Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing of Proposed Rule Change To Adopt Rules To Implement the Options Order Protection and Locked/Crossed Market Plan, 27224-27228 [E9-13205]

Download as PDF 27224 Federal Register / Vol. 74, No. 108 / Monday, June 8, 2009 / Notices be submitted by any of the following methods: SECURITIES AND EXCHANGE COMMISSION 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–BATS–2009–018 on the subject line. [Release No. 34–60014; File No. SR–ISE– 2009–27] Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing of Proposed Rule Change To Adopt Rules To Implement the Options Order Protection and Locked/Crossed Market Plan June 1, 2009. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. cprice-sewell on PRODPC61 with NOTICES All submissions should refer to File No. SR–BATS–2009–018. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. 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 File No. SR–BATS–2009–018 and should be submitted on or before June 29, 2009. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.13 Florence E. Harmon, Deputy Secretary. [FR Doc. E9–13208 Filed 6–5–09; 8:45 am] Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 11, 2009, the International Securities Exchange, LLC (‘‘ISE’’ or ‘‘Exchange’’) 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 prepared by the Exchange. 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 proposes to adopt rules to implement the Options Order Protection and Locked/Crossed Market Plan (the ‘‘Plan’’). The text of the proposed rule change is available on the ISE’s Web site (https://www.ise.com), at the principal office of the ISE, and at the Commission’s Public Reference Room. 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 self-regulatory organization 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 those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to adopt rules to implement the Plan. These rules will replace current Chapter 19 of the ISE’s BILLING CODE 8010–01–P 1 15 13 17 CFR 200.30–3(a)(12). VerDate Nov<24>2008 15:15 Jun 05, 2009 2 17 Jkt 217001 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00137 Fmt 4703 Sfmt 4703 rules in their entirety. The proposed rules also will amend various other rules to accommodate the Plan. Background to the Plan and the Implementing Rules The ISE filed the current version of the Plan on November 7, 2008.3 The Plan would replace the current Plan for the Purpose of Creating and Operating an Intermarket Option Linkage (‘‘Old Plan’’). The Old Plan requires its participant exchanges to operate a stand-alone system or ‘‘Linkage’’ for sending order-flow between exchanges to limit trade-throughs. The Options Clearing Corporation (‘‘OCC’’) operates the Linkage system. The Linkage rules provide for unique types of Linkage orders, with a complicated set of requirements as to who may send such orders and under what conditions. While the Linkage largely has operated satisfactorily, it is under significant strain. When the Commission approved the Linkage Plan in 2000, average daily volume (‘‘ADV’’) in the options market was approximately 2.6 million contracts across all exchanges. Now the ADV has increased to more than 10 million contracts, putting added strain on the ability of market makers to comply with the complex Linkage rules. At the same time, the options markets have been moving towards quoting in pennies, and are quoting in pennies options representing over half the total industry volume. This greatly increases the number of price changes in an option, giving rise to greater chances of tradethroughs and missing markets as market makers send Linkage orders and have to wait for a response. Experience in the equities markets shows that there is a more efficient way to provide price protection in options. When first implemented, the Linkage represented a vast improvement over the then-current equities priceprotection system, which depended on the operation of the Intermarket Trading System (‘‘ITS’’). The plan governing ITS imposed long waiting times for filling ITS commitments and a cumbersome method for satisfying trade-throughs. Learning from the shortcomings of ITS, the options Linkage has shorter waiting periods and more efficient trade-through protections. The equity price-protection mechanisms have now leapfrogged the options Linkage. By adopting Regulation NMS in 2005 the Commission 3 The November 7th filing was Amendment No. 3 to the Plan. The ISE initially filed the Plan on September 12, 2007, filed Amendment No. 1 on December 10, 2007, and filed Amendment No. 2 on April 16, 2008. E:\FR\FM\08JNN1.SGM 08JNN1 Federal Register / Vol. 74, No. 108 / Monday, June 8, 2009 / Notices effectively terminated ITS, replacing it with a rules-based price-protection system.4 The key to Regulation NMS’s price-protection provisions is the Intermarket Sweep Order, or ISO. Each equity exchange must adopt rules ‘‘reasonably designed to prevent tradethroughs.’’ 5 Exempted from tradethrough liability is an ISO, which is an order a member sends to an exchange displaying a price inferior to the national best bid and offer (‘‘NBBO’’), while simultaneously sending orders to trade against the full size of any other exchange that is displaying the NBBO.6 The Regulation NMS rules-based price-protection system is working well. It requires neither a central linkage mechanism nor a complex set of operating rules. It also has eliminated the need for achieving unanimity to change even the most minor aspects of a linkage mechanism. A simple prohibition against most trade-throughs, coupled with the ISO mechanism, has given the equities markets a straightforward system to provide customers with price protection in a fast-moving, high-volume market that is quoted in pennies. The ISE and the other options exchange participants in the Plan intend for the Plan, and the implementing rules, to bring the efficiencies of Regulation NMS to the options market. cprice-sewell on PRODPC61 with NOTICES Operation of the Plan The Plan effectively would apply the Regulation NMS price-protection provisions to the options markets. Similar to Regulation NMS, the Plan would require participants to adopt rules ‘‘reasonably designed to prevent Trade-Throughs,’’ while exempting ISOs from that prohibition.7 The definition of an ISO is essentially the same as under Regulation NMS,8 and there are a number of additional exceptions to the trade-through prohibition. Like Regulation NMS,9 the Plan requires participating exchanges to take reasonable steps to establish that ISOs meet the requirements of the Plan. With respect to locked and crossed markets, similar to Regulation NMS, the Plan requires its participants to adopt, maintain and enforce rules requiring members: To avoid displaying locked and crossed markets; to reconcile such markets; and to prohibit members from engaging in a pattern or practice of displaying locked and crossed 4 Release No. 34–51808 (June 9, 2005), 70 FR 37496 (June 29, 2005). 5 Regulation NMS Rule 611(a). 6 Regulation NMS Rule 600(b)(30). 7 Sections 5(a)(i) and 5(b)(iv) of the Plan. 8 Section 2(9) of the Plan. 9 Regulation NMS Rule 611(c) and Section 5(c) of the Plan. VerDate Nov<24>2008 15:15 Jun 05, 2009 Jkt 217001 markets.10 With respect to locked markets, the Plan differs from Regulation NMS in that it specifically permits exceptions to the locked market prohibitions ‘‘as contained in the rules of a Participant approved by the Commission.’’ 11 Description of the Implementing Rules This proposed rule change would delete the ISE’s current Linkage rules in Chapter 19 of the ISE’s rule book and replace those rules with a new Chapter 19 entitled ‘‘Order Protection; Locked and Crossed Markets.’’ New Chapter 19 contains the following rules: Rule 1900—Definitions This proposed rule incorporates all the operative definitions from the Plan into the ISE’s rulebook. With one exception, the parties to the Plan derived all such definitions either from the Old Plan 12 or Regulation NMS.13 The one exception is the definition of ‘‘complex trade’’ in Rule 1900(d). A ‘‘complex trade’’ is exempt from tradethrough liability. The exemption in the Old Plan simply refers to complex trades ‘‘as that term may be defined by the Operating Committee from time to time.’’ Based on that provision, the ISE adopted current Rule 1900(3), which is substantially identical among all the options exchanges. We propose to carry that definition into new Chapter 19 unchanged. Rule 1901—Order Protection Paragraph (a) of Rule 1901 provides that, subject to specified exceptions, ISE Members shall not effect trade-throughs. Paragraph (b) provides for the following trade-through exceptions: • System Issues: Rule 1901(b)(1) implements Section 5(b)(i) of the Plan by establishing an exception for tradethroughs due to system-failures. This is akin to the exception in Regulation NMS for equity securities and permits trading through an Eligible Exchange that is experiencing system problems.14 The ISE is proposing ‘‘self-help’’ rules similar to its equity Rule 2107(c)(1), adopted pursuant to Regulation NMS. • Trading Rotations: Rule 1901(b)(2) implements Section 5(b)(ii) of the Plan and carries forward the current trade10 Section 6 of the Plan. 11 Id. 12 See, e.g., the definitions of ‘‘Broker-Dealer’’ in Rule 1900(c), NBBO in Rule 1900(j), Non-Firm in Rule 1900(k), OPRA Plan in Rule 1900(l), and Participant in Rule 1900(m). 13 See, e.g., the definitions of ‘‘Best Bid’’/‘‘Best Offer’’ in Rule 1900(a), ‘‘Bid’’/‘‘Offer’’ in Rule 1900(b), ‘‘Intermarket Sweep Order’’ (‘‘ISO’’) in Rule 1900(h), and ‘‘Quotation’’ in Rule 1900(p). 14 See Regulation NMS Rule 611(b)(1). PO 00000 Frm 00138 Fmt 4703 Sfmt 4703 27225 through exception in the Old Plan 15 and current Rule 1902(b)(5) related to the opening of markets. It is the options equivalent to the single price opening exception in Regulation NMS for equity securities.16 We use a trading rotation to open an option for trading, or to reopen an option after a trading halt. The rotation is effectively a single price auction to price the option and there are no practical means to include prices on other exchanges in that auction. • Crossed Markets: Rule 1901(b)(3) implements Section 5(b)(iii) of the Plan and is the functional equivalent to ISE Rule 2107(c)(3) for equity securities. If the best intermarket bid is higher than the best intermarket offer, it indicates that there is some form of market dislocation or inaccurate quoting. Permitting transactions to be executed without regard to trade-throughs in a Crossed Market will allow the market to quickly return to equilibrium. • Intermarket Sweep Orders (‘‘ISOs’’): Rule 1901(b)(4) is the ISO exemption and implements Sections 5(b)(iv) and (v) of the Plan. Section 5(b)(iv) of the Plan permits a Participant to execute orders it receives from other Participants or members that are marked as ISO even when it is not at the NBBO.17 Section 5(b)(v) of the Plan allows a Participant to execute inbound orders when it is not at the NBBO, provided it simultaneously ‘‘sweeps’’ all better-priced interest displayed by Eligible Exchanges. These provisions are the options equivalents of the corresponding Regulation NMS equity rules.18 • Quote Flickering: Rule 1901(b)(5) implements Section 5(b)(vi) of the Plan and corresponds to the flickering quote exception in Regulation NMS for equity securities.19 Options quotations change as rapidly, if not more rapidly, than equity quotations. Indeed, they track the price of the underlying security and thus change when the price of the 15 See Old Plan Section 8(c)(iii)(E). Regulation NMS Rule 611(b)(3) under the Securities Exchange Act of 1934, as amended (‘‘Act’’). 17 Supplementary Material .01 to Rule 1901 specifies that all ISOs routed to the ISE from other exchanges on behalf of public customers will be represented as Priority Customer Orders. Priority Customer Orders are executed prior to Professional Orders on the ISE. ISE Rule 100(37A) defines Priority Customer Orders as orders for persons who do not place more than 390 orders in listed options per day on average during a calendar month. The other options exchanges have not adopted this distinction between Priority Customer and Professional Orders. Thus, we do not believe it is practical or appropriate to require ISOs sent to us from other exchanges, representing customer orders from such exchanges, to be marked as Professional Orders. 18 See Regulation NMS Rules 611(b)(5) and (6). 19 See Regulation NMS Rule 611(b)(8). 16 See E:\FR\FM\08JNN1.SGM 08JNN1 cprice-sewell on PRODPC61 with NOTICES 27226 Federal Register / Vol. 74, No. 108 / Monday, June 8, 2009 / Notices underlying security changes. This exception provides a form of ‘‘safe harbor’’ to market participants to allow them to trade through prices that have changed within a second of the transaction, causing a nominal tradethrough. • Non-Firm Quotes: Rule 1901(b)(6) implements Section 5(b)(vii) of the Plan and carries forward the current non-firm quote trade-through exception in the Old Plan.20 By definition, an exchange’s quotations may not be firm for automatic execution during this trading state and thus should not be protected from trade-throughs. In effect, these quotations are akin to ‘‘manual quotations’’ under Regulation NMS. • Complex Trades: Rule 1901(b)(7) implements Section 5(b)(viii) of the Plan and carries forward the current complex trade exception in the Old Plan.21 Complex trades consist of multiple transactions (‘‘legs’’) effected at a net price, and it is not practical to price each leg at a price that does not constitute a trade-through. This exemption will apply to executions in the Exchange’s Complex Order Mechanism.22 • Customer Stopped Orders: Rule 1901(b)(8) implements Section 5(b)(ix) of the Plan and corresponds to the customer stopped order exception in Regulation NMS for equity securities.23 It permits broker-dealers to execute large orders over time at a price agreed upon by a customer, even though the price of the option may change before the order is executed in its entirety. • Stopped Orders and Price Improvement: Rule 1901(b)(9) implements Section 5(b)(x) of the Plan and would apply if an order is stopped at price that did not constitute a tradethrough at the time of the stop. This exception will facilitate the use of the ISE’s ‘‘Price Improvement Mechanism,’’ by which members could seek price improvement for that order, even if the market moves in the interim, and the transaction ultimately is effected at a price that would trade through the then currently-displayed market.24 • Benchmark Trades: Rule 1901(b)(10) implements Section 5(b)(xi) of the Plan and would cover trades executed at a price not tied to the price of an option at the time of execution, and for which the material terms were not reasonably determinable at the time of the commitment to make the trade. An example would be a volume20 See Old Plan Section 8(c)(iii)(C). 21 See Old Plan Section 8(c)(iii)(G). 22 See ISE Rule 722. 23 See Regulation NMS Rule 611(b)(9). 24 See ISE Rule 723. VerDate Nov<24>2008 15:15 Jun 05, 2009 Jkt 217001 weighted average price trade, or ‘‘VWAP.’’ This corresponds to a tradethrough exemption in Regulation NMS for equity trades.25 The ISE does not currently permit these types of options trades, and any transaction-type relying on this exemption would require the ISE to adopt implementing rules, subject to Commission review and approval. Rule 1902—Locked and Crossed Markets Proposed Rule 1902 implements Section 6 of the Plan, which requires Plan participants to establish, maintain and enforce rules that: require their members reasonably to avoid displaying locked and crossed markets; are reasonably deigned to assure reconciliation of locked and crossed markets; and prohibit their members from engaging in a pattern or practice of displaying locked and crossed markets. Section 6 of the Plan further allows an exchange to provide exceptions to these limitations as ‘‘contained in the rules of a Participant approved by the Commission.’’ Proposed Rule 1902(a) contains the general prohibition that ISE members shall reasonably avoid displaying, and shall not engage in a pattern or practice of displaying, any quotations that lock or cross the best bid or offer of another exchange. We propose four exceptions to this general prohibition.26 The first exception would apply when we are experiencing system issues, and is similar to the systems issues exception to the trade-through rule. The second exception applies when there is a crossed market, and also is similar to the corresponding trade-through exception. Also similar to the tradethrough exception, the third exception applies when a member simultaneously routes an ISO to execute against the full displayed size of any locked or crossed protected bid or offer. The fourth proposed exception applies to locked markets in the following circumstances: • Neither the locking or locked quote represents, in whole or in part, a customer order; or • A customer enters a bid or offer that locks a non-customer quotation on another market, and the customer, on a case-by-case basis, authorizes the locking of the other market’s quotation.27 This fourth exemption recognizes an important distinction between the equities and options markets. Options Regulation NMS Rule 611(b)(7). e-mail from Michael Simon, General Counsel, ISE, to David Liu, Assistant Director, Division of Trading and Markets, Commission, dated May 29, 2009. 27 See id. market makers compete for order flow by disseminating quotations in multiple series with respect to each underlying security, distributing liquidity over a much greater universe of products than in the equity markets. As a result, the options markets are more reliant on market maker quotations to provide liquidity, with fewer customer orders in each series than in each underlying security, where liquidity is concentrated in one product.28 With market makers on multiple exchanges constantly updating their quotations in all these series based on mathematical formulae there is a greater likelihood of market maker quotations locking. We believe that in most cases locked market maker quotations are good for the investing public. Effectively locked markets provide a ‘‘zero spread,’’ allowing market participants to buy and sell an option at the same price. On the ISE these quotations are firm, and are fully executable on an automated basis. We recognize that locked markets are more complicated where one or both of the locking quotations represents a customer order. Where there is contraside market interest willing to trade with a customer, the customer order should be filled. Thus, we would not exempt from the locked market prohibition situations involving customer orders unless the customer entering the locking order specifically authorizes the lock on a case-by-case basis.29 As proposed, the ISE will not permit a member to lock another exchange’s quotation unless the ISE can establish that the quotation on the other exchange is not for the account of a customer. The options exchanges currently are working on a method to so identify customer quotations through the Options Price Reporting Authority. Absent the ability to identify a customer quote as part of an exchange’s BBO, the ISE will assume that the quote represents, in whole or in part, a customer order. That is, the ISE will not permit its members to avail themselves of this exemption unless another exchange has informed the ISE that it will designate all customer orders as such in OPRA, and such exchange’s quotation does not contain such designation. If an exchange opts not to identify its customer quotations, the ISE will treat all of that exchange’s quotations as customer orders and, absent application of another exception, will not permit locks of such quotations. 25 See 26 See PO 00000 Frm 00139 Fmt 4703 Sfmt 4703 28 See id. can envision a customer authorizing a lock when the fees associating with trading against the locked market make the execution price uneconomical to the customer. 29 We E:\FR\FM\08JNN1.SGM 08JNN1 Federal Register / Vol. 74, No. 108 / Monday, June 8, 2009 / Notices cprice-sewell on PRODPC61 with NOTICES Temporary Rule 1903—Phase Out of Intermarket Linkage Rules When the Plan and implementing rules become operative it is possible that not all the options exchanges will be functionally able to operate pursuant to the Plan. Thus, in order to ensure there is full intermarket trade-through protection during this interim period, we propose to retain certain minimum trade-through rules governing the operation of the Linkage until all the options exchanges are operating pursuant to the Plan. When that occurs we will file a rule change with the Commission to delete Temporary Rule 1903. Temporary Rule 1903 provides that the ISE will continue to accept Principal Acting as Agent (‘‘P/A’’) and Principal Orders from options exchanges that use such orders to address trade-throughs. The handling of these orders will be subject to rules that parallel the operation of the Linkage under the Old Plan. Amendment of Other ISE Rules To Accommodate the Plan We propose to amend six ISE rules outside of Chapter 19: • First, Rule 701, entitled ‘‘Trading Rotations,’’ describes the initiation of trading in an options series. That rule currently permits an ISE Primary Market Maker (‘‘PMM’’) to send various Linkage orders prior to the opening of trading on the Exchange. With the termination of the Linkage such provision no longer will be necessary and we thus propose to delete this provision. • Second, Rule 714 governs when we provide automatic execution for orders we receive. We propose to amend that rule to reflect the terminology in the Plan and the implementing rules. We propose no substantive changes to that rule. • Third, we propose to amend the Supplementary Material Rule 716, entitled ‘‘Block Trades,’’ to delete Supplementary Material .07 which implements the block exception in the Old Plan, which no longer will be in effect. • Fourth, Rule 803(c) and the Supplementary Material govern the obligations of PMMs, including the PMMs’ obligation to address customer orders when there is a better market displayed on another exchange. We propose to amend this rule to specify that ISE will discharge its obligations under the Plan to ‘‘establish, maintain and enforce written policies and procedures * * * reasonably designed to prevent Trade-Throughs’’ 30 by 30 Section 5(a) of the Plan. VerDate Nov<24>2008 15:15 Jun 05, 2009 Jkt 217001 requiring PMMs to address customer orders when there is a better market away. This is similar to PMMs’ obligations under the Old Plan. However, PMMs would meet this obligation via the use of ISOs rather than Linkage orders.31 ISE will conduct surveillance of PMMs’ trading activities to ensure that they comply with this obligation. PMMs will comply with their obligation (i) by executing a customer order at a price that at least matches the best price displayed or (ii) by sending ISO(s) as agent for the customer to any other exchange(s) displaying a superior price and, with respect to any remaining portion of the customer order, either (a) releasing the remaining portion of the order for execution in the Exchange’s auction market or (b) executing the remaining portion of the order at a price superior to the best price in the Exchange’s auction market. The amended rule further specifies that: (i) In addressing customer orders that are not automatically executed because there is a displayed bid or offer on another exchange trading the same options contract that is better than the best bid or offer on the Exchange, the Exchange will act in compliance with its rules and with the provisions of the Act and the rules thereunder, including, but not limited to, the requirements in Section (6)(b)(4) and (5) of the Act that the rules of national securities exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers; and (ii) all orders entered on the Exchange and routed to another exchange via an ISO pursuant to the Rule, and that result in an execution, are binding. • Fifth, Rule 810 governs ‘‘informational barriers’’ that ISE market makers must maintain within their firms. These barriers restrict the flow of information between personnel handling market making activities, on the one hand, and personnel performing other functions, including the acting as agency [sic] for customer orders, on the other hand. Under