[Federal Register Volume 67, Number 249 (Friday, December 27, 2002)]
[Notices]
[Pages 79180-79186]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32795]



[[Page 79180]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47066; File No. SR-Amex-2002-84]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by American Stock Exchange LLC 
Regarding Rules Implementing the Options Intermarket Linkage Plan

December 20, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and rule 19b-4 thereunder,\2\ notice is hereby 
given that on October 15, 2002, the American Stock Exchange LLC 
(``Amex'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
items I, II, and III below, which items have been prepared by the 
Exchange. The Exchange submitted Amendment No. 1 to the proposed rule 
change on December 19, 2002.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter to Deborah Flynn, Assistant Director, Division of 
Market Regulation, Commission, from Jeffrey P. Burns, Assistant 
General Counsel, Amex, dated December 18, 2002 (``Amendment No. 
1''). In Amendment No. 1, Amex clarified that it is retaining its 
interim linkage rules.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to add Exchange rules 941 through 945 
(``Options Linkage Rules'') implementing the options intermarket 
linkage (``Linkage''). The Exchange is also proposing to clarify how 
its fees will apply to Linkage trades.\4\ The Options Linkage rules 
will become effective once the Commission approves this filing and the 
Exchange implements operation of the applicable provisions of the 
Linkage. For example, the provisions of proposed Amex rule 942 
regarding order protection will not become effective until the Exchange 
implements Linkage operations governing Satisfaction Orders (as defined 
in proposed Amex rule 940) and trade-through processing.
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    \4\ On August 10, 2001, the Amex filed SR-Amex-2001-64 proposing 
Linkage Rules. On September 10, 22001, and October 18, 2001, the 
Amex submitted Amendments No. 1 and 2, respectively. The Commission 
has not published that filing for comment, and concurrent with the 
filing of this proposed rule change, the Amex withdraw File No. SR-
Amex-2001-64.
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    The text of the proposed rule change is below. Deleted language is 
in brackets; proposed new language is italicized.
* * * * *

Rule 941. Options Intermarket Linkage

(a) Applicability

    The rules in this section are applicable only to linkage orders (as 
defined below). In addition, except to the extent that specific rules 
in this section govern, or unless the context otherwise requires, the 
provisions of the constitution and of all other rules and policies of 
the Board of Governors shall be applicable to the trading of options on 
the Exchange.
    (b) Definitions `` The following terms shall have the meaning 
specified in this rule solely for the purpose of this section 4:
    (1) ``Aggrieved Party'' means a member of a Participant Exchange 
whose bid or offer was traded-through.
    (2) ``Block Trade'' means a trade on a Participant Exchange that:
    (i) Involves 500 or more contracts and has a premium value of at 
least $150,000;
    (ii) Is affected at a price outside of the NBBO; and
    (iii) Involves either:
    (A) A cross (where a member of the Participant Exchange represents 
all or a portion of both sides of the trade), or
    (B) Any other transaction (i.e., in which such member represents an 
order of block size on one side of the transaction only) that is not 
the result of an execution at the current bid or offer on the 
Participant Exchange.

Contemporaneous transactions at the same price on a Participant 
Exchange shall be considered a single transaction for the purpose of 
this definition.
    (3) ,``Complex Trade'' means the execution of an order in an option 
series in conjunction with the execution of one or more related 
order(s) in different options series in the same underlying security 
occurring at or near the same time for the equivalent number of 
contracts and for the purpose of executing a particular investment 
strategy.
    (4) ``Crossed Market'' means a quotation in which the Exchange 
disseminates a bid (offer) in a series of an Eligible Option Class at a 
price that is greater than (is less than) the price of the offer (bid) 
for the series then being displayed from another Participant Exchange.
    (5) ``Eligible Market Maker'', with respect to an Eligible Option 
Class, means a specialist or registered options trader that:
    (i) Is assigned to, and is providing two-sided quotations in, the 
Eligible Option Class; and
    (ii) Is in compliance with the requirements of Rule 945
    (6) ``Eligible Option Class'' means all option series overlying a 
security (as that term is defined in Section 3(a)(10) of the Exchange 
Act) or group of securities, including both put options and call 
options, which class is traded on the Exchange and at least one other 
Participant Exchange.
    (7) ``Firm Customer Quote Size'' with respect to a P/A Order means 
the lesser of: (a) The number of option contracts that the Participant 
Exchange sending a P/A Order guarantees it will automatically execute 
at its disseminated quotation in a series of an Eligible Option Class 
for Public Customer orders entered directly for execution in that 
market; or (b) the number of option contracts that the Participant 
Exchange receiving a P/A Order guarantees it will automatically execute 
at its disseminated quotation in a series of an Eligible Option Class 
for Public Customer orders entered directly for execution in that 
market. The number shall be at least 10.
    (8) ``Firm Principal Quote Size'' means the number of options 
contracts that a Participant Exchange guarantees it will execute at its 
disseminated quotation for incoming Principal Orders in an Eligible 
Option Class. This number shall be at least 10.
    (9) ``Linkage'' means the systems and data communications network 
that link electronically the Participant Exchanges for the purposes 
specified in the Plan.
    (10) ``Linkage Order'' means an order routed through the Linkage as 
permitted under the Plan. There are three types of Linkage Orders:
    (i) ``Principal Acting as Agent (``P/A'') Order,'' which is an 
order for the principal account of a specialist (or equivalent entity 
on another Participant Exchange that is authorized to represent Public 
Customer orders), reflecting the terms of a related unexecuted Public 
Customer order for which the specialist is acting as agent;
    (ii) ``Principal Order,'' which is an order for the principal 
account of an Eligible Market Maker (or equivalent entity on another 
Participant Exchange) and is not a P/A Order; and
    (iii) ``Satisfaction Order,'' which is an order sent through the 
Linkage to notify a Participant Exchange of a Trade-Through and to seek 
satisfaction of the liability arising from that Trade-Through.
    (11) ``Locked Market'' means a quotation in which the Exchange 
disseminates a bid (offer) in a series of

