[Federal Register Volume 65, Number 125 (Wednesday, June 28, 2000)]
[Notices]
[Pages 39972-39974]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-16305]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42964; File No. SR-Amex-00-30].


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange LLC Relating to the Allocation 
of, and Participation in, Options and Index Share Trades

June 20, 2000
    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 May 30, 2000, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes to codify in Rule 950(d) Commentary .05 current 
practices regarding the allocation of, and participation in, option and 
index share trades executed on the Exchange by registered options 
traders and specialists.

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 Exchange 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 Exchange 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
    Since the inception of options trading at the Exchange in 1975, 
both specialists and registered options traders (``traders'') have had 
the responsibility of making markets in options. In addition, although 
index shares, portfolio depositary receipts, and trust issued receipts 
such as SPDRS, DIAMONDS, NASDAQ 100 shares and HOLDRs are equity 
securities listed and traded under the Exchange's equity rules, they 
have some of the characteristics of ``derivative products,'' and thus 
registered options traders are eligible for, and have been assisting 
specialists in, making markets in these products as well.
    The Exchange's rules require that both specialists' and traders' 
transactions should constitute a course of dealings reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market and that specialists and traders should not enter into 
transactions or make bids or offers that are inconsistent with such a 
course of dealing.\3\ Specialists and traders shall engage, to a 
reasonable degree under the existing circumstances, in dealings for 
their own accounts when there exists a lack of price continuity, a 
temporary disparity between the supply of and demand for options 
contracts of a particular series, or a temporary distortion of the 
price relationships between option contracts of the same class.\4\ The 
Exchange notes that the Commission stated in its Order announcing the 
effectiveness of the Exchange's plan to list and trade options that 
registered floor traders on the Amex ``will be expected to trade in a 
way assists the specialist in maintaining a fair and orderly market. * 
* *'' \5\
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    \3\ See Amex Rule 170 (concerning specialists)--made applicable 
to options trading by Rule 950(n)--and rule 958 (concerning 
registered traders).
    \4\ Id.
    \5\ See Securities Exchange Act Release No. 11144 (December 19, 
1974), 40 FR 3258 (January 20, 1975) (emphasis added).
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    The Amex notes that specialists do, however, have additional 
obligations, which include, among other things, the obligation to (1) 
Assure that disseminated market quotations are accurate; (2) assure 
that each disseminated market quotation in appointed options classes 
shall be honored up to ten contracts, or such other minimum number as 
set from time to time by the Exchange; (3) determine any formula for 
generating the automatically updated market quotations and disclosing 
the elements of the formula to the members of the trading crowd; (4) be 
present at the trading post throughout every business day; (5) 
participate at all times in the automated execution system for each 
assigned option class; and (6) resolve trading disputes, subject to 
Floor

[[Page 39973]]

Official review upon the request of any party to the dispute.\6\
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    \6\ These obligations are mandated by, or implicit in, various 
Amex trading rules and practices. Telephone conversation between 
Claire McGrath, Vice President and Special Counsel, Amex, and Ira L. 
Brandriss, Attorney, Division of Market Regulation, the Commission, 
on June 16, 2000.
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    The Exchange represents that in the course of making markets, 
specialists are often on parity with registered options traders; that 
is, bidding and offering simultaneously to provide liquidity. Amex Rule 
126--made applicable to options trading by Amex Rule 950(d)--provides 
that when bids (offers) are made simultaneously, all such bids (offers) 
are on parity, and any securities sold (bought) in execution of such 
bids (offers) shall be divided as equally as possible between those 
specialists and traders on parity. Over the years, it has been 
recognized by the Exchange as well as by the registered traders and 
specialists, that, given their role, specialists should be entitled to 
a greater than equal share when on parity with registered traders. As a 
result, a practice has developed in the trading crowds for many option 
classes and index shares to give the specialist a greater than equal 
share when on parity with registered options traders. The Exchange now 
seeks to codify this practice.
    The Exchange proposes to adopt commentary .05 to Rule 950(d), which 
would provide for a specialist to receive a specified participation in 
the number of securities executed, which would vary depending upon the 
number of traders on parity. The distribution of securities between the 
specialist and the traders on parity would be as follows:

------------------------------------------------------------------------
                                                   Approximate number of
   Number of traders on     Approximate number of   securities allocated
          parity            securities allocated    to the traders (as a
                              to the specialist            group)
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1........................  60%...................  40%
2-4......................  40....................  60
5-7......................  30....................  70
8-15.....................  25....................  75
16 or more...............  20....................  80
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    The Exchange emphasizes that the above percentages would apply only 
when the specialist and/or registered traders are on parity. In 
situations where a customer order is on parity with the specialist and 
registered traders, Exchange rules provide that the customer will not 
receive a lesser amount than the registered traders or specialist.\7\ 
The Exchange notes, however, that a specialist cannot be on parity with 
an order for which he is acting as agent,\8\ and registered traders 
(who never act as agents and trade only for their own accounts) cannot 
be on parity with a customer when either establishing or increasing 
their position in the option.\9\
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    \7\ See, e.g., Amex Rule 126(e)(2).
    \8\ See Amex Rule 155.
    \9\ See Amex Rule 111, Commentary .07, made applicable to 
options trading by Amex Rule 950(c).
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    The proposed rule change would also codify the distribution of 
``Auto-Ex'' executed options trades among specialists and registered 
traders.\10\ The Exchange's ``Auto-Ex'' system automatically executes 
public customer market and marketable limit orders of a minimum of 10 
and a maximum of 50 option contracts or less. Both specialist and 
registered options traders are contra-parties to the trades executed on 
the Auto-Ex system. Such trades are automatically allocated on a 
rotating basis to the specialist and to each trader that has signed on 
to Auto-Ex.\11\ If an Auto-Ex trade is greater than ten contracts, the 
Auto-Ex system divides the execution into lots of ten or fewer and 
allocates a lot to each Auto-Ex participant.\12\ Each lot is considered 
a separate trade for purposes of allocating trades within Auto-Ex. 
Under the proposed rule change, the rotation would be designed to 
provide that Auto-Ex trades be allocated between the specialist and 
traders signed on to Auto-Ex in a given option class as follows:
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    \10\ The Exchange notes, however, that index shares, portfolio 
depositary receipts, and trust issued receipts are not executed 
through the Auto-Ex system.
    \11\ At the start of each trading day, the order in which trades 
are allocated to the specialist and traders signed on to Auto-Ex is 
randomly determined.
    \12\ For example, an order for 25 contracts, in an option class 
for which orders of up to 50 contracts may be executed through Auto-
Ex, would be executed in three trades--two trades of 10 each and one 
trade of five contracts.

------------------------------------------------------------------------
                                                   Approximate number of
                            Approximate number of   trades allocated to
 Number of traders signed    trades allocated to    trader(s) signed on
      on to  Auto-Ex           the specialist      to Auto-Ex throughout
                             throughout the day           the day
------------------------------------------------------------------------
1........................  60%...................  40%
2-4......................  40....................  60
5-7......................  30....................  70
8-15.....................  25....................  75
16 or more...............  20....................  80
------------------------------------------------------------------------

    The Exchange believes that it is appropriate to provide a greater 
participation to specialists because they have responsibilities and are 
subject to certain costs that registered traders do not. For example, 
specialists have a continuous obligation to the market, and must update 
and disseminate quotes in all securities, reflect all market interest 
in the displayed quotes, and act as a contra-party on Auto-Ex at all 
times. In addition, connected with these responsibilities are fixed 
staffing costs committed to market making in a particular security 
whether it is actively traded or not and the costs associated with 
participating in educational and marketing functions to attract order 
flow.
    In order to attract specialist units to the Exchange who are 
willing to accept these responsibilities, the Exchange believes it is 
necessary to provide specialists with a guaranteed participation. The 
Exchange also believes that it must provide these guarantees in order 
to be competitive with other options exchanges that currently offer 
enhanced participation to their specialists and select market

[[Page 39974]]

makers.\13\ The Exchange believes that guaranteed participation would 
also give specialists the ability to attract order flow to the Exchange 
and provide its customers with tighter, more competitive markets. As a 
result, the Exchange would be able to attract new specialist units and 
retain the services of existing units.
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    \13\ See Chicago Board Options Exchange Rule 8.80; Pacific 
Exchange Rule 6.82; and Philadelphia Stock Exchange Rule 1014(g).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \14\ of the Act in general and furthers the 
objectives of Section 6(b)(5) \15\ of the Act in particular in that it 
is 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 facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Amex does not believe that the proposed rule change will impose 
any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:

(A) By order approve such proposed rule change, or

(B) Institute proceedings to determine whether the proposed rule change 
should be disapproved.

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 offices of the 
Amex. All submissions should refer to File No. SR-Amex-00-30 and should 
be submitted by July 19, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-16305 Filed 6-27-00; 8:45 am]
BILLING CODE 8010-01-M