[Federal Register Volume 68, Number 46 (Monday, March 10, 2003)]
[Notices]
[Pages 11418-11420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-5568]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47429; File No. SR-Amex-2003-08]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange LLC To Increase to Five Hundred 
Contracts the Maximum Permissible Number of Equity and Index Option 
Contracts Executable Through Auto-Ex

March 3, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 11419]]

(``Act'')\1\ and rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 10, 2003, 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 Amex. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to increase to 500 contracts the maximum 
permissible number of equity and index option contracts in an order 
executable through its automatic execution system, Auto-Ex.
    The text of the proposed rule change is available at the Office of 
the Secretary, Amex and at the Commission.

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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In 1985, the Exchange implemented the Auto-Ex system, which 
automatically executes public customer market and marketable limit 
orders in options at the best bid or offer displayed at the time the 
order is entered into the Amex Order File (``AOF''). There are, 
however, limitations on the number of option contracts that can be 
entered into or executed by these systems. AOF, which handles limit 
orders routed to the specialist's book as well as orders routed to 
Auto-Ex, allows for the entry of orders of up to 2500 option 
contracts.\3\ Auto-Ex, however, is only permitted to execute equity 
option orders and index option orders of up to 250 contracts.\4\ As a 
result, market and marketable limit orders of more than 250 contracts 
are routed by AOF to the specialist's book.
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    \3\ See Securities Exchange Act Release No. 44065 (March 12, 
2001), 66 FR 15513 (March 19, 2001).
    \4\ See Securities Exchange Act Release No. 45628 (March 22, 
2002), 67 FR 15262 (March 29, 2002) (``March 2002 Order''). The Amex 
notes that the Auto-Ex guarantee size for Nasdaq-100 Tracking Stock 
(``QQQ'') options is up to 2,000 contracts for the two near-term 
expiration months and 1,000 contracts for all other expiration 
months. See Securities Exchange Act Release No. 45828 (April 25, 
2002), 67 FR 22140 (May 2, 2002).
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    The Exchange now proposes to increase to 500 contracts the maximum 
permissible number of equity and index option contracts in an order 
that can be executed through the Auto-Ex system. It is proposed that 
this increase to 500 contracts in permissible order size for Auto-Ex be 
implemented on a case-by-case basis for an individual option class or 
for all option classes when two floor governors or senior floor 
officials deem such an increase appropriate. Currently, the Amex posts 
applicable quote size parameters on its web page and represents that it 
will continue to do so. The Exchange represents that it has sufficient 
systems capacity necessary to accommodate implementation of the 
proposed increase.
    The Exchange represents that the Commission, in its March 2002 
Order permitting the Amex to expand the maximum Auto-Ex size to 250 
contracts, was concerned at the time that an increase in the Auto-Ex 
order size could create greater risks for market participants. In 
particular, the Commission noted that a larger Auto-Ex size could 
subject market makers to greater financial risk due to the automatic 
execution of such orders at the quoted price. The Amex subsequently 
adopted a rule \5\ that would allow it to match the automatic execution 
sizes of other options exchanges provided the Exchange submits a filing 
pursuant to section 19(b)(3)(A) of the Act.\6\ In April 2002, pursuant 
to Amex rule 933, Commentary .03 and section 19(b)(3)(A) of the Act, 
the Amex filed a notice of immediate effectiveness with the Commission 
and increased its Auto-Ex size for QQQ options to up to 2,000 contracts 
for the two near-term expiration months and 1,000 contracts for all 
other expiration months in order to match Primary Market Makers' size 
guarantees in QQQ options on the International Securities Exchange, 
Inc. (``ISE'').\7\ Since April 29, 2002, the Exchange represents that 
it has established an Auto-Ex size of 1,000 contracts for all QQQ 
options series. The Exchange states that, to date, it is unaware of any 
increased risks to market participants and the marketplace as a result 
of the greater Auto-Ex size for QQQ options.
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    \5\ See Amex rule 933, Commentary .03; see also Securities 
Exchange Act Release No. 45828 (April 25, 2002), 67 FR 22140 (May 2, 
2002).
    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ See Securities Exchange Act Release No. 45828 (April 25, 
2002), 67 FR 22140 (May 2, 2002). The Amex rule change with respect 
to maximum Auto-Ex size for the QQQ options was submitted as a 
change effective on filing pursuant to section 19(b)(3)(A) of the 
Act, 15 U.S.C. 78s(b)(3)(A).
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    The Exchange also believes that the increased Auto-Ex size of up to 
250 contracts for all other options classes at the Exchange has 
similarly not created greater financial risks or other known system 
difficulties. The Exchange has set the Auto-Ex order size to the 250-
contract maximum in a number of actively-traded option classes that, 
the Exchange believes, are the classes with the greatest liquidity and 
trading interest.\8\ For example, options in Microsoft Corporation 
(MSFT) and General Electric Co. (GE) have Auto-Ex sizes of 250 
contracts. The Exchange states that market participants have further 
indicated that even larger sizes would provide greater benefits to 
their customers and proprietary trading strategies. The Exchange 
maintains that an increase in the permissible size of orders executable 
through Auto-Ex will provide more efficient executions due to the speed 
of execution obtained by Auto-Ex versus manual handling. The Exchange 
states that customers and other market participants are increasingly 
demanding that the Exchange automatically execute larger option order 
sizes that in the past would have received manual handling. The 
Exchange believes that an increase in the Auto-Ex size of up to 500 
contracts will meet this demand of the marketplace.
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    \8\ The Exchange states that, as of February 7, 2003, it had 
established a maximum 250-contract Auto-Ex size for the following 
options classes: (1) Altria Group, Inc. (MO); (2) Advanced Micro 
Devices Inc. (AMD); (3) Applied Materials (AMST); (4) ARIBA, Inc. 
(ARBA); (5) Brocade Communication Systems (BRCD); (6) Capital One 
Financial Corporation (COF); (7) Exxon Mobile Corporation (XOM); (8) 
General Electric Co. (GE); (9) Home Depot Inc. (HD); (10) Intel 
Corporation (INTC); (11) Johnson & Johnson Company (JNJ); (12) 
Microsoft Corporation (MSFT); (13) Motorola, Inc. (MOT); (14) Oracle 
Corporation (ORCL); (15) Qlogic Corporation (QLGC); (16) Qualcomm 
Corporation (QCOM); (17) Texas Instruments (TXN); (18) The Coca-Cola 
Co. (KO); and (19) United Parcel Services, Inc. (UPS).
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    The Exchange's Auto-Ex system provides that all customer and 
broker-dealer market and marketable limit orders within the appropriate 
size parameters are executed at the prevailing best bid or offer, with 
both the specialist and registered options traders (``ROTs'') as the 
contra-party to

