[Federal Register Volume 67, Number 100 (Thursday, May 23, 2002)]
[Notices]
[Pages 36273-36276]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12897]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45929; File No. SR-Amex-2001-74]


Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Granting Approval to Proposed Rule Change as Amended by Amendment Nos. 
1 and 2 and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 3 to Proposed Rule Change Relating to the Codification of 
the Exchange's Auto-Ex Policy and Calculation of the NBBO for Use in 
Auto-Ex

May 15, 2002.

I. Introduction

    On September 10, 2001, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), 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 \3\ relating to disengagement of 
the Exchange's automatic execution system (``Auto-Ex''), and declaring 
quotes from away markets unreliable. On January 31, 2002 and April 8, 
2002, Amex submitted Amendment Nos. 1 \4\ and 2 \5\ to the proposed 
rule change, respectively. The proposed rule change, as amended by 
Amendment Nos. 1 and 2, was published for comment in the Federal 
Register on April 15, 2002.\6\

[[Page 36274]]

The Commission received no comments on the amended proposal. On May 10, 
2002, Amex submitted Amendment No. 3 to the proposed rule change.\7\ 
This order approves the proposed rule change, as amended by Amendment 
Nos. 1 and 2. In addition, the Commission is publishing this notice to 
solicit comments on Amendment No. 3 from interested persons, and 
approving Amendment No. 3 on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange filed this proposed rule change pursuant to the 
requirements of Section IV.B.h.(i)(bb) of the Commission's September 
11, 2000 Order Instituting Public Administrative Proceedings 
Pursuant to Section 19(h)(1) of the Act, which required the Amex (as 
well as the other floor-based options exchanges) to adopt new, or 
amend existing rules concerning automatic quotation and execution 
systems which specify the circumstances, if any, by which automated 
execution systems would be disengaged or operated in any manner 
other than the normal manner set forth in the exchange's rules; and, 
requires the documentation of the reasons for each decision to 
disengage an automatic execution system or operate it in any manner 
other than the normal manner. See Securities Exchange Act Release 
No. 43268 (September 11, 2000), Administrative Proceeding File No. 
3-10282.
    \4\ See letter from Claire P. McGrath, Senior Vice President and 
Deputy General Counsel, Amex, to Elizabeth King, Associate Director, 
Division of Market Regulation (``Division''), Commission, dated 
January 30, 2002 (``Amendment No. 1''). Amendment No. 1 supersedes 
and replaces the original filing in its entirety.
    \5\ See letter from Claire P. McGrath, Senior Vice President and 
Deputy General Counsel, Amex, to Elizabeth King, Associate Director, 
Division, Commission, dated April 1, 2002 (``Amendment No. 2'').
    \6\ See Securities Exchange Act Release No. 45711 (April 9, 
2002), 67 FR 18274 (April 15, 2002).
    \7\ See letter from Claire P. McGrath, Senior Vice President and 
Deputy General Counsel, Amex, to Elizabeth King, Associate Director, 
Division, Commission, dated May 9, 2002 (``Amendment No. 3''). In 
Amendment No. 3, Amex proposes to clarify the following: (1) The 
Exchange's procedures for disengaging Auto-Ex pursuant to the 
unusual market exception, and (2) the role of the Auto-Ex 
Enhancement Committee with respect to the by-pass feature of Auto-
Ex.
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II. Description of the Proposal

    The Exchange proposes to codify in Amex Rule 933(c) its 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 actions to disengage Auto-Ex or to 
operate in a manner other than normal. The following are specific 
instances where Auto-Ex may be disengaged or operated in other than the 
normal manner.