the Old Plan, when there is a better market on another exchange, a PMM can send a 31 The routing of Public Customer orders to another exchange when the ISE is not at the best price is, in effect, voluntary. A customer can avoid such route-outs by entering an Immediate or Cancel (‘‘IOC,’’ see ISE Rule 715(b)(3)) or Fill or Kill (‘‘FOK,’’ see ISE Rule 715(b)(2)) order. If the Exchange cannot immediately execute such orders, it will cancel all of the order (FOK orders) or the unexecuted portion of the order (IOC orders) without routing such orders to another exchange. PO 00000 Frm 00140 Fmt 4703 Sfmt 4703 27227 P/A Order to that exchange in an attempt to access that better price for the customer. This is consistent with Rule 810 because a P/A Order is a principal order, and a firm is permitted to send such an order from the market-making side of the information barrier. Under the Plan and these proposed rules, PMMs will send ISOs representing the underlying customer orders, rather than P/A Orders, when there is a better market away. Because these ISOs technically will be orders on behalf of a Public Customer current Rule 810 would prohibit a PMM from sending such an order. We propose a narrow carve-out to Rule 810 that would permit a PMM to send ISOs solely to comply with its obligation under Rule 803 to address Public Customer orders when there is a better market on another exchange. PMMs will act as agent in these circumstances, and will send the ISOs from the market making side of the information barrier. In all other respects PMMs will be subject to Rule 810. • Sixth, Rule 811(b) governs Directed Orders and currently states that ISE market makers may act as agent for customer orders only when handling directed orders. We propose to amend that rule to reflect the ability of Primary Market Makers to act as agent when sending ISOs under Rule 803. 2. Statutory Basis The basis under the Act for this proposed rule change is found in Section 6(b)(5),32 in that the proposed rule change is designed to promote just and equitable principles of trade, remove impediments to and perfect the mechanisms of a free and open market and a national market system and, in general, to protect investors and the public interest. In particular, the Exchange believes that adopting rules that implement the Plan will facilitate the trading of options in a national market system by establishing more efficient protection against tradethroughs and locked and crossed markets. B. Self-Regulatory Organization’s Statement on Burden on Competition The proposed rule change does not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others The Exchange has not solicited, and does not intend to solicit, comments on 32 15 E:\FR\FM\08JNN1.SGM U.S.C. 78f(b)(5). 08JNN1 27228 Federal Register / Vol. 74, No. 108 / Monday, June 8, 2009 / Notices this proposed rule change. The Exchange has not received any unsolicited written comments from members or other interested parties. 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 the 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: cprice-sewell on PRODPC61 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–2009–27 on the subject line. the Commission’s Public Reference Room, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will 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 File Number SR–ISE– 2009–27 and should be submitted on or before June 29, 2009. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.33 Florence E. Harmon, Deputy Secretary. [FR Doc. E9–13205 Filed 6–5–09; 8:45 am] BILLING CODE 8010–01–P DEPARTMENT OF STATE [Public Notice 6655] 30-Day Notice of Proposed Information Collection: DS–5506, Local American Citizen Skills/Resources Survey, New—OMB No. 1405–XXXX ACTION: Notice of request for public comment and submission to OMB of proposed collection of information. SUMMARY: The Department of State has submitted the following information collection request to the Office of Management and Budget (OMB) for Paper Comments approval in accordance with the • Send paper comments in triplicate Paperwork Reduction Act of 1995. to Elizabeth M. Murphy, Secretary, • Title of Information Collection: Securities and Exchange Commission, Local American Citizen Skills/ Station Place, 100 F Street, NE., Resources Survey. Washington, DC 20549–1090. • OMB Control Number: New—OMB All submissions should refer to File No. 1405–XXXX. Number SR–ISE–2009–27. This file • Type of Request: New Collection. number should be included on the • Originating Office: Bureau of subject line if e-mail is used. To help the Consular Affairs, Overseas Citizens Commission process and review your Services (CA/OCS). comments more efficiently, please use • Form Number: DS–5506. • Respondents: United States only one method. The Commission will post all comments on the Commission’s Citizens. • Estimated Number of Respondents: Internet Web site (https://www.sec.gov/ 2,000. rules/sro.shtml). Copies of the • Estimated Number of Responses: submission, all subsequent 2,000. amendments, all written statements • Average Hours per Response: 15 with respect to the proposed rule minutes. change that are filed with the • Total Estimated Burden: 500 hours. Commission, and all written • Frequency: On Occasion. communications relating to the • Obligation to Respond: Voluntary. proposed rule change between the Commission and any person, other than DATE(S): Submit comments to the Office those that may be withheld from the of Management and Budget (OMB) for public in accordance with the up to 30 days from June 8, 2009. provisions of 5 U.S.C. 552, will be 33 17 CFR 200.30–3(a)(12). available for inspection and copying in VerDate Nov<24>2008 15:15 Jun 05, 2009 Jkt 217001 PO 00000 Frm 00141 Fmt 4703 Sfmt 4703 ADDRESSES: Direct comments and questions to Katherine Astrich, the Department of State Desk Officer in the Office of Information and Regulatory Affairs at the Office of Management and Budget (OMB), who may be reached at 202–395–4718. You may submit comments by any of the following methods: • E-mail: kastrich@omb.eop.gov. You must include the DS form number, information collection title, and OMB control number in the subject line of your message. • Mail (paper, disk, or CD–ROM submissions): Office of Information and Regulatory Affairs, Office of Management and Budget, 725 17th Street, NW., Washington, DC 20503. • Fax: 202–395–5806. FOR FURTHER INFORMATION CONTACT: You may obtain copies of the proposed information collection and supporting documents from Derek A. Rivers, Bureau of Consular Affairs, Overseas Citizens Services (CA/OCS/PRI), U.S. Department of State, SA–29, 4th Floor, Washington, DC 20520, who may be reached on (202) 736–9082 or ASKPRI@state.gov. We are soliciting public comments to permit the Department to: • Evaluate whether the proposed information collection is necessary for the proper performance of our functions. • Evaluate the accuracy of our estimate of the burden of the proposed collection, including the validity of the methodology and assumptions used. • Enhance the quality, utility, and clarity of the information to be collected. • Minimize the reporting burden on those who are to respond. Abstract of proposed collection: The Local American Citizen Skills/ Resources Survey is a systematic method of gathering information about skills and resources from U.S. citizens that will assist in improving the wellbeing of other U.S. citizens affected or potentially affected by a crisis. Methodology: The information is collected in person, by fax, or via mail. The Bureau of Consular Affairs is currently exploring options to make this information collection available electronically. SUPPLEMENTARY INFORMATION: Dated: May 5, 2009. Mary Ellen Hickey, Managing Director, Bureau of Consular Affairs, Department of State. [FR Doc. E9–13334 Filed 6–5–09; 8:45 am] BILLING CODE 4710–06–P E:\FR\FM\08JNN1.SGM 08JNN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 74, Number 108 (Monday, June 8, 2009)]
[Notices]
[Pages 27224-27228]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-13205]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60014; File No. SR-ISE-2009-27]

Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing of Proposed Rule Change To Adopt Rules To
Implement the Options Order Protection and Locked/Crossed Market Plan

June 1, 2009.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on May 11, 2009, the International Securities Exchange, LLC
(``ISE'' or ``Exchange'') 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 prepared by the
Exchange. 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 proposes to adopt rules to implement the Options Order
Protection and Locked/Crossed Market Plan (the ``Plan''). The text of
the proposed rule change is available on the ISE's Web site (https://www.ise.com), at the principal office of the ISE, and at the
Commission's Public Reference Room.

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 self-regulatory organization
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 those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
The Exchange proposes to adopt rules to implement the Plan. These
rules will replace current Chapter 19 of the ISE's rules in their
entirety. The proposed rules also will amend various other rules to
accommodate the Plan.
Background to the Plan and the Implementing Rules
The ISE filed the current version of the Plan on November 7,
2008.\3\ The Plan would replace the current Plan for the Purpose of
Creating and Operating an Intermarket Option Linkage (``Old Plan'').
The Old Plan requires its participant exchanges to operate a stand-
alone system or ``Linkage'' for sending order-flow between exchanges to
limit trade-throughs. The Options Clearing Corporation (``OCC'')
operates the Linkage system. The Linkage rules provide for unique types
of Linkage orders, with a complicated set of requirements as to who may
send such orders and under what conditions.
---------------------------------------------------------------------------

\3\ The November 7th filing was Amendment No. 3 to the Plan. The
ISE initially filed the Plan on September 12, 2007, filed Amendment
No. 1 on December 10, 2007, and filed Amendment No. 2 on April 16,
2008.
---------------------------------------------------------------------------

While the Linkage largely has operated satisfactorily, it is under
significant strain. When the Commission approved the Linkage Plan in
2000, average daily volume (``ADV'') in the options market was
approximately 2.6 million contracts across all exchanges. Now the ADV
has increased to more than 10 million contracts, putting added strain
on the ability of market makers to comply with the complex Linkage
rules. At the same time, the options markets have been moving towards
quoting in pennies, and are quoting in pennies options representing
over half the total industry volume. This greatly increases the number
of price changes in an option, giving rise to greater chances of trade-
throughs and missing markets as market makers send Linkage orders and
have to wait for a response.
Experience in the equities markets shows that there is a more
efficient way to provide price protection in options. When first
implemented, the Linkage represented a vast improvement over the then-
current equities price-protection system, which depended on the
operation of the Intermarket Trading System (``ITS''). The plan
governing ITS imposed long waiting times for filling ITS commitments
and a cumbersome method for satisfying trade-throughs. Learning from
the shortcomings of ITS, the options Linkage has shorter waiting
periods and more efficient trade-through protections.
The equity price-protection mechanisms have now leapfrogged the
options Linkage. By adopting Regulation NMS in 2005 the Commission

[[Page 27225]]

effectively terminated ITS, replacing it with a rules-based price-
protection system.\4\ The key to Regulation NMS's price-protection
provisions is the Intermarket Sweep Order, or ISO. Each equity exchange
must adopt rules ``reasonably designed to prevent trade-throughs.'' \5\
Exempted from trade-through liability is an ISO, which is an order a
member sends to an exchange displaying a price inferior to the national
best bid and offer (``NBBO''), while simultaneously sending orders to
trade against the full size of any other exchange that is displaying
the NBBO.\6\
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\4\ Release No. 34-51808 (June 9, 2005), 70 FR 37496 (June 29,
2005).
\5\ Regulation NMS Rule 611(a).
\6\ Regulation NMS Rule 600(b)(30).
---------------------------------------------------------------------------

The Regulation NMS rules-based price-protection system is working
well. It requires neither a central linkage mechanism nor a complex set
of operating rules. It also has eliminated the need for achieving
unanimity to change even the most minor aspects of a linkage mechanism.
A simple prohibition against most trade-throughs, coupled with the ISO
mechanism, has given the equities markets a straight-forward system to
provide customers with price protection in a fast-moving, high-volume
market that is quoted in pennies. The ISE and the other options
exchange participants in the Plan intend for the Plan, and the
implementing rules, to bring the efficiencies of Regulation NMS to the
options market.
Operation of the Plan
The Plan effectively would apply the Regulation NMS price-
protection provisions to the options markets. Similar to Regulation
NMS, the Plan would require participants to adopt rules ``reasonably
designed to prevent Trade-Throughs,'' while exempting ISOs from that
prohibition.\7\ The definition of an ISO is essentially the same as
under Regulation NMS,\8\ and there are a number of additional
exceptions to the trade-through prohibition. Like Regulation NMS,\9\
the Plan requires participating exchanges to take reasonable steps to
establish that ISOs meet the requirements of the Plan.
---------------------------------------------------------------------------

