I. Introduction

On January 13, 2004, February 13, 2004, April 6, 2004, July 7, 2004, and September 1, 2004, the International Securities Exchange, Inc. (“ISE”), the Philadelphia Stock Exchange, Inc. (“Phlx”), the Boston Stock Exchange, Inc. (“BSE”), the Chicago Board Options Exchange, Inc. (“CBOE”), and the Pacific Exchange, Inc. (“PCX”) (collectively, the “options exchanges”), respectively, filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) ^[1] and Rule 19b-4 thereunder,^[2] proposed rule changes to modify the definitions of Firm Customer Quote Size (“FCQS”) and Firm Principal Quote Size (“FPQS”) contained in their Exchange rules by changing certain minimum size guarantees for Linkage Orders to accommodate the “natural size” of quotations.^[3]

BSE submitted BSE Amendment No. 1 to its proposed rule change on June 9, 2004.^[4] ISE submitted ISE Amendment No. 1 to its proposed rule change on May 10, 2004,^[5] and ISE Amendment No. 2 to its proposed rule change on July 30, 2004.^[6] Phlx submitted Phlx Amendment No. 1 to its proposed rule change on August 11, 2004.^[7]

Notice of BSE's proposed rule change, as amended, was published in the Federal Register on September 16, 2004.^[8] Notice of CBOE's proposed rule change was published in the Federal Register on September 16, 2004.^[9]

Notice of ISE's proposed rule change, as amended, was published in the Federal Register on September 16, 2004.^[10] Notice of PCX's proposed rule change was published in the Federal Register on September 16, 2004.^[11] Notice of Phlx's proposed rule change, as amended, was published in the Federal Register on September 16, 2004.^[12] No comments were received on the proposed rule changes. This order approves the proposed rule changes, as amended.^[13]

II. Description of the Proposals

The purpose of the proposed rule changes is to amend the definitions of FCQS and FPQS provided in each of the options exchange's rules ^[14] to conform them to the definitions provided in the Linkage Plan, as amended by Joint Amendment No. 13.^[15] While the proposed rule changes would maintain a general requirement, in each of the options exchange's rules, that the FCQS and FPQS be at least 10 contracts, that requirement would not apply if, pursuant to its rules, an options exchange were disseminating a quotation of fewer than 10 contracts. In that case, the options exchange could establish a FCQS or FPQS equal to its disseminated size, or “natural size.”

Under the proposed rule changes, as with Linkage orders today, if an order is of a size eligible for automatic execution, the receiving options exchange must provide an automatic execution of the Linkage order. If this is not the case (for example, the receiving options exchange's automatic execution system is not engaged), the receiving exchange may allow the order to drop to manual handling. However, the receiving options exchange still must provide a manual execution for at least the FCQS or FPQS, as appropriate (in this case, the size of its disseminated quotation of less than 10 contracts).

III. Discussion

After careful review, the Commission finds that the proposed rule changes, as amended, are consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.^[16] In particular, the Commission finds that the proposals, as amended, are consistent with the provisions of ( printed page 62926) Section 6(b)(5) of the Act,^[17] which requires, among other things, that a national securities exchange's rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and to perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest.

The Commission notes that the options exchanges adopted the current definitions of FCQS and FPQS, which impose a “10-up” requirement, at a time when all the options exchanges had rules requiring that their minimum quotation size be for at least 10 contracts. Consequently, an exchange receiving a customer limit order for fewer than 10 contracts would disseminate the price of the customer limit order with a size of 10 contracts and the specialist or the trading crowd would be responsible to make up the difference. Since implementation of the Linkage Plan, several of the options exchanges have modified their rules to permit them to disseminate the “natural size” of customer limit orders that are of a size of less than 10 contracts.^[18] The Commission believes that approval of the proposed rule changes, which will permit options exchanges to conform their Linkage rules to other Exchange rules allowing them to disseminate a customer limit order's “natural size,” should provide greater transparency to investors and the marketplace and better reflect the true state of liquidity in the marketplace.

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,^[19] that the proposed rule changes (SR-BSE-2004-14; SR-CBOE-2004-41; SR-ISE-2004-01; SR-PCX-2004-84; SR-Phlx-2004-16), as amended, are approved.