[Federal Register Volume 67, Number 31 (Thursday, February 14, 2002)]
[Notices]
[Pages 6953-6956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-3495]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45413; File No. SR-Amex-2001-76]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange LLC Relating to the Obligations 
of Specialists and Registered Options Traders

February 7, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 12, 2001, 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. The Amex 
filed amendments to the proposed rule change on December 17, 2001 \3\ 
and January 18, 2002.\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\ The Amex submitted a new Form 19b-4, which replace and 
supersedes the original filing in its entirety (``Amendment No. 
1'').
    \4\ Letter from Clarie P. McGrath, Vice President and Deputy 
General Counsel, Amex, to Elizabeth King, Associate Director, 
Division of Market Regulation (``Division''), Commission, dated 
January 16, 2002 (``Amendment No. 2''). Amendment No. 2 amends 
proposed Amex Rules 950 and 958 to clarify that ``lage order'' means 
order larger than the size communicated or disseminated pursuant to 
Exchange Rule 958 or larger than the Exchange's auto-ex eligible 
size. Amendment No. 2 also make a technical correction to proposed 
Amex Rule 958(h)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes to amend Exchange Rules 950, 958 and 958A 
pertaining to the obligations of specialists and registered options 
traders. The text of the proposed rule change is set forth below. 
Additions are in italics; deletions are in brackets.

American Stock Exchange, LLC; Proposed Rule Change

Section 5. Floor Rules Applicable to Options

Rule 950 Rules of General Applicability
    (a) through (m) No change.
    (n) The provisions of Rule 170 and Commentaries .03 and .04 
thereto, shall apply to exchange option transactions.

[[Page 6954]]

In addition, the following Commentary shall also apply:
Commentary
    .01  No change.
    .02  Specialists and registered options traders are required to 
compete with each other to improve the quoted markets in all series of 
option classes which they trade. Unless otherwise provided for in 
Exchange rules, it shall be a violation of just and equitable 
principles of trade for specialists and registered options traders to 
determine by agreement the spreads or prices at which they will trade 
any option class, or the allocation of orders in any option class. In 
complying with this Rule, the specialist and registered option traders 
must make independent decisions to determine the spreads or prices at 
which they will quote and trade any option class. There are, however, 
certain specific circumstances where to make fair and orderly markets 
that are competitive with other exchanges and responsive to the needs 
and expectations of investors, some communication among the specialist 
and traders may be necessary and appropriate. Therefore, 
notwithstanding the foregoing:
    (a) Specialists are expected to participate in and support 
Exchange-sponsored automated systems such as automatic quote and 
execution systems or Exchange-approved equivalents. The variables in 
the formula used to generate automatically updated quotations for each 
option class and or series will be determined independently by the 
specialist. The specialist shall disclose to all registered option 
traders in an option class the following variables of the formula used 
to generate automatically updated market quotations for each option 
class and/or series: option pricing calculation model, volatility, 
interest rate, and dividends (both declared and anticipated). The 
specialist may receive input from the registered options traders on any 
one or all of these variables provided, however, it is within the 
specialist's sole discretion to make the final, independent decision in 
determining the variables to be used in the automated quote system. The 
registered options traders, however, are not required to give input on 
the variables to the specialist. The Exchange shall have the discretion 
to exempt specialists using an Exchange-approved proprietary automated 
quotation updating system from having to disclose proprietary 
information concerning the variables (but not the variables themselves) 
used by those systems;
    (b) The obligation of the specialists to make competitive markets 
does not preclude the specialists and registered options traders from 
making a collective response to a request for a market, provided the 
member representing such order requests such response and the size of 
the order is larger than the size communicated or disseminated pursuant 
to Rule 958A or is larger than the Auto-Ex eligible size parameter.\5\ 
With respect to orders sent through the Exchange's order routing 
systems that are larger than the size disseminated pursuant to Rule 
958A, it is presumed that the member has requested a collective 
response. The allocation of contracts executed in accordance with this 
paragraph done in accordance with the Exchange's specialist and 
registered options trader participation policy; and
    (c) In conjunction with their obligation as the responsible broker 
or dealer pursuant to Exchange Rule 958A and Rule 11Ac1-1 under the 
Securities Exchange Act of 1934, specialists and registered options 
traders may collectively agree to the best bid, best offer and 
aggregate quotation size required to be communicated to the Exchange 
pursuant to paragraph (c)(i) of Rule 958A.
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    \5\ This requirement would apply to the greater of the size 
communicated or disseminated pursuant to Rule 958 or the Auto-Ex 
eligible size parameter. The Exchange plans to file an amendment 
clarifying this point. Telephone call between Claire P. McGrath, 
Vice President and Deputy General Counsel, Amex, and Sonia Patton, 
Special Counsel, Division, Commission (February 5, 2002).
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* * * * *
Rule 958 Options Transactions of Registered Traders
    No Registered Trader shall initiate an Exchange option transaction 
on the Floor for any account in which he has an interest except in 
accordance with following provisions:
    (a) through (g) No change.
    (h) Registered options traders and specialists are required to 
compete with each other to improve the quoted markets in all series of 
option classes which they trade. Unless otherwise provided for in 
Exchange rules, it shall be a violation of just and equitable 
principles of trade for registered options traders and specialists to 
determine by agreement the spreads or prices at which they will trade 
any option class, or the allocation of orders in any option class. In 
complying with this Rule, the registered option traders and specialist 
must make independent decisions to determine the spreads or prices at 
which they will quote and trade any option class. There are, however, 
certain specific circumstances where to make fair and orderly markets 
that are competitive with other exchanges and responsive to the needs 
and expectations of investors, some communication among the specialist 
and registered options traders may be necessary and appropriate. 
Therefore, notwithstanding the foregoing:
    (i) Registered options traders are expected to participate in and 
support Exchange-sponsored automated systems such as automatic quote 
and execution systems or Exchange-approved equivalents. The variables 
in the formula used to generate automatically updated quotations for 
each option class and or series will be determined by the specialist. 
The specialist shall disclose to all registered option traders in an 
option class the following variables of the formula used to generate 
automatically updated market quotation for each option class and/or 
series: option pricing calculation model, volatility, interest rate, 
and dividends (both declared and anticipated). The specialist may 
receive input from the registered options traders on any one or all of 
these variables, provided, however, that it is within the specialist's 
sole discretion to make the final, independent decision in determining 
the variables to be used in the automated quote system. The registered 
options traders, however, are not required to give input on the 
variables to the specialist. The Exchange shall have the discretion to 
exempt specialists using an Exchange-approved proprietary automated 
quotation updating system from having to disclose proprietary 
information concerning the variables (but not the variables themselves) 
used by those systems;
    (ii) The obligation of registered options traders to make 
competitive markets does not preclude registered options traders and 
specialists from making a collective response to a request for a market 
provided the member representing such order requests such response and 
the size of the order is larger than the size communicated or 
disseminated pursuant to Rule 958A or is larger than the Auto-Ex 
eligible size parameter.\6\ With respect to orders sent through the 
Exchange's order routing systems that are larger than the size 
disseminated pursuant to Rule 958A, it is presumed that the member has 
requested a collective response. The allocation of contracts executed 
in accordance with this paragraph will be done in accordance with the 
Exchange's

