64466 Federal Register / Vol. 65, No. 209 / Friday, October 27, 2000 / Notices

8 17 CFR 240.19b–4(f)(2).

9 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3The ISE defines ‘‘Public Customer’’ in ISE Rule

100(29).

4The ISE defines ‘‘Non-Customer’’ in ISE Rule

100(19).

5 15 U.S.C. 78s(b)(3)(A).

thereunder,8 because it involves a

member due, fee, or other charge. At any

time within 60 days of the filing of the

proposed rule change, the Commission

may summarily abrogate such rule

change if it appears to the Commission

that such action is necessary or

appropriate in the public interest, for

the protection of investors, or otherwise

in furtherance of the purposes of the

Act.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposal is

consistent with the Act. Persons making

written submissions should file six

copies thereof with the Secretary,

Securities and Exchange Commission,

450 Fifth Street, NW., Washington, DC

20549–0609. Copies of the submission,

all subsequent amendments, all written

statements with respect to the proposed

rule change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the Exchange. All

submissions should refer to file number

SR–CSE–00–07, and should be

submitted by November 17, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–27650 Filed 10–26–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34 43462; File No. SR–ISE–

00–10]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the International Securities Exchange,

LLC Relating to Payment for Order

Flow

October 19, 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

September 12, 2000, the International

Securities Exchange, LLC (the

‘‘Exchange’’ or ‘‘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 ISE. 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 Exchange is proposing to

establish a payment for order flow

program as follows:

Authorization To Impose a Paymentfor-Order-Flow Fee. The ISE will impose

fees on Primary Market Makers

(‘‘PMMs’’) and Competitive Market

Makers (‘‘CMMs’’). There will be up to

three separate fees on a per-contract

basis:

• Fees on transactions with Public

Customer; 3

• Fees on transactions with NonCustomers 4 other than market makers

on another options exchange (‘‘away

market makers’’); and

• Fees on transactions with away

market makers.

There will not be any fees on

transactions in which all parties are

PMMs and CMMs. The Exchange will

establish the specific fees in a separate

rule filing submitted pursuant to

Section 19(b)(3)(A) of the Act.5 The

three fees may be the same, or may

differ from each other; one or more fees

may be set at $0 per contract. The fees

on transactions with Non-Customers

and away market makers may not be

higher than the fee on Customer

transactions, however. In addition, the

fee on transactions with away market

makers will not be higher than the fee

on transactions with other NonCustomers.

The Exchange also will have the

flexibility to establish multi-tiered fees.

These tiers can be based on such factors

as the overall trading activity of an

option, the Exchange’s market share in

an option, or any other objective factor.

If the Exchange establishes multi-tiered

fees, the Exchange’s fee filing will

specify each of those fees.

Use of the Funds Generated by the Fee

to Pay for Order Flow. The Exchange

will separately account for the funds

this fee generates on a per-group basis.

That is, the Exchange will segregate

these funds according to each of the

groups of ‘‘bins’’ of options the

Exchange trades. The PMMs will use the

funds generated by the fee to pay

Electronic Access Members (‘‘EAMs’’)

for their order flow. The PMMs will

have full discretion regarding payments,

including which EAMs will be paid, the

amount of the payments, and the type

of order flow subject to the payment.

The Exchange also will establish ‘‘bin

advisory committees’’ (‘‘BACs’’)

consisting of the PMM and CMMs in a

bin. The Exchange will provide to all

bin members information regarding

payments made and the BACs will

provide a forum for the discussion of,

among other things, payment issues.

These committees will be advisory in

nature only, however, and the PMM will

retain full discretion over all payment

decisions.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

ISE included statements concerning the

purpose of, and basis for, the proposed

rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. The ISE has prepared

summaries, set forth in sections A, B,

and C below, of the most significant

aspects of the statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The purpose of the proposed rule

change is to establish the structure for

an ISE payment-for-order-flow program.

This is a competitive response by the

Exchange to similar programs of the

other options exchanges. The proposal

has two parts: establishing the structure

of a fee to fund a payment-for-orderflow program; and establishing how the

funds the fees generate will be used to

pay for order flow.

Establishing a Fee Structure. The

Exchange is proposing the flexibility of

having up to three separate fees. The

highest level of market maker fees will

be on transactions between market

makers and Public Customers. Because

the funds generated will primarily be

used to pay for customer order flow, the

ISE believes that it is reasonable that

market makers be ‘‘taxed’’ primarily on

Federal Register / Vol. 65, No. 209 / Friday, October 27, 2000 / Notices 64467

6See Securities Exchange Act Release No. 43086

(July 28, 2000), 65 FR 48023 (August 4, 2000). 7 15 U.S.C. 78f(b)(5).

8The ISE urged the Commission to abrogate the

first of these filings, which was submitted by the

Chicago Board Options Exchange. See letter dated

July 14, 2000 from Michael Simon, Senior Vice

President and Secretary, ISE, to Jonathan G. Katz,

Secretary, SEC.

their transactions with customers to

fund these payments. The structure

allows for lower fees on Non-Customer

transactions and away market makers,

and there are no fees on transactions

executed between ISE market makers.

