[Federal Register Volume 66, Number 69 (Tuesday, April 10, 2001)]
[Notices]
[Pages 18662-18676]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-8740]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44145; File Nos. SR-Amex-01-18; SR-CBOE-01-15; SR-ISE-
01-07; SR-PCX-01-18; and SR-Phlx-01-37]


Self-Regulatory Organizations: Notice of Filing and Order 
Granting Partial Accelerated Approval for a Sixty Day Pilot Program of 
Proposed Rule Changes and Amendments by the American Stock Exchange 
LLC, the Chicago Board Options Exchange, Inc., the International 
Securities Exchange LLC, the Pacific Exchange, Inc., and the 
Philadelphia Stock Exchange, Inc. Relating to the Application of the 
Quote Rule to Options Trading

April 2, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4

[[Page 18663]]

thereunder,\2\ notice is hereby given that on March 15, 2001, the 
American Stock Exchange LLC (``Amex''); on March 30, 2001, the Chicago 
Board Options Exchange, Inc. (``CBOE''); on February 28, 2001, the 
International Securities Exchange LLC (``ISE''); on March 29, 2001, the 
Pacific Exchange, Inc. (``PCX''); and on March 12, 2001, the 
Philadelphia Stock Exchange, Inc. (``Phlx'') (referred to collectively 
as ``Exchanges'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule changes as described in 
Items I and II below, which Items have been prepared by the 
Exchanges.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ For ease of comparison and review, the Commission has 
consolidated the proposed rule changes of the Exchanges into one 
notice, which combines and summarizes the main provisions of the 
Exchanges' proposed rule changes.
---------------------------------------------------------------------------

    Amex submitted to the Commission Amex Amendment No. 1 to its 
proposed rule change on March 21, 2001 \4\ and Amex Amendment No. 2 on 
March 28, 2001.\5\ CBOE filed CBOE Amendment No. 1 to its proposed rule 
change on March 30, 2001.\6\ ISE submitted ISE Amendment No. 1 to its 
proposal on March 30, 2001.\7\ The PCX submitted PCX Amendment No. 1 on 
March 29, 2001.\8\ The Phlx submitted Phlx Amendment No. 1 to its 
proposal on March 16, 2001 \9\ and Phlx Amendment No. 2 on March 29, 
2001.\10\ The Commission is publishing this notice to solicit comments 
on the proposed rule changes, as amended, from interested persons. As 
discussed below, the Commission is also granting accelerated approval 
to those portions of the proposals relating the implementation of 
sixty-day pilot programs (``Pilots'') to accommodate the Exchanges' 
efforts to amend their rules to conform to the Quote Rule by the 
compliance date of April 1, 2001.
---------------------------------------------------------------------------

    \4\ In Amendment No. 1, Amex made technical corrections to its 
rule text to, in part, better conform to Exchange Act Rule 11Ac1-1 
(``Quote Rule''); clarified in a footnote that Nasdaq has begun 
trading in decimals; and requested a 60 day pilot program to 
accommodate the application of the Quote Rule to its market. See 
letter from Claire P. McGrath, Vice President and Special Counsel, 
Derivative Securities, Amex, to Nancy Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
March 20, 2001 (``Amex Amendment No. 1'').
    \5\ In Amendment No. 2, Amex made further corrections to its 
rule text to better conform to the Quote Rule. See letter from 
Claire P. McGrath, Vice President and Special Counsel, Derivative 
Securities, Amex, to Nancy Sanow, Assistant Director, Division, 
Commission, dated March 27, 2001 (``Amex Amendment No. 2'').
    \6\ In Amendment No. 1, CBOE made technical corrections to its 
rule text to, in part, better conform to the Quote Rule. See letter 
from Madge M. Hamilton, Legal Division, CBOE to Nancy Sanow, 
Assistant Director, Division, Commission, dated March 30, 2001 
(``CBOE Amendment No. 1'').
    \7\ In Amendment No. 1, ISE made technical corrections to its 
rule text to, in part, better conform to the SEC's Quote Rule and 
requested a 60-day pilot program to accommodate the application of 
the Quote Rule to its market. See letter from Michael Simon, Senior 
Vice President and General Counsel, ISE, to Nancy Sanow, Assistant 
Director, Division, Commission, dated March 29, 2001 (replacing Form 
19b-4 in its entirety) (``ISE Amendment No. 1'').
    \8\ In Amendment No. 1, PCX made technical corrections to its 
rule text to, in part, better conform to the Quote Rule. See letter 
from Michael D. Pierson, Senior Vice President Regulatory Policy, 
PCX, to John Roeser, Division, Commission, dated March 29, 2001 
(``PCX Amendment No. 1'').
    \9\ In Amendment No. 1, Phlx made technical corrections to its 
rule text to, in part, better conform to the Quote Rule; requested a 
60 day pilot program to accommodate the application of the Quote 
Rule to its market; and clarified that the applicable firm quote 
size will be the AUTO-X guarantee or ten contracts for booked limit 
orders. See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated March 15, 
2001 (``Phlx Amendment No. 1'').
    \10\ In Amendment No. 2, Phlx made further technical corrections 
to its rule text to conform to the Quote Rule; clarified that 
responsible brokers or dealers were collectively responsible for 
satisfying the disseminated size or quotation size; clarified the 
responsibility of a responsible broker or dealer when acting as an 
agent for a limit order; represented that Phlx would notify 
specified persons of an unusual market condition through OPRA using 
an agreed-upon indicator; and represented that Phlx will 
periodically publish its established quotation size for broker-
dealer orders on its web site. See letter from Richard S. Rudolph, 
Counsel, Phlx, to Nancy J. Sanow, Assistant Director, Division, 
Commission, dated March 28, 2001 (``Phlx Amendment No. 2'').
---------------------------------------------------------------------------

I. Self-Regulatory Organizations' Statement of the Terms of 
Substance of the Proposed Rule Changes

    The Exchanges propose to amend their rules to conform to the 
requirements of the Quote Rule. The text of the proposed rule changes 
follows. New text is italicized and deleted text is bracketed.

A. Amex Proposed Rule Text

Rule 958A. [Specialist Options Transactions]
    [(a) Firm Quotes. At all times other than during rotation, a 
specialist is required to sell (buy) at least ten (10) contracts at the 
offer (bid) which is displayed when a buy (sell) order reaches the 
trading post where the option class is located for trading. Option 
series that are subject to this rule shall be determined from time to 
time at the discretion of the Exchange. A Floor Official may determine 
on a case by a case basis that an exception to the rule is warranted 
for, among other things, a change in market conditions, an obvious 
error occurring in the posting of the display market quote due to 
reporter errors or system malfunctions.
    (b) Public Customer Definition. Only non-broker-dealer customer 
orders shall be entitled to executions pursuant to the provisions of 
this rule. For purposes of this Rule, the term ``broker/dealer'' 
includes foreign broker/dealers.
    (c) Registered Option Trader Orders. Specialists are not required 
to display as a market quotation bids or offers of a Registered Option 
Trader for less than 10 contracts.

* * * Commentary

    .01  Trade or Fade. With respect to broker-dealer orders to buy 
(sell) at the displayed offer (bid), or portions of customer orders 
that are not entitled to an execution pursuant to provisions of 
paragraph (a), the specialist is required to either (1) sell (buy) the 
number of contracts specified in the order, or (2) change the displayed 
offer (bid) to reflect that such displayed offer (bid) is no longer 
available. In such instance, where a displayed offer (bid) is revised, 
it shall be considered conduct inconsistent with just and equitable 
principles of trade for the specialist to immediately re-display the 
previously disseminated offer (bid), unless such action is warranted by 
a change in market conditions].

Application of the Firm Quote Rule

    (a) Definitions--(i) For purposes of this rule the terms 
``aggregate quotation size'', ``best bid and best offer'', ``bid and 
offer'', ``quotation size'', ``quotation vendor'', ``reported 
security'', ``listed option'', ``option class'', ``option series'' and 
``trading rotation'' shall have the meanings set forth in SEC Rule 
11Ac1-1.
    (ii) For purposes of this rule and SEC Rule 11Ac1-1 as applied to 
the Exchange and its members, the term ``responsible broker or dealer'' 
shall mean, with respect to any bid or offer for any listed option made 
available by the Exchange to quotation vendors, the specialist and any 
registered options traders constituting the trading crowd in such 
option series shall collectively be the responsible broker or dealer to 
the extent of the aggregate quotation size specified. 
    (b) Dissemination Requirements of the Exchange--with respect to 
paragraph (b) of SEC Rule 11Ac1-1 and except as set forth in Commentary 
.01 of this rule, the Exchange shall, at all times it is open for 
trading, (A) collect, process and make available to quotation vendors 
the best bid, the best offer, quotation sizes and aggregate quotation 
sizes associated therewith for each option series that is a reported 
security and for which a responsible broker or dealer is obligated to 
execute any

[[Page 18664]]

