[Federal Register Volume 66, Number 45 (Wednesday, March 7, 2001)]
[Notices]
[Pages 13820-13821]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-5541]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-44017; File No. SR-ISE-00-20]
Self Regulatory Organizations; Order Approving Proposed Rule
Change by the International Securities Exchange LLC Relating to
Limitations on Orders
February 28, 2001.
I. Introduction
On November 20, 2000, the International Securities Exchange LLC
(``ISE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend ISE Rule 717 relating to
limitations on orders.\3\ The proposed rule change was published for
comment in the Federal Register on January 16, 2001.\4\ The Commission
received no comments on the proposed rule change. This order approves
the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The ISE filed its proposed rule change on November 20, 2000.
On December 18, 2000, the ISE filed Amendment No. 1 that entirely
replaced the original rule filing.
\4\ See Securities Exchange Act Release No. 43803 (January 4,
2001), 66 FR 3624 (January 16, 2001).
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II. Description of the Proposal
Exchange market makers must be firm at their quotations for all
orders, although they can set different sizes for customer and broker-
dealer orders. When the size of a particular quote is exhausted, the
Exchange's trading system automatically moves the quote to an inferior
price according to parameters preset by the market maker. However, the
system moves only the quotation in the options series in which there
was a trade, leaving the market maker exposed to the risk that multiple
orders may be executed nearly simultaneously in many series of the same
option. This situation increases an ISE market maker's ``delta risk''
(the amount of underlying stock that would be necessary to hedge the
options position), due to exposure across multiple series. This could
result in ISE market makers providing more liquidity than may be
available in the underlying stock. Under the ISE's proposed new
paragraph (h), members shall not cause the entry of more than one order
every fifteen seconds for the account of the same beneficial owner in
options on the same underlying security.
The Exchange also proposes to amend paragraph (g) of ISE Rule 717,
which currently prohibits an Electronic Access Member (``EAM'') from
entering an order for any other member of the Exchange. The amendment
will limit the scope of ISE Rule 717(g) to only prohibit EAMs from
entering orders for ISE market maker accounts.
III. Discussion
The Commission has reviewed the ISE's proposed rule change and
finds, for the reasons set forth below, that the proposal is consistent
with the requirements of section 6 of the Act \5\ and the rules and
regulations thereunder applicable to a national securities exchange.
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\5\ 15 U.S.C. 78f.
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The Commission notes that amending ISE Rule 717 to prohibit members
from causing the entry of more than one order for the same beneficial
account within a fifteen second period should help reduce ISE market
maker risk exposure. The Commission believes that fifteen seconds is a
sufficient time period to allow market makers to change their
quotations following an execution, while at the same time not unduly
long
[[Page 13821]]
as to place a burden on investors seeking to execute transactions on
the Exchange.
The Commission also notes that the amendment to ISE Rule 717(g),
which will limit the scope of that rule solely to prohibit EAMs from
entering orders for ISE market maker accounts, recognizes that there
are legitimate reasons why a member may enter orders on the Exchange
through an EAM. These reasons can vary. For example, some EAMs may
desire a temporary means of routing orders to the ISE until they are
connected directly to the Exchange. In addition, a few members have
clearing relationships with EAMs and thus route orders through those
EAMs.
Therefore, the Commission finds that the proposed revisions to ISE
Rule 717 are consistent with section 6(b) of the Act \6\ in general,
and furthers the objectives of section 6(b)(5) \7\ in particular, in
that they 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.\8\
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
\8\ In approving the proposal, the Commission has considered the
rule's impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
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IV. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\9\ that the proposed rule change (SR-ISE-00-20) is approved.
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\9\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-5541 Filed 3-6-01; 8:45 am]
BILLING CODE 8010-01-M