[Federal Register Volume 70, Number 41 (Thursday, March 3, 2005)]
[Notices]
[Pages 10425-10436]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-844]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51246; File No. SR-Amex-2005-11]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 
Thereto by the American Stock Exchange LLC To Adopt Obvious Error Rules 
for Options Transactions

February 24, 2005.
    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 January 18, 2005, 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 and 
II below, which items have been prepared by the Exchange. The proposed 
rule change has been filed by Amex as a ``non-controversial'' rule 
change pursuant to section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ On January 24, 2005, Amex submitted Amendment 
No. 1 to the proposed rule change.\5\ On January 26, 2005, Amex 
submitted Amendment No. 2 to the proposed rule change.\6\ On February 
3, 2005, Amex submitted Amendment No. 3 to the proposed rule change.\7\ 
On February 24, 2005, Amex submitted Amendment No. 4 to the proposed 
rule change.\8\ 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ Amendment No. 1 superseded and replaced the original 
proposed rule change in its entirety.
    \6\ Amendment No. 2 superseded and replaced the original 
proposed rule change and Amendment No. 1 in their entirety.
    \7\ Amendment No. 3 superseded and replaced the original 
proposed rule change, Amendment No. 1, and Amendment No. 2 in their 
entirety.
    \8\ In Amendment No. 4, Amex replaced the term ``control room'' 
with ``Exchange's Service Desk'' in paragraph (b)(2) of proposed 
Amex Rule 936C and paragraph (b)(2) of Amex Rule 936C--ANTE.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Amex proposes to adopt new Amex Rules 936, 936C, 936-ANTE, and 
936C-ANTE to provide for the cancellation and adjustment of options 
transactions resulting from obvious errors. The proposed rule text is 
set forth below.\9\ Additions are italicized. Deletions are bracketed.
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    \9\ The proposed rule text below contains technical corrections 
as follows: (1) capitalize the word ``Official'' in proposed Amex 
Rule 936, Commentary .03; (2) change the abbreviation ``EST'' to 
``ET'' in proposed Amex Rule 936C--ANTE (a)(6) and (b)(1), and the 
purpose section; and (3) make typographical corrections to proposed 
Amex Rules 936, 936--ANTE, 936C, and 936C--ANTE. Telephone 
conversations between Claire P. McGrath, Senior Vice President and 
General Counsel, Amex, and Frank N. Genco, Special Counsel, Division 
of Market Regulation, Commission, on February 9, 2005; and Jeffrey 
Burns, Associate General Counsel, Amex, and Frank N. Genco, Special 
Counsel, Division of Market Regulation, Commission, on February 9, 
2005.
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* * * * *

Rule 950. Rules of General Applicability

    (a) The following Floor Rules shall apply to Exchange option 
transactions and other transactions on the Exchange in options 
contracts: 100, 101, 104, 105, 106, 110, 112, 117, 123, 129, 130, 
[135,] 150, 151, 152, 153, 155, 157, 172, 173, 174, 175, 176, 177, 180, 
181, 183, 184, 185, 192 and 193. Unless the context otherwise requires, 
the term ``stock'' wherever used in the foregoing Rules shall be deemed 
to include option contracts. Except as otherwise provided in this Rule, 
all other Floor Rules (series 100 et seq.) shall not be applicable to 
Exchange option transactions.
(b)-(n). No Change

Rule 936. Cancellation and Adjustment of Equity Options Transactions

    This Rule governs the cancellation and adjustment of transactions 
involving equity options. Rules 936C and 936C-ANTE govern the 
cancellation and adjustment of transactions involving options on 
indexes, exchange-traded funds (``ETFs'') and trust issued receipts 
(``TIRs''). Paragraphs (a)(1) and (2) of this Rule have no 
applicability to trades executed in open outcry. (a) Trades Subject to 
Review. A member or person associated with a member may have a trade 
cancelled or adjusted if, in addition to satisfying the procedural 
requirements of paragraph (b) below, one of the following conditions is 
satisfied:
    (1) Obvious Price Error. An obvious pricing error occurs when the 
execution price of an electronic transaction is above or below the 
Theoretical Price for the series by an amount equal to at least the 
amount shown below:

------------------------------------------------------------------------
                                                               Minimum
                     Theoretical price                          amount
------------------------------------------------------------------------
Below $2...................................................        $0.25
$2 to $5...................................................         0.40
Above $5 to $10............................................         0.50
Above $10 to $20...........................................         0.80
Above $20..................................................         1.00
------------------------------------------------------------------------

    Definition of Theoretical Price. For purposes of this Rule only, 
the Theoretical Price of an option series is, for series traded on at 
least one other options exchange, the last bid price with respect to an 
erroneous sell transaction and the last offer price with respect to an 
erroneous buy transaction, just prior to the trade, disseminated by the 
competing options exchange that has the most liquidity in that option 
class in the previous two calendar months. If there are no quotes for 
comparison, designated Trading Officials will

[[Page 10426]]

determine the Theoretical Price. For transactions occurring as part of 
an opening, the Theoretical Price shall be the first quote after the 
transaction(s) in question that does not reflect the erroneous 
transaction(s).
    (i) Cancellation or Price Adjustment. Obvious Pricing Errors will 
be cancelled or adjusted as follows.
     Transactions Between Amex specialists/registered options 
traders (ROTs): Where both parties to the transaction are Amex 
specialists/ROTs, the execution price of the transaction will be 
adjusted by Trading Officials to the prices provided in Paragraphs (A) 
and (B) below, minus (plus) an adjustment penalty (``adjustment 
penalty''), unless both parties agree to adjust the transaction to a 
different price or agree to cancel the trade within fifteen (15) 
minutes of being notified by Trading Officials of the Obvious Error.
    (A) Erroneous buy transactions will be adjusted to their 
Theoretical Price plus an adjustment penalty of either $.15 if the 
Theoretical Price is under $3 or $.30 if the Theoretical Price is at or 
above $3.
    (B) Erroneous sell transactions will be adjusted to their 
Theoretical Price minus an adjustment penalty of either $.15 if the 
Theoretical Price is under $3 or $.30 if the Theoretical Price is at or 
above $3.
     Transactions Involving at least one non-Amex specialist/
ROT: Where one of the parties to the transaction is not an Amex 
specialist/ROT, the transactions will be cancelled by Trading Officials 
unless both parties agree to an adjustment price for the transaction 
within thirty (30) minutes of being notified by Trading Officials of 
the Obvious Error.
    (2) No Bid Series. Electronic transactions in series quoted no bid 
at a nickel (i.e., $0.05 offer) will be cancelled provided at least one 
strike price below (for calls) or above (for puts) in the same options 
class was quoted no bid at a nickel at the time of execution.
    (3) Verifiable Disruptions or Malfunctions of Exchange Systems. 
Electronic or open outcry transactions arising out of a ``verifiable 
disruption or malfunction'' in the use or operation of any Exchange (a) 
automated quotation, dissemination, execution, or communication system 
that caused a quote/order to trade in excess of its disseminated size 
(e.g., a quote/order that is frozen because of an Exchange system error 
and is repeatedly traded) in which case trades in excess of the 
disseminated size may be nullified; or (b) automated quotation, 
dissemination or communication system that prevented a member from 
updating or canceling a quote/order for which the member is 
responsible, provided there is Exchange documentation reflecting that 
the member sought to update or cancel the quote/order. With respect to 
verifiable disruptions or malfunctions of the Exchange's automated 
quotation system, documentation of the existence of the disruption or 
malfunction will be sufficient provided the automated quotation system 
was programmed to update or cancel a quote based upon specific changes 
in the underlying, those changes occurred and due to the disruption or 
malfunction the quote was not updated or cancelled. Transactions that 
qualify for price adjustment will be adjusted to the Theoretical Price, 
as defined in paragraph (a)(1) above.
    (4) Erroneous Print in Underlying. A trade resulting from an 
erroneous print disseminated by the underlying market which is later 
cancelled or corrected by that underlying market may be cancelled. In 
order to be cancelled, however, the trade must be the result of an 
erroneous print that is higher or lower than the average trade in the 
underlying security during a two minute period before and after the 
erroneous print by an amount at least five times greater than the 
average quote width for such underlying security during the same 
period. For purposes of this Rule, the average trade in the underlying 
security shall be determined by adding the prices of each trade during 
the four minute time period referenced above (excluding the trade in 
question) and dividing by the number of trades during such time period 
(excluding the trade in question). For purposes of this Rule, the 
average quote width shall be determined by adding the quote widths of 
each separate quote during the four minute time period referenced above 
(excluding the quote in question) and dividing by the number of quotes 
during such time period (excluding the quote in question).
    (5) Erroneous Quote in Underlying. Electronic trades (this 
provision does not apply to trades executed in open outcry) resulting 
from an erroneous quote in the underlying security may be adjusted or 
canceled as set forth in paragraph (a)(1) above. An erroneous quote 
occurs when the underlying security has a width of at least $1.00 and 
has a width at least five times greater than the average quote width 
for such underlying security on the primary market (as defined in Rule 
900 (b)(26)) during the time period encompassing two minutes before and 
after the dissemination of such quote. For purposes of this Rule, the 
average quote width shall be determined by adding the quote widths of 
each separate quote during the four minute time period referenced above 
(excluding the quote in question) and dividing the number of quotes 
during such time period (excluding the quote in question).

