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Notice

Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by International Securities Exchange, Inc., Relating to Payment-for-Order-Flow and Marketing Fees

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Start Preamble December 9, 2002.

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 November 20, 2002, the International Securities Exchange, Inc. (“ISE”) filed with the Securities and Exchange Commission the proposed rule change as described in Items I, II, and III below, which the ISE has prepared. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

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

The ISE is proposing: (1) To reduce its payment-for-order-flow fee from $.65 a contract to $.55 a contract; (2) to lower the cap on each payment-for-order-flow fund from $650,000 to $550,000; and (3) to extend the waiver of the marketing fee from December 31, 2002 to June 30, 2003. The text of the proposed rule change is available at the ISE and at 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 had received. 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 those statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

The ISE operates a payment for order flow program as approved by the Commission.[3] This program is currently Start Printed Page 77117funded through a $.65 fee paid by ISE market makers for each customer contract they execute. The ISE is proposing to reduce its payment-for-order-flow fee from $.65 a contract to $.55 a contract. The ISE also has established a ceiling of $650,000 in each of the 10 payment-for-order-flow funds it maintains.[4] The ISE is proposing to lower the cap on each payment-for-order-flow fund from $650,000 to $550,000.

The ISE has also established a $.10 marketing fee, paid by market makers on customer contracts, that funds general ISE marketing efforts to increase order flow from Electronic Access members.[5] The ISE has waived that fee for the second half of this year.[6] The ISE is proposing to extend the waiver of the marketing fee from December 31, 2002 to June 30, 2003.

The ISE states that it regularly monitors the levels of these fees and ceilings to help ensure that the payment-for-order-flow and marketing efforts are sufficiently funded and that the fees it imposes on its market makers are no higher than necessary. With respect to payment-for-order-flow, the ISE states that it historically has collected more money than its Primary Market Makers have paid out. The ISE believes that it can adequately maintain this program with the reduced fee and ceiling. With respect to the marketing fee, the ISE currently has sufficient retained funds from the time the fee was in effect to pay for anticipated marketing efforts for the beginning part of next year. Thus, the ISE is proposing to extend this fee waiver through June 2003.

The basis for this proposed rule change is the requirement of section 6(b)(4) under the Act [7] 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 on Competition

The ISE believes that the proposed rule change will 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 has become effective pursuant to section 19(b)(3)(A) of the Act [8] and Rule 19b-4(f)(2) thereunder [9] because it changes an ISE fee. At any time within 60 days of the filing of such 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-2002-26 and should be submitted by January 6, 2003.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[10]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See Securities Exchange Act Release No. 43833 (January 10, 2001), 66 FR 7822 (January 25, 2001).

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4.  See Securities Exchange Act Release Nos. 45128 (December 4, 2001), 66 FR 64325 (December 12, 2001) and 45772 (April 17, 2002), 67 FR 20563 (April 25, 2002). The ISE has divided the options it trades into 10 groups, with one Primary Market Maker 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 Primary Market Maker 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.

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5.  See Securities Exchange Act Release No. 44102 (March 26, 2001), 66 FR 17590 (April 2, 2001).

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6.  See Securities Exchange Act Release No. 46189 (July 11, 2002), 67 FR 47587 (July 19, 2002).

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[FR Doc. 02-31592 Filed 12-13-02; 8:45 am]

BILLING CODE 8010-01-P