[Federal Register Volume 69, Number 70 (Monday, April 12, 2004)]
[Notices]
[Pages 19251-19253]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-8204]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49531; File No. SR-Amex-2003-105]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change by the American Stock Exchange LLC Relating to the 
Exceptions to the Exchange's Quote Rule

April 6, 2004.

I. Introduction

    On December 1, 2003, the American Stock Exchange LLC (``Amex'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change pursuant to section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ to amend Amex Rule 958A to clarify the application 
of the rule's exceptions to different series within the same option 
class. The proposed rule change was published for comment in the 
Federal Register on December 29, 2003.\3\ The Commission received no 
comments on the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 48948 (December 18, 
2003), 68 FR 74989 (``Notice'').
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II. Description

    Amex Rule 958A requires each responsible broker or dealer to 
promptly communicate its best bid, offer, and size, and to execute any 
order presented to it, at a price at least as favorable as its best bid 
or offer in any amount up to the size of that bid or offer, subject to 
certain exceptions. In this filing, Amex proposes to amend Amex Rule 
958A to clarify that a transaction in one option series would enable a 
responsible broker or dealer to avail itself of the exception provided 
in Amex Rule 958A(c)(ii) for that same series of options only, rather 
than for the entire class of options.

III. Discussion

    On November 17, 2000, the Commission adopted several amendments to 
Rule 11Ac1-1 under the Act (``Quote Rule'') to apply it to options 
exchanges and options market makers.\4\ Under the Quote Rule, an 
options exchange must provide to quotation vendors the best bid and the 
best offer for each options series traded on the exchange, subject to 
certain exceptions. In addition, the Quote Rule requires responsible 
brokers and dealers to honor their bids and offers for each options 
series, subject to certain exceptions. One exception to the Quote Rule 
would relieve a responsible broker or dealer of its obligation to be 
firm for its bid or offer for a particular options series if, at the 
time an order sought to be executed is presented, such responsible 
broker or dealer is in the process of effecting a transaction in such 
options series and immediately revises its bid or offer after the 
completion of such transaction.\5\
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    \4\ See Securities Exchange Act Release No. 43591 (November 17, 
2000), 65 FR 75439 (December 1, 2000) (the ``Adopting Release'').
    \5\ See SEC Rule 11Ac1-1(c)(3).
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    The options exchanges, including the Amex, subsequently amended 
their rules for the purpose of conforming to the requirements of the 
Quote Rule.\6\ The Amex amended its rules to, among other things, 
incorporate the exceptions to the requirement that a responsible broker 
or dealer be firm for its quotations set forth under Rule 11Ac1-1(c)(3) 
under the Act. Specifically, Amex Rule 958A(c)(ii)(A)(2) currently 
provides that a responsible broker or dealer shall not be obligated to 
execute a transaction for any listed option if, at the time an order is 
presented, the responsible broker or dealer was in the process of 
effecting a transaction in ``such class and/or series'' of option and 
immediately thereafter communicates a revised quotation size. 
Similarly, Amex Rule 958A(c)(ii)(A)(4) provides that a responsible 
broker or dealer shall not be obligated to execute a transaction for 
any listed option if, at the time an order is presented, the 
responsible broker or dealer was in the process of effecting a 
transaction in ``such class and/or series'' of option and immediately 
thereafter communicates a revised bid or offer. The Amex has 
misinterpreted these provisions as to relieve specialists and 
registered options traders of their obligations to execute orders in 
multiple series of an options class at the disseminated bid or offer. 
Accordingly, the Amex now proposes to amend Amex Rule 958A to clarify 
that a transaction in one series of an options class would enable a 
responsible broker or dealer to avail itself of the exception provided 
in Amex Rule 958A only for that same series of option.
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    \6\ See Securities Exchange Act Release Nos. 44145 (April 2, 
2001), 66 FR 18662 (April 10, 2001) (notice and order granting 
partial accelerated approval for a pilot program with respect to 
File Nos. SR-Amex-2001-18; SR-CBOE-2001-15; SR-ISE-2001-07; SR-PCX-
2001-18; and SR-Phlx-2001-37) (``SRO Rules Pilot Program Approval 
Order''); 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-PCX-2001-18; and SR-Phlx-2001-37) (``SRO Rules Final 
Approval Order'').
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    The Commission believes that it was clear at the time the Amex 
amended its rules to conform to the requirements of the Quote Rule that 
the exceptions contained in paragraph (c)(3) of the Quote Rule apply to 
each option series individually and not to the entire option class. In 
approving the option exchanges' rules in June 2001, the Commission 
noted that the Amex and the Chicago Board Options Exchange, Inc. 
(``CBOE'') \7\ incorporated into their own rules the exceptions from 
the Quote Rule regarding revised bids, offers and quotation sizes.\8\ 
The Commission, however, approved Amex Rule 958A and the comparable 
CBOE rule, stating that it ``believes that including such provisions in 
the exchanges' rules is consistent with the Exchange Act, provided that 
the Exchanges interpret them in a manner consistent with paragraph 
(c)(3) of Rule 11Ac1-1 under the Act.'' \9\ The CBOE represents that it 
has correctly interpreted, and enforced compliance with, its rule in a 
manner consistent with the Quote Rule, namely, to treat

