[Federal Register Volume 67, Number 56 (Friday, March 22, 2002)]
[Notices]
[Pages 13380-13382]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-6901]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45576; File No. SR-Amex-2001-76]


Self-Regulatory Organizations; Order Granting Partial Accelerated 
Approval of Proposed Rule Change and Amendment Nos. 1 and 2 Thereto and 
Notice of Filing and Order Granting Partial Accelerated Approval of 
Amendment No. 3 Thereto by the American Stock Exchange LLC Relating to 
the Obligations of Specialists and Registered Options Traders

March 15, 2002.

I. Introduction

    On September 12, 2001, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change relating to collective actions of specialists and 
registered options traders.\3\ The Amex filed Amendment Nos. 1 and 2 to 
the proposed rule change on December 17, 2001 \4\ and January 18, 
2002,\5\ respectively. The Federal Register published the proposed rule 
change and Amendment Nos. 1 and 2 for comment on February 14, 2002.\6\ 
The Exchange filed Amendment No. 3 to the proposed rule change on March 
13, 2002.\7\ The Commission received no comments on the proposed rule 
change. The Commission is publishing notice of Amendment No. 3 to 
solicit comments from interested persons. The Commission is also 
granting accelerated approval to all portions of the proposed rule 
change, as amended by Amendment Nos. 1, 2, and 3, except for the 
provision of proposed Commentary .02(b) to Amex Rule 950 that states 
that ``[w]ith respect to orders sent through the Exchange's order 
routing systems it is presumed that the member has requested a 
collective response.''
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Amex submitted the proposed rule change pursuant to 
subparagraph IV.B.j of the Commission's September 11, 2000 Order, 
which requires in part 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 any option class . . . .'' See Order 
Instituting 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).
    \4\ The Amex submitted a new Form 19b-4, which replaces and 
supersedes the original filing in its entirety (``Amendment No. 
1'').
    \5\ Letter from Claire 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 ``large order'' 
means orders 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 makes a technical correction to 
proposed Amex Rule 958(h)(iii).
    \6\ Securities Exchange Act Release No. 45413 (February 7, 
2002), 67 FR 6953.
    \7\ Letter from Claire P. McGrath, Vice President and Deputy 
General Counsel, Amex, to Elizabeth King, Associate Director, 
Division, Commission, dated March 8, 2002 (``Amendment No. 3'').
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II. Description of Proposal

    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. 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.

X-TOPS Parameters

    Proposed Commentary .02 to Exchange Rule 950(n) and proposed 
paragraph (h) to Exchange Rule 958 would (i) require the specialist to 
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) permit the 
specialist to 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. Registered 
options traders would not be required to provide input into these 
decisions. 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

    Proposed Commentary .02 to Exchange Rule 950(n) and proposed new 
paragraph (h) to Exchange Rule 958 would expressly permit a collective 
response to 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

[[Page 13381]]

Rule 958A,\8\ provided the member requested the collective response.
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    \8\ Id. Amendment No. 3 amends proposed Amex Rules 950 and 958 
to clarify that ``large order'' means orders larger than the greater 
of the size communicated or disseminated pursuant to Exchange Rule 
958 or larger than the Exchange's auto-ex eligible size.
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    In addition, the proposed rule change would permit the specialist 
to agree to transact the full size of the options order at a specific 
price unilaterally determined by the specialist and subsequently 
allocate portions of the order to registered options traders that wish 
to participate in the trade.\9\ If or when a trade is executed under 
such circumstances, the contracts would be allocated in accordance with 
the Exchange's specialist and registered options traders participation 
policy.\10\
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    \9\ See Amendment No. 3, supra note 7. Amex No. 3 codifies in 
proposed Amex Rules 950 and 958 that the specialist may unilaterally 
give a single bid (offer) in response to a request for a market and 
subsequently discuss with the registered options traders whether 
they wish to participate in the contracts executed in accordance 
with that bid (offer).
    \10\ See Securities Exchange Act Release No. 42964 (June 20, 
2000) 65 FR 39972 (June 28, 2000) (File No. SR-Amex-00-30) 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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    Finally, the Exchange proposes that 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.\11\
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    \11\ As noted in Section III of this order, the Commission is 
not approving this provision at this time.
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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.

