Self-Regulatory Organizations; International Securities Exchange, Inc. (n/k/a International Securities Exchange, LLC); Order Approving Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 1 Thereto Relating to the Adoption of Rules To Govern Its Electronic Trading System for Equities, 58650-58656 [E6-16366]
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58650
Federal Register / Vol. 71, No. 192 / Wednesday, October 4, 2006 / Notices
Because the longer exposure period
introduces unnecessary market risk to
orders entered into the Block Order
Mechanism, the Exchange proposes to
reduce the Block Order Mechanism
exposure period to three seconds.
2. Statutory Basis
The basis under the Act for this
proposed rule change is found in
Section 6(b)(5),6 in that the proposed
rule change is designed to promote just
and equitable principles of trade,
remove impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest. In particular, the
proposed rule change will reduce
unnecessary market risk for orders
entered into the Block Order
Mechanism.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The proposed rule change does not
impose any burden on competition.
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 written
comments from members or other
interested parties.
rwilkins on PROD1PC63 with NOTICES
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 7 and Rule 19b–
4(f)(6) thereunder.8
At any time within 60 days of the
filing of the proposed rule change, the
Commission may summarily abrogate
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
A proposed rule change filed under
Rule 19b–4(f)(6) normally may not
become operative prior to 30 days after
6 15
U.S.C. 78f(b)(5).
7 15 U.S.C. 78s(b)(3)(A).
8 17 CFR 240.19b–4(f)(6).
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the date of filing.9 However, Rule 19b–
4(f)(6)(iii) 10 permits the Commission to
designate a shorter time if such action
is consistent with the protection of
investors and the public interest. The
ISE provided the Commission with
written notice of its intent to file this
proposed rule change at least five
business days prior to the date of filing
of the proposed rule change. In
addition, the ISE has requested that the
Commission waive the 30-day operative
delay. The Commission has previously
stated its belief that in an electronic
environment—such as that of the ISE
options market—reducing the exposure
period for orders to three seconds could
facilitate the prompt execution of such
orders, while providing market
participants with an adequate
opportunity to compete for them.11
Thus, the Commission believes that
waiving the 30-day operative delay for
the instant proposed rule change is
consistent with the protection of
investors and the public interest. For
this reason, the Commission designates
the proposal to be effective and
operative immediately.12
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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–ISE–2006–52 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–ISE–2006–52. 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 (https://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. Copies of such filing also will be
available for inspection and copying at
the principal office of the ISE. 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–2006–52 and should be
submitted on or before October 25,
2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.13
Nancy M. Morris,
Secretary.
[FR Doc. E6–16363 Filed 10–3–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54528; File No. SR–ISE–
2006–48]
Self-Regulatory Organizations;
International Securities Exchange, Inc.
(n/k/a International Securities
Exchange, LLC); Order Approving
Proposed Rule Change and Notice of
Filing and Order Granting Accelerated
Approval of Amendment No. 1 Thereto
Relating to the Adoption of Rules To
Govern Its Electronic Trading System
for Equities
September 28, 2006.
9 17
CFR 240.19b–4(f)(6)(iii).
10 Id.
11 See, e.g., Securities Exchange Act Release Nos.
52711 (November 1, 2005), 70 FR 67508 (November
7, 2005) (SR–ISE–2004–04); 53384 (February 27,
2006), 71 FR 11280 (March 6, 2006) (SR–PCX–
2005–135); and 53567 (March 29, 2006), 71 FR
17529 (April 6, 2006) (SR–CBOE–2006–09).
12 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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I. Introduction
On August 4, 2006, the International
Securities Exchange, Inc. (n/k/a
International Securities Exchange, LLC)
(‘‘ISE’’ or ‘‘Exchange’’) 1 filed with the
13 17
CFR 200.30–3(a)(12).
September 1, 2006, the Exchange adopted a
holding company structure by forming a new parent
company, International Securities Exchange
1 On
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Federal Register / Vol. 71, No. 192 / Wednesday, October 4, 2006 / Notices
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3 to
adopt rules to govern its electronic
trading system for equity securities. The
proposed rule change was published for
comment in the Federal Register on
August 15, 2006.4 The Commission
received no comments on the proposal.
On September 27, 2006, the Exchange
filed Amendment No. 1 to the
proposal.5 This order approves the
proposed rule change, grants accelerated
approval to Amendment No. 1, and
solicits comments from interested
persons on Amendment No. 1.
II. Summary Description of the
Proposal
rwilkins on PROD1PC63 with NOTICES
The Exchange proposes to adopt new
rules and amend existing ISE rules to
govern the operation of the ISE Stock
Exchange, LLC (‘‘ISE Stock Exchange’’),
a new electronic trading system for
Holdings, Inc. (‘‘Holdings’’). As part of the
restructuring, International Securities Exchange,
Inc. (‘‘ISE Inc.’’), the registered national securities
exchange, merged into a newly formed entity,
International Securities Exchange, LLC (‘‘ISE LLC’’),
a wholly-owned subsidiary of Holdings. ISE LLC
continues to conduct the business operations of the
exchange and is the successor to the registration of
ISE Inc. as a national securities exchange. See
Securities Exchange Act Release No. 53705 (April
21, 2006), 71 FR 25260 (April 28, 2006) (File No.
SR–ISE–2006–04). Holdings is also the parent
company of ISE Stock Exchange, LLC, the facility
to which the proposed rule change relates. All
references herein to ‘‘ISE’’ or the ‘‘Exchange’’ refer
to ISE Inc. or ISE LLC, as appropriate.
2 15 U.S.C. 78s(b)(1).
3 17 CFR 240.19b–4.
4 See Securities Exchange Act Release No. 54287
(August 8, 2006), 71 FR 46947.
5 In Amendment No. 1, the Exchange: (i)
Amended proposed ISE Rule 2110 (Minimum Price
Variation) to conform with the language of Rule 612
of Regulation NMS; (ii) amended proposed ISE Rule
2106 (Opening Process) to reflect all order types
that cannot participate in the opening process and
to add a provision addressing closing procedures;
(iii) changed the term ‘‘partial round lot’’ to ‘‘mixed
lots’’ to correspond to the current industry term and
clarified corresponding proposed ISE Rule 2105
(Order Entry); (iv) amended proposed ISE Rule 2107
(Priority and Execution of Orders) to address how
orders entered into the ISE Stock Exchange will
interact with MidPoint Match orders; (v) amended
proposed ISE Rule 2118 (Trade Modifiers) to
incorporate applicable requirements of Rule 611 of
Regulation NMS; (vi) made clarifying changes to the
clearing requirements; (vii) made conforming
changes to the proposed rules to match, where
applicable, the rules filed under the Form PILOT
relating to MidPoint Match; (viii) added proposed
ISE Rule 2120 (Taking or Supplying Securities); (ix)
clarified routing procedures before and after
February 5, 2007, the Regulation NMS ‘‘Trading
Phase Date’’; and (x) made other minor clarifying
changes to various proposed rules. The complete
text of Amendment No. 1 is available on the
Commission’s Web site (https://www.sec.gov/rules/
sro.shtml), at the Commission’s Public Reference
Room, and at the Exchange.
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equity securities (‘‘System’’).6 In
addition, the Exchange proposes to
apply certain of its options rules to the
trading of equity securities on the ISE
Stock Exchange. The ISE Stock
Exchange will trade equity securities
only pursuant to unlisted trading
privileges (‘‘UTP’’).7
The System will provide for the
electronic execution and display of
orders, as well as a midpoint matching
feature (‘‘MidPoint Match’’). The class
of members who will be eligible to trade
on the ISE Stock Exchange are
electronic access members (‘‘EAMs’’) of
the Exchange whom ISE specifically
authorizes to trade on the ISE Stock
Exchange (‘‘Equity EAMs’’). Orders will
be ranked in the System based on pricetime priority, regardless of the identity
of the entering Equity EAM. Executions
will take place automatically and
immediately upon order entry if trading
interest is available. The System will
provide a routing service for orders
when trading interest is not present on
the ISE Stock Exchange. The ISE Stock
Exchange will not have any market
makers, only Equity EAMs who will
provide liquidity to the ISE Stock
Exchange. The ISE Stock Exchange will
be an order-driven marketplace.
The proposed rules incorporate the
ISE Stock Exchange’s compliance with
Rule 611 of Regulation NMS 8 by
requiring that, for any execution to
occur on the ISE Stock Exchange during
regular trading hours, the price must be
equal to, or better than, any ‘‘protected
quotation’’ within the meaning of
Regulation NMS (‘‘Protected
Quotation’’),9 unless an exception to
Rule 611 of Regulation NMS is
available.10 The Exchange proposes to
direct to away markets for execution all
or a portion of the orders that cannot be
executed at the Protected Quotation on
the ISE Stock Exchange, and are not
cancelled.11 The proposed rules also
6 On September 1, 2006, the Commission
approved a proposed rule change establishing the
ISE Stock Exchange as a ‘‘facility,’’ as defined in
Section 3(a)(2) of the Act, of the Exchange. See
Securities Exchange Act Release No. 54399, 71 FR
53728 (September 12, 2006) (SR–ISE–2006–45).
7 While the proposed rules would allow the ISE
Stock Exchange to trade common stock,
Commodity-Based Trust Shares, Currency Trust
Shares, Partnership Units, Trust Issued Receipts
including those based on Investment Shares, and
Investment Company Units by either listing and/or
trading pursuant to UTP, the Commission notes
that, to list equity securities, the Exchange would
need to amend its rules to comply with Rule 10A–
3 under the Act, 17 CFR 240.10A–3, and to
incorporate qualitative listing criteria by filing a
proposed rule change under Section 19(b)(1) of the
Act.
8 17 CFR 242.611.
9 See proposed ISE Rule 2100(c)(16).
10 See proposed ISE Rule 2107(c).
11 See proposed ISE Rule 2107(d).
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58651
incorporate the prohibition in
Regulation NMS on locking or crossing
Protected Quotations,12 except in
certain circumstances.13
The MidPoint Match feature of the
System will be a mechanism for trading
equity securities in a continuous
matching system.14 Users will enter
unpriced orders into MidPoint Match,
and MidPoint Match will continuously
monitor buy and sell orders in MidPoint
Match and, subject to certain limitations
discussed more fully below, will
execute orders at the midpoint of the
NBBO when interest is resident in
MidPoint Match on both sides of the
market.15
A more complete discussion of the
features of the ISE Stock Exchange is
contained below.
