[Federal Register Volume 68, Number 250 (Wednesday, December 31, 2003)]
[Notices]
[Pages 75664-75667]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-32172]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48964; File No. SR-Amex-2003-107]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the American Stock Exchange 
LLC Relating to a Six-Month Extension of the Exchange's Pilot Program 
for Automatic Execution of Orders for Exchange Traded Funds

December 19, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on December 5, 2003, the American Stock Exchange LLC (``Exchange'' 
or ``Amex'') 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 Amex. 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

    Amex seeks a six-month extension of Amex Rule 128A to continue its 
pilot program for the automatic order execution feature (``Auto-Ex'') 
for Exchange Traded Funds (``ETFs'').
    The text of the proposed rule change is available at Amex and at 
the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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. 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

I. Purpose
    On June 19, 2001, the Commission approved the Exchange's proposal, 
adopted as Amex Rule 128A, to

[[Page 75665]]

implement an automatic execution system for ETFs on a six-month pilot 
program basis.\3\ On December 20, 2001, June 17, 2002, December 30, 
2002, and July 2, 2003, the pilot was extended for consecutive terms of 
six months.\4\ The Exchange now seeks to extend the pilot for an 
additional six months.
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    \3\ See Securities Exchange Act Release No. 44449 (June 19, 
2001), 66 FR 33724 (June 25, 2001) (approval of File No. SR-Amex-
2001-29).
    \4\ See Securities Exchange Act Release Nos. 45176, 66 FR 67582 
(December 31, 2001); 46085, 67 FR 42836 (June 25, 2002); 47105, 68 
FR 592 (January 6, 2003); and 48126, 68 FR 41189 (July 10, 2003) 
(notices of filing and immediate effectiveness of File Nos. SR-Amex-
2001-105, SR-Amex-2002-42, SR-Amex-2002-99, and SR-Amex-2003-61, 
respectively).
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    Since 1986, the Exchange has had an Auto-Ex feature for eligible 
orders in listed options. The Chicago Board Options Exchange, 
Philadelphia Stock Exchange, and Pacific Exchange established similar 
Auto-Ex features at about the same time as Amex, and the newest options 
exchange, the International Securities Exchange, also features 
automatic order execution. Auto-Ex, accordingly, has been a standard 
feature of the options markets for a number of years.
    In 1993, Amex commenced trading Standard and Poor's Depositary 
Receipts (``SPDRs[reg]''), the first ETF to be listed and traded on 
Amex. ETFs are individual securities that represent a fractional, 
undivided interest in a portfolio of securities. Currently, more than 
100 ETFs are listed on Amex. Like an option, an ETF is a derivative 
security, and, according to Amex, its price is a function of the value 
of the portfolio of securities underlying the ETF. Thus, the Exchange 
asserts that, as is the case with options, it is not the price 
discovery market for ETFs, and that the price discovery market is the 
market or markets where the underlying securities trade.
    The Exchange is now proposing to extend its current Auto-Ex 
technology for an additional six months to ETFs listed under Amex Rules 
1002, 1002A, and 1202. Amex represents that this will continue to 
provide investors that send eligible orders to the Exchange with faster 
executions than they otherwise would receive. The Exchange believes 
that many investors desire rapid executions in trading securities that 
are priced derivatively since the value of the underlying instruments 
may fluctuate during order processing. Amex, moreover, will continue 
under the pilot extension to incorporate a price improvement algorithm 
into Auto-Ex for ETFs, which Amex expects will provide investors with 
better execution prices on their orders. The price improvement 
algorithm works in the following manner:
    When Amex establishes the National Best Bid or Offer (``NBBO''), 
Auto-Ex is programmed to execute eligible incoming ETF orders at the 
Amex Published Quote (``APQ'') plus a programmable number of trading 
increments with respect to the Amex bid, and less a programmable number 
of trading increments in the case of the Amex offer.\5\ For example, if 
the APQ were 90.10 to 90.20, and the APQ constituted the NBBO, incoming 
sell orders might be automatically executed at 90.12 (the Amex bid plus 
two ticks) and incoming buy orders might be executed at 90.18 (the Amex 
offer less two ticks).
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    \5\ The term ``establish,'' as used in Amex Rule 128A, means 