\7\ Sections 5(a)(i) and 5(b)(iv) of the Plan.
\8\ Section 2(9) of the Plan.
\9\ Regulation NMS Rule 611(c) and Section 5(c) of the Plan.
---------------------------------------------------------------------------

With respect to locked and crossed markets, similar to Regulation
NMS, the Plan requires its participants to adopt, maintain and enforce
rules requiring members: To avoid displaying locked and crossed
markets; to reconcile such markets; and to prohibit members from
engaging in a pattern or practice of displaying locked and crossed
markets.\10\ With respect to locked markets, the Plan differs from
Regulation NMS in that it specifically permits exceptions to the locked
market prohibitions ``as contained in the rules of a Participant
approved by the Commission.'' \11\
---------------------------------------------------------------------------

\10\ Section 6 of the Plan.
\11\ Id.
---------------------------------------------------------------------------

Description of the Implementing Rules
This proposed rule change would delete the ISE's current Linkage
rules in Chapter 19 of the ISE's rule book and replace those rules with
a new Chapter 19 entitled ``Order Protection; Locked and Crossed
Markets.'' New Chapter 19 contains the following rules:
Rule 1900--Definitions
This proposed rule incorporates all the operative definitions from
the Plan into the ISE's rulebook. With one exception, the parties to
the Plan derived all such definitions either from the Old Plan \12\ or
Regulation NMS.\13\ The one exception is the definition of ``complex
trade'' in Rule 1900(d). A ``complex trade'' is exempt from trade-
through liability. The exemption in the Old Plan simply refers to
complex trades ``as that term may be defined by the Operating Committee
from time to time.'' Based on that provision, the ISE adopted current
Rule 1900(3), which is substantially identical among all the options
exchanges. We propose to carry that definition into new Chapter 19
unchanged.
---------------------------------------------------------------------------

\12\ See, e.g., the definitions of ``Broker-Dealer'' in Rule
1900(c), NBBO in Rule 1900(j), Non-Firm in Rule 1900(k), OPRA Plan
in Rule 1900(l), and Participant in Rule 1900(m).
\13\ See, e.g., the definitions of ``Best Bid''/``Best Offer''
in Rule 1900(a), ``Bid''/``Offer'' in Rule 1900(b), ``Intermarket
Sweep Order'' (``ISO'') in Rule 1900(h), and ``Quotation'' in Rule
1900(p).
---------------------------------------------------------------------------

Rule 1901--Order Protection
Paragraph (a) of Rule 1901 provides that, subject to specified
exceptions, ISE Members shall not effect trade-throughs. Paragraph (b)
provides for the following trade-through exceptions:
System Issues: Rule 1901(b)(1) implements Section 5(b)(i)
of the Plan by establishing an exception for trade-throughs due to
system-failures. This is akin to the exception in Regulation NMS for
equity securities and permits trading through an Eligible Exchange that
is experiencing system problems.\14\ The ISE is proposing ``self-help''
rules similar to its equity Rule 2107(c)(1), adopted pursuant to
Regulation NMS.
---------------------------------------------------------------------------

\14\ See Regulation NMS Rule 611(b)(1).
---------------------------------------------------------------------------

Trading Rotations: Rule 1901(b)(2) implements Section
5(b)(ii) of the Plan and carries forward the current trade-through
exception in the Old Plan \15\ and current Rule 1902(b)(5) related to
the opening of markets. It is the options equivalent to the single
price opening exception in Regulation NMS for equity securities.\16\ We
use a trading rotation to open an option for trading, or to reopen an
option after a trading halt. The rotation is effectively a single price
auction to price the option and there are no practical means to include
prices on other exchanges in that auction.
---------------------------------------------------------------------------

\15\ See Old Plan Section 8(c)(iii)(E).
\16\ See Regulation NMS Rule 611(b)(3) under the Securities
Exchange Act of 1934, as amended (``Act'').
---------------------------------------------------------------------------

Crossed Markets: Rule 1901(b)(3) implements Section
5(b)(iii) of the Plan and is the functional equivalent to ISE Rule
2107(c)(3) for equity securities. If the best intermarket bid is higher
than the best intermarket offer, it indicates that there is some form
of market dislocation or inaccurate quoting. Permitting transactions to
be executed without regard to trade-throughs in a Crossed Market will
allow the market to quickly return to equilibrium.
Intermarket Sweep Orders (``ISOs''): Rule 1901(b)(4) is
the ISO exemption and implements Sections 5(b)(iv) and (v) of the Plan.
Section 5(b)(iv) of the Plan permits a Participant to execute orders it
receives from other Participants or members that are marked as ISO even
when it is not at the NBBO.\17\ Section 5(b)(v) of the Plan allows a
Participant to execute inbound orders when it is not at the NBBO,
provided it simultaneously ``sweeps'' all better-priced interest
displayed by Eligible Exchanges. These provisions are the options
equivalents of the corresponding Regulation NMS equity rules.\18\
---------------------------------------------------------------------------

\17\ Supplementary Material .01 to Rule 1901 specifies that all
ISOs routed to the ISE from other exchanges on behalf of public
customers will be represented as Priority Customer Orders. Priority
Customer Orders are executed prior to Professional Orders on the
ISE. ISE Rule 100(37A) defines Priority Customer Orders as orders
for persons who do not place more than 390 orders in listed options
per day on average during a calendar month. The other options
exchanges have not adopted this distinction between Priority
Customer and Professional Orders. Thus, we do not believe it is
practical or appropriate to require ISOs sent to us from other
exchanges, representing customer orders from such exchanges, to be
marked as Professional Orders.
\18\ See Regulation NMS Rules 611(b)(5) and (6).
---------------------------------------------------------------------------

Quote Flickering: Rule 1901(b)(5) implements Section
5(b)(vi) of the Plan and corresponds to the flickering quote exception
in Regulation NMS for equity securities.\19\ Options quotations change
as rapidly, if not more rapidly, than equity quotations. Indeed, they
track the price of the underlying security and thus change when the
price of the

[[Page 27226]]

underlying security changes. This exception provides a form of ``safe
harbor'' to market participants to allow them to trade through prices
that have changed within a second of the transaction, causing a nominal
trade-through.
---------------------------------------------------------------------------

