[Federal Register Volume 68, Number 71 (Monday, April 14, 2003)]
[Notices]
[Pages 17970-17972]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8997]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47643; File No. SR-Amex-2000-49]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to Proposed Rule Change by the American 
Stock Exchange LLC to Permanently Approve Its Pilot Program Relating to 
Facilitation Cross Transactions

April 7, 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 August 22, 2000, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change to revise and permanently 
approve its pilot program relating to facilitation cross transactions. 
On August 29, 2000, October 15, 2002, and January 29, 2003, 
respectively, the Amex filed Amendment Nos. 1, 2, and 3 to the proposed 
rule change.\3\ On March 18, 2003, the Amex filed Amendment No. 4 to 
the proposed rule change, in which the Exchange replaced the original 
proposal and previous amendments with a proposal to permanently adopt 
the pilot program in its present form, and added a clarification 
concerning specialist participation in facilitation transactions.\4\ 
The proposed rule change, as amended by Amendment No. 4, is described 
in Items I and II below, which Items have been prepared by the 
Exchange. On April 1, 2003, the Amex filed Amendment No. 5 to the 
proposed rule change, requesting that the Commission accelerate 
approval of the proposal.\5\ The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons, and is granting accelerated approval of the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Claire P. McGrath, Vice President and 
Special Counsel, Amex, to Nancy Sanow, Assistant Director, Division 
of Market Regulation (``Division''), Commission, dated August 28, 
2000, and letters from Claire P. McGrath, Senior Vice President and 
Deputy General Counsel, Amex, to Elizabeth King, Associate Director, 
Division, Commission, dated October 14, 2002, and January 28, 2003.
    \4\ See letter from Claire P. McGrath, Senior Vice President and 
Deputy General Counsel, Amex, to Elizabeth King, Associate Director, 
Division, Commission, dated March 17, 2003. The proposed rule 
change, as originally filed, and Amendment Nos. 1, 2, and 3 
contained significant proposed revisions to the pilot program that 
the Exchange in Amendment No. 4 determined to delete.
    \5\ See letter from Claire P. McGrath, Senior Vice President and 
Deputy General Counsel, Amex, to Elizabeth King, Associate Director, 
Division, Commission, dated March 31, 2003.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to permanently approve its pilot program relating 
to facilitation cross transactions, with an added clarification 
concerning specialist participation in such transactions. The text of 
the proposed rule change is set forth below. Additions are italicized; 
deletions are in brackets.
* * * * *
Rule 950--Rules of General Applicability
    (a)-(c) No change.
    (d) The provisions of Rule 126, with the exception of subparagraphs 
(a) and (b) thereof, shall apply to Exchange options transactions and 
the following additional commentary shall also apply.
* * * 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)-(c) No change.
    (d)(1) notwithstanding paragraph (c) above, a member firm seeking 
to facilitate its own public customer's equity option order for the 
eligible order size will be permitted to participate in the firm's 
proprietary account as the contra-side of that order to the extent of 
the percentages set forth below:

    (i) 20% of the order if the order is traded at the best bid or 
offer given by the trading crowd in response to a floor broker's 
request for a market; or
    (ii) 40% of the order if the member firm improves the market 
that was provided by the trading crowd in response to a floor 
broker's request and the order is traded at that best bid or offer.

    If, however, a public customer order on the specialist's book or 
represented in the trading crowd has priority over the facilitation 
order, the member firm may participate in only those contracts 
remaining after the public customer's order has been filled.
    (2) No change.
    (3) if a facilitation transaction pursuant to this subparagraph (d) 
occurs at the specialist's bid or offer, [then] the specialist shall be 
allocated the greater of either (i) 20% of the executed contracts if 
the facilitating member firm, pursuant to subparagraph (d)(1)(i), has 
participated to the extent of 20% of the executed contracts; or (ii) a 
share of the executed contracts that have been divided equally among 
the specialist and other participants to the trade. T[t]he specialist's 
participation allocation [pursuant to trading floor practices,] shall 
only apply to the number of contracts remaining after all public 
customer orders and the member firm's facilitation order have been 
satisfied. However, the total number of contracts guaranteed to be 
allocated to the member firm and the specialist in the aggregate shall 
not exceed 40% of the facilitation transaction. If the facilitation 
transaction occurs at a price at which the specialist is not on parity, 
the specialist is entitled to no guaranteed participation allocation.
    (4) No change.
    .03-.07 No change.
* * * * *