[[Page 79181]]

an Eligible Option Class at a price that equals the price of the offer 
(bid) for the series then being displayed from another Participant 
Exchange.
    (12) ``NBBO'' means the national best bid and offer in an options 
series as calculated by a Participant Exchange.
    (13) ``Non-Firm'' means, with respect to quotations, that members 
of a Participant Exchange are relieved of their obligation to be firm 
for their quotations pursuant to rule 11Ac1-1 under the Exchange Act.
    (14) ``Participant Exchange'' means a registered national 
securities exchange that is a party to the Plan.
    (15) ``Plan'' means the Plan for the Purpose of Creating and 
Operating an Intermarket Option Linkage, as such plan may be amended 
from time to time.
    (16) ``Public Customer'' means an individual or organization that 
is not a broker-dealer. With respect to a Linkage Order, it means an 
order which, if executed, results in the purchase or sale for an 
account in which no broker-dealer has an interest.
    (17) ``Reference Price'' means the limit price attached to a 
Linkage Order by the sending Participant Exchange. Except with respect 
to a Satisfaction Order, the Reference Price is equal to the bid 
disseminated by the receiving Participant Exchange at the time that the 
Linkage Order is transmitted in the case of a Linkage Order to sell and 
the offer disseminated by the receiving Participant Exchange at the 
time that the Linkage Order is transmitted in the case of a Linkage 
Order to buy. With respect to a Satisfaction Order, the Reference Price 
is the bid or offer price reflecting order(s) of Public Customers 
disseminated by the sending Participant Exchange that was traded 
through, except in the case of a Trade-Through that is a Block Trade, 
in which case the Reference Price shall be the price of the Block Trade 
that caused the Trade-Through.
    (18) ``Third Participating Market Center Trade-Through'' means a 
Trade-Through in a series of an Eligible Option Class that is effected 
by executing a Linkage Order, and such execution results in a sale 
(purchase) at a price that is inferior to the best bid (offer) being 
disseminated by another Participant Exchange.
    (19) ``Trade-Through'' means a transaction in an options series at 
a price that is inferior to the NBBO.
    (20) ``Verifiable Number of Customer Contracts'' means the number 
of Public Customer contracts in the book of a Participant Exchange.

Rule 942. Operation of the Linkage

By subscribing to the Plan, the Exchange has agreed to comply with, and 
enforce compliance by its Members with, the Plan. In this regard, the 
following shall apply:
    (a) Pricing. Members may send P/A Orders and Principal Orders 
through the Linkage only if such orders are priced at the NBBO.
    (b) P/A Orders.
    (1) Sending of P/A Orders for Sizes No Larger than the Firm 
Customer Quote Size. A specialist may send through the Linkage a P/A 
Order for execution in the automatic execution system of a Participant 
Exchange if the size of such P/A Order is no larger than the Firm 
Customer Quote Size. Except as provided in subparagraph (b)(2)(ii) 
below, a specialist may not break up an order of a Public Customer that 
is larger than the Firm Customer Quote Size into multiple P/A Orders, 
one or more of which is equal to or smaller than the Firm Customer 
Quote Size, so that such orders could be represented as multiple P/A 
Orders through the Linkage.
    (2) Sending of P/A Orders for Sizes Larger than the Firm Customer 
Quote Size. If the size of a P/A Order is larger than the Firm Customer 
Quote Size, a specialist may send through the Linkage such P/A Order in 
one of two ways:
    (i) The specialist may send a P/A Order representing the entire 
Public Customer order. If the receiving Participant Exchange's 
disseminated quotation is equal to or better than the Reference Price 
when the P/A Order arrives at that market, that exchange will execute 
the P/A Order at its disseminated quotation for at least the Firm 
Customer Quote Size. Within 15 seconds of receipt of such order, the 
receiving Participant Exchange will inform the specialist of the amount 
of the order executed and the amount, if any, that was canceled.
    (ii) Alternatively, the specialist may send an initial P/A Order 
for the Firm Customer Quote Size pursuant to subparagraph (b)(1) above. 
If the Participant Exchange executes the P/A Order and continues to 
disseminate the same quotation at the NBBO 15 seconds after reporting 
the execution of the initial P/A Order, the specialist may send an 
additional P/A Order to the same Participant Exchange. If sent, such 
additional P/A Order must be for at least the lesser of 100 contracts 
or the entire remainder of the Public Customer order.