\19\ See Regulation NMS Rule 611(b)(8).
---------------------------------------------------------------------------

Non-Firm Quotes: Rule 1901(b)(6) implements Section
5(b)(vii) of the Plan and carries forward the current non-firm quote
trade-through exception in the Old Plan.\20\ By definition, an
exchange's quotations may not be firm for automatic execution during
this trading state and thus should not be protected from trade-
throughs. In effect, these quotations are akin to ``manual quotations''
under Regulation NMS.
---------------------------------------------------------------------------

\20\ See Old Plan Section 8(c)(iii)(C).
---------------------------------------------------------------------------

Complex Trades: Rule 1901(b)(7) implements Section
5(b)(viii) of the Plan and carries forward the current complex trade
exception in the Old Plan.\21\ Complex trades consist of multiple
transactions (``legs'') effected at a net price, and it is not
practical to price each leg at a price that does not constitute a
trade-through. This exemption will apply to executions in the
Exchange's Complex Order Mechanism.\22\
---------------------------------------------------------------------------

\21\ See Old Plan Section 8(c)(iii)(G).
\22\ See ISE Rule 722.
---------------------------------------------------------------------------

Customer Stopped Orders: Rule 1901(b)(8) implements
Section 5(b)(ix) of the Plan and corresponds to the customer stopped
order exception in Regulation NMS for equity securities.\23\ It permits
broker-dealers to execute large orders over time at a price agreed upon
by a customer, even though the price of the option may change before
the order is executed in its entirety.
---------------------------------------------------------------------------

\23\ See Regulation NMS Rule 611(b)(9).
---------------------------------------------------------------------------

Stopped Orders and Price Improvement: Rule 1901(b)(9)
implements Section 5(b)(x) of the Plan and would apply if an order is
stopped at price that did not constitute a trade-through at the time of
the stop. This exception will facilitate the use of the ISE's ``Price
Improvement Mechanism,'' by which members could seek price improvement
for that order, even if the market moves in the interim, and the
transaction ultimately is effected at a price that would trade through
the then currently-displayed market.\24\
---------------------------------------------------------------------------

\24\ See ISE Rule 723.
---------------------------------------------------------------------------

Benchmark Trades: Rule 1901(b)(10) implements Section
5(b)(xi) of the Plan and would cover trades executed at a price not
tied to the price of an option at the time of execution, and for which
the material terms were not reasonably determinable at the time of the
commitment to make the trade. An example would be a volume-weighted
average price trade, or ``VWAP.'' This corresponds to a trade-through
exemption in Regulation NMS for equity trades.\25\ The ISE does not
currently permit these types of options trades, and any transaction-
type relying on this exemption would require the ISE to adopt
implementing rules, subject to Commission review and approval.
---------------------------------------------------------------------------

\25\ See Regulation NMS Rule 611(b)(7).
---------------------------------------------------------------------------

Rule 1902--Locked and Crossed Markets
Proposed Rule 1902 implements Section 6 of the Plan, which requires
Plan participants to establish, maintain and enforce rules that:
require their members reasonably to avoid displaying locked and crossed
markets; are reasonably deigned to assure reconciliation of locked and
crossed markets; and prohibit their members from engaging in a pattern
or practice of displaying locked and crossed markets. Section 6 of the
Plan further allows an exchange to provide exceptions to these
limitations as ``contained in the rules of a Participant approved by
the Commission.''
Proposed Rule 1902(a) contains the general prohibition that ISE
members shall reasonably avoid displaying, and shall not engage in a
pattern or practice of displaying, any quotations that lock or cross
the best bid or offer of another exchange. We propose four exceptions
to this general prohibition.\26\
---------------------------------------------------------------------------

\26\ See e-mail from Michael Simon, General Counsel, ISE, to
David Liu, Assistant Director, Division of Trading and Markets,
Commission, dated May 29, 2009.
---------------------------------------------------------------------------

The first exception would apply when we are experiencing system
issues, and is similar to the systems issues exception to the trade-
through rule. The second exception applies when there is a crossed
market, and also is similar to the corresponding trade-through
exception. Also similar to the trade-through exception, the third
exception applies when a member simultaneously routes an ISO to execute
against the full displayed size of any locked or crossed protected bid
or offer. The fourth proposed exception applies to locked markets in
the following circumstances:
Neither the locking or locked quote represents, in whole
or in part, a customer order; or
A customer enters a bid or offer that locks a non-customer
quotation on another market, and the customer, on a case-by-case basis,
authorizes the locking of the other market's quotation.\27\
---------------------------------------------------------------------------

\27\ See id.
---------------------------------------------------------------------------

This fourth exemption recognizes an important distinction between
the equities and options markets. Options market makers compete for
order flow by disseminating quotations in multiple series with respect
to each underlying security, distributing liquidity over a much greater
universe of products than in the equity markets. As a result, the
options markets are more reliant on market maker quotations to provide
liquidity, with fewer customer orders in each series than in each
underlying security, where liquidity is concentrated in one
product.\28\
---------------------------------------------------------------------------

\28\ See id.
---------------------------------------------------------------------------

With market makers on multiple exchanges constantly updating their
quotations in all these series based on mathematical formulae there is
a greater likelihood of market maker quotations locking. We believe
that in most cases locked market maker quotations are good for the
investing public. Effectively locked markets provide a ``zero spread,''
allowing market participants to buy and sell an option at the same
price. On the ISE these quotations are firm, and are fully executable
on an automated basis.
We recognize that locked markets are more complicated where one or
both of the locking quotations represents a customer order. Where there
is contra-side market interest willing to trade with a customer, the
customer order should be filled. Thus, we would not exempt from the
locked market prohibition situations involving customer orders unless
the customer entering the locking order specifically authorizes the
lock on a case-by-case basis.\29\
---------------------------------------------------------------------------

\29\ We can envision a customer authorizing a lock when the fees
associating with trading against the locked market make the
execution price uneconomical to the customer.
---------------------------------------------------------------------------

As proposed, the ISE will not permit a member to lock another
exchange's quotation unless the ISE can establish that the quotation on
the other exchange is not for the account of a customer. The options
exchanges currently are working on a method to so identify customer
quotations through the Options Price Reporting Authority. Absent the
ability to identify a customer quote as part of an exchange's BBO, the
ISE will assume that the quote represents, in whole or in part, a
customer order. That is, the ISE will not permit its members to avail
themselves of this exemption unless another exchange has informed the
ISE that it will designate all customer orders as such in OPRA, and
such exchange's quotation does not contain such designation. If an
exchange opts not to identify its customer quotations, the ISE will
treat all of that exchange's quotations as customer orders and, absent
application of another exception, will not permit locks of such
quotations.