customer order as set forth in paragraph (c)(i) below; and (B) shall 
for each listed option class, establish by rule and periodically 
publish the quotation size for which the responsible broker or dealer 
is obligated to execute an order for the account of a broker or dealer 
to buy or sell an option series that is a reported security at its 
published bid or offer as set forth in paragraph (c)(ii) below. The 
Exchange may collect, process and make available to quotation vendors a 
best bid or best offer determined by an automated quotation system. 
    The Exchange's obligation to collect, process and make available 
data as set forth above shall not include (A) collecting processing or 
making available any such bid or offer which is executed immediately 
after being made in the crowd and any such bid or offer which is 
cancelled or withdrawn if not executed immediately after being made; or 
(B) data communicated during any period when trading in such reported 
security has been suspended or halted; prior to the commencement of 
trading in such reported security on any trading day; or during a 
trading rotation. The minimum quotation size made available to 
quotation vendors or established by rule and published by the exchange 
shall be ten contracts for each option series.
    (c) Obligations of a Responsible Broker or Dealer--Pursuant to SEC 
Rule 11Ac1-1 each responsible broker or dealer for each series of each 
listed option class shall promptly communicate to the Exchange its best 
bid, best offer, quotation size and aggregate quotation size. No 
responsible broker or dealer shall communicate a quotation size or 
aggregate quotation size for less than ten contracts. This obligation 
may be fulfilled by the use of an automated quotation system.
    (i) Subject to the provisions of paragraph (d) of this rule, each 
responsible broker or dealer shall be obligated to execute any customer 
order in an option series in an amount up to its published quotation 
size. 
    (ii) Subject to the provisions of paragraph (d) of this rule, each 
responsible broker or dealer shall be obligated to execute any order 
for the account of a broker or dealer in a listed option in an amount 
up to the quotation size established by rule and periodically published 
by the Exchange. 
    (iii) Subject to the provisions of paragraph (d) of this Rule, each 
responsible broker or dealer shall comply with the Thirty Second 
Response provisions set forth in paragraph (d)(3) of SEC Rule 11Ac1-1. 
    (d) Use of Unusual Market Exception--Notwithstanding paragraphs (b) 
and (c) above and pursuant to paragraph (b)(3) of SEC Rule 11Ac1-1, if 
the Exchange determines, in accordance with the procedures set forth 
below, that the level of trading activity or the existence of unusual 
market conditions is such that the Exchange cannot collect, process and 
make available to quotation vendors quotation data in a manner which 
accurately reflects the current state of the market at the Exchange, 
the Exchange shall immediately notify the persons specified in 
paragraph (b)(3) of SEC Rule 11Ac1-1 below and, upon such notification, 
the obligation imposed upon Exchange members under paragraph (c)(2) of 
SEC Rule 11Ac1-1 and the Exchange under paragraphs (b)(1) and (2) of 
SEC Rule 11Ac1-1 shall be suspended, until a determination by the 
Exchange that the unusual market activity or condition has terminated 
and the specified persons have been notified that the unusual market 
activity or condition has terminated: 
    (i) If a responsible broker or dealer is unable to update his 
quotations on a timely basis due to the high level of trading activity 
or the existence of an unusual market condition, he shall promptly 
notify a Floor Official. 
    (ii) Upon notification by a responsible broker or dealer, the Floor 
Official shall promptly verify the existence of the unusual market 
activity or condition and if, in his judgment, the responsible broker 
or dealer is unable to update his quotations on a timely basis, the 
Floor Official shall promptly notify the Market Operations Division of 
the Exchange. If a Floor Official, independent of notification by a 
responsible broker or dealer, becomes aware of any unusual market 
activity or condition which adversely affects a responsible broker or 
dealer's ability to promptly communicate quotation data, he shall 
likewise promptly advise the Market Operations Division. 
    (iii) If the Exchange is unable to accurately collect, process, 
and/or disseminate quotation data owing to the high level of trading 
activity or the existence of unusual market conditions, the Market 
Operations Division of the Exchange, after consultation with a Floor 
Official, shall make a determination that this is the case. 
    (iv) The Market Operations Division, after receiving notification 
from a Floor Official pursuant to either subparagraphs (i) and (iii) 
above, shall notify the persons specified in paragraph (b)(3) of SEC 
Rule 11Ac1-1 regarding the Exchange's inability to accurately collect, 
process, and make available the quotation data required by SEC Rule 
11Ac1-1. The Exchange shall append to each quotation made available to 
a quotation vendor an identifier which will indicate that the 
obligation imposed upon Exchange members and the Exchange by SEC Rule 
11Ac1-1 has been suspended.
    (v) The Floor Official or the Market Operations Division (as the 
case may be) shall monitor the unusual market activity or condition 
until it has terminated. Thereupon, the Market Operations Division 
shall immediately notify the persons specified in paragraph (b)(3) of 
SEC Rule 11Ac1-1 that the Exchange is once again capable of 
disseminating the quotation data required by Rule SEC 11Ac1-1 and 
responsible brokers or dealers shall be once again obligated under SEC 
Rule 11Ac1-1 as made applicable to Exchange members pursuant to this 
Rule 958A.
* * * * *
* * * Commentary
    .01  As of April 1, 2001, the compliance date for application of 
SEC Rule 11Ac1-1 to the trading of options, the Exchange is able to 
disseminate to quotation vendors the quotation size or aggregate 
quotation size of the best bid or best offer in most, but not all, 
option classes. This is not expected to be a permanent condition and it 
is anticipated that quotation sizes will be available for all option 
classes shortly after the compliance date. However, until such time as 
the Exchange is able to disseminate quotation size for all option 
classes, for those option classes for which it is unable to do so, it 
will collect, process and disseminate the best bid and best offer, and 
establish by rule and periodically publish the quotation size for which 
the responsible broker or dealer is obligated to execute a customer 
order to buy or sell an option series in that class. 
    .02  No specialist shall be deemed to be a responsible broker or 
dealer with respect to a published bid or offer that is erroneous as a 
result of an error or omission made by the Exchange or any quotation 
vendor. If a published bid or published offer is accurate but the 
published quotation size (or published aggregate quotation size, as the 
case may be) associated with it is erroneous as a result of an error or 
omission made by the Exchange or any quotation vendor, then the 
specialist who is responsible for the published bid or published offer 
shall be obligated to the extent set forth in paragraph (c) of Rule 
11Ac1-1 but only to the extent of one

[[Page 18665]]

unit of trading in the reported security in question. 
    .03  Absent unusual market conditions, the responsible broker or 
dealer shall honor any bid or offer then being displayed by quotation 
vendors which is erroneous, up to the quotation size then being so 
displayed, which has been displayed for six minutes or more. Provided, 
however, that the specialist shall not be required to honor such a bid 
or offer which is erroneous as to either price or size or both if: 
    (i) as a matter or record, an execution, cancellation or update of 
such bid or offer was in effect or in process; 
    (ii) in honoring such a bid or offer, the resulting transaction 
would violate applicable Exchange rules or federal regulations; 
    (iii) equipment failure prevents the specialist from monitoring 
such bid or offer; or 
    (iv) the price sought upon such quotation is above the current bid 
or below the current offer, on the Floor, by (a) $.25 or more in the 
case of a reported security trading at $3 or less or (b) $.50 or more 
in the case of a reported security trading at more than $3. 

B. CBOE Proposed Rule Text

Rule 8.51. [Trading Crowd] Firm Disseminated Market Quotes
    (a) Rule 8.51. Definitions.
    (1) For the purposes of this rule, and SEC Rule 11Ac1-1 as applied 
to the Exchange and members on the floor, the term ``responsible broker 
or dealer'' shall mean, with respect to any bid or offer for any 
reported security made available by the Exchange to quotation vendors, 
the trading crowd in a series or class of option, which shall be the 
responsible broker or dealer to the extent of the quotation size 
specified in (b) or (c) of this rule. 
    (2) For purposes of this rule, the term ``reported security'' means 
any security or class of securities for which transaction reports are 
collected, processed and made available pursuant to an effective 
national market system plan for reporting transactions in listed 
options. 
    (b) Firm Quote Requirement for Non-broker-dealer Orders. All [The] 
classes and series [which] shall be subject to the requirements of this 
rule. [will be determined at the discretion of the appropriate Market 
Performance Committee (``MPC'').]
    (1) The appropriate Floor Procedure Committee may establish the 
firm quote requirement for each series of option, which shall be for at 
least one contract, for non-broker-dealer orders. The Exchange will 
periodically publish the firm quote requirement for each series of 
option. In the event the Exchange disseminates quotation size, the firm 
quote requirement would be for up to the disseminated size. 
    [(1) Only non-broker dealer customer orders shall be entitled to an 
execution pursuant to the provisions of this paragraph (a). For the 
purposes of this Rule, the term broker-dealer includes foreign broker-
dealers as defined in Rule 1.1(xx).]
    (2) [The firm quote requirement shall be no less than the RAES 
contract limit applicable to that class of options, except where the 
RAES contract limit is more than fifty contracts for a particular 
option class then the firm quote requirement shall be fifty contracts. 
However, for those classes where the RAES contract limit is fifty or 
less, the appropriate Floor Procedure Committee, in its discretion, may 
establish a different firm quote requirement for a particular class of 
options that is no less than the RAES contract limit and no more than 
50 contracts. For classes or series that are not traded on RAES, the 
appropriate Floor Procedure Committee may establish a firm quote 
requirement of between 10 and 50 contracts; The firm quote requirement 
applies at all times other than during rotation, unless there is a 
contrary FloorOfficial ruling pursuant to subparagraph (3) of this 
paragraph (a).]
    The firm quote requirement obligates [a trading crowd] the 
responsible broker or dealer to sell(buy) at least the established 
number of contracts at the offer(bid) which is displayed when [a] the 
responsible broker or dealer receives a buy (sell) order [reaches] at 
the trading station where the particular option class is located for 
trading. [The Exchange may establish a higher firm quote requirement, 
of up to 100 contracts, for the trading crowd for options on the Dow 
Jones Industrial Average. Except in the case of rerouted RAES orders 
that are eligible for the RAES kick out price in accordance with 
Interpretation .04 to Rule 6.8, an order ordinarily will be deemed to 
reach the trading station when a Floor Broker represents the order in 
open outcry at the trading station.]
    (3) When orders for the same class (whether for the same series or 
different series) from the same beneficial owner are represented at the 
trading station at approximately the same time, then only the first of 
such orders that cumulatively equal or add up to less than the firm 
quote requirement shall be entitled to an execution pursuant to 
paragraphs (b) and (c) [(a)(2)] above.
    [(4) On a case by case basis, any two Floor Officials may grant 
exemptions to or suspend the provisions of this paragraph (a) for 
either a class or series within a class if, in their determination, to 
do so is in the interest of a fair and orderly market. Additionally, 
any two Floor Officials may determine that an exemption to Rule 8.51(a) 
is warranted, on a case by case basis, upon their determination that an 
obvious error occurred in the posting of the disseminated market 
quote.]
    [(5) The senior person then in charge of the Exchange's Control 
Room shall have the authority to suspend the firm quote requirements of 
this paragraph (a) with respect to a class of options if a system 
malfunction or circumstance impairs the Exchange's ability disseminate 
or update market quotes in a timely and accurate manner. After 
exercising such authority, that senior person shall immediately seek 
approval by two Floor Officials, who may confirm or overrule the 
decision. If this authority is invoked, the Exchange's Control Room 
will disseminate a message notifying the public that the displayed 
quotes are not firm because of a data dissemination problem. Once the 
problem has been corrected and the market quotes have been updated, the 
suspension of the firm quote requirements of paragraph (a), shall be 
lifted by either the senior person then in charge of the Exchange's 
Control Room, or by two Floor Officials.]
    ([b]c) Firm Quote Requirement for Broker-Dealer Orders. The 
appropriate Floor Procedure Committee may establish the firm quote 
requirement for each series of option, which shall be for at least one 
contract, for broker-dealer orders. The Exchange will periodically 
publish the firm quote requirement for each series of option. In the 
event the Exchange disseminates quotation size, if the disseminated 
quotation size is for a lesser amount than the firm quote requirement, 
then the broker-dealer firm quote requirement would be for the 
disseminated size. For purposes of this Rule, the term broker-dealer 
includes foreign broker-dealers as defined in Rule 1.1(xx). [With 
respect to orders (or portions of orders) at the displayed offer (bid), 
that are not entitled to an pursuant to the provisions of paragraph 
(a), the trading crowd is required to either
    (1) sell (buy) the number of contracts specified in the order; or
    (2) change the displayed offer (bid) to reflect that the previously 
displayed offer (bid) is no longer available.]
    (d) Thirty Seconds Rule. Each responsible broker or dealer within 
thirty seconds from receiving an order that is greater than the 
quotation size

