[Federal Register Volume 68, Number 58 (Wednesday, March 26, 2003)]
[Notices]
[Pages 14722-14723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7116]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47531; File No. SR-Amex-2002-33]


Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Approving Proposed Rule Change as Amended by Amendment No. 1 Thereto 
Relating to Proprietary Order Routing Facilities for Amex Listed 
Options and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 2 Thereto

March 19, 2003.

I. Introduction

    On April 16, 2002, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to prohibit members from using facilities that are 
not owned or operated by the Exchange to transmit orders electronically 
from the Amex floor to other exchanges through a direct electronic 
link, and to receive orders transmitted electronically to the Amex 
floor from other exchanges through a direct electronic link for the 
purchase or sale of Amex listed options after the complete 
implementation of the permanent intermarket linkage in the options 
market (``Options Linkage''). On April 30, 2002, Amex submitted 
Amendment No. 1 to the proposed rule change.\3\ The proposed rule 
change, as amended, was published in the Federal Register on May 8, 
2002.\4\ The Commission received one comment letter on the proposed 
rule change.\5\ On May 28, 2002, Amex submitted Amendment No. 2 to the 
proposed rule change.\6\ On September 13, 2002, Amex submitted a 
response to the ISE Letter.\7\ On December 30, 2002, Amex submitted an 
additional response to the ISE Letter.\8\ This order approves the 
amended proposed rule change, provides notice of filing of Amendment 
No. 2 and grants accelerated approval to Amendment No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Geraldine M. Brindisi, Vice President and 
Corporate Secretary, Amex, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
April 29, 2002 (``Amendment No. 1''). In Amendment No. 1, Amex 
included the text of the proposed rule change.
    \4\ See Securities Exchange Act Release No. 45864 (May 2, 2002), 
67 FR 30985.
    \5\ See letter from Michael J. Simon, Senior Vice President and 
Secretary, International Securities Exchange, Inc. (``ISE''), to 
Jonathan Katz, Secretary, Commission, dated May 28, 2002 (``ISE 
Letter'').
    \6\ See letter from Geraldine M. Brindisi, Vice President and 
Corporate Secretary, Amex, to Nancy J. Sanow, Assistant Director, 
Division, Commission, dated May 24, 2002 (``Amendment No. 2'').
    \7\ See letter from Bill Floyd-Jones, Assistant General Counsel, 
Amex, to Deborah Flynn, Division, Commission, dated September 13, 
2002 (``Amex Initial Response'').
    \8\ See letter from Bill Floyd-Jones, Assistant General Counsel, 
Amex, to Deborah Flynn, Division, Commission, dated December 27, 
2002 (``Amex Supplemental Response'').
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II. Description of the Proposal and Amendment No. 2

    As originally filed, Amex proposed to prohibit members from using 
facilities that are not owned or operated by the Exchange to transmit 
orders \9\ electronically from the Amex floor to other exchanges 
through a direct electronic link, and to receive orders transmitted 
electronically to the Amex floor from other exchanges through a direct 
electronic link for the purchase or sale of Amex listed options upon 
the complete implementation of the Options Linkage.\10\
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    \9\ These facilities cannot be used for listed equities and 
Exchange-Traded Funds as the Intermarket Trading System serves as 
the mechanism for routing trading interest in these securities 
between exchanges.
    \10\ The Commission approved the Plan for the Purpose of 
Creating and Operating an Intermarket Options Linkage (``Linkage 
Plan'') in July 2000. See Securities Exchange Act Release No. 43086 
(July 28, 2000), 65 FR 48023 (August 4, 2000).
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    In Amendment No. 2, Amex limited the proposed rule change to apply 
only to facilities and services of another registered exchange on the 
Amex floor that provide a direct electronic link to the other exchange. 
The proposed rule change would not alter the current ability of members 
and member organizations, with the prior written approval of Amex, to 
use an electronic order routing facility or service owned and operated 
by a registered broker-dealer to transmit orders for Amex listed 
options to another registered exchange for execution.