(b) Procedures for Reviewing Transactions

    (1) Notification. Any member or person associated with a member 
that believes it participated in a transaction that may be cancelled or 
adjusted in accordance with paragraph (a) must notify any Trading 
Official promptly but not later than fifteen (15) minutes after the 
execution in question. Absent unusual circumstances, Trading Officials 
shall not grant relief under this Rule unless notification is made 
within the prescribed time periods. In the absence of unusual 
circumstances, Trading Officials (either on their own motion or upon 
request of a member) must initiate action pursuant to paragraph (a)(3) 
above within sixty (60) minutes of the occurrence of the verifiable 
disruption or malfunction. When Trading Officials take action pursuant 
to paragraph (a)(3), the members involved in the transaction(s) shall 
receive verbal notification as soon as is practicable.
    (2) Review and Determination. Once a party to a transaction has 
applied to a Trading Official for review, the transaction shall be 
reviewed and a determination rendered, unless both parties to the 
transaction agree to withdraw the application for review prior to the 
time a decision is rendered. Absent unusual circumstances (e.g., a 
large number of disputed transactions arising out of the same 
incident), Trading Officials must render a determination within sixty 
(60) minutes of receiving notification pursuant to paragraph (b)(1) 
above. Trading Officials shall promptly provide verbal notification of 
a determination to the members involved in the disputed transaction and 
to the Exchange's Service Desk.

(c) Obvious Error Panel

    (1) Composition. An Obvious Error Panel will be comprised of at 
least one (1) member of the Regulatory staff and four (4) Floor 
Officials. Fifty percent of the number of Floor Officials on the 
Obvious Error Panel must be directly engaged in market making activity 
and fifty percent of the number of Floor Officials on the Obvious Error 
Panel must act in the capacity of a non-specialist floor broker.
    (2) Scope of Review. If a party affected by a determination made 
under this Rule so requests within the time permitted in paragraph (b), 
an Obvious Error Panel will review decisions made by the Trading 
Officials under this Rule,

[[Page 10427]]

including whether an obvious error occurred, whether the correct 
Theoretical Price was used, and whether the correct adjustment was made 
at the correct price. A party may also request that the Obvious Error 
Panel provide relief as required in this Rule in cases where the party 
failed to provide the notification required in paragraph (b) and the 
Trading Officials declined to grant an extension, but unusual 
circumstances must merit special consideration.
    (3) Procedure for Requesting Review. A request for review must be 
made in writing within (30) minutes after a party receives verbal 
notification of a final determination by the Trading Officials under 
this Rule, except that if notification is made after 3:30 p.m. Eastern 
Time (``ET''), either party has until 9:30 a.m. ET the next trading day 
to request review. The Obvious Error Panel shall review the facts and 
render a decision on the day of the transaction, or the next trade day 
in the case where a request is properly made the next trade day.
    (4) Panel Decision. The Obvious Error Panel may overturn or modify 
an action taken by the Trading Officials under this Rule upon agreement 
by a majority of the Panel representatives. All determinations by the 
Obvious Error Panel may be appealed in accordance with paragraph (d) of 
this rule.
    (d) Review of Rulings. A member affected by a determination made 
under this rule may appeal such determination to a Review Panel of at 
least three (3) Exchange Officials who have not already ruled on the 
matter. A request for review must be made in writing (in a form and 
manner prescribed by the Exchange) no later than the close of trading 
on the next trade date after the member receives verbal notification of 
such determination by Trading Officials. Notwithstanding other Exchange 
rules to the contrary (e.g., Rule 22(d)), decisions of the Review Panel 
are binding on members, subject to any right of appeal pursuant to 
Article II, Section 3 of the Constitution. The parties may also elect 
to submit the matter to arbitration pursuant to Article VIII of the 
Constitution.
    (e) Negotiated Trade Cancellation. A trade may be cancelled if the 
parties to the trade agree to the cancellation. When all parties to a 
trade have agreed to a trade cancellation one party must promptly 
disseminate cancellation information in OPRA format.

Commentary

    .01 The term ``Trading Officials'' means two Exchange members 
designated as Floor Officials and one member of the Regulatory staff.
    .02 For purposes of this Rule, an ``erroneous sell transaction'' is 
one in which the price received by the person selling the option is 
erroneously low, and an ``erroneous buy transaction'' is one in which 
the price paid by the person purchasing the option is erroneously high.
    .03 Applicability: Trading Officials may also allow for the 
execution of opening trades that were not executed on the opening but 
that should have been executed had the specialist opened the series at 
the non-erroneous price. The Exchange will endeavor to notify its 
members as soon as practicable after the correction of an erroneous 
print and will indicate that this may result in the adjustment of 
trades executed during the opening rotation. The only trades that will 
be adjusted are those that were executed on the opening or those that 
should have executed on the opening. All adjustments will be made 
during the day when the correction of the erroneous print occurred.
* * * * *
    Rule 936C. Cancellation and Adjustment of Index Option Transactions 
This Rule only governs the cancellation and adjustment of transactions 
involving options on indexes, exchange-traded funds (ETFs) and trust 
issued receipts (TIRs). Rule 936 governs the cancellation and 
adjustment of transactions involving equity options. Paragraphs (a)(1), 
(2), (6) and (7) of this Rule have no applicability to trades executed 
in open outcry.

(a) Trades Subject To Review

    A member or person associated with a member may have a trade 
cancelled or adjusted if, in addition to satisfying the procedural 
requirements of paragraph (b) below, one of the following conditions is 
satisfied:
    (1) Obvious Price Error. An obvious pricing error will be deemed to 
have occurred when the execution price of a transaction is above or 
below the fair market value of the option by at least a prescribed 
amount. For series trading with normal bid-ask differentials as 
established in Rule 958(c), the prescribed amount shall be: (a) the 
greater of $0.10 or 10% for options trading under $2.50; (b) 10% for 
options trading at or above $2.50 and under $5; or (c) $0.50 for 
options trading at $5 or higher. For series trading with bid-ask 
differentials that are greater than the widths established in Rule 
958(c), the prescribed error amount shall be: (a) the greater of $0.20 
or 20% for options trading under $2.50; (b) 20% for options trading at 
or above $2.50 and under $5; or (c) $1.00 for options trading at $5 or 
higher.
    (i) Definition of Fair Market Value: For purposes of this Rule 
only, the fair market value of an option is the midpoint of the 
national best bid and national best offer for the series (across all 
exchanges trading the option). In multiply listed issues, if there are 
no quotes for comparison purposes, fair market value shall be 
determined by Trading Officials. For singly-listed issues, fair market 
value shall be the first quote after the transaction(s) in question 
that does not reflect the erroneous transaction(s). For transactions 
occurring as part of an opening, the Fair Market Value shall also be 
the first quote after the transaction(s) in question that does not 
reflect the erroneous transaction(s).
    (2) Obvious Quantity Error. An obvious error in the quantity term 
will be deemed to occur when the transaction size exceeds the 
responsible broker or dealer's average disseminated size over the 
previous four hours by a factor of five (5) times. The quantity to 
which a transaction shall be adjusted from an obvious quantity error 
shall be the responsible broker or dealer's average disseminated size 
over the previous four trading hours (which may include the previous 
trading day).
    (3) Verifiable Disruptions or Malfunctions of Exchange Systems. 
Trades arising out of a ``verifiable disruption or malfunction'' in the 
use or operation of any Exchange (a) automated quotation, 
dissemination, execution, or communication system that caused a quote/
order to trade in excess of its disseminated size (e.g., a quote/order 
that is frozen because of an Exchange system error and is repeatedly 
traded) in which case trades in excess of the disseminated size may be 
nullified; or (b) automated quotation, dissemination or communication 
system that prevented a member from updating or canceling a quote/order 
for which the member is responsible, provided there is Exchange 
documentation reflecting that the member sought to update or cancel the 
quote/order. With respect to verifiable disruptions or malfunctions of 
the Exchange's automated quotation system, documentation of the 
existence of the disruption or malfunction will be sufficient provided 
the automated quotation system was programmed to update or cancel a 
quote based upon specific changes in the underlying, those changes 
occurred and due to the disruption or malfunction the quote was not 
updated or cancelled. Transactions that qualify for price adjustment 
will be