In any situation where a receiving Participant Exchange does not 
execute a P/A Order in full, such Exchange is required to move its 
quotation to a price inferior to the Reference Price of the P/A Order.
    (c) Principal Orders.
    (1) Sending of an Initial Principal Order. An Eligible Market Maker 
may send a Principal Order through the Linkage at a price equal to the 
NBBO. Subject to the next paragraph, if the Principal Order is not 
larger than the Firm Principal Quote Size, the receiving Participant 
Exchange will execute the order in its automatic execution system, if 
available, if its disseminated quotation is equal to or better than the 
price specified in the Principal Order when that order arrives at the 
receiving Participant Exchange. If the Principal Order is larger than 
the Firm Principal Quote Size, the receiving Participant Exchange will 
(a) execute the Principal Order at its disseminated quotation for at 
least the Firm Principal Quote Size and (b) within 15 seconds of 
receipt of such order, reply to the sending Participant Exchange, 
informing such Participant Exchange of the amount of the order that was 
executed and the amount, if any, canceled. If the receiving Participant 
Exchange does not execute the Principal Order in full, it will move its 
quote to a price inferior to the Reference Price of the Principal 
Order.
    (2) Receipt of Multiple Principal Orders. Once the Exchange 
provides an automatic execution of a Principal Order in a series of an 
Eligible Options Class (the ``initial execution''), the Exchange may 
reject any Principal Order(s) in the same Eligible Option Class sent by 
the same Participant Exchange for 15 seconds after the initial 
execution unless: (a) there is a change of price in the Exchange's 
disseminated offer (bid) in the series of the Eligible Option Class in 
which there was the initial execution; and (b) such price continues to 
be the NBBO. After this 15 second period, and until the sooner of (y) 
one minute after the initial execution or (z) a change in the 
Exchange's disseminated bid (offer), the Exchange is not obligated to 
provide an automatic execution for any Principal Orders in the same 
Eligible Option Class received from the Participant Exchange that sent 
the order resulting in the initial execution, and thus may treat any 
such Principal Orders as being greater than the Firm Principal Quote 
Size.
    (d) Responses to Linkage Orders.
    (1) Failure to Receive a Timely Response. A Member who does not 
receive a response to a P Order or a P/A Order within 20 seconds of 
sending the order may reject any response received thereafter 
purporting to report an execution of all or part of that order. The 
Member so rejecting the response

[[Page 79182]]

shall inform the Exchange Participant sending that response of the 
rejection within 15 seconds of receipt of the response.
    (2) Failure to Send a Timely Response. If a Member responds to a P 
Order or P/A Order more than 20 seconds after receipt of that order, 
and the Participant Exchange to whom the Member responded cancels such 
response, the Member shall cancel any trade resulting from such order 
and shall report the cancellation to OPRA.
    (e) Receipt of Linkage Orders. The Exchange will provide for the 
execution of P/A Orders and Principal Orders if its disseminated 
quotation is (i) equal to or better than the Reference Price, and (ii) 
equal to the then current NBBO. Subject to paragraph (c) above, if the 
size of a P/A Order or Principal Order is not larger than the Firm 
Customer Quote Size or Firm Principal Quote Size, respectively, the 
Exchange will provide for the execution of the entire order, and shall 
execute such order in its automatic execution system if that system is 
available. If the size of a P/A Order or Principal Order is larger than 
the Firm Customer Quote Size or Firm Principal Quote Size, 
respectively, the specialist must address the order within 15 seconds 
to provide an execution for at least the Firm Customer Quote Size or 
Firm Principal Quote Size, respectively. If the order is not executed 
in full, the Exchange will move its disseminated quotation to a price 
inferior to the Reference Price.

