[Federal Register: January 13, 2004 (Volume 69, Number 8)]
[Notices]
[Page 2030-2032]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13ja04-117]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49023; File No. SR-ISE-2003-37]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the International Securities Exchange, Inc. To Amend the
Procedures for Executing Stock-Option Orders Under ISE Rule 722
January 5, 2004.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 18, 2003, the International Securities Exchange, Inc.
(``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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to revise the procedures for executing stock-
option orders by: (1) automating the transmission of the stock leg(s)
of a stock-option combination order to a broker-dealer on behalf of
members; and (2) allowing for the pricing of the options leg(s) of
stock-option combination orders in penny increments.
The text of the proposed rule change appears below. New text is in
italic. Deleted text is in brackets.\3\
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\3\ With the Exchange's consent, the Commission has made
technical corrections to the proposed rule text. Telephone
conversation between Katherine Simmons, Vice President and Associate
General Counsel, ISE, and Christopher Solgan, Attorney, Division of
Market Regulation, Commission, on December 30, 2003.
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[[Page 2031]]
Rule 722. Complex Orders
* * * * *
(b) Applicability of Exchange Rules. Except as otherwise provided
in this Rule, complex orders shall be subject to all other Exchange
Rules that pertain to orders generally.
(1) Minimum Increments. Bids and offers on complex orders may be
expressed in any decimal price, and the option leg(s) of a stock-option
order may be executed in one cent increments, regardless of the minimum
increments otherwise [appropriate] applicable to the individual option
legs of the order. Complex orders expressed in net price increments
that are not multiples of the minimum increment are not entitled to the
same priority under subparagraph (b)(2) of this Rule as such orders
expressed in increments that are multiples of the minimum increment.
* * * * *
Supplementary Material to Rule 722
.01 A bid or offer made as part of a stock-option order (as defined
in (a)(5)(i) above) or a SSF-option order (as defined in (a)(5)(ii)
above) is made and accepted subject to the following conditions: (1)
the order must disclose all legs of the order and must identify the
security (which in the case of a single stock future requires
sufficient identification to determine the market(s) on which the
single stock future trades) and the price at which the non-option
leg(s) of the order is to be filled; and (2) concurrent with the
execution of the options leg of the order, the initiating member and
each member that agrees to be a contra-party on the non-option leg(s)
of the order must either elect to have the stock leg(s) of a stock-
option order electronically communicated to a designated broker-dealer
for execution as provided in .02 below or take steps immediately to
transmit the non-option leg(s) to a non-Exchange market(s) for
execution. Failure to observe these requirements will be considered
conduct inconsistent with just and equitable principles of trade and a
violation of Rule 400.
A trade representing the execution of the options leg of a stock-
option or SSF-option order may be cancelled at the request of any
member that is a party to that trade only if market conditions in any
of the non-Exchange market(s) prevent the execution of the non-option
leg(s) at the price(s) agreed upon.
.02 Automated Stock-Option Orders. A Member may elect to have the
Exchange electronically communicate the stock leg(s) of a stock-option
order to a designated broker-dealer for execution. To make such an
election, the Member must enter into a brokerage agreement with the
designated broker-dealer. The Exchange will automatically transmit the
stock leg(s) of a trade to the designated broker-dealer for execution
on behalf of the Member. A trade of a stock-option order will be
automatically cancelled if market conditions prevent the execution of
the stock or option leg(s) at the prices necessary to achieve the
agreed upon net price.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to revise the procedures for executing stock-
option orders by: (1) Automating the transmission of the stock leg(s)
of a stock-option combination order to a broker-dealer on behalf of
members; and (2) allowing for the pricing of the options leg(s) of
stock-option combination orders in penny increments.
Automatic Transmission of Stock Legs
Supplementary Material .01 to ISE Rule 722 currently describes a
manual procedure by which a stock-option order may be executed on the
Exchange. This manual procedure requires each party to a stock-option
trade to take steps immediately to transmit the stock leg(s) of the
order to a non-Exchange market for execution. The Exchange proposes to
offer an automated process for the communication of stock-option orders
by electronically transmitting the orders related to the stock leg(s)
for execution on behalf of the parties to the trade. To participate in
this automated process for stock-option orders, an ISE member must
enter into a customer agreement with the designated broker-dealer. In
addition, each member will be responsible for whatever fees and other
charges the designated broker-dealer imposes for executing the trades.
The Exchange will not receive any fees related to the stock portion of
the stock-option trade. Members will be able to continue using the
current manual procedure for execution of stock-option orders if they
choose.
The electronic communication of the orders by the Exchange
eliminates the necessity for each party to the trade to separately
communicate orders to the broker-dealer for execution, thereby making
the process more efficient. Once the orders are communicated to the
broker-dealer for execution, the broker-dealer has complete
responsibility for determining whether the orders may be executed in
accordance with all of the rules applicable to execution of equity
orders, including compliance with the applicable short-sale, trade-
through and trade reporting rules. As with the current manual
procedure, if the broker-dealer cannot execute the equity orders at the
designated price, the stock-option combination order will not be
executed on the Exchange.
Penny Pricing for Options Legs of Stock-Option Orders
Because the options leg(s) of a stock-option order must be executed
in $.05 increments (for options trading below $3) and $.10 increments
(for options trading at or above $3),\4\ while the stock leg(s) of a
stock-option order trades in $.01 increments, it is not always possible
to achieve a proposed net price for stock-option orders. For example,
suppose an investor proposes to buy stock and sell options at a net
price of $8.50. If the stock is $11.72 bid to $11.74 offered, and the
option is $3.20 bid to $3.30 offered, a net price of $8.50 cannot be
achieved without executing the option leg at $3.22, $3.23, or $3.24.\5\
Therefore, the Exchange proposes to allow for the execution of the
option leg(s) of stock-option combination orders in one-cent increments
to allow investors greater opportunities to receive execution of their
stock-option orders. The options leg(s) of a stock-option order will
continue to be reported through the Options Price Reporting Authority
(``OPRA'') with a code that indicates that the trade was
[[Page 2032]]
part of a complex order. The actual price of the trade will be
reported.
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\4\ See ISE Rule 710.
\5\ To execute the order within the bid and offer for the stock
and the option, a net price of $8.50 could only be achieved by (1)
executing the stock at $11.72 and the option at $3.22 ($11.72-
$8.50); (2) executing the stock at $11.73 and the option at $3.23
($11.73-$8.50); or (3) executing the stock at $11.74 and the option
at $3.24 ($11.74-$8.50).
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(2) Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the Act in general, and Section 6(b)(5) \6\ in particular. The
Exchange states that the proposed rule change is intended 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. The Exchange further believes that the automated
procedure for transmitting the stock leg(s) of a stock-option order
would provide a more efficient means for members to execute orders, and
the execution of the options leg(s) of a stock-option order in $.01
minimum increments would improve investors' ability to receive
execution of their orders.
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\6\ 15 U.S.C. 78f(b)(5).
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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 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 such proposed rule change; or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549-0609.
Comments should be submitted electronically at the following e-mail
address: rule-comments@sec.gov. All comment letters should refer to
File No. SR-ISE-2003-37. 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, comments should be sent in hard
copy or by e-mail but not by both methods. Copies of the submission,
all subsequent amendments, all written statements with respect to the
proposed rule change that are filed with the Commission, and all
written communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for inspection and copying in the Commission's Public
Reference Room. Copies of such filings will also be available for
inspection and copying at the principal office of the Exchange. All
submissions should refer to File No. SR-ISE-2003-37 and should be
submitted by February 3, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-617 Filed 1-12-04; 8:45 am]
BILLING CODE 8010-01-P