Temporary Disengagement of Auto-Ex During Market Data Delays

    The Exchange's Market Operations Division reviews on a case-by-case 
basis, in consultation with the Exchange's Floor Governors, when 
deciding to disengage Auto-Ex due to market data delays either at the 
Options Price Reporting Authority (``OPRA'') or internally at the Amex. 
Market Operations can disengage Auto-Ex for one option class, a group 
of option classes, or all option classes floor-wide. Market data delays 
can include delays in: (i) The Exchange disseminating quotations or 
last sale information to OPRA; (ii) receiving information from OPRA to 
be displayed on the trading floor or used to calculate the best bid or 
offer; or (iii) receiving market information regarding the underlying 
security. Senior Market Operations staff, together with the Floor 
Governors, review each market data delay individually and make a 
determination to disengage Auto-Ex based on specific facts. Auto-Ex is 
re-engaged as soon as the market data delay has ended.
    Disengagement of Auto-Ex due to market data delays is documented in 
each instance in the Systems Support Log. The Log notes the class(es) 
affected by the market data delay, time the disengagement started and 
ended, the reason for the determination and the Floor Governor(s) 
involved in the determination. If Auto-Ex is re-engaged during that 
trading day, the time of re-engagement is noted on the Log and if the 
re-engagement is for a reason other than the cessation of the market 
data delay, the reason is also noted in the Log.

Temporary Disengagement of Auto-Ex Pursuant to the Unusual Market 
Exception

    Rule 11Ac1-1(b)(3) under the Act \8\ and Exchange Rule 948A(d) 
(``Firm Quote Rules'') provide that if the Exchange determines that the 
level of trading activity or the existence of unusual market conditions 
is such that the Exchange is incapable of collecting, processing and 
making available quotation data in a manner that accurately reflects 
the current state of the market, the Firm Quote Rule obligations 
imposed on the Exchange and its member shall be suspended (an ``Unusual 
Market Exception''). The Market Operations staff, in consultation with 
a Floor Official, may determine to disengage Auto-Ex for the duration 
of the Unusual Market Exception. Documentation of this disengagement of 
Auto-Ex must be maintained in either the Systems Support Log or the 
Service Desk Log depending on the cause of the unusual market 
condition. The Log notes the class(es) affected by the Unusual Market 
Exception, the time the disengagement started and ended, the reason for 
the determination, and the Floor Official involved in the 
determination. If Auto-Ex is re-engaged during that trading day, the 
time of re-engagement is noted on the Log and if the re-engagement is 
for a reason other than the cessation of the Unusual Market Exception, 
the reason is also noted in the Log.
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    \8\ 17 CFR 240.11Ac1-1(b)(3).
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Temporary Disengagement of Auto-Ex During Unusual Market Conditions or 
Systems Malfunctions

    The Market Operations Division, with Floor Governor or Senior 
Supervisory Official approval, may disengage Auto-Ex during unusual 
market conditions in respect of an option class(es) or their underlying 
security(ies). Unusual market conditions may include (i) significant or 
market disruptive order imbalances in the option class or series, or 
the underlying security;\9\ or (ii) unusually wide or market disrupting 
spreads between the bid and the offer in the underlying security. 
Documentation of the disengagement of Auto-Ex due to unusual market 
conditions is made in the Service Desk Log.
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    \9\ Pursuant to Exchange Rules 958A and 115 and New York Stock 
Exchange Rule 60, at 3:40 p.m. each trading day order imbalances are 
required to be publicly announced. On occasion, these order 
imbalances are significant and may necessitate the disengagement of 
Auto-Ex.
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    In Amendment No. 3, Amex proposes to clarify that unusual market 
conditions will vary, depending upon trading conditions in the option 
and/or its underlying security. There are no rules in the markets for 
the underlying securities requiring spreads between the bid and offer 
to be within specific parameters, however, depending upon the 
volatility and liquidity of the underlying security, its spread is 
usually within a specific range, which can be considered normal for 
that security. A decision to disengage Auto-Ex would occur when the 
spreads between the bid and the offer in a specific underlying security 
are wider than normal. Given the subjective nature of this 
determination, Market Operations will not be able to disengage Auto-Ex 
in this situation unless they have obtained approval of either the 
Senior Supervisory Officer (the Vice Chairman of the Exchange's Board 
of Governors), one of the four Floor Governors (members of the 
Exchange's Board of Governors) or one of the three Senior Floor 
Officials (former Governors who have remained active on the trading 
floor).
    With respect to systems malfunctions that affect the Exchange's 
ability to (i) disseminate or update market quotes; or (ii) deliver 
orders to the trading floor in a timely manner, senior Market 
Operations staff determines whether to disengage Auto-Ex. Documentation 
of the disengagement of Auto-Ex due to systems malfunctions is made in 
the Systems Support Log. Both documentation Logs indicate the class(es) 
affected, the reason(s) for the disengagement, approval by the 
appropriate official (with respect to disengagement for unusual market 
conditions) and the time the disengagement started and ended. If Auto-
Ex is re-engaged during that trading day, the time of re-engagement is 
noted on the Log and if the re-engagement is for a reason other than 
the cessation of the Unusual Market Exception, the reason is also noted 
in the Log.