that the APQ is currently at the NBBO, regardless of whether Amex 
was the first exchange to be at that price. See Securities Exchange 
Act Release No. 44449 (June 19, 2001), 66 FR 33724 (June 25, 2001).
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    If Amex does not establish the NBBO, Auto-Ex is programmed to 
execute eligible incoming ETF orders at or better than the NBBO up to a 
specified number of trading increments relative to the APQ.\6\ Auto-Ex 
executes an eligible order at an improved price relative to the APQ 
unless such execution would result in a trade-through with respect to 
the price of an away market that is a participant in the Intermarket 
Trading System (``ITS'').\7\ If a trade-through would result, the order 
is routed to the specialist for processing through the Amex electronic 
order book.
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    \6\ Amex represents that once an order that is Auto-Ex eligible 
is sent to the Exchange, the person that initiated the order has no 
control over its execution. This is the case regardless of whether 
the order is executed by Auto-Ex or is executed by the specialist 
because Auto-Ex is unavailable. If the order is routed to the 
specialist for handling because Auto-Ex is unavailable, the 
specialist does not know if the order is for the account of a 
broker-dealer or for the account of a customer. This information is 
in the Exchange's order processing systems and is unavailable to the 
specialist.
    \7\ The number of trading increments designated for price 
improvement when Amex establishes the NBBO may be different than the 
number of increments designated for price improvement when Amex does 
not establish the NBBO. See Securities Exchange Act Release No. 
44449 (June 19, 2001), 66 FR 33724 (June 25, 2001).
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    For example, assume that Auto-Ex is programmed to execute an order 
at the Amex bid plus two ticks. If the Amex bid were 90, and an away 
ITS market were bidding 90.01, an incoming sell order would be 
automatically executed on Amex at 90.02. Continuing with this example, 
if the away market were bidding 90.02, an incoming sell order would be 
automatically executed on Amex at 90.02 (matching the away market). If 
the away market were bidding 90.03, the incoming sell order would not 
be automatically executed. Instead, it would be routed to the 
specialist for electronic processing through the Amex electronic order 
book.
    The amount of price improvement that the system provides, both when 
Amex establishes the NBBO and when it does not, is determined by the 
Auto-Ex Enhancements Committee (``Committee'') upon the request of a 
specialist and may differ among ETFs. The Committee consists of the 
Exchange's four Floor Governors and the Chairmen (or their designees) 
of the Specialists Association, Options Market Makers Association, and 
the Floor Brokers Association, respectively. The Exchange believes that 
the amount of price improvement will vary among securities based upon 
factors such as the width of the spread, the volatility of the 
underlying basket of securities underlying the ETF, and liquidity of 
available hedging vehicles. The amount of price improvement may be 
adjusted intra-day by the Committee.
    As detailed in Amex Rule 128A, Auto-Ex for ETFs with price 
improvement is unavailable when the spread is at a specified minimum 
and maximum variation that may be adjusted security to security. The 
Committee determines, upon the request of a specialist, the minimum and 
maximum spreads at which Auto-Ex is unavailable. As further provided by 
Amex Rule 128A, Auto-Ex is also unavailable with respect to incoming 
sell orders when the Amex bid is for 100 shares, and similarly 
unavailable with respect to incoming buy orders when the Amex offer is 
for 100 shares.
    Orders that are otherwise Auto-Ex eligible orders are also routed 
to the specialist, and not automatically executed, in situations where 
the specialist in conjunction with a Floor Governor or two Floor 
Officials determine that quotes are not reliable and the Exchange is 
experiencing communications or systems problems, ``fast markets,'' or 
delays in the dissemination of quotes. Members and member organizations 
are notified when the Exchange has determined that quotes are not 
reliable prior to disengaging Auto-Ex.
    Specialists and Registered Options Traders (``ROTs'') that sign 
onto the system are automatically allocated the contra side of Auto-Ex 
trades for ETFs. Due to the automatic price improvement feature, the 
specialists and ROTs that sign onto Auto-Ex for ETFs are deemed to be 
on parity for purposes of allocating the contra side of ETF Auto-Ex 
trades. Amex Rule 128A incorporates the following methodology for the

