[Federal Register Volume 69, Number 160 (Thursday, August 19, 2004)]
[Notices]
[Pages 51495-51498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18980]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50188; File No. SR-Amex-00-27]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change and Amendments No. 1, 2, 3, 4, 
5, and 6 Thereto To Require the Immediate Display of Customer Option 
Limit Orders

August 12, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on May 10, 2000, the American Stock Exchange LLC 
(``Amex'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the 
Exchange. The Exchange filed amendments to the proposed rule change on 
March 13, 2002,\3\ April 3, 2003,\4\ July 15, 2003,\5\ August 19, 
2003,\6\ October 22, 2003,\7\ and August 12, 2004,\8\ respectively. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On March 13, 2002, the Exchange filed a Form 19b-4, which 
replaced the original filing in its entirety (``Amendment No. 1'').
    \4\ On April 3, 2003, the Exchange filed a Form 19b-4, which 
replaced the original filing in and Amendment No. 1 in their 
entirety (``Amendment No. 2'').
    \5\ On July 15, 2003, the Exchange filed a Form 19b-4, which 
replaced the original filing in and all previous amendments in their 
entirety (``Amendment No. 3'').
    \6\ On August 19, 2004, the Exchange filed a Form 19b-4, which 
replaced the original filing and all previous amendments in their 
entirety (``Amendment No. 4'').
    \7\ See letter from Claire P. McGrath, Senior Vice President and 
Deputy General Counsel, Amex, to Nancy Sanow, Assistant Director, 
Division of Market Regulation, Commission, dated October 21, 2003 
(``Amendment No. 5''). In Amendment No. 5, the Exchange amended the 
proposed text of Amex Rule 958(A)(e) to require that specialists 
publish immediately upon receipt, both the price and size of each 
customer options limit order that improves the displayed bid or 
offer.
    \8\ On August 12, 2004, the Exchange filed a Form 19b-4, which 
replaced the original filing and all previous amendments in their 
entirety (``Amendment No. 6'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Amex Rules 958A and 958A--ANTE to 
require the immediate display of customer options limit orders that 
better the current market quotation. In addition, the Exchange proposes 
to amend Amex Rule 590 to include violations of the options limit order 
display rules in the Minor Rule Violation Fine System. The text of the 
proposed rule change follows. Proposed new text is in italics.

Rule 590 General Rule Violations

    (a) through (f) No changes.
    (g) The Enforcement Department may impose fines according to the 
following schedule for the rule violations listed below:
* * * * *
     Violation of the Limit Order Display Rule. (SEC Rule 
11Ac1-4 and Amex Rule 958A(e))
* * * * *

Rule 958A Application of the Firm Quote Rule and the Limit Order 
Display Rule

    (a) through (d) No change.
    (e) Customer Limit Orders: (1) Specialists shall publish 
immediately upon receipt the price and size of each customer options 
limit order held by the specialist that is at a price or size that 
would improve the displayed bid or offer in the option that is the 
subject of the limit order. ``Immediately upon receipt'' shall mean, 
under normal market conditions, as soon as practicable but no later 
than 30 seconds after receipt.
    (2) The requirement in subparagraph (1) shall not apply to any 
customer options limit order that: (i) Is executed upon receipt of the 
order; (ii) is placed by a customer that expressly requests, either at 
the time that the order is

[[Page 51496]]

placed or prior thereto pursuant to an individually negotiated 
agreement with respect to each customer's order, that the order not be 
displayed and upon receipt of the order, the specialist announces to 
the trading crowd the information concerning the order that would be 
displayed absent the customer's request; (iii) is in excess of 100 
contracts, unless the customer placing the order requests the order be 
displayed; (iv) is received prior to or during the opening trading 
rotation whether at the beginning of the trading day or after a trading 
halt, provided the order is displayed immediately upon the conclusion 
of the trading rotation; (v) is an order type set forth in Rules 131 
(c), (e), (i), (k), (l), (q), (r) and (s), 950(e) and 950--ANTE (e); or 
(vi) the terms of which are delivered by the specialist to another 
exchange for an execution.
    (3) For purposes of this rule, the term ``customer options limit 
order'' shall mean an order to buy or sell an option at a specified 
price and size that is for the account of a customer as defined in 
paragraph (a)(26) of Rule 11Ac1-1 under the Securities Exchange Act of 
1934.
   Commentary
    .01 through .02 No change.
* * * * *

