[Federal Register Volume 66, Number 65 (Wednesday, April 4, 2001)]
[Notices]
[Pages 17977-17978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-8208]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44106; File No. 4-429]


Joint Industry Plan; Notice of Filing of Amendment to the Options 
Intermarket Linkage Plan To Conform the Options Intermarket Linkage 
Plan to the Requirements of Securities Exchange Act Rule 11Ac1-7

    Pursuant to section 11A(a)(3) of the Securities Exchange Act of 
1934 (``Act'') \1\ and Rule 11Aa3-2, thereunder,\2\ notice is hereby 
given that on March 13, 2001, the American Stock Exchange LLC 
(``Amex''), Chicago Board Options Exchange, Inc. (``CBOE''), 
International Securities Exchange LLC (``ISE''), Pacific Exchange, Inc. 
(``PCX''), and Philadelphia Stock Exchange, Inc. (``Phlx'') 
(collectively the ``Participants'') submitted to the Securities and 
Exchange Commission (``SEC'' or ``Commission'') an amendment to the 
Options Intermarket Linkage Plan.\3\ The amendment proposes to conform 
the Linkage Plan to the requirements of the recently-adopted Exchange 
Act Rule 11Ac1-7, the Trade-Through Disclosure Rule.\4\The Commission 
is publishing this notice to solicit comments from interested persons 
on the proposed Linkage Plan amendment.
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    \1\ 15 U.S.C. 78k-1(a)(3).
    \2\ 17 CFR 240,11Aa3-2.
    \3\ On July 28, 2000, the Commission approved a national market 
system plan for the purpose of creating and operating an intermarket 
options market linkage (``Linkage Plan'') proposed by the Amex, 
CBOE, and ISE. See Securities Exchange Act Release No. 43086 (July 
28, 2000), 65 FR 48023 (August 4, 2000). Subsequently, upon request 
by the Phlx and PCX, the Commission issued orders to permit these 
exchanges to participate in the Linkage Plan. See Securities 
Exchange Act Release Nos. 43573 (November 16, 2000), 65 FR 70850 
(November 28, 2000) and 43574 (November 16, 2000), 65 FR 70851 
(November 28, 2000).
    \4\ 17 CFR 240.11Ac1-7. See Securities Exchange Act Release No. 
43591 (November 17, 2000), 65 FR 75439 (December 1, 2000) 
(``Adopting Release''). Specifically, in the Adopting Release, the 
Commission noted that to conform to the regulations of the Trade 
Through Disclosure Rule, a linkage plan must, at a minimum: (1) 
Limit participants from trading through, not only the quotes of 
other linkage plan participants, but also, the quotes of exchanges 
that are not participants in an approved linkage plan; (2) require 
plan participants to actively surveil their markets for trades 
executed at prices inferior to those publicly quoted on other 
exchanges; and (3) make clear that the failure of a market with a 
better quote to complain within a specified period of time that its 
quote was traded-through may affect potential liability, but does 
not signify that a trade-through has not occurred.
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I. Description and Purpose of the Amendment

    On November 17, 2000, the Commission adopted Rule 11Ac1-7 to 
require a broker-dealer to disclose to its customer when the customer's 
order for listed options is executed at a price inferior to a better 
published quote (``intermarket trade-through''), and to disclose the 
better published quote available at that time. However, a broker-dealer 
is not required to disclose to its customer an intermarket trade-
through if the broker-dealer effects the transaction on an exchange 
that participates in an approved linkage plan that includes provisions 
reasonably designed to limit customers' orders from being executed at 
prices that trade through a better published quote. The purpose of the 
proposed amendment to the Linkage Plan is to add provisions to the 
Linkage Plan that are reasonably designed to limit intermarket trade-
throughs.
    The proposed amendment would change the definitions of ``National 
Best Bid or Offer'' (``NBBO'') and ``Trade-Throughs'' so that the terms 
would apply to unlinked, as well as linked, exchanges. The Participants 
represent that the proposed changes would extend the requirement in the 
Linkage Plan that, absent reasonable justification and during normal 
market conditions, members should not effect trade-throughs, to 
unlinked markets, as well as linked markets.
    Next, the proposed amendment would require that Participants 
establish procedures for conducting surveillance for trade-throughs, 
both with respect to trading through linked and unlinked markets. It 
also would require that Participants adopt uniform rules that

[[Page 17978]]

would make it a violation of a Participant's rules for a member to 
engage in a pattern or practice of trading through bids and offers in 
other linked markets,\5\ unless one of the enumerated exceptions to the 
Linkage Plan's Trade-Through provisions applies and, in the case of a 
Block Trade, where the initiating member has satisfied aggrieved 
parties at the block price.
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    \5\ In the Adopting Release, the Commission noted that in 
addition to the minimal provisions that must be included in an 
intermarket linkage plan to allow broker-dealers effecting 
transactions on exchanges participating in the plan to be excepted 
from the disclosure requirements of the Trade-Through Disclosure 
Rule, each exchange participating in a linkage plan would have to 
adopt certain rules. Specifically, the Commission stated that each 
exchange,
    would have to adopt rules to allow the exchange to sanction 
specialists or market makers that trade through better prices of 
other exchanges, maintain policies and procedures that would limit 
the occurrence of intermarket trade-throughs, and maintain records 
that would identify intermarket trade-throughs and any review or 
remedial action taken by the exchange in response to such 
intermarket trade-throughs.
    See Adopting Release, supra note 5 at n.62. Notwithstanding the 
more limited language in the proposed amendment to the Linkage Plan, 
each exchange's rules must address trade-throughs of better quotes 
displayed by both linked and unlinked markets.
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    Lastly, the proposed amendment would add a provision to the Linkage 
Plan that states that a failure to lodge a Trade-Through complaint will 
not signify that a Trade-Through has not occurred, but instead, would 
affect only liability.
    The Participants believe that, upon Commission approval of the 
amendment, coupled with the adoption and approval of the conforming 
rules by the Participants, the Linkage Plan would meet the requirements 
of the Trade-Through Disclosure Rule, and therefore, broker-dealers who 
effect transactions on one of the linked markets would be exempt from 
making the required disclosures under the Trade-Through Disclosure 
Rule.

II. Implementation of the Plan Amendment

    The Participants intend to make the proposed amendment to the 
Linkage Plan reflected in this filing effective when the Commission 
approves the amendment.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed 
Linkage Plan amendment is consistent with the Act. Persons making 
written submission 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 Linkage Plan amendment 
that are filed with the Commission, and all written communications 
relating to the proposed Linkage Plan amendment 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 at the Commission's Public Reference Room. 
Copies of such filings will also be available for inspection and 
copying at the principal offices of the Amex, CBOE, ISE, Phlx, and PCX. 
All submissions should refer to File No. 4-429 and should be submitted 
by April 25, 2001.

For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-8208 Filed 4-3-01; 8:45 am]
BILLING CODE 8010-01-M