Document ID: SEC-2009-0755-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: International Securities Exchange, LLC
Posted Date: 2009-06-08T04:00Z

[Federal Register: June 8, 2009 (Volume 74, Number 108)]
[Notices]               
[Page 27224-27228]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08jn09-119]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60014; File No. SR-ISE-2009-27]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change To Adopt Rules To 
Implement the Options Order Protection and Locked/Crossed Market Plan

June 1, 2009.
    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 May 11, 2009, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The ISE proposes to adopt rules to implement the Options Order 
Protection and Locked/Crossed Market Plan (the ``Plan''). The text of 
the proposed rule change is available on the ISE's Web site (http://
www.ise.com), 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 self-regulatory organization 
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 those 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 parts 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 proposes to adopt rules to implement the Plan. These 
rules will replace current Chapter 19 of the ISE's rules in their 
entirety. The proposed rules also will amend various other rules to 
accommodate the Plan.
Background to the Plan and the Implementing Rules
    The ISE filed the current version of the Plan on November 7, 
2008.\3\ The Plan would replace the current Plan for the Purpose of 
Creating and Operating an Intermarket Option Linkage (``Old Plan''). 
The Old Plan requires its participant exchanges to operate a stand-
alone system or ``Linkage'' for sending order-flow between exchanges to 
limit trade-throughs. The Options Clearing Corporation (``OCC'') 
operates the Linkage system. The Linkage rules provide for unique types 
of Linkage orders, with a complicated set of requirements as to who may 
send such orders and under what conditions.
---------------------------------------------------------------------------

    \3\ The November 7th filing was Amendment No. 3 to the Plan. The 
ISE initially filed the Plan on September 12, 2007, filed Amendment 
No. 1 on December 10, 2007, and filed Amendment No. 2 on April 16, 
2008.
---------------------------------------------------------------------------

    While the Linkage largely has operated satisfactorily, it is under 
significant strain. When the Commission approved the Linkage Plan in 
2000, average daily volume (``ADV'') in the options market was 
approximately 2.6 million contracts across all exchanges. Now the ADV 
has increased to more than 10 million contracts, putting added strain 
on the ability of market makers to comply with the complex Linkage 
rules. At the same time, the options markets have been moving towards 
quoting in pennies, and are quoting in pennies options representing 
over half the total industry volume. This greatly increases the number 
of price changes in an option, giving rise to greater chances of trade-
throughs and missing markets as market makers send Linkage orders and 
have to wait for a response.
    Experience in the equities markets shows that there is a more 
efficient way to provide price protection in options. When first 
implemented, the Linkage represented a vast improvement over the then-
current equities price-protection system, which depended on the 
operation of the Intermarket Trading System (``ITS''). The plan 
governing ITS imposed long waiting times for filling ITS commitments 
and a cumbersome method for satisfying trade-throughs. Learning from 
the shortcomings of ITS, the options Linkage has shorter waiting 
periods and more efficient trade-through protections.
    The equity price-protection mechanisms have now leapfrogged the 
options Linkage. By adopting Regulation NMS in 2005 the Commission

[[Page 27225]]

effectively terminated ITS, replacing it with a rules-based price-
protection system.\4\ The key to Regulation NMS's price-protection 
provisions is the Intermarket Sweep Order, or ISO. Each equity exchange 
must adopt rules ``reasonably designed to prevent trade-throughs.'' \5\ 
Exempted from trade-through liability is an ISO, which is an order a 
member sends to an exchange displaying a price inferior to the national 
best bid and offer (``NBBO''), while simultaneously sending orders to 
trade against the full size of any other exchange that is displaying 
the NBBO.\6\
---------------------------------------------------------------------------

    \4\ Release No. 34-51808 (June 9, 2005), 70 FR 37496 (June 29, 
2005).
    \5\ Regulation NMS Rule 611(a).
    \6\ Regulation NMS Rule 600(b)(30).
---------------------------------------------------------------------------

