[Federal Register Volume 65, Number 250 (Thursday, December 28, 2000)]
[Notices]
[Pages 82426-82428]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-33130]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-43743; File No. SR-ISE-00-15]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the International Securities Exchange, LLC Relating to an
Interim Intermarket Linkage
December 19, 2000.
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 November 15, 2000, the International Securities Exchange LLC
(``ISE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by the ISE. On December 13, 2000, the Exchange submitted Amendment No.
1 to the proposed rule change.\3\ 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\ In Amendment No. 1, the Exchange specified that the proposed
interim linkage would be for a pilot period expiring on January 31,
2002. See letter from Michael Simon, Senior Vice President and
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division
of Market Regulation, Commission, dated December 11, 2000
(``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange is proposing a rule authorizing implementation of
``interim linkages'' with the other options exchanges. The interim
linkage will permit qualified market makers on participating exchanges
to send specified types of principal orders to other participating
exchanges for automatic execution as if such orders were customer
orders. Below is the text of the proposed rule change. Proposed new
language is italicized.
Rule 721. Pilot Program for Away Market Maker Access
(a) Definitions. Solely for the purpose of this Rule:
(1) ``Corresponding Rule'' means a rule of a Participating Exchange
that is substantially identical to this Rule 721.
(2) ``Customer Size'' means the lesser of (i) the number of option
contracts that the Participating Exchange sending the order guarantees
it will automatically execute at its disseminated quotation in an
Eligible Option Class for Public Customer Orders and (ii) the number of
option contracts that the Participating Exchange receiving the order
guarantees it will automatically execute at its disseminated quotation
in an Eligible Option Class for Public Customer Orders. This number
shall be no fewer than 10.
(3) ``Eligible Away Market Maker'' (``EAMM'') means, with respect
to an Eligible Option Class, a market maker, as that term is defined in
Section 3(a)(22) of the Exchange Act, on a Participating Exchange that:
(i) is assigned to, and is providing two-sided quotations in the
Eligible Option Class; and
(ii) that is participating in its market's automatic execution
system in such Eligible Option Class.
(4) ``Eligible Away Principal Market Maker'' (``EAPMM'') means:
with respect to the American Stock Exchange and the Philadelphia Stock
Exchange, a Specialist in an Eligible Option Class; with respect to the
Chicago Board Options Exchange, a Designated Primary Market Maker in an
Eligible Option Class; and with respect to the Pacific Exchange, a Lead
Market Maker in an Eligible Option Class.
(5) ``Eligible Option Class'' means all option series overlying a
security, including both put and call options, which class is traded by
the Exchange and at least one other Participating Exchange, to the
extent that such Participating Exchanges have mutually agreed to
include the option class in the Pilot Program.
(6) ``Eligible Order'' means an order for the account of a market
maker, an EAMM or an EAPMM that can be sent to a Participating Exchange
marked as a Public Customer Order pursuant to
[[Page 82427]]
provisions of paragraphs (b), (c), and (d) of this Rule.
(7) ``Participating Exchange'' means (i) the Exchange and (ii) one
or more of the American Stock Exchange, the Chicago Board Options
Exchange, the Pacific Exchange, and the Philadelphia Stock Exchange, as
the President of the Exchange, or his designee, has designated from
time to time as having adopted a Corresponding Rule.
(8) ``Pilot Program'' means the program established by this Rule
and the Corresponding Rules of the other Participating Exchanges.
(9) ``Principal Size'' means the number of option contracts that
two or more Participating Exchanges mutually agree that they will
automatically execute during the Pilot Program at their disseminated
quotation for orders sent for the principal account of a market maker,
an EAMM or an EAPMM that does not correspond to a Underlying Customer
Order. This number shall be no fewer than 10.
(10) ``Underlying Customer Order'' means an unexecuted Public
Customer Order for which a Primary Market Maker or EAPMM is acting as
agent and which underlies an Eligible Order.
(b) Access to Other Participating Exchanges by Market Makers.
Pursuant to the Pilot Program, a market maker participating in the
program may send an order to another Participating Exchange for
execution as a Public Customer Order only if the market maker complies
with the following conditions:
(1) the order is an immediate-or-cancel order;
(2) the price of the order is equal to the bid (offer) disseminated
by the Participating Exchange at the time the market maker sends an
order to sell (buy), and such bid (offer) is equal to the national
highest bid (offer) in that series of an Eligible Option Class, as
calculated by the Exchange;
(3) the Exchange's bid (offer) at the time the market maker sends
the order to sell (buy) is not then equal to the national highest bid
(offer) in that series of an Eligible Option Class, as calculated by
the Exchange;
(4) the order is no larger than the Principal Size; and
(5) except with respect to orders a Primary Market Maker is sending
pursuant to paragraph (c), below, the market maker has not received an
execution of another such order in the same series of an Eligible
Option Class on the same Participating Exchange pursuant to the Pilot
Program in the previous one minute period.
