[Federal Register Volume 70, Number 9 (Thursday, January 13, 2005)]
[Notices]
[Pages 2433-2435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-127]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50999; File No. SR-Amex-2003-90]


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

January 7, 2005.

I. Introduction

    On October 9, 2003, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities

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and Exchange Commission (``SEC'' or ``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 amend Amex Rule 
153 relating to the creation of an electronic order audit trail. On 
December 15, 2004, the Exchange submitted Amendment No. 1 to the 
proposed rule change. The proposed rule change, as amended, was 
published for comment in the Federal Register on December 22, 2004, for 
a 15-day comment period, which expired on January 6, 2005.\3\ This 
order approves the proposed rule change, and Amendment No. 1 thereto, 
on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 50866 (December 16, 
2004), 69 FR 76798.
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II. Background

    The proposed rule change is intended to fulfill certain of the 
undertakings contained in an order issued by the Commission relating to 
the settlement of an enforcement action against the Amex, Chicago Board 
Options Exchange, Inc., Pacific Exchange, Inc., and Philadelphia Stock 
Exchange, Inc. (collectively ``Options Exchanges'') for failure to 
comply with their own rules and to enforce compliance with their own 
rules by their members and persons associated with their members \4\ as 
is required by section 19(g) of the Act.\5\ The Order found that the 
Options Exchanges impaired the operations of the options market by: (1) 
Following a course of conduct under which they refrained from multiple 
listing a large number of options; and (2) inadequately discharging 
their obligations as self-regulatory organizations by failing 
adequately to enforce compliance with (a) certain of their rules, 
including order handling rules, that promote competition as well as 
investor protection, and (b) certain of the rules prohibiting 
anticompetitive conduct, such as harassment, intimidation, refusals to 
deal and retaliation directed at market participants who sought to act 
competitively. In addition, the Commission found that the Options 
Exchanges failed to enforce compliance with their trade reporting 
rules, which promote transparency of the market and facilitate 
surveillance and enforcement of other exchange rules and the Federal 
securities laws.
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    \4\ See Order Instituting Public Administrative Proceedings 
Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, 
Making Findings and Imposing Sanctions, Securities Exchange Act 
Release No. 43268 (September 11, 2000) and Administrative Proceeding 
File 3-10282 (the ``Order'').
    \5\ 15 U.S.C. 78s(g).
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    As part of the Order, the Options Exchanges agreed to, and were 
ordered to comply with, a variety of undertakings. Among other things, 
they agreed to, and were ordered to, design and implement an accurate, 
time-sequenced, consolidated options audit trail system (``COATS'') 
that would enable the Options Exchanges to reconstruct markets 
promptly, effectively surveil them, and enforce order handling, firm 
quote, trading reporting and other rules. The Options Exchanges were 
required to complete this undertaking in five phases. The Options 
Exchanges have completed the first four phases. The final phase of the 
undertaking to implement COATS requires that each exchange incorporate 
into its audit trail all non-electronic orders. This proposed rule 
change addresses that aspect of the undertaking.

III. Description of Proposed Rule Change

    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.\6\ To comply with the COATS standard for an 
accurate time sequencing of option orders, transactions and quotations, 
in the instant filing, the Exchange proposes that members and member 
organizations would be required to systematize, prior to 
representation, either in BARS or in the Order Ticket 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 10, 2005.
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    \6\ See Securities Exchange Act Release No. 45794 (April 22, 
2002), 67 FR 20849 (April 26, 2002).
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    In the case of an order that is not systematized when it reaches 
the Exchange, Amex proposes that a floor broker or a broker's clerk 
would be required to 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 at the 
time of order receipt. Brokers and their clerks also would be required 
to enter information relating to any modification, cancellation or 
execution of an order into BARS. The Exchange would then incorporate 
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 would allow floor brokers and their clerks to create 
electronic, time stamped, handwritten order tickets which would be 
saved by the Exchange as JPEG files.
    A broker or clerk using the proposed BARS Order Ticket enhancement 
would select a new ``Order Ticket'' button on the booth or hand held 
BARS terminal, which would create a blank image template on a screen 
that exists on both the booth and hand held BARS terminals. Brokers and 
their clerks would write on the screen with a stylus and 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 be required to hit a ``save'' button, 
and the Order Ticket would be assigned a specific sequence number. Once 
the ``save'' button is hit, the Order

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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 would be required to 
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 be required to enter the required order 
terms into the OET and transmit the order to AOF. The broker or clerk 
also would be required to enter any information pertaining to a 
modification or cancellation of an order, or the execution of an order, 
directly into BARS from where it would be transmitted to AOF. 
Information pertaining to order modifications and cancellations would 
be required to be systematized prior to representation of the revised 
order in the crowd.
    The Exchange further proposes that any proprietary system approved 
by the Exchange on the Exchange's trading floor which receives orders 
would 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 would be required to have the functionality to comply 
with the requirements of COATS.
    Under the proposed rule change, orders for FLEX options and 
accommodation trades would not have to be systematized prior to 
representation. Information about these orders would be required to be 
submitted to the Exchange on trade date no later than 10 minutes after 
the close of trading. The Exchange would maintain information submitted 
to it pertaining to FLEX options and accommodation trades in the COATS 
format.

IV. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\7\ In 
particular the Commission finds that the proposed rule change is 
consistent with section 6(b)(5) of the Act,\8\ which requires among 
other things, that the Exchange's rules be designed to promote just and 
equitable principles of trade, to remove impediments and to 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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    \7\ 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).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the rules as proposed should allow the 
Exchange to comply with its obligations under the Order in that they 
will result in the creation of an audit trail that incorporates manual 
orders sent to Amex. Specifically, the proposed rule change requires 
that Amex members enter certain order details immediately upon receipt, 
prior to representation of the order, into BARS or in the Order Ticket 
enhancement to BARS for later integration into COATS, which the 
Commission believes should result in an accurate, time-sequenced record 
of orders.
    The Commission notes that the Exchange has acknowledged the need 
for effective and proactive surveillance for activities such as trading 
ahead and front-running in connection with the creation of its audit 
trail. The Exchange represents that it currently conducts automated 
surveillance for such activities and will incorporate a review of order 
systemization as part of such surveillance. The Exchange also states 
that it intends to implement supplementary surveillance and examination 
programs related to the systemization of orders requirement promptly 
after this requirement is instituted, which are designed to address, 
among other things, trading ahead and front-running. The Commission 
views effective surveillance as critical to the integrity of COATS and 
expects that the Exchange will inform the Commission of any problems it 
encounters in conducting effective surveillance.
    The Commission finds good cause for accelerating approval of the 
proposed rule change and Amendment No. 1 thereto, prior to the 
thirtieth day after the date of the publication of notice thereof in 
the Federal Register. The Commission notes that the proposed rule 
change was noticed for a 15-day comment period and no comments were 
received. The Commission believes that it is appropriate to accelerate 
approval of the proposed rule change and Amendment No. 1 thereto so 
that the rule may be implemented on a timely basis to ensure prompt 
compliance with the undertakings contained in the Commission's Order.

V. Conclusion

    For all of the aforementioned reasons, the Commission finds that 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-Amex-2003-90) and Amendment 
No. 1 are approved on an accelerated basis.
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    \9\ 15 U.S.C. 78s(b)(2).

    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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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E5-127 Filed 1-12-05; 8:45 am]
BILLING CODE 8010-01-P