[[Page 18666]]

established by paragraph (b) or (c) of this rule must:
    (1) Execute the entire order; or
    (2) (A) Execute that portion of the order equal to at least the 
quotation size established by paragraphs (b) or (c) of this rule; and
    (B) Revise its bid or offer.
    (e) Exemptions to Firm Quote Requirements. Non-Firm Mode.
    (1) With respect to paragraph (b)(3) of SEC Rule 11Ac1-1:
    (i) Any two Floor Officials, on a case by case basis, for either a 
class or series within a class, may make a determination, that the 
level of trading activity or the existence of unusual market conditions 
are such that the Exchange is incapable of collecting, processing and 
making available to quotation vendors bids, offers and quotation sizes 
with respect to one or more class or series within a class of option in 
a manner which accurately reflects the current state of the market on 
the floor. During any period that the market in a reported security is 
in a non-firm mode, the responsible broker or dealer shall be relieved 
of their obligations under SEC Rule 11Ac1-1 as applicable to such 
members under this Rule 8.51 with respect to such reported security, 
but the responsible broker or dealer shall report bids and offers or 
revised bids and offers in such reported security, for publication, on 
a ``best efforts'' basis; or
    (ii) The senior person, then in charge of the Exchange's Control 
Room, shall have the authority to suspend the firm quote requirements 
of paragraphs (b) or (c) with respect to a class of options if he or 
she determines that the level of trading activity or the existence of 
unusual market conditions are such that the Exchange is incapable of 
collecting, processing and making available to quotation vendors bids, 
offers and quotation sizes with respect to one or more class or series 
of option in a manner which accurately reflects the current state of 
the market on the floor. After exercising such authority, that senior 
person shall immediately seek approval by two Floor Officials, who may 
confirm or overrule the decision. During any period that the market in 
a reported security is in a non-firm mode, the responsible broker 
dealer shall be relieved of their obligations under SEC Rule 11Ac1-1 as 
applicable to such members under this Rule 8.51 with respect to such 
reported security, but the responsible broker or dealer shall report 
bids and offers or revised bids and offers in such reported security, 
for publication, on a ``best efforts'' basis.
    (iii) Whenever two Floor Officials or the senior person then in 
charge of the Exchange's Control Room make a determination under 
subparagraphs (i) or (ii) above with respect to any reported security, 
the Exchange's Control Room will disseminate a message notifying the 
specified persons that the displayed quotes are not firm.
    (iv) During any period that the market in a reported security is in 
a non-firm mode, the Floor Officials shall monitor the activity or 
condition, which formed the basis for his or their determination. No 
more than 30 minutes after such market has been designated to be in a 
non-firm mode, the DPM shall review the condition of such market with 
the Floor Officials. Continuation of the non-firm mode for longer than 
30 minutes shall require the reaffirmation of the reviewing Floor 
Officials. Such review and reaffirmation shall occur not less 
frequently than every 30 minutes thereafter while the non-firm mode is 
in effect.
    (v) When the Exchange is once again capable of collecting, 
processing and making available to quotation vendors bids and offers 
with respect to a reported security that is in a non-firm mode in a 
manner which accurately reflects the current state of the market on the 
floor then the senior person then in charge of the Exchange's Control 
Room, or two Floor Officials shall lift the non-firm mode designation. 
Once the non-firm mode designation has been lifted, responsible broker 
dealers shall be obligated for the firm quote requirement as stated in 
paragraphs (b) or (c).
    (2) No responsible broker or dealer shall be obligated to execute a 
transaction for any listed option as provided in paragraphs (b) and (c) 
of this rule \11\ when:
---------------------------------------------------------------------------

    \11\ This section is pursuant to SEC Rule 11Ac1-(d)(4). The 
responsible broker or dealer shall also be relieved of their 
obligations under SEC Rule 11Ac1-1(c)(2).
---------------------------------------------------------------------------

    (i) (A) Prior to the presentation of an order to sell(buy), a 
responsible broker or dealer has communicated to the exchange, a 
revised quotation size; or
    (B) At the time an order to sell(buy) is presented, a responsible 
broker or dealer is in the process of effecting a transaction in such 
class and/or series of option, and immediately after the completion of 
such transaction, it communicates to the exchange a revised quotation 
size, such responsible broker or dealer shall not be obligated by 
paragraphs (b), (c) or (d) of this Rule to sell(buy) that option in an 
amount greater than such revised quotation size.
    (C) Before the order sought to be executed is presented, a 
responsible broker or dealer has communicated to the exchange, a 
revised bid or offer; or
    (D) At the time the order sought to be executed is presented, a 
responsible broker or dealer is in the process of effecting a 
transaction in such class or series of option, and, immediately after 
the completion of such transaction, a responsible broker or dealer 
communicates to the exchange, a revised bid or offer; provided, 
however, that the responsible broker or dealer shall nonetheless be 
obligated to execute any such order as provided in paragraphs (b) or 
(c) of this rule at its revised bid or offer in any amount up to its 
published quotation size or revised quotation size; or
    (ii) The order for the purchase or sale of a listed option is 
presented during a trading rotation in that listed option.
    (f) Each member on the floor shall abide by such rules and 
procedures adopted by the Exchange, in order to enable the Exchange to 
meet its quotation dissemination requirements. \12\
---------------------------------------------------------------------------

    \12\ See SEC Rule 11Ac1-1.
---------------------------------------------------------------------------

    * * * Interpretations and Policies:
    .01  With respect to subsection [(a)] (b) of this Rule, if the 
disseminated bid (offer) is on behalf of an order represented by a 
Floor Broker, DPM, or OBO and is for less than the firm quote 
requirement applicable for that class of options, [the trading crowd] a 
responsible broker or dealer is obligated to buy or sell the necessary 
number of contracts needed to make the disseminated quote firm for the 
firm quote requirement for that class of options.
    .02  Where a Floor Broker, DPM, or OBO has caused a bid or offer to 
be disseminated and the order is subsequently filled or canceled, the 
Floor Broker, DPM, or OBO will be responsible for causing such 
disseminated bid or offer to be removed. Failure to do so will result 
in the Floor Broker, DPM, or OBO being responsible for satisfying the 
firm disseminated quote commitment pursuant to subsection [(a)](b) or 
(c) of this Rule. [A Market-Maker] Any member who has caused a bid or 
offer to be disseminated is equally responsible for removing such bid 
or offer when he leaves the trading crowd.
    [.03  In broad-based index options, orders for accounts exempted 
from the firm quote treatment as defined in paragraph (a)(1) that in 
each case are for less than the firm quote requirement applicable for 
that class of options, and are represented in the crowd by a Floor 
Broker or DPM need not be reflected in the displayed market quote. In 
all option classes other than broad-based index option classes, orders 
for accounts

[[Page 18667]]

exempted from the firm quote treatment as defined in paragraph (a)(1) 
that in each case are for less than ten contracts, and are represented 
in the crowd by a Floor Broker or DPM need not be reflected in the 
displayed market quote. However, a Floor Broker or DPM remains 
obligated to use due diligence in the representation of such orders as 
set forth in Rule 6.73.]
    .03[.04]  Where a disseminated market quote is revised, as provided 
for in paragraph (e) [(b)] of this Rule, it shall be considered conduct 
inconsistent with just and equitable principles of trade for [the 
trading crowd] a responsible broker or dealer immediately to re-display 
the previously disseminated market quote, unless such action is 
warranted by a change in market conditions.
    .04[.05]  Floor Officials may, as provided for under Rules 6.20(c) 
and 17.50(g)(6), impose a fine on members of the trading crowd for 
violations of this Rule and its Interpretations and Policies.
    .05[.06]  The requirement of paragraphs [subsection] (b) and (c) of 
this Rule that [that the trading crowd] the responsible broker or 
dealer must honor displayed quotations up to the firm quote requirement 
subject to the conditions of the Rule applies not only to orders to buy 
or to sell options, but also to two-part spread or straddle for 
[equity] all options orders which may be executed at displayed 
quotations for both parts of the order. This obligation of [the trading 
crowd] a responsible broker or dealer applies to two-part orders where 
the two sides are on opposite sides of the market in a one-to-one 
ratio, and extends to the amount of the firm quote requirement on each 
side of the order.
    .06[.07]  Pursuant to Rule 6.20 Interpretation .09, the reference 
to any two Floor Officials in Rule 8.51 and its Interpretations and 
Policies includes, but is not limited to, members of the appropriate 
Market Performance Committee.
    .07[.08  Pursuant to Rule 6.6, if a] Under paragraph (e) of this 
Rule, when two Floor Officials may determine that a market in a class 
or series of option is fast [market is declared] pursuant to Rule 6.6, 
the Floor Officials may determine the market constitutes a level of 
trading activity or such unusual market conditions that the Exchange is 
incapable of collecting, processing and making available to quotation 
vendors bids, offers and quotation sizes in a manner that accurately 
reflects the current state of the market on the floor, and thus, 
suspend the firm quote requirement. [any two Floor Officials have the 
power, but are not required, to suspend the firm quote requirement of 
Rule 8.51(a).]
    .08[. 09]  The trading crowd shall not be deemed to be a 
responsible broker or dealer with respect to a published bid or offer 
that is erroneous as a result of an error or omission made by the 
Exchange or any quotation vendor. If a published bid or published offer 
is accurate but the published quotation size (or published aggregate 
quotation size, as the case may be) associated with it is erroneous as 
a result of an error or omission made by the Exchange or any quotation 
vendor, then the trading crowd responsible broker or dealer is 
responsible for the published bid or published offer shall be obligated 
to the extent set forth in paragraph (c) of Rule 11Ac1-1 but only to 
the extent of one contract of the listed option in question.
* * * * *
Rule 6.6. Unusual Market Conditions
* * * * *
    (b) If a market is declared fast, any two Floor Officials shall 
have the power to do one or more of the following with respect to the 
class or classes involved.
* * * * *
    (iv) Suspend the firm quote requirement as permitted [of] under 
Rule 8.51[(a)].
* * * * *
Rule 6.20. Admission to and Conduct on the Trading Floor; Member 
Education
* * * * *
    .09  Members of the appropriate Market Performance Committee may 
perform the functions of a Floor Official for the purpose of enforcing 
trading conduct policies, including but not limited to, enforcing 
policies and acting pursuant to rules related to the Retail Automatic 
Execution System, fast markets, and the firm quote requirement of Rule 
8.51[(a)].
* * * * *
Rule 26.11. Market-Makers
* * * * *
    [(e) Firm Disseminated Quotations. The trading crowd (including the 
DPM) at the trading station for a class of market baskets is required 
to sell (buy) one contract, or such greater number as shall be 
indicated, at the offer (bid) which is displayed when a buy (sell) 
order reaches that trading station.]
    Supplements Rule 8.5 and replaces Rules 8.3, 8.7, and 8.50 [and 
8.51].
* * * * *
Rule 27.6. Application of Certain Rules to BOUNDs
    For purposes of Rule 6.51, a transaction in BOUNDs need not be 
identified as a put or a call. [The requirements contained in Rule 8.51 
regarding trading crowd firm disseminated market quotes will not apply 
to BOUNDs.] For purposes of Rule 9.15, the requirement to deliver an 
Options Disclosure Document shall include the obligation to deliver any 
supplement thereto pertaining to BOUNDs with respect to any customer 
whose account is approved for trading in BOUNDs.
    This Rule supplements Rules 6.51, [8.51] and 9.15
    C. ISE Proposed Rule Text

Rule 804. Market Maker Quotations

    (a) No change.
    (b) Size Associated with Quotes. A market maker's bid and offer for 
a series of options contracts shall be accompanied by the number of 
contracts at that price the market maker is willing to buy from or sell 
[at that price] to (i) Public Customers (the ``Public Customer Size'') 
and (ii) Non-Customers (the ``Non-Customer Size''). Unless the Exchange 
has declared a fast market pursuant to Rule 704, a market maker may not 
initially enter a bid or offer [for] with a Public Customer Size of 
less than ten (10) contracts. Where the size associated with a market 
maker's bid or offer falls below ten (10) contracts due to executions 
at that price and consequently the size of the best bid or offer on the 
Exchange would be for less than ten (10) contracts, the market maker 
shall enter a new bid or offer for at least ten (10) contracts, either 
at the same or a different price. Every market maker bid or offer must 
have a Non-Customer Size of at least one (1) contract.
    (c) No change.
    (d) Firm Quotes. (1) [With respect to Public Customer Orders, 
market] Market maker bids and offers are firm for Public Customer 
Orders and Non-Customer Orders both under this Rule and Rule 11Ac1-1 
under the Exchange Act (``Rule 11Ac1-1'') for the number of contracts 
specified for each according to the requirements of paragraph (b) above 
[associated with each, unless:]. Market maker bids and offers are not 
firm under this Rule and Rule 11Ac1-1 if:
    (i) the Exchange determines that an exception is warranted, on a 
case by case basis, because of an obvious error; [or]
    (ii) a system malfunction or other circumstance impairs the 
Exchange's ability to disseminate or update market

[[Page 18668]]

quotes in a timely and accurate manner[.];
    (iii) the level of trading activities or the existence of unusual 
market conditions is such that the Exchange is incapable of collecting, 
processing, and making available to quotation vendors the data for the 
option in a manner that accurately reflects the current state of the 
market on the Exchange, and as a result, the market in the option is 
declared to be ``fast'' pursuant to Rule 704;
    (iv) during trading rotations; or
    (v) any of the circumstances provided in paragraph (c)(3) of Rule 
11Ac1-1 exist.
    (2) Within thirty seconds of receipt of a Public Customer Order 
(Non-Customer Order) to buy or sell an option in an amount greater than 
the Public Customer Size (Non-Customer Size), that portion of the order 
equal to the Public Customer Size (Non-Customer Size) will be executed 
and the bid or offer price will be revised.
    [(2) With respect to Non-Customer Orders, market makers must either 
buy or sell the number of contracts specified in their quotes or change 
their quotes to reflect that the previously displayed quote is no 
longer available.]
    Paragraphs (e)-(f): No change.