[[Page 36275]]

Automatic By-Pass of Auto-Ex Due to an Influx of Order Executions

    In certain option classes (generally the less active classes) the 
Exchange allows Auto-Ex to be by-passed when a specified number of 
automatic executions in that option class occur. The specialist 
determines the number of executions that can occur before this by-pass 
feature is activated. The specialist's determination depends on a 
number of factors, such as the volatility of the underlying security 
and amount of activity in the option class or series. However, in order 
to set the number of automatic executions at one, the specialist must 
receive the approval of a Floor Governor. Use of this feature does not 
relieve the specialist or registered options traders, as the 
responsible broker or dealer, from their obligations under Exchange 
Rule 958A or under Rule 11Ac1-1 under the Securities Exchange Act of 
1934.\10\ Once the disengagement occurs, the specialist and Post 
Supervisor are notified immediately and Auto-Ex is generally turned 
back on shortly thereafter. Any extended use of the by-pass feature 
will need Floor Official approval and must meet the standards for 
either a market data delay, an Unusual Market Exception, unusual market 
conditions or systems malfunctions. Pursuant to the firm quote rule 
(Rule 958A(c)(ii)), the responsible broker or dealer, when in the 
process of effecting a transaction in an option class or series, is not 
obligated to execute a transaction when he has revised or is in the 
process of revising the bid, offer or quotation size. This by-pass 
feature provides the responsible broker or dealer with the ability to 
react to automatic executions in the option series or class by allowing 
the responsible broker or dealer to execute the order, if appropriate 
under the firm quote rule, at the revised bid or offer or in the amount 
of the revised quotation size.
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    \10\ 17 CFR 240.11Ac1-1.
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    In Amendment No. 3, Amex clarified that the Auto-Ex Enhancement 
Committee, which is comprised of the Exchange's four Floor Governors 
and the Chairman (or their designee) of the Specialists Association, 
the Options Market Makers Association and the Floor Brokers 
Association, will, upon the request of a specialist, review and 
designate which option classes or series are eligible for this by-pass 
feature. When making this designation, the Committee may consider such 
factors as the amount of trading activity in the option class or 
series, the average daily trading volume of the option; volatility of 
the underlying security; and any other factors as the Committee deems 
appropriate. The Committee will determine the number of executions that 
can occur before this by-pass feature is activated. In additional, 
Market Operations staff will re-engage Auto-Ex within three minutes 
unless the specialist has obtained additional approvals.