The ISE states that the possible lower

fees on Non-Customers reflect a

balancing of the competitive interests

that currently exist in the options

markets. The Exchange seeks to

encourage market makers to provide

significant size for Non-Customer

orders. If the payment-for-order flow fee

is set at too high a level, however,

PMMs and CMMs may not provide

sufficient size to attract these orders to

the Exchange. Thus, the Exchange

believes that it is important to establish

a structure that will allow it to establish

a balance between generating revenue to

pay for order flow and attracting NonCustomer order flow.

In addition, the Exchange is

proposing a structure that could

distinguish between orders of away

market makers and other NonCustomers. While the fee could be lower

on transactions with away market

makers than with other Non-Customers,

it could not be higher. This distinction

recognizes certain unique aspects of

away market maker order flow. In

particular, pursuant to the intermarket

options linkage plan 6 that the

Commission has approved, ISE market

makers will have certain obligations to

trade against the orders of away market

makers. Thus, the Exchange believes

that it may be appropriate to ‘‘tax’’ these

transactions less than other NonCustomer transactions, recognizing that

these transactions could be in

fulfillment of regulatory and market

obligations and are important in

promoting price discovery in the market

place. This proposal establishes a

structure that would allow, but not

require, the fee to be set in a manner

than reflects these competitive and

market place factors.

The proposed rule change also

provides that there will not be a fee on

transactions in which all parties are

PMMs and CMMs. Transactions

between market makers are an

important aspect of the ISE’s pricediscovery model. These trades often

occur when market makers have

different views on an options price and

their quotes interact until a ‘‘price

equilibrium’’ is established. In addition,

these trades could occur as market

makers hedge or rebalance their

positions. The Exchange believes that it

would be inappropriate to ‘‘tax’’ these

trades. Such a ‘‘tax’’ could create

incentives to avoid this type of trading,

which could harm the overall depth,

liquidity, and pricing efficiency of the

ISE’s market.

Finally, the proposal would permit

the Exchange to establish multiple tiers

of fees. The Exchange would define the

tiers pursuant to objective criteria,

including but not limited to the overall

activity in an option and the Exchange’s

market share in an option. This is

intended to provide the ISE with as

much flexibility as possible in collecting

funds to pay for order flow in a manner

consistent with the Exchange’s overall

goal of creating incentives for market

makers to provide deep and liquid

markets.

Payment for Order Flow. The only use

of funds generated will be to pay for

order flow. The Exchange will segregate

the funds proportionately to the bins

that generated the funds, and the PMM

in each bin generally will have full

discretion on how to use those funds to

pay for order flow. The Exchange will

make the payments to the EAMs based

on the PMM’s directives. While the

Exchange will establish BACs as a

forum for CMMs to discuss payment

issues with PMMs, CMMs will not have

any formal role in making payment

decisions.

With respect to members who receive

payments for their order flow, the

Exchange will be issuing appropriate

circulars to its members emphasizing

their disclosure and best execution

obligations. The Exchange also will be

providing to members various reports

and other information demonstrating

the quality of executions that they

receive on the Exchange.

2. Basis

The basis for this proposed rule

change is the requirement under Section

6(b)(5) of the Act 7 that an exchange

have rules that are designed to prevent

fraudulent and manipulative acts and

practices, to promote just and equitable

principles of trade, and, in general, to

protect investors and the public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The ISE believes that payment-fororder-flow raises significant competitive

issues. In the ISE’s view, when market

makers pay broker-dealers for their

order flow, the true cost of executing

orders is obscured, imposing a burden

on price competition in the market.

Specifically, the ISE believes that it is

difficult to compete for order flow when

undisclosed payments are influencing

order routing decisions.

Furthermore, the ISE believes that

these competitive issues are

compounded when exchanges establish

payment-for-order-flow programs. In the

ISE’s view, not only do the payment

programs impede price discovery and

competition on an intermarket basis, but

these programs also can raise

intramarket competitive issues. In this

regard, the ISE believes that market

makers on an exchange should be

encouraged to compete vigorously

within their markets for order flow.

Exchange-mandated payment-for-orderflow programs require these competitors

to act jointly in paying broker-dealers

for their orders, however. The ISE

believes that this mandated‘‘tax’’ on

transactions may well adversely affect

the ability of individual market makers

to compete as vigorously as possible for

order flow through aggressive

quotations, thus harming intra market

price competition. Moreover, in the

ISE’s view, to the extent that market

makers do ‘‘compete’’ by paying for

order flow, such payments may or may

not flow through to the ultimate

investor. In contrast, aggressive

quotation competition clearly would

flow through to investors.

Notwithstanding these concerns, the

ISE believes that it must establish a

level playing field on which it can

compete with the other options

exchanges, all of which have developed

their own payment for order flow

programs. Accordingly, the Exchange

believes that this proposed rule change

does not impose any burden on

competition that is not necessary or

appropriate in furtherance of the

purposes of the Act.