[[Page 11420]]

the transaction. Auto-Ex trades are automatically allocated on a 
rotating basis to the specialist and to each ROT that has signed on to 
Auto-Ex.\9\ If an Auto-Ex trade is greater than 10 contracts, the Auto-
Ex system divides the execution into lots of 10 or fewer contracts and 
allocates a lot to each Auto-Ex participant.\10\ Accordingly, for 
actively-traded option classes in large trading crowds, the Auto-Ex 
allocation of executed contracts into lots of 10 contracts operates so 
that an Auto-Ex size of 250 contracts is spread out among several ROTs, 
thereby significantly reducing the potential financial risk that a 
single ROT may incur. The Exchange believes that an increase of the 
Auto-Ex eligible size to 500 will not significantly increase the 
financial risks of ROTs for such actively-traded option classes.
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    \9\ At the start of each trading day, the order in which trades 
are allocated to the specialist and traders signed on to Auto-Ex is 
randomly determined.
    \10\ For example, an option class that allows up to 50 contracts 
to be executed through Auto-Ex would have a trade of 25 contracts 
divided into lots of 10, 10 and 5. See Securities Exchange Act 
Release No. 47229 (January 22, 2003), 68 FR 5060 (January 31, 2003) 
(File No. SR-Amex-00-30).
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    The Exchange believes that market participants desire, and will 
support, an increase in Auto-Ex eligible sizes of up to 500 contracts. 
The Exchange represents that, as of April 29, 2002, it has established 
an Auto-Ex size of 1,000 contracts for all QQQ options series. The Amex 
believes that the proposed increase in Auto-Ex eligible size for all 
other options is necessary in order for the Exchange to address market 
demands and for the purpose of competing effectively with other options 
exchanges that may not be so restricted.
    The Amex notes that the Chicago Board Options Exchange, Inc. 
(``CBOE'') has received regulatory approval, with respect to option 
classes that disseminate quotations with size, to automatically execute 
orders in such options through its RAES system up to the disseminated 
size, which may be larger than 250 contracts.\11\ Furthermore, the Amex 
notes that the ISE automatically executes a customer order for the 
disseminated quote size once such order hits the available option 
quote.\12\ As a result, the disseminated size for a particular option 
quote is the actual size of an order that will be automatically 
executed. Accordingly, the Amex believes that, based on competitive 
considerations, an increase in the maximum Auto-Ex eligible size will 
provide customers with increased opportunities for better and more 
efficient executions.
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    \11\ See Securities and Exchange Act Release No. 45676 (March 
29, 2002), 67 FR 16478 (April 5, 2002) (CBOE File No. 2001-70); see 
also CBOE rule 6.8 (c)(v) and Commentary .09 to CBOE rule 6.8.
    \12\ See Securities Exchange Act Release No. 42455 (February 24, 
2000), 65 FR 11388 (March 2, 2000). The ISE operates an electronic 
marketplace where orders and quotes are entered into a central order 
book. Trades are then executed automatically when orders and quotes 
match.
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    The Exchange represents that Auto-Ex has been extremely successful 
in enhancing execution and operational efficiencies during emergency 
situations and during other, non-emergency situations for certain 
option classes. The Exchange believes that automatic executions of 
orders for up to 500 contracts will allow for the quick, efficient 
execution of public customer orders, as well as broker-dealer orders on 
a case-by-case basis consistent with the Exchange's recent ability to 
provide automatic executions of broker-dealer transactions.\13\
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    \13\ See Securities Exchange Act Release No. 46479 (September 
10, 2002) 67 FR 58654 (September 17, 2002).
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2. Statutory Basis
    The proposed rule change is consistent with section 6(b)\14\ of the 
Act, in general, and furthers the objectives of section 6(b)(5)\15\ of 
the Act, 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, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Amex 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

    No written comments were solicited or received 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:
    (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

    The Commission invites interested persons to submit written data, 
views, and arguments concerning the foregoing, including whether the 
proposed rule change 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-2003-08 and should be submitted by March 31, 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. 03-5568 Filed 3-7-03; 8:45 am]
BILLING CODE 8010-01-P