    The Regulation NMS rules-based price-protection system is working 
well. It requires neither a central linkage mechanism nor a complex set 
of operating rules. It also has eliminated the need for achieving 
unanimity to change even the most minor aspects of a linkage mechanism. 
A simple prohibition against most trade-throughs, coupled with the ISO 
mechanism, has given the equities markets a straight-forward system to 
provide customers with price protection in a fast-moving, high-volume 
market that is quoted in pennies. The ISE and the other options 
exchange participants in the Plan intend for the Plan, and the 
implementing rules, to bring the efficiencies of Regulation NMS to the 
options market.
Operation of the Plan
    The Plan effectively would apply the Regulation NMS price-
protection provisions to the options markets. Similar to Regulation 
NMS, the Plan would require participants to adopt rules ``reasonably 
designed to prevent Trade-Throughs,'' while exempting ISOs from that 
prohibition.\7\ The definition of an ISO is essentially the same as 
under Regulation NMS,\8\ and there are a number of additional 
exceptions to the trade-through prohibition. Like Regulation NMS,\9\ 
the Plan requires participating exchanges to take reasonable steps to 
establish that ISOs meet the requirements of the Plan.
---------------------------------------------------------------------------

    \7\ Sections 5(a)(i) and 5(b)(iv) of the Plan.
    \8\ Section 2(9) of the Plan.
    \9\ Regulation NMS Rule 611(c) and Section 5(c) of the Plan.
---------------------------------------------------------------------------

    With respect to locked and crossed markets, similar to Regulation 
NMS, the Plan requires its participants to adopt, maintain and enforce 
rules requiring members: To avoid displaying locked and crossed 
markets; to reconcile such markets; and to prohibit members from 
engaging in a pattern or practice of displaying locked and crossed 
markets.\10\ With respect to locked markets, the Plan differs from 
Regulation NMS in that it specifically permits exceptions to the locked 
market prohibitions ``as contained in the rules of a Participant 
approved by the Commission.'' \11\
---------------------------------------------------------------------------

    \10\ Section 6 of the Plan.
    \11\ Id.
---------------------------------------------------------------------------

Description of the Implementing Rules
    This proposed rule change would delete the ISE's current Linkage 
rules in Chapter 19 of the ISE's rule book and replace those rules with 
a new Chapter 19 entitled ``Order Protection; Locked and Crossed 
Markets.'' New Chapter 19 contains the following rules:
Rule 1900--Definitions
    This proposed rule incorporates all the operative definitions from 
the Plan into the ISE's rulebook. With one exception, the parties to 
the Plan derived all such definitions either from the Old Plan \12\ or 
Regulation NMS.\13\ The one exception is the definition of ``complex 
trade'' in Rule 1900(d). A ``complex trade'' is exempt from trade-
through liability. The exemption in the Old Plan simply refers to 
complex trades ``as that term may be defined by the Operating Committee 
from time to time.'' Based on that provision, the ISE adopted current 
Rule 1900(3), which is substantially identical among all the options 
exchanges. We propose to carry that definition into new Chapter 19 
unchanged.
---------------------------------------------------------------------------

    \12\ See, e.g., the definitions of ``Broker-Dealer'' in Rule 
1900(c), NBBO in Rule 1900(j), Non-Firm in Rule 1900(k), OPRA Plan 
in Rule 1900(l), and Participant in Rule 1900(m).
    \13\ See, e.g., the definitions of ``Best Bid''/``Best Offer'' 
in Rule 1900(a), ``Bid''/``Offer'' in Rule 1900(b), ``Intermarket 
Sweep Order'' (``ISO'') in Rule 1900(h), and ``Quotation'' in Rule 
1900(p).
---------------------------------------------------------------------------

Rule 1901--Order Protection
    Paragraph (a) of Rule 1901 provides that, subject to specified 
exceptions, ISE Members shall not effect trade-throughs. Paragraph (b) 
provides for the following trade-through exceptions:
     System Issues: Rule 1901(b)(1) implements Section 5(b)(i) 
of the Plan by establishing an exception for trade-throughs due to 
system-failures. This is akin to the exception in Regulation NMS for 
equity securities and permits trading through an Eligible Exchange that 
is experiencing system problems.\14\ The ISE is proposing ``self-help'' 
rules similar to its equity Rule 2107(c)(1), adopted pursuant to 
Regulation NMS.
---------------------------------------------------------------------------