[[Page 27227]]

Temporary Rule 1903--Phase Out of Intermarket Linkage Rules
When the Plan and implementing rules become operative it is
possible that not all the options exchanges will be functionally able
to operate pursuant to the Plan. Thus, in order to ensure there is full
intermarket trade-through protection during this interim period, we
propose to retain certain minimum trade-through rules governing the
operation of the Linkage until all the options exchanges are operating
pursuant to the Plan. When that occurs we will file a rule change with
the Commission to delete Temporary Rule 1903.
Temporary Rule 1903 provides that the ISE will continue to accept
Principal Acting as Agent (``P/A'') and Principal Orders from options
exchanges that use such orders to address trade-throughs. The handling
of these orders will be subject to rules that parallel the operation of
the Linkage under the Old Plan.
Amendment of Other ISE Rules To Accommodate the Plan
We propose to amend six ISE rules outside of Chapter 19:
First, Rule 701, entitled ``Trading Rotations,'' describes
the initiation of trading in an options series. That rule currently
permits an ISE Primary Market Maker (``PMM'') to send various Linkage
orders prior to the opening of trading on the Exchange. With the
termination of the Linkage such provision no longer will be necessary
and we thus propose to delete this provision.
Second, Rule 714 governs when we provide automatic
execution for orders we receive. We propose to amend that rule to
reflect the terminology in the Plan and the implementing rules. We
propose no substantive changes to that rule.
Third, we propose to amend the Supplementary Material Rule
716, entitled ``Block Trades,'' to delete Supplementary Material .07
which implements the block exception in the Old Plan, which no longer
will be in effect.
Fourth, Rule 803(c) and the Supplementary Material govern
the obligations of PMMs, including the PMMs' obligation to address
customer orders when there is a better market displayed on another
exchange. We propose to amend this rule to specify that ISE will
discharge its obligations under the Plan to ``establish, maintain and
enforce written policies and procedures * * * reasonably designed to
prevent Trade-Throughs'' \30\ by requiring PMMs to address customer
orders when there is a better market away. This is similar to PMMs'
obligations under the Old Plan. However, PMMs would meet this
obligation via the use of ISOs rather than Linkage orders.\31\ ISE will
conduct surveillance of PMMs' trading activities to ensure that they
comply with this obligation.
---------------------------------------------------------------------------

\30\ Section 5(a) of the Plan.
\31\ The routing of Public Customer orders to another exchange
when the ISE is not at the best price is, in effect, voluntary. A
customer can avoid such route-outs by entering an Immediate or
Cancel (``IOC,'' see ISE Rule 715(b)(3)) or Fill or Kill (``FOK,''
see ISE Rule 715(b)(2)) order. If the Exchange cannot immediately
execute such orders, it will cancel all of the order (FOK orders) or
the unexecuted portion of the order (IOC orders) without routing
such orders to another exchange.
---------------------------------------------------------------------------

PMMs will comply with their obligation (i) by executing a customer
order at a price that at least matches the best price displayed or (ii)
by sending ISO(s) as agent for the customer to any other exchange(s)
displaying a superior price and, with respect to any remaining portion
of the customer order, either (a) releasing the remaining portion of
the order for execution in the Exchange's auction market or (b)
executing the remaining portion of the order at a price superior to the
best price in the Exchange's auction market.
The amended rule further specifies that: (i) In addressing customer
orders that are not automatically executed because there is a displayed
bid or offer on another exchange trading the same options contract that
is better than the best bid or offer on the Exchange, the Exchange will
act in compliance with its rules and with the provisions of the Act and
the rules thereunder, including, but not limited to, the requirements
in Section (6)(b)(4) and (5) of the Act that the rules of national
securities exchange provide for the equitable allocation of reasonable
dues, fees, and other charges among its members and issuers and other
persons using its facilities, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers; and
(ii) all orders entered on the Exchange and routed to another exchange
via an ISO pursuant to the Rule, and that result in an execution, are
binding.
Fifth, Rule 810 governs ``informational barriers'' that
ISE market makers must maintain within their firms. These barriers
restrict the flow of information between personnel handling market
making activities, on the one hand, and personnel performing other
functions, including the acting as agency [sic] for customer orders, on
the other hand. Under the Old Plan, when there is a better market on
another exchange, a PMM can send a P/A Order to that exchange in an
attempt to access that better price for the customer. This is
consistent with Rule 810 because a P/A Order is a principal order, and
a firm is permitted to send such an order from the market-making side
of the information barrier.
Under the Plan and these proposed rules, PMMs will send ISOs
representing the underlying customer orders, rather than P/A Orders,
when there is a better market away. Because these ISOs technically will
be orders on behalf of a Public Customer current Rule 810 would
prohibit a PMM from sending such an order. We propose a narrow carve-
out to Rule 810 that would permit a PMM to send ISOs solely to comply
with its obligation under Rule 803 to address Public Customer orders
when there is a better market on another exchange. PMMs will act as
agent in these circumstances, and will send the ISOs from the market
making side of the information barrier. In all other respects PMMs will
be subject to Rule 810.
Sixth, Rule 811(b) governs Directed Orders and currently
states that ISE market makers may act as agent for customer orders only
when handling directed orders. We propose to amend that rule to reflect
the ability of Primary Market Makers to act as agent when sending ISOs
under Rule 803.
2. Statutory Basis
The basis under the Act for this proposed rule change is found in
Section 6(b)(5),\32\ in that the proposed rule change is designed to
promote just and equitable principles of trade, remove impediments to
and perfect the mechanisms of a free and open market and a national
market system and, in general, to protect investors and the public
interest. In particular, the Exchange believes that adopting rules that
implement the Plan will facilitate the trading of options in a national
market system by establishing more efficient protection against trade-
throughs and locked and crossed markets.
---------------------------------------------------------------------------

\32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

The proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others

The Exchange has not solicited, and does not intend to solicit,
comments on

[[Page 27228]]

this proposed rule change. The Exchange has not received any
unsolicited written comments from members or other interested parties.

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 the 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-2009-27 on the subject line.

Paper Comments

Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2009-27. 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, on official
business days between the hours of 10 a.m. and 3 p.m. Copies of such
filing also will 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
File Number SR-ISE-2009-27 and should be submitted on or before June
29, 2009.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
---------------------------------------------------------------------------

\33\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-13205 Filed 6-5-09; 8:45 am]
BILLING CODE 8010-01-P

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