Rule 958A--ANTE Application of the Firm Quote Rule and the Limit Order 
Display Rule

    (a) through (d) No change.
    (e) Customer Limit Orders: (1) Specialists shall publish 
immediately upon receipt the price and size of each customer options 
limit order held by the specialist that is at a price or size that 
would improve the displayed bid or offer in the option that is the 
subject of the limit order. ``Immediately upon receipt'' shall mean, 
under normal market conditions, as soon as practicable but no later 
than 30 seconds after receipt.
    (2) The requirement in subparagraph (1) shall not apply to any 
customer options limit order that: (i) is executed upon receipt of the 
order; (ii) is placed by a customer that expressly requests, either at 
the time that the order is placed or prior thereto pursuant to an 
individually negotiated agreement with respect to each customer's 
order, that the order not be displayed and upon receipt of the order, 
the specialist announces to the trading crowd the information 
concerning the order that would be displayed absent the customer's 
request; (iii) is in excess of 100 contracts, unless the customer 
placing the order requests the order be displayed; (iv) is received 
prior to or during the opening trading rotation whether at the 
beginning of the trading day or after a trading halt provided the order 
is displayed immediately upon the conclusion of the trading rotation; 
(v) is an order type set forth in Rules 131 (c), (e), (i), (k), (l), 
(q), (r) and (s), 950(e) and 950--ANTE (e); or (vi) the terms of which 
are delivered by the specialist to another exchange for an execution.
    (3) For purposes of this rule, the term ``customer options limit 
order'' shall mean an order to buy or sell an option at a specified 
price and size that is for the account of a customer as defined in 
paragraph (a)(26) of Rule 11Ac1-1 under the Securities Exchange Act of 
1934.
   Commentary
    .01 through .02 No change.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Amex Rules 958A and 958A--ANTE to 
require the immediate display of customer options limit orders. 
Customer limit orders in options are entered into the specialist's 
limit order book (the ``Amex Options Display Book'' or ``AODB'' or the 
``Central Book'' for orders in options trading on the ANTE System \9\) 
either through the Exchange's electronic routing system or manually by 
the specialist after the order has been handed to him by a floor 
broker. Currently, customer options limit orders of up to 30,000 
contracts can be electronically sent to the Exchange by the member 
firms through the Amex Order File system (``AOF''). If the limit order 
is executable (i.e., the customer limit is at the displayed market) and 
is within certain order size parameters,\10\ it will be automatically 
executed by the Exchange's Auto-Ex system or within the ANTE System. If 
the limit order is for greater than the established size parameter or 
is not executable (i.e., the customer limit is away from--either better 
or worse than--the displayed market), it will be sent directly to the 
AODB. If the limit order is better than the current market, the 
specialist can either execute the order or display it.
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    \9\ ANTE is an integrated, scaleable, easily configurable system 
developed to meet the Exchange's current and future competitive and 
economic challenges. ANTE has been designed to replicate and improve 
upon many of the processes and procedures in place on the trading 
floor. The ANTE System has replaced many of the Exchange's systems, 
including the automated quotation calculation system and specialist 
``book'' functions such as limit order display, automatic order 
execution and allocation of trades. The functions available in the 
AODB are split between the ANTE Central Book and the ANTE Display 
Book. The Central Book contains what was formerly known as the 
``specialist's limit order book'' and provides for the matching and 
execution of eligible orders similar to the Auto Match and Auto-Ex 
Systems. The ANTE Display Book is similar to the ``Acknowledgement 
Box'' currently found in the AODB and contains orders awaiting 
manual handling. Use of the ANTE System was approved by the 
Commission on May 20, 2004 and is currently being rolled-out across 
the Amex trading floor. It is expected that all equity and index 
option classes will be trading on the ANTE System by the end of the 
third quarter of 2005. See Securities Exchange Act Release No. 49747 
(May 20, 2004), 69 FR 30344 (May 27, 2004) (Order Approving File No. 
SR-Amex-2003-89).
    \10\ The Exchange's Auto-Ex feature was initially approved in 
1985 to allow orders of up to 10 contracts to be automatically 
executed. Over the years, the Exchange states that it has recognized 
that the order size for some option classes should be larger. The 
Exchange has obtained Commission approval to increase the order size 
for select option classes up to 500 contracts. See Securities 
Exchange Act Release No. 47673 (April 14, 2003), 68 FR 19242 (April 
18, 2003)(Order Approving File No. SR-Amex-2003-08). In the ANTE 
System, the automatic matching and execution of the executable 
customer limit orders can occur up to the disseminated size of the 
displayed quote.
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    To improve on the timeliness of displaying customer limit orders, 
the Exchange proposes to require the immediate display of customer 
options limit orders, which, under normal market conditions, would mean 
as soon as practicable but no later than 30 seconds after receipt,\11\ 
unless a specific exception applies. The proposed limit order display 
rule would not apply to any customer limit order that: (i) Is executed 
upon receipt of the order; (ii) a customer expressly requests not be 
displayed and upon receipt of the order, the specialist announces to 
the trading crowd the information concerning the

