[Federal Register Volume 68, Number 248 (Monday, December 29, 2003)]
[Notices]
[Pages 74989-74991]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31803]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48948; File No. SR-Amex-2003-105]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange LLC Relating to the Exceptions to 
the Exchange's Firm Quote Rule

December 18, 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 December 1, 2003, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. 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 Rule 958A to eliminate the application 
of the Rule's exceptions to different series within the same option 
class. The text of the proposed rule change is set forth below in its 
entirety. Proposed deletions are in brackets.
* * * * *

Rule 958A Application of the Firm Quote Rule

    (a) through (b) No change
    (c) Obligations of a Responsible Broker or Dealer--(i) No change.
    (ii) No responsible broker or dealer shall be obligated to execute 
a transaction for any listed options as provided in paragraph (c)(i) 
when:
    (A)(1) Prior to the presentation of an order to sell (buy), a 
responsible broker

[[Page 74990]]

or dealer has communicated to the exchange, a revised quotation size;
    (2) At the time an order to sell (buy) is presented, a responsible 
broker or dealer is in the process of effecting a transaction in such 
[class and/or] series of option, and immediately after the completion 
of such transaction it communicates to the Exchange a revised quotation 
size, such responsible broker or dealer shall not be obligated by 
paragraph (c)(i) of this Rule to sell (buy) that option in an amount 
greater than such revised quotation size;
    (3) Before the order sought to be executed is presented, a 
responsible broker or dealer has communicated to the Exchange a revised 
bid or offer; or
    (4) At the time the order sought to be executed is presented, a 
responsible broker or dealer is in the process of effecting a 
transaction in such [class and/or] series of option, and, immediately 
after the completion of such transaction, a responsible broker or 
dealer communicates to the exchange a revised bid or offer; provided, 
however, that the responsible broker or dealer shall nonetheless be 
obligated to execute any such order as provided in paragraph (c)(i) at 
its revised bid or offer in any amount up to its published quotation 
size or revised quotation size; or
    (B) No change.
    (d) 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 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
    In November 2000, the Commission determined to impose market-wide 
firm quote obligations on the options markets effective April 1, 
2001.\3\ Rule 11Ac1-1 under the Act (known as the Quote Rule) requires 
all national securities exchanges to establish procedures for 
collecting from their members and making available to quotation 
vendors, bids, offers and quotation sizes with respect to reported 
securities. It also requires that quotation information be ``firm'' for 
the disseminated size, subject to certain exceptions. In applying the 
Quote Rule to the options markets, the SEC required the options 
exchanges to amend their rules to conform to the requirements of the 
Quote Rule. The Amex amended Rule 958A as required and received final 
SEC approval of the amendments in June 2001.\4\
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    \3\ See Securities Exchange Act Release No. 43591 (November 17, 
2000), 65 FR 75450 (December 1, 2000).
    \4\ See Securities Exchange Act Release No. 44383 (June 1, 
2001), 66 FR 30959 (June 8, 2001).
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    The purpose of the Quote Rule is to make information on prices, 
volume and quotes for securities in all markets available to all 
investors so that they can make informed investment decisions. However, 
the SEC also recognized that the rule needs to prevent responsible 
brokers or dealers from being required to execute more than one order 
on the basis of the disseminated bid or offer and that the responsible 
brokers or dealers need sufficient time to update their quotations 
following completion of a transaction. Thus, in conforming Amex Rule 
958A to the Quote Rule, the Amex included two exceptions, among others, 
from SEC Rule 11Ac1-1, with revisions to clarify the manner in which 
the Amex planned to interpret and enforce the Quote Rule in its options 
market.
    The Quote Rule exceptions provide that the specialist would be 
relieved of his obligation to effect transactions at his published bid 
or published offer if (i) before an order is presented for execution, 
the specialist has communicated to the Exchange a revised bid or offer 
superseding his published bid or offer (a ``revised bid or offer'') or, 
(ii) at the time an order is presented, the specialist is in the 
process of effecting a transaction in that security, and, immediately 
after the completion of such transaction, he communicates a revised bid 
or offer to the Exchange.\5\
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    \5\ In the Quote Rule adopting Release the SEC further clarified 
the second exception by stating ``[a] responsible broker or dealer 
should be deemed to be in the process of effecting a transaction 
from the moment an order is presented to him for execution until the 
completion of communication of all information necessary to complete 
the transaction.'' See Securities Exchange Act Release No. 14415 
(January 26, 1978), 43 FR 4342 (February 1, 1978), at footnote 33.
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    The exceptions to the Quote Rule as set forth in Rule 11Ac1-1(c)(3) 
apply to ``subject security'' and it was unclear at the time the Amex 
amended Rule 958A whether the exceptions applied to an option class, 
option series or both. The definition of subject security found in Rule 
11Ac1-1 suggests both.\6\ As a result, in order to clarify its 
understanding of the scope of the exceptions, the Amex specified in its 
amendment to Rule 958A that the exceptions would apply to the entire 
class as well as each individual series in an option class. Thus, 
pursuant to the exceptions set forth in Amex Rule 958A(c)(ii), the 
specialist and registered options traders, as responsible brokers or 
dealers, are not required to execute more than one order at their 
published bid or offer in that series or in any series within that 
option class. The period of time within which the specialist and 
registered options traders are relieved of their obligation to effect 
additional transactions at the published bid or offer would begin to 
run for all series in a given option class whenever a transaction was 
being effected in any one of the series in that option class.
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    \6\ The term subject security is defined in subparagraph (a)(25) 
of Rule 11Ac1-1 as an ``exchange-traded security'' meeting certain 
executed volume thresholds. An ``exchange-traded security'' is 
defined in subparagraph (a)(10) as any ``covered security'' or 
``class of covered securities'' listed or registered on an exchange. 
A ``covered security'' is defined in subparagraph (a)(6) and means 
any ``reported security,'' which is defined in subparagraph (a)(20) 
and means any security or class of securities.
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    The Exchange believed at the time it filed its amendments to Rule 
958A and continues to believe that the exceptions should apply to the 
entire class as well as each individual series in a given option class. 
It is appropriate to allow the exceptions to apply to the entire class 
as an effective way for specialists and registered options traders to 
manage their overall risk in an option class. In determining 
competitive quotes and sizes for each series, specialists and 
registered options traders take into consideration their overall risk 
in the option class. If there is a change in the price of the 
underlying stock or an execution in one series, the specialist and 
registered options trader will seek to re-quote all series in that 
class. The exceptions provide specialists with the ability to update 
quotes on a timely basis without having to be firm to multiple orders 
in different series within the same class submitted simultaneously by 
one or more market participants. Given the numerous series within each 
option class that are traded by the Exchange,\7\ the requirements for 
specialists to make two-sided markets