Rule 704. [Unusual Market Conditions] Collection and Dissemination 
of Quotations

    [(a) Whenever an Exchange official who is designated by the Board 
shall have the power to determines, because of an influx of orders or 
other unusual conditions or circumstances and the interest of 
maintaining a fair and orderly market so requires, such designated 
Exchange official may declare the market in one or more classes of 
options contracts to be ``fast.'']
    (a) Each market maker shall communicate to the Exchange its bid and 
offers in accordance with the requirements of Rule 11Ac1-1 under the 
Exchange Act and the Rules of the Exchange.
    (b) The Exchange will disseminate to quotation vendors the highest 
bid and the lowest offer, and the aggregate quotation size associated 
therewith that is available to Public Customer Orders, in accordance 
with the requirements of Rule 11Ac1-1 under the Exchange Act.
    (c) Unusual Market Conditions.
    (1) An Exchange official designated by the Board shall have the 
power to determine that the level of trading activities or the 
existence of unusual market conditions is such that the Exchange is 
incapable of collecting, processing, and making available to quotation 
vendors the data for the option in a manner that accurately reflects 
the current state of the market on the Exchange. Upon making such a 
determination, the Exchange shall designate the market in such option 
to be ``fast.'' When a market for an option is declared fast, the 
Exchange will provide notice that its quotations are not firm by 
appending an appropriate indicator to its quotations.
    [(b)] (2) If a market is declared fast, designated Exchange 
officials shall have the power to: (i) Direct that one or more trading 
rotations be employed pursuant to Rule 701; (ii) suspend the minimum 
size requirement of Rule 804(b); or (iii) take such other actions as 
are deemed in the interest of maintaining a fair and orderly market.
    [(c)] (3) The Exchange will monitor the activity or conditions that 
caused a fast market to be declared, and a designated Exchange official 
shall review the condition of such market at least every thirty (30) 
minutes. Regular trading procedures shall be resumed by the Exchange 
when a designated Exchange official determines that the conditions 
supporting a fast market declaration no longer exist. The Exchange will 
provide notice that its quotations are once again firm by removing the 
indicator from its quotations.
    [(d)] (4) If the conditions supporting a fast market declaration 
cannot be managed utilizing one or more of the procedures described 
above [contained in paragraphs (b) of this Rule], then a designated 
Exchange official shall halt trading in the class or classes so 
affected.
    D. PCX Proposed Rule Text

para. 4935  Obligations of Market Makers

    RULE 6.37(a)-(c)--No change.
    [(d) Trade or Update. When an order is represented at a trading 
post for execution at the currently disseminated bid or offer, Market 
Makers or Lead Market Makers at the trading post, if they do not 
satisfy the order in its entirety, shall lower their bid or raise their 
offer. Thereafter, the dissemination of such revised bid or offer must 
be maintained for a reasonable period of time, as specified in 
Commentary .09.]
    Commentary:
    .01-.09--No change.
    [.10  For purposes of subsection (d), two minutes shall be presumed 
to be ``reasonable'' period of time in which to maintain a revised bid 
or offer. However, a revised market may be further revised before two 
minutes pass if the following market changes occur:
    (1) A change in the market quote in the underlying security or a 
change in the size of the market quoted; or
    (2) In the case of another option series on the same underlying 
security, a quote change of twice the minimum price differential 
resulting from a customer order.
    Two Floor Officials may grant exemption from the rule on a case-by-
case basis if the individual situation warrants such action.]
* * * * *

 5221  [Guaranteed Markets] Firm Quotes

    Rule 6.86--Deleted in its entirety.

RULE 6.86 (a) Definitions

    (1) For purposes of this Rule the terms ``bid and offer,'' 
``quotation size,'' ``quotation vendor,'' ``reported security,'' 
``listed option,'' ``option series'' and ``trading rotation'' will have 
the meanings set forth in SEC Rule 11Ac1-1.
    (2) For purposes of this Rule and SEC Rule 11Ac1-1 as applied to 
the Exchange and its members, the term ``Responsible Broker or Dealer'' 
means that with respect to any bid or offer for any listed option made 
available by the Exchange to quotation vendors, the Lead Market Maker 
and any registered Market Makers constituting the trading crowd in such 
option series will collectively be the Responsible Broker or Dealer to 
the extent of the aggregate quotation size specified.
    (b) Dissemination Requirements
    (1) Price. The Exchange will, at all times that it is open for 
trading, collect, process and make available to quotation vendors the 
best bid and best offer for each option series that is a reported 
security. The Exchange may collect, process and make available to 
quotation vendors a best bid and best offer determined by an automated 
quotation system.
    (2) Size. The Exchange will for each listed option, establish by 
rule and periodically publish the quotation size for which the 
Responsible Broker or Dealer is obligated to execute an order to buy or 
sell an option series that is a reported security at its published bid 
or offer as set forth in subsection (c) below.
    (3) The Exchange's obligation to collect, process and make 
available data as set forth above will not include:
    (A) collecting, processing or making available any such bid or 
offer that is executed immediately after being made in the trading 
crowd and any such bid or offer that is cancelled or withdrawn if not 
executed immediately after being made; or
     (B) data communicated during any period when trading in such 
reported security: (i) has been suspended or halted; (ii) prior to the 
commencement

[[Page 18669]]

of trading in such reported security on any trading day; or (iii) 
during a trading rotation.
    (c) Obligations of Responsible Brokers or Dealers
    (1) Customer Orders. Except as provided in subsection (d), below, 
each Responsible Broker or Dealer is obligated to execute any customer 
order in a listed option series in an amount up to the quotation size 
established by rule and periodically published by the Exchange. The 
minimum quotation size established by rule and published by the 
Exchange for customer orders will be 20 contracts for each option 
series.
    (2) Broker-Dealer Orders. Except as provided in subsection (d), 
below each Responsible Broker or Dealer is obligated to execute any 
order in a listed option for the account of a broker or dealer in an 
amount up to the quotation size established by rule and periodically 
published by the Exchange. The minimum quotation size established by 
rule and published by the Exchange for broker-dealer orders will be one 
contract for each option series.
    (3) Each Responsible Broker or Dealer, within thirty seconds of 
receiving an order to buy or sell a listed option in an amount greater 
than the quotation size required pursuant to subsections (c)(1) or 
(c)(2), above, must either:
    (A) execute the entire order; or
    (B) execute the portion of the order that is equal to the size 
required pursuant to this subsection (c) and revise its bid or offer.
    (d) Exception for Unusual Market Conditions
    (1) If the Exchange determines, in accordance with the procedures 
set forth below, that the level of trading activity or the existence of 
unusual market conditions is such that the Exchange cannot collect, 
process and make available to quotation vendors quotation data in a 
manner that accurately reflects the current state of the market at the 
Exchange, the Exchange will immediately notify the persons specified in 
SEC Rule 11Ac1-1(b)(3) and, upon such notification, the obligation 
imposed upon Exchange members under SEC Rule 11Ac1-1(c)(2) and the 
Exchange under subsection (b), above, will be suspended, until the 
Exchange determines that the unusual market activity or condition has 
terminated and the specified persons have been notified that the 
unusual market activity or condition has terminated.
    (A) If a Responsible Broker or Dealer is unable to update its 
quotations on a timely basis due to the high level of trading activity 
or the existence of unusual market conditions, the Responsible Broker 
or Dealer will promptly notify a Floor Official.
    (B) Upon notification by a Responsible Broker or Dealer, the Floor 
Official will promptly verify the existence of the unusual market 
activity or condition and if, in the Floor Official's judgment, the 
Responsible Broker or Dealer is unable to update its quotations on a 
timely basis, the Floor Official will promptly notify the Exchange. If 
a Floor Official, independent of notification by a responsible broker 
or dealer, becomes aware of any unusual market activity or condition 
that adversely affects a Responsible Broker or Dealer's ability to 
promptly communicate quotation data, the Floor Official will likewise 
promptly advise the Exchange.
    (C) If the Exchange is unable to accurately collect, process, or 
disseminate quotation data owing to a high level of trading activity or 
the existence of unusual market conditions, the Exchange, after 
consultation with a Floor Official, will make a determination that this 
is the case.
    (D) The Exchange, after receiving notification from a Floor 
Official pursuant to either subsection (A) or (B), above, will notify 
the persons specified in SEC Rule 11Ac1-1(b)(3) regarding the 
Exchange's inability to accurately collect, process, and make available 
the quotation data required by SEC Rule 11Ac1-1. The Exchange will 
append to each quotation made available to a quotation vendor an 
identifier that will indicate that the obligation that is imposed upon 
Exchange members and the Exchange by SEC Rule 11Ac1-1 has been 
suspended.
    (E) The Floor Official or Exchange staff (as the case may be) will 
monitor the unusual market activity or condition until it has 
terminated. Thereupon, the Exchange will immediately notify the persons 
specified in SEC Rule 11Ac1-1(b)(3) that the Exchange is once again 
capable of disseminating the quotation data required by SEC Rule 11Ac1-
1 and Responsible Brokers or Dealers will be once again obligated under 
SEC Rule 11Ac1-1.
Commentary:
    .01  As of April 1, 2001, the compliance date for the application 
of SEC Rule 11Ac1-1 to the trading of options, the Exchange will 
collect, process and disseminate the best bid and best offer in each 
option series, and establish by rule and periodically publish the 
quotation size for which the responsible broker or dealer is obligated 
to execute a customer order to buy or sell an option in that series.
    .02  No Lead Market Maker or Marker Maker will be deemed to be a 
Responsible Broker or Dealer with respect to a published bid or offer 
that is erroneous as a result of an error or omission made by the 
Exchange or any quotation vendor. If a published bid or offer is 
accurate but the published quotation size associated with it is 
erroneous as a result of an error or omission made by the Exchange or 
any quotation vendor, then the Lead Market Maker or Market Maker who is 
responsible for the published bid or published offer will be obligated 
to the extent set forth in SEC Rule 11Ac1-1(c), but only to the extent 
of one unit of trading in the option series in question.
    E. Phlx Proposed Rule Text

