[Federal Register Volume 73, Number 147 (Wednesday, July 30, 2008)]
[Notices]
[Pages 44303-44305]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-17440]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58224; File No. SR-ISE-2007-94]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Order Granting Accelerated Approval of a Proposed Rule Change as
Modified by Amendments No. 1 and 3 Thereto Relating to Reduction of
Certain Order Handling and Exposure Periods From Three Seconds to One
Second
July 25, 2008.
I. Introduction
On October 5, 2007, the International Securities Exchange, LLC
(``ISE'' or ``Exchange''), filed with the Securities and Exchange
Commission (``Commission'') pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to reduce certain order exposure
times from three seconds to one second. On December 4, 2007, ISE filed
Amendment
[[Page 44304]]
No. 1 to the proposed rule change. On May 22, 2008, ISE filed Amendment
No. 2 to the proposed rule change and withdrew this Amendment on May
29, 2008. On June 23, 2008, ISE filed Amendment No. 3 to the proposed
rule change. The proposed rule change, as modified by Amendments No. 1
and 3, was published for comment in the Federal Register on July 3,
2008.\3\ The Commission received one comment on the proposal.\4\ This
order approves the proposed rule change, as modified by Amendments No.
1 and 3, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(l).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 58041 (June 26,
2008), 73 FR 38263 (``Notice'').
\4\ See letter from Lisa J. Fall, General Counsel, Boston
Options Exchange (``BOX''), to Nancy M. Morris, Secretary,
Commission, dated May 14, 2008 (``BOX Comment'').
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II. Description of the Proposal
The Exchange proposes to reduce the order handling and exposure
periods contained in Exchange Rules 716 (Block Trades), 717
(Limitations on Orders), 723 (Price Improvement Mechanism for Crossing
Transactions), and 811 (Directed Orders) from three seconds to one
second.
Rule 716 contains the requirements applicable to the execution of
orders using the Block Order Mechanism, Facilitation Mechanism, and
Solicited Order Mechanism. The Block Order Mechanism allows members to
obtain liquidity for the execution of a block-size order, whereas the
Facilitation and Solicited Order Mechanisms allow members to enter
block-size cross transactions. Rule 723 contains the requirements
applicable to the execution of orders using the Price Improvement
Mechanism (``PIM''). The PIM allows members to enter cross transactions
of any size. Orders entered into any of these mechanisms currently are
exposed to all market participants for three seconds, giving
participants an opportunity to enter additional trading interest before
the orders are automatically executed.
Rule 717 requires members to expose agency orders to the
marketplace before executing them as principal \5\ or executing them
against orders solicited from other members.\6\ Under Rule 717, an
order can be exposed either by entering it onto the Exchange and
waiting at least three seconds before entering the contra-side
proprietary or solicited order, or by utilizing the various mechanisms
that have an exposure period built into the functionality.
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\5\ Rule 717(d).
\6\ Rule 717(e). The Exchange proposes to make a non-substantive
clean-up of Rule 717(e) to specify that members can use the
Facilitation Mechanism to execute solicited crosses. The
Facilitation Mechanism rule was amended earlier this year to allow
members to enter solicited crosses, and Rule 717(e) should have been
updated at that time. See Securities Exchange Act Release No. 55557
(March 29, 2007), 72 FR 16838 (April 5, 2007).
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Rule 811 contains the requirements applicable to the handling and
execution of Directed Orders. A Directed Market Maker is required to
enter Directed Orders into the PIM or release the order to the
Exchange's limit order book within three seconds of receipt.\7\
Additionally, there are three instances when a Directed Order is
exposed to all market participants for three seconds after being
released to the Exchange's limit order book: (i) Before a Directed
Order is matched against the Directed Market Maker at the national best
bid or offer (``NBBO''); \8\ (ii) before executing a Directed Order
against the Directed Market Maker's Guarantee; \9\ and (iii) before
being given to the Primary Market Maker for handling where the Directed
Market Maker is also the Primary Market Maker.\10\ Finally, if a
Directed Order is placed on the Exchange's limit order book, the
Directed Market Maker is not permitted to enter a proprietary order to
execute against the Directed Order during the three seconds following
the release of the Directed Order.
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\7\ Rule 811(c)(3). If the Directed Market Maker fails to do so
within three seconds, the Exchange's system automatically releases
the order. Rule 811(c)(3)(ii).
\8\ If a Directed Market Maker is quoting at the NBBO at the
time it releases a Directed Order, the Directed Market Maker is last
in priority, and the order is exposed to all market participants
before the Directed Order is executed against the Directed Market
Maker's quote.