III. Discussion
After careful review, the Commission
finds that the proposed rule change, as
amended, is consistent with the Act and
the rules and regulations promulgated
thereunder applicable to a national
securities exchange 16 and, in particular,
with the requirements of Section 6(b) of
the Act.17 Specifically, the Commission
finds that approval of the proposed rule
change is consistent with Section 6(b)(5)
of the Act 18 in that it is designed to
facilitate transactions in securities; 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 transactions
12 17
CFR 242.610(d).
proposed ISE Rule 2112.
14 See proposed ISE Rule 2129.
15 The Exchange previously filed with the
Commission pursuant to Rule 19b–5 under the Act,
17 CFR 240.19b–5, a Form PILOT setting forth rules
governing MidPoint Match. See PILOT–ISE–2006–
01 (July 28, 2006). ISE commenced operation of
MidPoint Match on September 8, 2006. The rules
filed under the Form PILOT, with minor
modifications, were incorporated into the
Exchange’s proposed rule change, as amended.
Upon the Commission’s approval of the proposed
rule change, the rules relating to the fully displayed
market will be effective, but will not be operative
until ISE launches its fully displayed market, and
the rules pertaining to MidPoint Match that are
incorporated into the proposed rule change will be
operative immediately. Prior to launch of the fully
displayed market, the Exchange intends to file a
proposed rule change with the Commission to
indicate that the rules relating to the fully displayed
market have become operative. The Exchange
represents that it intends to commence trading in
the displayed market prior to February 5, 2007, the
Regulation NMS ‘‘Trading Phase Date.’’
16 In approving this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
17 15 U.S.C. 78f(b).
18 15 U.S.C. 78f(b)(5).
13 See
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Federal Register / Vol. 71, No. 192 / Wednesday, October 4, 2006 / Notices
in securities; to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system; and, in general, to protect
investors and the public interest.
A. Access to ISE Stock Exchange
The class of members who will be
eligible to trade on the ISE Stock
Exchange are Equity EAMs. All current
EAMs of the Exchange are eligible to
become Equity EAMs. Any brokerdealer that is not currently an EAM can
become an Equity EAM first by applying
for EAM status through the existing
membership process and then by
connecting to the ISE Stock Exchange
through the FIX or CMS protocols and
paying any applicable fees. Such fees
will be the same for current and new
EAMs seeking to become Equity EAMs.
The Commission believes that the
proposed definition of, and the
procedures relating to authorization of
an EAM to act as, an Equity EAM are
consistent with the Act.
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B. Order Types
The following order types will be
eligible for execution on the ISE Stock
Exchange, including MidPoint Match
orders, which are described below.
Market Orders: A Market Order is an
order to buy or sell a stated amount of
a security that is to be executed
immediately and automatically at the
best available price(s) 19 when the order
reaches the ISE Stock Exchange, to the
greatest extent possible without causing
an execution during regular trading
hours at a price that is inferior to a
Protected Quotation (‘‘Trade-Through’’).
Any unexecuted shares of a Market
Order may be routed in whole or in part
to other Trading Centers 20 with
Protected Quotations.
Limit Orders: A Limit Order is a onesided order to buy or sell a stated
quantity of a security at a specified price
or better. The types of Limit Orders that
the ISE Stock Exchange will accept
include Reserve Orders, Immediate-orCancel (‘‘IOC’’) Orders, Intermarket
Sweep Orders (‘‘ISOs’’), Fill-or-Kill
(‘‘FOK’’) Orders, Not Routable Orders,
and Post Only Orders.
Reserve Orders will have a portion of
their size displayed, while a reserve
19 The ‘‘best available price’’ means the highest
bid price and the lowest offer price, including
orders with executable undisplayed interest to buy
or sell and interest to buy or sell that may exist in
MidPoint Match. See proposed ISE Rule 2100(c)(3).
20 A ‘‘Trading Center’’ is a national securities
exchange or national securities association that
operates an SRO trading facility, an alternative
trading system, an exchange market maker, an OTC
market maker, or any other broker or dealer that
executes orders internally by trading as principal or
crossing orders as agent. See proposed ISE Rule
2100(c)(20).
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Jkt 211001
portion of their size at the same price
will not be displayed. The reserve size
will be used to refresh the displayed
size when the displayed size is executed
in full. When the displayed size of a
Reserve Order is replenished from the
reserve size, the displayed order is
considered newly entered for purposes
of time priority.
IOC Orders will be executed
immediately and automatically against
existing orders on the System at the best
available price(s) to the greatest extent
possible without causing a TradeThrough, and any unexecuted balance
will be cancelled. Any Equity EAM may
use an IOC Order to immediately and
automatically execute against the full
size of the displayed quotation on the
System (including any undisplayed or
reserve size available at the price of the
displayed quotation).
With respect to orders received by the
ISE Stock Exchange, ISOs are orders to
be executed in whole or in part upon
receipt against existing orders on the
System at their executable price, in
order of their ranking and without
regard to better-priced quotations
displayed at other Trading Centers, and
if not so executed are to be cancelled.
With respect to orders sent by the ISE
Stock Exchange to other Trading
Centers, ISOs are orders to be executed
in whole or in part at such Trading
Centers without regard to better-priced
quotations displayed at other Trading
Centers, and if not so executed are to be
cancelled.21
FOK Orders are to be executed in
their entirety or cancelled upon receipt.
Not Routable Orders are to be executed
in whole or in part upon receipt, and if
not fully executed, displayed on the ISE
Stock Exchange, as long as the order
would not be executable against a
Protected Quotation. Post Only Orders
are to be displayed on the ISE Stock
Exchange upon receipt or cancelled if
they are executable upon entry, either
on the ISE Stock Exchange or at another
Trading Center.
Pegged Orders: Pegged Orders are
Limit Orders to buy or sell a stated
amount of a security at a displayed price
set to track the current NBBO. The
tracking of the relevant NBBO for
Pegged Orders will occur on a real-time
basis. If the calculated price for the
Pegged Order would exceed its limit
price, it will no longer track the NBBO
and will remain displayed at its limit
price.
The Commission believes that these
order types are appropriate in the
21 The Exchange intends the ISO order type to be
equivalent to the ‘‘intermarket sweep order’’
defined in Rule 600(b)(30) of Regulation NMS
under the Act, 17 CFR 242.600(b)(30).
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context of the trading services proposed
to be offered by the ISE Stock Exchange.
In addition, these order types should
help provide market participants with
flexibility in executing transactions that
meet the specific requirements of the
order type.
C. Operating Hours and Opening
Process
The ISE Stock Exchange will operate
during regular trading hours.22 The
System will accept orders each day
prior to the opening.23 The ISE Stock
Exchange will open based upon the
opening of the primary market for a
security.24 When the primary market is
either the NYSE or the Amex, the
opening trade will be executed at the
midpoint of the first reported NBBO
subsequent to a reported trade on the
primary market. When the primary
market is Nasdaq, the opening trade will
be executed at the midpoint of the first
reported NBBO. All orders eligible to
trade at the midpoint will be processed
in time sequence, beginning with the
oldest order. Matches will occur until
there is no remaining volume or there is
an imbalance of orders. Following the
opening execution process in an
individual security, all orders remaining
will be executed in accordance with the
proposed ISE rules, as more fully
discussed in the following section. All
unexecuted orders will be displayed on
the order book, cancelled, or routed to
other Trading Centers in accordance
with the proposed rules.
The Commission believes that the
proposed rules relating to the System’s
operating hours and opening procedures
are consistent with the Act.
D. Order Execution and Priority
Once the opening occurs for
individual securities, the ISE Stock
Exchange will operate during regular
trading hours. All orders will be ranked
automatically by the ISE Stock
Exchange following price-time priority
as soon they are entered in the order
book. Orders are ranked beginning with
the highest priced orders to buy and the
lowest priced orders to sell.25 For the
22 For common stock, the hours of business for
the ISE Stock Exchange will be 9:30 a.m. until 4
p.m. (ET). For securities other than common stock,
the hours of business are set forth in proposed ISE
Rules 2123 through 2127. See proposed ISE Rule
2102.
23 All order types other than Stop, Stop Limit, No
MPM, Post Only, FOK, and IOC may participate in
the opening transaction.
24 Proposed ISE Rule 2106(c) defines the primary
market as the listing market for a security. If a
security is traded on both the NYSE and the Amex,
the primary market would be considered the NYSE.
If a security is listed on both the NYSE and Nasdaq,
the NYSE would be considered the primary market.
25 See proposed ISE Rule 2107.
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Federal Register / Vol. 71, No. 192 / Wednesday, October 4, 2006 / Notices
purposes of ranking, the System will use
the price at which the order is
displayed. Within each price, orders
will be ranked in time priority based on
the time that an order is displayed or
‘‘updated’’ at that price, except that the
undisplayed portions of Reserve Orders
will be ranked after all other orders and
displayed portions of Reserve Orders at
the same price. When the displayed size
of a Reserve Order is replenished from
the reserve size, the displayed order is
considered newly entered for the
purposes of time priority.
In addition, all orders will be
available for price improvement at the
midpoint of the NBBO if contra-side
interest exists in MidPoint Match,
unless the order is marked ‘‘No
MPM.’’ 26 Except as indicated below,
incoming orders will be executed at or
within the NBBO. The Commission
believes that the proposed rules relating
to order priority and order execution are
consistent with the Act.27
E. Compliance With Regulation NMS
Under the Act
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The System is designed to
automatically prevent Trade-Throughs
of Protected Quotations. The System
will accomplish this in two principal
ways: (i) By providing outbound routing
for those orders that will be available to
route; and (ii) by displaying orders at
prices that would not cause a TradeThrough when executed. Additionally,
the System will take advantage of
various exceptions to Rule 611 of
26 Equity EAMs can choose to place orders into
MidPoint Match or into the displayed market.
Orders placed into the displayed market will be
eligible, by default, to interact with MidPoint Match
orders for purposes of gaining price improvement.
Optionally, orders in the displayed market can
bypass MidPoint Match by being marked as No
MPM.
27 Section 11(a) of the Act, 15 U.S.C. 78k(a)(1),
prohibits a member of a national securities
exchange from effecting transactions on that
exchange for its own account, the account of an
associated person, or an account over which it or
an associated person exercises discretion, unless an
exception applies. Rule 11a2–2(T) under the Act, 17
CFR 240.11a2–2(T), commonly known as the ‘‘effect
versus execute’’ rule, provides exchange members
with an exemption from this prohibition. The
Exchange represents that, consistent with this rule,
the System’s time-priority execution parameters
will place all participants on the ‘‘same footing,’’
and no participant will enjoy any special control
over the timing of execution or any special order
handling advantages. According to the Exchange,
all orders will be transmitted directly to the System
by electronic means, and, once submitted, all orders
will be executed, displayed, cancelled, or routed
automatically by the System, based on established
trading rules. The Commission notes that the
Exchange would enforce this requirement pursuant
to its obligation under Section 6(b)(1) of the Act, 15
U.S.C. 78f(b)(1), to enforce compliance by its
members and persons associated with its members
with the Federal securities laws and rules
thereunder.
