[Federal Register Volume 68, Number 53 (Wednesday, March 19, 2003)]
[Notices]
[Pages 13348-13350]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6554]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47479; File No. SR-Amex-2002-86]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by American Stock Exchange LLC To Eliminate the Obligation of 
Specialists to Accord Priority to Non-Public Customer Options Orders

March 11, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 17, 2002, the American Stock Exchange LLC (``Amex'') 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 amend paragraphs (a) and (d) of Amex Rule 950, 
and add new paragraph (q) to Amex Rule 950, to provide that when a 
specialist represents an options order as agent, the specialist is 
required to accord priority only to those orders of public customers 
over the specialist's principal transactions. The text of the proposed 
rule change is below. New language is italicized; deleted language is 
in brackets.

Rule 950. Rules of General Applicability

    (a) The following Floor Rules shall apply to Exchange option 
transactions and other transactions on the Exchange in options 
contracts: 100, 101, 104, 105, 106, 110, 112, 117, 123, 129, 130, 135, 
150, 151, 152, 153, [155,] 157, 172, 173, 174, 175, 176, 177, 180, 181, 
183, 184, 185, 192 and 193. Unless the context otherwise requires, the 
term ``stock'' wherever used in the foregoing Rules shall be deemed to 
include option contracts. Except as otherwise provided in this Rule, 
all other Floor Rules (series 100 et seq.) shall not be applicable to 
Exchange option transactions.
    (b)-(c) No change.
    (d) No change.
    Commentary--
    .01 No change
    .02 A member who holds both an order for a public customer of a 
member organization and a facilitation order may cross such orders if:
    (a) No change
    (b) No change
    (c) No change
    (d) No change
    For purposes of this Rule, [and] Rule 950(e)(iv) and 950(q) the 
term ``public customer of a member organization'' means a customer that 
is neither a member nor a broker-dealer.
    .03 No change
    .04 No change
    .05 No change
    (f)-(p) No change
    (q) The provisions of Rule 155 shall apply to Exchange options 
transactions as modified below:
    A specialist shall give precedence to the options orders of a 
public customer of a member organization entrusted to the specialist as 
an agent in any option in which he is registered before executing at 
the same price any purchase or sale in the same option for

[[Page 13349]]

an account in which he has an interest. However, the requirements of 
this Rule shall not apply to those option orders which are not 
executable because of the restrictions of Securities Exchange Act Rule 
11a1-1, the two tick requirement of Rule 111 and the procedures for the 
handling of percentage orders pursuant to Rule 154.

