of time EAMs are

required to expose agency orders on the

Exchange before executing them as

principal or against a solicited order)

from two minutes to 30 seconds are

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

Act.22 The Commission recognizes that,

on floor-based exchanges, there are no

rules that govern the extent to which a

given trading crowd has an opportunity

to interact with a proposed crossing of

orders. Because the ISE operates a

unique electronic options market, it

must define an order exposure time

period. The Commission finds that a 30

second exposure period is a reasonable

time frame for participants in ISE’s

market to assess market conditions and

their own trading interest, and to allow

a reasonable opportunity for price

improvement from interested

participants. The Commission finds that

a 30 second exposure period strikes a

reasonable balance between maintaining

liquidity and efficiency in the ISE

market and preventing impediments to

a free and open market, while providing

the appropriate safeguards for investors

and the public.

In determining that a 30-second

exposure period is reasonable, the

Commission has considered carefully

the commenters’ concern that market

makers might be able to subvert the 30

second exposure period by posting bids

or offers for a very short period of time,

and arranging to receive agency orders

simultaneously when they are

executable against the market maker as

principal, or against other agency orders

held by the market maker.23 In such a

scenario, EAMs allegedly would prescreen order flow, and hold orders until

they can be internalized, denying the

order any exposure in the market and

the opportunity for price improvement.

The Commission is not persuaded by

this argument. The ISE allows for only

one exception to the 30 second exposure

period, in the scenario where an EAM

has previously disseminated proprietary

trading interest on the ISE for at least 30

seconds prior to receipt of a customer

order. Under this limited exception, a

firm will have placed itself ‘‘at risk’’ to

the public by having disseminated

trading interest available to all customer

orders at a stated price. ISE Rule 717(d)

states that a member must have been

bidding or offering on the Exchange for

at least 30 seconds prior to receiving an

agency order that is executable against

such bid or offer. The Commission finds

that an EAM’s execution of its own

customer order under this particular

scenario would not deprive the public

of the opportunity to trade at the same

price.

The Commission also has considered

carefully the commenters’ concerns

about the potential for internalization of

order flow where there is a 30 second

exposure period, and finds that the

proposal provides sufficient safeguards

against such activity. The ISE’s system

is designed to ensure that, once

customer orders are entered into the

system, any limit orders that do not

improve upon the ISE best bid or offer

automatically are placed into the ISE’s

electronic limit order book last in time

priority behind any existing customer

orders at the same price. Therefore, an

EAM has no guarantee that it will be

able to trade against its agency orders.

Because ISE’s system automatically

provides reasonable safeguards to

prevent EAMs from executing against

their own customer orders, the

Commission finds that a 30 second

exposure period does not pose an

unreasonable risk of increasing the

internalization of order flow. For these

reasons, the Commission finds that ISE’s

proposal is consistent with Section

6(b)(5) of the Act.24

V. Conclusion

It Is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,25 that the

proposed rule change (SR–ISE–00–04),

as amended, is approved.

Margaret H. McFarland.

Deputy Secretary.

For the Commission, by the Division

of Market Regulation, pursuant to

delegated authorty.26

[FR Doc. 00–13959 Filed 6–2–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42847; File No. SR–NASD–

00–30]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the National Association of Securities

Dealers, Inc. to Include UTP

Exchanges in the Nasdaq National

Market Execution Service

May 26, 2000.

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

Securities Exchange Act of 1934

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

notice is hereby given that on May 25,

2000, the National Association of

Securities Dealers, Inc. (‘‘NASD’’ or

‘‘Association’’), through its wholly

owned subsidiary, the Nasdaq Stock

Market, Inc. (‘‘Nasdaq’’), filed a

proposed rule change with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’). The

proposed rule change is described in

Items I, II, and III below, which Items

have been prepared by Nasdaq. The

Commission is publishing this notice to

solicit comments on the proposed rule

changes from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

Nasdaq is proposing to provide for the

inclusion of national securities

exchanges trading Nasdaq-listed

securities pursuant to grants of unlisted

trading privileges (‘‘UTP’’) in the

automatic-execution functionality of the

Nasdaq National Market Execution

System (‘‘NNMS’’). Below is the text of

the proposed rule change. Proposed

deletions are in brackets and proposed

addition are in italics.

4720. SelectNet Serve

(a)–(b) No Change

(c) Prohibition Regarding the Entry of

Certain Preferenced Orders to Nasdaq

National Market Execution System

Market Makers

(i) No member [may] shall direct a

SelectNet preferenced order to a Nasdaq