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14:45 Oct 03, 2006
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Regulation NMS under the Act.28 The
Exchange has proposed to adopt an
exception (‘‘self-help’’) to allow for the
System to Trade-Through a Protected
Quotation displayed by a Trading
Center that is experiencing a failure,
material delay, or malfunction of its
systems or equipment. If another
Trading Center repeatedly fails to
respond within one second to incoming
orders attempting to access its Protected
Quotations, the System may bypass
those Protected Quotations by: (i)
Notifying the non-responding Trading
Center immediately after (or at the same
time as) electing self-help; and (ii)
assessing whether the cause of the
problem lies with its own systems and,
if so, taking immediate steps to resolve
the problem. ISOs may, by definition,
trade at a price inferior to a Protected
Quotation. In addition, transactions may
be executed at a time when the
Protected Quotations are crossed.
The ISE Stock Exchange will not
intentionally lock or cross any Protected
Quotations on another Trading Center,29
except in certain circumstances. For
instance, the System may lock or cross
a Protected Quotation: (i) When a
Protected Bid is higher than a Protected
Offer;30 or (ii) if the locking or crossing
quotation is an automated quotation and
an ISO has simultaneously been routed
to execute against the full displayed size
of the locked or crossed Protected
Quotation.
The Commission believes that the
proposed rule change is consistent with
the requirements of Rule 610(d) and
Rule 611 of Regulation NMS.
F. Order Routing
The ISE Stock Exchange will offer a
routing service for Equity EAMs, when
it does not have interest equal to or
better than the Protected Bid or
Protected Offer.31 Certain order types,
including Market Orders and Limit
Orders, are eligible to be routed.32 To be
eligible to enter routable orders into the
ISE Stock Exchange, Equity EAMs must,
among other things, enter into a Routing
Agreement with the outbound routing
facility of the Exchange.33
28 See
proposed ISE Rule 2107(c).
proposed ISE Rule 2112.
30 See proposed ISE Rule 2100(c)(15).
31 Prior to February 5, 2007, the Regulation NMS
‘‘Trading Phase Date,’’ the ISE Stock Exchange will
not execute orders at a price that is inferior to the
best bid or offer of other Trading Centers.
32 See proposed ISE Rule 2107(d).
33 See proposed ISE Rule 2105(d). A ‘‘Routing
Agreement’’ is an agreement between an Equity
EAM and the outbound routing facility of the ISE
Stock Exchange, under which the outbound routing
facility agrees to act as agent for routing orders of
the Equity EAM entered into the ISE Stock
Exchange to other market centers or broker-dealers
29 See
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The System will accept the following
orders to be handled on the ISE Stock
Exchange, without routing to another
Trading Center: IOC Orders, FOK
Orders, Not Routable Orders, and Post
Only Orders.34 No Equity EAM may
enter any other type of order unless it
has entered into a Routing Agreement
with the outbound routing facility of the
Exchange.35
Market Orders and Routable Limit
Orders Executable on the ISE Stock
Exchange. For orders that are routable,
an IOC or ISO will automatically be sent
to one or more Trading Centers with a
Protected Quotation that is better than
the ISE Stock Exchange quote for the
lesser of the full displayed size of the
Protected Quotation or the balance of
the order. Any additional balance of the
order will be executed on the ISE Stock
Exchange simultaneously. If the market
is crossed, the order will be handled as
described below.
Routable Limit Orders Unexecutable
on the ISE Stock Exchange. If display of
a Limit Order (or any balance thereof)
on the ISE Stock Exchange would lock
or cross a Protected Quotation, an ISO
will automatically be sent to one or
more Trading Centers with a Protected
Quotation that would be locked or
crossed by the display of the order for
up to the full displayed size of the
Protected Quotation. Any additional
balance of the order will be displayed
on the ISE Stock Exchange immediately.
Market Orders Unexecutable on the
ISE Stock Exchange. An IOC will
automatically be sent to one or more
Trading Centers with a Protected
Quotation for the full size of the Market
Order that is not executable on the ISE
Stock Exchange.
The Commission finds that the
proposed rules governing the routing of
orders to other Trading Centers are
consistent with the Act.
G. Outbound Routing Facility
In connection with the proposed
trading rules described above, the
Exchange intends to enter into a
contractual relationship with a brokerdealer that will function solely as the
outbound routing facility (‘‘ORF’’) of the
Exchange. The ORF will be a member of
both the National Association of
Securities Dealers, Inc. (‘‘NASD’’) and
for execution, other than orders excluded by the
terms of the Routing Agreement, whenever such
routing is required. See proposed ISE Rule
2100(c)(18).
34 See proposed ISE Rules 2107(b)(2)(i), (ii), (iii),
and (iv), respectively. In addition, MidPoint Match
orders would not be routed, because MidPoint
Match will execute all trades at the midpoint of the
NBBO.
35 See proposed ISE Rule 2105(d)
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ISE. The ORF will provide an optional
routing service for the Exchange, in
which the ORF will route orders from
the ISE Stock Exchange to Trading
Centers with Protected Quotations
through other brokers (‘‘Access
Brokers’’) that are members or
participants of those Trading Centers.
As an outbound router, the ORF will
receive routing instructions from the
System, route orders to another Trading
Center through an Access Broker, and be
responsible for reporting resulting
executions back to the System, which in
turn will report resulting executions
back to the Equity EAM. All orders
routed through the ORF will be subject
to the Exchange’s rules. The ORF would
not be able to change the terms of an
order or the routing instructions, nor
would it have any discretion about
where to route an order. The ORF
includes the clearing functions that the
ORF may perform for trades with
respect to orders routed to other Trading
Centers. Use of the ORF is optional for
Equity EAMs.
The outbound router function of the
ORF will operate as a facility (as defined
in Section 3(a)(2) of the Act) of the
Exchange.36 As such, the outbound
router function of the ORF is subject to
the Commission’s continuing oversight.
In particular, and without limitation,
under the Act, the Exchange is
responsible for filing with the
Commission proposed rule changes and
fees relating to the ORF outbound router
function, and the ORF is subject to
exchange non-discrimination
requirements.37
Pursuant to Rule 17d–1 under the
Act,38 where a member of the Securities
Investor Protection Corporation is a
member of more than one self-regulatory
organization (‘‘SRO’’), the Commission
will designate to one of such
organizations the responsibility for
examining such member for compliance
with the applicable financial
responsibility rules.39 The SRO
designation by the Commission is
referred to as a ‘‘Designated Examining
Authority’’ (‘‘DEA’’). As noted above,
the ORF will apply to become a member
organization of the Exchange and a
36 15
U.S.C. 78c(a)(2).
U.S.C. 78f(b)(5).
38 17 CFR 240.17d–1.
39 Pursuant to Rule 17d–1 under the Act, in
making such designation the Commission will take
into consideration the regulatory capabilities and
procedures of the SROs, availability of staff,
convenience of location, unnecessary regulatory
duplication, and such other factors as the
Commission may consider germane to the
protection of investors, the cooperation and
coordination among SROs, and the development of
a national market system for the clearance and
settlement of securities transactions.
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member of the NASD. The NASD is an
SRO not affiliated with the Exchange or
its affiliates and is a DEA pursuant to
Rule 17d–1 under the Act.40
Furthermore, the Exchange represents
that it will enter into a 17d–2
Agreement with the NASD to delegate to
the NASD all regulatory oversight and
enforcement responsibilities with
respect to the ORF pursuant to
applicable laws. The Exchange
represents that it will submit the 17d–
2 Agreement to the Commission under
Rule 17d–2 within 90 days of the date
of this order.
The Exchange will establish and
maintain procedures and internal
controls to restrict the flow of
confidential and proprietary
information between the Exchange and
the ORF and any other entity or affiliate
of the ORF.41 The books, records,
premises, officers, directors, agents, and
employees of the ORF, as a facility of
the Exchange, shall be deemed to be the
books, records, premises, officers,
directors, agents, and employees of the
Exchange for purposes of and subject to
oversight pursuant to the Act. The books
and records of the ORF, as a facility of
the Exchange, shall be subject at all
times to inspection and copying by the
Exchange and the Commission.
The Commission agrees with the
Exchange that the ORF’s services would
qualify it as a ‘‘facility’’ of the Exchange,
and, consequently, the operation of the
ORF will be subject to Exchange
oversight, as well as Commission
oversight. The Commission notes that
the outbound routing functionality is
not the exclusive means for accessing
better-priced orders in other market
centers should an order not be
executable on the ISE Stock Exchange.
Accordingly, the ORF’s routing services
are optional, and an Equity EAM is free
to route its orders to other market
centers through alternative means. In
light of the protections afforded by the
conditions discussed above, the
Commission believes that the
Exchange’s outbound routing function,
and the rules and procedures governing
the ORF, are appropriate and consistent
with the Act.
H. MidPoint Match
MidPoint Match is a mechanism of
the ISE Stock Exchange for trading
common stocks and similar securities in
a continuous midpoint matching
system.42 Equity EAMs will be able to
enter MidPoint Match orders to buy or
sell at the midpoint of the NBBO.
40 17
CFR 240.17d–1.
proposed ISE Rule 2108.
42 See proposed ISE Rule 2129.
41 See
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Although orders in MidPoint Match will
be unpriced, members may specify a
boundary price above which they will
not buy (or below which they will not
sell). The System will continuously
monitor buy and sell orders in MidPoint
Match and will execute orders at the
midpoint of the NBBO as long as the
execution does not violate the boundary
price on an order.
When entering an order, a member
can specify what, if any, information the
System should disseminate:
(i) The member can specify that the
System not disseminate any information
regarding the order (‘‘Standard Order’’);
or
(ii) The member can specify that the
System disseminate that there is a
pending order in a particular security,
but not identify the side or the size of
the order (‘‘Solicitation of Interest’’ or
‘‘SOI’’).43
MidPoint Match will reject an SOI
(but not a Standard Order) with a
boundary price that is not then
currently executable. Upon arrival of an
SOI, MidPoint Match will immediately
generate a single broadcast internally to
all Equity EAMs that have programmed
their systems to accept this message
announcing the arrival of the order. An
Equity EAM entering an SOI may not
cancel that SOI for five seconds. In
addition, if an SOI is not executed
within ten seconds, the SOI will convert
into a Standard Order.