III. ISE Letter and Amex Responses

ISE Letter

    In the ISE Letter, ISE argues that Amex's proposal has significant 
customer protection and competitive implications because it would 
require an Amex floor broker that sees an ISE price that is superior to 
the Amex price to route the order off-floor for transmission to the 
ISE. ISE believes the delay caused by off-floor transmissions raises 
serious risks that the ISE market may not be available when the 
customer order reaches ISE. In addition, ISE believes the Amex floor 
broker may determine that the delay makes the possibility of ISE 
execution too risky and may execute the order on the Amex at the 
inferior price. ISE points out that once the Options Linkage is 
implemented, the Amex broker could incur trade-through liability if the 
broker executes the order on the Amex at the inferior price.
    ISE argues that in limiting members' ability to send orders 
electronically to other markets, the Amex impedes competition because, 
without this limitation, free market forces and price competition would 
lead to the sending of order flow to exchanges displaying superior 
prices. ISE stated its view that, under the proposal, market makers 
could use only the Options Linkage to access competing exchanges 
electronically, even if there may be more efficient methods of access, 
and that the Options Linkage will provide only limited access because: 
(1) Brokers will not have direct access to the Options Linkage; (2) 
market makers are prohibited from using the Options Linkage as an order 
delivery system for

[[Page 14723]]

customer orders; and (3) the number of principal orders market makers 
may send through the Options Linkage is restricted. ISE claims that 
Amex wrongly implies that the Options Linkage would render obsolete the 
need for proprietary access systems.

Amex Initial Response

    In the Amex Initial Response, Amex stated that it had addressed 
ISE's concerns in Amendment No. 2. In Amendment No. 2, Amex clarified 
that, after the Options Linkage is implemented, Amex members would 
continue to have electronic access to ISE from the Amex floor through 
broker-dealer order routing facilities; members would only be precluded 
from using ISE terminals on the Amex floor.

Amex Supplemental Response

    In the Amex Supplemental Response, Amex responded in greater detail 
to ISE's concerns that the proposal is anti-competitive. Amex argues 
that it is not required by any applicable law or regulation to 
permanently maintain on its floor a separate, direct electronic link 
operated by the ISE to transmit orders in options to that exchange.
    In addition, Amex argues that more than adequate alternative means 
exist for Amex member firms to route orders from the Amex floor to the 
ISE. Even though its use is restricted, the Options Linkage would be 
available. Furthermore, Amex's proposal would not alter the ability of 
Amex member firms to route orders from the floor of Amex to ISE using 
their own (or third party) proprietary order routing facilities. Amex 
believes the proprietary routing systems available to most, if not 
virtually all, Amex members on the Amex's floor are sufficiently fast 
and efficient that they can essentially function as an exchange-to-
exchange system for orders sent from the floor of one exchange. Amex 
points out that not one Amex member firm has complained that the 
removal of the direct linkage with ISE when the Options Linkage is 
implemented would make it difficult for it to route orders to ISE. With 
respect to broker-dealers, they will have indirect access to the 
Options Linkage by delivering an order to the Amex specialist, who will 
have direct access to the Options Linkage.

IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange \11\ and, in particular, the requirements of 
Section 6 of the Act \12\ and the rules and regulations thereunder. The 
Commission finds specifically that the proposed rule change is 
consistent with Section 6(b)(5) of the Act \13\ because it should 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, in general, protect investors 
and the public interest.
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    \11\ In approving this proposed rule change, the Commission 
notes that it has considered its impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f.
    \13\ 15 U.S.C. 78f(b)(5).
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    Specifically, prohibiting Amex members from using the facilities 
and services of another registered exchange on the floor of the Amex as 
a direct electronic link to transmit orders electronically to the other 
exchange for the purchase or sale of listed options once the Options 
Linkage has been implemented is not an inappropriate burden on 
competition. The Commission agrees that neither the Act nor Commission 
rules require Amex to permit its members to have another exchange's 
terminals on Amex's floor to provide direct electronic access to that 
exchange. Finally, Amex represents that Amex members will be able to 
access other exchanges, as they do today, through their own or another 
registered broker-dealer's electronic order routing facility or 
service, as well as through the Options Linkage.
    The Commission also finds good cause for approving Amendment No. 2 
prior to the thirtieth day after the date of publication of notice of 
filing thereof in the Federal Register. Amendment No. 2 clarifies and 
limits the scope of Amex's proposal in response to the ISE Letter. 
Specifically, Amendment No. 2 addresses the concern raised in the ISE 
Letter that the proposal would preclude an Amex member from using its 
own or a third party's proprietary facility to access another exchange. 
Accordingly, consistent with Section 19(b)(2) of the Act,\14\ the 
Commission is accelerating approval of Amendment No. 2.
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    \14\ 17 CFR 240.19b-4.
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2 to the proposed rule change, 
including whether Amendment No. 2 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 Amendment No. 2 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 Exchange. All submissions should refer 
to File No. SR-Amex-2002-33 and should be submitted by April 16, 2003.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-AMEX-2002-33), as amended by 
Amendment No. 1, is approved, and that Amendment No. 2 to the proposed 
rule change is approved on an accelerated basis.
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    \15\ 15 U.S.C. 78s(b)(2).

    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. 03-7116 Filed 3-25-03; 8:45 am]
BILLING CODE 8010-01-P