[Federal Register Volume 69, Number 103 (Thursday, May 27, 2004)]
[Notices]
[Pages 30344-30350]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12027]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49747; File No. SR-Amex-2003-89]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendments No. 1, 2, 3, 4, 5, and 6 Thereto and Notice of 
Filing and Order Granting Accelerated Approval to Amendment No. 7 to 
the Proposed Rule Change by the American Stock Exchange LLC To 
Implement a New Options Trading Platform Known as the Amex New Trading 
Environment or ANTE

May 20, 2004.

I. Introduction

    On October 7, 2003, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt new rules for the implementation of its 
new options trading platform known as the Amex New Trading Environment 
or ANTE. On November 17, 2003, December 17, 2003, February 9, 2004, 
March 2, 2004, March 18, 2004, and March 24, 2004, the Exchange 
submitted Amendments No. 1, 2, 3, 4, 5, and 6 to the proposed rule 
change.\3\ The proposed rule change and

[[Page 30345]]

Amendments No. 1, 2, 3, 4, 5, and 6 were published for comment in the 
Federal Register on March 31, 2004.\4\ The Commission received no 
comment letters with respect to the proposal, as amended. On April 19, 
2004, the Amex filed Amendment No. 7 to the proposed rule change.\5\ 
This order approves the proposed rule change and Amendments No. 1, 2, 
3, 4, 5 and 6; grants accelerated approval to Amendment No. 7 to the 
proposed rule change; and solicits comments from interested persons on 
Amendment No. 7.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letters from Claire P. McGrath, Senior Vice President 
and Deputy General Counsel, Amex, to Nancy Sanow, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated November 14, 2003 (``Amendment No. 1''); December 16, 2003 
(``Amendment No. 2''); February 5, 2004 (``Amendment No. 3''); March 
1, 2004 (``Amendment No. 4''); March 17, 2004 (``Amendment No. 5''); 
and March 23, 2004, replacing Form 19b-4 in its entirety 
(``Amendment No. 6'').
    \4\ See Securities Exchange Act Release No. 49465 (March 24, 
2004), 69 FR 16990 (``Notice'').
    \5\ See letter from Claire P. McGrath, Senior Vice President and 
Deputy General Counsel, Amex, to Nancy Sanow, Assistant Director, 
Division, Commission, dated April 16, 2004, replacing the proposed 
rule text in its entirety (``Amendment No. 7''). In Amendment No. 7, 
the Exchange made minor clarifying changes to the text of proposed 
Amex Rule 951-ANTE, Commentary .01.
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II. Description of the Proposal

    The Exchange proposes to implement a new trading environment 
(referred to hereinafter as ``ANTE'' or the ``ANTE System'') to replace 
many of its existing floor trading systems. Initially, ANTE would be 
used for the trading of standardized options on the Exchange, but would 
be expanded to include all of the Exchange's current and future product 
lines--Exchange-Traded Funds, equities and single stock futures.\6\ The 
ANTE System would replace many of the Exchange's current systems, 
including the automated quotation calculation system and specialist 
``book'' functions such as limit order display, automatic order 
execution, and allocation of trades. Each floor participant would have 
electronic access to the ANTE System.\7\
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    \6\ The Exchange seeks the approval of new rules and the 
amendment of current rules to implement ANTE in options only. 
Additional filings would be submitted to the Commission when the 
Exchange seeks to expand ANTE to other product lines.
    \7\ Floor brokers would access the ANTE system through the Booth 
Automated Routing System (``BARS''); specialists would access the 
ANTE System through the Central and Display Books, described below, 
which would provide the functions of the existing quote calculation 
system (known as ``XTOPS'') and the Amex Options Display Book 
(``AODB'') in one integrated system; and registered options traders 
would access the ANTE System through handheld devices.
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A. ANTE Central Book and ANTE Display Book

    The functions currently available in the AODB would be split 
between the ANTE Central Book and the ANTE Display Book. The Central 
Book would contain what was formerly known as the ``specialist's limit 
order book'' and would provide for the matching and execution of 
eligible orders similar to the current Auto Match and Auto-Ex Systems. 
The Display Book would be similar to the ``Acknowledgement Box'' 
currently found in the AODB and would contain orders awaiting manual 
handling.\8\ Market and marketable limit orders routed to the Exchange 
would be sent to either the Central Book or the Display Book depending 
on whether the size of the order is within the size eligible for 
automatic matching in the Central Book (referred to as the ``auto-match 
size''). As discussed in greater detail below, the Options Trading 
Committee would establish the auto-match size for each option class.\9\
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    \8\ Registered options traders would be able to view both the 
Display Book and the Central Book on their hand-held devices, giving 
them a complete view of the limit order book and all pending orders 
in each option series they trade.
    \9\ Under the ANTE System, an order greater than the established 
auto-match size would be routed to the Display Book for an immediate 
execution by the specialist, at the disseminated price, up to the 
disseminated size. Market and marketable limit orders less than or 
equal to the disseminated size and less than or equal to the auto-
match size would be sent to the Central Book for automatic matching 
and execution against the disseminated quote and allocation to the 
appropriate party. Orders less than or equal to the disseminated 
size and greater than the auto-match size would be routed to the 
Display Book. Orders greater than the disseminated size and less 
than or equal to the auto-match size would be routed to the Central 
Book for a partial execution up to the disseminated size.
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B. Quote Calculation and Dissemination

