[Federal Register Volume 66, Number 153 (Wednesday, August 8, 2001)]
[Notices]
[Pages 41632-41639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19854]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44647; File No. SR-Amex-00-60]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 Thereto by the American Stock 
Exchange LLC To Require the Use of Handheld Computers by Floor Brokers 
and Registered Options Traders and To Update the Exchange's Audit Trail 
Rules

August 2, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4\2\ thereunder, notice is hereby given that 
on December 11, 2000, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On May 
15, 2001, Amex submitted No. 1 to the proposal.\3\ On July 27, 2001, 
Amex submitted Amendment No. 2. \4\ The Commission is publishing this 
notice to solicit comments on the proposed rule change, as amended, 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from William Floyd-Jones, Assistant General 
Counsel, Legal & Regulatory Policy Division, Amex, to Nancy Sanow, 
Assistant Director, Division of Market Regulation, Commission, date 
May 15, 2001 (``Amendment No. 1''). In Amendment No. 1, Amex revised 
the proposal to clarify that its new Hand Held Terminal Policy would 
apply to both wired as well as wireless terminals, and to make 
technical corrections to the proposed rule text.
    \4\ See letter from William Floyd-Jones, Assistant General 
Counsel, Legal & Regulatory Policy Division, Amex, to Nancy Sanow, 
Assistant Director, Division of Market Regulation, Commission, dated 
July 26, 2001 (``Amendment No. 2''). In Amendment No. 2, Amex 
resubmitted its statement of the purpose of, and the statutory basis 
for, the proposed rule change. However, Amex did not make any 
revisions to the proposed rule text.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Amex Rules 153, 180, and 220: (i) To 
require the use of handheld computers by floor brokers and Registered 
Options Traders (``ROTs''); (ii) to require the immediate 
systemization, upon receipt on the floor, of orders that are eligible 
for input into Amex's electronic order processing facilities (``CMS-
eligible orders'') and that are not already systematized; and (iii) to 
update the Exchange's rules regarding records of orders.

[[Page 41633]]

    The text of the proposed rule change is set forth below. New text 
is in italics; deleted text is in brackets:
Record of Orders
    Rule 153. (a) Every member or member organization shall maintain a 
record of every order and every modification and cancellation of such 
order transmitted [by him] to the Floor of the Exchange, which record 
shall include the name, amount and price of the security and the time 
when such order, modification or cancellation was so transmitted.
    (b) Every member or member organization shall maintain a record of 
every order and every modification and cancellation of such order 
[originating on the Floor of the Exchange given to such member for 
execution, and of every order originating off the Floor, transmitted by 
any person other than a member or a member organization or a member, 
officer or employee therein, to such member on the Floor,] received by 
such member or member organization on the Floor of the Exchange. 
[which] Such record shall include the name, amount and price of the 
security and the time when such order modification or cancellation was 
received. [so given or transmitted.] With respect to orders that are 
eligible for input into the Exchange's electronic order processing 
facilities, members and member organization shall comply with their 
record keeping obligations under this Rule by inputting immediately 
upon receipt eligible orders, modifications and cancellations that are 
not already systematized into the Exchange's electronic order 
processing facilities and retaining the record of such orders provided 
to them by the Exchange for this purpose. 
    (c) Rescinded. [Every member shall maintain a record of every order 
received, either orally or in writing, and carried by him to the floor 
of the Exchange, which record shall include the name and amount of the 
security, the terms of the order, and the time when such order was so 
received; provided, however, that the Exchange may, upon application, 
for cause shown, grant exemptions from the provisions of this 
paragraph.]
    (d) Every member or member organization shall preserve for at least 
three years [twelve months] a record of every commitment or obligation 
to trade issued form the Floor and cancellation thereof, which record 
shall include the name, amount, and price of the security, the 
destination market center, and the time when such commitment was issued 
or cancelled.
    (e) Every member or member organization shall maintain for at least 
three years a record of every order and every modification and 
cancellation of such order entered [by such member or member 
organization] into the After-Hours Trading Facility (as Rule 1300 
(After-Hours Trading: Applicability and Definitions) defines that 
term), which record shall include the name and amount of the security, 
the terms of the order, the time when it was so entered, and the time 
at which a report of execution was received. Every specialist shall 
maintain for at least three years reports of all executions and 
modifications and cancellations of orders placed with the specialist 
through the After-Hours Trading Facility.
    (f) [Whenever a cancellation is entered with respect to an order, 
commitment or obligation covered by paragraph (a), (b), (c), (d) or (e) 
of this rule, or a] Every member of member organizations shall maintain 
a record for at least three years of every report of the execution of 
[such] an order, commitment or obligation covered by paragraph (a), 
(b), (d) or (e) of this rule [is received, there shall be preserved for 
at least 12 months,] in addition to the record required by such 
paragraphs, [a record of the cancellation of the order, commitment or 
obligation or of the receipt of such report] which shall include the 
time of [the entry of such cancellation or of] the receipt of such 
report.
    (g) Before any order, commitment or obligation covered by paragraph 
(a),(c), [(c),] (d) or (e) of this rule is executed, there shall be 
placed upon the order slip or other record the name or designation of 
the account for which such order, commitment or obligation is to be 
executed; no change in such account name or designation shall be made 
unless the change has been authorized by any member or officer in the 
member organization or authorized representative thereof who shall, 
prior to giving his approval of such change, be personally informed of 
the essential facts relative thereto and shall indicate his approval of 
such change in writing on the order.
    (h) All records required to be maintained under this rule shall 
include such information and shall be preserved for such period as 
required by the Securities Exchange Act of 1934 and the rules 
thereunder relating to the requirements for the retention of orders.
    (i) The term ``order'' as used in this Rule 153 includes any 
modification to or cancellation of such order.
* * * * *

