[Federal Register Volume 68, Number 128 (Thursday, July 3, 2003)]
[Notices]
[Pages 39992-39994]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-16884]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48101; File No. SR-AMEX-2003-24]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendments No. 1 and 2 by the American Stock Exchange LLC 
Relating to the Dissemination of Option Quotations

June 26, 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 April 4, 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. On May 15, 
2003, the Amex filed Amendment No. 1 to the proposed rule change.\3\ On 
June 12, 2003, the Amex filed Amendment No. 2 to the proposed rule 
change.\4\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Jeffrey P. Burns, Associate General Counsel, 
Amex, to Nancy Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated May 12, 2003 (``Amendment No. 1''). In 
Amendment No. 1, the Exchange made modifications to the purpose 
section of this notice to provide more detail and specificity 
regarding the proposal. The substance of Amendment No. 1 has been 
incorporated in this notice in its entirety.
    \4\ See Letter from Jeffrey P. Burns, Associate General Counsel, 
Amex, to Nancy Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated June 11, 2003 (``Amendment No. 2''). 
In Amendment No. 2, the Exchange made minor technical amendments to 
language in the purpose section. The substance of Amendment No. 2 
has been incorporated in this notice in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to permit the dissemination of option quotes in 
sizes of less than ten (10) contracts. Below is the text of the 
proposed rule change. Proposed new text is italicized and proposed 
deleted text is [bracketed].
* * * * *

Rule 958A. Application of the Firm Quote Rule

    (a) No Change
    (b) No Change
    (c) Obligations of a Responsible Broker or Dealer--
    (i) Pursuant to SEC Rule 11Ac1-1 each responsible broker or dealer 
for each series of each listed option class shall promptly communicate 
to the Exchange its best bid, best offer, quotation size and aggregate 
quotation size. No responsible broker or dealer shall communicate a 
quotation size or aggregate quotation size for less than [ten] one 
contract[s]. This obligation may be fulfilled by the use of an 
automated quotation system.
    (A) Subject to the provisions of paragraph (d) of this rule, each 
responsible broker or dealer shall be obligated to execute any customer 
order in an option series in an amount up to its published quotation 
size.
    (B) Subject to the provisions of paragraph (d) of this rule, each 
responsible broker or dealer shall be obligated to execute any order 
for the account of a U.S. registered or foreign broker or dealer in a 
listed option in an amount up to the quotation size established and 
periodically published by the Exchange which quotation size shall be 
for at least one contract.
    (C) Subject to the provisions of paragraph (d) of this Rule, each 
responsible broker or dealer shall comply with the Thirty Second 
Response provisions set forth in paragraph (d)(3) of SEC Rule 11Ac1-1.

[[Page 39993]]

