Document ID: SEC-2006-0701-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: International Securities Exchange, Inc.
Posted Date: 2006-06-01T04:00Z

[Federal Register: June 1, 2006 (Volume 71, Number 105)]
[Notices]               
[Page 31244-31246]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01jn06-122]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53862; File No. SR-ISE-2006-23]

 
Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change and Amendment No. 1 Thereto Relating to Cancellation Fee Changes

May 24, 2006.
    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 1, 2006, the International Securities Exchange, Inc. (``ISE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change concerning the Exchange's 
cancellation fee as described in Items I, II, and II below, which Items 
have been prepared by the ISE. On May 18, 2006, the ISE submitted an 
amendment to the proposed rule change (``Amendment No. 1'').\3\ The ISE 
has filed the proposed rule change as one establishing or changing a 
due, fee, or other charge imposed by the ISE under Section 
19(b)(3)(A)(ii) of the Act \4\ and Rule 19b-4(f)(2) thereunder,\5\ 
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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The purpose of Amendment No. 1 was to clarify the 
application of the proposed cancellation fee in the Notes section of 
the Exchange's Schedule of Fees and to include in that section an 
exception for the cancellation of orders that improved the 
Exchange's disseminated quotes at the time the orders were entered. 
This exception, described below, was discussed in the purpose 
section of the filing, but was not set forth in the text of the 
Schedule of Fees.
    \4\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \5\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE proposes to amend its Schedule of Fees regarding its

[[Page 31245]]

cancellation fee. The text of the proposed rule change is available on 
the Exchange's Internet Web site (http://www.iseoptions.com/legal/proposed_rule_changes.asp
), at the principal office of the ISE, and 

at the Commission's Public Reference Room.

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 such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to amend the ISE's 
cancellation fee. Through June 2005, the Exchange charged Electronic 
Access Members (``EAMs'') $1 per order canceled in excess of the number 
of orders executed. In File No. SR-ISE-2005-31 (``Fee Amendment''), the 
Exchange amended that fee in a rule change effective on filing pursuant 
to Section 19(b)(3)(A) of the Act.\6\ To address problems the Exchange 
encountered in applying the cancellation fee, the Fee Amendment applied 
the fee: (1) On the cancellation activity of each of an EAM's customers 
(including itself when it self-clears), rather than the aggregate 
activity of all of an EAM's customers; and (2) on a per-contract, 
rather than a per-order basis.
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 52177 (July 29, 
2005), 70 FR 45457 (August 5, 2005) (File No. SR-ISE-2005-31).
---------------------------------------------------------------------------

    Upon the Exchange's filing of the Fee Amendment, the Commission 
received a number of comment letters raising objections to the 
proposal. According to the Exchange, based on those comment letters, 
the Commission staff informed the ISE that it believed that the 
proposed fee should be subject to formal comment pursuant to Section 
19(b)(2) of the Act. Accordingly, the Exchange submitted File No. SR-
ISE-2005-36, which reinstated the cancellation fee as it was in effect 
prior to the submission of the Fee Amendment. The Exchange thereafter 
submitted File No. SR-ISE-2005-37 (the ``19(b)(2) Fee Amendment''), a 
proposed rule change pursuant to Section 19(b)(2) of the Act to 
implement the same change that had previously been adopted in the Fee 
Amendment. The Exchange is withdrawing the 19(b)(2) Fee Amendment 
filing and submitting the instant filing.
    Since the inception of the cancellation fee (except during the 
month of July 2005), the Exchange has charged EAMs $1 per order 
canceled in excess of the number of orders executed.\7\ Recognizing 
that order cancellations often happen in large numbers, the purpose of 
the fee was to ease congestion in the ISE Order Routing System 
(``IORS'') and to fairly allocate costs among members according to 
system use. According to the Exchange, experience shows that two 
limitations are preventing the fee from fully achieving its intended 
effect. First, the ISE applies the fee to the aggregate number of 
orders a clearing EAM cancels on behalf of itself and its customers, 
which tends to mask the activity of the EAM's particular customers who 
are responsible for the cancellations. Second, because the Exchange 
applies the fee on a per order basis, firms have adjusted trading 
activity solely to avoid this fee by executing small orders to offset 
the cancellation of larger orders. ISE states that, if anything, this 
increases message traffic as firms enter more small orders to mask 
their order cancellations.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 46189 (July 11, 
2002), 67 FR 47587 (July 19, 2002) (File No. SR-ISE-2002-16).
---------------------------------------------------------------------------

    To address these concerns, the ISE first proposes to charge a 
clearing EAM based on the cancellation activity of each of its 
customers (including itself when it self-clears). The Exchange has 
enhanced its systems so that it now can identify the specific broker-
dealer customers of a clearing EAM who enters and cancels orders. This 
will allow the Exchange to identify and charge for cancellation 
activity beyond aggregate numbers. The ISE similarly will be able to 
provide clearing EAMs with the information necessary for them to pass 
through resulting cancellation charges to their customers.\8\
---------------------------------------------------------------------------

    \8\ The Exchange notes that this is similar to how the NYSE 
Arca, Inc. now imposes its cancellation fee. See Securities Exchange 
Act Release No. 49802 (June 3, 2004), 69 FR 32391 (June 9, 2004) 
(File No. SR-PCX-2004-31).
---------------------------------------------------------------------------

    Further, for purposes of calculating the number of trades that may 
offset cancellations, the Exchange proposes to consider all orders 
executed by the same firm in the same series on the same side of the 
market at the same price within 30 seconds as only one execution. The 
Exchange believes that this will remove the incentive for an EAM to 
enter multiple orders in rapid succession. To ensure that the Exchange 
covers only activity that is truly excessive and inappropriately uses 
bandwidth and system capacity, the Exchange proposes to exclude from 
the cancellation fee orders that improve ISE's disseminated quotation 
at the time the orders were entered.
2. Statutory Basis
    The basis for the proposed rule change is the requirement under 
Section 6(b)(4) of the Act \9\ that an exchange have an equitable 
allocation of reasonable dues, fees, and other charges among its 
members and other persons using its facilities. The ISE states that, in 
particular, these fees would permit the Exchange to recover capacity 
costs more equitably from among its members.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

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 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 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

    Because the foregoing proposed rule change, as amended, establishes 
or changes a due, fee, or other charge imposed by the Exchange, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \10\ and 
Rule 19b-4(f)(2) \11\ thereunder. At any time within 60 days of the 
filing of the proposed rule change the Commission may summarily 
abrogate such proposed 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.\12\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 19b-4(f)(2).
    \12\ For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change under 
Section 19(b)(3)(C) of Act, the Commission considers the period to 
commence on May 18, 2006, the date on which the ISE submitted 
Amendment No. 1. See 15 U.S.C. 78s(b)(3)(C).

---------------------------------------------------------------------------

[[Page 31246]]

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. 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 rule-comments@sec.gov. Please include 

File No. SR-ISE-2006-23 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File No. SR-ISE-2006-23. 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. Copies of the 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 available publicly. All submissions should refer to File No. SR-
ISE-2006-23 and should be submitted on or before June 22, 2006.
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-8434 Filed 5-31-06; 8:45 am]

BILLING CODE 8010-01-P