[Federal Register Volume 65, Number 221 (Wednesday, November 15, 2000)]
[Notices]
[Pages 69079-69080]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-29184]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43516; File No. SR-Amex-95-45]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval of Amendment Nos. 1 and 2 to the Proposed Rule 
Change by the American Stock Exchange LLC Relating to the Maximum Size 
of Option Orders That May Be Executed Automatically

November 3, 2000.

I. Introduction

    On October 25, 1999, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change amending its rules regarding the 
automatic execution of options orders to increase the maximum number of 
contracts that may be designated for automatic execution from fifty 
contracts to seventy-five contracts. Notice of the proposal was 
published in the Federal Register on June 21, 2000.\3\ The Commission 
received no comments on the proposal. On November 1, 2000, the Exchange 
submitted Amendment No. 1 to the proposal.\4\ On November 3, 2000, the 
Exchange submitted Amendment No. 2 to the proposal.\5\ This order 
approves the proposal and grants accelerated approval of Amendment Nos. 
1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 42931 (June 13, 
2000), 65 FR 38615 (June 21, 2000).
    \4\ See letter from Scott Van Hatten, Legal Counsel, Derivative 
Securities, Amex, to Nancy Sanow, Assistant Director, Division of 
Market Regulation, Commission dated October 31, 2000 (``Amendment 
No. 1''). In Amendment No. 1, the Amex proposes to codify its rules 
regarding the AUTO-EX parameters for option contracts under Amex 
Rule 933, Commentary .02.
    \5\ See letter from Scott Van Hatten, Legal Counsel, Derivative 
Securities, Amex to Nancy Sanow, Assistant Director, Division of 
Market Regulation Commission dated November 2, 2000 (``Amendment No. 
2''). In Amendment No. 2, the Amex corrects the language in Amex 
Rule 933, Commentary .02 to state that the eligible orders for 
options on the Institutional, Japan and S&P MidCap 400 Indices must 
be for ``fewer than 100 contracts'' for series subject to AUTO-EX.
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II. Description of the Proposal

    The Exchange's AUTO-EX system automatically executes public 
customer market and marketable limit orders in options at the best bid 
or offer displayed at the time the order is entered into the order is 
entered into the Amex Order File (``AOF''). Generally, public customer 
market and marketable limit orders for up to fifty options contracts 
may be automatically executed through the Exchange's AUTO-EX system.\6\ 
Recently, AOF, which handles limit orders routed to the specialist's 
book as well as those orders routed to AUTO-EX, was increased to allow 
for the entry of orders of up to 250 option contracts.\7\ Because AUTO-
EX is only allowed to execute equity option orders and index orders of 
up to fifty contracts, any market and marketable limit orders for 
between fifty and 250 option contracts are generally routed by the AOF 
to the specialist's book.
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    \6\ See Securities Exchange Act Release No. 42094 (November 3, 
1999), 64 FR 61675 (November 12, 1999). Although the maximum 
permissible number of cotracts in an option order executable through 
AUTO-EX is generally fifty contracts, there are three exceptions 
that allow ninety-nine contract orders; the Institutional, Japan and 
S&P MidCap 400 Indexes.
    \7\ See Securities Exchange Act Release No. 42128 (November 10, 
1999), 64 FR 63836 (November 22, 1999).
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    The Exchange proposes to increase the maximum AUTO-EX order size 
eligibility for equity and index option contracts orders from fifty 
contracts to seventy-five contracts.\8\ The proposed increase in 
permissible order size will be implemented on a case-by-case basis for 
an individual option class or for all option classes when two floor 
governors or senior floor officials deem such an increase appropriate.
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    \8\ The Exchange is codifying its rules, under Amex Rule 933, 
Commentary .02, regarding the maximum option order size eligibility 
for its AUTO-EX system. See Amendment No. 1, supra note 4. Order 
size maximum levels for the Institutional, Japan, and S&P MidCap 400 
Indexes would remain at ninety-nine contracts under this proposal. 
See Amendment No. 2, supra note 5.
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    The Exchange represents that it has sufficient systems capacity to 
accommodate implementation of the proposed increase in permissible 
order size and that AUTO-EX has been extremely successful in enhancing 
execution and operational efficiencies during emergency situations and 
during other non-emergency situations for certain options classes. The 
Exchange believes that automatic executions of orders for up to 
seventy-five contracts will enhance its overall operational efficiency 
and give the Exchange better means of competing with other options 
exchanges for order flow.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, the requirements of section 6 of the Act.\9\ Among 
other provisions, section 6(b)(5) of the Act requires that the rules of 
an exchange be designed to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating securities transactions; 
remove impediments to and perfect the mechanism of a free and open 
market and a national securities system; and protect investors and the 
public interest.\10\
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    \9\ The Commission has considered the proposed rule's impact of 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    While increasing the maximum order size limit from fifty contracts 
to seventy-five contracts for AUTO-EX eligibility by itself does not 
raise concerns under the Act,\11\ the Commission believes that this 
increase raises collateral issues that the Amex will need to monitor 
and address. Increasing the maximum order size for particular option 
classes will make a larger number of option orders eligible for the 
Exchange's automatic execution system. These orders may benefit from 
greater speed of execution, but at the same time create greater risks 
for market maker participants. Market makers signed onto the AUTO-EX 
system will be exposed to the financial risks associated with larger-
sized orders being routed through the system for automatic execution at 
the displayed price. When the market for the underlying security 
changes rapidly, it may take a few moments for the related option's 
price to reflect that change. In the interim, customers may submit 
orders that try to capture the price differential between the 
underlying security and the option. The larger the orders accepted 
through AUTO-EX, the greater the risk market makers must be willing to 
accept. The Commission does not believe that, because Amex

