[Federal Register Volume 69, Number 3 (Tuesday, January 6, 2004)]
[Notices]
[Pages 706-707]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-217]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49010; File No. 4-429]


Joint Industry Plan; Notice of Filing of Joint Amendment No. 8 to 
the Options Intermarket Linkage Plan Relating to Satisfaction Orders 
and Trade-Throughs

December 30, 2003.
    Pursuant to Section 11A of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 11Aa3-2 thereunder,\2\ notice is hereby given 
that on December 18, 2003, December 22, 2003, December 29, 2003, and 
December 30, 2003, the International Securities Exchange, Inc. 
(``ISE''), the Pacific Exchange, Inc. (``PCX''), the American Stock 
Exchange LLC (``Amex''), the Philadelphia Stock Exchange, Inc. 
(``Phlx''), and the Chicago Board Options Exchange, Inc. (``CBOE'') 
(collectively, the ``Participants''), respectively, filed with the 
Securities and Exchange Commission (``SEC'' or

[[Page 707]]

``Commission'') an amendment (``Amendment No. 8'') to the Options 
Intermarket Linkage Plan (``Linkage Plan'').\3\ In proposed Joint 
Amendment No. 8, the Participants propose to extend the pilot provision 
limiting trade-through liability to 10 contracts for each Satisfaction 
Order (``S Order'') at the end of the day for an additional five 
months, until June 30, 2004. The Commission is publishing this notice 
to solicit comments from interested persons on the proposed Linkage 
Plan amendment.
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    \1\ 15 U.S.C. 78k-1.
    \2\ 17 CFR 240.11Aa3-2.
    \3\ On July 28, 2000, the Commission approved a national market 
system plan for the purpose of creating and operating an intermarket 
options market linkage (``Linkage'') proposed by Amex, CBOE, and 
ISE. See Securities Exchange Act Release No. 43086 (July 28, 2000), 
65 FR 48023 (August 4, 2000). Subsequently, Phlx and PCX joined the 
Linkage Plan. See Securities Exchange Act Release Nos. 43573 
(November 16, 2000), 65 FR 70850 (November 28, 2000) and 43574 
(November 16, 2000), 65 FR 70851 (November 28, 2000). On June 27, 
2001 and May 30, 2002, respectively, the Commission approved 
amendments to the Linkage Plan. See Securities Exchange Act Release 
Nos. 44482 (June 27, 2001), 66 FR 35470 (July 5, 2001) and 46001 
(May 30, 2002), 67 FR 38687 (June 5, 2002).
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I. Description and Purpose of the Amendment

    The Participants are proposing to extend the pilot provision that 
limits ``trade-through'' \4\ liability to 10 contracts for each S Order 
at the end of the day for an additional five months, until June 30, 
2004, in order to gain more experience with the effect of this 
limitation on trade-through liability. Pursuant to the pilot, an 
Participant member's trade-through liability is limited to 10 contracts 
per Satisfaction Order for the period between five minutes prior to the 
close of trading in the underlying security and the close of trading in 
the options class.
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    \4\ A ``Trade-Through'' is defined as a transaction in an 
options series at a price that is inferior to the national best bid 
and offer in an options series calculated by a Participant.
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    The Participants originally proposed this limitation on liability 
as a one-year pilot in Amendment No. 4 to the Plan.\5\ In Amendment No. 
4, the Participants represented that members of various exchanges had 
raised concerns regarding their obligation to fill Satisfaction Orders 
(which they receive when an options exchange disseminating a better 
price complains about a trade-through) at the close of trading in the 
underlying security. Specifically, members expressed concern that they 
may not have time to hedge the positions they acquire.\6\ Thus, the 
Participants proposed to limit liability for trade-throughs for the 
last five minutes of the trading day in the underlying security to the 
filling of 10 contracts per Participant, per transaction. The 
Participants represented that they believed that the proposal would 
protect small customer orders, yet establish a reasonable limit for 
their members' liability. Further, the Participants represented that 
the proposal would not affect a member's potential liability under an 
exchange's disciplinary rule for engaging in a pattern or practice of 
trading through other markets under Section 8(c)(i)(C) of the Linkage 
Plan.
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    \5\ The Commission approved the pilot on a 120-day temporary 
basis on January 31, 2003. See Securities Exchange Act Release No. 
47298 (January 31, 2003), 68 FR 6524 (February 7, 2003). On June 18, 
2003, the Commission approved the pilot until January 31, 2004. See 
Securities Exchange Act Release No. 48055, 68 FR 37869 (June 25, 
2003) (File No. 4-429).
    \6\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Annette Nazareth, Director, Division of 
Market Regulation, Commission, dated November 19, 2002.
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    In the order approving the pilot, Commission stated that in the 
event the Participants chose to seek permanent approval of this 
limitation, the Participants must provide the Commission with a report 
(the ``Report'') regarding data on the use of the exemption no later 
than 60 days before seeking permanent approval.\7\ In Amendment No. 8, 
the Participants represente that if they seek to make the limitations 
on trade-throughs permanent, they will submit the Report to the 
Commission no later than March 31, 2004.
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    \7\ See supra note 4.
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    With respect to the Report, the Participants represente in 
Amendment No. 8 that each Participant currently plans to submit 
individual Reports regarding the requested data as it pertains to their 
own exchange. They further represent that these Reports will detail the 
number of trade-throughs in the last seven minutes and the rest of the 
day, as well as the number and size of Satisfaction Orders that would 
have been filled absent the current exemption.\8\ In addition, the 
Participants represent that the Reports will provide information on the 
extent to which the exchange's members hedge their options trading 
during the day as part of their overall risk management. Finally, the 
Participants represent that they will make every effort to provide 
specific information regarding hedging at the end of the trading day.
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    \8\ The Participants explain that, for example, if an exchange 
receives a Satisfaction Order for 50 contracts and only fills 10, 40 
contracts ``would have been filled absent this exemption.'' To the 
extent the Participants have the relevant information, the Report 
will compare the size of Satisfaction Orders they could have sent in 
the last seven minutes of the trading day with the size of the 
actual fills. However, the ability to provide this data will depend 
on whether a particular Participant has the data on the size of the 
trade-throughs underlying the Satisfaction Orders, and not just the 
data on the size of the Satisfaction Orders themselves.
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II. Implementation of the Plan Amendment

    The Participants propose to make the proposed amendment to the 
Linkage Plan reflected in this filing effective when the Commission 
approves the amendment.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed 
Linkage Plan amendment 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. 4-429. 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 
hardcopy or by e-mail but not by both methods. Copies of the 
submissions, all subsequent amendments, all written statements with 
respect to the proposed Linkage Plan amendment that are filed with the 
Commission, and all written communications relating to the proposed 
Linkage Plan amendment 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 
filings will also be available for inspection and copying at the 
principal offices of the Amex, CBOE, ISE, Phlx, and PCX. All 
submissions should refer to File No. 4-429 be submitted by January 21, 
2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\

Margaret H. McFarland,
Deputy Secretary.
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    \9\ 17 CFR 200.30-3(a)(29).
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[FR Doc. 04-217 Filed 1-5-04; 8:45 am]
BILLING CODE 8010-01-P