Must Keep Record of Orders

    Rule 180. Rescinded. [Every specialist shall keep a legible record 
of all orders placed with him in the securities in which he is 
registered as a specialist and of all executions, modifications and 
cancellations of such orders. Such records shall include such 
information and shall be preserved for such period as required by the 
Securities Exchange Act of 1934 and the rules thereunder relating to 
the requirements for the retention of orders. The specialist shall 
retain for a period of a least three years reports of all executions 
and modifications and cancellations of orders placed with him through 
the ``After-Hours Trading Facility'' (as Rule 1300 (After-Hours 
Trading: Applicability and Definitions) defines that term).]
* * * * *

Communications to and on the Floor

    Rule 220. No change.

* * * Commentary

    .01 through .03. No change.
    .04 Hand Held Terminal (``HHT'') [Wireless Communications 
Infrastructure] Policy. [The Exchange has filed with, and received SEC 
approval for, the development of a wireless communications 
Infrastructure (the ``Infrastructure'') and associated Exchanged policy 
designed to implement the Infrastructure (``Wireless Communications 
Policy''). (SR-Amex 97-40, approved May 21, 1998, Exchange Act Release 
No. 34-40019.) Violations of the Wireless Communications Policy may 
result in disciplinary action by the Exchange pursuant to Article V of 
the Exchange Constitution or Exchange Rules 345 or 590 as 
appropriate.\5\
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    \5\ In its present form, Commentary .04 to Amex Rule 220 has 
only a single paragraph. The additional paragraphs that appear below 
constitute the Exchange's existing Wireless Communications Policy, 
which is being amended and added to Amex's rulebook. The proposed 
edits are shown below as if the Wireless Communications Policy were 
already a part of Amex's rulebook.
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    The Exchange for many years has had rules and policies governing 
communications to and between locations on [from] the Trading Floor. 
[In 1987, the Exchange filed its current communications policies with 
the SEC.\1\] These policies[, embodied in Rule 220,] give the Exchange 
broad authority to review telephonic and other electronic 
communications both between the Floor and other locations and between 
points on the Floor. [In 1996, the Exchange amended Rule 220

[[Page 41634]]

to allow it to regulate communications between points on the Floor and 
adopted a policy regarding wireless communications (the ``Wireless 
Communications Policy''). At the same time, the Exchange adopted 
related amendments to Exchange Rule 60.\2\ In 1997, the Exchange 
amended its Wireless Communications Policy.\3\]
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    [\1\ See Exchange Act Release No. 34-33735, dated March 8, 1994, 
approving SR-Amex-87-33.]
    [\2\ See Exchange Act Release No. 34-37728, dated September 26, 
1996, approving SR-Amex-96-10.]
    [\3\ See Exchange Act Release No. 34-40019, dated May 21, 1998.]
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[Design and Implementation of Infrastructure]