    Specialists and registered options traders would be able to 
calculate quotations using either their own proprietary automatic 
quotation systems or an Exchange-provided automatic quotation system. 
Both specialists and registered options traders would have the ability 
to stream quotations for each option series they trade. While 
specialists would continue to be required to disseminate quotations in 
all series of the option classes they trade, registered options traders 
would be able to choose whether to stream quotes with size in all or 
select series of the option classes they trade or join the specialist's 
quote.
    The ANTE System would collect all of the quotes submitted by the 
specialist and each registered options trader, and would determine the 
best bid and best offer for dissemination as the Amex Best Bid and 
Offer (``ABBO'').\10\ The Exchange's market data system would continue 
to submit only one quote per series to the Options Price Reporting 
Authority. Each quote entered would have a specific participant 
identifier to allow the ANTE System to allocate directly contracts 
executed at the best bid or best offer to those participants quoting at 
the ABBO at the time the execution occurs. Furthermore, the ANTE System 
would allocate to each registered options trader only the amount of 
executed contracts indicated in their quote size.
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    \10\ The ANTE System would never allow a locked or crossed 
market to occur in the ABBO. Proposed Amex Rule 933-ANTE, (f)(i)(E) 
provides that orders otherwise eligible for automatic matching and 
execution may not receive automatic matching during certain market 
activities, including whenever the ABBO crosses or locks the 
National best bid or offer (``NBBO'') and causes an inversion in the 
quote, except as provided in Amex Rule 941-ANTE (e) for orders sent 
through the Options Intermarket Linkage.
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C. Trading Outside the ANTE System

    The Exchange would continue to maintain its floor-based auction 
market so that orders of size, complex orders, solicited orders, 
facilitation orders and other types of orders as determined by the 
order flow providers could potentially receive price improvement and be 
exposed to the auction market environment. Orders not eligible for 
execution through the ANTE System and orders represented by a floor 
broker at the specialist's post would trade in the same manner and 
pursuant to the same rules as they do today. Crowd trades or trades 
that occur outside the ANTE System would be allocated to registered 
options traders in the same manner as such trades are allocated 
today.\11\ Paragraph (l) of Amex Rule 950-ANTE, Commentary .03 would be 
revised to reflect that it remains the specialist's obligation to 
allocate executed contracts when an execution has occurred outside the 
ANTE System.\12\
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    \11\ See Amex Rule 950-ANTE (l), Commentary .03.
    \12\ Specialists would be obligated to use best efforts to 
attempt to ensure that the registered options trader responsible for 
announcing the best bid or offer during a crowd trade be 
appropriately allocated executed contracts in accordance with the 
participation provisions found in Amex Rule 950-ANTE (d), Commentary 
.07.
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D. Rollout of the ANTE System

    The Exchange currently anticipates to begin its rollout of the ANTE 
System on or about May 24, 2004 and to complete the rollout by the end 
of the third quarter of 2005.\13\ The Exchange plans to roll out the 
ANTE System on a specialist's post-by-specialist's post basis. Assuming 
the ANTE System performs well at the three initial specialist posts, by 
the end of June 2004, option classes on additional specialist's posts 
would begin to be rolled-out, and

[[Page 30346]]

by the end of July 2004, it is anticipated that three additional 
specialists' posts and another 200 classes would be rolled-out. The 
Exchange expects that by the end of the January 2005, the 300 most 
actively traded option classes would be trading on the ANTE System. 
Additional specific plans for the roll out are being developed by the 
Exchange with the intention to have all equity and index option classes 
trading on the ANTE System by the second quarter of 2005. Once rolled 
out, the new system would be used for all option classes traded on the 
Exchange.\14\
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    \13\ The Exchange has changed its implementation dates and the 
time frame for the roll out of the ANTE System initially proposed in 
the Notice from March 1, 2004 to May 24, 2004. Telephone 
conversation between Claire P. McGrath, Senior Vice President and 
Deputy General Counsel, Amex, and Jennifer Colihan, Special Counsel, 
Division, Commission, on May 20, 2004.
    \14\ During the roll-out period, while the Exchange has option 
classes trading on both systems, current rules (as they are amended 
from time to time) would apply to those option classes continuing to 
trade on its current system, while the ANTE rules (as they are 
amended from time to time) would apply to those option classes 
trading on the new trading system. Once the roll-out of ANTE is 
complete, the amendments to the Exchange's options rules reflecting 
the implementation of ANTE would replace, where applicable, the 
corresponding provisions in Amex Rules 900 through 958A. Once the 
roll-out period has ended and all option classes are trading on the 
ANTE System, the Exchange would submit a filing pursuant to Rule 
19b-4 under the Act, which would delete rules that would not be 
applicable to the Exchange's then current trading environment.
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 7, including whether Amendment No. 7 
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 SR-Amex-2003-89 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 File Number SR-Amex-2003-89. 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 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 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 
Amex. 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 File Number SR-
Amex-2003-89 and should be submitted on or before June 17, 2004.

IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the Act and the rules and 
regulations promulgated thereunder applicable to a national securities 
exchange and, in particular, with the requirements of section 6(b) of 
the Act.\15\ Specifically, the Commission finds that approval of the 
proposed rule change, as amended, is consistent with section 6(b)(5) of 
the Act \16\ in that it is designed to facilitate transactions in 
securities; to prevent fraudulent and manipulative acts and practices; 
to promote just and equitable principles of trade; to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities; to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system; and in general, to protect investors and the public interest.
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    \15\ 15 U.S.C. 78f(b). In approving this proposal, the 
Commission has considered the proposed rule's impact on efficiency, 
competition and capital formation. 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f(b)(5).
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A. Quoting Function for ANTE Participants and Firm Quotations

    Under the proposal, specialists and registered options traders 
would be able to calculate quotations using either their own 
proprietary automatic quotation systems or an Exchange provided 
automatic quotation system and have the ability to stream quotations 
for each option series in which they trade. While specialists would be 
required to disseminate quotations in all series of the option classes 
they trade, registered options traders would be able to either stream 
their own quotes or join the specialist's disseminated quotation in 
some or all of his assigned classes or series. If registered options 
traders join the specialist's quote, they would have the ability to 
manually improve a quote on a series by series basis. The Commission 
believes that allowing registered options traders to automatically 
generate their own quotes across all series in a class should enhance 
intramarket competition on the Exchange.
    Furthermore, whether entering their own quotes or joining the 
specialist's quote, registered options traders using the ANTE hand held 
devices would be required to specify the size of each quote they submit 
or join. As executed contracts are allocated to registered options 
traders at the ABBO, their quote size would decrement so that they 
would never be allocated more than their indicated quote size. Once the 
indicated quote size is depleted, the registered options trader would 
need to replenish the quote size before being allocated additional 
executed contracts. The Commission believes that this ability to 
indicate their size for quotes in each option series should allow 
registered options traders to manage their exposure to the market and 
compete more effectively. Registered options traders also would have to 
be physically present at the specialist's post on the floor of the 
Exchange whenever they use the ANTE System to enter quotes, join the 
specialist's quote, or enter an order in an option class through the 
ANTE System.
    In addition, proposed Rule 958A-ANTE would provide: (i) that the 
registered options traders inputting their own quotes, either manually 
on a series by series basis or through the use of an Exchange-provided 
or proprietary automated quote calculation system, would be considered 
the responsible broker or dealer for the purposes of the rule; and (ii) 
while the responsible broker or dealer would continue to be required to 
quote a minimum of ten contracts, customer limit orders representing 
the best bid or offer may be disseminated at less than ten contracts. 
The Commission believes that the proposed provisions are consistent 
with the obligations imposed upon responsible brokers or dealers under 
the requirements of the Commission's Quote Rule.\17\
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    \17\ Rule 11Ac1-1 under the Act, 17 CFR 240.11Ac1-1 (``Quote 
Rule'').
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    As noted above, the ANTE System would never allow a locked or 
crossed market to occur at the ABBO. The Exchange proposes under Amex 
Rule

[[Page 30347]]

951-ANTE, Commentary .01 that if a quote is submitted that would lock 
or cross the ABBO, the ANTE System would either: (i) revise the bid or 
the offer by the minimum price variant(s) so that the ABBO is not 
locked or crossed; or (ii) if the ABBO represents an off-floor limit 
order, the ANTE System would execute the order and allocate the trade 
pursuant to the post trade allocation process.\18\ The Commission 
believes that providing for the execution of off-floor limit orders 
against a quote that would lock or cross the ABBO should contribute to 
a fair and orderly market because such orders would receive executions 
as soon as there is interest available at the limit order price or 
better.
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    \18\ If the ANTE System revises the quote as discussed in (i), a 
notification would be sent to the ANTE Participant (specialist or 
registered options trader) submitting the quote.
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B. Obligations of Registered Options Traders

