[Federal Register Volume 69, Number 245 (Wednesday, December 22, 2004)]
[Notices]
[Pages 76798-76801]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-27969]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50866; File No. SR-Amex-2003-90]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by American Stock Exchange LLC Relating to the Amendment of 
Exchange Rule 153 and Amendment No. 1 Thereto

December 16, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 9, 2003, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II below, which Items have been prepared by the Exchange. On 
December 15, 2004, the Exchange submitted Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange: (1) Applied the proposed 
rule change to index options that are exclusively traded on Amex, 
(2) changed a deadline in the proposed rule, (3) provided that 
orders for FLEX options and accommodation trades do not need to be 
systematized prior to representation, (4) provided for the use of 
the Exchange's ``Order Ticket'' enhancement to BARS as a second 
acceptable means for systematizing order, (5) clarified that the 
systemization prior to representation requirement applies to 
modifications and cancellations of orders, and (6) made minor 
corrections to the text of the rule and filing.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to amend its Rule 153 relating to the creation of 
an electronic audit trail. The text of the proposal rule change is set 
forth below. New text is in italics; deletions are in brackets.
* * * * *

Record of Orders

    Rule 153. (a) Every member or member organization shall maintain a 
record of every order and every modification and cancellation of such 
order transmitted to the Floor of the Exchange, which record shall 
include the name, amount and price of the security and the time when 
such order, modification or cancellation was so transmitted.
    (b) Every member or member organization shall maintain a record of 
every order and every modification and cancellation of such order 
received by such member or member organization on the Floor of the 
Exchange. Such record shall include the name, amount and price of the 
security and the time when such order, modification or cancellation was 
received. With respect to orders that are eligible for input into the 
Exchange's electronic order processing facilities, members and member 
organizations shall comply with their record keeping obligations under 
this Rule by inputting immediately upon receipt eligible orders, 
modifications and cancellations that are not already systematized into 
the Exchange's electronic order processing facilities and retaining the 
record of such orders provided to them by the Exchange for this 
purpose.
    (c) Rescinded.
    (d) Every member or member organization shall preserve for at least 
three years a record of every commitment or obligation to trade issued 
from the Floor and cancellation thereof, which record shall include the 
name, amount, and price of the security, the destination market center, 
and the time when such commitment was issued or cancelled.
    (e) Every member or member organization shall maintain for at least 
three years a record of every order and every modification and 
cancellation of such order entered into the After-Hours Trading 
Facility (as Rule 1300 (After-Hours Trading: Applicability and 
Definitions) defines that term), which record shall include the name 
and amount of the security, the terms of the order, the time when it 
was so entered, and the time at which a report of execution was 
received. Every specialist shall maintain for at least three years 
reports of all executions and modification and cancellations of orders 
placed with the specialist through the After-Hours Trading Facility.
    (f) Every member or member organization shall maintain a record for 
at least three years of every report of the execution of an order, 
commitment or obligation covered by paragraph (a), (b), (d) or (e) of 
this rule in addition to the record required by such paragraphs, which 
shall include the time of the receipt of such report.
    (g) Before any order, commitment or obligation covered by paragraph 
(a), (b), (d) or (e) of this rule is executed, there shall be placed 
upon the order slip or other record the name or designation of the 
account for which such order, commitment or obligation is to be 
executed; no change in such account name or designation shall be made 
unless the change has been authorized by any member or officer in the 
member organization or authorized representative thereof who shall, 
prior to giving his approval of such change, be personally informed of 
the essential facts relative thereto and shall indicate his approval of 
such change in writing on the order.
    (h) All records required to be maintained under this rule shall 
include such information and shall be preserved for such period as 
required by the Securities Exchange Act of 1934 and the rules 
thereunder relating to the requirements for the retention of orders.
    (i) The term ``order'' as used in this Rule 153 includes any 
modification to or cancellation of such order.
    * * * Commentary

[[Page 76799]]