\9\ If the Directed Market Maker is quoting at the NBBO on the
opposite side of the market from a Directed Order at the time the
Directed Order is received by the Directed Market Maker, and the
Directed Order is marketable, the Exchange's system will
automatically guarantee execution of the Directed Order against the
Directed Market Maker at the price and the size of the Directed
Market Maker's quote. Rule 811(d).
\10\ As provided in Rule 714, when the Exchange's best bid or
offer is inferior to another exchange, incoming marketable customer
orders are handled by the Primary Market Maker pursuant to Rule
803(c), which requires the Primary Market Maker to either execute
the order at a price that matches the NBBO or attempt to obtain the
better price for the customer according to the Linkage rules
contained in Chapter 19.
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Under the proposal, all of the three-second exposure periods
referred to above would be reduced to one second.
The Commission received one comment letter regarding the proposed
rule change.\11\ The commenter expresses concern that the combined
effect of the proposed rule change and another ISE proposal \12\ would
lead to greater rates of internalization and reduced amounts of price
improvement being made available to public customers on ISE, especially
to small orders under 50 contracts.\13\
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\11\ See BOX Comment, supra note 4.
\12\ The BOX Comment, supra note 4, was submitted in connection
with SR-ISE-2008-29. In SR-ISE-2008-29, the ISE proposed to allow
members to enter orders into the PIM at a price that matches the
NBBO when the ISE market is inferior to the NBBO. The Commission
approved SR-ISE-2008-29. See Securities Exchange Act Release No.
57847 (May 21, 2008), 73 FR 30987 (May 29, 2008).
\13\ See BOX Comment, supra note 4.
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III. Discussion and Commission Findings
After carefully reviewing the proposed rule change and the comment
submitted, the Commission finds that the proposal is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\14\ In particular, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\15\ which, among other things, requires
that the rules of a national securities exchange be designed to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest. The Commission also finds
that the proposed rule change is consistent with Section 6(b)(8) of the
Act,\16\ which requires that the rules of an exchange not impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
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\14\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\15\ 15 U.S.C. 78f(b)(5).
\16\ 15 U.S.C. 78f(b)(8).
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The Commission believes that, given the electronic environment on
ISE, reducing each of the exposure periods from three seconds to one
second as proposed could facilitate the prompt execution of orders,
while continuing to provide market participants with an opportunity to
compete for exposed bids and offers. To substantiate that ISE members
could receive, process, and communicate a response back to the Exchange
within one second, the Exchange stated that it distributed a survey to
ISE members that regularly participate in orders executed through the
mechanisms that would be affected by the proposal. ISE stated that the
survey results indicated that it typically takes, at most, 110
milliseconds, for members to receive, process, and
[[Page 44305]]
respond to broadcast messages related to the various mechanisms.
According to the ISE, members who responded to the survey also
indicated that reducing the exposure period to one second would not
impair their ability to participate in orders executed through the
mechanisms.\17\ Accordingly, the Commission believes that it is
consistent with the Act for ISE to reduce the order handling and
exposure times discussed herein from three seconds to one second.
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\17\ The ISE stated that all of the eight members that responded
to the specific timing questions, and two of the three members that
did not answer the specific timing questions, indicated that
reducing the crossing exposure timer to one second would not impair
their ability to participate in ISE crossing orders. The ISE stated
that one member responded that it could not measure the specific
times and indicated that it would prefer to keep the exposure
periods at three seconds. See Notice.
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The Commission does not agree with the concerns raised by the
commenter. Based on the ISE's statements regarding the survey results,
the Commission believes that market participants should continue to
have opportunities to compete for exposed bids and offers within a one
second exposure period.
The Commission finds good cause to approve the proposed rule change
prior to the thirtieth day after publication for comment in the Federal
Register. The Commission notes that the proposed rule change was
noticed for the full comment period and no additional comments were
received.\18\ The Commission also notes that the proposed rule change
is substantially similar to a recently approved proposal submitted by
the Chicago Board Options Exchange, Incorporated \19\ and the
Commission believes that ISE has provided reasonable support for ISE's
belief that ISE market participants would continue to have an
opportunity to compete for exposed bids and offers if exposure periods
were reduced to one second. Therefore, the Commission finds good cause,
consistent with Section 19(b)(2) of the Act,\20\ to approve the
proposed rule change on an accelerated basis.
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\18\ The BOX Letter was received prior to the publication of the
Notice. See BOX Comment, supra note 4.
\19\ See Securities Exchange Act Release No. 58088 (July 2,
2008), 73 FR 39747 (July 10, 2008).
\20\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\21\ that the proposed rule change (SR-ISE-2007-94), as modified by
Amendments No. 1 and 3, be, and hereby is, approved on an accelerated
basis.
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\21\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-17440 Filed 7-29-08; 8:45 am]
BILLING CODE 8010-01-P