[[Page 19252]]

each options series as a separate security and to apply the exception 
on a series basis.\10\ Moreover, the CBOE amended its rule to clarify 
that the exceptions to the Quote Rule apply to each options series and 
not to an entire options class.\11\ The Amex, however, interpreted its 
rule in a manner inconsistent with the Quote Rule.
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    \7\ The language in the Amex rule and the CBOE rule were similar 
in that the CBOE rule also included the language ``such class and/or 
series.''
    \8\ See SRO Rules Final Approval Order, supra note 6.
    \9\ See Securities Exchange Act Release No. 44383 (June 1, 
2001), 66 FR 30959 (June 8, 2001) (approving File Nos. SR-Amex-2001-
18; SR-CBOE-2001-15; SR-ISE-2001-07; SR-PCX-2001-18; and SR-Phlx-
2001-37).
    \10\ The CBOE stated that, ``it has always interpreted CBOE Rule 
8.51(d)(6) such that each series of option was deemed a separate 
security.'' See Securities Exchange Act Release No. 48525 (September 
23, 2003), 68 FR 56355 (September 30, 2003) (notice and immediate 
effectiveness of File No. SR-CBOE-2003-38).
    \11\ Id.
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    In the instant proposal, the Amex suggests that, ``[t]he exceptions 
to the Quote Rule as set forth in Rule 11Ac1-1(c)(3) apply to `subject 
security' and it was unclear at the time the Amex amended Rule 958A 
whether the exceptions [to the Quote Rule] applied to an option class, 
option series or both.'' \12\ In support of its assertion, the Amex 
notes that the term, ``subject security,'' is defined in SEC Rule 
11Ac1-1(a)(25) under the Act as an ``exchange-traded security'' meeting 
certain executed volume thresholds. The Amex then notes that the term, 
``exchange traded security,'' is defined in SEC Rule 11Ac1-1(a)(10) 
under the Act as any ``covered security'' or ``class of covered 
securities'' listed or registered on an exchange. Finally, the Amex 
states that the term, ``covered security,'' is defined in SEC Rule 
11Ac1-1(a)(20) under the Act as any ``reported security,'' which means 
any security or class of securities. Accordingly, the Amex appears to 
believe that it is unclear from the use of these definitions whether 
the exceptions in paragraph (c)(3) of the Commission's Quote Rule would 
apply to an entire options class or to individual options series, 
because the definitions in the Quote Rule refer to the phrase ``class 
of securities,'' instead of the phrase ``series of securities.''
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    \12\ See Notice, supra note 3.
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    The Commission, however, believes that it is clear that the 
obligations and exceptions to those obligations under the Quote Rule 
are intended to apply to each option series listed on an exchange. For 
example, in several places in the Adopting Release, the Commission 
stated that, ``an options exchange would be required to establish by 
rule and periodically publish the size for which its best bid or offer 
in each option series that is listed on the exchange is firm.'' \13\ In 
addition, the Commission understood that the options exchanges, 
including the Amex, would be applying the Quote Rule to each options 
series individually. For example, in the purpose section of the SRO 
Rules Pilot Program Approval Order, the Amex stated that it proposed to 
define the term, ``responsible broker or dealer,'' to mean the 
specialist and any registered options traders constituting the trading 
crowd in ``a given options series.'' \14\ These examples demonstrate 
that an option series is a separate security for which a responsible 
broker or dealer must communicate a separate bid, offer, and size, and 
be firm for such quotation.
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    \13\ See Adopting Release, supra note 4.
    \14\ See Securities Exchange Act Release Nos. 44145 (April 2, 
2001), 66 FR 18662 (April 10, 2001) (approving pilot program 
regarding File Nos. SR-Amex-2001-18; SR-CBOE-2001-15; SR-ISE-2001-
07; SR-PCX-2001-18; and SR-Phlx-2001-37).
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    The plain language of the Commission's Quote Rule further indicates 
that the exceptions to the Quote Rule apply on an individual options 
series basis. When amending the Quote Rule to apply it to options 
exchanges and options market makers, the Commission set forth its 
expectations with respect to the application of the Quote Rule to 
listed options in paragraph (d) of the Quote Rule.\15\ Specifically, 
paragraph (d) of Rule 11Ac1-1 under the Act provides that an options 
exchange may ``establish[] by rule and periodically publish[] the 
quotation size for which such responsible brokers or dealers are 
obligated to execute an order to buy or sell an options series that is 
a subject security at its published bid or offer under paragraph (c)(2) 
of this section.'' \16\ The use of phrase ``options series'' in the 
Quote Rule, in conjunction with the reference to paragraph (c)(2), 
provides additional clarity that the obligations of a responsible 
broker or dealer under paragraph (c)(3) of the Commission's Quote Rule 
apply on a series-by-series basis, because paragraph (c)(3) of the 
Quote Rule provides that the exceptions to the Quote Rule apply to 
``any subject security as provided in paragraph (c)(2)'' and, as 
discussed above, the term ``subject security'' in paragraph (c)(2) 
refers to an options series that is a subject security.\17\
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    \15\ 17 CFR 240.11Ac1-1(d).
    \16\ Id. (emphasis added).
    \17\ 17 CFR 240.11Ac1-1(c)(3).
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    In its suggestion that the exceptions under paragraph (c)(3) of the 
Commission's Quote Rule are unclear, the Amex makes the illogical 
assertion that the definition of the term ``subject security'' could 
have a different meaning in paragraph (c)(3) than it has in all of the 
other provisions of the rule. In an earlier proposal to amend Amex Rule 
958A,\18\ the Amex describes paragraph (c)(i)(A) of Amex Rule 958A, 
which was intended to conform to the requirements of paragraph (c)(2) 
of the Quote Rule. In that proposal, the Amex states that, ``[t]he 
operation of Exchange Rule 958A in paragraph (c)(i)(A) requires that 
each responsible broker or dealer execute customer orders in an options 
series in an amount up to its published quotation size.'' \19\ However, 
in the instant proposal, the Amex asserts that the exceptions to the 
Quote Rule, which Amex codified in Amex Rule 958A(c)(ii), ``should 
apply to the entire class as well as each individual series in a given 
options class.'' In effect, the Amex asserts that the same term, 
``subject security,'' in the Quote Rule should have different meanings 
in interrelated and contiguous paragraphs of the same rule. 
Accordingly, the Commission rejects Amex's assertion that it is unclear 
whether the term, ``subject security,'' in the Commission's Quote Rule 
applies to an options class, options series, or both.
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    \18\ See Securities Exchange Act Release No. 48957 (December 18, 
2003), 68 FR 75294 (December 30, 2003) (SR-Amex-2003-24) (amending 
Amex Rule 958A to provide that, with respect to a customer limit 
order representing the best bid or offer, responsible brokers or 
dealers would no longer be required to disseminate a quotation size 
of at least 10 contracts when the actual size is less than 10 
contracts, but would be permitted to disseminate the actual size of 
such customer limit orders).
    \19\ Id. (emphasis added).
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    Moreover, the Commission considered a proposal by the CBOE that 
generally would have provided that when multiple orders for the same 
class from the same beneficial owner are represented at the trading 
station at approximately the same time, only the first of such orders 
would be entitled to an execution.\20\ At the same time, the Commission 
considered a similar proposal by the Philadelphia Stock Exchange, Inc. 
(``Phlx'').\21\ These proposals would have relieved a responsible 
broker or dealer of its obligation to be firm for its quotation for all 
series within a class because of a transaction within the same options 
class. In the SRO Rules Pilot Program Approval Order, which also 
approved

