[Federal Register Volume 66, Number 45 (Wednesday, March 7, 2001)]
[Notices]
[Pages 13816-13819]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-5540]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44013; File No. SR-AMEX-01-05]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the American Stock Exchange 
LLC Relating to Price Matching and Improvement Enhancements to Auto-Ex

February 28, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on 
February 12, 2001, the American Stock Exchange LLC (the ``Amex'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Exchange has designed the proposed rule change as 
constituting a ``non-controversial'' rule change under paragraph (f)(6) 
of Rule 19b-4 under the Act,\3\ which renders the proposal effective 
upon receipt of this filing by the Commission. On February 27, 2001, 
the Exchange Commission received Amendment No. 1 to the filing.\4\
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    \1\ 15 U.S.C. 78s(b)(1)
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b(f)(6).
    \4\ See letter from Claire McGrath, Vice President and Special 
Counsel, Amex to Nancy Sanow, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated February 26, 2001 
(``Amendment No. 1''). In Amendment No. 1, the Exchange deleted 
Commentary .01(g) from the proposed rule text, and clarified the 
circumstances under which customer orders would be routed to the 
specialist instead of being automatically executed.
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    The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

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

    The Amex proposes to implement price improvement enhancements to 
the Exchange's Automatic Execution system. Below is the text of the 
proposed rule change. Proposed new language is in italics.
* * * * *

Automatic Execution of Options Orders

Rule 933
    (a)-(b) No change.

Commentary

    .01(a) Orders to buy or sell options that are multiply traded on 
one or more options exchanges in addition to the Exchange will not be 
automatically executed at prices inferior to the current best bid or 
offer displayed by any other options exchange, as such best bids or 
offers are identified by the Exchange's order routing system.
    (b) Customer orders in those series of options that have been 
specifically designated by the Auto-Ex Enhancements Committee 
(``automatic price matching series''), under circumstances where the 
Exchange's best bid or offer is inferior to the current best bid or 
offer displayed by another options exchange by no more than the ``price 
matching amount,'' as defined below, will be automatically executed at 
the current best bid or offer displayed by the other options exchange. 
If the Exchange's best bid or offer is inferior to the current best bid 
or offer displayed by another options exchange by more than the price 
matching amount, the order will be routed to the specialist and not 
automatically executed. Only customer orders within the order size 
parameters established by the Auto-Ex Enhancements Committee will be 
eligible for automatic price matching. A customer order that exceeds 
the established order size parameter will be routed to the specialist 
and not automatically executed.
    (c) Customer orders in those series of options that have been 
specifically designed by the Auto-Ex Enhancements Committee 
(``automatic price improvement series'') will be automatically executed 
when the Exchange's best bid or offer is equal to the current best bid 
or offer by the price improvement amount, as defined below. Only 
customer orders within the order size parameters established by the 
Auto-Ex Enhancements Committee will be eligible for automatic price 
improvement. A customer order that exceeds the established order size 
parameter will be either automatically executed at the Exchange's best 
bid or offer if it is within the Auto-Ex order size parameters, or it 
will be routed to the specialist and not automatically executed.
    (d) Notwithstanding paragraphs (b) and (c) above, orders for 
automatic price matching series or automatic price improvement series 
will be routed to the specialist and not automatically executed in 
situations where: (i) the current best bid or offer for one of the 
series is crossed (e.g., 4.20 bid, 4 asked) or locked (e.g., 4 bid, 4 
asked); (ii) the specialist in conjunction with a Floor governor or two 
Floor Officials determined quotes in such options or options 
exchange(s) are not reliable; or (iii) the Exchange is experiencing 
communications or systems problems, ``fast markets,'' or delays in the 
dissemination of quotes by the Options Price Reporting Authority 
(``OPRA''). Members and member organizations will be notified when the 
Exchange has determined that quotes are not reliable and prior to one 
or both Auto-Ex Enhancements being shut off and customer orders being 
routed to the specialist for execution. The specialist will report the 
execution or non-execution of such orders to the firm that

[[Page 13817]]

