[Federal Register Volume 67, Number 83 (Tuesday, April 30, 2002)]
[Notices]
[Pages 21302-21303]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-10541]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45795; File No. 4-429]


Joint Industry Plan; Notice of Filing of Joint Amendments Nos. 2 
and 3 to the Options Intermarket Linkage Plan Relating to Satisfaction 
of Trade-Throughs, the Procedures for Handling Multiple Principal 
Orders, Restrictions on Withdrawal, and an Implementation Timetable

April 22, 2002.
    Pursuant to section 11A(a)(3) of the Securities Exchange Act of 
1934 (``Act'') \1\ and Rule 11Aa3-2 thereunder,\2\ notice is hereby 
given that on November 20, 2001, November 21, 2001, December 10, 2001, 
December 10, 2001, and December 26, 2001, the Philadelphia Stock 
Exchange, Inc. (``Phlx''), International Stock Exchange LLC (``ISE''), 
Chicago Board Options Exchange, Inc. (``CBOE''), Pacific Exchange, Inc. 
(``PCX''), and American Stock Exchange LLC (``AMEX'') (collectively, 
the ``Participants''), respectively, filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') an amendment (``Joint 
Amendment No. 2'') to the Options Intermarket Linkage Plan.\3\ In 
addition, on April 5, 2002, April 9, 2002, April 15, 2002, April 15, 
2002 and April 16, 2002, CBOE, ISE, Phlx, PCX, and Amex, respectively, 
filed with the Commission an additional amendment (``Joint Amendment 
No. 3'') to the Linkage Plan. In Joint Amendment No. 2, the 
Participants propose to alter the manner in which Participants achieve 
satisfaction of trade-throughs, to change the procedures for handling 
multiple principal orders that one Participant sends to another 
Participant, and to make other nonsubstantive revisions to the Linkage 
Plan. In Joint Amendment No. 3, the Participants propose to change the 
process by which a participant may withdraw from the Linkage Plan, to 
incorporate a specific implementation timetable into the Linkage Plan, 
to require each participant to provide the Commission with a detailed 
project plan and status reports regarding implementation of such 
project plan, and to conform two provisions of the Linkage Plan to 
Joint Amendment No. 2. The Commission is publishing this notice to 
solicit comments from interested persons on Joint Amendments Nos. 2 and 
3.
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    \1\ 15 U.S.C. 78k-1(a)(3).
    \2\ 17 CFR 240.11Aa3-2.
    \3\ On July 28, 2000, the Commission approved a national market 
system plan (``Linkage Plan'') for the purpose of creating and 
operating an intermarket options market linkage (``Linkage'') 
proposed by Amex, CBOE, and ISE. See Securities Exchange Act Release 
No. 43086, 65 FR 48023 (August 4, 2000). Subsequently, Phlx and PCX 
joined the Linkage Plan. See Securities Exchange Act Release Nos. 
43573 (November 16, 2000), 65 FR 70850 (November 28, 2000) and 43574 
(November 16, 2000), 65 FR 70851 (November 28, 2000). On June 27, 
2001, the Commission approved an amendment to the Linkage Plan. See 
Securities Exchange Act Release No. 44482, 66 FR 35470 (July 5, 
2001).
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I. Description and Purpose of the Proposed Amendments

A. Proposed Joint Amendment No. 2

    The primary purpose of Joint Amendment No. 2 is to effect two 
substantive changes to the Linkage Plan. In addition, the proposed 
amendment corrects certain typographical errors in the Linkage Plan and 
simplifies the language of certain of the Linkage Plan's provisions.
    In the first substantive change, the proposed amendment would alter 
the manner in which the Participants achieve satisfaction of trade-
throughs. The Linkage Plan now requires that a Participant lodge a 
complaint when it identifies a trade-through on another exchange. That 
complaint must specify the verifiable number of customer contracts at 
the disseminated quotation that were traded-through. The exchange that 
traded through then responds to the

[[Page 21303]]

