[Federal Register Volume 68, Number 250 (Wednesday, December 31, 2003)]
[Notices]
[Pages 75667-75670]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-32177]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48975; File No. SR-Amex-2003-44]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange LLC Relating to Percentages Used 
To Allocate Executed Options Contracts Between the Specialist and 
Registered Options Traders

December 23, 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 May 14, 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 Exchange. On 
November 18, 2003, Amex filed Amendment No. 1 to the proposed rule 
change.\3\ 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 Claire P. McGrath, Senior Vice President and 
Deputy General Counsel, Amex, to Nancy Sanow, Assistant Director, 
Division of Market Regulation, Commission, dated November 17, 2003 
(``Amendment No. 1''). In Amendment No. 1, Amex made technical 
corrections to the proposed rule text and amended the purpose 
section of the proposal to reflect the re-institution of the 
Exchange-sponsored payment for order flow program.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Amex proposes to amend Amex Rules 933 and 950 to revise the 
percentages used to allocate executed contracts between the specialist 
and registered options traders. In addition, the Exchange is correcting 
the paragraph reference to the allocation provisions in Amex Rule 933 
from (d) to (h).
    Below is the text of the proposed rule change, as amended. Deleted 
language is in brackets. Proposed new language is italicized.
* * * * *

Rule 933 Automatic Execution of Options Orders

    (a) through (g) No change.
    [(d)] (h)(i) Options orders executed through Auto-Ex shall be 
automatically allocated on a rotating basis to the specialist and to 
each trader that has signed on to Auto-Ex. Auto-Ex trades of ten 
contracts or less are allocated to each Auto-Ex participant as set 
forth below. 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. Each lot is 
considered a separate trade for purposes of allocating trades within 
Auto-Ex. The rotation is designed to provide that the allocation of 
Auto-Ex trades between the specialist and traders signed on to Auto-Ex 
in a given equity option class is as follows:

------------------------------------------------------------------------
                                                                trades
                                                              allocated
                                                                to the
Number of traders signed on to Auto-  Approximate number of    traders
                 Ex                    trades allocated to    signed on
                                         the specialist       to Auto-Ex
                                                                (as a
                                                                group)
------------------------------------------------------------------------
1..................................  60%...................          40%
2..................................  40%...................          60%
3 or more..........................  30%...................          70%
------------------------------------------------------------------------

    In addition, for options on Exchange Traded Funds, Trust Issued 
Receipts and Indexes, the allocation of Auto-Ex trades between the 
specialist and traders signed on to Auto-Ex is as follows:

[[Page 75668]]



------------------------------------------------------------------------
                                                             Approximate
                                                              number of
                                                                trades
                                                              allocated
Number of traders signed on to Auto-  Approximate number of     to the
                 Ex                    trades allocated to     traders
                                         the specialist       signed on
                                                              to Auto-Ex
                                                                (as a
                                                                group)
------------------------------------------------------------------------
1..................................  60%...................          40%
2..................................  40%...................          60%
3-7................................  30%...................          70%
8 or more..........................  25%...................          75%
------------------------------------------------------------------------

    (ii) Notwithstanding the foregoing, in the event the Exchange 
establishes a payment for order flow program, in which it collects a 
fee from the registered options traders, the rotation designed to 
provide that the allocation of Auto-Ex trades between the specialist 
and traders signed on to Auto-Ex in a given option class is as follows:

------------------------------------------------------------------------
                                                             Approximate
                                                              number of
                                                                trades
                                                              allocated
Number of traders signed on to Auto-  Approximate number of     to the
                 Ex                    trades allocated to     traders
                                         the specialist       signed on
                                                              to Auto-Ex
                                                                (as a
                                                                group)
------------------------------------------------------------------------
1..................................  60%...................          40%
2-4................................  40%...................          60%
5-7................................  30%...................          70%
8-15...............................  25%...................          75%
16 or more.........................  20%...................          80%
------------------------------------------------------------------------

* * * Commentary
    .01 through .03 No change.
* * * * *

Rules of General Applicability

Rule 950

    (a) through (c) No change.
    (d) The provisions of Rule 126, with the exception of subparagraphs 
(a) and (b) thereof, shall apply to Exchange option transactions and 
the following additional commentary shall also apply.
* * * Commentary
    .01 through .05 No change.
    .06(i)(A) When two or more bids (offers) are made simultaneously by 
the specialist dealing for his own account and by registered options 
traders, all such bids (offers) shall be on parity and any contracts 
sold (bought) in execution of such bids (offers) shall be divided among 
the specialist and registered options trader(s) so that the specialist 
shall receive the following percentage of contracts executed and the 
registered options traders shall divide the remainder in accordance 
with Rule 950(n), Commentary .03(a)(iii)[:]. The following percentages 
shall be in effect for equity option classes:

------------------------------------------------------------------------
                                                             Approximate
                                                Approximate   percentage
                                                 percentage       of
                                                     of       contracts
          Number of traders on parity            contracts    allocated
                                                 allocated      to the
                                                   to the    traders (as
                                                 specialist    a group)
------------------------------------------------------------------------
1.............................................           60           40
2.............................................           40           60
3 or more.....................................           30           70
------------------------------------------------------------------------

    In addition, the following percentages shall be in effect for 
options on Exchange Traded Funds, Trust Issued Receipts and Indexes:


------------------------------------------------------------------------
                                                             Approximate
                                                Approximate   percentage
                                                 percentage       of
                                                     of       contracts
          Number of traders on parity            contracts    allocated
                                                 allocated      to the
                                                   to the    traders (as
                                                 specialist    a group)
------------------------------------------------------------------------
1.............................................           60           40
2.............................................           40           60
3-7...........................................           30           70
8 or more.....................................           25           75
------------------------------------------------------------------------

    Notwithstanding the foregoing, neither the specialist nor a 
registered options trader will be allocated more executed contracts 
than the number of contracts representing the specialist's or 
registered options trader's portion of the aggregate quotation size, as 
that term is used in Rule 958A, except, when the number of executed 
contracts to be allocated exceeds the aggregate quotation size 
disseminated for that options series.
    (B) In the event the Exchange establishes a payment for order flow 
program, in which it collects a fee from the registered options 
traders, when two or more bids (offers) are made simultaneously by the 
specialist dealing for his own account and by registered options 
traders, all such bids (offers) shall be on parity and any contracts 
sold (bought) in execution of such bids (offers) shall be divided among 
the specialist and registered options trader(s) so that the specialist 
shall receive a percentage of the contracts executed and the registered 
options traders shall divide the remainder in accordance with Rule 
950(n), Commentary .03(a)(iii). The following percentages shall be in 
effect for equity option classes:

------------------------------------------------------------------------
                                                             Approximate
                                                Approximate    [number]
                                                  [number]    percentage
                                                 percentage       of
          Number of traders on parity                of       contracts
                                                 contracts    allocated
                                                 allocated      to the
                                                   to the    traders (as
                                                 specialist    a group)
------------------------------------------------------------------------
1.............................................           60           40
2-4...........................................           40           60
5-7...........................................           30           70
8-15..........................................           25           75
16 or more....................................           20           80
------------------------------------------------------------------------

    Notwithstanding the foregoing, neither the specialist nor a 
registered options trader will be allocated more executed contracts 
than the number of contracts representing the specialist's or 
registered options trader's portion of the aggregate quotation size, as 
that term is used in Rule 958A, except, when the number of executed 
contracts to be allocated exceeds the aggregate quotation size 
disseminated for that options series.
    (ii) No change.
    .07 (i) The Exchange's automated allocation system, known as Quick 
Trade, when activated for a particular transaction in a given options 
series, will provide for the automatic allocation on a rotating basis 
of executed orders to the specialist and participating registered 
options traders. Executed orders of ten contracts or less are allocated 
to Quick Trade participants as set forth below. If an executed order is 
greater than ten contracts, Quick Trade divides the execution into ten 
or less lots and allocates a lot to each participant. Each lot is 
considered a separate trade for purposes of allocating trades within 
Quick Trade. The rotation is designed to provide that the allocation of 
trades between the specialist and traders signed on to Quick Trade in a 
given equity option [series] class is as follows:

------------------------------------------------------------------------
                                                             Approximate
                                                              number of
                                                Approximate     trades
                                                 number of    allocated
                                                   trades       to the
  Number of traders signed on to quick trade     allocated     traders
                                                   to the     signed on
                                                 specialist    to quick
                                                             trade (as a
                                                                group)
------------------------------------------------------------------------
1.............................................          60%          40%
2.............................................          40%          60%
3 or more.....................................          30%           70
------------------------------------------------------------------------

    In addition, for options on Exchange Traded Funds, Trust Issued 
Receipts and Indexes, the allocation of trades between the specialist 
and traders signed on to Quick Trade is as follows:

------------------------------------------------------------------------
                                                             Approximate
                                                Approximate   number of
                                                 number of      trades
   Number of trades signed on to quick trade       trades     signed on
                                                 allocated     to quick
                                                   to the    trade (as a
                                                 specialist     group)
------------------------------------------------------------------------
1.............................................          60%          40%

[[Page 75669]]

 
2.............................................          40%          60%
3-7...........................................          30%          70%
8 or more.....................................          25%          75%
------------------------------------------------------------------------

    (ii) Notwithstanding the foregoing, in the event the Exchange 
establishes a payment for order flow program, in which it collects a 
fee from the registered options traders, the rotation is designed to 
provide that the allocation of trades between the specialist and 
traders signed on to Quick Trade in a given option class is as follows:

------------------------------------------------------------------------
                                                             Approximate
                                               Approximate  [percentage]
                                              [percentage]    number of
                                                number of      trades
 Number of traders signed on to quick trade      trades     allocated to
                                              allocated to   the traders
                                                   the      signed on to
                                               specialist    quick trade
                                                            (as a group)
------------------------------------------------------------------------
1...........................................           60%           40%
2-4.........................................           40%           60%
5-7.........................................           30%           70%
8-15........................................           25%           75%
16 or more..................................           20%           80%
------------------------------------------------------------------------

    (e) through (p) 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, 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
    On April 24, 2003, the Commission approved amendments to Amex Rules 
933 and 950(d), codifying longstanding practices regarding the 
allocation of options contracts executed on the Exchange and, among 
other things, setting forth in Commentary .06 to Amex Rule 950(d) 
allocation ratios by which contracts are divided between registered 
options traders and specialists on parity.\4\ In addition, on May 22, 
2002, the Commission approved the implementation of Quick Trade, an 
automated allocation system activated for particular kinds of 
transactions that allocates trades between specialists and registered 
options traders using specific allocation ratios set forth in Amex Rule 
950(d), Commentary .07.\5\ The Exchange is now proposing to revise the 
allocation ratios set forth in Amex Rule 933 and in Commentaries .06 
and .07 of Amex Rule 950(d), as discussed below, in connection with the 
re-institution of an exchange-sponsored payment for order flow 
program.\6\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 47729 (April 24, 
2003) 68 FR 23344 (May 1, 2003) (approving File No. SR-Amex SR-00-
30).
    \5\ See Securities Exchange Act Release No. 45974 (May 22, 2002) 
67 FR 37886 (May 30, 2002) (approving File No. SR-Amex-2001-65). The 
allocation ratios in Commentary .07 to Amex Rule 950(d) are the same 
as those in Commentary .06.
    \6\ See Securities Exchange Act Release No. 48053 (June 17, 
2003), 68 FR 37880 (June 25, 2003) (File No. SR-Amex-2003-50).
---------------------------------------------------------------------------

    Recently, the Exchange re-instituted an exchange-sponsored payment 
for order flow program. The Exchange has traditionally opposed payment 
for order flow, believing, among other things, that it can create 
serious conflicts of interest and can compromise a broker's fiduciary 
obligation to achieve best execution of the broker's customers' orders. 
However, given the institution of payment for order flow programs at 
other options exchanges and the continuation of payment for order flow 
programs by some specialist and market making organizations, the 
Exchange believes that the re-institution of payment for order flow is 
necessary to respond to these competitive pressures. Amex represents 
that most specialists and registered options traders are fundamentally 
against the practice of payment for order flow, but they recognize its 
necessity, especially when specialists and market makers at other 
exchanges engage in the practice using either their own funds or funds 
provided by their exchange.
    The Exchange's re-instituted payment for order flow program 
collects a marketing fee of $0.40 per contract from both specialists 
and registered options traders. The Exchange represents that the 
marketing fee, however, will only be collected on those specialist and 
registered options trader transactions involving customer orders from 
firms that accept payment for directing their orders to the Exchange 
(``payment-accepting firms''). The Exchange also represents that the 
specialist is solely responsible for negotiating payment for order flow 
arrangements with payment-accepting firms. Amex asserts that 
specialists would not be required to negotiate with any payment-
accepting firms. Accordingly, the marketing fee would be assessed only 
on those specialist and registered options trader transactions 
resulting from orders from customers of payment-accepting firms with 
whom a specialist has negotiated a payment for order flow arrangement. 
Amex represents that the current payment for order flow program in 
place at the Exchange also allows registered options traders to vote to 
eliminate the program in select classes.\7\ The Exchange asserts that a 
vote to eliminate the marketing fee will result in registered options 
traders not contributing to the payment for order flow program in some 
option classes, which in turn will require the specialists in those 
classes to pay for order flow using their own funds. Amex represents 
that one issue of concern to the specialists is that, while they pay 
for order flow out of their own funds, the order flow that is received 
by the Exchange is shared with the registered options traders who will 
not be contributing to the payment for order flow program.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 48577 (September 30, 
2003), 68 FR 57943 (October 7, 2003)(File No. SR-Amex-2003-80). The 
Commission notes that Amex instituted the procedures by which 
specialists and registered options traders may determine whether to 
continue to participate in the payment for order flow program on a 
six-month pilot basis.
---------------------------------------------------------------------------

