[Federal Register Volume 67, Number 212 (Friday, November 1, 2002)]
[Notices]
[Pages 66693-66695]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-27809]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46723; File No. SR-ISE-2002-24]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the International Securities Exchange, Inc. Relating to
Quotation Size
October 25, 2002.
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 October 11, 2002, the International Securities Exchange, Inc.
(``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. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes that all ISE's quotations would be firm for
all incoming orders for their full disseminated size. The ISE would
retain a one-contract minimum size for quotations when they interact
with quotations entered by other ISE market makers. The proposed rule
change would be implemented when the Commission approves the proposal
and grants the Exchange an exemption from Rule 11Ac1-1 (the ``Firm
Quote Rule'') under the Act, and when the Exchange implements technical
enhancements to its system necessary to support this change. Below is
the text of the proposed rule change. Additions are italicized.
Brackets indicate deletions.
* * * * *
Rule 804.--Market Maker Quotations
(a) Options Classes. A quotation only may be entered by a market
maker, and only in the options classes to which the market maker is
appointed under Rule 802.
(b) Size Associated with Quotes. A market maker's bid and offer for
a series of options contracts shall be accompanied by the number of
contracts at that price the market maker is willing to buy [from] or
sell (i) upon receipt of an order (``Order Execution Size'') and (ii)
upon interaction with a quotation entered by another market maker on
the Exchange (``Quotation Execution Size'') [to (i) Public Customers
(the ``Public Customer Size'') and (ii) Non-Customers (the ``Non-
Customer Size'')]. Unless the Exchange has declared a fast market
pursuant to Rule 704, a market maker may not initially enter an Order
Execution Size [a bid or offer with a Public Customer] of less than ten
(10) contracts. Where the size associated with a market maker's bid or
offer falls below ten (10) contracts due to executions at that price
and consequently the size of the best bid or offer on the Exchange
would be for less than ten (10) contracts, the market maker shall enter
a new bid or offer for at least ten (10) contracts, either at the same
or a different price. Every market maker bid or offer must have a
Quotation Execution [a Non-Customer] Size of at least one (1) contract.
(c) Two-Sided Quotes. A market maker that enters a bid (offer) on
the Exchange must enter an offer (bid) within the spread allowable
under Rule 803(b)(4).
(d) Firm Quotes. (1) Market maker bids and offers are firm for
orders and Exchange market maker quotations [Public Customer Orders and
Non-Customer Orders] both under this Rule and Rule 11Ac1-1 under the
Exchange Act (``Rule 11Ac1-1'') for the number of contracts specified
[for each] according to the requirements of paragraph (b) above. Market
maker bids and offers are not firm under this Rule and Rule 11Ac1-1 if:
(i) a system malfunction or other circumstance impairs the
Exchange's ability to disseminate or update market quotes in a timely
and accurate manner;
(ii) the level of trading activities or the existence of unusual
market conditions is such that the Exchange is incapable of collecting,
processing, and making available to quotation vendors the data for the
option in a manner that accurately reflects the current state of the
market on the Exchange, and as a result, the market in the option is
declared to be ``fast'' pursuant to Rule 704;
(iii) during trading rotations; or
(iv) any of the circumstances provided in paragraph (c)(3) of Rule
11Ac1-1 exist.
(2) Within thirty seconds of receipt of an order [a Public Customer
Order (Non-Customer Order)] to buy or sell an option in an amount
greater than the Order Execution Size, or within thirty seconds of
another Exchange market maker entering a quotation at a price
executable against the market maker's quotation [Public Customer Size
(Non-Customer Size)], that portion of the order equal to the Order
Execution Size, or the Quotation Execution Size, as the case may be,
[Public Customer Size
[[Page 66694]]
(Non-Customer Size)] will be executed and the bid or offer price will
be revised.
[Supplementary Material to Rule 804
.01 Notwithstanding the provisions of paragraph (b), for the
``Enhanced Size Pilot'' described in .02 below, a Primary Market Maker
may not initially enter a bid or offer for a Public Customer of less
than 100 contracts, and a bid or offer for Non-Customers (except for
other market makers) of less than 50 contracts. Also for the purposes
of the Enhanced Size Pilot, a Competitive Market Maker may not
initially enter a bid or offer for a Public Customer of less than 50
contracts, and a bid or offer for Non-Customers (except for other
market makers) of less than 25 contracts. Where the size associated
with a market maker's bid or offer falls below such specified size, the
market maker shall enter a new bid or offer for at least the specified
size, either at the same or a different price.
