02-21958. Self-Regulatory Organizations; Order Approving Proposed Rule Change by the International Securities Exchange LLC Relating to the Execution of Complex Orders Involving Options and Single Stock Futures

August 21, 2002.

I. Introduction

On June 27, 2002, the International Securities Exchange, Inc. (“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 adopt rules and procedures governing the execution of complex orders involving options and single stock futures. The proposed rule change was published for comment in the Federal Register on July 17, 2002.^[3] The Commission received no comments on the proposed rule change. This order approves the proposed rule change.

II. Description of the Proposal

The proposed rule change would permit Exchange members to enter option-stock future complex orders. As is the case with stock-option complex orders, the option leg of the transaction would have priority over non-customer orders at the same price. The Exchange would execute the option leg of the trade and the parties then would seek to execute the stock futures leg on an appropriate exchange. Because the stock futures products may not be fungible between markets, the member would be required to specify the market of execution for the stock futures leg of the complex order. In addition, as with stock-option complex orders, if the parties are unable to execute the stock futures leg of the transaction due to a change in market conditions, the Exchange would cancel the option leg of the transaction at the request of a party to the trade. The proposed rule change would become part of the complex order pilot program, which the Commission has approved to operate through October 18, 2002.^[4]

III. Discussion

After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.^[5] In particular, the Commission believes that the proposed rule change is consistent with section 6(b)(5) of the Act,^[6] which requires, among other things, that the Exchange's rules be designed 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.

In general, the Commission believes that rules permitting the execution of complex orders serve to reduce the risk of incomplete or inadequate executions, while increasing efficiency and competitive pricing. At the same time, they protect the priority of orders of public customers by permitting the legs of complex orders to trade ahead of bids and offers established in a market place only under specific restrictions. The rule change authorizes the execution of complex orders involving options and single stock futures pursuant to procedures that are virtually identical procedures for complex orders involving options and stocks. The Commission believes that these types of orders are of a similar degree of complexity to those approved in the past for special priority rules, and it is therefore appropriate to afford them the same treatment.

IV. Conclusion

For the foregoing reasons, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and rules and regulations thereunder.

It is therefore ordered, pursuant to section 19(b)(2) of the Act,^[7] that the proposed rule change (SR-ISE-2002-18) is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[8]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See Securities Exchange Act Release No. 46181 (July 11, 2002), 67 FR 47010.

4.  See Securities Exchange Act Release No. 44955 (October 18, 2001), 66 FR 53819 (October 24, 2001) (File No. SR-ISE-2001-18).

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

6.  15 U.S.C. 78f(b)(5).

7.  15 U.S.C. 78s(b)(2).

8.  17 CFR 200.30-3(a)(12).