Rule 943. Order Protection

    (a) Avoidance and Satisfaction of Trade-Throughs.
    (1) General Provisions. Absent reasonable justification and during 
normal market conditions, Members should not effect Trade-Throughs. 
Except as provided in paragraph (b) below, if a Member effects a Trade-
Through with respect to the bid or offer of a Participant Exchange in 
an Eligible Option Class and the Exchange receives a Satisfaction Order 
from an Aggrieved Party, either:
    (i) the Member who initiated the Trade-Through shall satisfy, or 
cause to be satisfied, the Aggrieved Party by filling the Satisfaction 
Order in accordance with subparagraph (a)(2) below; or
    (ii) if the Member elects not to do so (and, in the case of Third 
Participating Market Center Trade-Through, the Member obtains the 
agreement of the contra party that received the Linkage Order that 
caused the Trade-Through), then the price of the transaction that 
constituted the Trade-Through shall be corrected to a price at which a 
Trade-Through would not have occurred. If the price of the transaction 
is corrected, the Member correcting the price shall report the 
corrected price to OPRA, notify the Aggrieved Party of the correction 
and cancel the Satisfaction Order.
    (2) Price and Size. The price and size at which a Satisfaction 
Order shall be filled is as follows:
    (i) Price. A Satisfaction Order shall be filled at the Reference 
Price. However, if the Reference Price is the price of an apparent 
Block Trade that caused the Trade-Through, and such trade was not, in 
fact, a Block Trade, then the Member may cancel the Satisfaction Order. 
In that case, the Member shall inform the Aggrieved Party within three 
minutes of receipt of the Satisfaction Order the reason for the 
cancellation. Within three minutes of receipt of such cancellation, the 
Aggrieved Party may resend the Satisfaction Order with a Reference 
Price of the bid or offer that was traded through.
    (ii) Size. An Aggrieved Party may send a Satisfaction Order up to 
the size of the Verifiable Number of Customer Contracts that were 
included in the disseminated bid or offer that was traded through. 
Subject to subparagraph (2)(i) above and paragraph (b) below, a Member 
shall fill in full all Satisfaction Orders it receives following a 
Trade-Through, subject to the following limitations:
    (A) If the number of contracts to be satisfied exceeds the size of 
the transaction that caused the Trade-Through, the size of the 
Satisfaction Order(s) that must be filled with respect to each 
Participant Exchange(s) shall be limited to the size of the transaction 
that caused the Trade-Through, and the remainder of any Satisfaction 
Order(s) shall be canceled;
    (B) If the transaction that caused the Trade-Through was for a size 
larger than the Firm Customer Quote Size with respect to any of the 
Participant Exchange(s) traded through, the total number of contracts 
to be filled, with respect to all Satisfaction Orders received, shall 
not exceed the size of the transaction that caused the Trade-Through. 
In that case, the Member shall fill the Satisfaction Orders pro rata 
based on the Verifiable Number of Customer Contracts traded through on 
each Participant Exchange, and shall cancel the remainder of such 
Satisfaction Orders(s); and
    (C) Notwithstanding paragraphs (A) and (B) above, if the 
transaction that caused the Trade-Through occurred during the five 
minutes prior to the regularly-scheduled close of trading in the 
principal market in which the underlying security is traded, the 
maximum number of contracts to be satisfied with respect to any one 
Participant Exchange is 10 contracts.
    (3) Rejection of Fills of Satisfaction Orders. Within 30 seconds of 
receipt of notification that another Participant Exchange has filled a 
Member's Satisfaction Order, the Member that sent the Satisfaction 
Order may reject such fill, but only to the extent that either: (i) the 
order(s) for the customer contracts underlying the Satisfaction Order 
already have been filled; or (2) the customer order(s) to buy (sell) 
the contracts underlying the Satisfaction Order were canceled.
    (4) Protection of Customers. Whenever subparagraph (a)(1) applies, 
if Public Customer orders (or P/A Orders representing Public Customer 
orders) constituted either or both sides of the transaction involved in 
the Trade-Through, each such Public Customer order (or P/A Order) shall 
receive:
    (i) The price that caused the Trade-Through; or
    (ii) The price at which the bid or offer traded through was 
satisfied, if it was satisfied pursuant to subparagraph (a)(1)(i), or 
the adjusted price, if there was an adjustment, pursuant to 
subparagraph (a)(1)(ii), Whichever price is most beneficial to the 
Public Customer order. Resulting differences in prices shall be the 
responsibility of the Member who initiated the Trade-Through.
    (b) Exceptions to Trade-Through Liability. The provisions of 
paragraph (a) pertaining to the satisfaction of Trade-Throughs shall 
not apply under the following circumstances:
    (1) The Member who initiated the Trade-Through made every 
reasonable effort to avoid the Trade-Through, but was unable to do so 
because of a systems/equipment failure or malfunction;
    (2) The Member trades through the market of a Participant Exchange 
to which such Member had sent a P/A Order or Principal Order, and 
within 20 seconds of sending such order the receiving Participant 
Exchange had neither executed the order in full nor adjusted the 
quotation traded through to a price inferior to the Reference Price of 
the P/A Order or Principal Order;
    (3) The bid or offer traded through was being disseminated from a 
Participant Exchange whose quotes were Non-Firm with respect to such 
Eligible Option Class;
    (4) The Trade-Through was other than a Third Participating Market 
Center Trade-Through and occurred during a period when, with respect to 
the Eligible Option Class, the Exchange's quotes were Non-Firm; 
provided, however, that,