    .01 Consolidated Options Audit Trail System Requirements--Non-
System Orders--COATS Phase V--. The Exchange has undertaken with the 
other options exchanges to build a Consolidated Options Audit Trail 
System (COATS) which, when fully implemented, will provide an accurate, 
time-sequenced record of electronic and other orders, quotations and 
transactions in listed options on the exchanges. Rule 153(b) currently 
requires members and member organizations to systematize ``immediately 
upon receipt'' orders ``that are eligible for input into the Exchange's 
electronic order processing facilities'' if such orders are not already 
systematized in the Exchange's electronic order processing facilities. 
Commencing on January 10, 2005, members and member organizations must 
systematize in BARS those options orders and modifications and 
cancellations of such orders that are not already systematized in an 
Amex system prior to representing the order in the crowd. Members and 
member organizations also must record in BARS immediately upon receipt 
information pertaining to the execution of option orders.
    The Exchange currently is developing an enhancement to its BARS 
system (called ``Order Ticket'') to facilitate order systemization by 
floor brokers and their clerks. This enhancement will be available by 
the end of the first quarter in 2005. The Order Ticket enhancement will 
allow members and member organizations to create electronic, time 
stamped, handwritten order tickets which will be saved by the Exchange 
as JPEG files. This enhancement, when implemented, will provide members 
and member organizations with a second acceptable means for complying 
with their COATS Phase V obligation to systematize orders prior to 
representation. The following information must be recorded in an Order 
Ticket if this enhancement is used to record an option order prior to 
representing it:
     Buy/Sell
     Symbol
     Quantity
     Call/Put (calls are assumed unless ``P'' is written)
     Expiration
     Strike (fractions are assumed, e.g., ``22\1/2\'' should be 
written as ``22'')
     Price term (a limit order is assumed if a price is 
written, e.g., ``1.20'' means a 1.20 limit. Market orders are blank or 
represented by a dash)
     Contingencies (if applicable, e.g., NH, AON, FOK, IOC)
     Open/Close (close is assumed unless ``O'' is written)
     Customer/Firm/Member Market Maker/Non-Member Market Maker 
(customer is assumed unless ``F'', ``P'' or ``N'' is written.)
     Give up
    At the first mark on the Order Ticket, the Exchange's systems will 
automatically time stamp the ticket. When a broker or clerk finishes 
entering the information on the Order Ticket, he or she should hit a 
``save'' button, and the Order Ticket will be assigned a specific 
sequence number. Once the ``save'' button is hit, the Order Ticket 
cannot be modified and is stored by the Exchange as a JPEG file. After 
the Order Ticket is saved, a broker or clerk must enter the order 
information into BARS as soon as possible, and the Order Ticket 
enhancement will transfer both the time stamp and the sequence number 
from the Order Ticket into BARS. Brokers and their clerks also must 
enter information relating to any modification or cancellation of an 
order into BARS prior to representing the revised order in the crowd. 
Brokers and their clerks must record in BARS immediately upon receipt 
information pertaining to the execution of option orders.
    Any proprietary system approved by the Exchange on the Exchange's 
trading floor which receives orders will be considered an Exchange 
system for the purpose of systematizing those options orders and 
modifications and cancellations of such orders that are not already 
systematized in an Amex system prior to representing the orders in the 
crowd. Any proprietary system approved by the Exchange shall have the 
functionality to comply with the requirements of COATS.
    Members and member organizations do not need to systematize orders 
for accommodation trades (Rule 959) or FLEX options (Rules 900G through 
909G) prior to representing the orders in the crowd. Information about 
these orders must be submitted to the Exchange on trade date no later 
than ten minutes after the close of trading. The Exchange will maintain 
information submitted to it pertaining to FLEX option and accommodation 
trades in the COATS format.
* * * * *

