[Federal Register Volume 68, Number 26 (Friday, February 7, 2003)]
[Notices]
[Pages 6524-6526]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-3101]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47298; File No. 4-429]


Joint Industry Plan; Order Approving on a Temporary Basis Joint 
Amendment No. 4 to the Options Intermarket Linkage Plan Relating to 
Satisfaction Orders, Trade-Throughs and Other Nonsubstantive Changes, 
as Modified by an Amendment Thereto, and Notice of Filing of Such 
Amendment

January 31, 2003.

I. Introduction

    On September 24, 2002, October 1, 2002, October 9, 2002, November 
6, 2002, and November 26, 2002, the International Stock Exchange, Inc. 
(``ISE''), the Pacific Exchange, Inc. (``PCX''), the Chicago Board 
Options Exchange, Inc. (``CBOE''), the Philadelphia Stock Exchange, 
Inc. (``Phlx''), and the American Stock Exchange LLC (``Amex'') 
(collectively, the ``Participants''), respectively, filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission''), 
pursuant to section 11A of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 11Aa3-2 thereunder,\2\ an amendment (``Joint 
Amendment No. 4'') to the Options Intermarket Linkage Plan (``Linkage 
Plan'').\3\
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    \1\ 15 U.S.C. 78k-1.
    \2\ 17 CFR 240.11Aa3-2.
    \3\ On July 28, 2000, the Commission approved a national market 
system 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 (July 28, 2000), 
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, May 30, 2002, and January 29, 2003, respectively, the 
Commission approved amendments to the Linkage Plan. See Securities 
Exchange Act Release Nos. 44482 (June 27, 2001), 66 FR 35470 (July 
5, 2001), 46001 (May 30, 2002), 67 FR 38687 (June 5, 2002), and 
47274 (January 29, 2003).

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[[Page 6525]]

    Proposed Joint Amendment No. 4 was published for comment in the 
Federal Register on December 27, 2002.\4\ No comments were received on 
the proposal. On January 28, 2003, January 28, 2003, January 29, 2003, 
January 29, 2003, and January 29, 2003, the ISE, the Phlx, the Amex, 
the PCX, and the CBOE, respectively, filed with the Commission an 
amendment to proposed Joint Amendment No. 4 to provide that the 
limitation on the liability for trade-throughs for the last seven 
minutes of the trading day would be effective for a one-year pilot 
period and to clarify that the limitation on liability would apply to 
each Satisfaction Order (``Pilot Amendment'').\5\ This order approves 
Joint Amendment No. 4, as modified by the Pilot Amendment, on a 
temporary basis not to exceed 120 days, and solicits comment on the 
Pilot Amendment from interested persons.
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    \4\ See Securities Act Release No. 47028 (December 18, 2002), 67 
FR 79171.
    \5\ See letters from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Jonathan Katz, Secretary, Commission, dated 
January 27, 2003; Charles Rogers, Executive Vice President, Phlx, to 
Jonathan Katz, Secretary, Commission, dated January 27, 2003; 
Jeffrey Burns, Assistant General Counsel, Amex, to Jonathan Katz, 
Secretary, Commission, dated January 28, 2003; Kathryn L. Beck, 
Senior Vice President, General Counsel and Corporate Secretary, PCX, 
to Jonathan Katz, Secretary, Commission, dated January 28, 2003; and 
Edward J. Joyce, President and Chief Operating Officer, CBOE, to 
Jonathan Katz, Secretary, dated January 29, 2003.
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II. Description of Proposed Joint Amendment No. 4

    In proposed Joint Amendment No. 4, as modified by the Pilot 
Amendment, the Participants propose to clarify that the proposed 
limitation on liability for trade-throughs for the last seven minutes 
of the trading day would apply to the filling of 10 contracts per 
exchange, per transaction. Pursuant to the Pilot Amendment, this 
proposal would be effective for a one-year pilot period, and would 
apply to each Satisfaction Order. The proposed Linkage Plan amendment 
also would: (1) Decrease the time period a member must wait after 
sending a linkage order to a market before that member can trade 
through that market from 30 seconds to 20 seconds; (2) prohibit linkage 
fees for executing satisfaction orders; and (3) make other 
nonsubstantive revisions to the Linkage Plan.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the Pilot Amendment, including whether the 
proposed Pilot Amendment 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 submissions, all subsequent amendments, 
all written statements with respect to the proposed Pilot Amendment 
that are filed with the Commission, and all written communications 
relating to the proposed Pilot Amendment 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 February 28, 2003.

