[Federal Register Volume 65, Number 219 (Monday, November 13, 2000)]
[Notices]
[Pages 67784-67785]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-28945]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43508; File No. SR-ISE-00-09]


Self Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the International Securities Exchange LLC Relating to Chinese 
Wall Procedures

November 2, 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 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange is proposing to amend ISE Rule 810 relating to Chinese 
Wall procedures. Proposed new language is italicized.

810. Limitations on Dealings

    (a) General Rule. A market maker on the Exchange may engage in 
Other Business Activities, or it may be affiliated with a broker-
dealer that engages in Other Business Activities, only if there is a 
Chinese Wall between the market making activities and the Other 
Business Activities. ``Other Business Activities'' means: \3\
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    \3\ The ISE corrected a typographical error that appeared in the 
proposed rule language. Telephone conversation between Michael J. 
Simon, Senior Vice President and General Counsel, ISE, Katherine A. 
England, Assistant Director, and Susie Cho. Attorney, Division of 
Market Regulation, Commission, October 31, 2000.
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    (1) conducting an investment or banking or public securities 
business;
    (2) making markets in the stocks underlying the options in which 
it makes markets; or
    (3) functioning as an Electronic Access Member.
    (b)-(e) No changes.
    (b) Exception to Chinese Wall Requirement. A market maker shall 
be exempt from paragraph (a)(3) of this Rule to the extent the 
market maker complies with the following conditions:
    (1) such member functions as an Electronic Access Member solely 
in options classes (i) contained in Groups to which the member is 
not appointed as a market maker pursuant to Rule 802 or (ii) in 
which the member is prohibited from acting as a market maker 
pursuant to regulatory requirements; and
    (2) the member enters orders as an Electronic Access Member only 
for (i) the proprietary account of the member or (ii) the account of 
entities that are affiliated with the member.

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 Exchange 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 Exchange 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
    ISE Rule 810 requires that ISE market makers erect a ``Chinese 
Wall'' between their market making activity and certain other business 
activities, including their trading as an Electronic Access Member 
(``EAM''). The wall is intended to prevent any real-time communication 
between the various business lines. The ISE believes that this is 
especially critical to the integrity of the ISE market with respect to 
EAM activities. Without the wall, a trader entering an order as an EAM 
could potentially inform the person making markets about the pending 
order. The market maker could then, based on this knowledge, move its 
quotation either (i) to ``intercept'' an order against which the firm 
wants to trade, or (ii) to avoid an order against which it does not 
want to trade. The Exchange adopted ISE Rule 810 because such behavior 
would be inconsistent with the agency auction market structure of the 
Exchange.
    The ISE believes that although ISE Rule 810 generally has worked 
well, it broad restrictions limit the ability of

[[Page 67785]]

certain market makers to send proprietary order flow to the ISE in 
options outside of their assigned groups of options (``bins''. \4\ In 
particular, many market makers do not have the facilities to establish 
a ``Chinese Wall'', which requires physical separation of functions 
(generally on separate floors), between their proprietary traders and 
individuals performing ISE market making activities. The ISE notes that 
several of its market maker members do a significant amount of 
proprietary trading.
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    \4\ The ISE assigns market makers to bins of options. There are 
10 bins, and each bin has one Primary Market Maker (``PMM'') and up 
to 10 Competitive Market Makers (CMM) assigned to each.
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    The ISE represents that the purpose of the proposed rule change is 
to ease ISE Rule 810 to allow members to conduct proprietary trading in 
the same physical space as their market making activities, but only: 
(i) in options that are not within their market making assignments or 
(ii) in options which, pursuant to regulatory requirements, the member 
is prohibited from making markets. This latter provision is intended to 
apply to market makers that are specialists in the underlying stock on 
the New York Stock Exchange, Inc. (``NYSE''), whose rules limit the 
options trading of specialists and affiliated firms to ``hedging 
activities,'' thus prohibiting them from making markets in options.\5\ 
In addition, the proposed rule change would permit only proprietary 
trading without the Chinese Wall and would not permit the market maker 
to enter agency orders (except with respect to proprietary orders for 
its affiliates) without complying with the full restrictions of ISE 
Rule 810.
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    \5\ See NYSE Rule 105. This applies solely to CMMs. Because CMMs 
are required to provide continuous quotes in only 60 percent of the 
options in a bin, it is possible that a CMM could be assigned a bin 
in which it is not permitted to make markets in certain options 
classes. Such a CMM simply would not quote in these ``restricted'' 
options. PMMs must provide continuous quotes in all options in a bin 
and thus were bit assigned bins where these regulatory restrictions 
apply.
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    In these narrow circumstances, the Exchange does not believe that 
there is the potential for the type of harm against which ISE Rule 810 
is intended to protect. Since the member will not be making markets in 
the stocks in which they are engaging in proprietary trading, there is 
no opportunity for using the dual roles either to manipulate the market 
or take unfair advantage of market information. Thus, the ISE believes 
that relaxing this rule will help attract proprietary order flow to the 
ISE, without any adverse regulatory implications.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \6\ in general, and furthers the 
objectives of Section 6(b)(5) \7\ in particular, in that it is 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.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange did not solicit or receive written comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such long period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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 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-00-09 and should be submitted by December 4, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-28945 Filed 11-9-00; 8:45 am]
BILLING CODE 8010-01-M