    \14\ See Regulation NMS Rule 611(b)(1).
---------------------------------------------------------------------------

     Trading Rotations: Rule 1901(b)(2) implements Section 
5(b)(ii) of the Plan and carries forward the current trade-through 
exception in the Old Plan \15\ and current Rule 1902(b)(5) related to 
the opening of markets. It is the options equivalent to the single 
price opening exception in Regulation NMS for equity securities.\16\ We 
use a trading rotation to open an option for trading, or to reopen an 
option after a trading halt. The rotation is effectively a single price 
auction to price the option and there are no practical means to include 
prices on other exchanges in that auction.
---------------------------------------------------------------------------

    \15\ See Old Plan Section 8(c)(iii)(E).
    \16\ See Regulation NMS Rule 611(b)(3) under the Securities 
Exchange Act of 1934, as amended (``Act'').
---------------------------------------------------------------------------

     Crossed Markets: Rule 1901(b)(3) implements Section 
5(b)(iii) of the Plan and is the functional equivalent to ISE Rule 
2107(c)(3) for equity securities. If the best intermarket bid is higher 
than the best intermarket offer, it indicates that there is some form 
of market dislocation or inaccurate quoting. Permitting transactions to 
be executed without regard to trade-throughs in a Crossed Market will 
allow the market to quickly return to equilibrium.
     Intermarket Sweep Orders (``ISOs''): Rule 1901(b)(4) is 
the ISO exemption and implements Sections 5(b)(iv) and (v) of the Plan. 
Section 5(b)(iv) of the Plan permits a Participant to execute orders it 
receives from other Participants or members that are marked as ISO even 
when it is not at the NBBO.\17\ Section 5(b)(v) of the Plan allows a 
Participant to execute inbound orders when it is not at the NBBO, 
provided it simultaneously ``sweeps'' all better-priced interest 
displayed by Eligible Exchanges. These provisions are the options 
equivalents of the corresponding Regulation NMS equity rules.\18\
---------------------------------------------------------------------------

    \17\ Supplementary Material .01 to Rule 1901 specifies that all 
ISOs routed to the ISE from other exchanges on behalf of public 
customers will be represented as Priority Customer Orders. Priority 
Customer Orders are executed prior to Professional Orders on the 
ISE. ISE Rule 100(37A) defines Priority Customer Orders as orders 
for persons who do not place more than 390 orders in listed options 
per day on average during a calendar month. The other options 
exchanges have not adopted this distinction between Priority 
Customer and Professional Orders. Thus, we do not believe it is 
practical or appropriate to require ISOs sent to us from other 
exchanges, representing customer orders from such exchanges, to be 
marked as Professional Orders.
    \18\ See Regulation NMS Rules 611(b)(5) and (6).
---------------------------------------------------------------------------

     Quote Flickering: Rule 1901(b)(5) implements Section 
5(b)(vi) of the Plan and corresponds to the flickering quote exception 
in Regulation NMS for equity securities.\19\ Options quotations change 
as rapidly, if not more rapidly, than equity quotations. Indeed, they 
track the price of the underlying security and thus change when the 
price of the

[[Page 27226]]

underlying security changes. This exception provides a form of ``safe 
harbor'' to market participants to allow them to trade through prices 
that have changed within a second of the transaction, causing a nominal 
trade-through.
---------------------------------------------------------------------------

    \19\ See Regulation NMS Rule 611(b)(8).
---------------------------------------------------------------------------

     Non-Firm Quotes: Rule 1901(b)(6) implements Section 
5(b)(vii) of the Plan and carries forward the current non-firm quote 
trade-through exception in the Old Plan.\20\ By definition, an 
exchange's quotations may not be firm for automatic execution during 
this trading state and thus should not be protected from trade-
throughs. In effect, these quotations are akin to ``manual quotations'' 
under Regulation NMS.
---------------------------------------------------------------------------

    \20\ See Old Plan Section 8(c)(iii)(C).
---------------------------------------------------------------------------

     Complex Trades: Rule 1901(b)(7) implements Section 
5(b)(viii) of the Plan and carries forward the current complex trade 
exception in the Old Plan.\21\ Complex trades consist of multiple 
transactions (``legs'') effected at a net price, and it is not 
practical to price each leg at a price that does not constitute a 
trade-through. This exemption will apply to executions in the 
Exchange's Complex Order Mechanism.\22\
---------------------------------------------------------------------------