[[Page 79183]]

unless one of the other conditions of this paragraph (b) applies, 
during any such period: (i) Members shall make every reasonable effort 
to avoid trading through the firm quotes of another Participant 
Exchange; and (ii) it shall not be considered an exception to paragraph 
(a) if a Member regularly trades through the firm quotes of another 
Participant Exchange during such period;
    (5) The bid or offer traded through was being disseminated by a 
Participant Exchange during a trading rotation in the Eligible Option 
Class;
    (6) The transaction that caused the Trade-Through occurred during a 
trading rotation;
    (7) The transaction that caused the Trade-Through was the execution 
of a Complex Trade;
    (8) In the case of a Trade-Through other than a Third Participating 
Market Center Trade-Through, a Satisfaction Order with respect to the 
Trade-Through was not received by the Exchange from the Aggrieved Party 
promptly following the Trade-Through and, in any event, (i) except in 
the final five minutes of trading, within three minutes from the time 
the report of the transaction(s) that constituted the Trade-Through was 
disseminated over OPRA, and (ii) in the final five minutes of trading, 
within one minute from the time the report of the transaction(s) that 
constituted the Trade-Through was disseminated over OPRA; or
    (9) In the case of a Third Participating Market Center Trade-
Through, a Satisfaction Order with respect to the Trade-Through was not 
received by the Exchange promptly following the Trade-Through. In 
applying this provision, the Aggrieved Party must send the Exchange a 
Satisfaction Order within three minutes from the time the report of the 
transaction that constituted the Trade-Through was disseminated over 
OPRA. To avoid liability for the Trade-Through, the Member receiving 
such Satisfaction Order must cancel the Satisfaction Order and inform 
the Aggrieved Party of the identity of the Participant Exchange that 
initiated the Trade-Through within three minutes of the receipt of such 
Satisfaction Order (within one minute in the final five minutes of 
trading). The Aggrieved Party then must send to the Participant 
Exchange that initiated the Trade-Through, a Satisfaction Order within 
three minutes of receipt of the cancellation of the initial 
Satisfaction Order (within one minute in the final five minutes of 
trading).
    (c) Responsibilities and Rights Following Receipt of Satisfaction 
Orders.
    (1) When a Member receives a Satisfaction Order, that Member shall 
respond as promptly as practicable pursuant to Exchange procedures by 
either:
    (i) Specifying that one of the exceptions to Trade-Through 
liability specified in paragraph (b) above is applicable and 
identifying that particular exception; or
    (ii) Taking the appropriate corrective action pursuant to paragraph 
(a) above.
    (2) If the Member who initiated the Trade-Through fails to respond 
to a Satisfaction Order or otherwise fails to take the corrective 
action required under paragraph (a) within three minutes of receiving 
the notice of a Satisfaction Order, and the Exchange determines that:
    (i) There was a Trade-Through; and
    (ii) None of the exceptions to Trade-Through liability specified in 
paragraph
    (b) above were applicable;
    Then, subject to the next paragraph, the Member who initiated the 
Trade-Through shall be liable to the Aggrieved Party for the amount of 
the actual loss resulting from non-compliance with paragraph (a) and 
caused by the Trade-Through.
    If either (a) the Aggrieved Party does not establish the actual 
loss within 30 seconds from the time the Aggrieved Party received the 
response to its Satisfaction Order (or, in the event that it did not 
receive a response, within four minutes from the time the Aggrieved 
Party sent the Satisfaction Order) or (b) the Aggrieved Party does not 
notify the Exchange Participant that initiated the Trade-Through of the 
amount of such loss within one minute of establishing the loss, then 
the liability shall be the lesser of the actual loss or the loss caused 
by the Trade-Through that the Aggrieved Party would have suffered had 
that party purchased or sold the option series subject to the Trade-
Through at the ``mitigation price.''
    The ``mitigation price'' is the highest reported bid (in the case 
where an offer was traded through) or the lowest reported offer (in the 
case where a bid was traded through), in the series in question 30 
seconds from the time the Aggrieved Party received the response to its 
Satisfaction Order (or, in the event that it did not receive a 
response, four minutes from the time the Aggrieved Party sent the 
Satisfaction Order). If the Participant Exchange receives a 
Satisfaction Order within the final four minutes of trading (on any day 
except the last day of trading prior to the expiration of the series 
which is the subject of the Trade-Through), then the mitigation price 
shall be the price established at the opening of trading in that series 
on the Aggrieved Party's Participant Exchange on the next trading day. 
However, if the price of the opening transaction is below the opening 
bid or above the opening offer as established during the opening 
rotation, then the mitigation price shall be the opening bid (in the 
case where an offer was traded through) or opening offer (in the case 
where a bid was traded through). If the Trade-Through involves a series 
that expires on the day following the day of the Trade-Through and the 
Satisfaction Order is received within the four minutes of trading, the 
``mitigation price'' shall be the final bid (in the case where an offer 
was traded through) or offer (in the case where a bid was traded 
through) on the day of the trade that resulted in the Trade-Through.
    (3) A Member that is an Aggrieved Party under the rules of another 
Participant Exchange governing Trade-Through liability must take steps 
to establish and mitigate any loss such Member might incur as a result 
of the Trade-Through of the Member's bid or offer. In addition, the 
Member shall give prompt notice to the other Participant Exchange of 
any such action in accordance with subparagraph (c)(2) above.
    (d) Limitations on Trade-Throughs. Members may not repeatedly trade 
through better prices available on other exchanges, whether or not the 
exchange or exchanges whose quotations are traded through are 
Participant Exchanges, unless one or more of the provisions of 
paragraph (b) above are applicable. In applying this provision:
    (1) The Exchange will consider there to have been a Trade-Through 
if a Member executes a trade at a price inferior to the NBBO even if 
the Exchange does not receive a Satisfaction Order from an Aggrieved 
Party pursuant to subparagraph (a)(1);
    (2) The Exchange will not consider there to have been a Trade-
Through if a Member executes a Block Trade at a price inferior to the 
NBBO if such Member satisfied all Aggrieved Parties pursuant to 
subparagraph (a)(2) following the execution of the Block Trade; and
    (3) The Exchange will not consider there to have been a Trade-
Through if a Member executes a trade at a price inferior to the 
quotation being disseminated by an exchange that is not a Participant 
Exchange if the Member made a good faith effort to trade against the 
superior quotation of the non-Participant Exchange prior to trading 
through that quotation. A ``good faith effort'' to reach a non-
Participant Exchange's quotation requires that a