[[Page 74991]]

with size in each series, and the dependence upon a limited supply of 
stock available to hedge risk taken by specialists and registered 
options traders who submit narrow quotes in large size for each series 
within an option class it was believed to be appropriate for the 
Exchange to apply the exception to the class as well as the series. In 
addition, the Exchange's surveillance and enforcement program for the 
options Quote Rule was designed based upon the rule text as approved 
and the interpretation that would allow specialists and registered 
options traders to avail themselves of the exceptions to the Quote Rule 
for all series within a class after having received an order in one 
series in that option class.
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    \7\ For a typical equity option class, the Exchange initially 
lists 24 series, that is, both puts and calls in four expiration 
months with three strike prices within each expiration month. As the 
underlying stock price moves, additional series are added. Options 
on volatile stocks can have well over 100 different series trading 
at any given time.
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    However, in recent discussions with SEC staff regarding the Amex's 
enforcement of the Quote Rule for options, the Exchange has been 
advised that the exceptions should only be applied on a series-by-
series basis. The SEC staff has, therefore, requested that the Amex 
amend Rule 958A to eliminate the exception for the entire class. The 
Amex is submitting this proposed rule change in compliance with that 
request.
2. Statutory Basis
    The proposed rule change is consistent with section 6(b) of the Act 
\8\ in general and furthers the objectives of section 6(b)(5) of the 
Act \9\ in particular in that it is designed to prevent fraudulent and 
manipulative acts and practices and to promote just and equitable 
principles of trade.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 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.

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 Exchange 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, 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. 
Comments should be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-Amex-2003-105. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your comments more efficiently, comments should be sent in hard 
copy or by e-mail but not by both methods. 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 Exchange. All 
submissions should refer to File No. SR-Amex-2003-105 and should be 
submitted by January 20, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-31803 Filed 12-24-03; 8:45 am]
BILLING CODE 8010-01-P