    \21\ See Old Plan Section 8(c)(iii)(G).
    \22\ See ISE Rule 722.
---------------------------------------------------------------------------

     Customer Stopped Orders: Rule 1901(b)(8) implements 
Section 5(b)(ix) of the Plan and corresponds to the customer stopped 
order exception in Regulation NMS for equity securities.\23\ It permits 
broker-dealers to execute large orders over time at a price agreed upon 
by a customer, even though the price of the option may change before 
the order is executed in its entirety.
---------------------------------------------------------------------------

    \23\ See Regulation NMS Rule 611(b)(9).
---------------------------------------------------------------------------

     Stopped Orders and Price Improvement: Rule 1901(b)(9) 
implements Section 5(b)(x) of the Plan and would apply if an order is 
stopped at price that did not constitute a trade-through at the time of 
the stop. This exception will facilitate the use of the ISE's ``Price 
Improvement Mechanism,'' by which members could seek price improvement 
for that order, even if the market moves in the interim, and the 
transaction ultimately is effected at a price that would trade through 
the then currently-displayed market.\24\
---------------------------------------------------------------------------

    \24\ See ISE Rule 723.
---------------------------------------------------------------------------

     Benchmark Trades: Rule 1901(b)(10) implements Section 
5(b)(xi) of the Plan and would cover trades executed at a price not 
tied to the price of an option at the time of execution, and for which 
the material terms were not reasonably determinable at the time of the 
commitment to make the trade. An example would be a volume-weighted 
average price trade, or ``VWAP.'' This corresponds to a trade-through 
exemption in Regulation NMS for equity trades.\25\ The ISE does not 
currently permit these types of options trades, and any transaction-
type relying on this exemption would require the ISE to adopt 
implementing rules, subject to Commission review and approval.
---------------------------------------------------------------------------

    \25\ See Regulation NMS Rule 611(b)(7).
---------------------------------------------------------------------------

Rule 1902--Locked and Crossed Markets
    Proposed Rule 1902 implements Section 6 of the Plan, which requires 
Plan participants to establish, maintain and enforce rules that: 
require their members reasonably to avoid displaying locked and crossed 
markets; are reasonably deigned to assure reconciliation of locked and 
crossed markets; and prohibit their members from engaging in a pattern 
or practice of displaying locked and crossed markets. Section 6 of the 
Plan further allows an exchange to provide exceptions to these 
limitations as ``contained in the rules of a Participant approved by 
the Commission.''
    Proposed Rule 1902(a) contains the general prohibition that ISE 
members shall reasonably avoid displaying, and shall not engage in a 
pattern or practice of displaying, any quotations that lock or cross 
the best bid or offer of another exchange. We propose four exceptions 
to this general prohibition.\26\
---------------------------------------------------------------------------

    \26\ See e-mail from Michael Simon, General Counsel, ISE, to 
David Liu, Assistant Director, Division of Trading and Markets, 
Commission, dated May 29, 2009.
---------------------------------------------------------------------------

    The first exception would apply when we are experiencing system 
issues, and is similar to the systems issues exception to the trade-
through rule. The second exception applies when there is a crossed 
market, and also is similar to the corresponding trade-through 
exception. Also similar to the trade-through exception, the third 
exception applies when a member simultaneously routes an ISO to execute 
against the full displayed size of any locked or crossed protected bid 
or offer. The fourth proposed exception applies to locked markets in 
the following circumstances:
     Neither the locking or locked quote represents, in whole 
or in part, a customer order; or
     A customer enters a bid or offer that locks a non-customer 
quotation on another market, and the customer, on a case-by-case basis, 
authorizes the locking of the other market's quotation.\27\
---------------------------------------------------------------------------

    \27\ See id.
---------------------------------------------------------------------------