[[Page 19253]]

Amex Rule 958A on a pilot basis, the Commission stated that the 
provisions proposed by the CBOE and the Phlx would be inconsistent with 
the Commission's Quote Rule and could not be used to relieve exchange 
members from their obligations under the Quote Rule.\22\ The 
Commission, however, specifically solicited comment on whether to grant 
an exemption from the Quote Rule that would allow such relief, and 
noted that neither the CBOE nor the Phlx provided a basis for why such 
proposals would be consistent with the Quote Rule.\23\ Ultimately, in 
the SRO Rules Final Approval Order, the Commission declined to grant 
exemptive relief in this regard.\24\
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    \20\ See SRO Rules Pilot Program Approval Order and SRO Rules 
Final Approval Order, supra note 6.
    \21\ Id. The Phlx proposal would have prohibited a customer from 
``unbundling'' an order for the primary purpose of availing upon the 
requirement that responsible brokers and dealers execute the order 
up to a minimum of the disseminated size. Prohibiting ``unbundling'' 
would have prevented entry of multiple orders for different series 
within the same options class that would cumulatively exceed the 
firm quote size for one such series. Thus, a responsible broker or 
dealer would have been relieved of its obligations to be firm for 
its quotation for all series within a class because of a transaction 
within the same options class.
    \22\ See SRO Rules Pilot Program Approval Order, supra note 6.
    \23\ Id.
    \24\ See SRO Rules Final Approval Order, supra note 6.
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    Accordingly, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\25\ In particular, the Commission finds that the proposed 
rule change 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 and to promote just and 
equitable principles of trade.\26\ The Commission believes that the 
proposed rule change is necessary to conform the exceptions in Amex 
Rule 958A more closely to the exceptions in the Quote Rule set forth in 
Rule 11Ac1-1(c)(3) under the Act. The Commission also believes that the 
proposed rule change should help to ensure that the Amex refrains from 
interpreting its rules in a manner that is inconsistent with Commission 
rules, including Rule 11Ac1-1 under the Act.
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    \25\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \26\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-Amex-2003-105) is approved.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-8204 Filed 4-9-04; 8:45 am]
BILLING CODE 8010-01-P