[[Page 10428]]

adjusted to the Fair Market Value, as defined in paragraph (a)(1)(i) 
above.
    (4) Erroneous Print in Underlying. A trade resulting from an 
erroneous print disseminated by the underlying market which is later 
cancelled or corrected by that underlying market may be cancelled or 
adjusted. In order to be cancelled or adjusted, however, the trade must 
be the result of an erroneous print that is higher or lower than the 
average trade in the underlying security during a two minute period 
before and after the erroneous print by an amount at least five times 
greater than the average quote width for such underlying security 
during the same period.
    For purposes of this Rule, the average trade in the underlying 
security shall be determined by adding the prices of each trade during 
the four minute time period referenced above (excluding the trade in 
question) and dividing by the number of trades during such time period 
(excluding the trade in question). For purposes of this Rule, the 
average quote width shall be determined by adding the quote widths of 
each separate quote during the four minute time period referenced above 
(excluding the quote in question) and dividing by the number of quotes 
during such time period (excluding the quote in question).
    (5) Erroneous Quote in Underlying. A trade resulting from an 
erroneous quote in the underlying security may be cancelled or 
adjusted. An erroneous quote occurs when the underlying security has a 
width of at least $1.00 and has a width at least five times greater 
than the average quote width for such underlying security on the 
primary market (as defined in Rule 900(b)(26)) during the time period 
encompassing two minutes before and after the dissemination of such 
quote.
    (6) Trades Below Intrinsic Value. An obvious pricing error will be 
deemed to occur when the transaction price of an equity option is more 
than $0.10 below the intrinsic value of the same option (an option that 
trades at its intrinsic value is sometimes said to trade at 
``parity''). Paragraph (6) shall not apply to transactions occurring 
during the last two minutes of the trading day (which is typically 
4:00:01 p.m. (ET) to 4:02 p.m. (ET)) on days with regular trading 
hours).
    (i) Definition of Intrinsic Value: For purposes of this Rule, the 
intrinsic value of an equity call option equals the value of the 
underlying stock (measured from the bid or offer as described below) 
minus the strike price, and the intrinsic value of an equity put option 
equals the strike price minus the value of the underlying stock 
(measured from the bid or offer as described below), provided that in 
no case is the intrinsic value of an option less than zero. In the case 
of purchasing call options and selling put options, intrinsic value is 
measured by reference to the bid in the underlying security, and in the 
case of purchasing put options and selling call options, intrinsic 
value is measured by reference to the offer in the underlying security.
    (7) No Bid Series. Electronic transactions in series quoted no bid 
at a nickel (i.e., $0.05 offer) will be cancelled provided at least one 
strike price below (for calls) or above (for puts) in the same options 
class was quoted no bid at a nickel at the time of execution.

(b) Procedures for Reviewing Transactions.

    (1) Notification. Any member or person associated with a member 
that believes it participated in a transaction that may be cancelled or 
adjusted in accordance with paragraph (a) must notify any Trading 
Official promptly but not later than fifteen (15) minutes after the 
execution in question. For transactions occurring after 3:45 p.m. (ET), 
notification must be provided promptly but not later than fifteen (15) 
minutes after the close of trading of that security on the Exchange. 
Absent unusual circumstances, Trading Officials shall not grant relief 
under this Rule unless notification is made within the prescribed time 
periods. In the absence of unusual circumstances, Trading Officials 
(either on their own motion or upon request of a member) must initiate 
action pursuant to paragraph (a)(3) above within sixty (60) minutes of 
the occurrence of the verifiable disruption or malfunction. When 
Trading Officials take action pursuant to paragraph (a)(3), the members 
involved in the transaction(s) shall receive verbal notification as 
soon as is practicable.
    (2) Review and Determination. Once a party to a transaction has 
applied to a Trading Official for review, the transaction shall be 
reviewed and a determination rendered, unless both parties to the 
transaction agree to withdraw the application for review prior to the 
time a decision is rendered. Absent unusual circumstances (e.g., a 
large number of disputed transactions arising out of the same 
incident), Trading Officials must render a determination within sixty 
(60) minutes of receiving notification pursuant to paragraph (b)(1) 
above. If the transaction(s) in question occurred after 3:30 p.m. (ET), 
Trading Officials shall have until 10:30 a.m. (ET) the following 
morning to render a determination. Trading Officials shall promptly 
provide verbal notification of a determination to the members involved 
in the disputed transaction and to the Exchange's Service Desk.
    (c) Adjustments. Unless otherwise specified in Rule 936C(a)(1)-(6), 
transactions will be adjusted provided the adjusted price does not 
violate the customer's limit price. Otherwise, the transaction will be 
cancelled. With respect to 936C(a)(1)-(5), the price to which a 
transaction shall be adjusted shall be the national best bid or offer 
(NBBO) immediately following the erroneous transaction with respect to 
a sell (buy) order entered on the Exchange. For opening transactions, 
the price to which a transaction shall be adjusted shall be based on 
the first non-erroneous quote after the erroneous transaction on the 
Exchange. With respect to Rule 936C(a)(6), the transaction shall be 
adjusted to a price that is $0.10 under parity.
    (d) Review of Rulings. A member affected by a determination made 
under this rule may appeal such determination to a Review Panel of at 
least three (3) Exchange Officials who have not already ruled on the 
matter. A request for review must be made in writing (in a form and 
manner prescribed by the Exchange) no later than the close of trading 
on the next trade date after the member receives verbal notification of 
such determination by Trading Officials. Notwithstanding other Exchange 
rules to the contrary (e.g., Rule 22(d)), decisions of the Review Panel 
are binding on members, subject to any right of appeal pursuant to 
Article II, Section 3 of the Constitution. The parties may also elect 
to submit the matter to arbitration pursuant to Article VIII of the 
Constitution.
    (e) Negotiated Trade Cancellation. A trade may be cancelled if the 
parties to the trade agree to the cancellation. When all parties to a 
trade have agreed to a trade cancellation one party must promptly 
disseminate cancellation information in OPRA format.

Commentary

    .01 The term ``Trading Officials'' means two Exchange members 
designated as Floor Officials and one member of the Regulatory staff.
    .02 Applicability: Trading Officials may also allow for the 
execution of opening trades that were not executed on the opening but 
that should have been executed had the specialist opened the series at 
the non-erroneous price. The Exchange will endeavor to notify its 
members as soon as practicable after the correction of an erroneous 
print and will indicate that this may result in the adjustment of 
trades executed during

[[Page 10429]]

the opening rotation. The only trades that will be adjusted are those 
that were executed on the opening or those that should have executed on 
the opening. All adjustments will be made during the day when the 
correction of the erroneous print occurred.
* * * * *
    Rule 936--ANTE. Cancellation and Adjustment of Equity Options 
Transactions This Rule governs the nullification and adjustment of 
transactions involving equity options. Rule 936C and 936C--ANTE governs 
the nullification and adjustment of transactions involving options on 
indexes, exchange-traded funds (``ETFs'') and trust issued receipts 
(``TIRs''). Paragraphs (a)(1) and (2) of this Rule have no 
applicability to trades executed in open outcry. (a) Trades Subject to 
Review. A member or person associated with a member may have a trade 
cancelled or adjusted if, in addition to satisfying the procedural 
requirements of paragraph (b) below, one of the following conditions is 
satisfied:
    (1) Obvious Price Error. An obvious pricing error occurs when the 
execution price of an electronic transaction is above or below the 
Theoretical Price for the series by an amount equal to at least the 
amount shown below:

------------------------------------------------------------------------
                                                               Minimum
                     Theoretical price                          amount
------------------------------------------------------------------------
Below......................................................        $0.25
$2 to $5...................................................         0.40
Above $5 to $10............................................         0.50
Above $10 to $20...........................................         0.80
Above $20..................................................         1.00
------------------------------------------------------------------------

