Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing of Proposed Rule Change To Implement a Pilot Program To Quote and To Trade Certain Options in Pennies, 62024-62026 [E6-17564]
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Federal Register / Vol. 71, No. 203 / Friday, October 20, 2006 / Notices
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proposal to revise the definition of
Theoretical Price 23 to account for the
situation when the Amex disseminates
an erroneous quote that is then reflected
in the quote of a competing exchange.
The Citadel Letter contended that it will
generally be impossible to discern
whether another exchange widened its
quotes as a result of an Amex erroneous
quote. The Citadel Letter noted that
allowing the Amex to determine
whether another Exchange’s quotes
were erroneous and thus remove them
from the calculation of Theoretical Price
would inject uncertainty and
unpredictability into the determination
of obvious error.
In Amendment No. 4, the Exchange
revised the definition of Theoretical
Price by adding quantifiable standards
to better indicate how the Exchange will
determine when a quote is ‘‘erroneous’’
and thus should be disregarded for
purposes of calculating Theoretical
Price. The Commission believes that the
proposed rule change, as amended,
addresses the concerns raised by the
Citadel Letter that pertain to the
proposed rule change.24 Amex’s
proposal to add numerical criteria to
assess when another exchange’s quote is
erroneous should help to ensure that the
Exchange’s obvious error
determinations with respect to
erroneous quotes are objective.
The Commission also finds good
cause to approve Amendment Nos. 4
and 5 to the proposed rule change prior
to the thirtieth day after the amendment
is published for comment in the Federal
Register pursuant to Section 19(b)(2) of
the Act.25 Amendment No. 4 bases the
definition of Theoretical Price on the
midpoint of the NBBO, ensuring that the
Amex’s obvious error rule is consistent
with the Options Intermarket Linkage
Plan, which requires exchanges to avoid
trade-throughs. This revision is also
consistent with recent changes to the
obvious error rule of the Philadelphia
Stock Exchange that were approved by
the Commission.26 Amendment No. 5
simply clarifies that the process for
calculating average quote width set forth
in Amex Rules 936(a)(5) and 936(a)(5)—
ANTE (relating to equity options) also
applies to the calculation of average
quote width for purposes of Amex Rules
936C(a)(5) and 936C(a)(5)—ANTE
(relating to index options). The
Commission believes that accelerated
23 In Amex’s Obvious Error Rules relating to
index options, Theoretical Price is referred to as
Fair Market Value.
24 See Amendment No. 4, supra note 9.
25 15 U.S.C. 78s(b)(2).
26 Securities Exchange Act Release No. 54070
(June 29, 2006), 71 FR 38441 (July 6, 2006) (SR–
Phlx–2005–73).
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15:52 Oct 19, 2006
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approval of Amendment Nos. 4 and 5
would enable investors to benefit from
the changes in the proposed rule change
without further delay. Therefore, for
these reasons, the Commission believes
that good cause exists to accelerate
approval of Amendment Nos. 4 and 5.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning Amendment Nos.
4 and 5, including whether Amendment
Nos. 4 and 5 are 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–Amex–2005–060 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
Station Place, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–Amex–2005–060. 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 Amex. 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–Amex–2005–060 and
should be submitted on or before
November 13, 2006.
