01-5541. Self Regulatory Organizations; Order Approving Proposed Rule Change by the International Securities Exchange LLC Relating to Limitations on Orders

February 28, 2001.

I. Introduction

On November 20, 2000, 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 amend ISE Rule 717 relating to limitations on orders.^[3] The proposed rule change was published for comment in the Federal Register on January 16, 2001.^[4] The Commission received no comments on the proposed rule change. This order approves the proposal.

II. Description of the Proposal

Exchange market makers must be firm at their quotations for all orders, although they can set different sizes for customer and broker-dealer orders. When the size of a particular quote is exhausted, the Exchange's trading system automatically moves the quote to an inferior price according to parameters preset by the market maker. However, the system moves only the quotation in the options series in which there was a trade, leaving the market maker exposed to the risk that multiple orders may be executed nearly simultaneously in many series of the same option. This situation increases an ISE market maker's “delta risk” (the amount of underlying stock that would be necessary to hedge the options position), due to exposure across multiple series. This could result in ISE market makers providing more liquidity than may be available in the underlying stock. Under the ISE's proposed new paragraph (h), members shall not cause the entry of more than one order every fifteen seconds for the account of the same beneficial owner in options on the same underlying security.

The Exchange also proposes to amend paragraph (g) of ISE Rule 717, which currently prohibits an Electronic Access Member (“EAM”) from entering an order for any other member of the Exchange. The amendment will limit the scope of ISE Rule 717(g) to only prohibit EAMs from entering orders for ISE market maker accounts.

III. Discussion

The Commission has reviewed the ISE's proposed rule change and finds, for the reasons set forth below, that the proposal is consistent with the requirements of section 6 of the Act ^[5] and the rules and regulations thereunder applicable to a national securities exchange.

The Commission notes that amending ISE Rule 717 to prohibit members from causing the entry of more than one order for the same beneficial account within a fifteen second period should help reduce ISE market maker risk exposure. The Commission believes that fifteen seconds is a sufficient time period to allow market makers to change their quotations following an execution, while at the same time not unduly long as to place a burden on investors seeking to execute transactions on the Exchange.

The Commission also notes that the amendment to ISE Rule 717(g), which will limit the scope of that rule solely to prohibit EAMs from entering orders for ISE market maker accounts, recognizes that there are legitimate reasons why a member may enter orders on the Exchange through an EAM. These reasons can vary. For example, some EAMs may desire a temporary means of routing orders to the ISE until they are connected directly to the Exchange. In addition, a few members have clearing relationships with EAMs and thus route orders through those EAMs.

Therefore, the Commission finds that the proposed revisions to ISE Rule 717 are consistent with section 6(b) of the Act ^[6] in general, and furthers the objectives of section 6(b)(5) ^[7] in particular, in that they are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism for a free and open market and a national market system, and, in general, to protect investors and the public interest.^[8]

IV. Conclusion

It is therefore ordered, pursuant to section 19(b)(2) of the Act,^[9] that the proposed rule change (SR-ISE-00-20) is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[10]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  The ISE filed its proposed rule change on November 20, 2000. On December 18, 2000, the ISE filed Amendment No. 1 that entirely replaced the original rule filing.

4.  See Securities Exchange Act Release No. 43803 (January 4, 2001), 66 FR 3624 (January 16, 2001).

5.  15 U.S.C. 78f.

6.  15 U.S.C. 78f(b).

7.  15 U.S.C. 78f(b)(5).

8.  In approving the proposal, the Commission has considered the rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

9.  15 U.S.C. 78s(b)(2).

10.  17 CFR 200.30-3(a)(12).