[Federal Register Volume 76, Number 124 (Tuesday, June 28, 2011)]
[Notices]
[Pages 37863-37866]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-16033]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64719; File No. SR-ISE-2011-33]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing of Proposed Rule Change Relating to Appointments
to Competitive Market Makers
June 22, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\
[[Page 37864]]
notice is hereby given that on June 10, 2011, the International
Securities Exchange, LLC (the ``Exchange'' or the ``ISE'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I and II 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 manner in which Competitive
Market Makers are appointed to options classes. The text of the
proposed rule change is available on the Exchange's Web site http://www.ise.com, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
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 self-regulatory organization 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 ISE's membership is divided into three categories, Primary
Market Makers (``PMMs''), Competitive Market Makers (``CMMs'') and
Electronic Access Members. There are 10 PMM trading rights and 160 CMM
trading rights (collectively ``market maker rights''). In order to
access the Exchange as a market maker, a member must own or lease one
or more market maker rights. EAMs are not required to purchase a
membership right in order to access the Exchange. Under the current
structure, options traded on the Exchange are divided into 10 groups,
with one of the 10 PMM trading right and 16 of the 160 CMM trading
rights appointed to each group. Thus, each PMM and CMM trading right is
associated with a specific group of options. This structure has been in
place since ISE began operations in 2000. The purpose of this proposed
rule change is to change the manner in which the Exchange appoints
options classes with respect to CMM trading rights.
The Exchange proposes to change the structure of CMM appointments
to give market makers more flexibility to choose the options classes to
which they are appointed. Under the current structure that associates
each membership with a particular group of options, a member generally
must own or lease multiple CMM trading rights in order to gain access
to the options classes in which it seeks to make markets. Moreover, the
structure requires market makers to provide continuous quotations in a
minimum number of options classed in each group, which results in some
market makers entering in some options classes continuous quotations
that are away from the national best bid and offer solely to satisfy
the minimum requirement. While such quotations do not add to the
quality of the ISE's market or the national market system, they place a
burden on the Exchange and its members with respect to the need to
maintain additional systems capacity to handle the quotation traffic.
To address the issues created by the current CMM structure, the
Exchange proposes to allow CMMs to seek appointment in the options
classes listed on the Exchange across the groups of options assigned to
particular PMMs. Under the proposal, the Exchange will assign points to
each options class equal to its percentage of overall industry volume
(not including exclusively-traded index options), rounded down to the
nearest tenth of a percentage. A CMM will be able to seek appointments
to options classes that total: (i) 20 points for the first CMM trading
right it owns or leases; and (ii) 10 points for the second and each
subsequent CMM trading right it owns or leases.\3\ CMMs will be able to
change their appointments at any time upon advance notification to the
Exchange.\4\ This structure is similar to the way in which the Chicago
Board Options Exchange allows its market makers to choose options to
which they are appointed.\5\
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\3\ Under the proposal, CMMs can select the options classes to
which they seek appointment, but the Exchange retains the authority
to make such appointments and to remove appointments from CMMs based
on their performance. In this respect, under the current rule, the
Board or a committee designated by the Board makes appointments to
market makers. In consideration of the new process for making CMM
appointments, the Exchange is proposing to allow the Exchange to
make appointments to market makers. Under the proposal, either the
Exchange or a committee designated by the Board will be permitted to
make appointments. The Board itself has never made market makers
appointments, and the Exchange does not believe such determinations
require Board-level consideration.
\4\ The Exchange will notify CMMs of the procedure for
requesting changes to their appointments, including the length of
advance notification required. The Exchange will establish the
shortest advance notification period that is operationally feasible,
such as a specific time on the day prior to the intended
effectiveness of a change in a CMM's appointments, or by a specified
time prior to the opening on the same trading day.
\5\ CBOE Rule 8.3 (Appointment of Market Makers).
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The Exchange believes that this proposal strikes an appropriate
balance between the Exchange's goal of attracting additional market
makers to the Exchange and the interests of the current CMMs on the
Exchange. Under the existing structure, a member is required to own
and/or lease 10 CMM trading rights (one in each of the 10 options
groups) in order to have the ability to make markets in all of the
options classes traded on the Exchange. Moreover, because the number of
options classes contained in each group varies, CMM trading rights
currently represent 10 different levels of participation. Under the
proposal, the level of access gained by owning or leasing a CMM trading
right will be standardized. Finally, the proposal will make additional
memberships available, which will provide greater opportunity for more
market makers to join the Exchange.
Specifically, by assigning 20 points to the first CMM trading right
owned or leased by a member and 10 points to each subsequent CMM
trading right owned or leased by the same member, only 9 CMM trading
rights will be required to cover the entire ISE market. Accordingly,
members that currently own or lease 10 CMM trading rights will be able
to sell or discontinue leasing one of their CMM trading rights.
Similarly, other market markers on the ISE also will be able to reduce
the number of CMM trading rights they need to gain access to the
options classes in which they want to make markets. Thus, the proposal
will reduce the cost of market making on the ISE and increase the
supply of available CMM trading rights, which will provide the
opportunity for more market makers to join the ISE. Moreover, assigning
the first CMM trading right that is owned or leased by a market maker
20 points and subsequent CMM trading rights 10 points takes into
consideration that the CMM trading rights currently are assigned to
groups with a varying number of options classes. This structure makes
it less likely that current market makers with CMM trading rights
primarily in the larger
[[Page 37865]]
groups will be negatively impacted by the proposed change.\6\
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\6\ The Exchange will provide members with a transition period
of 30 to 60 days following approval of the proposed rule change.