    There have been significant developments in data transmission 
technology since the Exchange formalized its communications policies. 
In light of these changes, the Exchange promulgated its Hand Held 
Terminal Policy and [in 1987. The Exchange's staff, assisted by the 
Committee on Trading Technology Policy, has studied the questions 
raised by the new communications technologies. As a result of this 
ongoing review, the Exchange determined to build] built a [wireless] 
data communications infrastructure (the ``Infrastructure''). The 
Exchange undertook these regulatory and systems initiatives in order 
to: (i) Facilitate the execution of orders on the Exchange, (ii) 
facilitate the execution by Amex members of hedging and other permitted 
transactions in other markets, (iii) facilitate risk management, trade 
comparison and transaction reporting, (iv) facilitate the transmission 
of options analytics to Amex members, (v) provide appropriate oversight 
of [wireless] data communications, (vi) ensure the safety and efficient 
operation of the Exchange's trading systems, (vii) provide fair access 
for all members and the Exchange to the finite supply of available 
radio frequencies and system capacity, and (vii) promote a fair, 
orderly and efficient market for securities on the Exchange.
    [The Exchange has contracted with Symbol Technologies, Inc. 
(``Symbol''), an experienced vendor of wireless equipment, to design 
(in accordance with specifications provided by the Exchange), build, 
test and service the Infrastructure. The Infrastructure consists of two 
systems: (1) the Base Station System which will consist of the base 
stations and antennas that establish communications with the hand held 
terminals ``HHTs'') on the Floor, and (2) the Wireless Network 
Management System which will allow the staff of the Exchange to monitor 
radio frequency (``RF'') capacity usage. The two systems will be 
connected by a wired network (the ``LAN'').]
    [The Exchange will require] All members using proprietary HHT 
[wireless] technology on the Floor must [that have not already done so 
to] conform their proprietary technologies at their cost to the 
requirements of the Infrastructure and the Exchange's other systems. 
For example, members are [will be] required to use the Exchange's 
antennas, base stations and Exchange specified [Symbol's] radio cards 
for their wireless HHTS. Members also are [will be] required to conform 
to physical interface standards specified by the Exchange.
    The Exchange will require members to conform their proprietary 
technologies at their cost the requirements of any enhancements to, or 
replacements of, the Infrastructure or any other Exchange system should 
this be deemed necessary by the Exchange. The Exchange may also require 
members to link their HHT [wireless] system hosts to the Exchange's 
trade comparison, reporting or other systems, or implement entirely new 
technologies should this be more efficient or cost effective for the 
operations of the Exchange. The members will be responsible for bearing 
all costs associated with any such changes.
    To further advance the policy objectives underlying the Hand Held 
Terminal Policy and the Infrastructure, the Exchange will require all 
members acting as brokers and all Registered Options Traders ``ROTs'') 
to use HHTs in conducting business on the Exchange Floor. (Specialists 
acting as broker in their specialty securities will not be required to 
use HHTs). The Exchange currently is developing a standard application 
that will reside on an HHT that it will issue to brokers for their use. 
Once this Exchange provided HHT system is operational, all brokers will 
be required to use it at all times. The Exchange, moreover, will 
require all ROTs to use HHTs to conduct their business. Since the 
Exchange does not currently plan to develop an HHT application for 
ROTs, ROTs must either develop or secure HHTs for their own use at such 
time as may be specified by the Exchange with the following minimum 
capabilities:
     ROTs must be able to receive execution report on their 
HHTs during a trading session with respect to trades executed against 
their accounts automatically (e.g. Auto-Ex and Book trades).
     ROTs must be able to report their trades within time 
limits prescribed by the Exchange to their clearing agents during a 
trading session by means of their HHTs.
     HHTs used by ROTs must be able to make a record of text 
transmissions to or from other persons. This record must include the 
date and time of the transmission, the person initiating the 
transmission, all persons receiving the transmission, and the text of 
the message. 
     ROTs must be able to capture the following audit trail 
data on their HHTs with respect to all trades they execute on the Amex: 
(1) time of trade (the clocking mechanism must be seconds), (2) 
executing broker badge number, (3) contra broker badge number, (4) open 
or closing transaction, (5) clearing member, (6) contra clearing 
member. ROTs must be able to report this audit trail information to 
their clearing agents during a trading session within time limits 
prescribed by the Exchange. 
     HHTs used by ROTs must be able to make a record of the 
following information with respect to orders or quotes initiated by 
ROTs for securities or futures traded in other markets: (1) date, (2) 
the time the order or quote is sent to the other market (the clocking 
mechanism must be in tenths of a second measurement), (3) the identity 
of the person initiating the order or quote, (4) security symbol, (5) 
buy, sell, sell short, short exempt, (6) order type (e.g., market, 
limit), (7) order or quote size, (8) order or quote price, (9) 
execution quantity, (10) execution price, (11) market where the order 
or quote is routed (e.g., NYSE, Nasdaq, CBOE, and Instinet). 
     All clocking must be done electronically. All clocking 
mechanisms must by synchronized at least once per business day to the 
National Time Service or as specified by the Exchange from time to 
time. 
     All records required to be made must be maintained for at 
least three years and available to the staff of the Exchange upon 
request in no more than three business days. 
    [The Amex intends to develop its own HHT applications for its 
members that are unable or unwilling either to develop their own or 
acquire them from another source. The Exchange, however, has not yet 
determined when it will proceed with such an initiative. The Exchange 
also intends to develop HHT applications for its Trading Floor 
personnel.]
    The Exchange will not require any member that develops a 
proprietary [wireless] data communications system to make its 
technology available to other members. The Exchange believes that the 
enforced sharing of proprietary

[[Page 41635]]

technology among competitors would be a disincentive to innovation.