    Definition of Theoretical Price. For purposes of this Rule only, 
the Theoretical Price of an option series is, for series traded on at 
least one other options exchange, the last bid price with respect to an 
erroneous sell transaction and the last offer price with respect to an 
erroneous buy transaction, just prior to the trade, disseminated by the 
competing options exchange that has the most liquidity in that option 
class in the previous two calendar months. If there are no quotes for 
comparison, designated Trading Officials will determine the Theoretical 
Price. For transactions occurring as part of an opening, the 
Theoretical Price shall be the first quote after the transaction(s) in 
question that does not reflect the erroneous transaction(s).
    (i) Cancellation or Price Adjustment. Obvious Pricing Errors will 
be cancelled or adjusted as follows.
     Transactions Between Amex specialists/registered options 
traders (ROTs): Where both parties to the transaction are Amex 
specialists/ROTs, the execution price of the transaction will be 
adjusted by Trading Officials to the prices provided in Paragraphs (A) 
and (B) below, minus (plus) an adjustment penalty (``adjustment 
penalty''), unless both parties agree to adjust the transaction to a 
different price or agree to cancel the trade within fifteen (15) 
minutes of being notified by Trading Officials of the Obvious Error.
    (A) Erroneous buy transactions will be adjusted to their 
Theoretical Price plus an adjustment penalty of either $.15 if the 
Theoretical Price is under $3 or $.30 if the Theoretical Price is at or 
above $3.
    (B) Erroneous sell transactions will be adjusted to their 
Theoretical Price minus an adjustment penalty of either $.15 if the 
Theoretical Price is under $3 or $.30 if the Theoretical Price is at or 
above $3.
     Transactions Involving at least one non-Amex specialist/
ROT: Where one of the parties to the transaction is not an Amex 
specialist/ROT, the transactions will be cancelled by Trading Officials 
unless both parties agree to an adjustment price for the transaction 
within thirty (30) minutes of being notified by Trading Officials of 
the Obvious Error.
    (2) No Bid Series. Electronic transactions in series quoted no bid 
at a nickel (i.e., $0.05 offer) will be cancelled provided at least one 
strike price below (for calls) or above (for puts) in the same options 
class was quoted no bid at a nickel at the time of execution.
    (3) Verifiable Disruptions or Malfunctions of Exchange Systems. 
Electronic or open outcry transactions arising out of a ``verifiable 
disruption or malfunction'' in the use or operation of any Exchange (a) 
automated quotation, dissemination, execution, or communication system 
that caused a quote/order to trade in excess of its disseminated size 
(e.g., a quote/order that is frozen because of an Exchange system error 
and is repeatedly traded) in which case trades in excess of the 
disseminated size may be nullified; or (b) automated quotation, 
dissemination or communication system that prevented a member from 
updating or canceling a quote/order for which the member is 
responsible, provided there is Exchange documentation reflecting that 
the member sought to update or cancel the quote/order. With respect to 
verifiable disruptions or malfunctions of the Exchange's automated 
quotation system, documentation of the existence of the disruption or 
malfunction will be sufficient provided the automated quotation system 
was programmed to update or cancel a quote based upon specific changes 
in the underlying, those changes occurred and due to the disruption or 
malfunction the quote was not updated or cancelled. Transactions that 
qualify for price adjustment will be adjusted to the Theoretical Price, 
as defined in paragraph (a)(1) above.
    (4) Erroneous Print in Underlying. A trade resulting from an 
erroneous print disseminated by the underlying market which is later 
cancelled or corrected by that underlying market may be cancelled. In 
order to be cancelled, however, the trade must be the result of an 
erroneous print that is higher or lower than the average trade in the 
underlying security during a two minute period before and after the 
erroneous print by an amount at least five times greater than the 
average quote width for such underlying security during the same 
period. For purposes of this Rule, the average trade in the underlying 
security shall be determined by adding the prices of each trade during 
the four minute time period referenced above (excluding the trade in 
question) and dividing by the number of trades during such time period 
(excluding the trade in question). For purposes of this Rule, the 
average quote width shall be determined by adding the quote widths of 
each separate quote during the four minute time period referenced above 
(excluding the quote in question) and dividing by the number of quotes 
during such time period (excluding the quote in question).
    (5) Erroneous Quote in Underlying. Electronic trades (this 
provision does not apply to trades executed in open outcry) resulting 
from an erroneous quote in the underlying security may be adjusted or 
canceled as set forth in paragraph (a)(1) above. An erroneous quote 
occurs when the underlying security has a width of at least $1.00 and 
has a width at least five times greater than the average quote width 
for such underlying security on the primary market (as defined in Rule 
900(b)(26)--ANTE) during the time period encompassing two minutes 
before and after the dissemination of such quote. For purposes of this 
Rule, the average quote width shall be determined by adding the quote 
widths of each separate quote during the four minute time period 
referenced above (excluding the quote in question) and dividing the 
number of quotes during such time period (excluding the quote in 
question).

(b) Procedures for Reviewing Transactions

    (1) Notification. Any member or person associated with a member 
that believes it participated in a transaction that may be cancelled or 
adjusted in accordance with paragraph (a) must

[[Page 10430]]

notify any Trading Official promptly but not later than fifteen (15) 
minutes after the execution in question. Absent unusual circumstances, 
Trading Officials shall not grant relief under this Rule unless 
notification is made within the prescribed time periods. In the absence 
of unusual circumstances, Trading Officials (either on their own motion 
or upon request of a member) must initiate action pursuant to paragraph 
(a)(3) above within sixty (60) minutes of the occurrence of the 
verifiable disruption or malfunction. When Trading Officials take 
action pursuant to paragraph (a)(3), the members involved in the 
transaction(s) shall receive verbal notification as soon as is 
practicable.
    (2) Review and Determination. Once a party to a transaction has 
applied to a Trading Official for review, the transaction shall be 
reviewed and a determination rendered, unless both parties to the 
transaction agree to withdraw the application for review prior to the 
time a decision is rendered. Absent unusual circumstances (e.g., a 
large number of disputed transactions arising out of the same 
incident), Trading Officials must render a determination within sixty 
(60) minutes of receiving notification pursuant to paragraph (b)(1) 
above. Trading Officials shall promptly provide verbal notification of 
a determination to the members involved in the disputed transaction and 
to the Exchange's Service Desk.

(c) Obvious Error Panel

    (1) Composition. An Obvious Error Panel will be comprised of at 
least one (1) one member of the regulatory staff and four (4) Floor 
Officials. Fifty percent of the number of Floor Officials on the 
Obvious Error Panel must be directly engaged in market making activity 
and fifty percent of the number of Floor Officials on the Obvious Error 
Panel must act in the capacity of a non-specialist floor broker.
    (2) Scope of Review. If a party affected by a determination made 
under this Rule so requests within the time permitted in paragraph (b), 
an Obvious Error Panel will review decisions made by the Trading 
Officials under this Rule, including whether an obvious error occurred, 
whether the correct Theoretical Price was used, and whether the correct 
adjustment was made at the correct price. A party may also request that 
the Obvious Error Panel provide relief as required in this Rule in 
cases where the party failed to provide the notification required in 
paragraph (b) and the Trading Officials declined to grant an extension, 
but unusual circumstances must merit special consideration.
    (3) Procedure for Requesting Review. A request for review must be 
made in writing within (30) minutes after a party receives verbal 
notification of a final determination by the Trading Officials under 
this Rule, except that if notification is made after 3:30 p.m. Eastern 
Time (``ET''), either party has until 9:30 a.m. ET the next trading day 
to request review. The Obvious Error Panel shall review the facts and 
render a decision on the day of the transaction, or the next trade day 
in the case where a request is properly made the next trade day.
    (4) Panel Decision. The Obvious Error Panel may overturn or modify 
an action taken by the Trading Officials under this Rule upon agreement 
by a majority of the Panel representatives. All determinations by the 
Obvious Error Panel may be appealed in accordance with paragraph (d) of 
this rule.
    (d) Review of Rulings. A member affected by a determination made 
under this rule may appeal such determination to a Review Panel of at 
least three (3) Exchange Officials who have not already ruled on the 
matter. A request for review must be made in writing (in a form and 
manner prescribed by the Exchange) no later than the close of trading 
on the next trade date after the member receives verbal notification of 
such determination by Trading Officials. Notwithstanding other Exchange 
rules to the contrary (e.g., Rule 22(d)), decisions of the Review Panel 
are binding on members, subject to any right of appeal pursuant to 
Article II, Section 3 of the Constitution. The parties may also elect 
to submit the matter to arbitration pursuant to Article VIII of the 
Constitution.
    (e) Negotiated Trade Cancellation. A trade may be cancelled if the 
parties to the trade agree to the cancellation. When all parties to a 
trade have agreed to a trade cancellation one party must promptly 
disseminate cancellation information in OPRA format.