Rule 1082. Firm Quotations

    (a) Definitions
    (i) The term ``disseminated price'' shall mean the bid (or offer) 
price for an options series that is made available by the Exchange and 
displayed by a quotation vendor on a terminal or other display device.
    (ii) The term ``disseminated size'' shall mean with respect to the 
disseminated price for any quoted options series, the AUTO-X guarantee 
for the quoted option, except that the disseminated size of bids and 
offers of limit orders on the book shall be ten (10) contracts.
    (iii) The term ``SEC Quote Rule'' shall mean Rule 11Ac1-1 under the 
Securities Exchange Act of 1934, as amended.
    (iv) The terms ``customer,'' ``responsible broker or dealer,'' and 
``specified persons'' shall have the meaning set forth in the SEC Quote 
Rule.
    (b) Except as provided in paragraph (c) of this Rule, all 
quotations made available by the Exchange and displayed by quotation 
vendors shall be firm for customer orders at the disseminated price in 
an amount up to the disseminated size. Responsible brokers or dealers 
bidding (or offering) at the disseminated price shall be collectively 
required to execute orders presented to them at such price up to the 
disseminated size in accordance with Rule 1015, or, if the responsible 
broker or dealer is representing (as agent) a limit order, such 
responsible broker or dealer shall be responsible (as agent) up to the 
size of such limit order, but may be responsible as principal for all 
or a portion of the excess of the disseminated size over the size of 
such limit order to the extent provided in Rule 1015.
    (c) The requirements of paragraph (b) or (d) of this Rule shall not 
apply to

[[Page 18670]]

displayed quotations: (i) when the level of trading activities or the 
existence of unusual market conditions is such that the Exchange is 
incapable of collecting, processing, and making available to quotation 
vendors the data for a subject security required to be made available 
pursuant to the SEC Quote Rule in a manner that accurately reflects the 
current market on the Exchange as determined by two Floor Officials, 
with the concurrence of the Director of Surveillance, or his designee; 
(ii) during a trading rotation; (iii) if any of the circumstances 
provided in paragraph (c)(3) of the SEC Quote Rule exist; or (iv) on a 
case by case basis where it is determined that an exemption is 
warranted for an obvious error in the posting of the disseminated price 
or disseminated size due to reporter error or system malfunction. The 
Exchange shall immediately notify all specified persons of such a 
determination. Regular trading procedures shall be resumed when two 
Floor Officials determine that the conditions supporting that 
declaration no longer exist. The Exchange shall immediately notify all 
specified persons of such a determination.
    Any exemption granted pursuant to paragraph (c)(iv) shall be in 
writing and shall set forth the basis upon which the exemption is 
granted.
    (d) In accordance with paragraph (d)(1)(ii) of the SEC Quote Rule, 
the quotation size for a disseminated price with respect to an order 
for the account of a broker or dealer (``broker-dealer order'') shall 
be one (1) contract (``quotation size''), and all quotations made 
available by the Exchange and displayed by quotation vendors shall be 
firm for broker-dealer orders at the disseminated price in an amount up 
to the quotation size. The quotation size for broker-dealer orders 
provided in this paragraph (d) shall be periodically published by the 
Exchange. Responsible brokers or dealers bidding (or offering) at the 
disseminated price shall be collectively required to execute broker-
dealer orders at such price up to the quotation size.
    (e) If responsible brokers or dealers receive an order to buy or 
sell a listed option at the disseminated price in an amount greater 
than the disseminated size (for customer orders) or the quotation size 
(for broker-dealer orders), such responsible broker or dealer shall, 
within thirty (30) seconds of receipt of the order, (i) execute the 
entire order at the disseminated price (or better), or (ii) execute 
that portion of the order equal to the disseminated size (in the case 
of a customer order) or the quotation size (in the case of a broker-
dealer order) at the disseminated price (or better), and revise its bid 
or offer.

A-3  Requesting Market Quotations

    A Specialist may request an ROT in the crowd to state his current 
bid and offer (including size) for any series of options traded at the 
post. A Specialist may request that staff or a Floor Official call for 
additional ROTs to enter the trading crowd.

A-11  Responsibility to [Make Ten-Up Markets] Fill Customer Orders

    (a) Execution [Quotation] Guarantees--[Public] C[c]ustomer market 
or marketable limit orders in any options series on the Exchange are to 
be filled at the best market, in accordance with Rule 1082, to a 
minimum of the disseminated size [ten contracts] by floor traders 
(i.e., Specialists and ROTs) in the crowd as follows:
    (i) If only one floor trader is quoting the availed upon best bid 
(or offer), that floor trader is responsible for providing a fill for 
the disseminated size [on the minimum ten contracts].
    (ii) If more than one floor trader is quoting the availed upon best 
bid (or offer), and their combined quote size is less than the 
disseminated size [ten contracts], participation for the additional 
contracts needed to meet the disseminated size [minimum ten contract] 
requirement shall be decided upon agreement by those floor traders or 
otherwise divided proportionately among them.
    (iii) If the availed upon best bid (or offer) is established by 
someone other than a floor trader and is not for at least the 
disseminated size [ten contracts], participation for the additional 
contracts needed to meet the disseminated size [minimum ten contract] 
requirement shall be supplied at that same price by the floor trader 
with the immediately prior best bid (or offer). If more than one floor 
trader was on the prior bid (or offer), participation for the 
additional contracts shall be decided upon agreement by those floor 
traders or otherwise divided proportionately among them. For example, 
if a 2\1/4\ or 2.25 bid by an ROT is followed by a 2\1/2\ or 2.50 bid 
for five contracts by a customer, the ROT who was bidding 2\1/4\ or 
2.25 will be responsible for buying the other five contracts at 2\1/2\ 
or 2.50.
    [(iv) ROT orders for less than ten contracts that are represented 
at a trading post by a Floor Broker shall not be disseminated and shall 
have no standing in the crowd. Floor Brokers shall otherwise remain 
obligated to use due diligence in the representation of orders pursuant 
to Rule 155.]
    ([v]iv) The ``availed upon best bid (or offer)'' for purposes of 
this Advice shall be the disseminated price (as defined in Rule 1082) 
[crowd markets or the displayed or screen markets, whichever is better. 
In the instance of a broker quoting a market on behalf of a ten-up 
eligible order, once the crowd market has been sought, the screen 
market (if superior) is available on an immediate basis and if not 
availed upon the displayed market may be revised].
    [(vi) In each case where the responsibility to make ten-up markets 
based on displayed or screen quotations generally applies, an exemption 
will exist for the first three minutes following completion of the 
rotation in each series for which a quotation update to the opening 
quote has not yet occurred. While any such exemption is in effect, the 
ten-up market guarantee will be based on the crowd markets.]
    ([vii]v) Orders received by a member from a customer may not be 
unbundled for the primary purpose of availing upon the execution 
guarantee [ten up market] requirement, nor may a Firm solicit a 
customer to unbundle an order for the primary purpose of availing upon 
the execution guarantee [ten up market requirement].
    ([viii]vi) Floor Brokers must make reasonable efforts to ascertain 
whether each order entrusted to them is for the account of a customer 
or a broker-dealer. If it is ascertained that the order is for the 
account of a broker-dealer, the responsible Floor Broker must advise 
the crowd of that fact prior to bidding/offering on behalf of the order 
or executing the order. The responsible floor agent must legibly mark 
the floor ticket as ``B/D'' when it has been determined that the order 
is for an account of a broker/dealer.
    ([ix]vii) The disseminated size requirement shall not apply when 
Exchange quotations are not required to be firm pursuant to paragraph 
(c) of Rule 1082. [Exemptions from the ten-up requirement may be 
granted by two Floor Officials with the concurrence of the Director of 
Surveillance or his designee, (1) under exceptional circumstances or 
for good cause shown (e.g., in fast market conditions) for all or part 
of a trading session; or (2) on a case-by-case basis where it is 
determined that an exemption is warranted for an obvious error in the 
posting of the displayed market quote due to reporter error or system 
malfunction. Any such exemption shall be in writing and shall set forth 
the basis upon which the exemption is granted.]
    (b) Trade or Fade When paragraph (e) of Rule 1082 is applicable to 
an order

[[Page 18671]]

received by a responsible broker or dealer, participation by 
Specialists or ROTs above their stated size to fill the order 
completely or meet the disseminated size requirement (for customer 
orders) or the quotation size requirement (for broker-dealer orders) 
shall be decided upon agreement by such Specialists or ROTs or 
otherwise divided proportionately among them.
    [With respect to non-public customer orders to buy (sell) at the 
displayed offer (bid), or portions of customer orders greater than the 
minimum size guarantee in that option, the trading crowd is required to 
either: (1) sell (buy) the number of contracts specified in the order; 
or (2) change the displayed offer (bid) to reflect that the previously 
displayed offer (bid) is no longer available.] Where the [a] 
disseminated market quote of a responsible broker or dealer is revised, 
as provided for in Rule 1082 [this paragraph], it shall be considered 
conduct inconsistent with just and equitable principles of trade for 
such responsible broker or dealer [the trading crowd] to immediately 
re-display its [the] previously disseminated market quote, unless such 
action is warranted by a change in market conditions.

F-7  Bids and Offers

    All bid and offer prices shall be general ones and shall not be 
specified for acceptance by particular members.
    In the absence of a stated size to any bid or offer voiced or 
displayed on the Options Floor, the person responsible for such bid and 
offer is deemed to be quoting for one contract, except in those 
instances where predetermined volume guarantees are provided for the 
facilitation of specific account types. Floor traders (Specialists and 
ROTs) are [may], however, [be] required to trade more than one contract 
in connection with the execution of a customer order pursuant to 
[provisions under] Advice A-11.
    The size of any disseminated bid or offer by the Exchange shall be 
equal to the AUTO-X guarantee for the quoted option and shall be firm, 
except that the disseminated size of bids and offers of limit orders on 
the book [customer limit orders] shall be ten (10) contracts and shall 
be firm regardless of the actual size of such orders.

F-10  Unusual [Extraordinary] Market Conditions [(Fast Markets)]

    In the interest of maintaining a fair and orderly market under 
unusual [trading] market conditions for one or more classes of options, 
two Floor Officials, with the concurrence of the Director of 
Surveillance or his designee, may [declare a ``fast market'' for these 
options] determine that the level of trading activities or the 
existence of unusual market conditions is such that the Exchange is 
incapable of collecting, processing, and making available to quotation 
vendors the data for a subject security required to be made available 
pursuant to the SEC Quote Rule in a manner that accurately reflects the 
current market on the Exchange. The Exchange shall immediately notify 
all specified persons of such a determination. Regular trading 
procedures shall be resumed when two Floor Officials determine that the 
conditions supporting that declaration no longer exist. During the 
period for which [a fast market is in effect] such a determination has 
been made, displayed quotes for the respective options are not firm (as 
required by Rule 1082) and volume guarantees of [Option] Advice A-11 
and Rule 1015 are not applicable, but the respective Specialists and 
trading crowds are required to use best efforts to update quotes and 
fill incoming orders in accordance with Advice A-11 and Rule 1015.