    (ii) No Change
    (d) No Change

Commentary--------

    .01 No specialist or registered options trader shall be deemed to 
be a responsible broker or dealer with respect to a published bid or 
offer that is erroneous as a result of an error or omission made by the 
Exchange or any quotation vendor. If a published bid or published offer 
is accurate but the published quotation size (or published aggregate 
quotation size, as the case may be) associated with it is erroneous as 
a result of an error or omission made by the Exchange or any quotation 
vendor, then the specialist and registered options traders responsible 
for the published bid or published offer shall be obligated as set 
forth in paragraph (c) of Rule 11Ac1-1 but only to the extent of [ten] 
one contract[s].
    .02 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 IV below. The Exchange 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 2001, the Exchange amended the firm quote requirement in Amex 
Rule 958A to accommodate the application of Rule 11Ac1-1 (the ``Quote 
Rule'') under the Act.\5\ The amendments to the Commission's Quote Rule 
in 2000 were made to apply the firm quote requirements to the option 
exchanges and option market makers, thereby, requiring a corresponding 
revision to the rules of the options exchanges.\6\ At that time, the 
Amex proposed in Rule 958A that ``no responsible broker or dealer shall 
communicate a quotation size or aggregate quotation size for less than 
ten (10) contracts.''
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    \5\ See Securities Exchange Act Release No. 44145 (April 2, 
2001), 66 FR 18662 (April 10, 2001); and Securities Exchange Act 
Release No. 44383 (June 1, 2001), 66 FR 30959 (June 8, 2001).
    \6\ See Securities Exchange Act Release No. 43591 (November 17, 
2000), 65 FR 75439 (December 1, 2000).
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    In applying the Quote Rule to the options markets, the Commission 
has given the options exchanges the flexibility to determine whether 
they will collect from responsible brokers or dealers and make 
available to quotation vendors the size associated with each quotation 
or choose instead to establish by rule the size for which their 
disseminated bid and offer in each option series is firm and not 
collect and disseminate size with each quotation. The Commission has 
also given the options exchanges the flexibility to disseminate 
quotations with sizes at which the specialist and registered traders 
are firm for customer accounts, and, at the same time, establish by 
rule a different size for which specialists and registered traders must 
be firm for orders from the accounts of broker-dealers.
    As indicated above, the Amex previously determined that it would 
disseminate a size of ten (10) contracts for all of its option 
quotations regardless of the underlying ``actual'' size associated with 
such quote. In connection with the dissemination of option quotations, 
the Exchange amended and received Commission approval of Amex Rule 958A 
requiring that the communicated and disseminated size be a minimum of 
ten (10) contracts. Therefore, responsible brokers or dealers on the 
Amex are required to disseminate a minimum size of ten (10) contracts 
for all options quotations regardless of whether such quotations may 
represent a customer or broker-dealer order.
    The operation of Amex Rule 958A in paragraph (c)(i)(A) requires 
that each responsible broker or dealer execute customer orders in an 
option series in an amount up to its published quotation size. As a 
result, specialists and registered options traders (``ROTs'') are 
required to be firm for customer orders of up to 10 contracts 
regardless of the actual size of the customer order. Paragraph 
(c)(i)(B) of Amex Rule 958A provides that specialists and ROTs are 
obligated to be firm for the account of broker-dealer orders, including 
foreign broker-dealers, for at least one (1) contract.
    The effect of the instant proposal will be that if the disseminated 
quotation on behalf of a customer order is for an order of less than 
ten (10) contracts, the Exchange would no longer disseminate a minimum 
size of ten (10) contracts, but instead, would disseminate the actual 
size of the associated customer order. As a result, the responsible 
broker or dealer would not be required to execute a minimum size of ten 
(10) contracts for a customer order that has an actual size of less 
than ten (10) contracts. Therefore, under the proposed amendment to 
Amex Rule 958A, the responsible broker or dealer will now be firm to 
customers based upon the actual size of the order rather than an 
artificial minimum of ten (10) contracts.\7\ The proposed rule change 
also provides for a corresponding amendment to Commentary .01 to Amex 
Rule 958A so that the specialist and ROT responsible for the published 
bid or offer is obligated for one (1) contract rather than ten (10) 
contracts in connection with an erroneous bid or offer that is the 
result of an error or omission by the Exchange or a quotation vendor.
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    \7\ An example of the rule's current operation is as follows: An 
Exchange specialist disseminates a market of 2 bid, 2.20 asked, in a 
particular option series at the minimum size of 10 contracts. An 
incoming order to buy one contract for 2.10 is entered making the 
new best bid and offer 2.10 bid, 2.20 asked. The Exchange 
disseminates 10 contracts as the size of the 2.10 bid. If a market 
order to sell 10 contracts is then entered in that series, the 
responsible broker-dealer (generally the specialist) is obligated to 
buy the 9 contracts at a price of 2.10. This proposal would 
eliminate the responsible broker or dealers obligation to be firm 
for the balance between the actual size of a customer limit order 
and ten contracts as illustrated under this example.
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    For purposes of the application of the Options Intermarket Linkage 
(the ``Linkage''), the Amex represents that the proposal will not 
affect the Exchange's Linkage rules. In particular, ``Firm Customer 
Quote Size'' \8\ and ``Firm Principal Quote Size'' \9\ as defined in 
Amex Rule 940 will not be revised.\10\ Accordingly, the obligation of

[[Page 39994]]

