[Federal Register Volume 66, Number 27 (Thursday, February 8, 2001)]
[Notices]
[Pages 9613-9615]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-3267]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43920; File No. SR-ISE-01-03]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the International Securities Exchange LLC, Relating to Market 
Maker Block Transactions

February 2, 2001.
    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 January 12, 2001, the International Securities Exchange LLC 
(``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, and 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 its Rules 716(c) and 805(a) to 
permit market makers to enter block-size orders into the Block Order 
Mechanism. The text of the proposed rule change is set forth below. 
Additions are italicized and deletions are bracketed.
* * * * *

Rule 716. Block Trades

* * * * *
    (c) Block Order Mechanism. The Block Order Mechanism is a process 
by which [an Electronic Access Member] a Member can obtain liquidity 
for the execution of block-size orders.
* * * * *

Rule 805. Market Maker Orders

    (a) Options Classes to Which Appointed. Market makers may not place 
principal orders to buy or sell options in the options classes to which

[[Page 9614]]

they are appointed under Rule 802, other than immediate-or-cancel 
orders and block-size orders executed through the Block Order Mechanism 
pursuant to Rule 715(c). Competitive Market Makers shall comply with 
the provisions of Rule 804(e)(2)(ii) upon the entry of such orders if 
they were not previously quoting in the series.
* * * * *

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 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
    The Exchange's Block Order Mechanism permits Electronic Access 
Members to solicit trading interest for orders of 50 contracts or more. 
Because market makers do not handle agency orders, the Exchange did not 
anticipate that they would need a block mechanism. Thus, the Exchange 
initially limited the Block Order Mechanism to Electronic Access 
Members. Experience indicates that market makers would find the Block 
Order Mechanism useful to hedge or liquidate positions resulting from 
their market making activities on the Exchange.
    The ISE provides automatic executions for orders placed by market 
makers on the Exchange. The ISE trading system enables ISE market 
makers to individually enter quotations with an associated size 
representing the number of contracts for which each market maker is 
firm for Public Customer orders. The trading system also permits ISE 
market makers to specify how much of this size is available for 
automatic execution by non-customer orders and other ISE market makers. 
Because ISE market makers may be reluctant to be exposed to automatic 
executions from other market makers, the size available for market 
makers may be substantially lower than that available for Public 
Customers. Indeed, no other options exchange provides market makers the 
opportunity to receive automatic execution of their orders; and 
conversely, no other options exchange requires that its market makers 
be exposed to automatic executions by other market makers.
    The ISE believes that permitting market makers to utilize the Block 
Order Mechanism will give the trading crowd an opportunity to determine 
whether they are willing to provide more liquidity to large market 
maker orders than would be available if the market maker entered a 
large-size order for automatic execution against existing quotes. 
Market makers on the floors of the other options exchanges currently 
are able to trade with each other in this manner.
    The Exchange thus proposes to amend Rule 716(c) (Block Order 
Mechanism) and Rule 805(a) (Market Maker Orders) to extend the Block 
Order Mechanism to ISE market makers. The Block Order Mechanism permits 
a participant to solicit trading interest from crowd participants via a 
text message in a manner that replicates requests for markets in a 
floor-based trading crowd. Crowd participants receive the message 
indicating interest to trade in large-size and are given 30 seconds to 
respond. It is necessary for the Exchange to set a response period only 
because the communications are made electronically rather than face-to-
face as on a floor. In the case of a floor-based crowd, there will be 
some amount of time between the announcement of the trading interest by 
the floor broker and the response by the market makers, but there is no 
need to define a time limit because the market makers are able to 
communicate directly.
    The ISE states that when requests for markets are made on a trading 
floor, they are not considered the same as bids or offers that are 
required to be displayed in the exchange's disseminated quotation by 
Rule 11Ac1-1 under the Act,\3\ as they require an immediate response 
which may or may not be accepted. On a floor, if the response from the 
crowd is not sufficient, the broker walks away and the interest is 
withdrawn. Similarly, when interest is communicated electronically 
through the ISE's Block Order Mechanism, there is no obligation to 
execute during the response period, and the indication may be withdrawn 
anytime during the 30 seconds. If the response from the crowd is not 
sufficient at the end of the response period, the interest is 
automatically withdrawn from the system.
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    \3\ See 17 CFR 240.11ac1-1(b).
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    It is only after the 30 seconds that an interest entered into the 
Block Order Mechanism will be executed in whole or in part according to 
the algorithm contained in 716(c). Again, if no execution takes place, 
the interest is automatically canceled from the system. In other words, 
there is no standing limit order in the trading system and there is no 
ability for any person to execute against the interest during the 
exposure period.\4\
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    \4\ The Exchange states that while a recent amendment to 
Exchange Act Rule 11Ac1-1, making it applicable to the trading of 
options, is not yet effective, use of the Block Order Mechanism will 
be consistent with the requirements of the Rule. See Securities 
Exchange Act Release No. 43591 (November 17, 2000), 65 FR 75439 
(December 1, 2000). The Exchange states in particular that the Block 
Order Mechanism does not come within the definition of an 
``electronic communications network'' contained in paragraph (a)(8) 
of Rule 11Ac1-1, and thus indications of interest entered into the 
Block Order Mechanism would not be subject to the requirements of 
paragraph (c)(5) of the Rule.
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    Permitting ISE market makers to enter trading interest into the 
Block Order Mechanism is no different from allowing market makers on 
the floor of the other options exchanges to announce trading interest 
to the crowd. In fact, an ISE market maker can use a floor broker to 
assess the liquidity in trading crowds on the other options exchange, 
but currently has no mechanism to accomplish the same objective on the 
ISE. This situation places the ISE at a competitive disadvantage, as 
this trading interest is executed on other exchanges purely because 
participants communicate directly rather than electronically.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \5\ 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. In particular, to the extent that ISE market makers 
can seek liquidity for large size orders on other options exchanges but 
currently are unable to do so on the ISE, the proposed rule change will 
remove a substantial impediment to and perfect the mechanism for a free 
and open market on the ISE.
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    \5\ 15 U.S.C. 78f(b)(5).

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[[Page 9615]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    This proposed rule change will remove a burden on competition in 
that it provides a mechanism for ISE market makers to announce 
indications of interest where currently they only have such capability 
on other options exchanges. Restricting ISE market makers' ability to 
seek liquidity for large-size trading interest when they are able to do 
so on other options exchanges is a substantial burden on competition as 
it reduces the likelihood that such orders will be executed on the 
Exchange. It is not necessary or appropriate in furtherance of the 
purposes of the Act to competitively disadvantage the ISE on the basis 
that its members communicate electronically rather than in person.

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. 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 (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 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 offices of the 
ISE. All submissions should refer to File No. SR-ISE-01-03 and should 
be submitted by March 1, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-3267 Filed 2-7-01; 8:45 am]
BILLING CODE 8010-01-M