[Federal Register Volume 67, Number 104 (Thursday, May 30, 2002)]
[Notices]
[Pages 37886-37888]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-13622]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45974; File No. SR-Amex-2001-65]


Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Granting Approval to Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval to Amendment Nos. 3 and 4 to the 
Proposed Rule Change Relating to the Implementation of Quick Trade

May 22, 2002.

I. Introduction

    On August 22, 2001, the American Stock Exchange LLC (``Amex'') 
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 
implement Quick Trade, an enhancement to the Amex Order File (``AOF'') 
and Amex Options Display Book (``AODB'').\3\ On October 19, 2001 and 
December 4, 2001, respectively, the Amex filed Amendment Nos. 1 and 2 
to the proposed rule change. The proposed rule change, as amended, was 
published for comment in the Federal Register on December 31, 2001.\4\ 
The Commission received no comments on the proposal. On April 23, 2002 
and May 7, 2002, respectively, the Amex filed Amendment Nos. 3 and 4 to 
the proposed rule change.\5\ This order

[[Page 37887]]

approves the proposed rule change, accelerates approval of Amendment 
Nos. 3 and 4, and solicits comments from interested persons on those 
amendments.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The AODB is the Exchange's specialist's book.
    \4\ See Securities Exchange Act Release No. 45180 (December 20, 
2001), 66 FR 67585 (``Notice'').
    \5\ See Letters from Claire P. McGrath, Senior Vice President 
and Deputy General Counsel, Amex, to Nancy Sanow, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated April 25, 2002 and May 6, 2002, respectively. In Amendment No. 
3, the Amex added proposed rule text to codify the ratios that would 
be used by Quick Trade in allocating orders among the specialist and 
registered options traders; eliminated ``Sweep of the Book'' as one 
of the proposed functions for which Quick Trade would be used; and 
elaborated on the manner in which the opening price for an options 
series is established. In Amendment No. 4, the Amex amended the 
proposed rule text submitted in Amendment No. 3 to clarify that 
Quick Trade would allocate orders on a rotating basis in lots of ten 
contracts or less. See more at infra note and accompanying text.
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II. Description of the Proposal

    Currently, for orders executed through the AODB in which some or 
all of the contra-parties are registered options traders, the 
specialist or the specialist's clerk must manually allocate the 
contracts to those registered options traders participating in the 
trade. The Amex states that, for option classes with large trading 
crowds, the procedure can be very time consuming and can delay the 
processing of trades.
    The Amex thus proposes to implement a feature, to be known as 
``Quick Trade,'' that would automate the process of allocating trades 
for the three situations described below, and thereby obviate the need 
for the specialist or the specialist's clerk to allocate the trades 
manually in those situations.
    Quick Trade would allocate trades by means of a rotational wheel, 
as further detailed below. Registered options traders would be able to 
log on to the Quick Trade wheel through the AOF, and the specialist 
would be able to activate the wheel at the opening of trading and 
throughout the day. While registered options traders would not be 
required to participate in Quick Trade, they would be encouraged to 
sign on and remain on the Quick Trade wheel throughout the trading day. 
Each registered option trader signed on to Quick Trade would have the 
ability to advise the specialist, prior to the feature's activation on 
any given trade, that he or she does not want to receive an allocation 
through Quick Trade. In this situation, and in the situation where a 
registered options trader wishes to participate in a given trade but is 
not signed on to Quick Trade, the specialist would not use Quick Trade 
to allocate the trade but would allocate the trade manually.\6\
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    \6\ As indicated above, the specialist would have the ability to 
determine on a trade-by-trade basis whether to use Quick Trade or to 
allocate the contracts manually. However, once Quick Trade was 
activated, it would be assumed to remain on and would be used to 
allocate contracts in all the functions described below, unless the 
specialist informed the crowd that he was turning it off. See 
Notice, at note 5.
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    The Quick Trade wheel would allocate executed orders of ten or 
fewer contracts among the specialist and registered options traders in 
accordance with the ratios set forth below. If an executed order is 
greater than ten contracts, Quick Trade would divide the execution into 
lots of ten (or fewer) and allocate a lot to each participant in the 
rotation. Each lot would be considered a separate trade for purposes of 
Quick Trade allocations.

                           Allocation Ratio\7\
------------------------------------------------------------------------
 
                                                             Approximate
                                                Approximate   percentage
                                                 percentage     trades
        Number of traders on Quick Trade         of trades    allocated
                                                 allocated      to the
                                                   to the    traders (as
                                                 specialist    a group)
------------------------------------------------------------------------
1.............................................           60           40
2-4...........................................           40           60
5-7...........................................           30           70
8-15..........................................           25           75
16 or more....................................           20          80
------------------------------------------------------------------------
\7\ The ratios set forth below were described in the Notice in terms of
  the number contracts allocated to the specialist and traders. In
  Amendment No. 4, Amex proposed new rule text to codify these ratios,
  expressing them in terms of the percentage of trades allocated to the
  specialist and traders. This reflects the rotational system described
  above, in which orders are divided into lots of ten or fewer
  contracts, with the allocation wheel rotating one turn for each lot.