Capacity[, Fault Tolerance, Security] and Radio Frequency

    [The Infrastructure will be able to support the simultaneous 
operation of 600 HHTs on the Trading Floor.\4\ The specifications of 
the system, moreover, provide for a message capacity which is 
substantially greater than anticipated usage as currently estimated. 
There will be no single point of failure within the Infrastructure. All 
units, bases, antennas, routers, etc. will be redundant to provide 
seamless recovery if a component fails. The failure and recovery will 
be transparent to users without any interruption of service and there 
will be no requirement for a ``log-out/log-in'' process. The redundant 
component will automatically take over the processing as soon as a 
component fails. In the event of failure, messages in transit will be 
recovered transparently.]
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    \4\ [The Exchange has 661 regular members (approximately 200 of 
which are specialists), 203 options principal members and 10 limited 
trading permit holders. Since specialists are stationed in one 
place, they will not require HHTs, and a capacity of 600 HHTs on any 
given day should be sufficient.]
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    [Whenever an HHT is turned on, the unit will transmit its own 
identity code to the Wireless Network Management System. This will 
limit the possibility of unauthorized access to the Infrastructure. In 
addition, the Exchange will require members to assign passwords to 
their HHT users. This will provide another means of restricting 
unauthorized access to the Infrastructure. The Infrastructure also will 
have firewalls to protect the integrity of the Exchange's other 
systems.]
    The Exchange will use the 2.4 GHz ``unlicensed'' radio frequency 
for the Infrastructure[ and will require members currently using 902 
MHz radios to replace these units with Symbol's 2.4 GHz radio cards to 
conform with the requirements of the Infrasture]. Currently, the 
Exchange intends to permit persons that have approved wireless 
capabilities to use up to 1/30 of the available capacity of the 2.4 GHz 
frequency. [As of September 1997, the Exchange has approved 12 separate 
wireless applications from 10 unaffiliated firms covering a total of 
217 HHTs.] Each unaffiliated applicant that has been approved to use 
wireless technology currently may use up to 1/30 of the available 
capacity of the 2.4 GHz frequency. Persons and firms that are 
affiliated are required to aggregate their frequency usage to determine 
if they are using a disproportionate amount of RF capacity. Thus, for 
example, if Firm A and Firm B are under common ownership, they 
currently only will be permitted to use 1/30 of the available RF 
capacity. (The term ``affiliate'' means, with respect to any person, 
any other person who or which controls, is controlled by or is under 
common control with such person.) In the event that more than 30 
separate persons or firms (including the Exchange's Trading Floor 
personnel) use wireless technology, the Exchange will develop 
alternative methods for the equitable allocation of RF capacity.
    Persons approved to use wireless technology do not acquire any 
property rights with respect to their use of the 2.4 GHz frequency or 
any other frequency that the Exchange may approve for wireless 
communications on the Floor. The Exchange's staff will be able to 
monitor the level of [wireless] message traffic[ through the Wireless 
Network Management System and will have the following information 
available on a real-time basis: status of each HHT, users that are 
currently logged on, the ``traffic'' (i.e., radio frequency use) that 
each HHT is generating, the traffic that each firm is generating, total 
radio frequency load, and warning messages in case unauthorized access 
is attempted]. If the Exchange determines that a firm has exceeded the 
amount of message traffic that it is permitted to use, it will require 
that firm to reduce its message traffic immediately. In addition, if 
the Exchange determines that wireless or other HHT message traffic 
throughout the Exchange is threatening the integrity of the 
Infrastructure or any of its other systems, the Exchange may require 
certain or all users to reduce their message traffic immediately. HHT 
[Wireless] users that do not comply with a request to reduce their 
message traffic are subject to disciplinary action and may have their 
ability to communicate with their HHTs [send wireless communications] 
immediately terminated by the Exchange.
    [The Exchange intends to monitor total radio frequency load on an 
ongoing basis to determine whether steps should be taken to reduce 
traffic on the 2.4 GHz wavelength to ensure the efficient operation of 
the system. Among other measures, the Exchange might permit users of 
wireless data transmission technology to use other frequencies or 
technologies for certain classes of data transmission. (E.g., the 
Exchange might permit wireless technology users to transmit options 
analytics on the 902 MHz radio frequency.) The Exchange may conclude 
that other radio frequencies are preferable to the 2.4 GHz frequency, 
or it might decide to implement a multiple frequency approach should 
this appear advantageous in terms of increasing message capacity, 
avoiding interference, etc.]

Exchange Review and Approval of Member Wireless Technology 
Applications

    As noted above, the Exchange will permit proprietary HHTs [wireless 
technology] in order to foster innovation and efficiency. However, 
since the use of nonstandardized, proprietary equipment and 
applications conceivably could threaten the Exchange's Infrastructure 
and/or other trading systems, the Exchange will review all proposals 
for new HHT [wireless] technology prior to introduction to the Floor to 
ensure that the proposed technology is compatible with the 
Infrastructure, poses no threat to the Exchange's other systems, and 
satisfies applicable regulatory and other requirements.
    Potential users of a proprietary HHT [wireless data transmission] 
technology will have to complete a detailed questionnaire and provide 
the Exchange with the specifications for their system. [In addition, 
the Exchange intends to consult with the Committee on Trading 
Technology Policy in connection with its review of proposals to use new 
wireless data transmission technology.] The Exchange's staff may 
approve a proposal in whole or in part, conditionally approve it, or 
deny an application. Since members are permitted to employ proprietary 
technology with different applications, the conditions on an approval 
may vary from user to user. In addition, the Exchange may have to 
modify the conditions on an approval after it has been granted in view 
of the Exchange's experience with HHT [wireless] technology generally 
or experience with a particular member's [wireless] system. Members 
will be required to adhere to all conditions of approval, and 
violations of the terms of approval will be treated as violation of the 
[Revised] Hand Held Terminal [Wireless Communications] Policy. 
Following approval of a member's application to use [a] HHT [wireless 
data transmission] technology, the Exchange may inspect the system 
after installation and subsequently to ensure compliance with the 
application, approval terms, and other requirements.
    Without limiting the scope of the Exchange's review or the factors 
it may consider in determining whether to approve a proposed HHT 
application [wireless system], the Exchange will not