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 III 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
    The Exchange proposes to permanently approve its pilot program

[[Page 17971]]

relating to facilitation cross transactions, with an added 
clarification concerning specialist participation in such transactions. 
The pilot program was initially approved by the Commission on June 2, 
2000, was most recently extended on January 10, 2003, and is due to 
expire on April 7, 2003.\6\
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    \6\ See Securities Exchange Act Release Nos. 42894 (June 2, 
2000), 65 FR 36850 (June 12, 2000); 43229 (August 30, 2000), 65 FR 
54572 (September 8, 2000); 44019 (February 28, 2001), 66 FR 13819 
(March 7, 2001); 44538 (July 11, 2001), 66 FR 37507 (July 18, 2001); 
44924 (October 11, 2001), 66 FR 53456 (October 22, 2001); 45241 
(January 7, 2002), 67 FR 1524 (January 11, 2002); 45703 (April 8, 
2002), 67 FR 18272 (April 15, 2002); 46176 (July 9, 2002), 67 FR 
47007 (July 17, 2002); 46630 (October 9, 2002), 67 FR 64425 (October 
18, 2002); and 47153 (January 10, 2003), 68 FR 2378 (January 16, 
2003).
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    Commentary .02(d) to Amex Rule 950(d) established a pilot program 
to allow facilitation cross transactions in equity options.\7\ The 
pilot program entitles a floor broker, under certain conditions, to 
cross a specified percentage of a customer order with an order for the 
member firm's proprietary account before specialists and/or registered 
options traders in the crowd can participate in the transaction. The 
provision generally applies to orders of 400 contracts or more. 
However, the Exchange is permitted to establish smaller eligible order 
sizes, on a class-by-class basis, provided that the eligible order size 
is not for fewer than 50 contracts.
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    \7\ Facilitation cross transactions occur when a floor broker 
representing the order of a public customer of a member firm crosses 
that order with a contra side order from the firm's proprietary 
account.
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    The amount of the guaranteed participation percentage depends upon 
a comparison of the original market quoted by the trading crowd in 
response to a request from the floor broker and the price at which the 
orders are traded. If the order is traded at the best bid or offer 
provided by the trading crowd in response to the floor broker's initial 
request for a market, then the floor broker is entitled to cross 20% of 
the order. If the order is traded at a price that improves the market 
provided by the trading crowd (i.e., at a price between the best bid 
and offer) in response to the floor broker's initial request for a 
market, then the floor broker is entitled to cross 40% of the order. In 
addition, the facilitating member firm may only participate in the 
executed contracts after public customer orders on the specialist's 
book or represented by a floor broker in the crowd have been filled.
    In addition to its proposal to adopt the pilot program permanently, 
the Exchange proposes to revise subparagraph (d)(3) of Commentary .02 
to Amex Rule 950(d) to clarify the participation of the specialist in 
executed contracts allocated after all public customer orders and the 
member firm's facilitation order have been satisfied.\8\ Subparagraph 
(d)(3) would provide that the specialist shall be allocated the greater 
of either: (i) 20% of the executed contracts if the facilitating member 
firm, pursuant to the subparagraph (d)(1)(i) of Commentary .02, has 
participated to the extent of 20% of the executed contracts; or (ii) a 
share of the executed contracts that have been divided equally among 
the specialist and other participants to the trade.
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    \8\ In addition to the clarification provided by the proposed 
rule change, subparagraph (d)(3) would continue to include the 
general statement that if the facilitation transaction occurred at 
the specialist's bid or offer, the total number of contracts 
guaranteed to the member firm and the specialist in the aggregate 
could not exceed 40% of the facilitation transaction. If the 
facilitation transaction occurred at a price at which the specialist 
was not on parity, the specialist would be entitled to no guaranteed 
participation allocation.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \9\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \10\ in particular, in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, and is not designed 
to permit unfair discrimination between customers, issuers, brokers or 
dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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. Solicitation of Comments

    Interested persons are invited 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 the 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-2000-49 and 
should be submitted by May 5, 2003.