[[Page 75666]]

allocation of the contra side to Auto-Ex ETF trades:

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                                           Approximate Number of  Trades Allocated to the        Approximate Number of  Trades Allocated to ROTs  Signed
Number of ROTs Signed  on to Auto-Ex       Specialist Throughout the  Day (``Target Ratio          on to Auto-Ex  Throughout the Day  (``Target Ratio
             in a Crowd                                      Percent'')                                                Percent'')
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1...................................                                                        60                                                        40
2-4.................................                                                        40                                                        60
5-7.................................                                                        30                                                        70
8-15................................                                                        25                                                        75
16 or more..........................                                                        20                                                        80
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    At the start of each trading day, the sequence in which trades are 
allocated to the specialist and ROTs signed onto Auto-Ex is randomly 
determined. Auto-Ex trades then are automatically allocated in sequence 
on a rotating basis to the specialist and to the ROTs that have signed 
onto the system so that the specialist and the crowd achieve their 
``target ratios'' over the course of a trading session. If an Auto-Ex 
eligible order is greater than 100 shares, Auto-Ex divides the trade 
into lots of 100 shares each. Each lot is considered a separate trade 
for purposes of determining target ratios and allocating trades within 
Auto-Ex.
    Round lot orders delivered to the post electronically for 2,000 
shares or less are eligible for Auto-Ex for ETFs. Orders for an account 
in which a market maker in ETFs registered as such on another market 
has an interest are ineligible for Auto-Ex for ETFs. The Exchange 
represents that, if orders for such market makers were eligible for 
Auto-Ex with price improvement, Amex specialists and ROTs would be 
unable to make markets with the proposed liquidity for other investors. 
(Orders for Amex ROTs are ineligible for Auto-Ex for ETFs pursuant to 
Commentaries .04 and .05 to Amex Rule 111 and Amex Rule 950(c).)\8\
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    \8\ The Commission notes that it recently approved a rule change 
by Amex that eliminated the 10-second ``speed bump'' on the entry of 
successive Auto-Ex order for ETFs, while allowing it to be 
reinstated if conditions warrant its reintroduction. See Securities 
Exchange Act Release No. 48818 (November 21, 2003), 68 FR 67496 
(December 2, 2003) (approving File No. SR-Amex-2003-28).
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    The specialist may request the Exchange to increase the maximum 
size of Auto-Ex eligible orders. Under Amex Rule 128A, such requests 
are reviewed by the Committee, which approves, disapproves, or 
conditionally approves such requests. Amex Rule 128A directs the 
Committee to balance the interests of investors, the specialist, ROTs 
in the crowd, and the Exchange in determining whether to grant a 
request to increase the size of Auto-Ex eligible orders. The Committee 
also may consider requests from the specialist or ROTs to reduce the 
size of Auto-Ex eligible orders, balancing the same interests that it 
would consider in reviewing a request to increase the size of Auto-Ex 
eligible orders. The Committee, however, is not permitted to reduce the 
size of Auto-Ex eligible orders below 2,000 shares.
    In addition, under Amex Rule 128A, the Committee may delegate its 
authority to one or more Floor Governors. Amex Rule 128A provides, 
however, that the Committee must meet promptly to review a Floor 
Official's decision in the event that a Floor Governor acts pursuant to 
its delegated authority.
    Amex Rule 128A further provides that, in the event of system 
problems or unusual market conditions, a Floor Governor is permitted to 
reduce the size of Auto-Ex eligible orders below 2,000 shares or 
increase the size of Auto-Ex eligible orders up to 5,000 shares. Any 
such change is temporary and lasts only until the end of the unusual 
market condition or the correction of the system problem. Members and 
member organizations are notified when the size of Auto-Ex eligible 
orders is adjusted due to system problems or unusual market conditions.
    Amex Rule 128A also provides that the Chairman and Vice Chairman of 
the Exchange, acting jointly, determine which ETFs are Auto-Ex 
eligible.
2. Basis
    The Exchange believes the proposed rule change is consistent with 
section 6 of the Act,\9\ in general, and with 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, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to and facilitating transactions in 
securities, to 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, and is not designed to 
permit unfair discrimination between customers, issuers, brokers and 
dealers.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change will allow the Auto-Ex for ETFs pilot 
program to continue for an additional six months. The Exchange believes 
that the proposal also facilitates the comparison and settlement of 
trades since Auto-Ex transactions result in ``locked-in'' trades. 
Moreover, Auto-Ex for ETFs automatically provides investors with price 
improvement on their orders.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Amex believes that the proposed rule change will impose no burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Act. The Exchange believes that the proposal, in 
fact, will enhance competition among markets and market makers and 
thereby benefit investors by allowing the Exchange to continue to 
provide Auto-Ex for ETFs with price improvement.

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

    Because the foregoing proposed rule change (1) does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms, does not become operative until 30 days from the 
date on which it was filed, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, and the Exchange provided the Commission

[[Page 75667]]

with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change or such shorter time as designated by the Commission, it 
has become effective pursuant to section 19(b)(3)(A) of the Act \11\ 
and Rule 19b-4(f)(6) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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    Amex has requested that the Commission waive the usual five-
business-day notice period and the usual 30-day pre-operative waiting 
period. The Commission notes that this proposal simply extends the 
existing pilot program and does not alter the pilot in any way. As a 
result, the Commission believes that it is consistent with the 
protection of investors and the public interest to waive the five-
business-day notice period and accelerate the operative date so that 
the pilot can continue without delay and because the proposal raises no 
new regulatory issues. Therefore, the Commission designates that the 
proposal become operative immediately.\13\ This pilot extension will 
expire on June 19, 2004.
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    \13\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of this proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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 may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-Amex-2003-107. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review comments more efficiently, comments should be sent in hardcopy 
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 Amex. All submissions 
should be submitted by January 21, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-32172 Filed 12-30-03; 8:45 am]
BILLING CODE 8010-01-P