    This fourth exemption recognizes an important distinction between 
the equities and options markets. Options market makers compete for 
order flow by disseminating quotations in multiple series with respect 
to each underlying security, distributing liquidity over a much greater 
universe of products than in the equity markets. As a result, the 
options markets are more reliant on market maker quotations to provide 
liquidity, with fewer customer orders in each series than in each 
underlying security, where liquidity is concentrated in one 
product.\28\
---------------------------------------------------------------------------

    \28\ See id.
---------------------------------------------------------------------------

    With market makers on multiple exchanges constantly updating their 
quotations in all these series based on mathematical formulae there is 
a greater likelihood of market maker quotations locking. We believe 
that in most cases locked market maker quotations are good for the 
investing public. Effectively locked markets provide a ``zero spread,'' 
allowing market participants to buy and sell an option at the same 
price. On the ISE these quotations are firm, and are fully executable 
on an automated basis.
    We recognize that locked markets are more complicated where one or 
both of the locking quotations represents a customer order. Where there 
is contra-side market interest willing to trade with a customer, the 
customer order should be filled. Thus, we would not exempt from the 
locked market prohibition situations involving customer orders unless 
the customer entering the locking order specifically authorizes the 
lock on a case-by-case basis.\29\
---------------------------------------------------------------------------

    \29\ We can envision a customer authorizing a lock when the fees 
associating with trading against the locked market make the 
execution price uneconomical to the customer.
---------------------------------------------------------------------------

    As proposed, the ISE will not permit a member to lock another 
exchange's quotation unless the ISE can establish that the quotation on 
the other exchange is not for the account of a customer. The options 
exchanges currently are working on a method to so identify customer 
quotations through the Options Price Reporting Authority. Absent the 
ability to identify a customer quote as part of an exchange's BBO, the 
ISE will assume that the quote represents, in whole or in part, a 
customer order. That is, the ISE will not permit its members to avail 
themselves of this exemption unless another exchange has informed the 
ISE that it will designate all customer orders as such in OPRA, and 
such exchange's quotation does not contain such designation. If an 
exchange opts not to identify its customer quotations, the ISE will 
treat all of that exchange's quotations as customer orders and, absent 
application of another exception, will not permit locks of such 
quotations.

[[Page 27227]]

Temporary Rule 1903--Phase Out of Intermarket Linkage Rules
    When the Plan and implementing rules become operative it is 
possible that not all the options exchanges will be functionally able 
to operate pursuant to the Plan. Thus, in order to ensure there is full 
intermarket trade-through protection during this interim period, we 
propose to retain certain minimum trade-through rules governing the 
operation of the Linkage until all the options exchanges are operating 
pursuant to the Plan. When that occurs we will file a rule change with 
the Commission to delete Temporary Rule 1903.
    Temporary Rule 1903 provides that the ISE will continue to accept 
Principal Acting as Agent (``P/A'') and Principal Orders from options 
exchanges that use such orders to address trade-throughs. The handling 
of these orders will be subject to rules that parallel the operation of 
the Linkage under the Old Plan.
Amendment of Other ISE Rules To Accommodate the Plan
    We propose to amend six ISE rules outside of Chapter 19:
     First, Rule 701, entitled ``Trading Rotations,'' describes 
the initiation of trading in an options series. That rule currently 
permits an ISE Primary Market Maker (``PMM'') to send various Linkage 
orders prior to the opening of trading on the Exchange. With the 
termination of the Linkage such provision no longer will be necessary 
and we thus propose to delete this provision.
     Second, Rule 714 governs when we provide automatic 
execution for orders we receive. We propose to amend that rule to 
reflect the terminology in the Plan and the implementing rules. We 
propose no substantive changes to that rule.
     Third, we propose to amend the Supplementary Material Rule 
716, entitled ``Block Trades,'' to delete Supplementary Material .07 
which implements the block exception in the Old Plan, which no longer 
will be in effect.
     Fourth, Rule 803(c) and the Supplementary Material govern 
the obligations of PMMs, including the PMMs' obligation to address 
customer orders when there is a better market displayed on another 
exchange. We propose to amend this rule to specify that ISE will 
discharge its obligations under the Plan to ``establish, maintain and 
enforce written policies and procedures * * * reasonably designed to 
prevent Trade-Throughs'' \30\ by requiring PMMs to address customer 
orders when there is a better market away. This is similar to PMMs' 
obligations under the Old Plan. However, PMMs would meet this 
obligation via the use of ISOs rather than Linkage orders.\31\ ISE will 
conduct surveillance of PMMs' trading activities to ensure that they 
comply with this obligation.
---------------------------------------------------------------------------

