Document ID: SEC-2010-1521-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: International Securities Exchange, LLC
Posted Date: 2010-10-06T04:00Z

[Federal Register: October 6, 2010 (Volume 75, Number 193)]
[Notices]               
[Page 61795-61797]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06oc10-148]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63017; File No. SR-ISE-2010-95]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Amending Rule 717

September 29, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 21, 2010, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II below, which items have been prepared by 
the Exchange. The Exchange has filed the proposal as a ``non-
controversial'' proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend to amend [sic] ISE Rule 717 
(Limitations on Orders) to eliminate some of its restrictions. The text 
of the proposed rule change is available on the Exchange's Web site 
http://www.ise.com, at the principal office of the Exchange, 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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed

[[Page 61796]]

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 self-regulatory organization 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 is proposing to amend Rule 717(b) in order to 
eliminate some of its restrictions. First, Rule 717(b) currently 
provides that an Electronic Access Member (``EAM''), acting either as 
principal or agent, may not enter orders in the same options series, 
for the account or accounts of the same or related beneficial owner(s), 
in such a manner that the EAM or the beneficial owner(s) effectively is 
operating as a market maker by holding itself out as willing to buy and 
sell such options contracts on a regular or continuous basis. The 
Exchange is proposing that these restrictions be amended to only be 
applicable to Priority Customer Orders \5\ (i.e., non-broker-dealer 
orders) and not Professional Orders \6\ (as described below), since 
such Priority Customer Orders have priority at any price over bids and 
offers of Professional Orders.\7\
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    \5\ See ISE Rule 100(37B).
    \6\ ``Professional Order'' means an order that is for the 
account of a person or entity that is not a Priority Customer. See 
ISE Rule 100(37C).
    \7\ The Exchange notes that the Commission has previously found 
that it is consistent with the Act for an options exchange not to 
prohibit a user of its market from effectively operating as a market 
maker by holding itself out as willing to buy and sell options 
contracts on a regular or continuous basis without registering as a 
market maker. See Securities Exchange Act Release No. 57478 (March 
12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004) (Order 
approving, among other things, a proposed rule change to establish 
rules governing the trading of options on NASDAQ Options Market 
(``NOM'')).
     The Exchange notes that in the order approving a Chicago Board 
Options Exchange (``CBOE'') rule change to amend its rules 
prohibiting members from functioning as market makers, the 
Commission stated that any entity that acts as a ``dealer,'' as 
defined in Section 3(a)(5) of the Act, 15 U.S.C. 78c(a)(5), would be 
required to register with the Commission under Section 15 of the 
Act, 15 U.S.C. 78o, and the rules and regulations thereunder, or 
qualify for any exception or exemption from registration. Activity 
that may cause a person to be deemed a dealer includes `` `quoting a 
market in or publishing quotes for securities (other than quotes on 
one side of the market on a quotations system generally available to 
non-broker-dealers, such as a retail screen broker for government 
securities).' '' See Definitions of Terms in and Specific Exemptions 
for Banks, Savings Associations, and Savings Banks Under Sections 
3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, 
Securities Exchange Act Release No. 47364, 68 FR 8686, 8689, note 26 
(February 24, 2003) (quoting OTC Derivatives Dealers, Securities 
Exchange Act Release No. 40594 (October 23, 1998), 63 FR 59362, 
59370, note 61 (November 3, 1998)). See [sic] Securities Exchange 
Act Release No. 59701 (April 3, 2009), 74 FR 16247 (April 9, 2009). 
The Commission notes that the immediately preceding citation (Notice 
of filing and immediate effectiveness of SR-ISE-2009-15) is 
incorrect. The correct citation should be to Securities Exchange Act 
Release No. 59700 (April 2, 2009), 74 FR 16246 (April 9, 2009) 
(order approving SR-CBOE-2009-009).
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    Rule 717(b) was adopted to limit the ability of EAMs that are not 
market makers to compete on preferential terms within ISE's automated 
systems. Because Priority Customer Orders are provided with certain 
benefits, such as priority of bids and offers, the Exchange continues 
to believe that Priority Customer Orders should be subject to the 
Rule's restrictions. However, because Priority Orders \8\ are not 
subject to any priority that is any better than market makers, the 
Exchange no longer believes it is necessary to impose the Rule's 
restrictions on the entry of broker-dealer orders. Similarly, because 
Voluntary Professionals are not subject to priority that is any better 
than market makers, we do not believe it is necessary to impose the 
Rule's restrictions on Voluntary Professionals.\9\
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    \8\ The Commission notes ISE incorrectly stated that ``Priority 
Orders are not subject to any priority that is any better than 
market makers * * *.'' The Commission believes that the term 
``Priority Orders'' in the above-referenced sentence should be 
replaced with the term ``Professional Orders.'' See Securities 
Exchange Act Release No. See Securities Exchange Act Release No. 
59287 (January 23, 2009), 74 FR 5964 (January 30, 2009) (SR-ISE-
2006-26) (order approving ISE proposal to create Priority Customer 
and Professional order types).
    \9\ The Exchange notes that this rule change would only 
eliminate the restrictions of Rule 717(b) in the manner proposed. 
Members would continue to remain subject to the requirements of Rule 
408 (which requires Members to establish, maintain and enforce 
written policies and procedures reasonably designed, taking into 
consideration the nature of such Member's business, to prevent the 
misuse of material, nonpublic information by such Member or persons 
associated with such Member), Supplementary Material .02 to Rule 400 
(which may consider it conduct inconsistent with just and equitable 
principles of trade for any person associated with a Member who has 
knowledge of all material terms and conditions of (i) an order and a 
solicited order; (ii) an order being facilitated; or (iii) orders 
being crossed; the execution of which are imminent, to enter, based 
on such knowledge, an order to buy or sell an option for the same 
underlying security as any option that is the subject of the order, 
or an order to buy or sell the security underlying such class, or an 
order to buy or sell any related instrument until (a) the terms of 
the order and any change in the terms of the order of which the 
person associated with the Member has knowledge are disclosed to the 
trading crowd, or (b) the trade can no longer reasonably be 
considered imminent in the view of the passage of time since the 
order was received); Rule 717(d) (which state that EAMs may not 
execute as principal orders they represent as agent unless (i) 
agency orders are first exposed on the Exchange for at least one (1) 
second, (ii) the EAM has been bidding or offering on the Exchange 
for at least one (1) second prior to receiving an agency order that 
is executable against such bid or offer, (iii) the Member utilizes 
the Facilitation Mechanism pursuant to Rule 716(d), or (iv) the 
Member utilizes the Price Improvement Mechanism for Crossing 
Transactions pursuant to Rule 723); and Rule 717(e) (which states 
that EAMs may not execute orders they represent as agent on the 
Exchange against orders solicited from Members and non-member 
broker-dealers to transact with such orders unless (i) the 
unsolicited order is first exposed on the Exchange for at least one 
(1) second, (ii) the Member utilizes the Solicited Order Mechanism 
pursuant to Rule 716(e), (iii) the Member utilizes the Facilitation 
Mechanism pursuant to Rule 716(d) or (iv) the Member utilizes the 
Price Improvement Mechanism for Crossing Transactions pursuant to 
Rule 723).
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    Second, in those instances where the restrictions are applicable, 
Rule 717(b) currently provides that, in determining whether an EAM or 
beneficial owner effectively is operating as a market maker, the 
Exchange will consider, among other things, the simultaneous or near-
simultaneous entry of limit orders to buy and sell the same options 
contract; the multiple acquisition and liquidation of positions in the 
same options series during the same day; and the entry of multiple 
limit orders at different prices in the same options series. The 
Exchange is proposing to remove the condition pertaining to the 
multiple acquisition and liquidation of positions from its list of 
factors used for determining whether a beneficial owner is operating as 
a market maker. In light of the proliferation of day trading activity 
and the fact that such a prohibition does not exist on other 
markets,\10\ the Exchange no longer believes that this activity should 
be considered a factor in determining whether an EAM or beneficial 
owner is effectively acting as a market maker.
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    \10\ See note 7 and Securities Exchange Act Release No. 59700 
(April 2, 2009), 74 FR 16246 (April 9, 2009) (SR-CBOE-2009-009).
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2. Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \11\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \12\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
and to promote just and equitable principles of trade, 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 proposed changes should contribute to the 
Exchange's ability to maintain a fair and orderly market in a manner 
that will limit unfair advantage and encourage competition. 
Specifically, because broker-dealer orders are not subject to priority 
on the ISE that is any