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V. Conclusion
For the foregoing reasons, the
Commission finds that the proposed
rule change, as amended, is consistent
with the Act and the rules and
regulations thereunder applicable to a
national securities exchange, and, in
particular, with Section 6(b)(5) of the
Act 27 in that it is designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,28 that the
proposed rule change (SR–Amex–2005–
060) and Amendment Nos. 1, 2 and 3
thereto are approved, and that
Amendment Nos. 4 and 5 thereto are
approved on an accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.29
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6–17562 Filed 10–19–06; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54603; File No. SR–ISE–
2006–62]
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Notice of Filing of Proposed Rule
Change To Implement a Pilot Program
To Quote and To Trade Certain
Options in Pennies
October 16, 2006.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
11, 2006, the International Securities
Exchange, LLC (the ‘‘Exchange’’ or the
‘‘ISE’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been substantially prepared by the
ISE. The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The ISE is proposing to implement a
pilot program to quote and to trade
27 15
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
29 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
28 15
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Federal Register / Vol. 71, No. 203 / Friday, October 20, 2006 / Notices
1. Purpose
The proposed rule change will
implement a pilot program (the ‘‘Pilot’’)
for the quoting and trading of specified
options contracts in $.01 increments. In
a letter dated June 7, 2006, Chairman
Cox of the Commission encouraged the
six options exchanges to commence the
Pilot. ISE proposes the following rule
changes and related actions to
implement the Pilot:
• To amend ISE Rule 710, regarding
trading increments, to specify that the
Exchange: (i) Will participate in the
Pilot; and (ii) will identify the specific
options to be included in the Pilot, as
well as the increments for the quoting
and trading of such options, in circulars
that the Exchange will file with the
Commission as proposed rule changes
and will distribute to its members.
• To issue the proposed regulatory
information circular attached as Exhibit
5 to the proposed rule change,
identifying the initial Pilot options.
These options are the NASDAQ 100
Trust, for which all series will be quoted
and traded in pennies, and 12 other
options, for which series trading at less
than $3.00 will be quoted and traded in
penny increments, and series trading at
$3.00 or more will be quoted and traded
in nickel increments.
• To amend ISE Rule 716, which
currently permits trades in the
Exchange’s Block, Facilitation and
Solicitation Mechanisms to be effected
at ‘‘split prices,’’ which are the mid-
points of the current standard trading
increments. The Exchange proposes that
options trading in penny increments not
be eligible for such split pricing.
• To codify certain ISE ‘‘quote
mitigation’’ actions. In proposing the
Pilot, Chairman Cox noted that the Pilot
‘‘is almost certain to increase demands
on all market participants’ systems’’ and
that ‘‘it is essential that any exchange
proposal also include a workable
strategy for quote mitigation.’’ The
Exchange believes that it currently has
an effective quote mitigation strategy in
place. Specifically:
• API Fees: The ISE has implemented
a fee program that requires market
makers to purchase more APIs as the
market maker generates more quotes,
providing economic incentives on
market makers to limit the number of
quotations they disseminate.4
• Monitoring: The ISE submits that it
actively monitors the quotation activity
of its market makers. When the
Exchange detects that a market maker is
disseminating significantly more quotes
than an average market maker, the
Exchange contacts that market maker
and alerts it to such activity. Often such
monitoring reveals that the market
maker may have internal system issues
or has incorrectly-set system parameters
that were not immediately apparent to
it. The Exchange believes that, even
without uncovering problems, alerting a
market maker to possible excessive
quoting usually leads the market maker
to take steps to reduce the number of its
quotes.
• Holdback Timer: The ISE has the
systemic ability to limit the
dissemination of quotations and other
changes to the ISE best bid and offer
according to prescribed time criteria (a
‘‘holdback timer’’). For example, if there
is a change in the price of a security
underlying an option, multiple market
makers likely will adjust the price or
size of their quotes. Rather than
disseminating each individual change,
the holdback timer permits the
Exchange to wait until all market
makers have adjusted their quotes and
then to disseminate a new quotation.
This helps prevent the ‘‘flickering’’ of
quotations. The ISE proposes to codify
the holdback timer in this rule filing. As
proposed in ISE Rule 804, the ISE will
utilize a holdback timer that delays
quotation updates for no longer than
one second.
• Delisting: The ISE has committed to
the Commission that it will delist
options with average daily volume
3 Exhibit 5 to the proposed rule change contains
a proposed Regulatory Information Circular that
also is part of the text of the proposed rule change.
