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Notice

Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change by the International Securities Exchange LLC and Amendment No. 1 Thereto Relating to Payment for Order Flow Fees

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Start Preamble December 4. 2001.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”) [1] and Rule 19b-4 thereunder,[2] notice is hereby given that on November 16, 2001, the International Security Exchange LLC (the “Exchange” or the “ISE”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which the ISE has prepared. On November 28, 2001, the ISE submitted Amendment No. 1 to the proposed rule change. The Commission is publishing this notice to solicit comments from interested persons on the proposed rule change, as amended.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The ISE is proposing to establish a ceiling of $750,000 in each of the ten payment-for-order-flow funds that the ISE maintains. The text of the proposed Start Printed Page 64326rule change is available at the ISE and the Commission.

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

Under ISE Rule 802(b), the ISE has divided the options it trades into 10 groups, with one Primary Market Maker (“PMM”) assigned to each group. The ISE maintains a payment-for-order-flow fund for each group, consisting of the fees collected from market makers trading options in that group. The PMM for the group is responsible for arranging and making all payments to Electronic Access Members for order flow sent to the ISE in options in that Group.

The purpose of the proposed rule change is to establish a ceiling of $750,000 in each of the ten payment-for-order-flow funds that the ISE maintains. To date, the ISE has been paying out of these funds less money than has been collected, thus building a balance in the individual funds. The ISE believes that capping each fund at $750,000 will provide sufficient money for PMMs to maintain the payment-for-order-flow program while lessening the economic burden on market makers to continue to pay payment-for-order-flow fees. The funds for most of the ten groups of options either currently are at, or the ISE anticipates soon will reach, the $750,000 level. Once a fund reaches this level, market makers trading options in that group will pay the payment-for-order-flow fee only when the imposition of such fee is necessary to replenish the fund to the $750,000 level.

The ISE will implement the rule change so that market makers economically will not pay the payment-for-order-flow fee whenever the fund for a particular group reaches $750,000. In this regard, the ISE anticipates that soon all the group funds will reach this level. From that time forward, market makers will pay this fee only to the extent necessary to replenish a fund after the ISE makes its monthly payments to order flow providers. To the extent that collections exceed payments in a given month, market makers in a group will be responsible for the payment-for-order-flow fee only for that portion of the month necessary to return the fund to the $750,000 level.

The ISE will implement this process by working both with individual market makers and their clearing firms, who handle the payment of fees for their market maker clients. This could result in more than one operational process to implement this fee cap. For example, the ISE could cease charging the fee on the day that a fund reaches $750,000; alternatively, the ISE could continue to impose the fee for the entire month and then credit members for excess payments in their monthly bill. The ISE may adopt one or more of these processes (or a similar process) depending on the particular needs and practices of its market makers and clearing firms.

2. Basis

The ISE states that the basis for the proposed rule change is the requirement under Section 6(b)(4) of the Act [3] that an exchange have an equitable allocation of reasonable dues, fees, and other charges among its members and other persons using its facilities.

B. Self-Regulatory Organization's Statement on Burden Competition

The ISE believes that 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 ISE has not solicited, and does not intend to solicit, comments on this proposed rule change. The ISE 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

The foregoing rule change, which establishes or changes a due, fee, or other charge applicable to members of the Exchange, has become effective pursuant to section 19(b)(3)(A) of the Act [4] and Rule 19b-4(f)(2) thereunder. [5] At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate the rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.

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 in the Commission's Public Reference Room. Copies of the filing will also be available for inspection and copying at the principal office of the ISE. All submissions should refer to SR-ISE-2001-31 and should be submitted by January 2, 2002.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[6]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

[FR Doc. 01-30656 Filed 12-11-01; 8:45 am]

BILLING CODE 8010-01-M