    \30\ Section 5(a) of the Plan.
    \31\ The routing of Public Customer orders to another exchange 
when the ISE is not at the best price is, in effect, voluntary. A 
customer can avoid such route-outs by entering an Immediate or 
Cancel (``IOC,'' see ISE Rule 715(b)(3)) or Fill or Kill (``FOK,'' 
see ISE Rule 715(b)(2)) order. If the Exchange cannot immediately 
execute such orders, it will cancel all of the order (FOK orders) or 
the unexecuted portion of the order (IOC orders) without routing 
such orders to another exchange.
---------------------------------------------------------------------------

    PMMs will comply with their obligation (i) by executing a customer 
order at a price that at least matches the best price displayed or (ii) 
by sending ISO(s) as agent for the customer to any other exchange(s) 
displaying a superior price and, with respect to any remaining portion 
of the customer order, either (a) releasing the remaining portion of 
the order for execution in the Exchange's auction market or (b) 
executing the remaining portion of the order at a price superior to the 
best price in the Exchange's auction market.
    The amended rule further specifies that: (i) In addressing customer 
orders that are not automatically executed because there is a displayed 
bid or offer on another exchange trading the same options contract that 
is better than the best bid or offer on the Exchange, the Exchange will 
act in compliance with its rules and with the provisions of the Act and 
the rules thereunder, including, but not limited to, the requirements 
in Section (6)(b)(4) and (5) of the Act that the rules of national 
securities exchange provide for the equitable allocation of reasonable 
dues, fees, and other charges among its members and issuers and other 
persons using its facilities, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers; and 
(ii) all orders entered on the Exchange and routed to another exchange 
via an ISO pursuant to the Rule, and that result in an execution, are 
binding.
     Fifth, Rule 810 governs ``informational barriers'' that 
ISE market makers must maintain within their firms. These barriers 
restrict the flow of information between personnel handling market 
making activities, on the one hand, and personnel performing other 
functions, including the acting as agency [sic] for customer orders, on 
the other hand. Under the Old Plan, when there is a better market on 
another exchange, a PMM can send a P/A Order to that exchange in an 
attempt to access that better price for the customer. This is 
consistent with Rule 810 because a P/A Order is a principal order, and 
a firm is permitted to send such an order from the market-making side 
of the information barrier.
    Under the Plan and these proposed rules, PMMs will send ISOs 
representing the underlying customer orders, rather than P/A Orders, 
when there is a better market away. Because these ISOs technically will 
be orders on behalf of a Public Customer current Rule 810 would 
prohibit a PMM from sending such an order. We propose a narrow carve-
out to Rule 810 that would permit a PMM to send ISOs solely to comply 
with its obligation under Rule 803 to address Public Customer orders 
when there is a better market on another exchange. PMMs will act as 
agent in these circumstances, and will send the ISOs from the market 
making side of the information barrier. In all other respects PMMs will 
be subject to Rule 810.
     Sixth, Rule 811(b) governs Directed Orders and currently 
states that ISE market makers may act as agent for customer orders only 
when handling directed orders. We propose to amend that rule to reflect 
the ability of Primary Market Makers to act as agent when sending ISOs 
under Rule 803.
2. Statutory Basis
    The basis under the Act for this proposed rule change is found in 
Section 6(b)(5),\32\ in that the proposed rule change is designed to 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanisms of a free and open market and a national 
market system and, in general, to protect investors and the public 
interest. In particular, the Exchange believes that adopting rules that 
implement the Plan will facilitate the trading of options in a national 
market system by establishing more efficient protection against trade-
throughs and locked and crossed markets.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

[[Page 27228]]

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 the 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. 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-2009-27 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

    All submissions should refer to File Number SR-ISE-2009-27. 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, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
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-2009-27 and should be submitted on or before June 
29, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
---------------------------------------------------------------------------

    \33\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-13205 Filed 6-5-09; 8:45 am]

BILLING CODE 8010-01-P