[[Page 79184]]

Member at least had sent an order that day to the non-Participant 
Exchange in the class of options in which there is a Trade-Through, at 
a time at which such Non-Participant Exchange was not relieved of its 
obligation to be firm for its quotations pursuant to Rule 11Ac1-1 under 
the Exchange Act, and such Non-Participant Exchange neither executed 
that order nor moved its quotation to a price inferior to the price of 
the Member's order within 20 seconds of receipt of that order.

Rule 944. Locked Markets

    (a) Eligible Market Maker Locking or Crossing a Market. An Eligible 
Market Maker that creates a Locked Market or a Crossed Market shall 
unlock (uncross) that market or shall direct a Principal Order through 
the Linkage to trade against the bid or offer that the Eligible Market 
Maker locked (crossed).
    (b) Members Other than an Eligible Market Maker Locking or Crossing 
a Market. A Member other than an Eligible Market Maker that creates a 
Locked Market or a Crossed Market shall unlock or (uncross) the market.

Rule 945. Limitation on Principal Order Access

    A specialist or registered options trader shall not be permitted to 
send Principal Orders in an Eligible Option Class through the Linkage 
for a given calendar quarter if the specialist or registered options 
trader effected less than 80 percent of its volume in that Eligible 
Option Class on the Exchange in the previous calendar quarter (that is, 
the specialist or registered options trader effected 20 percent or more 
of its volume by sending Principal Orders through the Linkage). This 
``80/20'' is represented as follows:
[GRAPHIC] [TIFF OMITTED] TN27DE02.121