.02 The Enhanced Size Pilot shall operate as follows:
(1) The Enhanced Size Pilot shall operate until October 31, 2002;
(2) Securities included in the Enhanced Size Pilot are options on:
Nasdaq 100 Trust; Sun Microsystems; EMC Corp.; Qualcomm; Wells Fargo
&Co.; Oracle; Lucent; Juniper Networks; Intel; AOL Time Warner; Tyco;
Citigroup; Cisco; Applied Materials; Microsoft; General Electric;
Broadcom; Nokia; Siebel Systems; Banc of America; Ciena; Dell; Fannie
Mae; Motorola; Merrill Lynch; Nvidia; Xilinx; Amazon.com; Halliburton;
Nextel Communications; J.P. Morgan Chase; ADC Telecommunication; Best
Buy; Calpine; General Motors; and Hewlett Packard; and
(3) The size requirements in the Enhanced Size Pilot will not
apply:
(a) To options that expire beyond the nearest three expiration
months;
(b) To ``Deep-in-the-Money'' options; or
(c) On an option's last three trading days prior to expiration.
03. For the purpose of this Rule, ``Deep-in-the-Money'' means all
options with strike prices that are in the money by 12 percent or more
in relation to the at-the-money strike price.]
* * * * *
Rule 805.--Market Maker Orders
* * * * *
(c) Limitations on Orders. A market maker shall not enter more than
one order every fifteen (15) seconds for its own account in options on
the same underlying security; provided, however, that this shall not
apply to multiple orders in different series of options on the same
underlying security if such orders are part of a spread.
[Exemptive Authority. Until the earlier of (1) one year from the
date on which the Exchange commences operations or (2) the date on
which the Exchange opens all options Groups for trading, an Exchange
official designated by the Board may grant market makers exemptions
from the requirements of subparagraphs (b)(2) and (3) of this rule,
subject to the following:
(1) If a market maker has only one Membership, and thus is assigned
to only one Group, any exemption would end when the assigned Group is
open for trading, regardless of the number of options classes that
begin trading in the assigned Group;
(2) If a market maker has multiple Memberships, and thus is
assigned to trading in more than one Group, the exemption would end
when all the market maker's Groups are open for trading, again
regardless of the number of options classes that begin trading in the
assigned Groups; as the market maker's assigned Groups open for
trading, the amount of trading the market maker would be permitted to
execute outside of its assigned Groups would be reduced;
(3) Any exemption would be conditioned on the member performing
market maker functions in the classes they trade;
(4) An exemption could be revoked by the Exchange at any time if
the market maker is not acting in accordance with the terms of the
exemption; and
(5) No exemption would have a term of more than one month, but
would be renewable on a monthly basis until the market maker's group(s)
was open for trading.]
* * * * *
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 this proposed rule change is to provide that all ISE
quotations would be firm for all incoming orders for their full
disseminated size. This would be the first time that any options
exchange provides non-customers (that is, broker-dealers) with full
access to the entire disseminated size of the exchange's quotations for
all their orders. The specifics of the proposal are as follows:
[sbull] Each ISE Primary Market Maker and Competitive Market Maker
would enter a quotation with a single size, available in full for all
incoming orders, whether from customers, broker-dealers, ISE market
makers or market makers on other exchanges.
[sbull] Each market maker also would be able to establish a second
quotation size that would be available when its quotation interacts
with another ISE market maker quotation. This would limit an ISE market
maker's exposure when it establishes a quotation at the same price as
an existing ISE market maker quotation in the system. While this
interaction of quotations is beneficial from a price-discovery
standpoint, there is significant risk in this situation because
execution can occur simultaneously in multiple series. While market
makers would be able to limit this risk by setting their size to a
smaller number of at least one contract, ISE market makers would be
able to access the full size of another market maker's quotation by
sending an order in that series.\3\
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\3\ Implementing this aspect of the proposal would require the
Commission to grant an exemption from the Firm Quote Rule. While
that rule permits market makers to set smaller sizes for all non-
customer orders, it does not permit different quotation sizes for
different categories of professionals. Simultaneously with
submitting this proposed rule change, the ISE submitted a separate
exemption request.
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[sbull] The ISE also proposes to prohibit market makers from
sending more than one order every 15 seconds in options on the same
underlying security. ISE Rule 717(h) currently imposes this limitation
on orders that Electronic Access Members send to the Exchange. This
limitation reduces a market maker's exposure across multiple series of
options.\4\ This restriction, however, does not currently apply to
market maker orders since market makers generally have established
nominal
[[Page 66695]]
quotations for other market makers. Because ISE market makers now would
be able to enter orders accessing another market maker's full size, ISE
proposes to extend this 15-second limitation to ISE market maker
orders.
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\4\ See Securities Exchange Act Release No.44017 (February 28,
2001), 66 FR 13820 (March 7, 2001) (File No. SR-ISE-2000-20).
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[sbull] Finally, the ISE proposes two technical ``clean up''
changes to its rules. First, the Exchange proposes to delete language
from Rule 804 regarding the ``enhanced size pilot'' that would expire
on October 31, 2002. Second, the Exchange proposes to delete language
from Rule 805 regarding limited exemptive authority that expired a year
after the Exchange commenced trading.
2. Statutory Basis
The basis for this proposed rule change is the requirement under
section 6(b)(5) of the Act \5\ 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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\5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The ISE believes that 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
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-2002-24 and should
be submitted by November 22, 2002.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-27809 Filed 10-31-02; 8:45 am]
BILLING CODE 8010-01-P