As noted below, the Commission has

permitted payment-for-order-flow

programs on all four competing options

exchanges to take effect pursuant to

effective-on-filing rule changes. While

the Commission has the authority to

abrogate those filings, it has not

exercised that authority.8 In the ISE’s

view, the burden on competition

resulting from payment-for-order-flow

already is present in the market, and

therefore any incremental effects of the

ISE’s program will be minimal. The ISE

believes, moreover, that it will be at a

competitive disadvantage, at least in the

short term, if it is not permitted to offer

a competitive program. Accordingly, the

ISE believes that there is no basis under

64468 Federal Register / Vol. 65, No. 209 / Friday, October 27, 2000 / Notices

117 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3 15 U.S.C. 78s(b)(3)(A)(i).

4 17 CFR 240.19b–4(f)(1).

5Securities Exchange Act Release No. 41208

(March 24, 1999), 64 FR 15386 (March 31, 1999).

6Securities Exchange Act Release No. 41606 (July

8, 1999), 64 FR 38226 (July 15, 1999).

7Securities Exchange Act Release No. 43303

(September 19, 2000), 65 FR 57853 (September 26,

2000).

8Securities Exchange Act Release No. 41731

(August 11, 1999), 64 FR 44983 (August 18, 1999).

9Securities Exchange Act Release No. 41974

(October 4, 1999), 64 FR 55508 (October 13, 1999).

10Securities Exchange Act Release No. 41494

(March 3, 2000), 65 FR 13069 (March 10, 2000).

11Securities Exchange Act Release No. 43103

(August 1, 2000), 65 FR 48774 (August 9, 2000).

12See footnotes 5 and 6, supra.

13Securities Exchange Act Release No. 41208

(March 24, 1999), 64 FR 15386 (March 31, 1999) at

footnote 15.

14See footnote 8, supra.

the Act to impose such an

anticompetitive burden upon it.

C. Self-Regulatory Organziation’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

The Exchange has not solicited, and

does not intend to solicit, comments on

this proposed rule change. The

Exchange has not received any

unsolicited written comments from

members or other interested parties.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register (or within such longer period

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding, or

as to which the ISE consents), the

Commission shall by order approve this

proposed rule change or institute

proceedings to determine whether the

proposed rule change should be

disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549–0609. Copies of

the submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of the filing will also be

available for inspection and copying at

the principal office of the ISE. All

submissions should refer to File No.

SR–ISE–00–10 and should be submitted

by November 17, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.1

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–27651 Filed 10–26–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43469; File No. SR–NASD–

00–60]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

National Association of Securities

Dealers, Inc. To Delay the

Implementation Date of Changes to

Riskless Principal Trade Reporting

Rules

October 20, 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 October

18, 2000, the National Association of

Securities Dealers, Inc. (‘‘NASD’’),

through its wholly owned subsidiary,

The Nasdaq Stock Markets, Inc.

(‘‘Nasdaq’’), filed with the Securities

and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) the proposed

rule change as described in Item I, II,

and III below, which Items have been

prepared by Nasdaq. Nasdaq filed the

proposal pursuant to Section

19(b)(3)(A)(i) of the Act,3 and Rule 19b–

4(f)(1) 4 thereunder, which renders the

proposal effective upon filing with the

Commission. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

Nasdaq proposes to delay until

February 1, 2001, the implementation

date of the riskless principal trade

reporting rule changes announced in

SR–NASD–98–59,5 SR–NASD–98–08,6

SR–NASD–00–52,7 and the

interpretations thereto filed in SR–

NASD–99–39,8 SR–NASD–99–52,9 SR–

NASD–00–06,10 and SR–NASD–00–

44.11

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

Nasdaq included statements concerning

the purpose of and basis for its proposal

and discussed any comments it received

regarding the proposal. The text of these

statements may be examined at the

places specified in Item IV below.

Nasdaq 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

On March 24, 1999 and July 8, 1999,

the Commission approved proposals to

amend the NASD trade reporting rules

relating to riskless principal

transactions in Nasdaq National Market,

Nasdaq SmallCap Market, Nasdaq

convertible debt, and non-Nasdaq overthe-counter (‘‘OTC’’) equity securities,

and exchange-listed securities traded in

the Nasdaq InterMarket (‘‘Riskless

Principal Trade Reporting Rules’’).12

Under the new Riskless Principal Trade

Reporting Rules, a ‘‘riskless’’ principal

transaction is one where an NASD

member, after having received an order

to buy (sell) a security, purchases (sells)

the security as principal at the same

price to satisfy the order to buy (sell).

The Rules require a firm to report a

riskless principal trade as one

transaction.

In the Order approving SR–NASD–

98–59, the Commission asked Nasdaq to

submit an interpretation providing

examples of how mark-ups, markdowns, and other fees would be

excluded for purposes of the amended

riskless principal rules.13 As requested,

on August 5, 1999, Nasdaq filed with

the Commission SR–NASD–99–39,14

attached to which was Notice to

Members 99–65, which gave examples

of how mark-ups and other fees will be