    Under proposed Amex Rule 958-ANTE, the Exchange would review 
registered options traders' written applications to trade option 
classes on the ANTE System and assign classes to each registered 
options traders based upon the following factors: (i) The preference of 
applicants; (ii) assuring that financial resources available to a 
registered options trader enable him to satisfy the obligations set 
forth in Amex Rule 958-ANTE with respect to each class of option 
contracts to which he is assigned; (iii) the applicant's expertise in 
option trading; (iv) the applicant's prior market performance; and (v) 
the impact of the number of registered options traders assigned in an 
option class or classes on the Exchange's quotation system 
capacity.\19\
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    \19\ In addition, with respect to the factor relating to the 
potential impact on the Exchange's quotation system capacity, the 
Commission notes that Amex represents that to the extent that the 
Exchange places limitations on registered options traders' 
assignments based on concerns about capacity restraints, such limits 
must be objectively determined and submitted as a proposed rule 
change to the Commission for approval pursuant to section 19(b) of 
the Act. 15 U.S.C. 78s(b). See letter from Claire McGrath, Senior 
Vice President and Deputy General Counsel, Amex, to Kelly Riley, 
Division, Commission, dated May 20, 2004.
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    Although the Exchange could suspend or terminate any assignment of 
a registered options trader under this Rule and make additional 
assignments, the Exchange has clarified and the Commission notes that, 
pursuant to Article II, Section 3 of the Amex Constitution, registered 
options traders would have the right to appeal any Exchange 
determination made in accordance with this Rule.\20\
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    \20\ During the first six months that an option class is on the 
ANTE System, a registered options trader applying for an assignment 
in that option class should be guaranteed an assignment in such 
class, provided for at least the immediately preceding calendar year 
the registered options trader: (i) Has been a member of the 
Exchange; (ii) has maintained a continuous presence as a registered 
options trader in such option class; and (iii) has met the 
requirements of Amex Rule 958-ANTE.
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    In addition to the trading activity requirements in their assigned 
classes, registered options traders would have an electronic quoting 
requirement. Any registered options trader who transacts electronically 
more than 20% of its contract volume in an assigned option class and 
not through open outcry measured over a calendar quarter would be 
obligated to maintain continuous two-sided quotations for at least ten 
contracts in a percentage of series in that option class commencing the 
next calendar quarter as specified in the rules.
    Registered options traders whose electronically transacted contract 
volume is less than 20% in a given option class would not have an 
electronic quoting obligation in any specific number of series in that 
option class. Moreover, for the first 90 days after an option class 
begins trading on the ANTE System, registered options traders would not 
have to comply with the electronic quoting requirement set forth in 
Amex Rule 958-ANTE (h)(iii)(A).
    In summary, registered options traders would, pursuant to Amex Rule 
958-ANTE, be obligated to: (i) Apply for an assignment of options 
classes to trade on the ANTE System; (ii) continue to have 50% of their 
trading activity each quarter in their assigned classes; (iii) make 
competitive bids and offers as reasonably necessary to contribute to 
the maintenance of a fair and orderly market; (iv) maintain a 
continuous two-sided market in a specified percentage of series in 
those classes in which the registered options trader has electronically 
transacted more than 20% of his contract volume; (v) disseminate a size 
of at least 10 contracts with each quote; and (vi) be physically 
present at the specialist's post on the floor of the Exchange where the 
option class is traded in order to quote (either by joining the 
specialist's quote or streaming his own quotes) or submit orders in 
that option class.
    Because registered options traders receive certain benefits for 
carrying out their duties, the Commission believes that they should 
have an affirmative obligation to hold themselves out as willing to buy 
and sell options for their own account on a regular or continuous basis 
to justify this favorable treatment. In this regard, the Commission 
believes that Amex's proposed Rule 958-ANTE would impose such 
affirmative obligations on ANTE registered options traders.

C. Limit Order Display Feature

    The Exchange proposes to develop on a one-year pilot program basis 
a quote assist feature in ANTE to help the specialist display limit 
orders immediately upon receipt. The ANTE System would automatically 
display eligible limit orders within a configurable time that could be 
set on a class-by-class basis. In proposed Amex Rule 950(g)-ANTE, 
Commentary .01, Amex proposes to require a specialist to maintain and 
keep active the ANTE limit order quote assist feature. The Exchange 
would establish the time frame within which the quote assist feature 
would display eligible customer limit orders. The specialist could 
deactivate the quote assist feature provided Floor Official approval is 
obtained. Such approval would be required to be obtained no later than 
three minutes after deactivation. If the specialist does not receive 
approval within three minutes after deactivation, the Exchange would 
review the matter as a regulatory issue.\21\ The Exchange commits to 
documenting all instances where a Floor Official has granted approval. 
Moreover, the Exchange commits to conducting surveillance designed to 
detect whether specialists as a matter of course rely on the ANTE 
quote-assist feature to display all eligible limit orders.
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    \21\ The Exchange represents that Floor Officials could grant 
approval only in instances when there is an unusual influx of orders 
or movement of the underlying that would result in gap pricing or 
other unusual circumstances.
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    The Commission believes that the quote assist feature should help 
to ensure that eligible customer limit orders are displayed within the 
required time period then in effect. The Commission notes that the 
specialist could be violating his due diligence obligation if he 
excessively relies on the quote assist feature to display eligible 
limit orders without attempting to address the orders immediately. 
Accordingly, during this pilot program, the Commission expects the 
Exchange to document all instances where a Floor Official has granted 
approval and to conduct surveillance designed to detect whether 
specialists as a matter of course rely on the ANTE quote-assist feature 
to display all eligible limit orders.
    Since, according to the Exchange, the ANTE System initially would 
not be