originally forwarded the order to Auto-Ex.\5\
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    \5\ Proposed subparagraph (d) of Commentary .01 of Amex Rule 933 
is reorganized in this order to clarify that orders for automatic 
price matching series or automatic price improvement series will be 
routed to the specialist and will not be automatically executed if 
the specialist in conjunction with a Floor Governor or two Floor 
officials determines that quotes in such options or options 
exchange(s) are not reliable and if the Exchange is experiencing 
communications or systems problems, ``fast markets,'' or delays in 
the dissemination of quotes by OPRA. Telephone conversation between 
Elizabeth King, Associate Director, Nancy Sanow, Assistant Director, 
and Jennifer Colihan, Special Counsel, Division, Commission, and 
Claire McGrath, Vice President and Special Counsel, Amex, on 
February 27, 2001.
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    (e) As used in this Commentary, the term ``price matching amount'' 
shall mean the minimum increment for options of that series established 
pursuant to Rule 952, or any greater amount established by the Auto-Ex 
Enhancements Committee in respect of specified automatic price matching 
series of options. As used in this Commentary, the term ``price 
improvement amount'' shall mean the minimum increment for options of 
that series established pursuant to Rule 952, or any greater amount 
established by the Auto-Ex Enhancements Committee in respect of 
specified automatic price improvement series of options.\6\
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    \6\ Proposed subparagraph (e) of Commentary .01 of Amex Rule 933 
provides that that Auto-Ex Enhancement Committee shall determine the 
price improvement amounts and order size parameters. Telephone 
conversation between Nancy Sanow, Assistant Director and Jenifer 
Colihan, Special Counsel, Division, Commission, and Claire McGrath, 
Vice President and Special Counsel, Amex, on February 27, 2001.
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* * * * *

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 Amex 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 Amex 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to permit the 
implementation of enhancements to the Exchange's Automatic Execution 
(``Auto-Ex'') system. Auto-Ex executes, at the displayed bid or offer, 
customer market and marketable limit option orders up to a specified 
number of contracts routed through the Amex Order File (``AOF''). There 
are, however, some situations in which orders otherwise eligible for 
execution on Auto-Ex are routed to the specialist's book (known as the 
Amex Options Display Book (``AODB'')) for an execution. These 
situations occur when (i) the best bid or offer is represented by a 
limit order on the AODB, (ii) the best bid or offer is locked or 
crossed, or (iii) there is a better bid or offer being displayed by a 
competing market.
    The Exchange now proposes to enhance its automatic execution system 
to provide automatic price matching and improvement for certain orders 
executed through Auto-Ex, thus eliminating the need for these orders to 
be routed to the AODB. The first proposed enhancement will provide 
automatic price matching on Auto-Ex when the best bid or offer for that 
series being displayed by a competing market is within a specified 
number of trading increments or ``ticks'' of the bid or offer being 
displayed by the Amex (i.e., the ``price matching amount''). The second 
proposed enhancement will provide automatic price improvement on Auto-
Ex for orders within the established order size parameters when Amex is 
displaying the best bid or offer and specialists and registered options 
traders wish to improve upon their own bid or offer by a specified 
number of trading increments (i.e., the ``price improvement amount'').
    A newly created committee, the Auto-Ex Enhancement Committee (the 
``Committee''), will review and designate which option classes or 
series are eligible for either one or both of the Auto-Ex enhancements 
upon the request of a specialist. The Committee will be comprised of 
the Exchange's four Floor Governors and the Chairmen (or their 
designees) of the Specialists Association, the Options Market Makers 
Association and the Floor Brokers Association. In determining which 
option classes or series are eligible for either one or both of the 
Auto-Ex enhancements, the Committee may consider such factors as the 
open interest in the requested option; the average daily volume of the 
option; customer requests; and any other factors as the Committee deems 
appropriate. The Committee will also have the ability to delete options 
from the list of those eligible for the enhancements upon the request 
of the specialist using the same or similar criteria, including the 
specialists' ability to continue offering either of the enhancements. 
The Committee will also determine the price matching and price 
improvement amounts and the order size parameters. The Exchange will 
publish a list of all eligible options in an Information Circular 
distributed to members.

a. Automatic Price Matching

    The first proposed enhancement will provide for the matching of the 
best bid or offer displayed by a competing market by allowing customer 
market and marketable limit orders to be automatically executed at that 
best bid or offer provided it is within the specified number of trading 
increments or ticks of the Amex's displayed bid or offer, and the order 
is within the established order size parameters. Currently, the trading 
increment for an option with a premium equal to or less than $3.00 is 5 
cents and for an option with a premium greater than $3.00, the trading 
increment is 10 cents. Thus, for example, if the Amex displayed quote 
is 2-2.10, the best bid/offer displayed by a competing market is 2-
2.05, the specified number of ticks is one and the order size parameter 
is five contracts, when an order is received on the Amex to buy 5 
contracts at the market, the order will be automatically executed at 
the offer price of 2.05. The enhancement can be turned on at any level 
for an option, by symbol, class put/call or strike price. If an order 
is received and the competing market's best bid or offer was not within 
the specified number of ticks or the order size is larger than the 
order size parameters, then the order would be routed to the AODB for 
an execution.

b. Automatic Price Improvement

    The second enhancement will provide for automatic price improvement 
anytime the Amex quote is equal to the best bid/offer and the option 
series has been designated by the Auto-Ex Enhancement Committee. 
Through this enhancement, automatic price improvement will be provided 
based upon a predefined number of ticks and for orders within the 
established order size parameter. For example, if the Amex displayed 
quote is the best bid and offer at 2-2.10, the predefined number of 
ticks is one and the order size parameter is five when an order is 
received on the Amex to buy 5 contracts at the market, the order will 
be automatically executed at an improved price of 2.05. If the order 
size is for a number of contracts that exceeds the order size 
parameters, such orders will be automatically executed at the best bid/
offer. This enhancement may be turned on for any option, by symbol, 
class, put/call or strike price.