(c) Additional Access to Other Participating Exchanges by Primary
Market Makers. In addition to the access to other Participating
Exchanges provided in paragraph (b), above, a Primary Market Maker
participating in the Pilot Program may send an order to another
Participating Exchange for execution as a Public Customer if:
(1) the Primary Market Maker complies with subparagraphs (1)
through (3) of paragraph (b), above:
(2) the order reflects the same terms as an Underlying Customer
Order the Primary Market Maker is holding; and
(3) the order is no larger than the Customer Size.
(d) Access to the Exchange by Eligible Market Makers on other
Participating Exchanges. Notwithstanding any other Rule of the
Exchange, an Electronic Access Member may send to the Exchange for
execution as a Public Customer Order an order for the account of an
EAMM or an EAPMM that complies with the Corresponding Rule of the
EAMM's or EAPMM's Participating Exchange.
(e) Implementation of the Pilot Program. The President, or his
designee, may implement the Pilot Program, in whole or in part, with
respect to specific Participating Exchanges, to the extent that any
such Participating Exchange has agreed to implement corresponding
aspects of the Pilot Program. Primary Market Maker participation in the
Pilot Program shall be voluntary.
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 the proposed rule change is to implement certain
aspects of an intermarket options linkage on an ``interim'' basis.\4\
This interim linkage would utilize existing order types to facilitate
the sending and receiving of order flow between ISE market makers and
their counterparts on the other options exchanges as an interim step
towards development of a ``permanent'' linkage.
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\4\ Under the proposal, the interim linkage would be for a pilot
period expiring on January 31, 2002. See Amendment No. 1, supra note
3.
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By way of background, the Commission has approved a linkage plan
that now includes all five options exchanges.\5\ The options exchanges
continue to work towards implementation of this linkage, which likely
will include contracting with a third party to build a linkage
infrastructure. Since this will take a significant amount of time, the
options exchanges have discussed implementing an ``interim'' linkage.
Such a linkage would use the existing market infrastructure to route
orders between market makers on the participating exchanges in a more
efficient manner.
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\5\ See Securities Exchange Act Release Nos. 43086 (July 28,
2000), 65 FR 48023 (August 4, 2000); 43573 (November 16, 2000), 65
FR 70851 (November 28, 2000); and 43574 (November 16, 2000), 65 FR
70850 (November 28, 2000).
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The key component of the interim linkage would be for the
participating exchanges to open their automated customer execution
systems, on a limited basis, to market maker orders. Specifically,
market makers would be able to designate certain orders as ``customer''
orders, and thus would receive automatic execution of those orders on
participating exchanges.
This proposed rule would authorize the ISE to implement bilateral
or multilateral interim arrangements with the other exchanges to
provide for equal access between market makers on our respective
exchanges. The Exchange currently anticipates that the initial
arrangements would allow ISE Primary Market Makers (``PMMs'') and their
equivalents on the other exchanges, when they are holding customer
orders, to send orders reflecting the customer orders to the other
market for execution when the other market has a better quote. Such
orders would be limited in size to the lesser of the size of the two
markets ``firm'' quotes for customer orders. The Exchange expects that
the interim linkage may expand to include limited access for pure
principal orders, for orders of no more than 10 contracts.
All interim linkage orders must be ``immediate or cancel'' (that
is, they cannot be placed on an exchange's limit order book), and a
market maker can send a linkage order only when the other (receiving)
market is displaying the best national bid or offer and the sending
market is an inferior price. This will allow a market maker to access
the better price for its customer. In addition, if the interim linkage
includes principal orders, it would allow market makers to attempt to
``clear'' another market
[[Page 82428]]
displaying a superior quote. Any exchange participating in the interim
linkage will implement heightened surveillance procedures to help
ensure that their market makers send only properly-qualified orders
through the linkage.
PMM participation in the interim linkage will be voluntary. Only
when a PMM and its equivalent on another exchange believe that this
form of mutual access would be advantageous will the exchanges employ
the interim linkage procedures. The ISE believes that the interim
linkage will benefit investors and will provide useful experience that
will help the exchanges in implementing the full linkage.
2. Statutory Basis
The ISE believes that the basis under the Act for this proposed
rule change is the requirement under Section 6(b)(5)\6\ 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 foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transaction in
securities, 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.
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\6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The CBOE does not believe that the proposed rule change will impose
any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
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 self-regulatory organization 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 such filing also will be
available for inspection and copying at the principal office of the
ISE. All submissions should refer to File No. SR-ISE-00-15 and should
be submitted by January 18, 2001.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-33130 Filed 12-27-00; 8:45 am]
BILLING CODE 8010-01-M