[[Page 6955]]

specialist and registered options trader participation policy; and
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    \6\ Id.
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    (iii) In conjunction with their obligation as the responsible 
broker or dealer pursuant to Exchange Rule 958A and Rule 11Ac1-1 under 
the Securities Exchange Act of 1934, specialists and registered options 
traders may collectively agree to the best bid, best offer and 
aggregate quotation size required to be communicated to the Exchange 
pursuant to paragraph (c)(i) of Rule 958A.
* * * * *
Rule 958A. 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. The specialist and any registered options traders shall 
collectively be the responsible broker or dealer to the extent of the 
aggregate quotation size specified. In conjunction with their 
obligation as the responsible broker or dealer, specialists and 
registered options traders may collectively agree to the best bid, best 
offer and aggregate quotation size required to be communicated to the 
Exchange pursuant to paragraph (c)(i) of this rule. The allocation of 
contracts executed in accordance with this rule will be done pursuant 
to the Exchange's specialist and registered options traders 
participation policy. 
    (b) Through (d) No change.
* * * * *
Commentary
    .01  No specialist or registered options trader 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 and registered options traders [who is] 
responsible for the published bid or published offer shall be obligated 
[to the extent] as set forth in paragraph (c) of Rule 11Ac1-1 but only 
to the extent of ten contracts.
    .02  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] the responsible broker or dealer shall 
not be required to honor such a bid or offer which is erroneous as to 
either price or size or both if:
    (i)-(iv)--No change.