[[Page 13818]]

    Neither enhancement will apply if the current best bid or offer is 
locked or crossed. Further, the enhancements will not apply when the 
specialist in conjunction with a Floor Governor or two Floor Officials 
determines that quotes in such options or market(s) are deemed not to 
be reliable. This authority would be expected to be exercised only in 
circumstances such as communications or systems problems; fast markets; 
delays in the dissemination of quotes because of queues on the Option 
Price Reporting Authority (``OPRA'') (in which case the Exchange would 
know that there is a delay in the dissemination of quotes from the 
other exchanges, which would likely render such quotes stale) or if the 
Exchange is advised by another exchange that it is experiencing 
communications or system problems that would cause its disseminated 
quotes to be unreliable. Also, neither enhancement will apply if the 
Exchange is experiencing communications or systems problems; fast 
markets; or delays in the dissemination of quotes by OPRA.
    The Exchange believes the implementation of the proposed price 
matching and improvement enhancements will benefit investors by 
providing investors with automatic executions at prices equal to or 
better than the current best bid/offer and greatly enhance speed of 
execution and order turn-around times.
2. Basis
    The proposed rule change is consistent with section 6(b) of the Act 
\7\ in general and furthers the objectives of section 6(b)(5) \8\ 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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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    Written comments were neither solicited nor received with respect 
to the proposed rule change.

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

    The proposed rule change has been filed by the Exchange as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A) of the Act 
\9\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\10\ Because the 
foregoing proposed rule change: (i) Does not significantly affect the 
protection of investors or the public interest; (ii) does not impose 
any significant burden on competition; and (iii) by its terms, does not 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest; provided that the 
Exchange has given the Commission written notice of its intent to file 
the proposed rule change at least five business days prior to the 
filing date of the proposed rule change, it has become effective 
pursuant to section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6).
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 15 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission accelerate the 
operative date of the proposal. In addition, the Exchange provided the 
Commission with written notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed rule 
change, more than five business days prior to the date of the filing of 
the proposed rule change. The Commission finds that it is appropriate 
to accelerate the operative date of the proposal and designate the 
proposal to become operative today.\11\
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    \11\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    The Commission finds good cause for accelerating the operative date 
of the proposed rule change.\12\ The Commission notes that it has 
approved similar proposals filed by the Chicago Board Options Exchange 
(``CBOE'') \13\ and the Philadelphia Stock Exchange, Inc. 
(``Phlx'').\14\ Approval of this proposal on an accelerated basis will 
enable the Amex to compete on an equal basis with these other exchanges 
and thus is consistent with section 6(b)(8) of the Act.\15\
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    \12\ The Commission notes that its decision to accelerate the 
operative date of this rule change is not dispositive of whether all 
aspects of the new Commentary comply with the terms and conditions 
of section IV.h.(i)(bb) of the Order Instituting Public 
Administrative Proceedings Pursuant to section 19(h)(1) of the 
Securities Exchange Act of 1934, Making Findings and Imposing 
Remedial Sanctions (the ``Order''). The parties to the Order, 
including the Exchange, are required to ``specify the circumstances, 
if any, under which automated execution systems can be disengaged or 
operated in any manner other than the normal manner set forth in the 
exchange's rules and require the documentation of the reasons for 
each decision to disengage an automated execution system or operate 
it in any manner other than the normal manner.'' The Order further 
provides that parties to the Order must submit to the Commission 
staff draft proposed rule changes that comply with the requirements 
set forth above no later than six months from the date of the Order. 
See Securities Exchange Act Release No. 43268 (September 11, 2000).
    \13\ See Securities Exchange Act Release Nos. 43285 (September 
12, 2000), 65 FR 56972 (September 20, 2000) (approving SR-CBOE-93-
22); 40096 (June 16, 1998), 63 FR 34209 (June 23, 1998) (approving 
SR-CBOE-98-13); 41821 (September 1, 1999), 64 FR 50313 (September 
16, 1999) (approving SR-CBOE-99-17); 42167 (November 22, 1999), 64 
FR 66954 (November 30, 1999) (approving SR-CBOE-99-57).
    \14\ See Securities Exchange Act Release No. 43684 (December 6, 
2000), 65 FR 78238 (December 14, 2000) (partially approving SR-Phlx-
00-93).
    \15\ 15 U.S.C. 78f(b)(8).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such 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 Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Act. Persons making written submissions should file 
fix 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 number SR-Amex-01-05 and should be 
submitted by March 28, 2001.


[[Page 13819]]


    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. 01-5540 Filed 3-6-01; 8:45 am]
BILLING CODE 8010-01-M