Because MidPoint Match will execute
all trades at the midpoint of the NBBO,
MidPoint Match will never execute a
trade outside of the NBBO. In addition,
MidPoint Match will not execute a trade
if the quotation for a security is
‘‘crossed,’’ with the national best bid
being greater than the national best
offer. In that situation, MidPoint Match
will suspend executions, since both
buyers and sellers may be able to
receive executions in other markets at
prices better than the NBBO midpoint.
If the quotation is ‘‘locked,’’ with the
national best bid equaling the national
best offer, MidPoint Match will execute
all trades at the locked price.
Unless marked otherwise, all
incoming orders to the ISE Stock
Exchange will be eligible for price
improvement at the midpoint of the
NBBO if contra-side interest exists in
MidPoint Match. As set forth in the
proposed rules, incoming orders will be
executed at the best available price on
the ISE Stock Exchange, which means
the highest bid price and the lowest
offer price, including undisplayed
43 However, an SOI must be for a minimum of
2000 shares, so users would be aware that the SOI
represented interest of at least that size.
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orders to buy or sell that may exist in
MidPoint Match. Orders marked ‘‘No
MPM’’ will not be executed against
orders residing in MidPoint Match.
The Commission believes that the
order types and execution parameters
established in MidPoint Match are
consistent with the Act.
I. Anonymity
Except as described below,
transactions executed on the ISE Stock
Exchange will be processed
anonymously.44 This means that the ISE
Stock Exchange transaction reports will
indicate the details of the transaction
but will not reveal contra-party
identities.45 The Commission notes that
post-trade anonymity should not
compromise an Equity EAM’s ability to
settle an erroneous trade, because under
proposed ISE Rule 2128, the clearly
erroneous execution resolution process
is coordinated by the Exchange, without
the need for contra parties to know each
other’s identities.
The Exchange will only reveal the
identity of the Equity EAM or the Equity
EAM’s clearing firm in the following
circumstances: (i) For regulatory
purposes or to comply with an order of
a court or arbitrator; (ii) when the
National Securities Clearing Corporation
(‘‘NSCC’’) ceases to act for the Equity
EAM or the Equity EAM’s clearing firm,
and NSCC determines not to guarantee
the settlement of the Equity EAM’s
trades; or (iii) on risk management
reports provided to the contra-party of
the Equity EAM or Equity EAM’s
44 See
proposed ISE Rule 2117.
intends to submit a request for a limited
exemption from paragraph (a)(2)(i)(A) of Rule 10b–
10 under the Act, 17 CFR 240.10b–10, on behalf of
Equity EAMs that execute trades on the ISE Stock
Exchange for their customers and a request for noaction relief with respect to the corresponding
books and records requirements of Rules 17a–3 and
17a–4 under the Act, 17 CFR 240.17a–3 and 17a–
4, respectively. Rule 10b–10, among other things,
requires a broker-dealer to disclose to its customers
the identity of the party the broker-dealer sold to,
or bought from, to fill the customer’s order. The ISE
Stock Exchange will not routinely reveal the
identity of the actual contra-party when the order
is executed against another Equity EAM. Therefore,
the Equity EAMs will not be able to comply with
the contra-party identification requirement of Rule
10b–10. To permit Equity EAMs to utilize the ISE
Stock Exchange without violating Rule 10b–10, the
Exchange is seeking an exemption, on behalf of
such Equity EAMs, from the contra-party
identification requirement. Additionally, the
Exchange has asked the Commission not to
recommend enforcement action for violations of the
corresponding books and records requirements of
Rules 17a–3 and 17a–4 if, in lieu of making and
preserving a separate record, a broker-dealer relies
on the Exchange’s retention of the identities of
Equity EAMs that execute anonymous trades on the
ISE Stock Exchange. The Exchange represents that
it will not commence operation of the displayed
market unless the Exchange receives an exemption
from Rule 10b–10 with respect to that market.
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45 ISE
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clearing firm each day after 4:00 p.m.
that discloses trading activity on an
aggregate dollar value basis. Also, the
Exchange will reveal to an Equity EAM,
no later than the end of the day on the
date an anonymous trade was executed,
when that Equity EAM submits an order
that has executed against an order
submitted by that same Equity EAM.
The Commission finds that the
Exchange’s proposed anonymity
provisions are appropriate and
consistent with the Act.
J. Clearly Erroneous Executions
Pursuant to proposed ISE Rule 2128,
an Equity EAM that receives an
execution on an order that was
submitted erroneously to the ISE Stock
Exchange for its own or a customer
account may request that Market
Control, along with a member of the
regulatory staff, review the transaction
under proposed ISE Rule 2128(b) within
the time limits described therein.
Market Control will review the
transaction with a view toward
maintaining a fair and orderly market
and the protection of investors and the
public interest. A member of the
regulatory staff will advise and
participate in all steps of Market
Control’s review of the transaction.
Based upon this review, Market Control
will decline to ‘‘break’’ a disputed
transaction if Market Control believes
that the transaction under dispute is not
clearly erroneous. However, if Market
Control determines that the transaction
in dispute is clearly erroneous, Market
Control will declare that the transaction
is null and void or modify one or more
terms of the transaction. When adjusting
the terms of a transaction, Market
Control will seek to adjust the price
and/or size of the transaction to achieve
an equitable rectification of the error
that would place the parties to a
transaction in the same position, or as
close as possible to the same position,
as they would have been in had the
error not occurred. For purposes of the
clearly erroneous rule, the terms of a
transaction are ‘‘clearly erroneous’’
when there is an obvious error in any
term, such as price, number of shares or
other unit of trading, or identification of
the security.
Market Control may, on its own
motion, review transactions on the ISE
Stock Exchange that arose during any
disruption or malfunction in the use or
operation of any electronic
communications or trading facilities of
the ISE Stock Exchange, or
extraordinary market conditions or
other circumstances in which the
nullification or modification of
transactions may be necessary for the
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58655
maintenance of a fair and orderly
market or the protection of investors
and the public interest. Each affected
Equity EAM will be notified as soon as
practicable, and the Equity EAM
aggrieved by the action may appeal such
action to the Trade Panel.
The Commission believes that
proposed ISE Rule 2128 is consistent
with the Act because it is reasonably
designed to promote fair and orderly
markets by setting forth procedures for
reviewing and, if necessary, nullifying
or adjusting a clearly erroneous trade.
The Commission previously has
determined that it is consistent with the
Act for an exchange to be able to nullify
or adjust trades that are clearly
erroneous.46
K. Miscellaneous Rules
Proposed ISE Rules 2123 (Investment
Company Unit), 2124 (Trust Issued
Receipts), 2125 (Commodity-Based
Trust Shares), 2126 (Currency Trust
Shares), and 2127 (Partnership Units)
would permit the trading of derivative
products on the ISE Stock Exchange.
While these proposed ISE rules would
allow the ISE Stock Exchange to trade
such products by either listing and/or
trading pursuant to UTP, the ISE Stock
Exchange will only trade these products
pursuant to UTP. In order to list such
products, the Exchange would first need
to seek Commission approval and
amend its applicable rules.
Proposed ISE Rule 2117 (Settlement
Through Clearing Corporations) adds
provisions governing the settlement and
clearing of equity securities.
Proposed ISE Rule 2101 (Equity
Securities Traded) provides that, if the
Exchange trades its own securities, or
the securities of an affiliate or any entity
that operates and/or owns a trading
system or facility of the Exchange, on
the ISE Stock Exchange, the Exchange
will file a report each quarter with the
SEC describing: (i) The Exchange’s
monitoring of the issuer’s compliance
with the Exchange’s listing standards (in
the event the Exchange adopts such
listing standards); and (ii) the
Exchange’s monitoring of the trading of
the security. If the Exchange adopts
listing standards, an independent
accounting firm must annually review
the listing standards for the subject
security to ensure that the issuer is in
compliance with the applicable listing
requirements. If the Exchange
determines that the subject issuer is
non-compliant with any listing
standard, the Exchange must file a
46 See, e.g., NYSE Arca Equities Rule 7.10 (Clearly
Erroneous Executions) and Nasdaq Rule 11890
(Clearly Erroneous Transactions).
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report with the Commission at the same
time that the Exchange notifies the
issuer of its non-compliance.
The following Rules have been
incorporated from the Exchange’s
options rules: ISE Rule 100 (Definitions)
is being expanded to include equities in
the following definitions: Bid, clearing
corporation, offer and order; ISE Rule
500 (Designation of Securities) is being
amended to accommodate for the newly
adopted rules in Chapter 21; and ISE
Rules 702 and 703 (Trading Halts and
Trading Halts Due to Extraordinary
Market Volatility, respectively) are
being amended to account for halting
trading in equity securities.47
The Commission finds that these
various proposed ISE rules are
consistent with the Act.
rwilkins on PROD1PC63 with NOTICES
L. Accelerated Approval of Amendment
No. 1
The Commission finds good cause for
approving Amendment No. 1 to the
proposed rule change prior to the
thirtieth day after publishing notice of
Amendment No. 1 in the Federal
Register pursuant to Section 19(b)(2) of
the Act.48
In Amendment No. 1, the Exchange
amended proposed ISE Rule 2110
(Minimum Price Variation) to conform
with the language of Rule 612 of
Regulation NMS and amended proposed
ISE Rule 2118 (Trade Modifiers) to
incorporate applicable requirements of
Rule 611 of Regulation NMS. The
Exchange also amended proposed Rule
2106 (Opening Process) to reflect that
Stop Orders, Stop Limit Orders, No
MPM Orders, Post Only Orders, FOK
Orders and IOC Orders cannot
participate in the opening process and
to add a provision that the System
would cease matching orders in a
security upon the close of the primary
market for that security. In addition, the
Exchange changed the term ‘‘partial
round lot’’ to ‘‘mixed lots’’ to
correspond to the current industry term
and clarified corresponding proposed
ISE Rule 2105 (Order Entry). The
Exchange also added proposed ISE Rule
2120 (Taking or Supplying Securities),
which governs situations in which an
Equity EAM can, upon receipt of a
customer order, take or supply
securities named in the order on behalf
of itself or related parties.