    While specialists generally receive a larger share of order flow 
when on parity with registered options traders, the percentages and 
practices codified in Amex Rule 933 and Commentaries .06 and .07 of 
Rule 950(d) were established many years ago, and current payment for 
order flow practices had not been taken into consideration. Given the 
specialists' concerns, the Exchange has determined that a revision to 
the percentages set forth in these rules for those options classes in 
which the Exchange does not collect a payment for order flow marketing 
fee is appropriate. The Exchange has also determined that the 
percentages will vary depending on the type of option, whether equity 
option or option on an Exchange Traded Fund, Trust Issued Receipt, or 
index. The proposed revised percentages for equity options are set 
forth below:\8\
---------------------------------------------------------------------------

    \8\ Amex is also proposing comparable revisions to the 
percentages for traders signed on to Quick Trade.

[[Page 75670]]



------------------------------------------------------------------------
                                                             Approximate
                                                Approximate   Percentage
                                                 Percentage   of Option
                                                 of Option    Contracts
                                                 Contracts    (or Number
                                                 (or Number   of Trades
 Number of Traders on Parity (or Signed on to    of Trades    on Auto-Ex
            Auto-Ex or Quick Trade)              on Auto-Ex    or Quick
                                                  or Quick      Trade)
                                                   Trade)     Allocated
                                                 Allocated      to the
                                                   to the    Traders (as
                                                 Specialist    a group)
------------------------------------------------------------------------
1.............................................          60%          40%
2.............................................          40%          60%
3 or more.....................................          30%          70%
------------------------------------------------------------------------

    The revised percentages for options on ETFs, Trust Issued Receipts, 
and Indexes are set forth below:

------------------------------------------------------------------------
                                                             Approximate
                                                Approximate   Percentage
                                                 Percentage   of Option
                                                 of Option    Contracts
                                                 Contracts    (or Number
                                                 (or Number   of Trades
 Number of Traders on Parity (or Signed on to    of Trades    on Auto-Ex
            Auto-Ex or Quick Trade)              on Auto-Ex    or Quick
                                                  or Quick      Trade)
                                                   Trade)     Allocated
                                                 Allocated      to the
                                                   to the    Traders (as
                                                 Specialist    a group)
------------------------------------------------------------------------
1.............................................          60%          40%
2.............................................          40%          60%
3-7...........................................          30%          70%
8 or more.....................................          25%          75%
------------------------------------------------------------------------

    As discussed more fully in Amex's recently approved proposal to 
codify these percentages, the Exchange believes that it is appropriate 
to provide a greater participation to specialists since they have 
responsibilities and are subject to certain costs that registered 
options traders do not have. Specifically, some of these additional 
responsibilities and costs include paying for order flow, the fixed 
staffing costs committed to market making in a particular security 
whether it is actively traded or not, and the costs associated with 
participating in educational and marketing functions to attract order 
flow. However, for those options classes in which the Exchange has a 
payment for order flow program that collects a fee from registered 
options traders for the products set forth above, the allocation 
percentages will revert back to the percentages currently set forth in 
Amex Rule 933(h)(ii) and Commentaries .06(i)(B) and .07(ii) of Amex 
Rule 950(d). Finally, the Exchange is taking the opportunity to correct 
the paragraph reference in Amex Rule 933 from (d) to (h).
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \9\ in general and furthers the objectives 
of section 6(b)(5) of the Act \10\ 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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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange believes that the proposed rule change will impose no 
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 may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-Amex-2003-44. 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 the filing will also be available for 
inspection and copying at the principal offices of Amex. All 
submissions should be submitted by January 21, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-32177 Filed 12-30-03; 8:45 am]
BILLING CODE 8010-01-P