4 See Securities Exchange Act Release No. 53522
(March 20, 2006), 71 FR 14975 (March 24, 2006)
(SR–ISE–2006–09).
certain options in pennies. The text of
the proposed rule change is available on
the ISE’s Web site at https://
www.iseoptions.com, at the Exchange’s
Office of the Secretary, and at the
Commission’s Public Reference Room.3
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
ISE has prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
jlentini on PROD1PC65 with NOTICES
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
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62025
(‘‘ADV’’) of less than 20 contracts.5
However, it has been the ISE’s policy to
be much more aggressive in delisting
relatively inactive options, thereby
eliminating the quotation traffic
attendant to such listings. Currently, it
is the ISE’s policy to delist options with
ADV of less than 50, even with the
advent of the Exchange’s new ‘‘Second
Market,’’ 6 which provides liquidity for
less-active options.
• To submit certain reports. The
Commission staff has asked the options
exchanges to prepare reports regarding
the first three months’ experience under
the Pilot and to submit such reports by
the end of the fourth month of the Pilot.
The reports will compare quotation and
trading activity in the three months
prior to the Pilot (October 26, 2006
through January 25, 2007), to the first
three months of the Pilot (January 26,
2007 through April 25, 2007). The ISE
will submit the following reports to the
Commission pursuant to this timetable:
Æ Quality of Markets: This report will
focus on quotation spread and size of
quotations, as well as a number of other
factors, including average daily volume.
Æ Capacity: This report will focus on
the number of quotations in the Pilot
options and the effect on the ISE’s
system’s capacity.
Æ Linkage: This report will focus on
trade-throughs, Satisfaction orders the
ISE sends and receives, the number of
Linkage Orders that ‘‘time out’’ without
a response and the flickering of
quotations.
2. Statutory Basis
The Exchange believes that its
proposed rule change is consistent with
Section 6(b) of the Act,7 in general, and
furthers the objectives of Section 6(b)(5)
of the Act,8 in particular, in that the
proposed rule change is designed to
promote just and equitable principles of
trade, 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. In
particular, the proposed rule change
will permit the pilot quoting and trading
of certain options in pennies to help
determine whether such quoting and
trading increments benefit investors.
5 See Securities Exchange Act Release No. 47483
(March 11, 2003), 68 FR 13352 (March 19, 2003)
(SR–ISE–2003–04).
6 See Securities Exchange Act Release No. 54340
(August 21, 2006), 71 FR 51240 (August 29,
2006)(SR–ISE–2006–40).
7 15 U.S.C. 78f(b).
8 15 U.S.C. 78f(b)(5).
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62026
Federal Register / Vol. 71, No. 203 / Friday, October 20, 2006 / Notices
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
Written comments on the proposed
rule change were neither solicited nor
received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission will:
(A) By order approve such proposed
rule change; or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
jlentini on PROD1PC65 with NOTICES
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–2006–62 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–2006–62. 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
VerDate Aug<31>2005
15:52 Oct 19, 2006
Jkt 211001
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–2006–62 and should be
submitted on or before November 13,
2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority. 9
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6–17564 Filed 10–19–06; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54607; File No. SR–NASD–
2005–094]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Order Approving
Proposed Rule Change and
Amendment No. 1 Thereto Relating to
Amendments to the Classification of
Arbitrators Pursuant To Rule 10308 of
the NASD Code of Arbitration
Procedure
October 16, 2006.
I. Introduction
On June 17, 2005, the National
Association of Securities Dealers, Inc.
(‘‘NASD’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend NASD Rule 10308 relating to the
classification of arbitrators as nonpublic or public.3 On August 5, 2005,
9 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 On September 6, 2006, the Commission
approved similar amendments to NYSE Rule 607
1 15
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Frm 00081
Fmt 4703
Sfmt 4703
NASD filed amendment No. 1 to the
proposed rule.4 The proposed rule
change, as amended, was published for
comment in the Federal Register on
August 30, 2005,5 and the Commission
received 65 comments on the proposal.6
(SR–NYSE–2005–43) (the ‘‘NYSE Rule Change’’),
which also governs securities industry and public
arbitrators. The NYSE Rule Change will become
effective on Dec. 13, 2006, which is 90 days after
the Commission’s approval order was published in
the Federal Register. See Exchange Act Release No.