In Amendment No. 1, the Exchange
made certain revisions to the proposed
rules to provide for the interaction of
47 In addition, the Exchange proposes to apply
certain of its options rules to the trading of equity
securities on the ISE Stock Exchange, as set forth
in Appendix A to proposed Chapter 21 of the ISE
rules.
48 15 U.S.C. 78s(b)(2).
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MidPoint Match orders with other
orders entered into the ISE Stock
Exchange, as described more fully
above. The Exchange also revised the
text of proposed ISE Rule 2107(d) to
clarify that, prior to February 5, 2007,
the ISE Stock Exchange will not trade
through the best bid or offer of other
Trading Centers, while on and after
February 5, 2007, the ISE Stock
Exchange will not trade through a
Protected Quotation. Finally, the
Exchange made clarifying changes to the
clearing requirements and other
proposed rules and made changes to the
proposed rules to conform them to the
rules filed with the Commission on the
Form PILOT relating to MidPoint
Match.49
The Commission notes that
Amendment No. 1 is intended to clarify
various provisions of the Exchange’s
proposed rules. The Commission
believes that Amendment No. 1
proposes revisions that are nonsubstantive in nature and do not raise
novel issues, and that Amendment No.
1 is consistent with the Act. Therefore,
the Commission finds good cause to
accelerate approval of Amendment No.
1, pursuant to Section 19(b)(2) of the
Act.50
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning Amendment No.
1, including whether Amendment No. 1
is consistent with the Act. Comments
may be submitted by any of the
following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. SR–ISE–2006–48 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street NE. , Washington, DC
20549–1090.
All submissions should refer to
Amendment No. 1 to File No. SR-ISE–
2006–48. 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
(https://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. Copies of such filing will also 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 Amendment
No. 1 to File No. SR–SE–2006–48 and
should be submitted on or before
October 25, 2006.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,51 that the
proposed rule change (SR–ISE–2006–48)
be, and it hereby is, approved, and
Amendment No. 1 is approved on an
accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.52
Nancy M. Morris,
Secretary.
[FR Doc. E6–16366 Filed 10–3–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54514; File No. SR–OCC–
2006–05]
Self-Regulatory Organizations; The
Options Clearing Corporation; Order
Granting Approval of a Proposed Rule
Change Relating to Expiration Date
Exercise Procedures
September 26, 2006.
I. Introduction
On April 6, 2006, The Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) proposed
rule change SR–OCC–2006–05 pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’).1 Notice
51 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
49 See
supra note 15.
50 15 U.S.C. 78s(b)(2).
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E:\FR\FM\04OCN1.SGM
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]]>Agencies
[Federal Register Volume 71, Number 192 (Wednesday, October 4, 2006)]
[Notices]
[Pages 58650-58656]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-16366]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54528; File No. SR-ISE-2006-48]
Self-Regulatory Organizations; International Securities Exchange,
Inc. (n/k/a International Securities Exchange, LLC); Order Approving
Proposed Rule Change and Notice of Filing and Order Granting
Accelerated Approval of Amendment No. 1 Thereto Relating to the
Adoption of Rules To Govern Its Electronic Trading System for Equities
September 28, 2006.
I. Introduction
On August 4, 2006, the International Securities Exchange, Inc. (n/
k/a International Securities Exchange, LLC) (``ISE'' or ``Exchange'')
\1\ filed with the
[[Page 58651]]
Securities and Exchange Commission (``Commission'') a proposed rule
change pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ to adopt rules to
govern its electronic trading system for equity securities. The
proposed rule change was published for comment in the Federal Register
on August 15, 2006.\4\ The Commission received no comments on the
proposal. On September 27, 2006, the Exchange filed Amendment No. 1 to
the proposal.\5\ This order approves the proposed rule change, grants
accelerated approval to Amendment No. 1, and solicits comments from
interested persons on Amendment No. 1.
---------------------------------------------------------------------------
\1\ On September 1, 2006, the Exchange adopted a holding company
structure by forming a new parent company, International Securities
Exchange Holdings, Inc. (``Holdings''). As part of the
restructuring, International Securities Exchange, Inc. (``ISE
Inc.''), the registered national securities exchange, merged into a
newly formed entity, International Securities Exchange, LLC (``ISE
LLC''), a wholly-owned subsidiary of Holdings. ISE LLC continues to
conduct the business operations of the exchange and is the successor
to the registration of ISE Inc. as a national securities exchange.
See Securities Exchange Act Release No. 53705 (April 21, 2006), 71
FR 25260 (April 28, 2006) (File No. SR-ISE-2006-04). Holdings is
also the parent company of ISE Stock Exchange, LLC, the facility to
which the proposed rule change relates. All references herein to
``ISE'' or the ``Exchange'' refer to ISE Inc. or ISE LLC, as
appropriate.
\2\ 15 U.S.C. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
\4\ See Securities Exchange Act Release No. 54287 (August 8,
2006), 71 FR 46947.
\5\ In Amendment No. 1, the Exchange: (i) Amended proposed ISE
Rule 2110 (Minimum Price Variation) to conform with the language of
Rule 612 of Regulation NMS; (ii) amended proposed ISE Rule 2106
(Opening Process) to reflect all order types that cannot participate
in the opening process and to add a provision addressing closing
procedures; (iii) changed the term ``partial round lot'' to ``mixed
lots'' to correspond to the current industry term and clarified
corresponding proposed ISE Rule 2105 (Order Entry); (iv) amended
proposed ISE Rule 2107 (Priority and Execution of Orders) to address
how orders entered into the ISE Stock Exchange will interact with
MidPoint Match orders; (v) amended proposed ISE Rule 2118 (Trade
Modifiers) to incorporate applicable requirements of Rule 611 of
Regulation NMS; (vi) made clarifying changes to the clearing
requirements; (vii) made conforming changes to the proposed rules to
match, where applicable, the rules filed under the Form PILOT
relating to MidPoint Match; (viii) added proposed ISE Rule 2120
(Taking or Supplying Securities); (ix) clarified routing procedures
before and after February 5, 2007, the Regulation NMS ``Trading
Phase Date''; and (x) made other minor clarifying changes to various
proposed rules. The complete text of Amendment No. 1 is available on
the Commission's Web site (https://www.sec.gov/rules/sro.shtml), at
the Commission's Public Reference Room, and at the Exchange.
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II. Summary Description of the Proposal
The Exchange proposes to adopt new rules and amend existing ISE
rules to govern the operation of the ISE Stock Exchange, LLC (``ISE
Stock Exchange''), a new electronic trading system for equity
securities (``System'').\6\ In addition, the Exchange proposes to apply
certain of its options rules to the trading of equity securities on the
ISE Stock Exchange. The ISE Stock Exchange will trade equity securities
only pursuant to unlisted trading privileges (``UTP'').\7\
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\6\ On September 1, 2006, the Commission approved a proposed
rule change establishing the ISE Stock Exchange as a ``facility,''
as defined in Section 3(a)(2) of the Act, of the Exchange. See
Securities Exchange Act Release No. 54399, 71 FR 53728 (September
12, 2006) (SR-ISE-2006-45).
\7\ While the proposed rules would allow the ISE Stock Exchange
to trade common stock, Commodity-Based Trust Shares, Currency Trust
Shares, Partnership Units, Trust Issued Receipts including those
based on Investment Shares, and Investment Company Units by either
listing and/or trading pursuant to UTP, the Commission notes that,
to list equity securities, the Exchange would need to amend its
rules to comply with Rule 10A-3 under the Act, 17 CFR 240.10A-3, and
to incorporate qualitative listing criteria by filing a proposed
rule change under Section 19(b)(1) of the Act.
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The System will provide for the electronic execution and display of
orders, as well as a midpoint matching feature (``MidPoint Match'').
The class of members who will be eligible to trade on the ISE Stock
Exchange are electronic access members (``EAMs'') of the Exchange whom
ISE specifically authorizes to trade on the ISE Stock Exchange
(``Equity EAMs''). Orders will be ranked in the System based on price-
time priority, regardless of the identity of the entering Equity EAM.
Executions will take place automatically and immediately upon order
entry if trading interest is available. The System will provide a
routing service for orders when trading interest is not present on the
ISE Stock Exchange. The ISE Stock Exchange will not have any market
makers, only Equity EAMs who will provide liquidity to the ISE Stock
Exchange. The ISE Stock Exchange will be an order-driven marketplace.
The proposed rules incorporate the ISE Stock Exchange's compliance
with Rule 611 of Regulation NMS \8\ by requiring that, for any
execution to occur on the ISE Stock Exchange during regular trading
hours, the price must be equal to, or better than, any ``protected
quotation'' within the meaning of Regulation NMS (``Protected
Quotation''),\9\ unless an exception to Rule 611 of Regulation NMS is
available.\10\ The Exchange proposes to direct to away markets for
execution all or a portion of the orders that cannot be executed at the
Protected Quotation on the ISE Stock Exchange, and are not
cancelled.\11\ The proposed rules also incorporate the prohibition in
Regulation NMS on locking or crossing Protected Quotations,\12\ except
in certain circumstances.\13\
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\8\ 17 CFR 242.611.
\9\ See proposed ISE Rule 2100(c)(16).
\10\ See proposed ISE Rule 2107(c).
\11\ See proposed ISE Rule 2107(d).
\12\ 17 CFR 242.610(d).
\13\ See proposed ISE Rule 2112.
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The MidPoint Match feature of the System will be a mechanism for
trading equity securities in a continuous matching system.\14\ Users
will enter unpriced orders into MidPoint Match, and MidPoint Match will
continuously monitor buy and sell orders in MidPoint Match and, subject
to certain limitations discussed more fully below, will execute orders
at the midpoint of the NBBO when interest is resident in MidPoint Match
on both sides of the market.\15\
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\14\ See proposed ISE Rule 2129.
\15\ The Exchange previously filed with the Commission pursuant
to Rule 19b-5 under the Act, 17 CFR 240.19b-5, a Form PILOT setting
forth rules governing MidPoint Match. See PILOT-ISE-2006-01 (July
28, 2006). ISE commenced operation of MidPoint Match on September 8,
2006. The rules filed under the Form PILOT, with minor
modifications, were incorporated into the Exchange's proposed rule
change, as amended. Upon the Commission's approval of the proposed
rule change, the rules relating to the fully displayed market will
be effective, but will not be operative until ISE launches its fully
displayed market, and the rules pertaining to MidPoint Match that
are incorporated into the proposed rule change will be operative
immediately. Prior to launch of the fully displayed market, the
Exchange intends to file a proposed rule change with the Commission
to indicate that the rules relating to the fully displayed market
have become operative. The Exchange represents that it intends to
commence trading in the displayed market prior to February 5, 2007,
the Regulation NMS ``Trading Phase Date.''