Rule 1015. [Quotation] Execution Guarantees

    (a) Execution [Quotation] Guarantees--[Public] C[c]ustomer market 
or marketable limit orders in any options series on the Exchange are to 
be filled at the best market, in accordance with Rule 1082, to a 
minimum of the disseminated size [ten contracts] by floor traders 
(i.e., Specialists and ROTs) in the crowd as follows:
    (i) If only one floor trader is quoting the availed upon best bid 
(or offer), that floor trader is responsible for providing a fill for 
the disseminated size [on the minimum ten contracts].
    (ii) If more than one floor trader is quoting the availed upon best 
bid (or offer), and their combined quote size is less than the 
disseminated size [ten contracts], participation for the additional 
contracts needed to meet the disseminated size [minimum ten contract] 
requirement shall be decided upon agreement by those floor traders or 
otherwise divided proportionately among them.
    (iii) If the availed upon best bid (or offer) is established by 
someone other than a floor trader and is not for at least the 
disseminated size [ten contracts], participation for the additional 
contracts needed to meet the disseminated size [minimum ten contract] 
requirement shall be supplied at that same price by the floor trader 
with the immediately prior best bid (or offer). If more than one floor 
trader was on the prior bid (or offer), participation for the 
additional contracts shall be decided upon agreement by those floor 
traders or otherwise divided proportionately among them. For example, 
if a 2\1/4\ or 2.25 bid by an ROT is followed by a 2\1/2\ or 2.50 bid 
for five contracts by a customer, the ROT who was bidding 2\1/4\ or 
2.25 will be responsible for buying the other five contracts at 2\1/2\ 
or 2.50.
    [(iv) ROT orders for less than ten contracts that are represented 
at a trading post by a Floor Broker shall not be disseminated and shall 
have no standing in the crowd. Floor Brokers shall otherwise remain 
obligated to use due diligence in the representation of orders pursuant 
to Rule 155.]
    ([v]iv) The ``availed upon best bid (or offer)'' for purposes of 
this [Advice] Rule shall be the disseminated price (as defined in Rule 
1082) [crowd markets or the displayed or screen markets, whichever is 
better. In the instance of a broker quoting a market on behalf of a 
ten-up eligible order, once the crowd market has been sought, the 
screen market (if superior) is available on an immediate basis and if 
not availed upon the displayed market may be revised].
    [(vi) In each case where the responsibility to make ten-up markets 
based on displayed or screen quotations generally applies, an exemption 
will exist for the first three minutes following completion of the 
rotation in each series for which a quotation update to the opening 
quote has not yet occurred. While any such exemption is in effect, the 
ten-up market guarantee will be based on the crowd markets.]
    ([vii]v) Orders received by a member from a customer may not be 
unbundled for the primary purpose of availing upon the execution 
guarantee [ten up market] requirement, nor may a Firm solicit a 
customer to unbundle an order for the primary purpose of availing upon 
the execution guarantee [ten up market requirement].
    ([viii]vi) Floor Brokers must make reasonable efforts to ascertain 
whether each order entrusted to them is for the account of a customer 
or a broker-dealer. If it is ascertained that the order is for the 
account of a broker-dealer, the responsible Floor Broker must advise 
the crowd of that fact prior to bidding/offering on behalf of the order 
or executing the order. The responsible floor agent must legibly mark 
the floor ticket as ``B/D'' when it has been determined that the order 
is for an account of a broker/dealer.
    ([ix]vii) The disseminated size requirement shall not apply when 
Exchange quotations are not required to be firm pursuant to paragraph 
(c) of Rule 1082. [Exemptions from the ten-up

[[Page 18672]]

requirement may be granted by two Floor Officials with the concurrence 
of the Director of Surveillance or his designee, (1) under exceptional 
circumstances or for good cause shown (e.g., in fast market conditions) 
for all or part of a trading session; or (2) on a case-by-case basis 
where it is determined that an exemption is warranted for an obvious 
error in the posting of the displayed market quote due to reporter 
error or system malfunction. Any such exemption shall be in writing and 
shall set forth the basis upon which the exemption is granted.]
    (b) Trade or Fade  When paragraph (e) of Rule 1082 is applicable to 
an order received by a responsible broker or dealer, participation by 
Specialists or ROTs above their stated size to fill the order 
completely or meet the disseminated size requirement (for customer 
orders) or the quotation size requirement (for broker-dealer orders) 
shall be decided upon agreement by such Specialists or ROTs or 
otherwise divided proportionately among them.
    [With respect to non-public customer orders to buy (sell) at the 
displayed offer (bid), or portions of customer orders greater than the 
minimum size guarantee in that option, the trading crowd is required to 
either: (1) sell (buy) the number of contracts specified in the order; 
or (2) change the displayed offer (bid) to reflect that the previously 
displayed offer (bid) is no longer available.] Where the disseminated 
market quote of a responsible broker or dealer is revised, as provided 
for in Rule 1082 [this paragraph], it shall be considered conduct 
inconsistent with just and equitable principles of trade for such 
responsible broker or dealer [the trading crowd] to immediately re-
display its [the] previously disseminated market quote, unless such 
action is warranted by a change in market conditions.

Rule 1033. Bids And Offers-Premium

    (a) Size of Bid/Offer and Disseminated Size [10 up] Guarantee. All 
bids or offers made on the Floor for option contracts shall be deemed 
to be for one option contract unless a specific number of option 
contracts is expressed in the bid or offer. A bid or offer for more 
than one option contract shall be deemed to be for the amount thereof 
or a smaller number of option contracts. [The Exchange, in its 
discretion, may require that specialists and ROTs be responsible] 
Responsibility for ensuring that customer [public] orders are filled to 
a minimum of the disseminated size [depth of ten (10) contracts] at the 
disseminated price [best quoted bid or offer] is as set forth in 
Exchange Rules 1082 and 1015.
    (b)-(i) No change.

II. Self-Regulatory Organizations' Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In their filings with the Commission, the Exchanges included 
statements concerning the purpose of, and basis for, the proposed rule 
changes. The text of these statements may be examined at the places 
specified in Item IV below. The Exchanges have prepared summaries set 
forth in Section A, B, and C below, of the most significant aspects of 
such statements.

A. Self-Regulatory Organizations' Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

1. Purpose
    On November 17, 2000, the Commission adopted several amendments to 
the Quote Rule \13\ to apply it to the options exchanges and options 
market markers. The compliance date for these amendments is April 1, 
2001.\14\ As a result, it is necessary for the Exchanges to amend their 
rules to conform to the requirements of the Quote Rule. In particular, 
the Quote Rule requires responsible brokers or dealers to execute 
orders at their disseminated quotations, unless the level of trading 
activities or the existence of unusual market conditions is such that 
the exchange in which such responsible broker or dealer is a member is 
incapable of collecting, processing, and making available to quotation 
vendors the data for the options in a manner that accurately reflects 
the current state of the market (``unusual market conditions exception 
to the Quote Rule'').\15\ In the Adopting Release, the Commission noted 
that the options exchanges may have to amend their rules to conform to 
the Quote Rule's exception for unusual market conditions.\16\
---------------------------------------------------------------------------

    \13\ 17 CFR 240.11Ac1-1.
    \14\ Securities Exchange Act Release No. 43591 (November 17, 
2000), 65 FR 75439 (December 1, 2000) (``Adopting Release'').
    \15\ 17 CFR 240.11Ac1-1(b)(3)(i)
    \16\ See Adopting Release, supra note 14 at fn. 80.
---------------------------------------------------------------------------

    In applying the Quote Rule to the options markets, the Commission 
provided certain accommodations, because it recognized the unique 
structure of the options market. For example, the Commission provided 
the Exchanges with the flexibility to determine whether to collect from 
responsible brokers or dealers and make available to quotation vendors 
the size associated with each quotation or to choose, instead, to 
establish by rule and periodically publish the size for which their 
disseminated bid and offer in each option series is firm. Further, the 
Commission gave the Exchanges the flexibility to require responsible 
brokers or dealers to be firm for different quotation sizes for 
customer orders than for broker-dealer orders. Finally, with respect to 
orders to buy or sell options in an amount greater than the firm quote 
size, the Commission also amended the Quote Rule to require a 
responsible broker or dealer to respond within 30 seconds to an order 
to buy or sell options in an amount greater than the firm quote size by 
either (i) executing the entire order; or (ii) executing at least that 
portion of the order equal to the applicable firm quote size and then 
revising its bid or offer (``Thirty Second Response Requirement'').\17\ 
A brief summary of the proposed rule changes filed by each of the 
Exchanges is provided below.
---------------------------------------------------------------------------

    \17\ 17 CFR 240.11Ac1-1(d)(3).
---------------------------------------------------------------------------

    a. Amex. Generally, Amex proposes a number of amendments to Amex 
Rule 958A to conform it to the Quote Rule. First, Amex proposes to 
define the term ``responsible broker or dealer'' to mean that the 
specialist and any registered options traders constituting the trading 
crowd in a given options series would be collectively responsible for 
the aggregate quotation size at the disseminated price. Second, for 
customer orders in option classes for which quotation size can be 
disseminated by the Options Price Reporting Authority (``OPRA'') 
(currently, only those option classes trading in decimals), the Amex 
will collect and disseminate quotes with the size at which its 
specialists and registered traders will be firm.\18\ Third, for 
customer orders in option classes for which quotation size cannot be 
disseminated by OPRA and until such time as OPRA is able to disseminate 
quotation size, the Amex will establish by rule and periodically 
publish on its website \19\ the size for which the disseminated 
quotation is firm.\20\ Fourth, for broker-dealer orders in all option 
classes, the Amex will establish

[[Page 18673]]

by rule and periodically publish on its website \21\ the size for which 
disseminated quotations are firm. Fifth, the Amex proposes to amend 
Amex Rule 958A to relieve responsible brokers or dealers from their 
obligations under Rule 11Ac1-1 in unusual market conditions,\22\ and to 
comply with the Thirty Second Response Requirement, described 
above.\23\ Sixth, Amex proposes to relieve responsible broker-dealers 
from their obligations under the Quote Rule in the limited 
circumstances of an error or omission on the part of the Exchange or 
any quotation vendor.\24\ Finally, Amex, along with PCX, also has 
included as part of its proposal an exception from the Exchange's 
obligation to collect, process and make available data during a trading 
rotation.\25\
---------------------------------------------------------------------------

    \18\ Proposed Amex Rule 958A(b). Amex will continue to require 
that specialists and registered traders be firm for customer orders 
for a minimum of 10 contracts.
    \19\ Telephone conversation between Claire P. McGrath, Vice 
President and Special Counsel, Derivative Securities, Amex, and 
Deborah Flynn, Senior Special Counsel, Division, Commission, on 
March 30, 2001.
    \20\ Proposed Amex Rule 958A, Commentary .01. The minimum size 
established by the Amex for these option classes will also be 10 
contracts.
    \21\ See supra note 19.
    \22\ Proposed Amex Rule 958(A)(d).
    \23\ Proposed Amex Rule 958A(c)(iii).
    \24\ Proposed Amex Rule 958A, Commentary .02.
    \25\ Proposed Amex Rule 958A(b).
---------------------------------------------------------------------------

    b. CBOE. CBOE proposes to amend CBOE Rule 8.51 to define the term 
``responsible broker or dealer'' to mean that the trading crowd in a 
given series or class of option would be responsible for the aggregate 
quotation size at the disseminated price.\26\ CBOE further proposes to 
allow the appropriate Floor Procedure Committee to set the firm quote 
requirement for both non-broker-dealer orders and broker-dealer 
orders.\27\ The proposed rule change does require, however, that both 
types of order be subject to a firm quote requirement of at least one 
contract. The proposed rule change also requires CBOE to periodically 
publish its firm quote requirement. CBOE intends to publish the firm 
quote requirement on CBOE's public website.\28\ In addition, under the 
proposed rule change, if CBOE disseminates quotation sizes, the firm 
quote requirement for non-broker-dealer orders will be no greater than 
the disseminated size. CBOE also proposes to amend CBOE Rule 8.51 to 
relieve responsible brokers or dealers from their obligations under 
Rule 11Ac1-1 in unusual market conditions,\29\ and to comply with the 
Thirty Second Response Requirement.\30\ In addition, CBOE proposes to 
relieve responsible broker-dealers from their obligations under the 
Quote Rule in the limited circumstances of an error or omission made by 
the Exchange or any quotation vendor.\31\
---------------------------------------------------------------------------