    Quick Trade would provide automated allocation of trades for three 
AODB functions:
    (1) Quick Openings. The Amex states that a specialist opens trading 
in each options series by establishing an opening price for that series 
based on the market orders to buy and sell and the prices of limit 
orders prior to the opening, and executing by pairing off all market 
and marketable limit orders at this price.\8\ If, after all opening 
orders have been paired off, an imbalance exists, Quick Trade would 
automatically allocate the imbalance of executed contracts to the 
specialist and registered options traders signed on to Quick Trade in 
accordance with the ratios set forth above.
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    \8\ See Amendment No. 3.
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    (2) Block Window. The Amex represents that this function enables a 
specialist, in situations when there are limit orders on the book at 
various prices, to execute such limit orders at a single price.\9\ For 
example, assume the specialist has limit orders on the book to sell at 
$5.00, $5.05, $5.10, $5.15, and $5.20, and these orders represent in 
aggregate 50 contracts. The specialist has determined to buy all 50 
contracts at $5.20. The contracts would be allocated by Quick Trade to 
the specialist and registered traders in accordance with the ratios set 
forth above.
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    \9\ The Amex represents that the specialist unilaterally 
determines this clean-up price. Telephone conversation between 
Claire P. McGrath, Senior Vice President and Deputy General Counsel, 
Amex, and Ira L. Brandriss, Special Counsel, Division, Commission, 
on May 16, 2002.
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    (3) Auto-Match. According to the Exchange, the Auto-Match feature 
of AODB automatically matches and executes market and marketable limit 
orders that have bypassed the Exchange's automatic execution system 
(``Auto-Ex'') with limit orders on the AODB. This feature is proposed 
to be modified to include registered options trader participation when 
an imbalance occurs.\10\ Quick Trade would distribute the imbalance 
among the specialist and registered options traders. For example, 
assume the best bid is represented by a limit order to buy 10 contracts 
in an option class in which the Auto-Ex eligible size is 20 contracts. 
A market order of 20 contracts to sell bypasses Auto-Ex and is routed 
to the AODB. Ten contracts would be matched and executed with the limit 
order and the remaining 10 contracts would be allocated through Quick 
Trade to the specialists and registered options traders in accordance 
with the allocation ratios set forth above.
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    \10\ See Securities Exchange Act Release No. 42652 (April 7, 
2000), 65 FR 20235 (April 14, 2000) (notice of immediate 
effectiveness of proposed rule change relating to Auto-Match, in 
which Amex indicated that this function would be enhanced to allow 
the excess portion of an Auto-Ex eligible order to be allocated to 
the specialist and any registered options traders participating in 
the crowd).
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder, and, in particular, the requirements of Section 6 of the 
Act \11\ and the rules and regulations thereunder.\12\ The Commission 
finds specifically that the proposed rule change is consistent with 
Section 6(b)(5) of the Act \13\ because it will enable the Exchange to 
automate a process that until now has been performed manually, thus 
enhancing the speed and efficiency with which the allocation of trades 
can be effected.
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    \11\ 15 U.S.C. 78f.
    \12\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5). Section 6(b)(5) requires that the 
rules of a national securities exchange be designed to, among other 
things, promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market, 
and, in general, to protect investors and the public interest.
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    The Commission further believes that it is reasonable to allocate 
to the specialist the percentage of trades specified in the chart 
above, in view of the specialist's obligations under Exchange rules. 
The Commission notes that the proposed entitlement would never be 
greater than 40 percent (except in the one case where only one 
registered options trader is participating

[[Page 37888]]

in the trade). The Commission has found with respect to participation 
guarantees in other contexts that 40 percent is not inconsistent with 
statutory standards of competition and free and open markets.\14\ In 
addition, the Commission believes that the allocation of orders among 
the specialist and registered options traders on a rotating basis, as 
described above, is consistent with the Act.
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    \14\ See, e.g., Securities Exchange Act Release Nos. 42455 
(February 24, 2000), 65 FR 11388 (March 2, 2000) at 11398; and 43100 
(July 31, 2000), 65 FR 48778 (August 9, 2000) at notes 96-99 and 
accompanying text.
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    The Commission finds good cause for approving Amendment Nos. 3 and 
4 to the proposal prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Amendment No. 3 strengthens the proposed rule change in that it would 
codify the proposed allocation ratios as part of the Exchange's 
rules.\15\ The removal in Amendment No. 3 of ``Sweep of the Book'' as a 
Quick Trade function, on account of the inability of the system's 
technology to accommodate that function, poses no regulatory issues. 
Amendment No. 4 simply clarified the operation of the rotating wheel to 
be used by Quick Trade. The Commission believes that accelerating 
approval of these amendments will enable the Amex to expeditiously 
implement a feature that may serve to enhance the speed and efficiency 
of its marketplace.
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    \15\ The Commission is approving Quick Trade only with respect 
to its implementation for the ``Quick Openings,'' ``Block Window,'' 
and ``Auto-Match'' features described herein.
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    Accordingly, the Commission finds good cause, consistent with 
Sections 6(b)(5)\16\ and 19(b)(2) \17\ of the Act to accelerate 
approval of Amendments Nos. 3 and 4 to the proposed rule change.
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    \16\ 15 U.S.C. 78f(b)(5).
    \17\ 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 Nos. 3 and 4, including whether 
Amendment Nos. 3 and 4 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 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-2001-65 and should be submitted by June 20, 2002.

V. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal is consistent with the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\18\, that the proposed rule change (File No. SR-Amex-2001-65) be, and 
it hereby is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-13622 Filed 5-29-02; 8:45 am]
BILLING CODE 8010-01-P