[[Page 41636]]

approve any proposed HHT application [wireless data transmission 
technology] if it poses any danger to the efficient operation of the 
Exchange's existing trading systems or the Infrastructure or if it 
would interfere with the frequency or capacities assigned to other 
members or to the Exchange. For example, the Exchange generally will 
not permit internet access from an HHT as this may consume excessive 
message capacity. Likewise, the Exchange generally will not permit the 
transmission of images (as opposed to data) through the Infrastructure 
as image transmission may consume[s] a disproportionate amount of 
system capacity [radio frequency resources]. Similarly, the Exchange 
will not approve any HHT application [wireless data communications 
device] unless it will comply with the Exchange's rules, federal 
securities laws, government regulations pertaining to wireless 
communications, and other applicable requirements. Any HHT [wireless 
communications] system must be able to produce and maintain records 
required by the Exchange's rules and policies, federal securities laws 
and SEC regulations. (See, for example, Exchange Rules 111 Commentary 
.04, 114 Commentary .09, 153, 180, 181, 950(c) Commentary .03, and the 
Exchange's audit trail policies. The rules of the SEC also impose 
similar record keeping requirements on registered brokers and dealers. 
See Securities Exchange Act (``SEA'') rules 17a-3(a)(6) and (7), and 
17a-4(b)(1).)
    [For example,] The Exchange will require persons that have 
developed HHTs that may be used to initiate orders or enter quotes for 
financial instruments traded in other markets (e.g., the NYSE, Nasdaq 
or Instinet) to maintain a log of such orders or quotes. This record 
would, at the minimum, include the following information: (1) Date, (2) 
the time the order or quote is sent to the other market (the clocking 
mechanism must be in tenths of a second measurement), (3) the identity 
of the person initiating the order or quote, (4) security symbol, (5) 
buy, sell, sell short, short exempt, (6) order type (e.g., market, 
limit), (7) order or quote size, (8) order or quote price, (9) 
execution quantity, (10) execution price, (11) market where the order 
or quote is routed (e.g., NYSE, Nasdaq, CBOE, and Instinet). The record 
would be maintained for three years in a readily accessible place. This 
record of orders and quotes would have to be maintained for both 
executed and unexecuted orders and quotes. The Exchange also may 
require persons that have developed HHTs to maintain a record of any 
transmissions to or from their hand held terminals.
    The Exchange will permit members to encrypt options analytics and 
position information only. No other messages may be encrypted without 
the permission of the Exchange. In addition, members that choose to 
encrypt options analytics and/or position information must maintain the 
key to the code for a three-year period and provide the key to the 
Exchange on request.

[Exchange Fees]

    [The Exchange will impose a fee or fees upon users of wireless 
technology in order to recover all or part of the cost of building and/
or operating the Infrastructure or for other purposes. Thus, the 
Exchange will introduce a fee for each HHT used on the Floor. The 
specifics of this fee have not yet been determined, but it will not 
exceed $250 per month per HHT. (When the Exchange deploys its own HHTs 
for members, there will be a separate fee for those that use the 
Exchange-deployed HHTs.)]

[Liability and Indemnification]

    [Pursuant to Article IV, Section 1(e) of the Exchange Constitution, 
``The Exchange shall not be liable for any damages sustained by a 
member or member organization growing out of the use or enjoyment by 
such member or member organization of the facilities afforded by the 
Exchange to members for the conduct of their business. . .'' The 
Exchange, accordingly, shall not be liable for any damages sustained by 
a member or member organization growing out of the use or enjoyment by 
such member or member organization of the Infrastructure. In addition, 
the Exchange has approved new Commentary .03 to Rule 60 and will extend 
the current protection that the Exchange has from liability to members 
and member firms with respect to their use of the Infrastructure to the 
vendor and its subcontractors developing the Infrastructure for the 
Exchange, and will require that members and member firms indemnify the 
Exchange and the vendor and its subcontractors with regard to any 
third-party claims relating to member and member firm use of the 
Infrastructure.]