Commentary

    .01 The term ``Trading Officials'' means two Exchange members 
designated as Floor Officials and one member of the Regulatory staff.
    .02 For purposes of this Rule, an ``erroneous sell transaction'' is 
one in which the price received by the person selling the option is 
erroneously low, and an ``erroneous buy transaction'' is one in which 
the price paid by the person purchasing the option is erroneously high.
    .03 Applicability: Trading Officials may also allow for the 
execution of opening trades that were not executed on the opening but 
that should have been executed had the specialist opened the series at 
the non-erroneous price. The Exchange will endeavor to notify its 
members as soon as practicable after the correction of an erroneous 
print and will indicate that this may result in the adjustment of 
trades executed during the opening rotation. The only trades that will 
be adjusted are those that were executed on the opening or those that 
should have executed on the opening. All adjustments will be made 
during the day when the correction of the erroneous print occurred.
* * * * *

Rule 936C--ANTE. Cancellation and Adjustment of Index Option 
Transactions

    This Rule only governs the cancellation and adjustment of 
transactions involving options on indexes, exchange-traded funds (ETFs) 
and trust issued receipts (TIRs). Rule 936 and 936--ANTE governs the 
cancellation and adjustment of transactions involving equity options. 
Paragraphs (a)(1), (2), (6) and (7) of this Rule have no applicability 
to trades executed in open outcry.

(a) Trades Subject To Review

    A member or person associated with a member may have a trade 
cancelled or adjusted if, in addition to satisfying the procedural 
requirements of paragraph (b) below, one of the following conditions is 
satisfied:
    (1) Obvious Price Error. An obvious pricing error will be deemed to 
have occurred when the execution price of a transaction is above or 
below the fair market value of the option by at least a prescribed 
amount. For series trading with normal bid-ask differentials as 
established in Rule 958(c)--ANTE, the prescribed amount shall be: (a) 
The greater of $0.10 or 10% for options trading under $2.50; (b) 10% 
for options trading at or above $2.50 and under $5; or (c) $0.50 for 
options trading at $5 or higher. For series trading with bid-ask 
differentials that are greater than the widths established in Rule 
958(c)--ANTE, the prescribed error amount shall be: (a) the greater of 
$0.20 or 20% for options trading under $2.50; (b) 20% for options 
trading at or above $2.50 and under $5; or (c) $1.00 for options 
trading at $5 or higher.
    (i) Definition of Fair Market Value: For purposes of this Rule 
only, the fair market value of an option is the midpoint of the 
national best bid and national best offer for the series (across

[[Page 10431]]

all exchanges trading the option). In multiply listed issues, if there 
are no quotes for comparison purposes, fair market value shall be 
determined by Trading Officials. For singly-listed issues, fair market 
value shall be the first quote after the transaction(s) in question 
that does not reflect the erroneous transaction(s). For transactions 
occurring as part of an opening, the Fair Market Value shall also be 
the first quote after the transaction(s) in question that does not 
reflect the erroneous transaction(s).
    (2) Obvious Quantity Error. An obvious error in the quantity term 
will be deemed to occur when the transaction size exceeds the 
responsible broker or dealer's average disseminated size over the 
previous four hours by a factor of five (5) times. The quantity to 
which a transaction shall be adjusted from an obvious quantity error 
shall be the responsible broker or dealer's average disseminated size 
over the previous four trading hours (which may include the previous 
trading day).
    (3) Verifiable Disruptions or Malfunctions of Exchange Systems. 
Trades arising out of a ``verifiable disruption or malfunction'' in the 
use or operation of any Exchange (a) automated quotation, 
dissemination, execution, or communication system that caused a quote/
order to trade in excess of its disseminated size (e.g., a quote/order 
that is frozen because of an Exchange system error and is repeatedly 
traded) in which case trades in excess of the disseminated size may be 
nullified; or (b) automated quotation, dissemination or communication 
system that prevented a member from updating or canceling a quote/order 
for which the member is responsible, provided there is Exchange 
documentation reflecting that the member sought to update or cancel the 
quote/order. With respect to verifiable disruptions or malfunctions of 
the Exchange's automated quotation system, documentation of the 
existence of the disruption or malfunction will be sufficient provided 
the automated quotation system was programmed to update or cancel a 
quote based upon specific changes in the underlying, those changes 
occurred and due to the disruption or malfunction the quote was not 
updated or cancelled. Transactions that qualify for price adjustment 
will be adjusted to the Fair Market Value, as defined in paragraph 
(a)(1)(i) above.
    (4) Erroneous Print in Underlying. A trade resulting from an 
erroneous print disseminated by the underlying market which is later 
cancelled or corrected by that underlying market may be cancelled or 
adjusted. In order to be cancelled or adjusted, however, the trade must 
be the result of an erroneous print that is higher or lower than the 
average trade in the underlying security during a two minute period 
before and after the erroneous print by an amount at least five times 
greater than the average quote width for such underlying security 
during the same period.
    For purposes of this Rule, the average trade in the underlying 
security shall be determined by adding the prices of each trade during 
the four minute time period referenced above (excluding the trade in 
question) and dividing by the number of trades during such time period 
(excluding the trade in question). For purposes of this Rule, the 
average quote width shall be determined by adding the quote widths of 
each separate quote during the four minute time period referenced above 
(excluding the quote in question) and dividing by the number of quotes 
during such time period (excluding the quote in question).
    (5) Erroneous Quote in Underlying. A trade resulting from an 
erroneous quote in the underlying security may be cancelled or 
adjusted. An erroneous quote occurs when the underlying security has a 
width of at least $1.00 and has a width at least five times greater 
than the average quote width for such underlying security on the 
primary market (as defined in Rule 900 (b)(26)--ANTE) during the time 
period encompassing two minutes before and after the dissemination of 
such quote.
    (6) Trades Below Intrinsic Value. An obvious pricing error will be 
deemed to occur when the transaction price of an equity option is more 
than $0.10 below the intrinsic value of the same option (an option that 
trades at its intrinsic value is sometimes said to trade at 
``parity''). Paragraph (6) shall not apply to transactions occurring 
during the last two minutes of the trading day (which is typically 
4:00:01 p.m. (ET) to 4:02 p.m. (ET)) on days with regular trading 
hours). (i) Definition of Intrinsic Value: For purposes of this Rule, 
the intrinsic value of an equity call option equals the value of the 
underlying stock (measured from the bid or offer as described below) 
minus the strike price, and the intrinsic value of an equity put option 
equals the strike price minus the value of the underlying stock 
(measured from the bid or offer as described below), provided that in 
no case is the intrinsic value of an option less than zero. In the case 
of purchasing call options and selling put options, intrinsic value is 
measured by reference to the bid in the underlying security, and in the 
case of purchasing put options and selling call options, intrinsic 
value is measured by reference to the offer in the underlying security.
    (7) No Bid Series. Electronic transactions in series quoted no bid 
at a nickel (i.e., $0.05 offer) will be cancelled provided at least one 
strike price below (for calls) or above (for puts) in the same options 
class was quoted no bid at a nickel at the time of execution.