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 Amex is proposing to amend Amex Rule 950 for the purpose of 
revising the obligation of specialists in representing options orders. 
Currently, Amex Rule 950(a) incorporates and applies Amex Rule 155 to 
options so that a specialist is required to give precedence to orders 
entrusted to him as an agent in any option in which he is registered 
before executing at the same price any purchase or sale in the same 
option for an account in which he has an interest.\3\ This amendment to 
paragraphs (a) and (d) of Amex Rule 950, and the addition of new 
paragraph (q) to Amex Rule 950, would revise the obligation of options 
specialists so that such specialists are obligated to accord priority 
only to public customer orders. The term ``public customer of a member 
organization'' is defined as an order which, if executed, results in 
the purchase or sale for an account in which no member or broker-dealer 
has an interest.\4\
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    \3\ According to the Amex, the specialist does not have to give 
precedence to those orders which are not executable because of the 
restrictions of Rule 11a1-1(T) under the Act or because of the two-
tick requirement of Commentary .01(b) to Amex Rule 950(c).
    \4\ See Commentary .02 to Amex Rule 950(d).
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    Amex represents that a number of developments in the options 
industry and at the Amex in recent years have resulted in an increasing 
number of options orders left with specialists for representation. In 
particular, the consolidation of firms and changing economics have 
resulted in a decline in the number of independent floor brokers who 
formerly represented orders in trading crowds at the Amex.\5\ In 
addition, the enhanced use of electronic order routing systems by firms 
has further increased the number of options orders that specialists 
represent. Therefore, a larger percentage of all options orders traded 
in a particular trading crowd are now being electronically routed and 
either automatically executed via the Amex's automatic execution system 
or placed in the specialist's order display book, the Amex Options 
Order Display Book (``AODB''),\6\ for execution.
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    \5\ For example, Amex ``spread'' brokers no longer exist because 
of the inability to profitably remain in business. These specialized 
floor brokers at the Amex focused on executing options spread 
orders. See File No. SR-Amex-2001-48.
    \6\ The AODB is the electronic options specialist book that 
receives and stores both market and limit orders directed to the 
Amex through its electronic order routing system or given to the 
specialist by traders.
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    The introduction of the Booth Automated Routing System (``BARS'') 
\7\ at the Amex further permits member firms to manage their order flow 
more efficiently by providing members a choice of sending orders 
electronically to their floor broker booths for further action or using 
existing electronic order routing systems to send orders directly to 
the specialist. With the advent of a reduction in floor broker 
operations and the speed of electronic order routing, such orders 
increasingly are routed electronically to the specialist for handling. 
Accordingly, the Amex does not believe that it is appropriate for a 
specialist to be denied the opportunity to compete for orders merely 
because it is representing such orders that have in the past been 
represented by floor brokers.
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    \7\ BARS is an order routing system permitting brokers to manage 
and route orders for Amex traded securities. See Securities Exchange 
Act Release No. 45782 (April 18, 2002), 67 FR 20559 (April 25, 
2002).
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    The Amex believes it will become increasingly difficult for 
specialists to compete against Registered Options Traders (``ROTs'') 
and other members in the trading crowd given the preference for 
electronic order routing. As the percentage of electronically routed 
orders increases, the incentive to assume the affirmative obligations 
and exposure in managing a specialist unit decrease. Therefore, the 
Amex believes this proposal is justified in light of the particular 
responsibilities, burdens and costs borne by specialists as compared to 
other market participants. For example a specialist unit has greater 
market making responsibilities than ROTs and other non-specialists, 
higher capital requirements, and other costs such as staffing in 
connection with brokerage quote updating and quote processing.
    The Amex offers the following example to help illustrate how the 
current order precedence rule works at the Amex. A specialist who had 
been bidding $2 as dealer receives an order for a broker-dealer that 
has been electronically routed by an unaffiliated floor broker via 
BARS. The broker-dealer is seeking to buy 50 contracts of XYZ at a 
limit of $2 at a time when the market is 2 (bid) -2.25 (offer). A 
Registered Options Trader (``ROT'') now walks into the trading crowd to 
sell 100 contracts of XYZ at $2. The specialist must represent the 
order of the floor broker and, in addition, may bid as dealer to 
compete against other non-specialists to trade against the ROT order 
for 100 contracts. The specialist, however, must, when bidding as 
dealer, accord priority to the order of the floor broker and cannot 
compete to trade against that order. If competition in the trading 
crowd is such that the specialist is allocated 20 contracts (or less) 
in the trade of 100 contracts, the specialist will have no chance to 
participate, as principal, in the trade. If the specialist did not have 
to accord priority to the order of the broker-dealer, the specialist 
would be able to compete equally with the other trading crowd 
participants and assert its participation right if the trade occurred 
at the specialist's previously established principal bid or offer.
    The Amex believes this proposal is substantially similar to a 
proposal by the Chicago Board Options Exchange, Inc. (``CBOE'') that 
was approved by the Commission.\8\ Pursuant to the CBOE proposal, the 
designated primary market makers (``DPMs''), when representing an order 
as agent, would be required to accord priority only to public customer 
orders over their own principal transactions.\9\ The Amex represents 
that it has based the instant proposal on the CBOE rule change, and 
therefore, submits it is identical to the CBOE's approved rule. Amex 
therefore believes that approval of the proposal would place Amex 
specialists on an equal footing with DPMs so that a specialist when 
representing an order accords priority only to public customer orders.
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    \8\ See Securities Exchange Act Release No. 45103 (November 26, 
2001), 66 FR 63083 (December 4, 2001) (notice of SR-CBOE-00-42) and 
45341 (January 25, 2002) 67 FR 5016 (February 1, 2002) (approval 
order of SR-CBOE-00-42).
    \9\ Id.
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    The Amex, notes, however, that although Commission approval of this

[[Page 13350]]

proposal may be consistent with the Act, such approval will not relieve 
a specialist of its fiduciary obligations under the federal securities 
laws or agency law principles when acting as an agent.\10\ The 
Commission, in approving the CBOE proposed rule change, specifically 
stated that its approval was based solely on its determination that the 
CBOE proposal was consistent with the 1934 Act and the rules and 
regulations thereunder applicable to a national securities exchange. 
Therefore, like the CBOE rule filing, approval of this proposal will 
not affect existing fiduciary duties.\11\
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    \10\ See In re E.F. Hutton & Co. Securities Exchange Act Release 
No. 25887 (July 6, 1988) (``Manning Decision''). The Amex represents 
that the Commission found that broker-dealers owe a fiduciary duty 
to their limit order customers not to trade ahead of such orders 
unless the customer knows of the firm's limit order policy. 
Furthermore, under agency law principles, a specialist acting as 
agent has an obligation to act solely for its customer and not 
compete with the customer's order unless the customer understands 
such specialist intends to compete.
    \11\ The Amex offers the following as an example: A specialist 
that acts as agent for any customer has an obligation to act solely 
for the benefit of the customer in all matters connected with the 
customer's order, and not compete with the customer concerning the 
order unless the customer understands its agent is to compete, and 
such understanding is fully disclosed.
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    Accordingly, the Amex believes that the instant proposal limiting 
the priority of options orders to those orders of public customers 
entrusted to specialists for execution is consistent with the Act and 
Amex rules. The addition of new paragraph (q) to Amex Rule 950 will, 
therefore, allow specialists acting as agent to compete equally with 
other members and broker-dealers in the trading crowd by not being 
required to afford priority to such member or broker-dealer orders.
2. Statutory Basis
    The Amex believes that the proposed rule change is consistent with 
section 6(b) of the Act,\12\ in general, and furthers the objectives of 
section 6(b)(5) of the Act,\13\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, remove impediments to and perfect 
the mechanisms of a free and open market and a national market system, 
and, in general, protect investors and the public interest.
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    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Amex believes that the proposed rule change will impose no 
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 self-regulatory organization 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

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. 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-2002-86 and 
should be submitted by April 9, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-6554 Filed 3-18-03; 8:45 am]
BILLING CODE 8010-01-P