Sanctions for Violations of the [Revised] Hand Held Terminal 
[Wireless Communications] Policy

    Violations of any aspect of the foregoing Hand Held Terminal 
[Revised Wireless Communications] Policy may result in disciplinary 
action pursuant to Article V of the Exchange Constitution or Exchange 
Rules 345 or 590 as appropriate.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Amex included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Amex has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose

Mandatory Use of HHTs by Brokers and Registered Options Traders

    In the mid-1990s, ROTs began to make extensive use of proprietary 
handheld computer terminals (``HHTs'') that were linked to their home 
offices by wireless data transmission technologies. Recently, some 
members have begun using wired, as opposed to wireless, HHTs. Amex 
believes that HHTs have enhanced the ability to ROTs to conduct their 
business. The rapid proliferation of these devices, however, raised 
concerns with broadcast interference, systems disruption, antenna 
location, exhaustion of system capacity, and appropriate regulatory 
oversight of data communications. As a result of these considerations 
and in light of similar developments on other exchanges, Amex 
determined to build a Data Communications Infrastructure and adopt a 
Handheld Terminal Policy to regulate the use of these devices.\6\
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    \6\ See Securities Exchange Act Release No. 37728 (September 26, 
1996), 61 FR 51476 (October 2, 1996) (approving Amex's original 
Wireless Communications Policy); Securities Exchange Act Release No. 
40019 (May 21, 1998), 63 FR 29272 (May 28, 1998) (amending Amex's 
Wireless Communications Policy).
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    Amex permitted members to employ custom-designed HHTs, subject to 
Exchange review and approval of any new handheld technology or 
application. Amex also required members to use its Data Communications 
Infrastructure (i.e., Amex antennas, base stations, network, etc.) to 
transmit communications to and from HHTs and to conform their 
proprietary technologies at their cost to

[[Page 41637]]