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

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

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

1. Purpose
    The Exchange proposes to amend Exchange Rules 950, 958 and 958A to 
codify its interpretation that unless otherwise provided for in 
Exchange rules it is a violation of just and equitable principles of 
trade for specialists and registered options traders (``traders'') to 
determine by agreement the spreads or prices at which they will trade 
any option class, or the allocation of orders in any option class.\7\ 
Thus, specialists and traders are required to compete with each other 
to improve the quoted markets in all series of option classes which 
they trade. In meeting this obligation, the specialist and each trader 
must make independent decisions concerning what markets to quote at any 
given time and cannot determine by agreement what the quoted market, 
bid/ask differential or option prices should be. The Exchange believes 
that there are, however, certain specific circumstances where, in order 
to make fair and orderly markets that are competitive with other 
exchanges and responsive to the needs and expectations of investors, 
some communication among the specialist and traders may be necessary 
and appropriate. According to the Exchange, these circumstances arise: 
(1) In connection with the specialist's establishment of parameters 
used by the Exchange's automated quotation updating system (known as X-
TOPS) to automatically generate options quotations in response to 
changes in the market for the underlying security or index; (2) in 
responding to customer requests for markets in size, such that the 
collective efforts of the specialist and traders are necessary in order 
to be able to fill any resulting order to buy or sell options; and (3) 
whenever the specialist and traders, in order to fulfill their 
obligations pursuant to Rule 11Ac1-1 under the Act and Amex Rule 958A, 
and to be competitive with other exchanges, collectively agree as to 
the best bid, best offer and aggregate quotation size. The following is 
a description of the nature and extent of the joint action among the 
specialist and traders that is permitted under each of these 
circumstances.
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    \7\ The Amex is submitting the proposed rule change pursuant to 
subparagraph IV.B.j of the Commission's September 11, 2000 Order, 
which requires that certain options exchanges, including the Amex, 
adopt new, or amend existing, rules to make express any practice or 
procedure ``whereby market makers trading any particular option 
class determine by agreement the spreads or option prices at which 
they will trade nay option class * * *.'' See Order Institution 
Public Administrative Proceedings Pursuant to section 19(h)(1) of 
the Securities Exchange Act of 1934, Making Findings and Imposing 
Remedial Sanctions. Securities Exchange Act Release No. 43268 
(September 11, 2000).
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X-TOPS Parameters
    Automated quotation updating systems, which are relied upon by the 
specialist and traders to provide a single immediately updated 
quotation for each option series, utilize option valuation formulas to 
generate options quotations based on a number of variables. These 
variables include the price of the underlying stock, time remaining to 
expiration, interest rates (or ``cost to carry'', the amount of 
interest on the money used to pay for the options position during the 
period prior to expiration of the option series), dividends (both 
declared and anticipated) and volatility. It is the specialist's 
obligation to determine for each option class the variables used in the 
X-TOPS formula. However, the quotations generated and displayed by X-
TOPS result in firm quote obligations of the specialist and traders to 
buy or sell options at quoted prices and sizes. For this reason, the 
Exchange believes

[[Page 6956]]

that input from the registered options traders to the specialist 
regarding the variables used in the X-TOPS formula is necessary and 
appropriate. Proposed Commentary .02 to Exchange Rule 950(n) and 
proposed paragraph (h) to Exchange Rule 958 reflect this by stating 
that the specialist (i) shall disclose to all registered option traders 
in an option class the variables of the formula used to generate 
automatically updated market quotations for each option class and/or 
series, and (ii) may receive input from the registered options traders 
on any one or all of these variables provided, however, that it is 
within the specialist's sole discretion to make the final independent 
decision in determining the variables to be used in the X-TOPS formula. 
Those specialists using an Exchange-approved proprietary system to 
calculate and generate quotes may be exempt by the Exchange from having 
to disclose proprietary information concerning the variables (but not 
the variables themselves) used by their systems.
Joint Responses to Requests for Markets
    When a request for a market to buy or sell option contracts in 
sizes larger than the greater of the Auto-Ex eligible size or the size 
communicated or disseminated pursuant to Exchange Rule 958A is 
submitted to the specialists and traders,\8\ the Exchange believes that 
it is typically the case that the customer on whose behalf the request 
is made would want to know promptly at what single price all of the 
options represented by the request can be bought or sold. Often in 
order to compete effectively with other marketplaces also trading the 
option and with the over-the-counter market in similar products, the 
Exchange believes that the specialist and traders must collectively 
provide a response to this kind of request. Proposed Commentary .02 to 
Exchange Rule 950(n) and proposed new paragraph (h) to Exchange Rule 
958 would expressly permit a collective response to the member provided 
the member requests such a collective response. With respect to orders 
sent through the Exchange's order routing systems that are larger than 
the size disseminated pursuant to Exchange Rule 958, it would be 
presumed that the member has requested a collective response.
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    \8\ See supra note 5.
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    In addition, the specialist will sometimes agree to transact the 
full size of the options order at a specific price and subsequently 
allocate portions of the order to participating registered options 
traders. If or when a trade is executed, the contracts will be 
allocated in accordance with the Exchange's specialist and registered 
options traders participation policy.\9\
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    \9\ See Securities Exchange Act Release No. 42964 (June 20, 
2000) 65 FR 39972 (June 28, 2000) which proposes to codify current 
practices regarding the participation in option trades executed on 
the Exchange by registered options traders and specialists.
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Firm Quote Guarantees
    Currently, Amex Rule 958A obligates specialists and traders to be 
firm for (i) customer orders up to the quotation size being 
disseminated, and (ii) broker-dealer orders, up to the size established 
and periodically published by the Exchange. Rule 11Ac1-1 under the Act 
anticipates that exchanges will disseminate one automatically generated 
quote for a trading crowd, which necessitates collective action on 
behalf of the specialist and traders to communicate size to the 
Exchange. If or when a trade is executed, the contracts will be 
allocated in accordance with the Exchange's specialist and registered 
options traders participation policy.

2. Statutory Basis

    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \10\ in general and furthers the 
objectives of Section 6(b) \11\ in particular in that it is designed to 
promote just and equitable principles of trade, remove impediments to a 
free and open market and a national market system, and protect 
investors and the public interest.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any burden on competition.

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

    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 Amex 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 Amex. All submissions should refer to the File 
No. SR-Amex-2001-76 and should be submitted by March 7, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-3495 Filed 2-13-02; 8:45 am]
BILLING CODE 8010-01-P