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange has undertaken with the other options exchanges to 
build a Consolidated Options Audit Trail System (``COATS'') which, when 
fully implemented, will provide an accurate, time-sequenced record of 
electronic and other orders, quotations and transactions in listed 
options on the exchanges. In connection with the implementation of 
COATS, the Exchange has modified its Booth Automated Routing System 
(``BARS'') \4\ to accept option order types that are not otherwise 
eligible for input into the Exchange's order routing facilities (e.g., 
complex orders) so that members and member organizations may 
systematize these orders, and the Exchange can integrate them into 
COATS. The Exchange also is in the process of developing a further 
enhancement to BARS called Order Ticket, which, when implemented, the 
Exchange believe will provide a second acceptable means for brokers and 
clerks to comply with their COATS Phase V obligation to systematize 
orders prior to representation.
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    \4\ See Exchange Act Release No. 45782 (April 18, 2002), 67 FR 
20559 (April 25, 2002). BARS is an order routing system that allows 
brokers to manage and route orders for Amex traded securities. BARS 
also has a ``Market Look'' functionality that allows floor brokers 
to transmit information to booth clerks by means of time stamped 
JPEG files. The Exchange maintains these files.
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    Amex Rule 153(b) currently requires members and member 
organizations to systematize ``immediately upon receipt'' orders, and 
modifications or cancellations of orders, ``that are eligible for input 
into the Exchange's electronic order processing facilities'' if such 
orders are not already systematized in the Exchange's electronic order 
processing facilities.\5\ To comply with the COATS standard for an 
accurate time sequencing of option orders, transactions and quotations, 
the Exchange is proposing that members and member organizations should 
systematize, prior to representation, either in BARS or in the Order 
Ticket

[[Page 76800]]