[[Page 61797]]

better than market makers, the Exchange does not believe it is 
necessary to impose the Rule's restrictions on the entry of broker-
dealer orders. The Exchange believes that the elimination of these 
restrictions will permit entities other than market makers to enter 
orders on both sides of the market more freely, resulting in more 
orders on the ISE book and therefore increase liquidity on the ISE 
market, all to the benefit of investors.
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    \11\ 15 U.S.C. 78f (b) [sic].
    \12\ 15 U.S.C. 78f (b)(5) [sic].
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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 does not significantly 
affect the protection of investors or the public interest, does not 
impose any significant burden on competition, and, by its terms, does 
not become operative for 30 days from the date on which it was filed, 
or such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) \13\ of the Act and Rule 19b-
4(f)(6) \14\ thereunder. The Exchange provided the Commission with 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at least 
five business days prior to the date of filing the proposed rule 
change.
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend 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 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 Number SR-ISE-2010-95 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2010-95. 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,\15\ 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 Web site 
viewing and printing in the Commission's Public Reference Room, on 
official business days between the hours of 10 a.m. and 3 p.m. 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 Number SR-ISE-2010-95 and should be submitted on or before October 
27, 2010.
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    \15\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov/rules/sro.shtml.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-25068 Filed 10-5-10; 8:45 am]
BILLING CODE 8010-01-P