IV. Commission Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\11\ In its 
approval of the pilot program,\12\ the Commission detailed its reasons 
for finding the program's substantive features consistent with the Act, 
and, in particular, the requirements of Sections 6(b)(5) and 6(b)(8) of 
the Act.\13\ The Commission has previously approved rules on other 
exchanges that establish substantially similar programs on a permanent 
basis,\14\ and the establishment of the pilot as a permanent program on 
the Amex raises no new regulatory issues for consideration by the 
Commission.
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    \11\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \12\ See supra, note 6.
    \13\ 15 U.S.C. 78f(b)(5) and (b)(8).
    \14\ See, e.g., Securities Exchange Act Release Nos. 42835 (May 
26, 2000), 65 FR 35683 (June 5, 2000), and 42848 (May 26, 2000), 65 
FR 36206 (June 7, 2000).
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    The Commission notes that, in approving member firms participation 
rights and other guaranteed participations in the past, it has found 
that rules entitling a market participant(s) to up to 40% of an order 
are not inconsistent with the statutory standards of competition and 
free and open markets.\15\ The Commission has raised concerns, on the 
other hand, about participation guarantees that ``lock up'' a larger 
percentage of an order, and thereby reduce the number of

[[Page 17972]]

contracts for which the trading crowd can compete.\16\ The Amex 
facilitation program guarantees an allocation of no more than 40% of an 
order to a member firm seeking to facilitate an order. Moreover, the 
Amex rule includes a provision that limits the number of contracts to 
be allocated to the facilitating firm and the specialist in the 
aggregate to no more than 40% of the order. The rule for which the Amex 
seeks permanent approval is consistent with the Commission's position 
with respect to participation guarantees.
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    \15\ See, e.g., Securities Exchange Act Release Nos. 42455 
(February 24, 2000), 65 FR 11388 (March 2, 2000); 42894 (June 2, 
2000), 65 FR 36850 (June 12, 2000); 42835 (May 26, 2000), 65 FR 
35683 (June 5, 2000); 42848 (May 26, 2000), 65 FR 36206 (June 7, 
2000).
    \16\ See, e.g., Securities Exchange Act Release No. 43100 (July 
31, 2000), 65 FR 48778 (August 9, 2000).
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    The language that the Amex proposes to add to the rule would 
clarify that, if the facilitating firm has participated in the 20% of 
the contracts to which it is entitled when the order is traded at the 
best bid or offer provided by the trading crowd in response to the 
floor broker's initial request for a market, the specialist would be 
allocated either the greater of 20% of the executed contracts or a 
share of the executed contracts that have been divided equally among 
the specialist and other participants in the trade. This provision is 
consistent with the Commission's position regarding participation 
guarantees and comports with the Commission's understanding of how the 
Amex rule was to be applied when the Commission approved the rule on a 
pilot basis.
    As noted above, the Exchange has requested that the Commission 
grant accelerated approval to the proposed rule change. The Exchange 
states that the pilot program has been in effect for almost three years 
without incident and that substantially similar rules are in place at 
the Chicago Board Options Exchange, the Pacific Exchange, and the 
International Securities Exchange.\17\ The Exchange adds that 
accelerated approval would obviate the need to extend the pilot program 
beyond its current expiration date of April 7, 2003.
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    \17\ See Amendment No. 5.
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    The Commission finds good cause, consistent with Sections 6(b) and 
19(b)(2) of the Act, for approving the proposed rule change prior to 
the thirtieth day after the date of publication of the notice of filing 
thereof in the Federal Register. The proposal raises no new regulatory 
issue and will make permanent a pilot program that comports with the 
facilitation cross rules of other exchanges.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-Amex-2000-49), as amended, be, and 
hereby is, approved on an accelerated basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-8997 Filed 4-11-03; 8:45 am]
BILLING CODE 8010-01-P