[[Page 30348]]

able to produce data that would identify for surveillance purposes when 
the specialist has relied upon the quote assist feature to display a 
customer limit order versus when the specialist displayed the customer 
limit order prior to the quote assist time frame,\22\ the Commission 
expects the Exchange to run its limit order display exception report to 
detect any impermissible reliance on the quote assist feature, and to 
report to the Commission every three months the statistical data it 
uses to make this determination. The Commission notes that the pilot 
program for the quote assist feature would expire on the first 
anniversary of Commission approval of the ANTE System.
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    \22\ The Exchange represents that this information would be 
available by the end of the second quarter of 2004.
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D. Automatic Matching and Execution in the Central Book

    The Exchange proposes that the ANTE Central Book provide for the 
automatic matching and execution of eligible market and marketable 
limit orders at the ABBO, provided that there is no better market at 
another options exchange and the order is less than the auto-match 
size. Orders for the accounts of public customers would be eligible for 
automatic matching and execution in all option classes trading on the 
ANTE System, provided such order sizes are within the auto-match size. 
However, as currently provided, the Options Trading Committee would 
determine on a class-by-class basis whether orders for the accounts of 
broker-dealers and competing market makers would be eligible for 
automatic matching and execution. The Options Trading Committee would 
also continue to determine the maximum order size eligibility for 
broker-dealer and competing market maker accounts.
    The Exchange also proposes under Amex Rule 933-ANTE (c)(2) that 
non-broker-dealer customer orders would be eligible for automatic 
matching and execution at the current best bid or offer displayed by 
another options exchange (automatic price matching) and automatic price 
improvement pursuant to Commentary .01, while broker-dealer orders 
would not be so eligible. The Commission believes that excluding 
broker-dealer orders from the automatic price-matching feature of ANTE 
is consistent with the Act. Nevertheless, the Commission notes that the 
Linkage Plan requires Amex members to avoid trading through better 
prices on other markets, including when executing orders on behalf of 
broker-dealers.
    Under the proposal, orders greater than the disseminated size and 
less than or equal to the auto-match size would be routed to the 
Central Book for a partial execution up to the disseminated size. Any 
contracts remaining in a partially executed order would be handled by 
the specialist. Orders greater than the disseminated size and greater 
than the auto-match size would be routed to the Display Book. 
Furthermore, if the ABBO is not at the NBBO and the order is not 
eligible for automatic price matching at the NBBO as set forth in Amex 
Rule 933-ANTE, Commentary .01(b), the order would be routed to the 
specialist for handling through the Options Intermarket Linkage.
    The Commission believes that the various types of executions 
available through the ANTE System, whether via the Central Book or 
Display Book, should allow ANTE Participants to provide more efficient 
and immediate executions, subject to priority and allocation 
principles.

E. Specialist's Emergency Quote

    Since at all times during the trading day a quote with size would 
be required to be disseminated for each option series, the Exchange 
proposes in Amex Rule 933-ANTE, Commentary .03 for a Specialist's 
Emergency Quote process in the ANTE System. The Specialist's Emergency 
Quote would be calculated continuously and would be disseminated 
whenever an execution results in the disseminated bid or offer size 
decrementing to zero, and would continue to be disseminated until the 
specialist refreshes his bid or offer with size, a registered options 
trader disseminates a better bid or offer, or a limit order is received 
that betters the Specialist's Emergency Quote. However, the 
Specialist's Emergency Quote would not be disseminated if there is a 
better bid or offer already being disseminated by a registered options 
trader or represented by a limit order. Furthermore, the specialist 
could establish the Specialist's Emergency Quote parameters as often as 
the start of every trading day.\23\
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    \23\ Under proposed Amex Rule 933-ANTE, Commentary .03, the 
specialist would be required to establish for each option series 
emergency quote parameters, which shall be retained by the ANTE 
System.
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    Since the Specialist's Emergency Quote would not represent a bid or 
offer created using the theoretical value calculated by the 
specialist's automated quote calculation system, the Exchange believes 
that the specialist would have an incentive to refresh his previous 
quote size or update his quote as quickly as possible, and expects that 
the Specialist's Emergency Quote would be disseminated only for short 
periods of time before it is replaced by the specialist or other market 
participants. The Commission notes that the Specialist's Emergency 
Quote would be consistent with the specialist's obligation under 
exchange rules to continuously quote.