III. Discussion

    The Commission finds that the proposed rule change, except for the 
portion that states that it is presumed for orders sent through the 
Exchange's order routing systems that the member has requested a 
collective response, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\12\ Specifically, the Commission believes that the 
proposed rule change, except for the portion that states that it is 
presumed for orders sent through the Exchange's order routing systems 
that the member has requested a collective response, is consistent with 
the Section 6(b)(8) \13\ requirement that the rules of an exchange not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
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    \12\ In approving the proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(8).
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    The Commission believes that the portion of the proposed rule 
change approved herein should deter collective action on the part of 
Exchange members by clearly establishing in the Exchange's rules that 
options market makers are prohibited from determining by agreement the 
spreads or option prices at which they will trade an issue, subject to 
certain specified exceptions that the Commission herein approves.\14\ 
For instance, the proposal would permit specialists to receive input 
from members of the crowd in setting the parameters of the formula used 
to automatically update options quotations. At this time, the 
Commission believes it is reasonable for the Exchange's rules to permit 
the members of the crowd to be given a voice in setting autoquote 
parameters because, pursuant to the Exchange's rules, they will be 
obligated to execute orders at the resultant quote.
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    \14\ The Commission expects the Exchange to monitor the 
collective actions that are undertaken pursuant to the rule change 
approved herein for any undesirable or inappropriate anticompetitive 
effects. The Commission's examination staff will monitor the 
Exchange's efforts in this regard.
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    In addition, the proposed rule change would permit the specialist 
and registered options traders to make a collective response to a 
member's specific request to fill a large order, provided that a 
collective response is requested. The Commission believes that this 
exception recognizes the desire of the marketplace to provide a single 
price to a request to fill a large order that a single member would not 
be able to fill. The Commission believes that any anticompetitive 
effect of this exception is limited by requiring that there be a 
request for a single price and that the order be sufficiently large. In 
addition, the Commission notes that notwithstanding this exception, a 
single crowd participant may voice a bid or offer independently from, 
and differently from, the specialist and other members of a trading 
crowd.
    At this time, the Commission is not approving the provision of 
proposed Commentary .02(b) to Amex Rule 950, that states that it is 
presumed that the member has requested a collective response for orders 
sent through the Exchange's order routing systems, because this 
proposed provision warrants further consideration.
    Finally, the Commission finds that the portion of the proposed rule 
change that is approved herein is designed to effectively limit the 
circumstances in which collective action is permissible.
    The Commission finds good cause for accelerating approval of the 
proposed rule change and Amendment Nos. 1, 2, and 3 thereto prior to 
the thirtieth day after publication in the Federal Register. The 
Commission notes that the proposed rule change, as amended by Amendment 
Nos. 1 and 2, was published for the full comment period and the 
Commission is accelerating approval of the filing on the twenty-ninth 
day after publication of the proposed rule change, and Amendment Nos. 1 
and 2, in the Federal Register. The Commission believes that 
accelerated approval will permit the Exchange to implement, and 
investors to benefit from, the proposed rule change without undue 
delay. The Commission notes that the Amendment No. 3 to the proposal 
clarifies the proposed rules in response to issues raised by Commission 
staff. Accordingly, the Commission finds that good cause exists, 
consistent with Sections 6(b)(8) of the Act,\15\ and 19(b)(2) of the 
Act \16\ to grant partial accelerated approval of the proposed rule 
change and Amendment Nos. 1, 2, and 3 thereto.
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    \15\ 15 U.S.C. 78f(b)(8).
    \16\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 3, including whether the Amendment 
No. 3 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

[[Page 13382]]

public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the Amex. All 
submissions should refer to File No. SR-Amex-2001-76 and should be 
submitted by April 12, 2002.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-Amex-2001-76), as amended, 
except for the portion that states that it is presumed for orders sent 
through the Exchange's order routing systems that the member has 
requested a collective response, is approved on an accelerated basis.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-6901 Filed 3-21-02; 8:45 am]
BILLING CODE 8010-01-P