[Federal Register Volume 69, Number 132 (Monday, July 12, 2004)]
[Notices]
[Pages 41863-41864]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15685]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49969; File No. 4-429]


Joint Industry Plan; Order Approving Joint Amendment No. 11 to 
the Plan for the Purpose of Creating and Operating an Intermarket 
Option Linkage Relating to the Processing of Satisfaction Orders

July 2, 2004.

I. Introduction

    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 Option Linkage (``Linkage Plan'').\1\ The 
amendment proposes to change the manner in which the Participants and 
their members process Satisfaction Orders \2\ they send following a 
Trade-Through \3\, and the executions (``fills'') that arise from such 
orders.
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    \1\ On July 28, 2000, the Commission approved a national market 
system plan for the purpose of creating and operating an intermarket 
option 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, January 29, 
2003, June 18, 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 
37869 (June 25, 2003); and 49146 (January 29, 2004), 69 FR 5618 
(February 5, 2004).
    \2\ A ``Satisfaction Order'' is defined as 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.
    \3\ 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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    The proposed amendment to the Linkage Plan was published in the 
Federal Register on May 19, 2004.\4\ No comments were received on the 
proposed amendment. This order approves the proposed amendment to the 
Linkage Plan.
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    \4\ See Securities Exchange Act Release No. 49691 (May 12, 
2004), 69 FR 28954.
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II. Description of the Proposed Amendment

    The Participants propose to change the manner in which they process 
Satisfaction Orders following a Trade-Through in Joint Amendment No. 
11. 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.\5\ Upon receipt

[[Page 41864]]

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.\6\ 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 related to Satisfaction Order 
processing.
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    \5\ See Sections 7(a)(ii)(D) & 8(c)(ii)(B)(2) of the Linkage 
Plan.
    \6\ See Section 8(c)(ii)(A) of the Linkage Plan.
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    In Joint Amendment No. 11, the Participants explain that currently, 
the Linkage Plan 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).\7\ 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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    \7\ See Section 8(c)(ii)(B)(2) of the Linkage Plan.
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    In addition, the proposed amendment explains that the Linkage Plan 
currently permits a Participant that sends a Satisfaction Order through 
Linkage to reject the receiving Participant's 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.\8\ 
However, if the order is filled or canceled, the Participants represent 
that 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 as soon as practical if the 
underlying customer order is filled or canceled. The proposed amendment 
would clarify that the customer order must be canceled or executed 
prior to the receipt of the Satisfaction Order fill report.
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    \8\ See Section 8(c)(ii)(C) of the Linkage Plan.
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    Lastly, as noted above, a Participant can reject a Satisfaction 
Order fill if the underlying customer order is executed or canceled 
while the Satisfaction Order is pending. However, the member that 
initiated the Satisfaction Order may, itself, trade against the 
customer order before the member receives a notice from the receiving 
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.

III. Discussion

    After careful consideration, the Commission finds that proposed 
Joint Amendment No. 11 to the Linkage Plan is consistent with the 
requirements of the Act and the rules and regulations thereunder. 
Specifically, the Commission finds that the proposed amendment to the 
Linkage Plan is consistent with Section 11A of the Act \9\ and Rule 
11Aa3-2 thereunder,\10\ in that it should clarify the Participants' 
obligations with respect to the sending of Satisfaction Orders and the 
receipt of Satisfaction Order fills, which should facilitate the fair 
and efficient processing of Satisfaction Orders through the Linkage in 
furtherance of the goals of a national market system.
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    \9\ 15 U.S.C. 78k-1.
    \10\ 17 CFR 240.11Aa3-2.
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IV. Conclusion

    It is therefore ordered, pursuant to section 11A of the Act \11\ 
and Rule 11Aa3-2 thereunder,\12\ that the proposed Joint Amendment No. 
11 is hereby approved.
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    \11\ See supra note 10.
    \12\ See supra note 11.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-15685 Filed 7-9-04; 8:45 am]
BILLING CODE 8010-01-P