54407 (Sept. 6, 2006), 71 FR 54102 (Sept. 13, 2006).
4 The amendment clarified the rule’s text and
purpose, and revised the effective date of the rule.
NASD will announce the effective date of the
proposed rule change in a Notice to Members to be
published no later than 30 days following
Commission approval. The effective date will be no
later than 60 days following publication of the
Notice to Members announcing Commission
approval.
5 See Exchange Act Release No. 52332 (Aug. 24,
2005), 70 FR 51395 (Aug. 30, 2005) (the ‘‘Notice’’).
6 Richard H. Levenstein, Kramer, Sopko &
Levenstein, P.A., Feb. 1, 2006 (‘‘Levenstein’’); Les
Greenberg, Law Offices of Les Greenberg, Oct. 9
2005 (‘‘Greenberg’’); Bradford D. Kaufman,
Greenberg Traurig, Oct. 7, 2005 (‘‘Kaufman’’);
Jonathan L. Hochman, Schindler Cohen & Hochman
LLP, Sept. 30, 2005 (‘‘Hochman’’); Jonathan W.
Evans, Jonathan W. Evans and Associates, Sept. 21,
2005 (‘‘Evans’’); Scot Bernstein, Sept. 21, 2005
(‘‘Bernstein’’); John W. Barnes, Sept. 21, 2005
(‘‘Barnes’’); L. Jerome Stanley, Sept. 20, 2005
(‘‘Stanley’’); Dale Ledbetter, Ardorno & Yoss, Sept.
20, 2005 (‘‘Ledbetter’’); Randall R. Heiner, Sept. 20,
2005 (‘‘Heiner’’); Sam T. Brannan, Page Perry, LLC,
Sept. 20, 2005 (‘‘Brannan’’); Jason R. Doss, Page
Perry, LLC, Sept. 20, 2005 (‘‘Doss’’); William B.
Langenbacher, Sept. 20, 2005 (‘‘Langenbacher’’);
Steve Parker, Page Perry, LLC, Sept. 20, 2005
(‘‘Parker’’); Jeffrey D. Pederson, Sept. 20, 2005
(‘‘Pederson’’); Martin Seiler, Sept. 20, 2005
(‘‘Seiler’’); Brian Greenman, Sept. 20, 2005
(‘‘Greenman’’); Teresa M. Gillis, Shustak Jalil &
Heller, Sept. 20, 2005 (‘‘Gillis’’); William F. Davis,
Sept. 20, 2005 (‘‘Davis’’); David Harrison, Spivak &
Harrison, Sept. 20, 2005 (‘‘Harrison’’); Susan N.
Perkins, Sept. 20, 2005 (‘‘Perkins’’); Mitchell S.
Ostwald, Law Offices of Mitchell S. Ostwald, Sept.
20, 2005 (‘‘Ostwald’’); Scot D. Bernstein, Law
Offices of Scot D. Bernstein, Sept. 20, 2005
(‘‘Bernstein’’); William F. Galvin, Commonwealth of
Massachusetts, Sept. 20, 2005 (‘‘Galvin’’); William
P. Torngren, Law Offices of William P. Torngren,
Sept. 20, 2005 (‘‘Torngren’’); Charles C. Mihalek
and Steven M. McCauley, Charles C. Mihalek,
P.S.C., Sept. 20, 2005 (‘‘Mihalek’’); Timothy A.
Canning, Sept. 20, 2005 (‘‘Canning’’); Laurance M.
Landsman, Block & Landsman, Sept. 20, 2005
(‘‘Landsman’’); Steven J. Gard, Gard Smiley Bishop
& Dovin LLP, Sept. 20, 2005 (‘‘Gard’’); Scott L.