IV. Discussion

    After careful consideration, the Commission finds that the proposed 
Joint Amendment to the Linkage Plan, as amended by the Pilot Amendment, 
is consistent with the requirements of the Act and the rules and 
regulations thereunder.\6\ Specifically, the Commission finds that the 
proposed Joint Amendment, as modified by the Pilot Amendment, is 
consistent with section 11A of the Act,\7\ and Rule 11Aa3-2 
thereunder,\8\ in that it is appropriate in the public interest, for 
the protection of investors and the maintenance of fair and orderly 
markets. In addition, the Commission finds, as described further below, 
that it is appropriate to approve summarily the proposed amendment to 
the Linkage Plan, as amended, upon publication of the notice on a 
temporary basis for 120 days. The Commission believes that such action 
is appropriate in the public interest, for the protection of investors 
and the maintenance of fair and orderly markets, to remove impediments 
to, and perfect mechanisms of, a national market system, or otherwise 
in furtherance of the purposes of the Act.\9\
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    \6\ In approving this proposed Linkage Plan amendment, the 
Commission has considered its impact on efficiency, competition, and 
capital formation.
    \7\ 15 U.S.C. 78k-1.
    \8\ 17 CFR 240.11Aa3-2.
    \9\ 17 CFR 240.11Aa3-2(c)(2).
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    The Participants have represented to the Commission that members of 
various exchanges have raised concerns regarding their obligations to 
fill Satisfaction Orders (which result after a trade-through \10\) at 
the close of trading in the underlying security. Specifically, these 
members are concerned that they may not have sufficient time to hedge 
the positions they acquire.\11\ The Participants believe their proposal 
to limit liability for trade-throughs for the last five minutes of 
trading in the underlying security to the filling of 10 contracts per 
exchange, per transaction will protect small customer orders, yet 
establish a reasonable limit for their members' liability. The 
Participants represent that this proposal should not affect a member's 
potential liability under an exchange's disciplinary rule for engaging 
in a pattern or practice of trading through other markets under section 
8(c)(i)(C) of the Linkage Plan.
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    \10\ Trade-throughs occur when broker-dealers execute customer 
orders on one exchange at prices inferior to another exchange's 
disseminated quote.
    \11\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Annette Nazareth, Director, Division of 
Market Regulation, Commission, dated November 19, 2002.
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    The Pilot Amendment clarifies that the limitation on liability 
would apply to each Satisfaction Order. As amended, the proposal is 
limited to a one-year pilot period. The Commission believes this one-
year pilot period will give the Participants and the Commission an 
opportunity to evaluate: (1) The need for the limitation on liability 
for trade-throughs near the end of the trading day; (2) whether 10 
contracts per Satisfaction Order is the appropriate limitation; and (3) 
whether the opportunity to limit liability for trade-throughs near the 
end of the trading day leads to an increase in trade-throughs. The 
Commission expects the Participants to provide a report to the 
Commission at least sixty days prior to seeking permanent approval of 
the pilot program. The report should include information about the 
number and size of trade-throughs that occur during the last seven 
minutes of the trading day and the number and size of trade-throughs 
that occur during the rest of the trading day, the number and size of 
Satisfaction Orders that the Participants might be required to fill 
without the limitation on liability and how those amounts are affected 
by the limitation on liability, and the extent to which the

[[Page 6526]]

Participants use the underlying market to hedge their options 
positions.
    The Commission finds that the proposal to reduce the amount of time 
a member must wait after sending a linkage order to a market before 
that member can trade through that market from thirty seconds to twenty 
seconds is appropriate because the Linkage Plan will retain the 
requirement that a Participant respond to a Linkage order within 15 
seconds of receipt of that order.\12\
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    \12\ The Participants have represented that they believe 
reducing the response time even further to five seconds would 
provide an opportunity for the transmittal of responses to orders, 
while also allowing their members to execute orders on their own 
exchanges in a timely manner.
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    The Commission also finds that the proposal to establish a general 
prohibition against Linkage fees for executing Satisfaction Orders is 
appropriate. An exchange will receive a Satisfaction Order only when it 
has traded through customer orders on another exchange. The Commission 
agrees with the Participants that an exchange that traded through 
another market should not be allowed to impose a fee on the aggrieved 
party that exercises its rights under the Linkage Plan to complain 
about a trade-through.

V. Conclusion

    It is therefore ordered, pursuant to section 11A of the Act,\13\ 
and Rule 11Aa3-2(c)(4) thereunder,\14\ that Joint Amendment No. 4, as 
modified by the Pilot Amendment, is approved until May 31, 2003.
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    \13\ 15 U.S.C. 78k-1.
    \14\ 17 CFR 240.11Aa3-2(c)(4).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-3101 Filed 2-6-03; 8:45 am]
BILLING CODE 8010-01-P