the specialist to execute at least a size of ten (10) contracts will be 
unchanged in connection with Linkage Orders. With respect to automatic 
executions (``Auto-Ex'') outside of Linkage, the proposed change will 
not affect the current minimum Auto-Ex size of ten (10) contracts. 
Accordingly, orders that are not Auto-Ex eligible \11\ or are subject 
to an exception in Amex Rule 933(f), will be manually handled by the 
specialist and will receive an execution size of up to the disseminated 
size of the quoted market.
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    \8\ Exchange Rule 940(b)(7) defines ``Firm Customer Quote Size'' 
as the lesser of: (a) The number of option contracts that the 
Participant Exchange sending a P/A Order guarantees it will 
automatically execute at its disseminated quotation in a series of 
an Eligible Option Class for Public Customer orders entered directly 
for execution in that market; or (b) the number of option contracts 
that the Participant Exchange receiving a P/A Order guarantees it 
will automatically execute at its disseminated quotation in a series 
of an Eligible Option Class for Public Customer orders entered 
directly for execution in that market. The number shall be at least 
10.
    \9\ Exchange Rule 940(b)(8) defines ``Firm Principal Quote 
Size'' as the number of options contracts that a Participant 
Exchange guarantees it will execute at its disseminated quotation 
for incoming Principal Orders in an Eligible Option Class. This 
number shall be at least 10.
    \10\ See Securities Exchange Act Release Nos. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000) (Original Linkage Plan 
Approval); 44482 (June 27, 2001), 66FR 35470 (July 5, 2001) (Plan 
Amendment No. 1 Approval); 46001 (May 30, 2002), 67 FR 38687 (June 
5, 2002) (Plan Amendments No. 2 and 3 Approval); 47298 (January 31, 
2003), 68 FR 6524 (February 7, 2003) (Plan Amendment No. 4 
Approval); 47274 (January 29, 2003), 68 FR 5313 (February 3, 2003) 
(Plan Amendment No. 5 Approval); and 47297 (January 31, 2003), 68 FR 
6526 (February 7, 2003) (Approval of Amex Linkage Rules).
    \11\ The minimum eligible Auto-Ex size is ten (10) contracts 
while the maximum eligible Auto-Ex size is determined by the 
Exchange subject to a 500 contract ceiling (except in the case of 
options on QQQs which may be 2,000 contracts for the two near term 
months and 1,000 contracts for all other months).
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    The Exchange believes that the instant proposal to revise the 
operation of Amex Rule 958A so that option quotes are disseminated in 
actual size should provide greater transparency to investors and the 
marketplace because the actual size of orders will be disclosed rather 
than an artificial minimum size. In addition, the Amex further believes 
that the proposal to disseminate the actual size of quotes will better 
reflect the true state of liquidity being offered at that time by the 
trading crowd. The Exchange notes, that as a result of the proposed 
rule change, the responsible broker or dealer would be permitted to 
disseminate a size of less than ten (10) contracts. Currently, the 
responsible broker or dealer is required to disseminate a size of at 
least ten (10) contracts.
    The Exchange submits that the adoption of this proposal will foster 
increased competition by the Amex against markets that disseminate 
quotes with actual size. The Auto-Ex system at the Amex available for 
both customer and broker-dealer orders would not be impacted by this 
proposal.\12\ In addition, the dissemination of actual size quotes 
should also enable specialists and ROTs to better manage their risks by 
enabling such specialists and/or ROTs to reflect the size in quotes 
based on market factors rather than regulatory requirements. The Amex 
seeks through this proposal to match other option exchanges that 
currently are able to disseminate actual size market quotations for 
customer orders.\13\ We believe that this proposal should lead to 
increased competition on the basis of size among the options exchanges, 
enabling investors to receive better executions.
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    \12\ See Securities Exchange Act Release Nos. 22610 (November 8, 
1985), 50 FR 47480 (November 18, 1985) (pilot program for XMI 
options); 23544 (August 20, 1986), 51 FR 30601 (August 27, 1986) 
(permanent approval of XMI pilot); 24714 (July 17, 1987), 52 FR 
28396 (July 29, 1987) (expansion to competitively traded options); 
and 46479 (September 10, 2002), 67 FR 58654 (September 17, 2002) 
(automatic execution of broker-dealer option orders). Auto-Ex is an 
automated execution system that enables member firms to route public 
customer market and limit orders in options for automatic execution 
at the bid or offer at the time the order is entered. Auto-Ex 
executes, at the displayed bid or offer, customer market and 
immediately executable limit option orders up to a specified number 
of contracts routed through the Common Message Switch (CMS'') and 
the Amex Order File (``AOF''). There are, however, some situations 
in which orders otherwise eligible for execution on Auto-Ex are 
routed to the specialist's book, known as the Amex Options Display 
Book or ``AODB,'' for an execution. These situations occur when (i) 
the best bid or offer is represented by a limit order on the AODB, 
(ii) the best bid or offer is locked or crossed, (iii) there is a 
better bid or offer being displayed by a competing market, or (iv) 
when certain systems allowable parameters have been exceeded.
    \13\ See Securities Exchange Act Release Nos. 46325 (August 8, 
2002), 67 FR 53376 (August 15, 2002) (Phlx 2002-15); 46029 (June 4, 
2002), 67 FR 40362 (June 12, 2002) (PCX 2002-30); and 45676 (March 
29, 2002), 67 FR 16478 (April 5, 2002) (CBOE 2001-70).
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2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with section 6(b) of the Act,\14\ in general, and furthers 
the objectives of section 6(b),\15\ in particular, in that they are 
designed to promote just and equitable principles of trade, 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 Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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 Amex consents, the Commission will:
    (A) By order approve the 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, including whether the proposed rule 
change, as amended, 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-2003-24 and should be submitted by July 18, 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. 03-16884 Filed 7-2-03; 8:45 am]
BILLING CODE 8010-01-P