Subject: File No. SR-ISE-2005-31
From: Michael Adams
Affiliation: President, KSMA Holdings, LLC

July 11, 2005

As the President of a group of customers who trades over a million options contracts per year electronically, I see many problems with this proposed rule change; following are the most egregious:

1 Decreased liquidity - customers whose orders add liquidity to the market are discouraged from resting orders on the public books, as they may be subject to theses cancellation fees. Keep in mind that NASDAQ has REBATES for adding liquidity to the market, not penalties.

2. Reduced Price discovery. - Markets will widen as customers are less apt to try and split the market.

3. New risk management concerns: Consider this: I open an account at OptionsXpress, a large options brokerage, with 50,000. At 2:00 on the last day of the month, I send an order to the ISE electronically to buy a .10 OFFERED option 10,000 times for the BID price of .05.
Since the offer is .10 and I am only bidding .05 I am not filled - and I cancel. This whole process takes less than one second. I repeat this procedure 1,000 times over the next hour, and close my account.
OptionsXpress does not execute the 2,000,000 contracts necessary to offset my 10,000,000 cancelled contracts, and they are sent a bill for 1,000,000.
This could be done to every electronic broker in

The ISE is claiming these new rules are to cut down on bandwidth usage and reduce the number of one-lots executed in high frequencies.
First, the ISE created the one-lot problem by the implementation of their first cancellation policy which based fees on a per-execution
ratio as opposed to a per-contract ratio. Second, if the ISE imlpemented the commonly used 15-second rule, that would immediately stop the bandwidth issue without sacrificing liquidity and price

The ISE is clearly trying to force out customer order flow they dont see as valuable, and only accept the dumb money that comes from the small retail orders that EVERY exchange wants. The difference is that the other exchanges are still upholding their charge of serving the marketplace, rather than destroy it.