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A more complete discussion of the features of the ISE Stock
Exchange is contained below.
III. Discussion
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the Act and the rules and
regulations promulgated thereunder applicable to a national securities
exchange \16\ and, in particular, with the requirements of Section 6(b)
of the Act.\17\ Specifically, the Commission finds that approval of the
proposed rule change is consistent with Section 6(b)(5) of the Act \18\
in that it is designed to facilitate transactions in securities; 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 transactions
[[Page 58652]]
in securities; to remove impediments to and perfect the mechanism of a
free and open market and a national market system; and, in general, to
protect investors and the public interest.
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\16\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
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A. Access to ISE Stock Exchange
The class of members who will be eligible to trade on the ISE Stock
Exchange are Equity EAMs. All current EAMs of the Exchange are eligible
to become Equity EAMs. Any broker-dealer that is not currently an EAM
can become an Equity EAM first by applying for EAM status through the
existing membership process and then by connecting to the ISE Stock
Exchange through the FIX or CMS protocols and paying any applicable
fees. Such fees will be the same for current and new EAMs seeking to
become Equity EAMs. The Commission believes that the proposed
definition of, and the procedures relating to authorization of an EAM
to act as, an Equity EAM are consistent with the Act.
B. Order Types
The following order types will be eligible for execution on the ISE
Stock Exchange, including MidPoint Match orders, which are described
below.
Market Orders: A Market Order is an order to buy or sell a stated
amount of a security that is to be executed immediately and
automatically at the best available price(s) \19\ when the order
reaches the ISE Stock Exchange, to the greatest extent possible without
causing an execution during regular trading hours at a price that is
inferior to a Protected Quotation (``Trade-Through''). Any unexecuted
shares of a Market Order may be routed in whole or in part to other
Trading Centers \20\ with Protected Quotations.
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\19\ The ``best available price'' means the highest bid price
and the lowest offer price, including orders with executable
undisplayed interest to buy or sell and interest to buy or sell that
may exist in MidPoint Match. See proposed ISE Rule 2100(c)(3).
\20\ A ``Trading Center'' is a national securities exchange or
national securities association that operates an SRO trading
facility, an alternative trading system, an exchange market maker,
an OTC market maker, or any other broker or dealer that executes
orders internally by trading as principal or crossing orders as
agent. See proposed ISE Rule 2100(c)(20).
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Limit Orders: A Limit Order is a one-sided order to buy or sell a
stated quantity of a security at a specified price or better. The types
of Limit Orders that the ISE Stock Exchange will accept include Reserve
Orders, Immediate-or-Cancel (``IOC'') Orders, Intermarket Sweep Orders
(``ISOs''), Fill-or-Kill (``FOK'') Orders, Not Routable Orders, and
Post Only Orders.
Reserve Orders will have a portion of their size displayed, while a
reserve portion of their size at the same price will not be displayed.
The reserve size will be used to refresh the displayed size when the
displayed size is executed in full. When the displayed size of a
Reserve Order is replenished from the reserve size, the displayed order
is considered newly entered for purposes of time priority.
IOC Orders will be executed immediately and automatically against
existing orders on the System at the best available price(s) to the
greatest extent possible without causing a Trade-Through, and any
unexecuted balance will be cancelled. Any Equity EAM may use an IOC
Order to immediately and automatically execute against the full size of
the displayed quotation on the System (including any undisplayed or
reserve size available at the price of the displayed quotation).
With respect to orders received by the ISE Stock Exchange, ISOs are
orders to be executed in whole or in part upon receipt against existing
orders on the System at their executable price, in order of their
ranking and without regard to better-priced quotations displayed at
other Trading Centers, and if not so executed are to be cancelled. With
respect to orders sent by the ISE Stock Exchange to other Trading
Centers, ISOs are orders to be executed in whole or in part at such
Trading Centers without regard to better-priced quotations displayed at
other Trading Centers, and if not so executed are to be cancelled.\21\
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\21\ The Exchange intends the ISO order type to be equivalent to
the ``intermarket sweep order'' defined in Rule 600(b)(30) of
Regulation NMS under the Act, 17 CFR 242.600(b)(30).
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FOK Orders are to be executed in their entirety or cancelled upon
receipt. Not Routable Orders are to be executed in whole or in part
upon receipt, and if not fully executed, displayed on the ISE Stock
Exchange, as long as the order would not be executable against a
Protected Quotation. Post Only Orders are to be displayed on the ISE
Stock Exchange upon receipt or cancelled if they are executable upon
entry, either on the ISE Stock Exchange or at another Trading Center.
Pegged Orders: Pegged Orders are Limit Orders to buy or sell a
stated amount of a security at a displayed price set to track the
current NBBO. The tracking of the relevant NBBO for Pegged Orders will
occur on a real-time basis. If the calculated price for the Pegged
Order would exceed its limit price, it will no longer track the NBBO
and will remain displayed at its limit price.
The Commission believes that these order types are appropriate in
the context of the trading services proposed to be offered by the ISE
Stock Exchange. In addition, these order types should help provide
market participants with flexibility in executing transactions that
meet the specific requirements of the order type.
C. Operating Hours and Opening Process
The ISE Stock Exchange will operate during regular trading
hours.\22\ The System will accept orders each day prior to the
opening.\23\ The ISE Stock Exchange will open based upon the opening of
the primary market for a security.\24\ When the primary market is
either the NYSE or the Amex, the opening trade will be executed at the
midpoint of the first reported NBBO subsequent to a reported trade on
the primary market. When the primary market is Nasdaq, the opening
trade will be executed at the midpoint of the first reported NBBO. All
orders eligible to trade at the midpoint will be processed in time
sequence, beginning with the oldest order. Matches will occur until
there is no remaining volume or there is an imbalance of orders.
Following the opening execution process in an individual security, all
orders remaining will be executed in accordance with the proposed ISE
rules, as more fully discussed in the following section. All unexecuted
orders will be displayed on the order book, cancelled, or routed to
other Trading Centers in accordance with the proposed rules.
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\22\ For common stock, the hours of business for the ISE Stock
Exchange will be 9:30 a.m. until 4 p.m. (ET). For securities other
than common stock, the hours of business are set forth in proposed
ISE Rules 2123 through 2127. See proposed ISE Rule 2102.
\23\ All order types other than Stop, Stop Limit, No MPM, Post
Only, FOK, and IOC may participate in the opening transaction.
\24\ Proposed ISE Rule 2106(c) defines the primary market as the
listing market for a security. If a security is traded on both the
NYSE and the Amex, the primary market would be considered the NYSE.
If a security is listed on both the NYSE and Nasdaq, the NYSE would
be considered the primary market.
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The Commission believes that the proposed rules relating to the
System's operating hours and opening procedures are consistent with the
Act.
D. Order Execution and Priority
Once the opening occurs for individual securities, the ISE Stock
Exchange will operate during regular trading hours. All orders will be
ranked automatically by the ISE Stock Exchange following price-time
priority as soon they are entered in the order book. Orders are ranked
beginning with the highest priced orders to buy and the lowest priced
orders to sell.\25\ For the
[[Page 58653]]
purposes of ranking, the System will use the price at which the order
is displayed. Within each price, orders will be ranked in time priority
based on the time that an order is displayed or ``updated'' at that
price, except that the undisplayed portions of Reserve Orders will be
ranked after all other orders and displayed portions of Reserve Orders
at the same price. When the displayed size of a Reserve Order is
replenished from the reserve size, the displayed order is considered
newly entered for the purposes of time priority.
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\25\ See proposed ISE Rule 2107.
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In addition, all orders will be available for price improvement at
the midpoint of the NBBO if contra-side interest exists in MidPoint
Match, unless the order is marked ``No MPM.'' \26\ Except as indicated
below, incoming orders will be executed at or within the NBBO. The
Commission believes that the proposed rules relating to order priority
and order execution are consistent with the Act.\27\
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\26\ Equity EAMs can choose to place orders into MidPoint Match
or into the displayed market. Orders placed into the displayed
market will be eligible, by default, to interact with MidPoint Match
orders for purposes of gaining price improvement. Optionally, orders
in the displayed market can bypass MidPoint Match by being marked as
No MPM.
\27\ Section 11(a) of the Act, 15 U.S.C. 78k(a)(1), prohibits a
member of a national securities exchange from effecting transactions
on that exchange for its own account, the account of an associated
person, or an account over which it or an associated person
exercises discretion, unless an exception applies. Rule 11a2-2(T)
under the Act, 17 CFR 240.11a2-2(T), commonly known as the ``effect
versus execute'' rule, provides exchange members with an exemption
from this prohibition. The Exchange represents that, consistent with
this rule, the System's time-priority execution parameters will
place all participants on the ``same footing,'' and no participant
will enjoy any special control over the timing of execution or any
special order handling advantages. According to the Exchange, all
orders will be transmitted directly to the System by electronic
means, and, once submitted, all orders will be executed, displayed,
cancelled, or routed automatically by the System, based on
established trading rules. The Commission notes that the Exchange
would enforce this requirement pursuant to its obligation under
Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1), to enforce
compliance by its members and persons associated with its members
with the Federal securities laws and rules thereunder.
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E. Compliance With Regulation NMS Under the Act
The System is designed to automatically prevent Trade-Throughs of
Protected Quotations. The System will accomplish this in two principal
ways: (i) By providing outbound routing for those orders that will be
available to route; and (ii) by displaying orders at prices that would
not cause a Trade-Through when executed. Additionally, the System will
take advantage of various exceptions to Rule 611 of Regulation NMS
under the Act.\28\ The Exchange has proposed to adopt an exception
(``self-help'') to allow for the System to Trade-Through a Protected
Quotation displayed by a Trading Center that is experiencing a failure,
material delay, or malfunction of its systems or equipment. If another
Trading Center repeatedly fails to respond within one second to
incoming orders attempting to access its Protected Quotations, the
System may bypass those Protected Quotations by: (i) Notifying the non-
responding Trading Center immediately after (or at the same time as)
electing self-help; and (ii) assessing whether the cause of the problem
lies with its own systems and, if so, taking immediate steps to resolve
the problem. ISOs may, by definition, trade at a price inferior to a
Protected Quotation. In addition, transactions may be executed at a
time when the Protected Quotations are crossed.
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\28\ See proposed ISE Rule 2107(c).