Silver, Blum & Silver, P.A., Sept. 20, 2005
(‘‘Silver’’); G. Mark Brewer, Brewer Carlson, LLP,
Sept. 20, 2005 (‘‘Brewer’’); John D. Hudson, Sept.
20, 2005 (‘‘Hudson’’); Joel A. Goodman, Kalju
Nekvasil, Steven Krosschell, and Jennifer Newsom,
Goodman & Nekvasil, P.A., Sept. 20, 2005
(‘‘Goodman’’); Jill I. Gross, Barbara Black, and Per
Jebsen, Pace Investor Rights Project, Sept. 20, 2005
(‘‘Gross’’); Royal B. Lea, III, Bingham & Lea, and
Randall A. Pulman, Pulman, Bresnahan & Pullen,
LLP, Sept. 19, 2005 (‘‘Lea’’); Richard P. Ryder,
Securities Arbitration Commentator, Inc., Sept. 19,
2005 (‘‘Ryder’’); Alan C. Friedberg, Pendelton,
Friedberg, Wilson & Hennessey, P.C., Sept. 19, 2005
(‘‘Friedberg’’); Robert K. Savage, Savage Law Firm,
P.A., Sept. 19, 2005 (‘‘Savage’’); Michael Chasen,
Sept. 19, 2005 (‘‘Chasen’’); Adam S. Doner, Sept. 19,
2005 (‘‘Doner’’); Jan Graham, Graham Law Offices,
Sept. 19, 2005 (‘‘Graham’’); Frederick W. Rosenberg,
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20OCN1
]]>Agencies
[Federal Register Volume 71, Number 203 (Friday, October 20, 2006)]
[Notices]
[Pages 62024-62026]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-17564]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54603; File No. SR-ISE-2006-62]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing of Proposed Rule Change To Implement a Pilot
Program To Quote and To Trade Certain Options in Pennies
October 16, 2006.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 11, 2006, the International Securities Exchange, LLC (the
``Exchange'' or the ``ISE'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been substantially
prepared by the ISE. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The ISE is proposing to implement a pilot program to quote and to
trade
[[Page 62025]]
certain options in pennies. The text of the proposed rule change is
available on the ISE's Web site at https://www.iseoptions.com, at the
Exchange's Office of the Secretary, and at the Commission's Public
Reference Room.\3\
---------------------------------------------------------------------------
\3\ Exhibit 5 to the proposed rule change contains a proposed
Regulatory Information Circular that also is part of the text of the
proposed rule change.
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The ISE has prepared summaries, set forth in Sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The proposed rule change will implement a pilot program (the
``Pilot'') for the quoting and trading of specified options contracts
in $.01 increments. In a letter dated June 7, 2006, Chairman Cox of the
Commission encouraged the six options exchanges to commence the Pilot.
ISE proposes the following rule changes and related actions to
implement the Pilot:
To amend ISE Rule 710, regarding trading increments, to
specify that the Exchange: (i) Will participate in the Pilot; and (ii)
will identify the specific options to be included in the Pilot, as well
as the increments for the quoting and trading of such options, in
circulars that the Exchange will file with the Commission as proposed
rule changes and will distribute to its members.
To issue the proposed regulatory information circular
attached as Exhibit 5 to the proposed rule change, identifying the
initial Pilot options. These options are the NASDAQ 100 Trust, for
which all series will be quoted and traded in pennies, and 12 other
options, for which series trading at less than $3.00 will be quoted and
traded in penny increments, and series trading at $3.00 or more will be
quoted and traded in nickel increments.
To amend ISE Rule 716, which currently permits trades in
the Exchange's Block, Facilitation and Solicitation Mechanisms to be
effected at ``split prices,'' which are the mid-points of the current
standard trading increments. The Exchange proposes that options trading
in penny increments not be eligible for such split pricing.
To codify certain ISE ``quote mitigation'' actions. In
proposing the Pilot, Chairman Cox noted that the Pilot ``is almost
certain to increase demands on all market participants' systems'' and
that ``it is essential that any exchange proposal also include a
workable strategy for quote mitigation.'' The Exchange believes that it
currently has an effective quote mitigation strategy in place.
