[Federal Register Volume 69, Number 97 (Wednesday, May 19, 2004)]
[Notices]
[Pages 28954-28956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11261]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49691; File No. 4-429]


Joint Industry Plan; Notice of Filing of Joint Amendment No. 11 
to the Options Intermarket Linkage Plan Relating to the Handling of 
Satisfaction Orders

May 12, 2004.
    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 February 18, 2004, March 1, 2004, March 23, 2004, April 20, 
2004, April 23, 2004, and April 28, 2004, the International Securities 
Exchange, Inc. (``ISE''), the American Stock Exchange LLC (``Amex''), 
the Chicago Board Options Exchange, Inc. (``CBOE''), the Pacific 
Exchange, Inc. (``PCX''), the Philadelphia Stock Exchange, Inc. 
(``Phlx''), and the Boston Stock Exchange, Inc. (``BSE''), 
(collectively, the ``Participants''), respectively, filed with the 
Securities and Exchange Commission (``Commission'') an amendment 
(``Joint Amendment No. 11'') to the Plan for the Purpose of Creating 
and Operating an Intermarket

[[Page 28955]]

Option Linkage (``Linkage Plan'').\3\ In proposed Joint Amendment No. 
11, the Participants propose to change the manner in which the 
Participants and their members process Satisfaction Orders \4\ sent to 
them following a Trade-Through.\5\ The Commission is publishing this 
notice to solicit comments from interested persons on the proposed 
Joint Amendment No. 11 to the Linkage Plan.
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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, PCX, and BSE 
joined the Linkage Plan. See Securities Exchange Act Release Nos. 
43573 (November 16, 2000), 65 FR 70850 (November 28, 2000); 43574 
(November 16, 2000), 65 FR 70851 (November 28, 2000); and 49198 
(February 5, 2004), 69 FR 7029 (February 12, 2004). On June 27, 
2001, May 30, 2002, February 3, 2003, June 25, 2003, and January 29, 
2004, the Commission approved joint amendments to the Linkage Plan. 
See Securities Exchange Act Release Nos. 44482 (June 27, 2001), 66 
FR 35470 (July 5, 2001); 46001 (May 30, 2002), 67 FR 38687 (June 5, 
2002); 47274 (January 29, 2003), 68 FR 5313 (February 3, 2003); 
48055 (June 18, 2003), 68 FR 37689 (June 25, 2003); and 49146 
(January 29, 2004), 69 FR 5618 (February 5, 2004).
    \4\ A ``Satisfaction Order'' is an order sent through the 
Linkage to notify a Participant of a Trade-Through and to seek 
satisfaction of the liability arising from that Trade-Through. See 
Section 2(16)(c) of the Linkage Plan.
    \5\ A ``Trade-Through'' is defined as a transaction in an 
options series at a price that is inferior to the National Best Bid 
or Offer. See Section 2(29) of the Linkage Plan.
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I. Description and Purpose of the Amendment

    The purpose of proposed Joint Amendment No. 11 is to change the 
manner in which the Participants process Satisfaction Orders following 
a Trade-Through. Pursuant to the Linkage Plan, if a disseminated quote 
that is traded through represents a customer order, a member 
representing that order may send a Satisfaction Order.\6\ Upon receipt 
of the Satisfaction Order, the member that initiated the Trade-Through 
can either fill the Satisfaction Order, or cause the price of the 
transaction that constituted the Trade-Through to be corrected to a 
price at which a Trade-Through would not have occurred.\7\ While the 
Participants believe this process generally works well, the experience 
with the Options Intermarket Linkage (``Linkage'') to date has led the 
Participants to agree to three changes to Satisfaction Order 
processing.
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    \6\ See Section 7(a)(ii)(D) & 8(c)(ii)(B)(2) of the Linkage 
Plan.
    \7\ See Section 8(c)(ii)(A) of the Linkage Plan.
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    First, the Linkage Plan currently permits a Participant to send a 
Satisfaction Order for the full size of the customer order traded 
through, regardless of the size of the transaction that caused the 
Trade-Through (although the Participant receiving the Satisfaction 
Order that elects to execute it must limit its execution to the size of 
the Trade-Through).\8\ The amendment proposes that the size of the 
Satisfaction Order be limited to the lesser of the size of the customer 
order traded through and the size of the transaction that caused the 
Trade-Through.
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    \8\ See Section 8(c)(ii)(B) of the Linkage Plan.
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    Second, the Plan currently permits a Participant that sends a 
Satisfaction Order through Linkage to reject the receiving 
Participant's execution of the Satisfaction Order (a ``fill'') within 
30 seconds of being notified of the fill if the customer order that 
underlies the Satisfaction Order either has been executed on the 
sending exchange or has been canceled while the Satisfaction Order is 
being processed.\9\ The proposed amendment would clarify that the 
customer order must be cancelled or executed prior to the receipt of 
the Satisfaction Order fill report. However, if the order is filled or 
canceled, there is currently no requirement in the Linkage Plan for the 
Participant that sent the Satisfaction Order to cancel it while it is 
still pending execution on another market. The Participants believe 
that this aspect of the Linkage Plan leads to the rejection of 
Satisfaction Order fills that may have been avoided had the 
Satisfaction Order been canceled. To address this issue, the amendment 
proposes a requirement that a Participant cancel a pending Satisfaction 
Order that it sent through Linkage if the underlying customer order is 
filled or canceled.
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    \9\ See Section 8(c)(ii)(C) of the Linkage Plan.
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    Third, as noted above, a Participant can reject a Satisfaction 
Order fill if the underlying customer order is executed or cancelled 
while the Satisfaction Order is pending. However, it is possible that 
the member that initiated the Satisfaction Order could decide to trade 
against the customer order before the member receives a notice from 
another Participant that the Satisfaction Order has been filled. In 
this case, the Participants believe that it would be inappropriate to 
reject the fill. Accordingly, the proposed amendment would provide that 
a Participant may not reject the fill of the Satisfaction Order when 
the underlying customer order has been executed against the member that 
initiated the Satisfaction Order.

II. Implementation of the Plan Amendment

    The Participants propose to make the 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 Joint Amendment 
No. 11 is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number 4-429 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to Joint Amendment No. 11 to File 
Number 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, please use only one method. The Commission 
will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, 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 in the Commission's Public 
Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies 
of such filing also will be available for inspection and copying at the 
principal office of the Participants. All comments received will be 
posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly.
    All submissions should refer to Joint Amendment No. 11 to File 
Number 4-429 and should be submitted on or before June 9, 2004.


[[Page 28956]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(29).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-11261 Filed 5-18-04; 8:45 am]
BILLING CODE 8010-01-P