the requirements of the Infrastructure.\7\ As a result of the 
Exchange's initiatives, members (almost all of whom functioned as ROTs) 
were able to develop or acquire HHTs that provided them with the 
capabilities that best suited their particular business needs. Amex 
believes that its approach to implementing the widespread use of HHTs 
on the Trading Floor has been successful. Currently, more than 400 
members are approved to use HHTs.
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    \7\ There has been no resistance within Amex's membership to the 
requirement that members conform their technologies at their cost to 
the requirements of the Data Communications Infrastructure. This 
requirement has been part of the Exchange's Policy on HHTs since its 
inception. As a result, it has been subject to notice in the Federal 
Register and public comment on two prior occasions without any 
adverse comment. See supra note 6.
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    Amex began the introduction of its Booth Automated Routing System 
(``BARS'') in late 2000 and anticipates that BARS will be fully 
deployed by the end of 2001. In conjunction with the implementation of 
BARS, Amex in the first week of August 2001 introduced a wireless 
retail application system for brokers (``BRS/HHT'') that the Exchange 
expects will be fully deployed by the end of the second quarter of 
2002.\8\ As a member firm is added to BARS, Amex would provide that 
firm with the appropriate number of BARS/HHTs to efficiently utilize 
the new system.
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    \8\ Telephone conversation between William Floyd-Jones, 
Assistant General Counsel, Legal and Regulatory Policy, Amex, and 
Michael Gaw, Special Counsel, Division of Market Regulation, 
Commission, on August 2, 2001.
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    According to Amex, BARS would allow member firms to manage their 
order flow more efficiently by giving member firms a choice of either 
sending orders and instructions electronically to their booths for 
further action or using existing order routing systems to send orders 
directly to the specialist post. BARS/HHT would provide wireless 
communications between member firm booth personnel and floor brokers 
using HHTs via an interface to BARS.
    Amex believes that the introduction of HHTs devices on the floor: 
(1) Has significantly improved the ability of ROTs to make markets,\9\ 
and (2) with the introduction of BARS/HHT, promises to significantly 
enhance the ability of brokers to represent equity and option 
order.\10\ Amex believes that this benefits investors and enhances the 
Exchange's competitive position relative to other markets. The 
widespread introduction of HHTs among the broker and ROT populations on 
the Floor also permits significant enhancements to the Exchange's audit 
trail and self-regulatory capabilities by instituting comprehensive 
electronic tracking and ``time stamping'' of orders and executions.\11\ 
The Exchange, accordingly, is proposing to require brokers to use the 
new BARS/HHT system when it becomes fully operational\12\ Amex, 
similarly, is proposing to require all ROTs to use HHTs with the 
following minimum capabilities at such times as may be determined by 
the Exchange:\13\
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    \9\ Amex states that the benefits derived by ROTs from their 
HHTs have varied from firm to firm based upon the functionality of 
the HHTs used by the firm. Among the more common applications has 
been receiving options analytics (i.e., data used to price options), 
reporting trades to the home office and clearing firms, and 
initiating hedging transactions in other markets. Options analytics 
allow market makers to better value options, which permits them to 
make tighter and deeper markets in a growing number of options. 
Reporting executions electronically to the home office or clearing 
firm facilitates the comparison of trades and centralized risk 
management. Amex also believes that the ability to initiate hedging 
transactions from HHTs allows market makers to better manage their 
risk and, consequently, allows them to make tighter and deeper 
markets than they would be able to make without the ability to 
initiate trades from HHTs.
    \10\ With respect to the benefits that brokers will derive from 
BARS/HHT, Amex believes that this system speeds the routing of 
orders from off the floor to the point of trade by automating order 
processing. BARS/HHT also gives members more control over the 
execution of their orders by allowing them to determine whether the 
order should be routed to a floor broker or sent to the specialist 
book. BARS/HHT also automates the reporting of executions to 
customers and trade comparison, thus expediting and reducing errors 
in these processes.
    \11\ All orders pass through the Amex Order file (``AOF''), the 
host system of order processing, prior to a BARS booth terminal 
routing an order to an HHT. AOF includes a repository of all Amex 
orders, execution information, processing of orders, reports, 
cancels, and administrative messages. All orders are assigned a 
unique turnaround number that is referenced on any subsequent 
cancellations, executions, or administrative messages. Any message 
affecting an order is logged and time stamped in AOF. The Exchange's 
order processing systems have been designed so that the clocking 
mechanisms do not deviate by more than three seconds from the Naval 
Observatory atomic clock in Washington, DC.
    \12\ Specialists, when acting as brokers in the securities in 
which they are registered, will not have to use HHTs because they 
already have the other systems provided to them by the Exchange for 
the purpose of fulfilling their responsibilities as specialist. 
These systems (e.g., Amex Option Display Book and Point of Sale 
Book) provide audit trail functionality for orders given to 
specialists for execution.
    \13\ Since the inception of its HHT Policy, Amex has allowed 
members to develop their own HHT applications subject to review by 
the Exchange to ensure compliance with its rules and compatibility 
with its systems. This Policy has allowed members to develop those 
systems that best suited their business needs. Over time, almost all 
Amex ROTs have acquired HHTs. There is no need, accordingly, for the 
Exchange to develop HHT applications for ROTs, since a variety 
currently are available to members. In contrast, only one member 
firm has developed an HHT application for its activities as a 
broker. Since Amex believes that automating pre-trade order handling 
would provide better and faster service to its customers, Amex 
developed the BARS and BARS/HHT systems referenced in this filing. 
These systems are not being provided free of charge, and users are 
subject to an Exchange fee. See Securities Exchange Act Release No. 
44286 (May 9, 2001), 65 FR 27187 (May 16, 2001) (SR-Amex-2001-22.) 
Amex believes that this provides for a fair allocation of expenses 
among the various Exchange members.
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     HHTs used by ROTs must be able to receive execution 
reports during a trading session with respect to trades executed 
against their accounts automatically (e.g., Auto-Ex and Book trades).
     ROTs must be able to report their trades to their clearing 
agents within time limits prescribed by the Exchange by means of their 
HHTs.\14\
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    \14\ Trade reporting in this context refers to the reporting of 
trades to clearing agents for comparison and clearance rather than 
the reporting of trades for dissemination of last sale information. 
Trade reporting for purposes of comparison and clearance is subject 
to Amex Rules 590, Part 2(d)(3); 719(c); 720(a); 960; and 962.
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     HHTs used by ROTs must be able to make a record of text 
transmissions to or from other persons. This record must include the 
date and time of the transmission, the person initiating the 
transmission, all persons receiving the transmission, and the text of 
the message.
     ROTs must be able to capture the following audit trail 
data on their HHTs with respect to all trades they execute on the 
Exchange: (1) Time of trade (the clocking mechanism must be in 
seconds), (2) executing broker badge number, (3) contra broker badge 
number, (4) open or closing transaction, (5) clearing member, and (6) 
contra clearing member. ROTs must be able to report his audit trail 
information to their clearing agents during a trading session within 
time limits prescribed by the Exchange.
     HHRs used by ROTs must be able to make a record of the 
following information with respect to orders or quotes initiated by 
ROTs for securities or futures traded in other markets: (1) Date; (2) 
the time the order or quote is send to the other market (the clocking 
mechanism must be in tenths of a second measurement); (3) the identity 
of the person initiating the order or quote; (4) security symbol; (5) 
buy, sell, sell short, or short exempt; (6) order type (e.g., market, 
limit); (7) order or quote size; (8) order to quote price; (9) quote is 
routed (for example, the NYSE, Nasdaq, CBOE, and Instinet).\15\
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    \15\ The requirement that HHTs used by ROTs must be able to 
produce an audit trail with respect to orders and quotes initiated 
on the Exchange and sent to other markets (outgoing orders) is 
intended to facilitate surveillance of intermarket trading 
violations such as front running. Amex states that this requirement 
has been present in the exchange's HHT Policy since its adoption.

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[[Page 41638]]

     All clocking must be done electronically. All clocking 
mechanisms must be synchronized at least once per business day to the 
National Time Service or as specified by the Exchange from time to 
time.
     All required records must be maintained for at least three 
years and available to the staff of the Exchange upon request in no 
more than three business days.
    The Exchange proposes to amend its HHT Policy to accomplish the 
foregoing objectives. In addition. Amex proposes to incorporate the 
text of the HHT Policy into the Exchange's Rules as Commentary .04 to 
Amex Rule 220 to make it more accessible to members and member 
organizations.\16\ The HHT policy also would be revised: (1) To 
eliminate language that discussed the implementation of the 
Infrastructure, (2) to remove other features of the policy that are no 
longer used, and (3) to remove text that is found elsewhere in the 
Exchange's rues or is inappropriate in a rule.
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    \16\ Commentary .04 to Amex rule 220 currently references the 
HHT Policy but does not reprint it.
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Audit Trail Enhancements