(b) Procedures for Reviewing Transactions

    (1) Notification. Any member or person associated with a member 
that believes it participated in a transaction that may be cancelled or 
adjusted in accordance with paragraph (a) must notify any Trading 
Official promptly but not later than fifteen (15) minutes after the 
execution in question. For transactions occurring after 3:45 p.m. (ET), 
notification must be provided promptly but not later than fifteen (15) 
minutes after the close of trading of that security on the Exchange. 
Absent unusual circumstances, Trading Officials shall not grant relief 
under this Rule unless notification is made within the prescribed time 
periods. In the absence of unusual circumstances, Trading Officials 
(either on their own motion or upon request of a member) must initiate 
action pursuant to paragraph (a)(3) above within sixty (60) minutes of 
the occurrence of the verifiable disruption or malfunction. When 
Trading Officials take action pursuant to paragraph (a)(3), the members 
involved in the transaction(s) shall receive verbal notification as 
soon as is practicable.
    (2) Review and Determination. Once a party to a transaction has 
applied to a Trading Official for review, the transaction shall be 
reviewed and a determination rendered, unless both parties to the 
transaction agree to withdraw the application for review prior to the 
time a decision is rendered. Absent unusual circumstances (e.g., a 
large number of disputed transactions arising out of the same 
incident), Trading Officials must render a determination within sixty 
(60) minutes of receiving notification pursuant to paragraph (b)(1) 
above. If the transaction(s) in question occurred after 3:30 p.m. (ET), 
Trading Officials shall have until 10:30 a.m. (ET) the following 
morning to render a determination. Trading Officials shall promptly 
provide verbal notification of a determination to the members involved 
in the disputed transaction and to the Exchange's Service Desk.
    (c) Adjustments. Unless otherwise specified in Rule 936C--ANTE 
(a)(1)-(6), transactions will be adjusted provided the adjusted price 
does not violate the customer's limit price. Otherwise, the transaction 
will be

[[Page 10432]]

cancelled. With respect to Rule 936C--ANTE (a)(1)-(5), the price to 
which a transaction shall be adjusted shall be the national best bid or 
offer (NBBO) immediately following the erroneous transaction with 
respect to a sell (buy) order entered on the Exchange. For opening 
transactions, the price to which a transaction shall be adjusted shall 
be based on the first non-erroneous quote after the erroneous 
transaction on the Exchange. With respect to Rule 936C--ANTE (a)(6), 
the transaction shall be adjusted to a price that is $0.10 under 
parity.
    (d) Review of Rulings. A member affected by a determination made 
under this rule may appeal such determination to a Review Panel of at 
least three (3) Exchange Officials who have not already ruled on the 
matter. A request for review must be made in writing (in a form and 
manner prescribed by the Exchange) no later than the close of trading 
on the next trade date after the member receives verbal notification of 
such determination by Trading Officials.
    Notwithstanding other Exchange rules to the contrary e.g., Rule 
22(d)), decisions of the Review Panel are binding on members, subject 
to any right of appeal pursuant to Article II, Section 3 of the 
Constitution. The parties may also elect to submit the matter to 
arbitration pursuant to Article VIII of the Constitution.
    (e) Negotiated Trade Cancellation. A trade may be cancelled if the 
parties to the trade agree to the cancellation. When all parties to a 
trade have agreed to a trade cancellation one party must promptly 
disseminate cancellation information in OPRA format.

Commentary

    .01 The term ``Trading Officials'' means two Exchange members 
designated as Floor Officials and one member of the Regulatory staff.
    .02 Applicability: Trading Officials may also allow for the 
execution of opening trades that were not executed on the opening but 
that should have been executed had the specialist opened the series at 
the non-erroneous price. The Exchange will endeavor to notify its 
members as soon as practicable after the correction of an erroneous 
print and will indicate that this may result in the adjustment of 
trades executed during the opening rotation. The only trades that will 
be adjusted are those that were executed on the opening or those that 
should have executed on the opening. All adjustments will be made 
during the day when the correction of the erroneous print occurred.
* * * * *

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 parts of such 
statements.

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

1. Purpose
    The purpose of the proposed rule change is to adopt new Amex Rules 
936, 936C, 936--ANTE, and 936C--ANTE to allow the Exchange to either 
cancel or adjust equity, index, exchange-traded fund (``ETF''), and 
trust issued receipt (``TIR'') options transactions, the terms of which 
are obviously in error. The proposal would apply to transactions in 
both the Amex New Trading Environment (``ANTE'')\10\ as well as the 
existing floor-based auction market traditionally available on the 
Exchange. The proposed rule contains objective criteria for determining 
when an options transaction constitutes an ``obvious error,'' provides 
an objective process members must follow to seek relief under the rule, 
and provides an appeals process for members seeking to challenge an 
initial determination. Because of the lack of uniform obvious error 
rules among the options exchanges, customers that routinely send orders 
to multiple exchanges have indicated that a more uniform obvious error 
pricing rule with respect to equity options would be beneficial to 
them. Accordingly, in response to the requests of its customers, the 
Amex proposes to adopt an obvious error pricing rule for equity options 
that is similar to other options exchanges. The Exchange is also 
proposing an obvious error rule for index, ETF and TIR options.
---------------------------------------------------------------------------

    \10\ The Commission approved the ANTE system in May 2004. See 
Securities Exchange Act Release No. 49747 (May 20, 2004), 69 FR 
30344 (May 27, 2004) (approving File No. SR-Amex-2003-89). Amex 
represents that the rollout of ANTE is expected for completion by 
the end of the third quarter 2005 with the top 300 option classes on 
ANTE by the end of January 2005. Accordingly, the proposal initially 
would require application to both the traditional floor-based system 
as well as ANTE. Upon completion of the rollout of ANTE, the 
proposed rule would only need to apply to ANTE.
---------------------------------------------------------------------------

    Obvious Error Rule for Equity Options (Amex Rules 936 and 936--
ANTE).
    Criteria for Determining an Erroneous Transaction. For purposes of 
proposed Amex Rules 936 and 936--ANTE, an options transaction must 
satisfy one of the following ``obvious error'' categories in order for 
such transaction to be reviewed for cancellation or adjustment by the 
Exchange.
    Obvious Price Error. The Exchange proposes to adopt an obvious 
price error rule that operates identically to that of Chicago Board 
Options Exchange, Inc. (``CBOE'') Rule 6.25. As such, an obvious 
pricing error will be deemed to have occurred when the execution price 
of an electronic transaction (not open outcry) varies from the 
Theoretical Price \11\ by a requisite amount.\12\ When an obvious price 
error occurs, Amex either will adjust or cancel the transaction in the 
following manner.
---------------------------------------------------------------------------

    \11\ The Exchange proposes to use the definition of Theoretical 
Price currently employed by the CBOE and the International 
Securities Exchange (``ISE''). See CBOE Rule 6.25(a)(1) and ISE Rule 
720(b). For multiply traded options, Theoretical Price will be the 
last bid (offer) price with respect to an erroneous sell (buy) 
transaction just prior to the trade that is disseminated by the 
competing options exchange with the most liquidity in that class 
over the preceding two calendar months. If there are no quotes for 
comparison purposes, trading officials shall determine Theoretical 
Price. For transactions occurring as part of an opening, Theoretical 
Price shall be the first quote after the transaction(s) in question 
that does not reflect the erroneous transaction(s).
    \12\ The requisite amount is: $0.25 for options below $2, $0.40 
for options priced from $2 to $5, $0.50 for options priced above $5 
to $10, $0.80 for options priced above $10 to $20, and $1.00 for 
options priced above $20.
---------------------------------------------------------------------------

    Transactions Between Amex Specialists/Registered Options Traders 
(``ROTs''). Transactions between Amex specialists/ROTs will be adjusted 
to the Theoretical Price plus/minus an ``adjustment penalty'' of either 
$0.15 or $0.30. Erroneous buy transactions will be adjusted to the 
Theoretical Price plus an adjustment penalty of either $0.15 if the 
Theoretical Price is below $3 or $0.30 if the Theoretical Price is $3 
or higher. Conversely, erroneous sell transactions will be adjusted to 
the Theoretical Price minus an adjustment penalty of either $0.15 if 
the Theoretical Price is below $3 or $0.30 if the Theoretical Price is 
$3 or higher. Both parties to the transaction may agree to adjust to a 
different price or cancel the transaction altogether provided they do 
so within fifteen (15) minutes of being notified by trading officials 
that an obvious error occurred.
    Transactions where One Party is not an Amex specialist/ROT. In 
cases where at least one party is not an Amex