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The ISE Stock Exchange will not intentionally lock or cross any
Protected Quotations on another Trading Center,\29\ except in certain
circumstances. For instance, the System may lock or cross a Protected
Quotation: (i) When a Protected Bid is higher than a Protected
Offer;\30\ or (ii) if the locking or crossing quotation is an automated
quotation and an ISO has simultaneously been routed to execute against
the full displayed size of the locked or crossed Protected Quotation.
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\29\ See proposed ISE Rule 2112.
\30\ See proposed ISE Rule 2100(c)(15).
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The Commission believes that the proposed rule change is consistent
with the requirements of Rule 610(d) and Rule 611 of Regulation NMS.
F. Order Routing
The ISE Stock Exchange will offer a routing service for Equity
EAMs, when it does not have interest equal to or better than the
Protected Bid or Protected Offer.\31\ Certain order types, including
Market Orders and Limit Orders, are eligible to be routed.\32\ To be
eligible to enter routable orders into the ISE Stock Exchange, Equity
EAMs must, among other things, enter into a Routing Agreement with the
outbound routing facility of the Exchange.\33\
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\31\ Prior to February 5, 2007, the Regulation NMS ``Trading
Phase Date,'' the ISE Stock Exchange will not execute orders at a
price that is inferior to the best bid or offer of other Trading
Centers.
\32\ See proposed ISE Rule 2107(d).
\33\ See proposed ISE Rule 2105(d). A ``Routing Agreement'' is
an agreement between an Equity EAM and the outbound routing facility
of the ISE Stock Exchange, under which the outbound routing facility
agrees to act as agent for routing orders of the Equity EAM entered
into the ISE Stock Exchange to other market centers or broker-
dealers for execution, other than orders excluded by the terms of
the Routing Agreement, whenever such routing is required. See
proposed ISE Rule 2100(c)(18).
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The System will accept the following orders to be handled on the
ISE Stock Exchange, without routing to another Trading Center: IOC
Orders, FOK Orders, Not Routable Orders, and Post Only Orders.\34\ No
Equity EAM may enter any other type of order unless it has entered into
a Routing Agreement with the outbound routing facility of the
Exchange.\35\
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\34\ See proposed ISE Rules 2107(b)(2)(i), (ii), (iii), and
(iv), respectively. In addition, MidPoint Match orders would not be
routed, because MidPoint Match will execute all trades at the
midpoint of the NBBO.
\35\ See proposed ISE Rule 2105(d).
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Market Orders and Routable Limit Orders Executable on the ISE Stock
Exchange. For orders that are routable, an IOC or ISO will
automatically be sent to one or more Trading Centers with a Protected
Quotation that is better than the ISE Stock Exchange quote for the
lesser of the full displayed size of the Protected Quotation or the
balance of the order. Any additional balance of the order will be
executed on the ISE Stock Exchange simultaneously. If the market is
crossed, the order will be handled as described below.
Routable Limit Orders Unexecutable on the ISE Stock Exchange. If
display of a Limit Order (or any balance thereof) on the ISE Stock
Exchange would lock or cross a Protected Quotation, an ISO will
automatically be sent to one or more Trading Centers with a Protected
Quotation that would be locked or crossed by the display of the order
for up to the full displayed size of the Protected Quotation. Any
additional balance of the order will be displayed on the ISE Stock
Exchange immediately.
Market Orders Unexecutable on the ISE Stock Exchange. An IOC will
automatically be sent to one or more Trading Centers with a Protected
Quotation for the full size of the Market Order that is not executable
on the ISE Stock Exchange.
The Commission finds that the proposed rules governing the routing
of orders to other Trading Centers are consistent with the Act.
G. Outbound Routing Facility
In connection with the proposed trading rules described above, the
Exchange intends to enter into a contractual relationship with a
broker-dealer that will function solely as the outbound routing
facility (``ORF'') of the Exchange. The ORF will be a member of both
the National Association of Securities Dealers, Inc. (``NASD'') and
[[Page 58654]]
ISE. The ORF will provide an optional routing service for the Exchange,
in which the ORF will route orders from the ISE Stock Exchange to
Trading Centers with Protected Quotations through other brokers
(``Access Brokers'') that are members or participants of those Trading
Centers. As an outbound router, the ORF will receive routing
instructions from the System, route orders to another Trading Center
through an Access Broker, and be responsible for reporting resulting
executions back to the System, which in turn will report resulting
executions back to the Equity EAM. All orders routed through the ORF
will be subject to the Exchange's rules. The ORF would not be able to
change the terms of an order or the routing instructions, nor would it
have any discretion about where to route an order. The ORF includes the
clearing functions that the ORF may perform for trades with respect to
orders routed to other Trading Centers. Use of the ORF is optional for
Equity EAMs.
The outbound router function of the ORF will operate as a facility
(as defined in Section 3(a)(2) of the Act) of the Exchange.\36\ As
such, the outbound router function of the ORF is subject to the
Commission's continuing oversight. In particular, and without
limitation, under the Act, the Exchange is responsible for filing with
the Commission proposed rule changes and fees relating to the ORF
outbound router function, and the ORF is subject to exchange non-
discrimination requirements.\37\
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\36\ 15 U.S.C. 78c(a)(2).
\37\ 15 U.S.C. 78f(b)(5).
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Pursuant to Rule 17d-1 under the Act,\38\ where a member of the
Securities Investor Protection Corporation is a member of more than one
self-regulatory organization (``SRO''), the Commission will designate
to one of such organizations the responsibility for examining such
member for compliance with the applicable financial responsibility
rules.\39\ The SRO designation by the Commission is referred to as a
``Designated Examining Authority'' (``DEA''). As noted above, the ORF
will apply to become a member organization of the Exchange and a member
of the NASD. The NASD is an SRO not affiliated with the Exchange or its
affiliates and is a DEA pursuant to Rule 17d-1 under the Act.\40\
Furthermore, the Exchange represents that it will enter into a 17d-2
Agreement with the NASD to delegate to the NASD all regulatory
oversight and enforcement responsibilities with respect to the ORF
pursuant to applicable laws. The Exchange represents that it will
submit the 17d-2 Agreement to the Commission under Rule 17d-2 within 90
days of the date of this order.
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\38\ 17 CFR 240.17d-1.
\39\ Pursuant to Rule 17d-1 under the Act, in making such
designation the Commission will take into consideration the
regulatory capabilities and procedures of the SROs, availability of
staff, convenience of location, unnecessary regulatory duplication,
and such other factors as the Commission may consider germane to the
protection of investors, the cooperation and coordination among
SROs, and the development of a national market system for the
clearance and settlement of securities transactions.
\40\ 17 CFR 240.17d-1.
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The Exchange will establish and maintain procedures and internal
controls to restrict the flow of confidential and proprietary
information between the Exchange and the ORF and any other entity or
affiliate of the ORF.\41\ The books, records, premises, officers,
directors, agents, and employees of the ORF, as a facility of the
Exchange, shall be deemed to be the books, records, premises, officers,
directors, agents, and employees of the Exchange for purposes of and
subject to oversight pursuant to the Act. The books and records of the
ORF, as a facility of the Exchange, shall be subject at all times to
inspection and copying by the Exchange and the Commission.
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\41\ See proposed ISE Rule 2108.
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The Commission agrees with the Exchange that the ORF's services
would qualify it as a ``facility'' of the Exchange, and, consequently,
the operation of the ORF will be subject to Exchange oversight, as well
as Commission oversight. The Commission notes that the outbound routing
functionality is not the exclusive means for accessing better-priced
orders in other market centers should an order not be executable on the
ISE Stock Exchange. Accordingly, the ORF's routing services are
optional, and an Equity EAM is free to route its orders to other market
centers through alternative means. In light of the protections afforded
by the conditions discussed above, the Commission believes that the
Exchange's outbound routing function, and the rules and procedures
governing the ORF, are appropriate and consistent with the Act.
H. MidPoint Match
MidPoint Match is a mechanism of the ISE Stock Exchange for trading
common stocks and similar securities in a continuous midpoint matching
system.\42\ Equity EAMs will be able to enter MidPoint Match orders to
buy or sell at the midpoint of the NBBO. Although orders in MidPoint
Match will be unpriced, members may specify a boundary price above
which they will not buy (or below which they will not sell). The System
will continuously monitor buy and sell orders in MidPoint Match and
will execute orders at the midpoint of the NBBO as long as the
execution does not violate the boundary price on an order.
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\42\ See proposed ISE Rule 2129.
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When entering an order, a member can specify what, if any,
information the System should disseminate:
(i) The member can specify that the System not disseminate any
information regarding the order (``Standard Order''); or
(ii) The member can specify that the System disseminate that there
is a pending order in a particular security, but not identify the side
or the size of the order (``Solicitation of Interest'' or ``SOI'').\43\
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\43\ However, an SOI must be for a minimum of 2000 shares, so
users would be aware that the SOI represented interest of at least
that size.
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MidPoint Match will reject an SOI (but not a Standard Order) with a
boundary price that is not then currently executable. Upon arrival of
an SOI, MidPoint Match will immediately generate a single broadcast
internally to all Equity EAMs that have programmed their systems to
accept this message announcing the arrival of the order. An Equity EAM
entering an SOI may not cancel that SOI for five seconds. In addition,
if an SOI is not executed within ten seconds, the SOI will convert into
a Standard Order.
Because MidPoint Match will execute all trades at the midpoint of
the NBBO, MidPoint Match will never execute a trade outside of the
NBBO. In addition, MidPoint Match will not execute a trade if the
quotation for a security is ``crossed,'' with the national best bid
being greater than the national best offer. In that situation, MidPoint
Match will suspend executions, since both buyers and sellers may be
able to receive executions in other markets at prices better than the
NBBO midpoint. If the quotation is ``locked,'' with the national best
bid equaling the national best offer, MidPoint Match will execute all
trades at the locked price.
Unless marked otherwise, all incoming orders to the ISE Stock
Exchange will be eligible for price improvement at the midpoint of the
NBBO if contra-side interest exists in MidPoint Match. As set forth in
the proposed rules, incoming orders will be executed at the best
available price on the ISE Stock Exchange, which means the highest bid
price and the lowest offer price, including undisplayed
[[Page 58655]]
orders to buy or sell that may exist in MidPoint Match. Orders marked
``No MPM'' will not be executed against orders residing in MidPoint
Match.
The Commission believes that the order types and execution
parameters established in MidPoint Match are consistent with the Act.
