Document ID: SEC-2011-1139-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: International Securities Exchange, Inc.
Posted Date: 2011-08-08T04:00Z

[Federal Register Volume 76, Number 152 (Monday, August 8, 2011)]
[Notices]
[Pages 48187-48189]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-19982]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65011; File No. SR-ISE-2011-42]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by International Securities Exchange, Inc., Relating to Rule 717

August 2, 2011.
    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 July 25, 2011, the International Securities Exchange, Inc. (``ISE'' 
or the ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II 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 is proposing to specify in its rules an existing policy 
related to the application of Rule 717(d) and (e). The text of the 
proposed rule change is as follows (additions are in italics):

Rule 717. Limitation on Orders

    (a) through (g) no change.

Supplementary Material to Rule 717

    .01 through .05 no change.
    .06 The exposure requirement of paragraph (d) and (e) of Rule 717 
applies to the entry of orders with knowledge that there is a pre-
existing unexecuted agency, proprietary, or solicited order on the 
Exchange. Members may demonstrate that orders were entered without 
knowledge by providing evidence that effective information barriers 
between the persons, business units and/or systems entering the orders 
onto the Exchange were in existence at the time the orders were 
entered. Such information barriers must be fully documented and 
provided to the Exchange upon request.

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 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
    Rule 717(d) and (e) requires members to expose orders entered on 
the limit order book for at least one second before executing them as 
principal or against orders that were solicited from other broker-
dealers. This requirement gives

[[Page 48188]]

other market participants an opportunity to participate in the 
execution of orders before the entering member executes them. The 
Exchange recognizes, however, that because the Exchange does not 
identify the member that entered an order on the limit order book, 
orders from the same firm may inadvertently execute against each other 
as a result of being entered by disparate persons and/or systems at the 
same member firm. Therefore, when enforcing Rule 717(d) and (e), the 
Exchange has never considered the inadvertent interaction of orders 
from the same firm within one second to be a violation of the exposure 
requirement.
    When investigating potential violations of Rule 717(d) and (e), the 
Exchange takes into consideration whether orders that executed against 
each other within one second on the limit order book were entered by 
persons, business units and/or systems at the same firm that did not 
have knowledge of the order on the limit order book.\3\ Commonly, 
member firms are able to demonstrate that orders were entered by 
individuals or systems that did not have the ability to know of the 
pre-existing order on the limit order book due to information barriers 
in place at the time the orders were entered.
---------------------------------------------------------------------------

    \3\ The Exchange conducts routine surveillance to identify 
instances when an order on the limit order book is executed against 
an order entered by the same firm within one second.
---------------------------------------------------------------------------

    The Exchange proposes to codify this longstanding policy in 
Supplementary Material .06 to Rule 717. The proposed rule text 
specifies that members can demonstrate that orders were entered without 
knowledge of a pre-existing order on the book represented by the same 
firm by providing evidence that effective information barriers between 
the persons, business units and/or systems entering the orders onto the 
Exchange were in existence at the time the orders were entered. The 
rule requires that such information barriers be fully documented and 
provided to the Exchange upon request.\4\
---------------------------------------------------------------------------

    \4\ The Exchange reviews information barrier documentation to 
evaluate whether a member has implemented processes that are 
reasonably designed to prevent the flow of pre-trade order 
information given the particular structure of the member firm. 
Additionally, information barriers are reviewed as part of the 
Exchange's examination program, which is administered by the 
Financial Industry Regulatory Authority (``FINRA'') pursuant to a 
regulatory services agreement.
---------------------------------------------------------------------------

2. Statutory Basis
    The basis under the Securities Exchange Act of 1934 (the ``Act'') 
for this proposed rule change is the requirement under Section 6(b),\5\ 
in general, and Section 6(b)(5) \6\ in particular, 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, the Exchange believes 
that codifying the Exchange's policy that appropriate information 
barriers can be used to demonstrate that the execution of two orders 
within one second was inadvertent because the orders were entered 
without knowledge of each other, will clarify the intent and 
application of Rule 717(d) and (e) for ISE members.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that proposed rule change also is consistent 
with Section 6(b)(7) of the Act,\7\ which requires the rules of an 
exchange to provide a fair procedure for the disciplining of members 
and persons associated with members. In particular, by specifying that 
the information barriers must be fully documented, members will be 
better prepared to properly respond to requests for information by the 
Exchange in the course of a regulatory investigation. Moreover, while 
members are generally required to provide information to the Exchange 
as requested, specifying that members must provide written 
documentation regarding information barriers within the context of this 
rule will assure that all members adhere to the same standard for 
demonstrating compliance with the rule.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------

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

    Within 45 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 shall: (a) By order approve 
or disapprove 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. 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-2011-42 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-2011-42. 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, 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

[[Page 48189]]

submissions. You should submit only information that you wish to make 
publicly available. All submissions should refer to File Number SR-ISE-
2011-42 and should be submitted on or before August 29, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-19982 Filed 8-5-11; 8:45 am]
BILLING CODE 8011-01-P