    ``X'' equals the total contract volume the specialist or registered 
options trader effects in an Eligible Option Class against orders of 
Public Customers on the Exchange during a calendar quarter (a) 
including contract volume effected by executing P/A Orders sent to the 
Exchange through the Linkage, but (b) excluding contract volume 
effected by sending P/A Orders through the Linkage for execution on 
another Participant Exchange. ``Y'' equals the total contract volume 
the specialist or registered options trader effects in such Eligible 
Option Class by sending Principal Orders through the Linkage during 
that calendar quarter.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Amex included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
item IV below. The Amex has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing its Options Linkage Rules in connection 
with the implementation of the Options Linkage Plan (``Plan'') 
previously approved by the Commission on July 28, 2000,\5\ and 
subsequently amended on June 27, 2001,\6\ and May 30, 2002.\7\ The 
proposed Options Linkage rules also incorporate recent amendments to 
the Plan that are currently being approved and filed by each options 
exchange.\8\ The Plan provides for an options intermarket 
communications linkage for the purpose of linking the various options 
markets in the U.S. The purpose of the Plan and related Options Linkage 
rules is to enable the options exchanges to establish and implement a 
linkage consistent with the objectives set forth in section 11A of the 
Exchange Act.\9\ These objectives include, but are not limited to, 
increasing market efficiency, enhancing competition, increasing the 
information available to brokers and dealers and investors, 
facilitating the offsetting of investors' orders and contributing to 
the best execution of such orders.
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    \5\ See Securities Exchange Act Release No. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000). The Plan was in response to a 
Commission order pursuant to section 11A(a)(3)(B) of the Exchange 
Act, 15 U.S.C. 78k-1(a)(3)(B), directing the options exchanges to 
file a NMS plan within 90 days to link the options markets. See 
Securities Exchange Act Release No. 42029 (October 19, 1999), 64 FR 
57674 (October 26, 1999) (``SEC Order''). The options exchanges that 
are participants to the Plan include the Amex, Chicago Board Options 
Exchange, Inc., Pacific Exchange, Inc., Philadelphia Stock Exchange, 
Inc. and the International Securities Exchange, Inc. (the ``options 
exchanges'').
    \6\ See Securities Exchange Act Release No. 44482 (June 27, 
2001), 66 FR 35470 (July 5, 2001) (``Plan Amendment No. 1 
Approval'').
    \7\ See Securities Exchange Act Release No. 46001 (May 30, 
2002), 67 FR 38687 (June 5, 2002) (``Plan Amendments Nos. 2 and 3 
Approval'').
    \8\ The options exchanges have filed with the Commission Joint 
Amendment No. 4 (``Amendment No. 4'') to the Plan. The purpose of 
this Amendment is to effect three substantive changes governing the 
operation of the Linkage: (1) Establish special provisions for 
filling Satisfaction Orders at the end of the trading day; (2) 
reducing the time period that a member must wait after sending a 
Linkage Order from 30 seconds to 20 seconds before such member is 
able to trade through that market; and (3) prohibit fees for 
Satisfaction Orders executed through the Linkage.
    \9\ 15 U.S.C. 78k-1.
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    The SEC Order issued in October 1999 directed the options exchanges 
to act jointly in discussing, developing, and submitting for Commission 
approval an intermarket linkage plan for multiply-traded options. The 
Commission stated in the SEC Order that it believes a linkage among 
options markets will benefit investors by increasing competition among 
markets (and market participants) to provide the best execution of 
customer orders. In furtherance of this belief, the Commission ordered 
the options exchanges to take such joint action as is necessary to 
develop and implement a single linkage plan to permit the efficient 
transmission of orders among the various options exchanges on a 
nondiscriminatory basis. The SEC Order further stated that the 
Commission believes that a linkage of all the options exchanges on a 
nondiscriminatory basis is necessary to increase the opportunities for 
brokers to secure the best execution of their customers' orders, to 
ensure effective competition among options exchanges, and to further 
facilitate the establishment of a national market system as directed by 
Congress in section 11A of the Exchange Act.\10\
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    \10\ Id.
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    The development of the Plan raised a number of significant issues 
including, but not limited to: (1) Whether member firms should 
determine to which exchange they send their orders, or whether orders 
should be sent to a linkage system first and then routed to the 
exchange that has posted the best quote; (2) whether there should be 
any limitation on market maker or member firm principal access to the 
linkage; (3) whether there should be limits on the size and types of 
linkage eligible orders; (4) whether orders routed through the linkage 
system should be able to access an exchange's automatic execution 
system; (5) whether a trade-through rule should apply during trading 
rotations and non-firm quote (or fast market) conditions; and (6) 
whether there should be an exemption from the trade-through rule for 
block size trades. The proposed Options Linkage Rules address each of 
these issues in turn.
    Proposed Amex rule 941 sets out the definitions specific to the 
linkage.

[[Page 79185]]

