[Federal Register Volume 67, Number 61 (Friday, March 29, 2002)]
[Notices]
[Pages 15262-15263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7611]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45628; File No. SR-Amex-2001-94]


Self-Regulatory Organizations; Order Granting Approval to a 
Proposed Rule Change by the American Stock Exchange LLC To Increase to 
Two Hundred and Fifty the Maximum Permissible Number of Equity and 
Index Option Contracts Executable Through AUTO-EX

March 22, 2002.

I. Introduction

    On October 29, 2001, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with 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 to increase to 250 contracts the maximum 
permissible number of equity and index option contracts in an order 
executable through its automatic execution system, AUTO-EX. On November 
15, 2001, the proposed rule change was published for public comment in 
the Federal Register.\3\ The Commission received no comments on the 
proposed rule change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 45045 (November 7, 
2001), 66 FR 57495.
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II. Description of the Proposed Rule Change

    In 1985, the Exchange implemented its AUTO-EX system for options, 
which automatically executes public customer market and marketable 
limit orders in options at the best bid or offer displayed at the time 
the order is entered into the Amex Order File (``AOF''). There are, 
however, limitations on the number of option contracts that can be 
entered into or executed by these systems. AOF, which handles limit 
orders routed to the specialist's book as well as orders routed to 
AUTO-EX, was recently increased to allow for the entry of orders of up 
to 2,500 option contracts.\4\ AUTO-EX, however, is only permitted to 
execute equity option orders and index option orders of up to 100 
contracts.\5\ Thus, market and marketable limit orders of more than 100 
contracts are routed by AOF to the specialist's book.
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    \4\ See Securities Exchange Act Release No. 44065 (March 12, 
2001), 66 FR 15513 (March 19, 2001).
    \5\ See Securities Exchange Act Release No. 43887 (January 25, 
2001), 66 FR 8831 (February 2, 2001) (approving amendment to Amex 
Rule 933).
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    The Exchange now proposes to increase to 250 contracts the maximum 
permissible number of equity and index option contracts in an order 
that can be executed through the AUTO-EX system. It is proposed that 
this increase to 250 contracts as the permissible order size for AUTO-
EX be implemented on a case-by-case basis for an individual option 
class or for all option classes when two floor governors or senior 
floor officials deem such an increase appropriate. Currently, the Amex 
posts applicable quote size and AUTO-EX parameters on its web page. The 
Exchange represents that it has sufficient systems capacity necessary 
to accommodate implementation of the proposed increase.
    The Exchange represents that AUTO-EX has been extremely successful 
in enhancing execution and operational efficiencies during emergency 
situations

[[Page 15263]]

and during other, non-emergency situations for certain option classes. 
The Exchange believes that automatic executions of orders for up to 250 
contracts will allow for the quick, efficient execution of public 
customer orders.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, the requirements of Section 6 of the Act.\6\ Among 
other provisions, Section 6(b)(5) of the Act requires that the rules of 
an exchange be designed to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating securities transactions; 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system; and protect investors and the 
public interest.\7\
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    \6\ The Commission has considered the proposed rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    While increasing the maximum order size limit from 100 contracts to 
250 contracts for automatic execution eligibility by itself does not 
raise concerns under the Act, the Commission believes that this 
increase raises collateral issues that the Amex will need to monitor 
and address. Increasing the maximum order size for particular option 
classes will make a larger number of option orders eligible for AUTO-
EX. These orders may benefit from greater speed of execution, but at 
the same time create greater risks for market maker participants. 
Market makers signed on to the Amex's AUTO-EX system will be exposed to 
the financial risks associated with larger-sized orders being routed 
through the system for automatic execution at the displayed price. When 
the market for the underlying security changes rapidly, it may take a 
few moments for the related option's price to reflect that change. In 
the interim, customers may submit orders that try to capture the price 
differential between the underlying security and the option. The larger 
the orders accepted through AUTO-EX, the greater the risk market makers 
must be willing to accept. The Commission does not believe that, 
because Amex floor governors or senior floor officials determine to 
approve orders as large as 250 contracts as eligible for AUTO-EX, Amex 
floor governors or senior floor officials or Amex staff should 
disengage AUTO-EX more frequently by, for example, declaring an 
``unusual market condition.'' \8\ Disengaging AUTO-EX can negatively 
affect investors by making it slower and less efficient to execute 
their orders. It is the Commission's view that the Amex, when 
increasing the maximum size of orders that can be sent through AUTO-EX, 
should not disadvantage all customers--the vast majority of whom enter 
orders for less than 250 contracts--by making their automatic execution 
systems less reliable.
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    \8\ The Amex has filed a proposed rule change (File No. SR-Amex-
2001-74) with the Commission that would codify the Exchange's 
current practices and policies by specifying (i) the circumstances 
under which AUTO-EX can be disengaged or operated in a manner other 
than the normal manner set forth in Exchange rules and policies and 
(ii) the required documentation of the reasons for any action to 
disengage AUTO-EX to operate in a manner other than normal. The 
proposed rule change was filed pursuant to the 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) (File No. 3-10282) and is pending with the 
Commission.
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with Section 6(b)(5).\9\
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    \9\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-Amex-2001-94) is approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7611 Filed 3-28-02; 8:45 am]
BILLING CODE 8010-01-P