    \26\ Proposed CBOE Rule 8.51(a)(1).
    \27\ Proposed CBOE Rule 8.51(b)(1) and (c).
    \28\ However, at least initially, until the information can be 
placed on its website, CBOE will make a paper copy available to the 
public at its place of business.
    \29\ Proposed CBOE Rule 8.51(e).
    \30\ Proposed CBOE Rule 8.51(d).
    \31\ Proposed CBOE 8.51, Interpretation and Policy .08.
---------------------------------------------------------------------------

    CBOE's proposed rule change also proposes to include foreign 
broker-dealers within its definition of broker-dealer for purposes of 
their members' firm quote obligation.\32\ Finally, CBOE currently has a 
rule that provides that when multiple orders for the same class from 
the same beneficial owner are represented at the trading station at 
approximately the same time, only the first of such orders that 
cumulatively equal or add up to less than the firm quote requirement 
would be entitled to an execution pursuant to CBOE's rules.\33\ CBOE 
proposes that responsible broker-dealers also would be relieved of the 
obligations under Rule 11Ac1-1 in these circumstances.\34\
---------------------------------------------------------------------------

    \32\ Proposed CBOE Rule 8.51(c). In conjunction with this 
proposal, CBOE has submitted a request for an exemption that would 
allow responsible brokers or dealers to be firm for orders from 
foreign broker-dealers to the same amount as they are firm for U.S. 
broker-dealers under the Quote Rule. See letter to Annette L. 
Nazareth, Director, Division, Commission, from Timothy H. Thompson, 
Esq., Assistant General Counsel, CBOE, dated March 29, 2001.
    \33\ Current CBOE Rule 8.51(a)(3).
    \34\ Proposed CBOE Rule 8.51(b)(3). In conjunction with this 
proposal, CBOE has submitted to the Commission a request for an 
exemption that would allow responsible brokers or dealers to be 
relieved of their obligations under the Quote Rule for multiple 
orders for the same class of options received from the same 
beneficial owner at approximately the same time. See letter to 
Annette L. Nazareth, Director, Division, Commission, from Timothy H. 
Thompson, Esq., Assistant General Counsel, CBOE, dated March 29, 
2001.
---------------------------------------------------------------------------

    c. ISE. ISE proposes to amend ISE Rule 804 to specify that each 
market maker's quotes must be firm for customer orders up to the size 
of the quotation, and that each market maker quote must also be firm to 
non-customers for at least one contract.\35\ According to ISE, this 
rule change codifies current ISE practices and therefore, does not 
change current market maker obligations. Specifically, ISE's 
disseminated quotation will be firm for all public-customer orders. 
Also, the disseminated quotation price will be firm for non-customers 
for at least one contract.\36\ As required under the Quote Rule, ISE 
also will publish on its website the fact that it is firm for non-
customers for at least one contract.
---------------------------------------------------------------------------

    \35\ Proposed ISE Rule 804(b).
    \36\ Proposed ISE Rule 804(b). Because each quotation must be 
firm to non-customers for at least one contract, when there are 
multiple competing market makers quoting at the best price, the 
ISE's disseminated price would be firm to non-customers for more 
than one contract.
---------------------------------------------------------------------------

    ISE's proposed rule change would also relieve its market makers 
from their obligations under the Quote Rule in unusual market 
conditions,\37\ and would amend ISE Rule 704 (Unusual Market 
Conditions) to specify that, during fast markets,\38\ ISE would 
disseminate quotes with an indicator to provide notice that its quotes 
are not firm,\39\ and that the indicator would be removed to provide 
notice when quotes become firm again. In addition, ISE proposes to 
adopt language to incorporate into its rules the Thirty Second Response 
Requirement.\40\ Finally, ISE proposes to retain its existing, very 
general provision for obvious errors as an exception to their members' 
obligations under the Quote Rule.\41\
---------------------------------------------------------------------------

    \37\ Proposed ISE Rule 804(d)(1)(iii).
    \38\ The Commission notes that although ISE has decided to use 
the term ``fast'' market for those times when the level of trading 
activity or the existence of unusual market conditions is such that 
ISE is incapable of collecting, processing, and making available to 
quotation vendors quotation data, the definition of a fast market 
proposed by ISE in ISE Rule 704(d)(1)(iii) exactly parallels 
paragraph (b)(3)(i) of Exchange Act Rule 11Ac1-1.
    \39\ Proposed ISE Rule 704(c)(1). Each of the other Exchanges 
also represents that it would disseminate its quotes with an 
indicator to provide notice that their responsible brokers or 
dealers have been relieved of their obligations under the Quote 
Rule. Proposed Amex Rule 958A(d)(iv); Proposed CBOE Rule 
8.51(e)(1)(iii); Proposed PCX Rule 6.86(d)(1)(D); and Phlx Amendment 
No. 2, supra note 10.
    \40\ Proposed ISE Rule 804(d)(2).
    \41\ Proposed ISE Rule 804(d).
---------------------------------------------------------------------------

    d. PCX. PCX proposes to define the term ``responsible broker or 
dealer'' to mean that the Lead Market Maker and any registered market 
makers constituting the trading crowd in a given option series would be 
responsible collectively for the aggregate quotation size at the 
disseminated price.\42\ PCX proposes to comply with the Quote Rule by 
establishing by rule and periodically publishing the quotation size for 
which each responsible broker or dealer on PCX is obligated to execute 
an order to buy or sell an option series that is a reported security at 
its published bid or offer.\43\ The PCX also proposes to establish by 
rule that the minimum quotation size would be 20 contracts for customer 
orders and one contract for broker-dealer orders.\44\ PCX proposes to 
continue to disseminate its firm quote sizes in each option series over 
OPRA.\45\ Further, PCX is proposing to relieve responsible brokers or 
dealers of their obligations under the Quote Rule in

[[Page 18674]]

unusual market conditions \46\ and to incorporate into its rules the 
Thirty Second Response Requirement. In addition, PCX proposes to 
relieve responsible broker-dealers from their obligations under the 
Quote Rule in the limited circumstances of an error or omission made by 
the Exchange or any quotation vendor.\47\ Finally, PCX, along with 
Amex, has also included as part of its proposal an exception from the 
Exchange's obligation to collect, process, and make available to 
quotation vendors quotation data during a trading rotation.\48\
---------------------------------------------------------------------------

    \42\ Proposed PCX Rule 6.86(a)(2).
    \43\ Proposed PCX Rule 6.86(b).
    \44\ Proposed PCX Rule 6.86(c).
    \45\ PCX notes, however, that the firm quote sizes that it will 
be disseminating over OPRA may not be the same sizes that PCX 
guarantees for automatic execution on its Auto-Ex System.
    \46\ Proposed PCX Rule 6.86(d).
    \47\ Proposed PCX Rule 6.86, Commentary. 02.
    \48\ Proposed PCX Rule 6.86(b)(3)(B).
---------------------------------------------------------------------------

    e. Phlx. Phlx proposes to define the term ``responsible broker or 
dealer'' to mean that all members in the trading crowd bidding (or 
offering) at the disseminated price would be collectively required to 
execute orders presented to them at such price up to the disseminated 
size.\49\ Phlx also proposes to require firm quotes for customer orders 
up to the Phlx's disseminated size, which is defined to be the AUTO-X 
guarantee size unless the quote is for a limit order on the book, in 
which case the disseminated size is ten contracts.\50\ Proposed Phlx 
Rule 1082(d) would allow the quotation size for broker-dealer orders to 
be one contract. In addition, the Phlx also proposes to amend Phlx Rule 
1082 and Options Floor Procedure Advice F-10 to relieve responsible 
brokers or dealers of their obligations under the Quote Rule in unusual 
market conditions \51\ and to incorporate into its rules the Thirty 
Second Response Requirement.\52\
---------------------------------------------------------------------------

    \49\ Proposed Phlx Rule 1082(b).
    \50\ Proposed Phlx Rule 1082(a)(ii) and (b).
    \51\ Proposed Phlx Rule 1082(c).
    \52\ Proposed Phlx Rule 1082(e).
---------------------------------------------------------------------------

    In addition, Phlx proposes to relieve responsible broker-dealers 
from their obligations under the Quote Rule in the limited 
circumstances of an obvious error in the posting of the disseminated 
price or disseminated size due to reporter error or system 
malfunction.\53\ Finally, Phlx proposes to retain a provision from its 
current rules in Proposed Phlx Rule 1015(a)(v) and Proposed Options 
Floor Procedure Advice A-11(a)(v) that would prohibit orders from being 
``unbundled'' for the primary purpose of availing upon the execution 
guarantee requirement provided by the Phlx.
---------------------------------------------------------------------------

    \53\ Proposed Phlx Rule 1082(c)(iv).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchanges believe the proposed rule changes are consistent with 
Section 6(b) of the Exchange Act \54\ in general and further the 
objectives of Section 6(b)(5) \55\ in particular in that the proposed 
rule changes are designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism for a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78f.
    \55\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organizations' Statement on Burden on Competition

    The Exchanges believe that the proposed rule changes will impose no 
burden on competition.

C. Self-Regulatory Organizations' Statement on Comments on the Proposed 
Rule Changes Received from Members, Participants or Others

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

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

    Within 35 days of the 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 self-regulatory organizations consent, the Commission will:
    A. By order approve such proposed rule changes, or
    B. Institute proceedings to determine whether the proposed rule 
changes should be disapproved.
    The Exchanges have requested that the Commission find good cause, 
pursuant to Section 19(b)(2) of the Exchange Act,\56\ for approving the 
proposed rule changes so that they will be in place prior to April 1, 
2001, the compliance date of the Quote Rule for the options market.
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    CBOE currently has a rule that provides that when multiple orders 
for the same class from the same beneficial owner are represented at 
the trading station at approximately the same time, only the first of 
such orders that cumulatively equal or add up to less than the firm 
quote requirement would be entitled to an execution pursuant to CBOE's 
rules.\57\ CBOE proposes that responsible broker-dealers also would be 
relieved of their obligations under Rule 11Ac1-1 in these 
circumstances.\58\
---------------------------------------------------------------------------

    \57\ Current CBOE Rule 8.51(a)(3).
    \58\ Proposed CBOE Rule 8.51(b)(3).
---------------------------------------------------------------------------

    Similarly, Phlx proposes to retain a provision from its current 
rules in Proposed Phlx Rule 1015(a)(v) and Proposed Options Floor 
Procedure Advice A-11(a)(v) that would prohibit orders from being 
``unbundled'' for the primary purpose of availing upon the execution 
guarantee requirement provided by the Phlx. These provisions were 
approved by the Commission and implemented by the respective exchanges 
prior to the recent adoption of amendments to the Quote Rule that 
extended it to the options markets. Generally, the Quote Rule requires 
each responsible broker or dealer to ``execute any order to buy or sell 
a subject security * * * at a price at least as favorable to such buyer 
or seller as the responsible broker's or dealer's published bid or 
offer * * * in any amount up to its published quotation size.'' \59\ 
The Quote Rule does not expressly provide an exception for multiple 
orders submitted by the same beneficial owner. And, in fact, the Quote 
Rule requires, subject to certain limitations, a responsible broker or 
dealer to execute any order up to its published size. As a result, the 
Commission specifically solicits comments on whether it would be 
appropriate for the Commission to grant an exemption from the 
requirements of the Quote Rule for multiple orders submitted by the 
same beneficial owner.
---------------------------------------------------------------------------

    \59\ 17 CFR 240.11Ac1-1(c)(2) (emphasis added).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
changes, as amended, are consistent with the Exchange Act. Persons 
making written submissions should file six copies thereof with the 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, D.C. 20549-0609. Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rule 
changes that are filed with the Commission, and all written 
communications relating to the proposed rule changes 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 Exchanges. All 
submissions should refer to the File Nos. SR-Amex-01-18, SR-CBOE-01-

[[Page 18675]]

15, SR-ISE-01-07, SR-PCX-01-18, and SR-Phlx-01-37 and should be 
submitted by May 1, 2001.