Moreover, existing definitions in Amex rules would also apply to the 
linkage as required. In general, the definitions set forth in proposed 
Amex rule 941 would incorporate the definitions agreed to and contained 
in the Plan.
    Proposed Amex rule 942 concerns the operation of the linkage. This 
proposed Amex rule incorporates section 7 of the Plan into the Amex's 
rules by dictating how certain orders are handled. In particular, 
proposed Amex rule 942 sets forth the pricing of Linkage Orders, the 
manner in which both Principal Acting as Agent (P/A) Orders and 
Principal Orders are sent through the linkage and how the Exchange 
handles linkage orders it may receive. Pursuant to proposed Amendment 
No. 4 to the Plan, a member of the Amex may reject an execution of 
certain Linkage orders received more than 20 seconds after sending the 
order. This is a reduction from the 30 second time period currently in 
the Plan. In effect, this proposed Amex rule establishes the conditions 
pursuant to which Amex specialists and registered options traders may 
enter linkage orders and imposes obligations on the Exchange regarding 
the processing of incoming linkage orders.
    Proposed Amex rule 943 is an order protection rule concerned 
generally with the avoidance and satisfaction of trade-throughs. This 
proposed Amex rule contains the trade-through provisions required under 
section 8(c) of the Plan. First, this rule would establish a general 
standard that members should avoid trade-throughs as defined in 
proposed Amex rule 941. If a member does effect a trade-through, the 
member would be responsible for satisfying a member of another exchange 
pursuant to paragraphs (a)(2) and (c) of proposed Amex rule 943, 
subject to the exceptions outlined in paragraph (b) of the proposed 
Amex rule. The Exchange represents that both the satisfaction 
procedures and the exceptions to the satisfaction requirements 
incorporate relevant provisions of the Plan. Paragraph (d) of proposed 
Amex rule 943 would establish potential regulatory liability for 
members who repeatedly trade through other exchanges, whether or not 
the exchanges' traded-through are Participants in the Plan.
    Proposed Amex rule 943 also reflects pending Amendment No. 4 to the 
Plan, which proposes to reduce from 30 seconds to 20 seconds the time 
period a member must wait for a response to a linkage order. If the 
member does not receive the response within 20 seconds, the member 
could trade through the non-responding exchange without liability. In 
addition, proposed Amex rule 943 also reflects pending Amendment No. 4 
to the Plan, which proposes to limit liability for trade-throughs in 
the last few minutes of a trading day to 10 contracts per exchange. The 
Exchange represents that the purpose of that amendment is to provide 
protection for small customer orders, but also to limit the potential 
risk to members who may be unable to hedge options positions they 
assume near the close of trading.
    Proposed Amex rule 944 addresses locked or crossed markets.\11\ The 
Exchange represents that this proposed Amex rule implements section 
7(a)(i)(C) of the Plan by indicating that locked and crossed markets 
should be avoided and providing procedures to unlock and uncross 
markets that do occur.
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    \11\ A ``Locked Market'' means a quotation in which the Exchange 
disseminates a bid (offer) in a series of an eligible option class 
at a price that equals the price of the offer (bid) for the series 
then being displayed from another participant exchange. A ``Crossed 
Market'' means a quotation in which the Exchange disseminates a bid 
(offer) in a series of an eligible option class at a price that is 
greater than (is less than) the price of the offer (bid) for the 
series then being displayed from another participant exchange.
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    Proposed Amex rule 945 provides for a limitation on Principal Order 
access for Amex specialists and registered options traders. This 
proposed Amex Rule codifies the ``80/20 Test'' contained in Section 
8(b)(iii) of the Plan. Specifically, a specialist or registered options 
trader on the Exchange would be restricted from sending Principal 
Orders through the linkage if the specialist or registered options 
trader effects less than 80 percent of specified order flow on the 
Exchange. The Exchange would apply this test on a calendar quarter 
basis.
    With respect to the proposed fee change, the Exchange is proposing 
that its existing fees will apply to Principal Orders but will not 
impose fees on P/A Orders. The Amex currently does not impose 
transaction fees for customer orders, and Amex therefore believes that 
P/A Orders should similarly not be charged a transaction fee because 
such orders are essentially customer orders executed through the 
linkage. With respect to Principal Orders, existing transaction fees 
applicable to away market maker and specialist orders will apply 
equally to these linkage orders.
    This proposal also specifies that existing Amex fees will not apply 
to Satisfaction Orders. Proposed Amendment No. 4 to the Plan proposes 
to prohibit a Participant from charging a fee to a member of another 
Participant that is seeking to satisfy customer orders on its book that 
were traded through.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Exchange Act,\12\ in general, and furthers the 
objectives of section 6(b)(5),\13\ in particular, in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, to protect investors 
and the public interest and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. The 
Exchange also believes that the proposed fee change is also consistent 
with section 6(b)(4) of the Exchange Act \14\ regarding the equitable 
allocation of reasonable dues, fees and other charges among exchange 
members and other persons using exchange facilities. With respect to 
the proposed disciplinary sanctions for engaging in a pattern of trade-
throughs, the Exchange believes the proposal is consistent with section 
6(b)(6) of the Exchange Act \15\ requiring that an exchange have rules 
that provide for the appropriate discipline of members for violations 
of the Exchange Act, the rules and regulations thereunder, and the 
rules of the Exchange.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78f(b)(4).
    \15\ 15 U.S.C. 78f(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    The Exchange neither solicited nor received written comments with 
respect to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:

[[Page 79186]]

    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Exchange 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-2002-84 and should be submitted by January 17, 2003.

    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. 02-32795 Filed 12-26-02; 8:45 am]
BILLING CODE 8010-01-P