During the transition period, the Exchange will work with existing
market makers to restructure their appointments within the new
point-based structure.
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The Exchange also proposes to adjust its CMM quotation requirements
to reflect the proposed elimination of specified groups of options
associated with CMM trading rights. Specifically, under the current
structure, CMMs are required to participate in the opening and provide
continuous quotations in a minimum number of options classes in each of
their assigned groups. Since CMMs will have the flexibility to choose
the options classes to which they are appointed rather than being
appointed to a pre-determined group of options, the Exchange proposes
to modify this requirement to limit the number of appointed options
classes in which a CMM can initiate intraday quoting to the number of
options classes in which it participates in the opening rotation.
Under the current rules, a CMM is required to participate in the
opening in 60% of the options classes in its appointed group of options
or 40 options classes, whichever is lesser. If, for example, a CMM is
appointed to a group with 100 options classes, then it must participate
in the opening for 40 options classes and may initiate intra-day
quoting in 60 options classes. Under the proposed structure, a CMM
appointed to 100 options classes that participates in the opening in 40
options classes may only initiate intra-day quoting in 40 additional
classes. There is no minimum number of options classes in which a CMM
must quote because under the new structure, CMMs presumably will not
seek appointment to options classes unless they want to quote them.
Thus, the Exchange believes it is reasonable to adopt a structure that
is more restrictive with respect to entering quotes after the opening.
In addition, this requirement currently is in place for options classes
traded in the Exchange's Second Market,\7\ and the Exchange believes it
effectively encourages market makers to provide added liquidity during
the opening.
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\7\ ISE Rule 904(a).
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Additionally, under the proposal the Exchange will retain the
current requirement that once a CMM enters a quotation in an appointed
options class, it must maintain continuous quotations for that series
and at least 60% of the series of the options class until the close of
trading that day.\8\ If a CMM receives Preferenced Orders in an options
class, it will continue to be required to maintain continuous
quotations in at least 90% of the series in that class. Finally, the
Exchange will continue to have the ability under its rules to call upon
a CMM to submit quotations in one or more series of an options class to
which the CMM is appointed.\9\
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\8\ CMMs will continue to be subject to the quotation
requirements contained in Rule 803 and 804.
\9\ The proposal also amends Rule 805 to correct a cross-
reference to Rule 804, and amends rule 810 to replace a reference to
appointment to groups with a reference to appointed options.
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Finally, the Exchange proposes to terminate its current CMM
inactivity fee. That fee currently imposes a charge of $25,000 a month
for CMM trading rights that are not active. The purpose of the fee is
to help recoup a portion of the income that the Exchange loses when
market makers do not operate their trading rights and generate
transaction-based revenue. Under the proposed CMM trading rights
structure, the Exchange does not believe that the inactivity fee is
appropriate or necessary, as CMMs will now be able to manage the number
of options classes to which they are appointed.\10\ Moreover, we
believe that there will be increased demand for CMM trading rights, and
that owners of such rights will have a financial incentive to sell or
lease any unused trading rights. If this does not turn out to be the
case, the Exchange will consider reinstituting some form of inactivity
fee that is appropriate for the new structure.
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\10\ For example, under the current structure, a CMM that owns
or leases three CMM trading rights is obligated to continuously
quote a minimum of 120 options classes. Under the new structure, a
CMM with three trading rights could seek appointment for only three
options classes (one for each trading right), thus making the
inactivity fee ineffective.
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2. Basis
The basis under the Act for this proposed rule change is found in
Section 6(b)(5),\11\ in that the proposed change is designed to promote
just and equitable principles of trade, 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.
In particular, the proposal will provide more open access to the
Exchange for market makers. It will also permit broker-dealer members
of the ISE to use their CMM trading rights more efficiently, lowering
their costs of providing liquidity on the Exchange. At the same time,
because a PMM will continue to be appointed to each options class,
there will continue to be continuous, two-sided quotations in all
options listed on the Exchange.\12\ As further required under Section
6(b)(5) of the Exchange Act, the proposal will not result in unfair
discrimination between customers, issues, brokers or dealers. Indeed,
any and all potential market makers will be able to purchase or lease
newly available CMM trading rights.
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\11\ 15 U.S.C. 78f(b)(5).
\12\ Pursuant to Rule 804(a)(2), PMMs have the obligation to
provide continuous quotations in all of the series of all of the
options to which they are appointed.
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Pursuant to Section 6(b)(8) of the Exchange Act,\13\ the proposed
rule change is designed to foster competition, both with respect to
exchange competition and broker-dealer competition, as it will
encourage additional market maker participation. The additional market
making interest that this will attract to the ISE will make the ISE
more competitive with other exchanges that have a market making
structure which is less limited as the ISE's current structure. As to
broker-dealers, this proposal will permit more broker-dealers to join
the ISE and disseminate competitive quotations, which will enhance
competition among market makers.
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\13\ 15 U.S.C. 78f(b)(8).
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Finally, the proposal to eliminate the CMM inactivity furthers
Section 6(b)(4) of the Exchange Act \14\ in that it is an equitable
allocation of reasonable fees and other charges among Exchange members
and other persons using its facilities. The Exchange believes that
eliminating the inactivity will potentially lower costs for members
providing liquidity on the Exchange. Furthermore, it will apply equally
to all CMMs and thus is not discriminatory.
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\14\ 15 U.S.C. 78f(b)(4).
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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.
[[Page 37866]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove 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. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-ISE-2011-33 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2011-33. 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,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of the ISE. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-ISE-2011-33 and should be
submitted by July 19, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-16033 Filed 6-27-11; 8:45 am]
BILLING CODE 8011-01-P