I. Anonymity
Except as described below, transactions executed on the ISE Stock
Exchange will be processed anonymously.\44\ This means that the ISE
Stock Exchange transaction reports will indicate the details of the
transaction but will not reveal contra-party identities.\45\ The
Commission notes that post-trade anonymity should not compromise an
Equity EAM's ability to settle an erroneous trade, because under
proposed ISE Rule 2128, the clearly erroneous execution resolution
process is coordinated by the Exchange, without the need for contra
parties to know each other's identities.
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\44\ See proposed ISE Rule 2117.
\45\ ISE intends to submit a request for a limited exemption
from paragraph (a)(2)(i)(A) of Rule 10b-10 under the Act, 17 CFR
240.10b-10, on behalf of Equity EAMs that execute trades on the ISE
Stock Exchange for their customers and a request for no-action
relief with respect to the corresponding books and records
requirements of Rules 17a-3 and 17a-4 under the Act, 17 CFR 240.17a-
3 and 17a-4, respectively. Rule 10b-10, among other things, requires
a broker-dealer to disclose to its customers the identity of the
party the broker-dealer sold to, or bought from, to fill the
customer's order. The ISE Stock Exchange will not routinely reveal
the identity of the actual contra-party when the order is executed
against another Equity EAM. Therefore, the Equity EAMs will not be
able to comply with the contra-party identification requirement of
Rule 10b-10. To permit Equity EAMs to utilize the ISE Stock Exchange
without violating Rule 10b-10, the Exchange is seeking an exemption,
on behalf of such Equity EAMs, from the contra-party identification
requirement. Additionally, the Exchange has asked the Commission not
to recommend enforcement action for violations of the corresponding
books and records requirements of Rules 17a-3 and 17a-4 if, in lieu
of making and preserving a separate record, a broker-dealer relies
on the Exchange's retention of the identities of Equity EAMs that
execute anonymous trades on the ISE Stock Exchange. The Exchange
represents that it will not commence operation of the displayed
market unless the Exchange receives an exemption from Rule 10b-10
with respect to that market.
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The Exchange will only reveal the identity of the Equity EAM or the
Equity EAM's clearing firm in the following circumstances: (i) For
regulatory purposes or to comply with an order of a court or
arbitrator; (ii) when the National Securities Clearing Corporation
(``NSCC'') ceases to act for the Equity EAM or the Equity EAM's
clearing firm, and NSCC determines not to guarantee the settlement of
the Equity EAM's trades; or (iii) on risk management reports provided
to the contra-party of the Equity EAM or Equity EAM's clearing firm
each day after 4:00 p.m. that discloses trading activity on an
aggregate dollar value basis. Also, the Exchange will reveal to an
Equity EAM, no later than the end of the day on the date an anonymous
trade was executed, when that Equity EAM submits an order that has
executed against an order submitted by that same Equity EAM.
The Commission finds that the Exchange's proposed anonymity
provisions are appropriate and consistent with the Act.
J. Clearly Erroneous Executions
Pursuant to proposed ISE Rule 2128, an Equity EAM that receives an
execution on an order that was submitted erroneously to the ISE Stock
Exchange for its own or a customer account may request that Market
Control, along with a member of the regulatory staff, review the
transaction under proposed ISE Rule 2128(b) within the time limits
described therein. Market Control will review the transaction with a
view toward maintaining a fair and orderly market and the protection of
investors and the public interest. A member of the regulatory staff
will advise and participate in all steps of Market Control's review of
the transaction. Based upon this review, Market Control will decline to
``break'' a disputed transaction if Market Control believes that the
transaction under dispute is not clearly erroneous. However, if Market
Control determines that the transaction in dispute is clearly
erroneous, Market Control will declare that the transaction is null and
void or modify one or more terms of the transaction. When adjusting the
terms of a transaction, Market Control will seek to adjust the price
and/or size of the transaction to achieve an equitable rectification of
the error that would place the parties to a transaction in the same
position, or as close as possible to the same position, as they would
have been in had the error not occurred. For purposes of the clearly
erroneous rule, the terms of a transaction are ``clearly erroneous''
when there is an obvious error in any term, such as price, number of
shares or other unit of trading, or identification of the security.
Market Control may, on its own motion, review transactions on the
ISE Stock Exchange that arose during any disruption or malfunction in
the use or operation of any electronic communications or trading
facilities of the ISE Stock Exchange, or extraordinary market
conditions or other circumstances in which the nullification or
modification of transactions may be necessary for the maintenance of a
fair and orderly market or the protection of investors and the public
interest. Each affected Equity EAM will be notified as soon as
practicable, and the Equity EAM aggrieved by the action may appeal such
action to the Trade Panel.
The Commission believes that proposed ISE Rule 2128 is consistent
with the Act because it is reasonably designed to promote fair and
orderly markets by setting forth procedures for reviewing and, if
necessary, nullifying or adjusting a clearly erroneous trade. The
Commission previously has determined that it is consistent with the Act
for an exchange to be able to nullify or adjust trades that are clearly
erroneous.\46\
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\46\ See, e.g., NYSE Arca Equities Rule 7.10 (Clearly Erroneous
Executions) and Nasdaq Rule 11890 (Clearly Erroneous Transactions).
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K. Miscellaneous Rules
Proposed ISE Rules 2123 (Investment Company Unit), 2124 (Trust
Issued Receipts), 2125 (Commodity-Based Trust Shares), 2126 (Currency
Trust Shares), and 2127 (Partnership Units) would permit the trading of
derivative products on the ISE Stock Exchange. While these proposed ISE
rules would allow the ISE Stock Exchange to trade such products by
either listing and/or trading pursuant to UTP, the ISE Stock Exchange
will only trade these products pursuant to UTP. In order to list such
products, the Exchange would first need to seek Commission approval and
amend its applicable rules.
Proposed ISE Rule 2117 (Settlement Through Clearing Corporations)
adds provisions governing the settlement and clearing of equity
securities.
Proposed ISE Rule 2101 (Equity Securities Traded) provides that, if
the Exchange trades its own securities, or the securities of an
affiliate or any entity that operates and/or owns a trading system or
facility of the Exchange, on the ISE Stock Exchange, the Exchange will
file a report each quarter with the SEC describing: (i) The Exchange's
monitoring of the issuer's compliance with the Exchange's listing
standards (in the event the Exchange adopts such listing standards);
and (ii) the Exchange's monitoring of the trading of the security. If
the Exchange adopts listing standards, an independent accounting firm
must annually review the listing standards for the subject security to
ensure that the issuer is in compliance with the applicable listing
requirements. If the Exchange determines that the subject issuer is
non-compliant with any listing standard, the Exchange must file a
[[Page 58656]]
report with the Commission at the same time that the Exchange notifies
the issuer of its non-compliance.
The following Rules have been incorporated from the Exchange's
options rules: ISE Rule 100 (Definitions) is being expanded to include
equities in the following definitions: Bid, clearing corporation, offer
and order; ISE Rule 500 (Designation of Securities) is being amended to
accommodate for the newly adopted rules in Chapter 21; and ISE Rules
702 and 703 (Trading Halts and Trading Halts Due to Extraordinary
Market Volatility, respectively) are being amended to account for
halting trading in equity securities.\47\
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\47\ In addition, the Exchange proposes to apply certain of its
options rules to the trading of equity securities on the ISE Stock
Exchange, as set forth in Appendix A to proposed Chapter 21 of the
ISE rules.
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The Commission finds that these various proposed ISE rules are
consistent with the Act.
L. Accelerated Approval of Amendment No. 1
The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after publishing
notice of Amendment No. 1 in the Federal Register pursuant to Section
19(b)(2) of the Act.\48 \
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\48\ 15 U.S.C. 78s(b)(2).
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In Amendment No. 1, the Exchange amended proposed ISE Rule 2110
(Minimum Price Variation) to conform with the language of Rule 612 of
Regulation NMS and amended proposed ISE Rule 2118 (Trade Modifiers) to
incorporate applicable requirements of Rule 611 of Regulation NMS. The
Exchange also amended proposed Rule 2106 (Opening Process) to reflect
that Stop Orders, Stop Limit Orders, No MPM Orders, Post Only Orders,
FOK Orders and IOC Orders cannot participate in the opening process and
to add a provision that the System would cease matching orders in a
security upon the close of the primary market for that security. In
addition, the Exchange changed the term ``partial round lot'' to
``mixed lots'' to correspond to the current industry term and clarified
corresponding proposed ISE Rule 2105 (Order Entry). The Exchange also
added proposed ISE Rule 2120 (Taking or Supplying Securities), which
governs situations in which an Equity EAM can, upon receipt of a
customer order, take or supply securities named in the order on behalf
of itself or related parties.
In Amendment No. 1, the Exchange made certain revisions to the
proposed rules to provide for the interaction of MidPoint Match orders
with other orders entered into the ISE Stock Exchange, as described
more fully above. The Exchange also revised the text of proposed ISE
Rule 2107(d) to clarify that, prior to February 5, 2007, the ISE Stock
Exchange will not trade through the best bid or offer of other Trading
Centers, while on and after February 5, 2007, the ISE Stock Exchange
will not trade through a Protected Quotation. Finally, the Exchange
made clarifying changes to the clearing requirements and other proposed
rules and made changes to the proposed rules to conform them to the
rules filed with the Commission on the Form PILOT relating to MidPoint
Match.\49\
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\49\ See supra note 15.
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The Commission notes that Amendment No. 1 is intended to clarify
various provisions of the Exchange's proposed rules. The Commission
believes that Amendment No. 1 proposes revisions that are non-
substantive in nature and do not raise novel issues, and that Amendment
No. 1 is consistent with the Act. Therefore, the Commission finds good
cause to accelerate approval of Amendment No. 1, pursuant to Section
19(b)(2) of the Act.\50\
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\50\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1, including whether Amendment No. 1
is consistent with the Act. Comments may be submitted by any of the
following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File No. SR-ISE-2006-48 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street NE. ,
Washington, DC 20549-1090.
All submissions should refer to Amendment No. 1 to File No. SR-ISE-
2006-48. 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 (https://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. Copies of such
filing will also 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
Amendment No. 1 to File No. SR-SE-2006-48 and should be submitted on or
before October 25, 2006.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\51\ that the proposed rule change (SR-ISE-2006-48) be, and it
hereby is, approved, and Amendment No. 1 is approved on an accelerated
basis.
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\51\ 15 U.S.C. 78s(b)(2).
\52\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\52\
Nancy M. Morris,
Secretary.
[FR Doc. E6-16366 Filed 10-3-06; 8:45 am]
BILLING CODE 8010-01-P
