[Federal Register Volume 68, Number 249 (Tuesday, December 30, 2003)]
[Notices]
[Pages 75294-75296]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31949]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48957; File No. SR-Amex-2003-24]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 3 by the American Stock Exchange LLC Relating to the 
Dissemination of Customer Limit Orders

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 April 4, 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 and II below, which Items have been prepared by the Exchange. 
On May 14, 2003, the Exchange filed Amendment No. 1 to the proposal.\3\ 
On June 12, 2003, the Exchange filed Amendment No. 2 to the 
proposal.\4\ The Commission published the proposal, as amended, for 
comment in the Federal Register on June 26, 2003.\5\ The Commission 
received no comments on the proposal. On December 4, 2003, the Exchange 
filed Amendment No. 3 to the proposal.\6\ In Amendment No. 3, the Amex 
proposes to replace the proposed rule change as set forth in the 
original notice in its entirety. The Commission is publishing this 
notice of Amendment No. 3 to solicit comments on the proposed rule 
change, as amended, from interested persons and to approve the 
proposal, as amended, on an accelerated basis.
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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 (``Division''), Commission, dated May 12, 2003 
(``Amendment No. 1'').
    \4\ See letter from Jeffrey P. Burns, Associate General Counsel, 
Amex, to Nancy Sanow, Assistant Director, Division, Commission, 
dated June 11, 2003 (``Amendment No. 2'').
    \5\ Securities Exchange Act Release No. 48101 (June 26, 2003), 
68 FR 39992 (July 3, 2003) (``Original Notice'').
    \6\ See letter from Jeffrey P. Burns, Associate General Counsel, 
Amex, to Nancy Sanow, Assistant Director, Division, Commission, 
dated December 3, 2003 (``Amendment No. 3''). In Amendment No. 3, 
the Exchange proposes to modify the text of the rule proposal so 
that customer limit orders representing the best bid or offer are 
disseminated in actual size if less than ten (10) contracts.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to permit the dissemination of customer limit 
orders representing the best bid or offer (``BBO'') in sizes of less 
than ten (10) contracts. Below is the text of the proposed rule change 
as modified by Amendment No. 3. Proposed new language is italicized; 
proposed deletions are in brackets.
* * * * *

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 contracts 
with the exception that the size of customer limit orders representing 
the best bid or offer may be disseminated at less than ten (10) 
contracts, even though the responsible broker or dealer continues to 
have the obligation to quote a ten contract minimum. 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.
    (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 
contracts or in cases where the best bid or offer is represented by a 
customer limit order the actual size of such order(s) if less than ten 
contracts.
    .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 Exchange 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 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 
Exchange Rule 958A to accommodate the application of the SEC Rule 
11Ac1-1 (the ``Quote Rule'') under the Act.\7\ 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.\8\ At that time, the Amex proposed in Exchange Rule 958A 
that ``no responsible broker or dealer shall communicate a quotation 
size or

