[Federal Register Volume 69, Number 24 (Thursday, February 5, 2004)]
[Notices]
[Pages 5618-5619]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-2362]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49146; File No. 4-429]


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

January 29, 2004.

I. Introduction

    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 submitted to the 
Securities and Exchange Commission (``SEC'' or ``Commission'') in 
accordance with section 11A of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 11Aa3-2 thereunder,\2\ a proposed amendment to 
the Options Intermarket Linkage Plan (the ``Plan'').\3\ The amendment 
proposes to extend the pilot provision limiting trade-through liability 
to 10 contracts per satisfaction order at the end of the day for an 
additional five months, until June 30, 2004.
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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 proposed by the Amex, CBOE, and ISE. See 
Securities Exchange Act Release No. 43086 (July 28, 2000), 65 FR 
48023 (August 4, 2000). Subsequently, upon request by the Phlx and 
PCX, the Commission issued orders to permit these exchanges to 
participate in the 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).
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    The proposed amendment to the Plan was published in the Federal 
Register on January 6, 2004.\4\ No comments were received on the 
proposed amendment. This order approves the proposed amendment to the 
Plan.
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    \4\ See Securities Exchange Act Release No. 49010 (December 30, 
2003), 69 FR 706.
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II. Description of the Proposed Amendment

    In Joint Amendment No. 8, the Participants propose to extend the 
pilot provision contained in section 8(c)(ii)(B)(2)(c) of the Plan that 
limits trade-through liability to 10 contracts per satisfaction order 
at the end of the day for an additional five months, until June 30, 
2004, in order to gain more experience with the limitation on trade-
through liability. Pursuant to the pilot, an exchange 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.

III. Discussion

    When this pilot was originally proposed in Joint Amendment No. 4 to 
the Plan,\5\ the Participants represented to the Commission that their 
members had expressed concerns regarding their obligations to fill 
Satisfaction Orders (which arise after a trade-through \6\) at the 
close of trading in the underlying security. Specifically, the 
Participants represented that their members were concerned that they 
may not have sufficient time to hedge the positions they acquire.\7\ 
The Participants stated that they believed that their proposal to limit 
liability for trade-throughs for the last five minutes of trading in 
the underlying security to the filling of 10 contracts per exchange, 
per transaction would protect small customer orders, but still 
establish a reasonable limit for their members' liability. The 
Participants further represented that the proposal should not affect a 
member's potential liability under an exchange disciplinary rule for 
engaging in a pattern or practice of trading through other markets 
under section 8(c)(i)(C) of the Plan.
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    \5\ See Securities Exchange Act Release No. 47028 (December 18, 
2002), 67 FR 79171 (December 27, 2002) (Notice of Proposed Joint 
Amendment No. 4).
    \6\ Trade-throughs occur when a broker-dealer executes its 
customer's order on one exchange at a price inferior to another 
exchange's disseminated quote.
    \7\ 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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    The Commission approved the proposal for a one-year pilot \8\ to 
give the Participants and the Commission an opportunity to evaluate: 
(1) The need for the limitation on liability for trade-throughs near 
the end of the trading day; (2) whether 10 contracts per Satisfaction 
Order is the appropriate limitation; and (3) whether the opportunity to 
limit liability for trade-throughs near the end of the trading day 
leads to an increase in trade-throughs. In its approval order, the 
Commission requested that the Participants provide a report to the 
Commission at least sixty days prior to seeking permanent approval of 
the pilot program. The Commission specified that the report should 
include information about the number and size of trade-throughs that 
occur during the last seven minutes of the trading day, the number and 
size of Satisfaction Orders that Participants might be required to fill 
without the limitation on liability and how those amounts are affected 
by the limitation on liability, and the extent to which the 
Participants use the underlying market to hedge their options 
positions.\9\
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    \8\ See Securities Exchange Act Release No. 47298 (January 31, 
2003), 68 FR 6524 (February 7, 2003) (approval of pilot program on a 
120-day basis); see also Securities Exchange Act Release No. 48055 
(June 18, 2003), 68 FR 37869 (June 25, 2003) (approval of pilot 
program).
    \9\ Id.
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    In connection with the request in Joint Amendment No. 8 to extend 
the pilot for an additional five months until June 30, 2004, the 
Commission notes that the Participants represent that if they seek to 
make the limitations on trade-throughs permanent, they will submit the 
above-referenced report to the Commission no later than March 31, 2004. 
The Participants further represent in Joint Amendment No. 8 that each 
exchange plans to submit individual reports regarding the requested 
data and that these reports will detail the number of trade-throughs in 
the last seven minutes of options trading 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. 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 their members' hedging at the end of the trading 
day.
    After careful consideration, the Commission finds that the proposed 
amendment to the Plan seeking to extend the current pilot is consistent 
with the requirements of the Act and the rules and regulations 
thereunder. Specifically, the Commission finds that the proposed 
amendment to the Plan is consistent with section 11A of the Act \10\ 
and Rule 11Aa3-2 thereunder,\11\ in that extending the pilot, while the 
Participants gather and evaluate data

[[Page 5619]]

relating to the effect of the operation of the pilot, is appropriate in 
the public interest, for the protection of investors and the 
maintenance of fair and orderly markets. Therefore, the Commission is 
extending the effectiveness of section 8(c)(ii)(B)(2)(c) of the Plan 
for an additional five months, until June 30, 2004.
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    \10\ 15 U.S.C. 78k-1.
    \11\ 17 CFR 240.11Aa3-2.
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IV. Conclusion

    It is therefore ordered, pursuant to section 11A of the Act \12\ 
and Rule 11Aa3-2 thereunder,\13\ that the proposed Plan Amendment No. 8 
is approved on a pilot basis until June 30, 2004.
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    \12\ 15 U.S.C. 78k-1.
    \13\ 17 CFR 240.11Aa3-2.

    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)(29).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-2362 Filed 2-4-04; 8:45 am]
BILLING CODE 8010-01-P