complaint, either by claiming an exemption from liability or by 
addressing the trade-through. If such exchange elects to satisfy the 
Participant traded-through, it would send a Satisfaction Order (as 
defined in the Linkage Plan) to the Participant that sent the 
complaint.
    The proposed amendment would simplify that procedure by combining 
the complaint and satisfaction process. If a Participant identifies a 
trade-through on another exchange, that Participant would send a 
Satisfaction Order to the exchange that traded-through for the number 
of verifiable customer contracts at the disseminated quotation. The 
exchange receiving that order either can fill the order, claim an 
exemption from liability, or take the other action currently permitted 
under the Linkage Plan (such as correcting the price of the transaction 
to a price that would not be a trade-through). Due to the uncertainty 
as to whether a Participant will receive an execution of the 
Satisfaction Order, the proposed amendment would permit the Participant 
that sent the Satisfaction Order to reject any execution it receives if 
the customer order(s) underlying the Satisfaction Order had been 
executed or canceled while the Satisfaction Order was pending.\4\
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    \4\ See proposed changes to the definitions of ``Satisfaction 
Order'' and ``Reference Price,'' and Sec. 8(c) of the Linkage Plan.
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    The second substantive effect of the proposed amendment would be to 
change the procedures for handling multiple Principal Orders (as 
defined in the Linkage Plan) that one Participant sends to another 
Participant. Currently, the Linkage Plan provides that if a market 
maker on a Participant sends a Principal Order for automatic execution 
(that is, an order for up to 10 contracts) to another exchange, there 
are limits and prohibitions on any market maker from that Participant 
sending additional Principal Orders to the same exchange in the same 
options class. Subject to certain exceptions, a Participant cannot send 
another Principal Order for automatic execution for 15 seconds, and for 
the following 45 seconds it can only send Principal Orders larger than 
the automatic execution size.
    The Participants represent that as they began developing the 
Linkage, they recognized that implementing this provision would be 
extremely difficult. Thus, the Participants propose to place the 
responsibility for monitoring this activity on the receiving, not the 
sending, Participant. Proposed amended Section 7(a)(ii)(C) of the 
Linkage Plan states that if a Participant received a second Principal 
Order for automatic execution from a Participant within 15 seconds, it 
could reject such order. Similarly, for the next 45 seconds, the 
receiving Participant could deny automatic execution to any Principal 
Orders it receives from the same Participant. The same exceptions to 
these provisions contained in the current Linkage Plan would continue 
to apply. The Participants represent that they believe that this 
provision would simplify the development of the Linkage, while 
continuing to provide the same protections as currently provided in the 
Linkage Plan.\5\
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    \5\ See proposed changes to Sec. 7(a)(ii)(C) and (D) of the 
Linkage Plan.
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B. Proposed Joint Amendment No. 3

    The primary purpose of proposed Joint Amendment No. 3 is to make 
two substantive changes to the Linkage Plan. In addition, the proposed 
amendment conforms two provisions of the Linkage Plan to Joint 
Amendment No. 2.
    First, the proposed amendment would change the process by which a 
Participant withdraws from the Linkage Plan. Currently, a Participant 
must only provide 30 days written notice to the other Participants and 
the facilities manager to withdraw from the Linkage Plan. The proposed 
amendment would restrict withdrawal from the Linkage Plan by requiring 
Participants to effect an amendment to the Linkage Plan, which would be 
subject to Commission approval. The Participant would be required to 
state how it plans to accomplish, by alternate means, the goals of the 
Linkage Plan regarding limiting trade-throughs of prices on other 
exchanges trading the same options classes. A Participant would be 
permitted to propose such an amendment unilaterally, and approval of 
the other Participants would not be required.\6\
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    \6\ See Proposed Sec. 4(d) of the Linkage Plan.
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    Second, the proposed amendment would incorporate into the Linkage 
Plan a specific implementation timetable. The Participants propose to 
implement the Linkage in two phases: The first phase would be limited 
to those aspects of the plan providing for automatic execution, and the 
second phase would provide all other Linkage functionality. The 
proposal would require the Participants to begin full intermarket 
testing of phase 1 no later than December 1, 2002, and testing of phase 
2 no later than March 1, 2003. The Participants would be required to 
implement the functionality of phase 1 and phase 2 as soon as practical 
after successful testing, and no later than February 1, 2003 and April 
30, 2003, respectively.\7\
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    \7\ See Proposed Sec. 12(a) of the Linkage Plan.
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    In addition, proposed Joint Amendment No. 3 would require each 
Participant to provide the Commission with a detailed project plan and 
monthly status reports regarding implementation of such project 
plan.\8\
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    \8\ See Proposed Sec. 12(b) of the Linkage Plan.
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    Lastly, proposed Joint Amendment No. 3 would conform two Linkage 
Plan provisions to Joint Amendment No. 2 by replacing references to 
trade-through complaints with references to Satisfaction Orders.\9\
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    \9\ See proposed changes to Sec. 8(c) of the Linkage Plan.
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II. Implementation of the Plan Amendments

    The Participants propose to make the proposed amendments to the 
Linkage Plan reflected in this filing effective when the Commission 
approves the amendments.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed 
Linkage Plan amendments are 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 submissions, all subsequent amendments, 
all written statements with respect to the proposed Linkage Plan 
amendments that are filed with the Commission, and all written 
communications relating to the proposed Linkage Plan amendments 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 at the Commission's Public 
Reference Room. Copies of such filings will also be available for 
inspection and copying at the principal offices of the Amex, CBOE, ISE, 
Phlx, and PCX. All submissions should refer to File No. 4-429 and 
should be submitted by May 21, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-10541 Filed 4-29-02; 8:45 am]
BILLING CODE 8010-01-P