V. Commission Findings and Order Granting Partial Accelerated 
Approval of Certain Portions of the Proposed Rule Changes for a 
Sixty Day Pilot Period

    The Commission finds that the proposed rule changes, as amended and 
subject to the limitations described below, relating to the 
implementation of the Pilots for a sixty day period, are consistent 
with the Exchange Act and the rules and regulations thereunder 
applicable to a national securities exchange,\60\ and, in particular, 
Section 6(b)(5) of the Exchange Act.\61\ As noted in the Adopting 
Release, the Commission believes that the application of the Quote Rule 
to the options markets will provide significant and immediate benefits 
to investors. In particular, market participants, including customers 
and broker-dealers, will be able to rely on quotes up to the published 
size when routing orders. Further, the Commission is approving portions 
of the proposed rule changes as Pilots on an accelerated basis because 
the options exchanges and market makers must begin to comply with the 
Quote Rule beginning on April 2, 2001. During the 60 day Pilots, the 
Commission will consider any comments received and determine whether to 
approve the Exchanges' proposed rule changes on a permanent basis.
---------------------------------------------------------------------------

    \60\ In granting partial approval of the proposals, the 
Commission has considered the proposals' impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f). Approval of 
the Pilots should not be interpreted as suggesting that the 
Commission is predisposed to approving the Exchanges' proposed rule 
changes on a permanent basis.
    \61\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

A. Responsible Brokers or Dealers

    Each of the Exchanges' proposed rules, except for ISE's proposed 
rules, require that the trading crowd, as a group, be obligated under 
the Quote Rule for executing orders at the Exchanges' disseminated 
quote up to the published quotation size. The Commission believes that 
because all of these Exchanges disseminate one quotation, rather than 
independent quotations from each market maker on the floor, these 
proposals are consistent with the definition of responsible broker or 
dealer in the Quote Rule.

B. Unusual Market Conditions Exception to the Quote Rule

    The Commission notes that the Exchanges have proposed rules to 
relieve responsible brokers or dealers from their obligations under the 
Quote Rule in unusual market conditions. Paragraph (b)(3)(i) of the 
Quote Rule provides that responsible brokers or dealers on the 
Exchanges will be relieved of their obligations under their rules and 
the Quote Rule when the level of trading activities or the existence of 
unusual market conditions is such that the Exchange is incapable of 
collecting, processing, and making available to quotation vendors 
quotation data. The Commission believes that such rules are consistent 
with the Exchange Act; however, the Commission expects that the 
Exchanges will reevaluate their rules during the Pilots to ensure that 
sufficient monitoring procedures are in place to fully implement the 
requirements of the Quote Rule.

C. Thirty Second Response Requirement

    The Thirty Second Response Requirement provision of the Quote Rule 
requires a responsible broker or dealer to respond to an order to buy 
or sell a listed option in an amount greater than the firm quote size 
within thirty seconds by either executing the entire order or executing 
at least a portion of the order equal to the firm quote size and 
revising its bid or offer. The Commission expects that either the 
entire order would be executed at the disseminated price or better or 
that the responsible broker-dealer would execute at least that portion 
of the order equal to the applicable firm quote size at the 
disseminated price or better and then revise its bid or offer to an 
inferior quote. The Commission believes that the Exchanges' 
incorporation of the Thirty Second Response Requirement from the Quote 
Rule into their own rules should ensure that larger than firm quote 
size orders are handled in an expedited and equitable fashion.

D. Trading Rotations

    As described above, PCX and Amex have each proposed an exception 
from the Exchanges' obligations pursuant to Rule 11Ac1-1(b)(1)(i) to 
collect, process and make available quotation data during a trading 
rotation. While the Quote Rule does not specifically provide for this 
exception for Exchanges,\62\ the Commission believes that the proposed 
exception is consistent with the Quote Rule. Specifically, to the 
extent that a trading rotation is either an opening rotation or 
involves a halt or suspension in trading, the Quote Rule explicitly 
provides an exception for Exchanges from the dissemination requirement 
``during a period when trading in that security has been suspended or 
halted, or prior to the commencement of trading in that security on any 
trading day, on that exchange.'' \63\
---------------------------------------------------------------------------

    \62\ Rule 11Acl-1(d)(4) provides an exception for responsible 
brokers or dealers during a trading rotation. 17 CFR 240.11Ac1-
1(d)(4).
    \63\ 17 CFR 240.11Acl-1(b)(1)(i)(B).
---------------------------------------------------------------------------

E. Obvious Errors

    As described above, the Exchanges have proposed in their rules 
either to retain or incorporate an obvious error exception to the Quote 
Rule.\64\ While ISE has retained a very general provision for obvious 
errors,\65\ the other exchanges have limited the application of such an 
exception by permitting as an exception to the Quote Rule only those 
errors that are the result of an error or omission made by an exchange 
or quotation vendor or that are the result of a reporter error or 
system malfunction.\66\
---------------------------------------------------------------------------

    \64\ Proposed ISE Rule 804, Proposed Amex Rule 958A Commentary 
.02 and .03, Proposed PCX 6.86 Commentary .02, Proposed CBOE 8.51 
Interpretation and Policy .08, and Proposed Phlx Rule 1082(c).
    \65\ Proposed ISE Rule 804(d).
    \66\ Proposed Amex Rule 958A, Commentary .02, Proposed CBOE Rule 
8.51 Interpretation and Policy .08, Proposed PCX 6.86 Commentary 
.02, and Proposed Phlx Rule 1082(c).
---------------------------------------------------------------------------

    The Commission believes that for purposes of the Pilots, an obvious 
error exception to the Quote Rule must be interpreted very narrowly to 
avoid potential abuses and limitations on the Quote Rule. As a result, 
the Commission believes that, consistent with the Exchange Act, only 
errors that are not the result of an act or omission by the responsible 
broker or dealer should be permissible exceptions to the requirements 
of the Quote Rule. The Commission believes that any broader 
interpretation or application of the Exchanges' rules would be 
inconsistent with the Quote Rule. Similarly, the Commission believes 
that Amex Rule 958A, Commentary .03, which provides exceptions for when 
a responsible broker or dealer is not required to comply with an 
erroneous quote, is consistent with the Quote Rule only if it is 
interpreted to apply only when there has been an error or omission made 
by the Exchange or a quotation vendor.

F. Treatment of Orders From the Accounts of Foreign Broker-Dealers

    As discussed above, the Commission received a request for an 
exemption from CBOE that would permit its responsible brokers or 
dealers to treat unregistered foreign broker-dealers the same as 
broker-dealers for proposes of the Quote Rule. By letter dated April 2,

[[Page 18676]]

2001, the Commission granted the requested exemption to the CBOE, as 
well as all national securities exchanges, pursuant to Rule 11Ac1-1(e), 
permitting them to treat foreign broker-dealers the same as U.S. 
broker-dealers for purposes of the Quote Rule.\67\ Notwithstanding the 
requirements of Rule 11Ac1-1(c)(2),\68\ the Commission exempted 
responsible brokers or dealers from the requirement under paragraph 
(c)(2) of the Quote Rule\69\ to execute any order for the account of a 
foreign broker or dealer to buy or sell an options series in an amount 
up to such responsible brokers' or dealers' published quotation size 
for orders for the account of a customer. This exemption was 
conditioned on such responsible brokers and dealers executing orders 
for the accounts of foreign brokers and dealers at a price at least as 
favorable as the responsible broker's or dealer's published bid or 
published offer in an amount up to their published quotation size for 
orders for the account of brokers and dealers. The Commission's 
exemption applies to responsible brokers and dealers on each of the 
exchanges that trade listed options.
---------------------------------------------------------------------------

    \67\ See letter from Annette L. Nazareth, Director, Division, 
Commission, to Timothy H. Thompson, Esq., Assistant General Counsel, 
CBOE, dated April 2, 2001.
    \68\ 17 CFR 240.11Ac1-1(c)(2).
    \69\ 17 CFR 240.11Ac1-1(c)(2).
---------------------------------------------------------------------------

G. Proposed CBOE Rule 8.51(b)(3), Proposed Phlx Rule 1015(a)(v), and 
Proposed Options Floor Procedure Advice A-11(a)(v)

    As discussed above, CBOE currently has a rule that provides that 
when multiple orders for the same class from the same beneficial owner 
are represented at the trading station at approximately the same time, 
only the first of such orders that cumulatively equal or add up to less 
than the firm quote requirement would be entitled to an execution 
pursuant to CBOE's rules.\70\ CBOE proposes that responsible broker-
dealers also would be relieved of the obligations under Rule 11Ac1-1 in 
these circumstances.\71\ Similarly, Phlx proposes to retain a provision 
from its current rules in Proposed Phlx Rule 1015(a)(v) and Proposed 
Options Floor Procedure Advice A-11(a)(v) that would prohibit orders 
from being ``unbundled'' for the primary purpose of availing upon the 
execution guarantee requirement provided by the Phlx.
---------------------------------------------------------------------------

    \70\ Current CBOE Rule 8.51(a)(3).
    \71\ Proposed CBOE Rule 8.51(b)(3).
---------------------------------------------------------------------------

    The Commission notes that neither exchange has provided a basis for 
why such provisions are consistent with the Quote Rule.\72\ Although 
the Commission approved these provisions as being consistent with each 
exchange's rules, the Commission believes that these rules are not 
consistent with the Quote Rule. Therefore, these rules cannot be used 
to relieve the Exchanges' members from their obligations under the 
Quote Rule to be firm for the disseminated price up to their published 
quotation size. The Commission, however, is soliciting comment on 
whether it would be appropriate for it to grant responsible brokers or 
dealers an exemption from their obligations under the Quote Rule when 
multiple orders are submitted for the account of the same beneficial 
owner in the same options class at approximately the same time.
---------------------------------------------------------------------------

    \72\ In fact, as noted above, the Commission has received a 
request for an exemption from CBOE that would allow its responsible 
brokers or dealers to be relieved of their obligations under the 
Quote Rule with respect to multiple orders for the same class of 
options received from the same beneficial owner at approximately the 
same time. See supra note 34.
---------------------------------------------------------------------------

    The Commission finds good cause for granting the Exchanges' request 
for the Pilots prior to the thirtieth day after the date of publication 
of notice of filing thereof in the Federal Register. The Commission 
notes that April 1, 2001 is the compliance date for the amendments to 
the Quote Rule extending its application to the options markets. The 
Commission believes that granting accelerated approval to the Pilots 
will allow the Exchanges to implement the conforming amendments to the 
Quote Rule on its compliance date.
    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\73\ that only the portions of the proposed rule changes 
relating to the Pilots proposed by the Exchanges (File Nos. SR-Amex-01-
18, SR-CBOE-01-15, SR-ISE-01-07, SR-PCX-01-18, and SR-Phlx-01-37), as 
amended, are approved until June 1, 2001.
---------------------------------------------------------------------------

    \73\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\74\
---------------------------------------------------------------------------

    \74\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-8740 Filed 4-9-01; 8:45 am]
BILLING CODE 8010-01-U