[[Page 10433]]

specialist/ROT, the transaction will be cancelled by trading officials 
unless both parties agree to an adjustment price for the transaction 
within thirty (30) minutes of being notified by trading officials of 
the obvious error. This is identical to CBOE Rule 6.25.
    Series Quoted No Bid. An obvious pricing error will also be deemed 
to exist for ``series quoted no bid.'' Electronic transactions in 
series quoted no bid at a nickel (i.e., $0.05 offer) will be cancelled 
provided at least one strike price below (for calls) or above (for 
puts) in the same class were quoted no bid at a nickel ($0.05) at the 
time of execution. This proposed rule provision would correct errors in 
out-of-the-money options that often have no intrinsic value.
    Verifiable Disruptions or Malfunctions of Exchange Systems. 
Transactions arising out of a ``verifiable disruption or malfunction'' 
in the use or operation of any Exchange (1) automated quotation, 
dissemination, execution, or communication system that caused a quote/
order to trade in excess of its disseminated size (e.g., a quote/order 
that is frozen because of an Exchange system error and is repeatedly 
traded) in which case trades in excess of the disseminated size may be 
nullified; or (2) automated quotation, dissemination, or communication 
system that prevented a member from updating or canceling a quote/order 
for which the member is responsible, provided there is Exchange 
documentation reflecting that the member sought to update or cancel the 
quote/order. With respect to verifiable disruptions or malfunctions of 
the Exchange's automated quotation system, documentation of the 
existence of the disruption or malfunction will be sufficient provided 
the automated quotation system was programmed to update or cancel a 
quote based upon specific changes in the underlying, those changes 
occurred, and due to the disruption or malfunction, the quote was not 
updated or cancelled. This Rule will apply to transactions occurring 
both electronically and in open outcry.
    Erroneous Print in Underlying Market. A trade resulting from an 
erroneous print disseminated by the underlying market that is later 
cancelled or corrected by that underlying market may be cancelled. In 
order to be cancelled, however, the trade must be the result of an 
erroneous print that is higher or lower than the average trade in the 
underlying security during a two (2) minute period before and after the 
erroneous print by an amount at least five (5) times greater than the 
average quote width for such underlying security during the same 
period. This Rule will apply to transactions occurring both 
electronically and in open outcry.
    Erroneous Quote in Underlying Security. A trade resulting from an 
erroneous quote in the underlying security may be adjusted or 
cancelled. An erroneous quote occurs when the underlying security has a 
width of at least $1.00 and a width at least five times greater than 
the average quote width for such underlying security on the primary 
market (as defined in Amex Rule 900(b)(26) and Amex Rule 900(b)(26)--
ANTE) during the time period encompassing two minutes before and after 
the dissemination of such quote. For purposes of this proposed Rule, 
the average quote width shall be determined by adding the quote widths 
of each separate quote during the four-minute time period referenced 
above (excluding the quote in question) and dividing the number of 
quotes during such time period (excluding the quote in question).
    Erroneous Transactions During the Opening. A trading rotation in 
options is held each business day promptly following the opening of the 
underlying security or the availability of opening quotations in the 
underlying security. Included in the opening rotation are pre-opening 
market and limit orders as well as orders on the book from the previous 
trading day. As described in Commentary .01 to Amex Rule 918 and 
Commentary .01 to Amex Rule 918--ANTE, an opening price will be 
established and all market and marketable limit orders will be 
executed. Depending upon the opening price some limit orders may not be 
eligible for execution. If that opening price is erroneous and later 
corrected, Trading Officials may also allow for the execution of trades 
that were not executed on the opening but that should have been 
executed had the specialist or ANTE System opened the series at the 
non-erroneous price. The Exchange will endeavor to notify its members 
as soon as practicable after the correction of an erroneous print and 
will indicate that this may result in the adjustment of trades executed 
pursuant to the opening rotation. The only trades that will be adjusted 
are those that were executed on the opening or those that should have 
executed on the opening. All adjustments will be made during the day 
when the correction of the erroneous print occurred.
    Procedures for Reviewing Options Transactions Deemed Erroneous. The 
proposed Amex Rule would allow the Exchange to cancel or adjust options 
transactions that are obviously erroneous where either the parties 
agree or do not agree that the transaction should be cancelled or 
revised. Under the proposed Rule, a member or person associated with a 
member may request trading officials to review an option transaction(s) 
claimed to be erroneous. The Exchange proposes to require notification 
within 15 minutes of the transaction in question, regardless of the 
time it occurred. Once a ruling is requested, the trading officials 
must review the trade unless both parties agree to withdraw an 
application before ruling is made. The proposed Rule requires trading 
officials to render a determination within 60 minutes of notification, 
regardless of the time the transaction occurred.\13\
---------------------------------------------------------------------------

    \13\ The Amex represents that trading officials will remain at 
the Exchange until a determination is rendered.
---------------------------------------------------------------------------

    The process for appealing determinations regarding obvious errors 
is proposed in new Amex Rules 936(d) and 936(d)--ANTE. The Exchange 
proposes to create an Obvious Error Panel (``Panel'') that will review 
decisions rendered by trading officials. The rules creating and 
governing the Panel are substantially similar to CBOE Rule 6.25(c) and 
ISE Rule 720(e). Regarding the composition of the Panel, Amex, in 
addition to including one member of the regulatory staff, will require 
that the Panel be comprised of an equal number of Amex specialists and 
ROTs, and floor broker members. Decisions of the Panel are subject to 
review by a panel of three (3) Exchange Officials who have not already 
ruled on the matter presented on appeal. Notwithstanding other Exchange 
rules to the contrary (e.g., Rule 22(d)), the decision or ruling of the 
three (3) Exchange Official panel is binding on members subject to any 
right of appeal pursuant to Article II, Section 3 of the Amex 
Constitution. The parties may also submit the matter to arbitration 
pursuant to Article VIII of the Amex Constitution.
    Obvious Error Rule for Index, ETF and TIR Options (Amex Rules 936C 
and 936C--ANTE). Criteria for Determining an Erroneous Transaction. For 
purposes of proposed Amex Rules 936C and 936C--ANTE, an options 
transaction must satisfy one of the following ``obvious error'' 
categories in order for such transaction to be reviewed for 
cancellation or adjustment by the Exchange. The Exchange represents 
that the proposal is identical to CBOE Rule 24.16.
    Obvious Price Error. An obvious price error will be deemed to have 
occurred when the execution price of a

[[Page 10434]]