Automatic By-Pass of Auto-Ex in Response to Certain Market Activity

    The automatic by-pass feature provides in certain market situations 
for orders that are otherwise eligible for Auto-Ex to by-pass Auto-Ex 
and be sent to the Amex Options Display Book (``AODB'') for execution 
handling by the specialist. Auto-Ex is by-passed in the following 
situations: (i) Whenever the bid or offer in a specific option series 
represents a limit order on the specialist's book; (ii) whenever a 
crossed or locked market causes an inversion in the quote; and (iii) 
whenever a better bid or offer is being disseminated by another options 
exchange.\11\ The Amex Order File, the Exchange's host order processing 
system, keeps a record of each instance an otherwise eligible Auto-Ex 
order by-passes Auto-Ex and is sent to the AODB for execution by the 
specialist. This information is used by the Trading Analysis Division 
to monitor appropriate use of this by-pass feature.
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    \11\ In February 2001, the Exchange received Commission approval 
to eliminate the Auto-Ex by-pass feature in certain circumstances. 
See Securities Exchange Act Release No. 44013 (February 28, 2001), 
66 FR 13816 (March 7, 2001). Commentary .01 to Amex Rule 933 now 
provides for the matching of the best bid or offer displayed by a 
competing market by allowing customer market and marketable limit 
orders to be automatically executed at that best bid or offer 
provided it is within the specified number of trading increments or 
ticks of the Amex's displayed bid or offer, and the order is within 
the established order size parameters. Thus, orders will no longer 
by-pass Auto-Ex when they can be automatically executed at the 
better bid or offer being disseminated by another options exchange.
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Calculation of the NBBO for Use in Auto-Ex

    A Floor Governor or Exchange Official may determine that the quotes 
being disseminated by another options exchange are not reliable and 
exclude those quotes from the calculation of the National Best Bid or 
Offer (``NBBO'') based on one of the following circumstances: (i) The 
other options exchange's quotes are not firm based upon direct 
communication from that exchange or the dissemination through OPRA of a 
message indicating the quotes are not firm; or (ii) the other options 
exchange has directly communicated or otherwise confirmed that it is 
experiencing systems or other problems affecting the reliability of its 
disseminated quotes.
    In all cases where a Floor Governor or Exchange Official excludes 
an exchange or any of its quotes from the Auto-Ex determination of the 
NBBO due to quote unreliability, Market Operations staff will promptly 
notify the exchange of the action, continue to monitor the reliability 
of the excluded quotes in consultation with the Floor Governor or 
Exchange Official, and maintain records showing the date, time, 
duration, and reasons for each such action, as well as the identity of 
the Floor Governor or Exchange Official who authorized the action. Any 
determination to exclude a market or any of its quotes from the Auto-Ex 
determination of the NBBO will expire at the end of the trading day, or 
at such time as the quotes are confirmed by the exchange to be reliable 
again `` whichever occurs first. Exclusion of an exchange or its quotes 
from the Auto-Ex determination of the NBBO will be reported to Exchange 
member firms.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended by Amendment Nos. 1, 2, and 3, is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange \12\ and, in particular, 
the requirements of Section 6 of the Act \13\ and the rules and 
regulations thereunder. The Commission finds specifically that the 
proposed rule change is consistent with Section 6(b)(5) of the Act\14\ 
because it provides objective criteria and well-defined procedures for: 
(1) Disengaging and reengaging Auto-X, which should increase the 
likelihood that Auto-X will not be disengaged in a discriminatory 
manner; and (2) excluding another market's quote from the Amex's NBBO, 
which should increase the likelihood that Amex's NBBO will more 
accurately reflect the actual state of the market at a given time. 
Specifically, the Commission notes that the determination of a Floor 
Governor or Exchange Official to exclude unreliable quotes is limited 
to circumstances in which the away market has either directly 
communicated or confirmed that its quotes are unreliable. In this way, 
the discretion afforded to Amex

[[Page 36276]]

officials to determine that another market's options quotes are 
unreliable is appropriately limited. Moreover, the record keeping 
requirements and other proposed procedures are not unreasonable.
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    \12\ In approving this proposed rule change, the Commission 
notes that it has considered its impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(b)(5).
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    The Commission finds good cause for approving proposed Amendment 
No. 3 prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. Amendment No. 3 
clarifies the limits on the discretion of the Exchange to disengage or 
operate Auto-Ex in any manner other than the normal manner and thus, 
raises no novel issues of regulatory concern.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 3, including whether 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 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-2001-74 and should be 
submitted by June 13, 2002.

V. Conclusion

    It is Therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-Amex-2001-74), as amended by 
Amendment Nos. 1, and 2, is approved, and Amendment No. 3 is approved 
on an accelerated basis.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-12897 Filed 5-22-02; 8:45 am]
BILLING CODE 8010-01-P