[[Page 51497]]

order that would be displayed absent the customer's request; (iii) is 
in excess of 100 contracts, unless the customer placing such order 
requests that the order be displayed; (iv) is received prior to or 
during the opening trading rotation whether at the beginning of the 
trading day or after a trading halt, provided the order is displayed 
immediately upon the conclusion of the trading rotation; (v) is an 
order type set forth in Amex Rule 131 and made applicable to options 
trading pursuant to Amex Rules 950(e) and 950--ANTE (e); and (vi) the 
terms of which are delivered by the specialist to another exchange for 
an execution.
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    \11\ ``Receipt'' for all option surveillance reports is the time 
the order enters the Amex Order File (``AOF''). Amex systems do not 
capture for use in the surveillance reports the time an order is 
displayed on the AODB or on the Central Book, which may be a few 
seconds after the order entered AOF. Thus, surveillance for the 
proposed limit order display rule is similar to other rules, such as 
the firm quote rule, wherein the Exchange measures compliance with 
the rule using the time the order enters AOF.
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    The Exchange proposes to exempt the following order types set forth 
under Amex Rule 131 and discussed in item (v) above from display: (1) 
All or None Orders--a market or limited price order which is to be 
executed in its entirety or not at all (Amex Rule 131 (c));\12\ (2) At 
the Close Orders--market on close (``MOC'') and limit on close 
(``LOC'') orders are orders to buy or sell a stated amount of a 
security at the Exchange's closing price. Regardless of the time at 
which an MOC or an LOC order is entered, the specialist is required to 
hold such order, and is precluded from representing, displaying or 
booking it until as near as possible to the close of trading. As a 
result it would be impossible to determine whether the specialist met 
the limit order display standard for those orders (Amex Rule 131(e)); 
(3) Fill or Kill Orders--market or limited price orders which are to be 
executed in their entirety as soon as they are represented in the 
trading crowd or on the ANTE System, and such orders, if not so 
executed, are to be treated as cancelled (Amex Rules 131(i) and 950--
ANTE (e)(vi)); (4) Immediate or Cancel Orders--market or limited price 
orders which are to be executed in whole or in part as soon as such 
orders are represented in the trading crowd or on the ANTE System, and 
the portions not so executed are to be treated as cancelled (Amex Rules 
131(k) and 950--ANTE (e)(v)); (5) Not Held Order--a discretionary order 
with instructions granting the agent discretion as to the price and/or 
the time of execution. Specialists are prohibited by Amex Rule 154, 
Commentary .03 from accepting Not Held Orders (Amex Rule 131(l)); (6) 
Stop Orders--a stop order to buy becomes a market order when a 
transaction in the option occurs at or above the stop price or the bid 
price is at or above the stop price after the order is represented in 
the trading crowd and a stop order to sell becomes a market order when 
transaction in the option occurs at or below the stop price or the 
offer price is at or below the stop price after the order is 
represented in the trading crowd (Amex Rule 131(q)); (7) Stop Limit 
Orders--a stop limit order to buy becomes a limit order executable at 
the limit price or at a better price, if obtainable, when a transaction 
in the option occurs at or above the stop price or when the bid price 
in such option is at or above the stop price and a stop limit order to 
sell becomes a limit order executable at the limit price or at a better 
price, if obtainable, when a transaction in the option occurs at or 
below the stop price or when the offer price in such option is at or 
below the stop price (Amex Rule 131 (r)); and (8) Complex Orders: 
Spread, Straddle, Switch and Combination--These orders involve the 
trading of more than one option series as a package, typically at a net 
debit or credit, as opposed to a specific limit price for each series 
involved. Therefore, there is no specified limit price for each series 
involved to display. Moreover, the Options Price Reporting Authority 
(``OPRA'') does not accept for dissemination complex order quotes at 
net prices. Each component series of these complex orders is contingent 
upon the ability to execute the other component series in the order 
(Amex Rules 131(s), 950(e) and 950--ANTE (e)).
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    \12\ The Commission's Limit Order Display Rule for equities 
provides an exception for ``all or none'' orders. See Exchange Act 
Rule 11Ac1-4(c)(7), 17 CFR 240.11Ac1-4(c)(7).
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    The Exchange staff will conduct periodic reviews to ensure that 
specialists are displaying limit orders in a timely manner in 