F. Priority and Allocation

    The Exchange also proposes in Amex Rule 935-ANTE the manner in 
which the ANTE System would allocate executed contracts to non-broker-
dealer customers, broker-dealers, competing market makers, specialists 
and registered options traders.\24\ Under the proposal, non-broker-
dealer customer orders at the ABBO would always have priority over all 
other market participants in the ANTE System. Multiple public customer 
orders in ANTE at the ABBO would be ranked for allocation purposes 
based on time priority. An ANTE Participant quoting alone at the ABBO 
would be allocated all contracts executed at his disseminated bid or 
offer up to the disseminated size. When more than one ANTE Participant 
is quoting or has orders at the ABBO, executed contracts would be 
automatically allocated as follows: (i) All non-broker-dealer customer 
orders would be allocated first; (ii) specialist participating in the 
quote would be allocated executed contracts in accordance with the 
specialist participation schedule set forth in Amex Rule 935-ANTE; and 
(iii) remaining executed contracts would be allocated to broker-dealers 
and competing market makers as one ANTE Participant, and registered 
options traders as individual ANTE Participants in accordance with 
provisions also set forth in Amex Rule 935-ANTE.
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    \24\ In addition, Quick Trade, an allocation system in place 
today to aid in allocating executed contracts, would continue to 
exist in the ANTE System to assist in the allocation of executed 
contracts resulting from transactions occurring outside the ANTE 
System in the trading crowd.
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    The Exchange also proposes in Amex Rule 935-ANTE (b) that ANTE 
Participants and floor brokers representing customer orders be able to 
trade with orders in the Central Book. Under the proposal, executed 
contracts would be allocated to single or multiple ANTE Participants 
provided they have submitted their orders within five seconds of the 
initial ANTE Participant's submission. The ANTE Participant that first 
submits the order to trade with the order in the Central Book would be 
allocated executed contracts up to a size established on a class-by-
class basis by the Options

[[Page 30349]]

Trading Committee and referred to as the ``Take Size.'' \25\ The 
Options Trading Committee would review and in some cases revise the 
assigned ``Take Sizes'' on a periodic basis, but would not change a 
``Take Size'' during the course of a trading day.
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    \25\ The Options Trading Committee would consider the option's 
liquidity and the size of the trading crowd in determining the 
appropriate ``Take Size'' for each option class. The Exchange 
represents that the Options Trading Committee's authority to 
establish the Take Size for a given options class will not be used 
in a discriminatory manner.
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    Since the ANTE System initially would not be able to provide floor 
brokers representing a customer order in the trading crowd with the 
ability to participate in the post allocation of orders taken off the 
Central Book,\26\ the Amex would require: (i) The specialist to 
disengage the post trade allocation feature in the options series 
represented by the floor broker's customer order, provided the floor 
broker has alerted the specialist that he is working a customer order 
in a specified series; (ii) once the floor broker's customer order has 
been executed or the floor broker leaves the trading crowd, the 
specialist to re-engage the post trade allocation feature; (iii) the 
floor broker to alert the specialist within the five-second timeframe 
whenever he wants to participate on behalf of his customer in the post 
trade allocation of orders taken off the specialist's book; (iv) floor 
brokers to keep a written record of when they have alerted a specialist 
that they want to participate in the post trade allocation; and (v) the 
specialist to add the customer's interest being represented by the 
floor broker in the post trade allocation whenever appropriate.\27\ 
While the specialist would be required to keep track of the floor 
broker's allocation, the Commission expects the Exchange to ensure that 
the ANTE System is providing an auditable record of which ANTE 
Participants successfully submitted orders during the five-second 
period and were therefore entitled to participate in post trade 
allocation of executed contracts. The Commission finds Amex's proposal 
to allow the specialist to represent the floor broker's customer 
interest to be a reasonable, temporary solution.
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    \26\ Proposed Commentary .01 to Amex Rule 935(b)-ANTE sets forth 
that the ANTE System would provide floor broker's with greater 
functionality accessing the Central Book by March 31, 2005 or such 
later date as established by the Exchange and submitted to the 
Commission pursuant to section 19(b) of the Act.
    \27\ To accomplish an allocation to the floor broker's order, 
the specialist could, on a series-by-series basis, shut off the 
automated post trade allocation feature and manually allocate the 
executed contracts.
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G. Automated Opening, Re-Opening and Closing Rotations