enhancement to BARS described below, those options orders and 
modifications and cancellations of such orders that are not already 
systematized in an Amex system. The obligation to systematize orders 
prior to representation would commence on January 120, 2006.\6\
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    \5\ See, Exchange Act Release No. 34-45794 (April 22, 2002), 67 
FR 20849 (April 26, 2002).
    \6\ COATS Phase V obligates the options exchanges to 
``incorporate into the audit trail all non-electronic orders such 
that the audit trail provides an accurate, time sequenced record of 
electronic and other orders, quotations and transactions * * * 
beginning with the receipt of an order * * * and further documenting 
the life of the order through the process of execution, partial 
execution, or cancellation of that order, which audit trail shall be 
readily retrievable in the common computer format.''
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    In the case of an order that is not systematized when it reaches 
the Exchange, a floor broker or a broker's clerk would systematize the 
order by (1) opening an Order Entry Template (``OET'') on the 
Exchange's BARS booth or hand held terminal, (2) entering the order 
terms into the OET, and (3) transmitting the order to the Amex Order 
File (``AOF''). The first keystroke in the OET would be captured by the 
Exchange's systems as the time of order receipt. Brokers and their 
clerks also would enter information relating to any modification, 
cancellation or execution of an order into BARS. The Exchange 
incorporates order and execution information in the AOF into the COATS 
file. In addition to entering a non-system order directly into BARS, 
the Amex has designed an enhancement to the BARS system ( called 
``Order Ticket'') to facilitate order systemization by floor brokers 
and their clerks. The Exchange anticipates that the Order Ticket 
enhancement will be available by the end of the first quarter of 2005. 
The Order Ticket enhancement will allow floor brokers and their clerks 
to create electronic, time stamped, handwritten order tickets which 
will be saved by the Exchange as JPEG files.
    A broker or clerk who wants to use the BARS order Ticket 
enhancement would select a new ``Order Ticket'' button on the booth or 
hand held BARS terminal. This would create a blank image template on a 
screen that already exists on both the booth and hand held BARS 
terminals Brokers and their clerks would write on the screen with a 
stylus and, in this manner, record order terms just as if they were 
using a paper order ticket. A person using the Order Ticket enhancement 
would be required to record the following order terms on the ticket 
prior to representing the order in the trading crowd.
     Buy/Sell.
     Symbol.
     Quantity.
     Call/Put (calls would be assumed unless ``P'' is written).
     Expiration.
     Strike (fractions would be assumed e.g., ``22\1/2\'' would 
be written as ``22'').
     Price term (a limit order would be assumed if a price were 
written, e.g., ``1.20'' would mean a 1.20 limit. Market orders would be 
blank or represented by a dash).
     Contingencies (if applicable, e.g., NH, AON, FOK, IOC, 
stock).
     Open/Close (close would be assumed unless ``O'' is 
written).
     Customer/Firm/Member Market Maker/Non-Member Market Maker 
(customer would be assumed unless ``F,'' ``P'' or ``N'' is written.).
     Give-up.
    At the first mark on the template, the Order Ticket would be 
automatically time stamped by the Exchange's systems to the nearest 
second. When the broker or clerk finishes entering the information on 
the Order Ticket, he or she would hit a ``save'' button, and the Order 
Ticket would be assigned a specific sequence number. Once the ``save'' 
button is hit, the Order Ticket could not be modified and would be 
stored by the Exchange as a JPEG file.
    Once the order is systematized in Order Ticket, the member or 
member organization that accepted the order must transfer the order 
terms into BARS so that a record of the order may be maintained in the 
Exchange's AOF system and any trade information submitted to 
comparison. In order to enter the order into BARS, a floor broker or 
clerk would open a BARS OET on a saved Order Ticket by selecting a new 
OET button within the image. This would cause both the time stamp and 
the sequence number from the Order Ticket to be automatically 
transferred from the Order Ticket to the OET. The transfer of the time 
stamp and sequence number would be done by the Exchange's systems and 
could not be modified by the broker or clerk. The broker or clerk then 
would enter the required order terms into the OET and transmit the 
order to AOF. The broker or clerk also would enter any information 
pertaining to a modification or cancellation of an order, or the 
execution of an order, firectly into BARS from where it would be 
transmitted to AOF. Information pertaining to order modifications and 
cancellations would have to be systemized prior to representation of 
the revised order in the crowd. As previously noted, order information 
in AOF is incorporated into the COATS file.
    Any proprietary system approved by the Exchange on the Exchange's 
trading floor which receives orders will be considered an Exchange 
system for the purpose of systematizing those options orders and 
modifications and cancellations of such orders that are not already 
systematized in an Amex system prior to representing the orders in the 
crowd. Any proprietary system approved by the Exchange shall have the 
functionality to comply with the requirements of COATS.
    Orders for FLEX options and accommodation trades would not have to 
be systematized prior to representation. Information about these orders 
would be submitted to the Exchange on trade date no later than 10 
minutes after the close of trading. The Exchange will maintain 
information submitted to it pertaining to FLEX option and accommodation 
trades in the COATS format.
    The Exchange believes that the systemization of options orders 
directly into BARS or through the Order Ticket enhancement to BARS 
(once it is available) both would provide acceptable means for brokers 
and clerks to comply with their COATS Phase V obligation to systematize 
orders prior to representation. The Order Ticket enhancement, moreover, 
would facilitate COATS Phase V compliance by persons who are unfamiliar 
with keyboard style data entry because Order Ticket uses handwriting on 
an electronic pad similar to the traditional paper order tickets. \7\
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    \7\ The Exchange recognizes the need for effective and proactive 
surveillance for activities such as trading ahead and frontrunning. 
It currently conducts surveillance for such activities and will 
incorporate a review of order systemization as part of such 
surveillance. The Exchange also intends to implement supplementary 
surveillance and examination programs related to the systemization 
of order requirement promptly after this requirement is instituted, 
and which will support, among other things, trading ahead and 
frontrunning surveillances.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \8\ in general and furthers the objectives 
of Section 6(b)(5) \9\ in particular in that the proposed rule change 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, 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; and is not designed to

[[Page 76801]]

permit unfair discrimination between customers, issuers, brokers and 
dealers.
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    \8\ 15 U.S.C 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

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 self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change; 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-2003-90 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-2003-90. 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 offices 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-2003-90 and should be submitted on or before January 12, 2005.

    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)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-27969 Filed 12-21-04; 8:45 am]
BILLING CODE 8010-01-M