compliance with the display requirement. In determining compliance with 
the Rule, the Exchange will take into consideration factors such as 
market conditions and trading activity in the option and underlying 
security.\13\ Currently, violations of the limit order display rule for 
equities \14\ are handled by the Exchange's Enforcement Department as 
part of the Minor Rule Violation Fine System set forth in Rule 590. The 
Exchange also proposes to expand Amex Rule 590 to include violations of 
the options limit order display rule set forth in Amex Rules 958A(e) 
and 948A--ANTE (e).
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    \13\ See also Exchange Act Rule 11Ac1-4, 17 CFR 240.11Ac1-4, and 
NASD Notice to Members 99-99, which discusses member obligations to 
display customer limit orders. Exchange Act Rule 11Ac1-4 requires 
the immediate display of customer limit orders. In adopting Exchange 
Act Rule 11Ac1-4, the Commission clarified that the ``immediate'' 
display requirement meant that the orders must be displayed ``as 
soon as is practicable after receipt which, under normal market 
conditions, would require display no later than 30 seconds after 
receipt.'' See Securities Exchange Act Release No. 37619A, 61 FR 
48290, at 48304 (September 12, 1996). Interpretations, such as NASD 
Notice to Members 99-99, further state that the 30-second 
requirement to display limit orders does not operate as a safe 
harbor, that various factors should be taken into consideration when 
evaluating the immediacy with which a customer limit order is 
displayed, and that any systematic delay in the handling of orders, 
regardless of how long, would constitute a violation of the Exchange 
Act Rule 11Ac1-4.
    \14\ See Exchange Act Rule 11Ac1-4, 17 CFR 240.11Ac1-4.
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    In addition, the Exchange has recently implemented a quote assist 
feature on a one-year pilot program basis for both the AODB and the 
ANTE System, which automatically displays eligible limit orders within 
a configurable time period.\15\ While all customer limit orders are 
expected to be displayed immediately, the quote assist features can be 
set to automatically display limit orders at or close to the end of the 
30-second time frame or within any other shorter time frame established 
by the Exchange. In the event there are instances where the specialist 
has not yet addressed the order within the applicable 30-second period, 
the quote assist feature will automatically display the eligible 
customer limit order at or close to the end of that period. The quote 
assist features help to ensure that eligible customer limit orders are 
displayed within the required time period then in effect. The Exchange 
notes that the quote assist feature will not relieve the specialists of 
their obligation to display customer limit orders immediately. To the 
extent that a specialist excessively relies on the quote assist feature 
to display eligible limit orders without attempting to address the 
orders immediately, the specialist could be violating his due diligence 
obligation. A practice of excessive reliance upon the quote assist 
feature is reviewed by the Exchange's Member Firm Regulation as a 
possible due diligence violation.
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    \15\ See Securities Exchange Act Release No. 49797 (June 3, 
2004) 69 FR 32637 (June 10, 2004) (Notice of Filing and Immediate 
Effectiveness of File No. SR-Amex-2004-41).
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    Finally, as part of the proposed rule change, the Exchange has 
developed automated systems to surveil for limit order display 
violations and an automated Specialist Limit Order Display Report that 
will detail, should the proposed rule change be approved, instances 
when a specialist held an open customer order to buy or sell at a price 
that was superior to the specialist's posted quote and did not either 
execute or display the order in compliance with the proposed rule 
change. The Exchange believes implementing these enhancements will be 
beneficial for the marketplace by

[[Page 51498]]

requiring the immediate display of customer limit orders that better 
the posted quote.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
section 6(b) of the Act,\16\ in general, and furthers the objectives of 
section 6(b)(5),\17\ in particular, in that it is designed 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 facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will impose no burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, as amended, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-00-27 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-00-27. 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 Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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-00-27 and should be submitted on or before 
September 9, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-18980 Filed 8-18-04; 8:45 am]
BILLING CODE 8010-01-P