    The Exchange proposes under Amex Rule 918-ANTE for an automated and 
orderly process for the opening, re-opening after a trading halt, and 
closing of all option classes. The automated opening, re-opening, and 
closing rotations would be held in the same manner. The Exchange would 
require that the specialist always submit a two-sided quote for each 
option series to be used in the opening and closing sessions. 
Registered options traders would be able to view the same information 
as the specialist in the opening and closing session windows and 
participate in the rotations. To participate at the opening and the 
closing rotations, registered options traders could either: (i) Submit 
quotes for use during the automated opening and closing rotations; (ii) 
join the specialist's quote; or (iii) submit limit orders on a series 
by series basis.\28\
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    \28\ Under Amex Rule 918-ANTE, Commentary .01(b), registered 
options traders would not be able to submit market orders in the 
automated opening rotation.
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    Prior to the opening rotation, the ANTE System would receive all 
pre-opening orders, orders on the book from the previous trading day, 
and a theoretical quote based on the previous closing price for each 
option series he trades. After the underlying stock opens, the options 
specialist would be able to open the overlying options by accessing the 
opening session window and allowing the submission of quotes and orders 
that have been entered. During the activation of the opening session 
window, no additional quotes, orders, or cancellations would be 
permitted until the series opens. Under the proposal, the ANTE System 
would automatically pair-off the opening orders at a suggested price 
based on previous day and pre-opening limit orders and the specialist's 
and registered options traders' theoretical quotes. In those situations 
when the ANTE System is unable to determine an appropriate opening 
price, the system would present the series to the specialist for the 
manual setting of an opening price in that series. Once opened, orders 
and quote updates again would be permitted and active trading could 
begin.
    Unlike the current Amex Rule 918 (a)(4), which provides for a 
closing rotation to be held on the last trading day for expiring option 
series, the ANTE System under proposed Amex Rule 918-ANTE(a)(4) would 
require an automated closing rotation to be held in all option series 
at the end of every trading day. The Exchange proposes to use the 
automated closing rotation to execute at-the-close orders received by 
the Exchange prior to the close. If no at-the-close orders are received 
in a particular option series, then the ANTE System's automated closing 
rotation would simply close trading in that series. Orders could be 
entered, modified or canceled into the ANTE System up to 4:02 p.m., or 
4:15 p.m. for options on Exchange Traded Fund Shares when the 
underlying Fund Share ceases trading at 4:15 p.m. Under proposed Amex 
Rule 918-ANTE, Commentary .01(f), quotes could be submitted up until 
the commencement of the rotation in such series, and the closing 
rotation could begin once the underlying security has closed.
    The Commission believes that the proposed rules governing the 
automated opening, re-opening and closing rotations provide a 
reasonable process by which ANTE Participants would access and 
participate in the rotations and are consistent with the Act.

H. Application of ``Effect v. Execute'' Exemption From Section 11(a) of 
the Act

    Section 11(a) of the Exchange Act \29\ prohibits a member of a 
national securities exchange from effecting transactions on that 
exchange for its own account, the account of an associated person, or 
an account over which it or its associated person exercises discretion 
(collectively, ``covered accounts'') unless an exception applies. In 
addition to the exceptions set forth in the statute, Rule 11a2-2(T) 
\30\ provides exchange members with an exemption from this prohibition. 
Known as the ``effect versus execute'' rule, Rule 11a2-2(T) permits an 
exchange member, subject to certain conditions, to effect transactions 
for covered accounts by arranging for an unaffiliated member to execute 
the transactions on the exchange. To comply with the rule's conditions, 
a member (i) Must transmit the order from off the exchange floor; (ii) 
may not participate in the execution of the transaction once it has 
been transmitted to the member performing the execution; \31\ (iii) may 
not be affiliated with the executing member; and (iv) with respect to 
an account over which the member has investment discretion,

[[Page 30350]]

