[Federal Register Volume 68, Number 75 (Friday, April 18, 2003)]
[Notices]
[Pages 19242-19244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-9593]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47673; File No. SR-Amex-2003-08]


Self-Regulatory Organizations; Order Granting Approval to a 
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

April 14, 2003.

I. Introduction

    On February 10, 2003, 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 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. On March 
10, 2003, the proposed rule change was published for public comment in 
the Federal Register.\3\ The Commission received no comments on the 
proposed rule change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 47429 (March 3, 
2003), 68 FR 11418.
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II. Description of the Proposal

    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.\4\ Auto-Ex, however, is only permitted to execute equity 
option orders and index option orders of up to 250 contracts.\5\ 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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    \4\ See Securities Exchange Act Release No. 44065 (March 12, 
2001), 66 FR 15513 (March 19, 2001).
    \5\ See Securities Exchange Act Release No. 45628 (March 22, 
2002), 67 FR 15262 (March 29, 2002). 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.
    Under Commentary .03 to Amex Rule 933,\6\ the Exchange is permitted 
to

[[Page 19243]]

increase the size of Auto-Ex eligible orders for classes of multiply-
traded options to match the automatic execution order size of any other 
options exchange, provided that the Exchange files with the Commission 
a proposed rule change pursuant to Section 19(b)(3)(A) of the Act.\7\ 
In April 2002, pursuant to Amex Rule 933, Commentary .03 and Section 
19(b)(3)(A) of the Act, the Amex filed a proposed rule change with the 
Commission to increase its Auto-Ex eligible order 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'').\8\ Since April 29, 
2002, the Exchange represents that it has established an Auto-Ex 
eligible order 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 eligible order size for QQQ options.
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    \6\ See Amex Rule 933, Commentary .03; see also Securities 
Exchange Act Release No. 45828 (April 25, 2002), 67 FR 22140 (May 2, 
2002).
    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 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 filed with the 
Commission as a proposed rule 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 current Auto-Ex eligible order 
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. The Exchange notes that options in 
Microsoft Corporation (MSFT) and General Electric Co. (GE) have Auto-Ex 
order 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 
eligible order size of up to 500 contracts will meet this demand of the 
marketplace.
    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 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 ten 
contracts, the Auto-Ex system divides the execution into lots of ten 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 would be 
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 contracts 
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\ The Amex notes that, 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 
order size will provide customers with increased opportunities for 
better and more efficient executions.
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    \11\ See Securities 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 successful in 
enhancing execution and operational efficiencies 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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III. Discussion

    After careful review, 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 
and, in particular, the requirements of section 6 of the Act.\14\ Among 
other provisions, section 6(b)(5) of the Act requires that the rules of 
an exchange be designed to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating securities transactions, 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.\15\
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    \14\ The Commission has considered the proposed rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    While increasing the maximum order size limit from 250 contracts to 
500 contracts for automatic execution eligibility by itself does not 
raise concerns under the Act, the Commission believes that this 
increase

[[Page 19244]]

raises collateral issues that the Amex will need to monitor and 
address. Increasing the maximum order size for particular option 
classes will make a larger number of option orders eligible for Auto-
Ex. These orders may benefit from greater speed of execution, but at 
the same time create greater risks for market maker participants. 
Market makers signed on to the Amex's Auto-Ex system will be exposed to 
the financial risks associated with larger-sized orders being routed 
through the system for automatic execution at the displayed price; 
however, these risks are somewhat offset by the fact that the 
Exchange's Auto-Ex system allocates executed contracts into lots of 10 
contracts among the specialist and any ROTs logged onto Auto-Ex.
    In addition, when the market for the underlying security changes 
rapidly, it may take a few moments for the related option's price to 
reflect that change. In the interim, customers may submit orders that 
try to capture the price differential between the underlying security 
and the option. The larger the orders accepted through Auto-Ex, the 
greater the risk market makers must be willing to accept. The 
Commission does not believe that, because Amex floor governors or 
senior floor officials determine to approve orders as large as 500 
contracts as eligible for Auto-Ex, Amex floor governors or senior floor 
officials or Amex staff should disengage Auto-Ex more frequently by, 
for example, declaring an ``unusual market condition.'' Disengaging 
Auto-Ex can negatively affect investors by making it slower and less 
efficient to execute their orders.\16\ It is the Commission's view that 
the Amex, when increasing the maximum size of orders that can be sent 
through Auto-Ex, should not disadvantage all customers--the vast 
majority of whom enter orders for less than 500 contracts--by making 
their automatic execution systems less reliable.
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    \16\ See Amex Rule 933(f)(i), specifying the circumstances in 
which Auto-Ex may be disengaged or operated in a manner other than 
the normal manner.
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with section 6(b)(5).\17\
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    \17\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-Amex-2003-08) is approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-9593 Filed 4-17-03; 8:45 am]
BILLING CODE 8010-01-P