[[Page 69080]]

governors and senior floor officials determine to approve orders as 
large as seventy-five contracts as eligible for AUTO-EX, those 
officials or any other Amex officials or Amex committee should 
disengage AUTO-EX more frequently by, for example, declaring a ``fast'' 
market. Disengaging AUTO-EX can negatively affect investors by making 
it slower and less efficient to execute their option orders. It is the 
Commission's view that the Exchange, when increasing the maximum size 
orders that can be sent through AUTO-EX, should not disadvantage all 
customers--the vast majority of which enter orders for less than 
seventy-five contracts--by making the AUTO-EX system less reliable.
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    \11\ The Commission notes that it is concurrently approving 
similar proposals filed by the Chicago Board Options Exchange, Inc. 
(``CBOE''), the Pacific Stock Exchange, Inc. (``PCX'') and the 
Philadelphia Stock Exchange, Inc. (``Phlx''). See Securities 
Exchange Act Release No. 43517 (November 3, 2000) (SR-CBOE-99-51); 
Securities Exchange Act Release No. 43518 (November 3, 2000) (SR-
PCX-00-32); and Securities Exchange Act Release No. 41515 (November 
3, 2000) (SR-Phlx-99-32).
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    Finally, the Commission finds good cause for approving Amendment 
Nos. 1 and 2 prior to the 30th day after notice of the Amendment is 
published in the Federal Register pursuant to section 19(b)(2) of the 
Act.\12\ Amendment No. 1 codifies the proposed increase in the AUTO-EX 
parameters from fifty contracts to seventy-five option contracts. 
Amendment No. 2 corrects the rule language in Amex Rule 933, Commentary 
.02. The Commission finds that accelerated approval of Amendment Nos. 1 
and 2 is appropriate in order to allow the Amex to increase its AUTO-EX 
eligibility limits so that it may better compete with the other option 
exchanges.
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    \12\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 1 and 2, including whether they are 
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 such filing will also be available for 
inspection and copying at the principal office of the Amex. All 
submissions should refer to File No. SR-Amex-99-45 and should be 
submitted by December 6, 2000.

Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with section 6(b)(5).\13\
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    \13\ 15 U.S.C. 78f(b)(5).
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    It is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-Amex-99-45) is approved, and 
Amendment Nos. 1 and 2 are approved on an accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-29184 Filed 11-14-00; 8:45 am]
BILLING CODE 8010-01-M