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aggregate quotation size for less than ten (10) contracts.''
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    \7\ 17 CFR 240.11Ac1-1; see Securities Exchange Act Release Nos. 
44145 (April 2, 2001), 66 FR 18662 (April 10, 2001) (notice) and 
44383 (June 1, 2001), 66 FR 30959 (June 8, 2001) (approval of File 
Nos. SR-Amex-2001-18; SR-CBOE-2001-15; SR-ISE-2001-07; SR-6PCX-2001-
18; and SR-Phlx-2001-37).
    \8\ 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 Exchange 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 Exchange 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 Exchange 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 a customer limit 
order representing the BBO is for 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 
customer limit order(s). 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 in cases where the disseminated quote is 
represented by a customer limit order of less than ten (10) contracts. 
Therefore, under the proposed amendment to Exchange Rule 958A, the 
responsible broker or dealer will now be firm to customers for less 
than ten (10) contracts whenever the disseminated quote represents 
customer limit orders of less than ten (10) contracts.\9\ The proposed 
rule change also provides for a corresponding amendment to Commentary 
.01 to Exchange Rule 958A so that the specialist and ROT responsible 
for the published bid or offer is obligated for the size of the 
customer limit order on the book representing the BBO if less 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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    \9\ 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. The risk of requiring a size 
of ten (10) contracts to be disseminated is that the specialist is 
discouraged from increasing guaranteed sizes because of the greater 
potential liability. This proposal accordingly seeks to reduce this 
exposure by disseminating the actual size of customer limit orders 
representing the BBO if less than ten (10) contracts so that the 
responsible broker or dealer is not obligated to buy the balance 
between the actual size and the guaranteed size.
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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'' \10\ and ``Firm Principal Quote Size'' \11\ as defined in 
Exchange Rule 940 will not be revised without amendment to the Linkage 
Plan by all options exchanges and approval by the Commission. The 
obligation of the specialist to execute at least a size of ten (10) 
contracts for Linkage Orders will be unchanged by the adoption of this 
proposal.\12\ 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 \13\ or are subject to an exception in 
Exchange 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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    \10\ 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.
    \11\ 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.
    \12\ See Securities Exchange Act Release Nos. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000) (Original Linkage Plan 
Approval); 44482 (June 27, 2001), 66 FR 35470 (July 5, 2001) (Plan 
Amendment No. 1 Approval); 46001 (May 30, 2002), 67 FR 38687 (June 
5, 2002) (Plan Amendments Nos. 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).
    \13\ 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 Exchange Rule 958A so that customer limit orders 
representing the best bid or offer are disseminated in actual size if 
less than ten (10) contracts 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 
booked customer limit orders representing the BBO will better reflect 
the true state of liquidity. 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 when 
the BBO is reflected by customer limit orders. Currently, the 
responsible broker or dealer is required to disseminate a size of at 
least ten (10) contracts in all circumstances.
    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.\14\ In

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addition, the dissemination of the actual size of customer limit orders 
representing the BBO 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.\15\ The Exchange believes that 
this should lead to increased competition on the basis of size among 
the options exchanges, enabling investors to receive better executions.
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    \14\ 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.
    \15\ See Securities Exchange Act Release Nos. 46325 (August 8, 
2002), 67 FR 53376 (August 15, 2002) (File No. SR-Phlx-2002-15); 
46029 (June 4, 2002), 67 FR 40362 (June 12, 2002) (File No. SR-PCX-
2002-30); 45067 (November 16, 2001), 66 FR 58766 (November 23, 2001) 
(File No. SR-COE-2001-56); and 47959 (May 30, 2003), 68 FR 34441 
(June 9, 2003) (File No. SR-CBOE-2002-05).
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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 \16\ in general, and furthers 
the objectives of section 6(b)(5)\17\ in particular, in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 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 
result in 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. 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 by Amendment No. 3, 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-2003-24. 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 at 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-2003-24 and should be submitted by January 20, 2004.

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

    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.\18\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with section 6(b)(5) of 
the Act, which requires that the rules of an exchange be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and to remove.\19\ The Commission believes that the 
proposed rule change, as amended, should provide greater transparency 
to investors and the marketplace and should better reflect the true 
state of liquidity in the marketplace, because the actual size of 
customer limit orders representing the best bid or offer will be 
disclosed rather than an artificial minimum size. In addition, the 
Commission notes that the proposed rule change is consistent with the 
rules of other options exchanges.\20\ Accordingly, the Commission finds 
good cause, pursuant to section 19(b)(2) of the Act,\21\ for approving 
Amendment No. 3 to the proposed rule change prior to the thirtieth day 
after the date of publication of notice thereof in the Federal 
Register.
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    \18\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ See supra note 15.
    \21\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-Amex-2003-24), as amended, 
is hereby approved, and Amendment No. 3 is approved, on an accelerated 
basis.
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    \22\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-31949 Filed 12-29-03; 8:45 am]
BILLING CODE 8010-01-P