    Amex is proposing a number of changes to its rules regarding 
records of orders (Amex Rules 153 and 180) to enhance the Exchange's 
audit trail and self-regulatory capabilities.
     Paragraph (a) of Amex Rule 153 would be amended to 
explicitly require members and member organizations located off the 
floor to maintain a record of order modifications and cancellations.
     Paragraph (b) of Amex Rule 153 would be amended to require 
all members and member organizations to maintain a record of all 
orders, modifications, and cancellations received by them on the floor. 
Members and member organizations would be required to systematize any 
order, modification, or cancellation that is CMS-eligible immediately 
upon receipt on the floor, if it were not already systematized.\17\ 
Amex would provide members and member organizations with a paper record 
of all of their systematized orders that they would retain to satisfy 
their recordkeeping obligations.
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    \17\ Currently, percentage and combination order (e.g. spread 
orders) are not CMS-eligible. Amex intends to develop systems that 
would make these orders CMS-eligible.
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     Paragraph (c) of Amex Rule 153 would be rescinded. Amex 
believes that this rule is archaic since it concerns orders ``carried'' 
to the Exchange floor, and the substance of the rule would be covered 
by Paragraph (b) of Amex Rule 153.
     Paragraph (d) of Amex Rule 153 concerns records of ITS 
commitments. It would be amended to extend recordkeeping obligations to 
member organizations and the cancellation of ITS commitments. The rule 
also would be amended to extend the obligation to maintain these 
records to three years.
     Paragraph (e) of Amex Rule 153 concerns records of orders 
in the Exchange's After Hours Trading (``AHT'') Facility. The proposed 
changes would consolidate AHT facility recordkeeping obligations in one 
place and would conform this provision to the other paragraphs of Amex 
Rule 153.
     Paragraph (f) of Amex Rule 153 concerns cancellations and 
reports. Recordkeeping responsibilities with respect to order 
cancellations would be transferred to the other sections of Amex Rule 
153. Paragraph (f) also would be modified to require members and member 
organizations to keep records of reports for three years instead of 12 
months.
     Amex Rule 180 concerns the recordkeeping obligations of 
specialists. This rule would be deleted as the revisions to Amex Rule 
153 would include recordkeeping by specialists as well as other 
members.
2. Statutory Basis
    Amex believes that the proposed rule change is consistent with 
Section 6(b) of the Act\18\ in general and further the objectives of 
Section 6(b)(5)\19\ in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices; to promote just and 
equitable principles of trade; to foster cooperative and coordination 
with person engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities; to remove impediments to and perfect the mechanisms of a 
free and open market and a national market system; and, in general, to 
protect investors and the public interest. Amex believes that the 
proposed rule change is also consistent with the National Market System 
goals of Section 11A(a)(C) of the Act\20\ in that they will enhance (1) 
economically efficient execution of securities transactions; (2) fair 
competition among brokers and dealers, among exchange markets, and 
between exchange markets and markets other than exchange markets; (3) 
the availability to brokers, dealers, and investors of information with 
respect to quotations for and transactions in securities; (4) the 
practicability of brokers executing investors' orders in the best 
market; and (5) an opportunity, consistent with the provisions of 
clauses (1) and (4) above, for investors orders to be executed without 
the participation of a dealer.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ 15 U.S.C. 78k-1(a)(1)(C).
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    Amex believes that the proposed rule change will further the 
National Market System objective of Section 11A of, ``fair competition 
among brokers and dealers, among exchange markets, and between exchange 
markets and markets other than exchange markets,'' by automating pre-
trade order processing on the Exchange. This will strengthen the 
Exchange's competitive position relative to other markets and benefit 
investors. Amex believes that the use of Exchange-standard HHT 
technology for order processing also will allow the Exchange to 
significantly enhance its order audit trail for both equities and 
options by allowing the Exchange to electronically track and time stamp 
all orders, modifications, and cancellations sent to the Exchange.
    BARS/HHT has a ``Market Look'' functionality that will allow 
brokers to electronically transmit information developed as a result of 
a market probe to the person that requested the information. Amex 
believes that this capability will ``enhance the availability to 
brokers, dealers, and investors of information with respect to 
quotations for * * * securities.'' BARS/HHT also has a functionality 
that allows brokers to electronically report executions to customers. 
Amex believes that this capability will ``enhance the availability to 
brokers, dealers, and investors of information with respect to * * * 
transactions in securities.'' Amex further believes that BARS/HHT will 
increase the automation of pre-trade order processing on the Exchange. 
This will speed and make order processing on the Exchange more 
efficient and thereby ``enhance the practicality of brokers executing 
investors' orders in the best market,'' when the best market is 
provided by the Exchange.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Amex believes that the proposed rule change would impose no burden 
on competition not necessary or appropriate in furtherance of the 
purpose of the Act.

[[Page 41639]]

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

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

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filings will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-Amex-00-60 and should be submitted by August 29, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
Margaret H. McFarland,
Deputy Secretary.
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    \21\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 01-19854 Filed 8-7-01; 8:45 am]
BILLING CODE 8010-01-M