[Federal Register Volume 76, Number 159 (Wednesday, August 17, 2011)]
[Notices]
[Pages 51075-51076]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-20901]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65100; File No. SR-ISE-2011-33]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Order Granting Approval to a Proposed Rule Change Relating to
Appointments to Competitive Market Makers
August 11, 2011.
I. Introduction
On June 10, 2011, the International Securities Exchange, LLC (the
``Exchange'' or the ``ISE'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) \1\ of the
Securities Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4
thereunder,\3\ a proposed rule change to revise the manner in which
Competitive Market Makers are appointed to options classes. The
proposed rule change was published for comment in the Federal Register
on June 28, 2011.\4\ The Commission received no comments regarding the
proposal. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
\4\ See Securities Exchange Act Release No. 64719 (June 22,
2011), 76 FR 37863 (``Notice'').
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II. Description of the Proposal
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 such a
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 rights 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. 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.
The Exchange proposes to change the structure of CMM appointments
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.\5\ CMMs will be able to change
their appointments at any time upon advance notification to the
Exchange.\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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\5\ 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. Under the proposal, either the Exchange or a
committee designated by the Board will be permitted to make
appointments.
\6\ 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.
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The proposal seeks to standardize the level of access gained by
owning or leasing a CMM trading right. In addition, the proposal will
make additional memberships available. 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 (instead of 10) will be required
to cover the entire ISE market.
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. 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
[[Page 51076]]
classes may only initiate intra-day quoting in 40 additional classes.
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. CMMs will also continue to be subject to the quotation
requirements contained in Rule 803 and 804. 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. 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.
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.\7\ Moreover, the
Exchange believes 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 states that it will consider reinstituting
some form of inactivity fee that is appropriate for the new structure.
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\7\ 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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III. Discussion and Commission Findings
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 \8\ and, in
particular, the requirements of Section 6 of the Act.\9\ Specifically,
the Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\10\ which requires, among other things,
that the rules of a national securities exchange be 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 and are not designed to
permit unfair discrimination between customers, issuers, brokers or
dealers. The Commission also believes that the proposal is consistent
with Section 6(b)(4) of the Act,\11\ which requires that the rules of a
national securities exchange provide for the equitable allocation of
reasonable fees and other charges among the Exchange's members and
issuers and other persons using its facilities.
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\8\ 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).
\9\ 15 U.S.C. 78f.
\10\ 15 U.S.C. 78f(b)(5).
\11\ 15 U.S.C. 78f(b)(4).
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In particular, the Commission believes that the proposal should
allow CMMs additional flexibility to choosing their appointed
classes.\12\ The Commission notes that potential market makers will be
able to purchase or lease newly-available CMM trading rights. 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.\13\ In addition, 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.\14\
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\12\ The Commission also notes that the new structure is similar
to the Chicago Board Options Exchange's (``CBOE'') rules, which
permit its market makers to choose the options to which they are
appointed. See CBOE Rule 8.3.
\13\ ISE Rule 802(e)-(f).
\14\ 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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The Exchange proposes 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. The
Commission notes that CMMs will also continue to be subject to the
quotation requirements contained in Rules 803 and 804. In addition,
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.\15\ 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.\16\ Also, 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.\17\
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\15\ ISE Rule 804(e)(2)(iii).
\16\ ISE Rule 804(e)(2)(iii).
\17\ ISE Rule 802(e)(2)(iv).
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Finally, the Exchange proposes to eliminate its current charge of
$25,000 a month for CMM trading rights that are not active. The
Exchange states that the inactivity fee is not appropriate or
necessary, as CMMs will now be able to manage the number of options
classes to which they are appointed. The Commission believes that the
proposal is consistent with Section 6(b)(4) of the Act.\18\
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\18\ 15 U.S.C. 78f(b)(4).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change (SR-ISE-2011-33), be, and hereby
is, approved.
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\19\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20901 Filed 8-16-11; 8:45 am]
BILLING CODE 8011-01-P