[Federal Register Volume 65, Number 44 (Monday, March 6, 2000)]
[Notices]
[Pages 11822-11823]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 00-5380]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42474; File No. SR-ISE-00-03]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the International Securities Exchange LLC Relating to Block 
and Facilitation Trades

:
    February 29, 2000.
    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 February 25, 2000, the International Securities Exchange LLC (the 
``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items #I, II, and III below, which items have been 
prepared by the ISE. 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 ISE is proposing commentary to ISE Rules 716(c) and (d) with 
respect to the Block Order Mechanism and the Facilitation Mechanism, 
which states that participants will be given 30 seconds to respond to a 
broadcast message. The ISE is also proposing to amend Rule 716(d)(4) to 
provide that only public customer bids (offers) on the Exchange at the 
time a facilitation order is executed that is priced higher (lower) 
than the facilitation price will be executed at the facilitation price 
unless there is sufficient size to execute a facilitation order 
entirely at a better price. Proposed new language is in italics; 
proposed deletions are in brackets.
* * * * *

Rule 716  Block Trades

* * * * *
    (d) Facilitation Mechanism. The Facilitation Mechanism is a process 
by which an Electronic Access Member can facilitate block-size Public 
Customer orders.
* * * * *
    (4) At the end of the period given for the entry of Indications, 
the facilitation order will be automatically executed in full.
    (i) Unless there is sufficient size to execute the entire 
facilitation order at a better price, Public Customer [B] bids (offers) 
on the Exchange at the time the facilitation order is executed that are 
priced higher (lower) than the facilitation price will be executed at 
the facilitation price. Non-Customer bids (offers) on the Exchange at 
the time the facilitation order is executed that are priced higher 
(lower) than the facilitation price will be executed at their stated 
price, thereby providing the order being facilitated a better price of 
the number contracts associated with such higher bids (lower offers).
* * * * *
Supplementary Material to Rule 716
    .01  It will be a violation of a member's duty of best execution to 
its customer it it were to cancel a facilitation order to avoid 
execution of the order at a better price. The availability of the 
Facilitation Mechanism does not alter a member's best execution duty to 
get the best price for its customer. Accordingly, while facilitation 
orders can be canceled during the thirty seconds given for the entry of 
Indications, if a member were to cancel a facilitation order when there 
was a superior price available on the Exchange and subsequently re-
enter the facilitation order at the same facilitation price after the 
better price was no longer available without attempting to obtain that 
better price for its customer, there would be a presumption that the 
member did so to avoid execution of its customer order [by other market 
participants] in whole or in part by other brokers at the better price.
    .02  The time given to Crowd Participants to enter Responses under 
paragraph (c)(1) and Indications under paragraph (d)(1) shall be thirty 
(30) seconds.
* * * * *

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 ISE 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 ISE 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
    ISE Rule 716(c) establishes a ``block mechanism'' through which ISE 
members can obtain liquidity for the execution of block-size orders \3\ 
from market makers and other ISE members with orders at the ISE inside 
bid or offer (the ``Crowd Participants''). Similarly, ISE Rule 716(d) 
establishes a ``facilitation mechanism'' through which members can seek 
to facilitate block-size public customer orders. Upon the entry of an 
order into the block or facilitation mechanisms, a broadcast message is 
sent to the Crowd Participants. Under ISE Rules 716(c)(1) and (d)(1), 
the Crowd Participants are given an opportunity to respond to the 
broadcast message without specifying how much time they will be given.
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    \3\ Block-size orders are orders for fifty contracts or more. 
ISE Rule 716(a).
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    The proposed rule change specifies that Crowd Participants will be 
given 30 seconds to respond to a broadcast message from either the 
block or facilitation mechanism.\4\ The Exchange believes that 30 
seconds is sufficient time to allow the Crowd Participants to respond 
to a broadcast message.
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    \4\ Crowd Participants may indicate a willingness to facilitate 
an order at an improved price by entering orders or changing their 
quotes, as applicable, but must do so at least ten seconds prior to 
the request for indications. ISE Rule 716(d)(3).
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    The ISE also is proposing to amend ISE Rule 716(d)(4)(i) to provide 
that only public customer bids (offers) on the Exchange at the time a 
facilitation order is executed that are priced higher (lower) than the 
facilitation price will be executed at the facilitation price, unless 
there is sufficient size to execute a facilitation order entirely at a 
better price. Higher bids and lower offers from non-customer orders and 
quotes will be executed at their stated price. Currently, under the 
Rule, such non-customer orders and quotes are given the benefit of the 
facilitation or ``block clean-up'' price.
    The Exchange believes that in the case where there are non-customer 
orders or quotes that can provide the order being facilitated a better 
price, the order being facilitated should receive the better price for 
the number of contracts available. The proposed change creates the 
opportunity for a facilitation order to receive partial execution at an 
improved price, while continuing to protect public customer orders on 
the book by giving them the benefit of a better block execution price.

[[Page 11823]]

    For example, under current ISE Rule 716(d)(4)(i), assume that a 
Member proposes to facilitate an order to sell 500 contracts at the 
ISE's best bid price of $4. During the exposure period, further assume 
that a non-customer order to buy 100 contracts at $4\1/8\ and a public 
customer order to buy 20 contracts at $4\1/8\ are entered. In this 
scenario, the facilitation order would have been executed at $4 in its 
entirety (i.e., both the customer and non-customer orders buy at $4). 
Under the proposed rule change, the customer order at $4\1/8\ would be 
executed at $4, but the non-customer order would be executed at its 
stated price of $4\1/8\. Accordingly, the order being facilitated would 
sell 100 contracts at $4\1/8\ (an improved price) and 400 contracts at 
$4. \5\
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    \5\ In this example, if public customer and/or non-customer 
orders totaling 500 contracts at $4\1/8\ had been entered during the 
exposure time, the entire facilitation order would have been 
executed at $4\1/8\.
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2. Statutory Basis
    The ISE believes that the proposed rule change is consistent with 
the provisions of Section 6(b)(5) of the Act, \6\ which requires that 
an exchange have rules that are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating 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.
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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 ISE does not believe that the proposed rule change will result 
in 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

    Written comments on the proposed rule change were neither solicited 
nor received.

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 ISE 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 
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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
ISE. All submissions should refer to File No. SR-ISE-00-03 and should 
be submitted by March 27, 2000.

    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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-5380 Filed 3-3-00; 8:45 am]
BILLING CODE 8010-01-M