neither the member nor its associated person may retain any 
compensation in the connection with effecting the transaction except as 
provided in the Rule.
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    \29\ 15 U.S.C. 78k(a).
    \30\ 17 CFR 240.11a2-2(T).
    \31\ The member, however, may participate in clearing and 
settling the transaction.
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    In a letter dated May 20, 2004,\32\ the Amex represents that 
transactions effected on ANTE satisfy the conditions of Rule 11a2-2(T). 
Based on these representations, the Commission finds that the order 
execution algorithm of ANTE complies with the requirements of section 
11(a) of the Exchange Act and Rule 11a2-2(T) thereunder.
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    \32\ See letter from Claire McGrath, Senior Vice President and 
Deputy General Counsel, Amex, to Kelly Riley, Division, Commission, 
dated May 20, 2004.
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    In particular, the Amex states that ANTE ``will place all users of 
the Exchange's ANTE System, members and non-members, on the `same 
footing' '' and that ``at no time following the submission of an order 
will a broker-dealer who enters an order retain any ability to control 
the timing of an execution or otherwise enjoy the kind of special 
order-handling advantages inherent in being on an exchange floor.'' 
Specifically, orders sent to ANTE will be transmitted from remote 
locations (via the member interface) directly to ANTE by electronic 
means. Once an order is submitted to ANTE, the order is executed 
against another order based on an established matching algorithm. As 
the Amex explains, the execution does not depend on the broker-dealer 
but rather upon what other orders are entered into ANTE at or around 
the same time as the subject order, what orders are on the specialist's 
book and where the order is ranked based on the price-time priority 
ranking algorithm. Accordingly, members do not control or influence the 
result or timing of orders submitted to ANTE. Finally, Amex represents 
that ANTE will continue the program currently in place, which allows 
orders for the accounts of broker-dealers to be eligible for execution 
through the Exchange's Auto-Ex system. The Commission notes that the 
staff of the Division previously provided interpretive guidance to the 
Amex regarding its Auto-Ex system.\33\ Based on Amex's representations, 
the staff believed that the execution of broker-dealer orders in the 
Amex Auto-Ex system satisfied the effect v. execute rule.
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    \33\ See letter from Paula R. Jenson, Deputy Chief Counsel, 
Division, Commission, to Jeffrey P. Burns, Assistant General 
Counsel, Amex, dated July 9, 2002.
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    Based on the Amex's representations regarding ANTE, the Commission 
finds that ANTE's electronic order submission and execution process 
also satisfies the four conditions of Rule 11a2-2(T).\34\ First, all 
orders are electronically submitted through remote terminals off the 
exchange floor. Second, because a member relinquishes control of its 
order after it is submitted to ANTE and will not be able to influence 
or guide the execution of its order, the member would not be 
participating in the execution of its order. Third, although the rule 
contemplates having an order executed by an exchange member who is not 
affiliated with the member initiating the order, the Commission 
recognizes that this requirement is satisfied when automated exchange 
facilities are used.\35\ Fourth, the Amex states that members that rely 
on Rule 11a2-2(T) for a managed account transaction must comply with 
the limitations on compensation set forth in the rule.
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    \34\ The Commission and its staff, on numerous occasions, have 
considered the application of Rule 11a2-2(T) to electronic trading 
and order routing systems. See, e.g., Securities Exchange Act 
Release Nos. 49068 (January 13, 2004) (Order approving the Boston 
Options Exchange as an options trading facility of the Boston Stock 
Exchange); 44983 (October 25, 2001) (Order approving the Archipelago 
Exchange as the equities trading facility of PCX Equities Inc.); 
29237 (May 31, 1991) (regarding NYSE's Off-Hours Trading Facility); 
15533 (January 29, 1979) (regarding the Amex Post Execution 
Reporting System, the Amex Switching System, the Intermarket Trading 
System, the Multiple Dealer Trading Facility of the Cincinnati Stock 
Exchange, the PCX's Communications and Execution System, and the 
Phlx's Automated Communications and Execution System); and 14563 
(March 14, 1978) (regarding the NYSE's Designated Order Turnaround 
System). See also Letter from Larry E. Bergmann, Senior Associate 
Director, Division, Commission, to Edith Hallahan, Associate General 
Counsel, Phlx (March 24, 1999) (regarding Phlx's VWAP Trading 
System); letter from Catherine McGuire, Chief Counsel, Division, 
Commission, to David E. Rosedahl, PCX (November 30, 1998) (regarding 
Optimark); and Letter from Brandon Becker, Director, Division, 
Commission, to George T. Simon, Foley & Lardner (November 30, 1994) 
(regarding Chicago Match).
    \35\ In considering the operation of automated execution systems 
operated by an exchange, the Commission noted that while there is no 
independent executing exchange member, the execution of an order is 
automatic once it has been transmitted into the systems. Because the 
design of these systems ensures that members do not possess any 
special or unique trading advantages in handling their orders after 
transmitting them to the exchange, the Commission has stated that 
executions obtained through these systems satisfy the independent 
execution requirement of Rule 11a2-2(T). See Securities Exchange Act 
Release No. 15533 (January 29, 1979).
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V. Accelerated Approval of Amendment No. 7

    The Commission finds good cause for approving Amendment No. 7 to 
the proposed rule change prior to the thirtieth day after the amendment 
is published for comment in the Federal Register pursuant to section 
19(b)(2) of the Act.\36\ Amendment No. 7 addresses concerns raised by 
Commission staff by clarifying in proposed Amex Rule 951-ANTE, 
Commentary .01 that if the bid or offer of a specialist or registered 
options trader locks or crosses the ABBO, the ANTE System would revise 
the bid by the minimum price variations so that the bid or offer 
submitted does not lock or cross the ABBO, provided, however, if the 
ABBO represents an off-floor limit order, the ANTE System would execute 
the order and allocate the trade pursuant to the post trade allocation 
process. The Commission believes that the proposed change in Amendment 
No. 7, which provides for a clearer understanding of the operation in 
the ANTE System of Amex Rule 951-ANTE, Commentary .01, raises no new 
issues of regulatory concern and, therefore, believes that accelerated 
approval of Amendment No. 7 is appropriate.
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    \36\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with section 6(b)(5) of the Act.\37\
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    \37\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\38\ that the proposed rule change (SR-Amex-2003-89) and Amendments 
No. 1, 2, 3, 4, 5 and 6 thereto are approved, and that Amendment No. 7 
thereto is approved on an accelerated basis.
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    \38\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-12027 Filed 5-26-04; 8:45 am]
BILLING CODE 8010-01-P