Specifically:
API Fees: The ISE has implemented a fee program that
requires market makers to purchase more APIs as the market maker
generates more quotes, providing economic incentives on market makers
to limit the number of quotations they disseminate.\4\
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\4\ See Securities Exchange Act Release No. 53522 (March 20,
2006), 71 FR 14975 (March 24, 2006) (SR-ISE-2006-09).
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Monitoring: The ISE submits that it actively monitors the
quotation activity of its market makers. When the Exchange detects that
a market maker is disseminating significantly more quotes than an
average market maker, the Exchange contacts that market maker and
alerts it to such activity. Often such monitoring reveals that the
market maker may have internal system issues or has incorrectly-set
system parameters that were not immediately apparent to it. The
Exchange believes that, even without uncovering problems, alerting a
market maker to possible excessive quoting usually leads the market
maker to take steps to reduce the number of its quotes.
Holdback Timer: The ISE has the systemic ability to limit
the dissemination of quotations and other changes to the ISE best bid
and offer according to prescribed time criteria (a ``holdback timer'').
For example, if there is a change in the price of a security underlying
an option, multiple market makers likely will adjust the price or size
of their quotes. Rather than disseminating each individual change, the
holdback timer permits the Exchange to wait until all market makers
have adjusted their quotes and then to disseminate a new quotation.
This helps prevent the ``flickering'' of quotations. The ISE proposes
to codify the holdback timer in this rule filing. As proposed in ISE
Rule 804, the ISE will utilize a holdback timer that delays quotation
updates for no longer than one second.
Delisting: The ISE has committed to the Commission that it
will delist options with average daily volume (``ADV'') of less than 20
contracts.\5\ However, it has been the ISE's policy to be much more
aggressive in delisting relatively inactive options, thereby
eliminating the quotation traffic attendant to such listings.
Currently, it is the ISE's policy to delist options with ADV of less
than 50, even with the advent of the Exchange's new ``Second Market,''
\6\ which provides liquidity for less-active options.
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\5\ See Securities Exchange Act Release No. 47483 (March 11,
2003), 68 FR 13352 (March 19, 2003) (SR-ISE-2003-04).
\6\ See Securities Exchange Act Release No. 54340 (August 21,
2006), 71 FR 51240 (August 29, 2006)(SR-ISE-2006-40).
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To submit certain reports. The Commission staff has asked
the options exchanges to prepare reports regarding the first three
months' experience under the Pilot and to submit such reports by the
end of the fourth month of the Pilot. The reports will compare
quotation and trading activity in the three months prior to the Pilot
(October 26, 2006 through January 25, 2007), to the first three months
of the Pilot (January 26, 2007 through April 25, 2007). The ISE will
submit the following reports to the Commission pursuant to this
timetable:
[cir] Quality of Markets: This report will focus on quotation
spread and size of quotations, as well as a number of other factors,
including average daily volume.
[cir] Capacity: This report will focus on the number of quotations
in the Pilot options and the effect on the ISE's system's capacity.
[cir] Linkage: This report will focus on trade-throughs,
Satisfaction orders the ISE sends and receives, the number of Linkage
Orders that ``time out'' without a response and the flickering of
quotations.
2. Statutory Basis
The Exchange believes that its proposed rule change is consistent
with Section 6(b) of the Act,\7\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\8\ in particular, in that the
proposed rule change is designed to promote just and equitable
principles of trade, 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. In particular,
the proposed rule change will permit the pilot quoting and trading of
certain options in pennies to help determine whether such quoting and
trading increments benefit investors.
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
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[[Page 62026]]
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
(A) By order approve such proposed rule change; or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. 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-2006-62 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-2006-62. 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-2006-62 and should be submitted on or before
November 13, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority. \9\
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\9\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-17564 Filed 10-19-06; 8:45 am]
BILLING CODE 8011-01-P