transaction is above or below the fair market value of the option by at 
least a prescribed amount. For series trading with normal bid-ask 
spreads as set forth in Amex Rule 958(c) and Amex Rule 958(c)--ANTE, 
the prescribed amount shall be: (a) The greater of $0.10 or 10% for 
options trading under $2.50; (b) 10% for options trading at or above 
$2.50 and under $5; or (c) $0.50 for options trading at $5 or higher. 
For series trading with bid-ask spreads that are greater than the bid-
ask spreads established in Rule 958(c) and 958(c)--ANTE, the prescribed 
error amount shall be: (a) The greater of $0.20 or 20% for options 
trading under $2.50; (b) 20% for options trading at or above $2.50 and 
under $5; or (c) $1.00 for options trading at $5 or higher.
    Fair market value for these purposes is deemed to be the midpoint 
of the national best bid and national best offer (the ``NBBO'') for the 
series for multiple-traded classes. If there are no quotes for 
comparison purposes, fair market value shall be determined by trading 
officials. In connection with single-listed classes, fair market value 
shall be the first quote after the transaction(s) in question that does 
not reflect the erroneous transaction(s). For transactions occurring as 
part of the opening, fair market value shall also be the first quote 
after the transaction(s) in question that does not reflect the 
erroneous transaction(s).
    Obvious Quantity Error. An obvious error in quantity will be deemed 
to occur when the transaction size exceeds the responsible broker or 
dealer's average disseminated size over the previous four (4) hours by 
a factor of ten (10) times. The quantity to which a transaction shall 
be adjusted from an obvious quantity error shall be the responsible 
broker or dealer's average disseminated size over the previous four (4) 
trading hours (which may include the previous trading day).
    Verifiable Disruptions or Malfunctions of Exchange Systems. 
Transactions arising out of a ``verifiable disruption or malfunction'' 
in the use or operation of any Exchange (1) automated quotation, 
dissemination, execution, or communication system that caused a quote/
order to trade in excess of its disseminated size (e.g., a quote/order 
that is frozen because of an Exchange system error and is repeatedly 
traded) in which case trades in excess of the disseminated size may be 
nullified; or (2) automated quotation, dissemination or communication 
system that prevented a member from updating or canceling a quote/order 
for which the member is responsible, provided there is Exchange 
documentation reflecting that the member sought to update or cancel the 
quote/order. With respect to verifiable disruptions or malfunctions of 
the Exchange's automated quotation system, documentation of the 
existence of the disruption or malfunction will be sufficient provided 
the automated quotation system was programmed to update or cancel a 
quote based upon specific changes in the underlying, those changes 
occurred, and due to the disruption or malfunction, the quote was not 
updated or cancelled. This Rule will apply to transactions occurring 
both electronically and in open outcry.
    Erroneous Print in Underlying Market. A trade resulting from an 
erroneous print disseminated by the underlying market that is later 
cancelled or corrected by that underlying market may be cancelled or 
adjusted. In order to be cancelled or adjusted, however, the trade must 
be the result of an erroneous print that is higher or lower than the 
average trade in the underlying security during a two (2) minute period 
before and after the erroneous print by an amount at least five (5) 
times greater than the average quote width for such underlying security 
during the same period. For purposes of this Rule, the average quote 
width shall be determined by adding the quote widths of each separate 
quote during the four (4) minute time period referenced above 
(excluding the quote in question) and dividing by the number of quotes 
during such time period (excluding the quote in question).
    Erroneous Quote in Underlying Security. A trade resulting from an 
erroneous quote in the underlying security may be cancelled or 
adjusted. An erroneous quote occurs when the underlying security has a 
width of at least $1.00 and that width is at least five (5) times 
greater than the average quote width for such underlying security on 
the primary market (as defined in Amex Rule 900(b)(26) and Amex Rule 
900(b)(26)--ANTE during the time period encompassing two (2) minutes 
before and after the dissemination of such quote.
    Trades Below Intrinsic Value. An obvious pricing error will be 
deemed to exist where a trade is automatically executed at a price so 
that the specialist or ROT sells at $0.10 or more below intrinsic 
value. An option that trades at its intrinsic value is known as trading 
at ``parity.'' Parity describes an option contract's total premium when 
that premium is equal to its intrinsic value. Parity for calls is 
measured by reference to the offer price of the underlying security at 
the time of the transaction minus the strike price for the call. Parity 
for puts is measured by the strike price of an underlying security 
minus its bid price at the time of the transaction.
    Series Quoted No Bid. An obvious pricing error will also be deemed 
to exist for ``series quoted no bid.'' In this situation, the trade 
resulted in an execution price in a series quoted no bid and at least 
one strike price below (for calls) or above (for puts) in the same 
class were quoted no bid immediately before the time of the erroneous 
execution, and the bid following the execution in that series was zero. 
This proposed rule provision would correct errors in out-of-the-money 
options that often have no intrinsic value.
    Adjustments. If the trading officials determine that the particular 
option transaction fits within one of the categories set forth above 
and the complaining party has timely documented a request for relief, 
then the trade will be cancelled or adjusted. In general, transactions 
will be adjusted provided the adjusted price does not violate the 
customer's limit price. Otherwise, the transaction will be cancelled.
    With respect to transactions deemed in error as set forth in Amex 
Rules 936C(a)(1)-(5) and 936C(a)(1)-(5)--ANTE, the price to which a 
transaction will be adjusted is the NBBO immediately following the 
erroneous transaction order entered on the Exchange. For opening 
transactions in ANTE, the price to which a transaction shall be 
adjusted is based on the first non-erroneous quote after the erroneous 
transaction on the Amex. In connection with transactions below 
intrinsic value set forth in Amex Rules 936C(a)(6) and 936C(a)(6)--
ANTE, the transaction would be adjusted to a price that is $0.10 under 
parity.
    Negotiated Trade Cancellation. A trade may also be cancelled if the 
parties to the trade agree to the cancellation. When a cancellation has 
been agreed to, one of the parties is required to disseminate 
cancellation information in OPRA format.
    Erroneous Transactions During the Opening. A trading rotation in 
options is held each business day promptly following the opening of the 
underlying security or the availability of opening quotations in the 
underlying security. Included in the opening rotation are pre-opening 
market and limit orders as well as orders on the book from the previous 
trading day. As described in Commentary .01 to Amex Rule 918 and 
Commentary .01 to Amex Rule 918--ANTE, Commentary .01, an opening price 
will be established and all market and marketable limit orders will be 
executed. Depending upon the opening price some limit orders may not be

[[Page 10435]]

eligible for execution. If that opening price is erroneous and later 
corrected, trading officials may also allow for the execution of trades 
that were not executed on the opening but that should have been 
executed had the specialist or ANTE System opened the series at the 
non-erroneous price. The Exchange will endeavor to notify its members 
as soon as practicable after the correction of an erroneous print and 
will indicate that this may result in the adjustment of trades executed 
pursuant to the opening rotation. The only trades that will be adjusted 
are those that were executed on the opening or those that should have 
executed on the opening. All adjustments will be made during the day 
when the correction of the erroneous print occurred.
    Procedures for Reviewing Options Transactions Deemed Erroneous. The 
proposed Rule would allow the Exchange to cancel or adjust options 
transactions that are obviously erroneous where either the parties 
agree or do not agree that the transaction should be cancelled or 
revised. Under the proposed rule change, a member or person associated 
with a member may request trading officials to review an option 
transaction(s) claimed to be erroneous. Once a ruling is requested, the 
trading officials must review the trade unless both parties agree to 
withdraw an application before ruling is made.
    Notification of trading officials by a member indicating that a 
transaction should be cancelled or adjusted should occur promptly but 
no later than fifteen (15) minutes after the execution in question. For 
transactions occurring after 3:45 p.m. Eastern Time (ET), notification 
may not occur later than fifteen (15) minutes after the close of 
trading. Absent unusual circumstances, trading officials must render a 
determination within sixty (60) minutes of receiving notification. If 
the transaction(s) in question occurred after 3:30 p.m. ET, trading 
officials have until 10:30 a.m. (ET) the following morning to render a 
determination.
    A member affected by a determination made under the proposed Rule 
may appeal such determination to a Review Panel of at least three (3) 
Exchange Officials. A request for review must be made in writing no 
later than the close of trading on the next trade date after a party 
receives verbal notification of a final determination by trading 
officials. Notwithstanding other Exchange rules to the contrary (e.g., 
Amex Rule 22(d)), decisions of the Review Panel are binding on members, 
subject to any right of appeal pursuant to Article II, Section 3 of the 
Amex Constitution. The parties may also submit the matter to 
arbitration pursuant to Article VIII of the Amex Constitution.
2. Statutory Basis
    Amex represents that the filing provides objective guidelines for 
the nullification or adjustment of transactions executed at clearly 
erroneous prices. Moreover, the proposed rule change provides more 
uniformity regarding obvious pricing errors, which will serve to 
benefit customers. For these reasons, the Exchange believes the 
proposed rule change is consistent with the Act and the rules and 
regulations under the Act applicable to a national securities exchange 
and, in particular, the requirements of section 6(b) of the Act.\14\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the requirements of section 6(b)(5) of the Act \15\ 
that the rules of an exchange be designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts and 
practices, and, in general, to protect investors and the public 
interest.
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    \14\ 15 U.S.C. 78(f)(b).
    \15\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Amex 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 Exchange 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.

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

    Because the foregoing proposed rule change (1) does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms, does not become operative until 30 days from the 
date on which it was filed, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, and the Exchange provided the Commission with written notice 
of its intent to file the proposed rule change at least five business 
days prior to the date of filing of the proposed rule change, or such 
shorter time as designated by the Commission, it has become effective 
pursuant to section 19(b)(3)(A) of the Act \16\ and Rule 19b-4(f)(6) 
thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission waive the 30-day 
operative delay and designate the proposed rule change immediately 
operative. The Commission believes that waiving the 30-day operative 
delay is consistent with the protection of investors and the public 
interest.\18\ The proposed Amex obvious error rules are substantially 
similar to CBOE Rules 6.25 and 24.16. Thus, the Commission does not 
believe that the proposed rule change raises any new regulatory issues. 
In addition, the Commission believes that waiver of the 30-day 
operative delay would enable the Exchange to implement the proposal as 
quickly as possible, and thereby should provide Amex members and users 
of Amex facilities with greater clarity with respect to whether a 
particular options transactions involves an obvious error.
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    \18\ For purposes of waiving the operative delay of this 
proposal, the Commission has considered the proposed rules impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of this proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.\19\
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    \19\ For purposes of calculating the sixty-day abrogation 
period, the Commission considers the abrogation period to have begun 
on February 22, 2005, the date Amex submitted Amendment No. 4. See 
15 U.S.C. 78s(b)(3)(C).
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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-2005-11 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.

[[Page 10436]]

    All submissions should refer to File Number SR-Amex-2005-11. 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 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-2005-11 
and should be submitted on or before March 24, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-844 Filed 3-2-05; 8:45 am]
BILLING CODE 8010-01-P