[Federal Register Volume 70, Number 50 (Wednesday, March 16, 2005)]
[Notices]
[Pages 12912-12915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1130]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51337; File No. SR-Amex-2004-109]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change and Amendment Nos. 1, 2 and 3 Thereto Relating to Split 
Price Priority

March 9, 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 December 23, 2004, the American Stock Exchange LLC (``Amex'' or the 
``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 Amex. On February 4, 
2005, the Amex amended the proposed rule change (``Amendment

[[Page 12913]]

No. 1'').\3\ On February 14, 2005, the Amex amended the proposed rule 
change (``Amendment No. 2'').\4\ On March 8, 2005, the Amex amended the 
proposed rule change (``Amendment No. 3'').\5\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons. In addition, the Commission is 
granting accelerated approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Amex restated the proposed rule 
change in its entirety.
    \4\ In Amendment No. 2, the Amex corrected a reference to the 
Options Trading Committee in proposed Commentary .06(b) to Amex Rule 
950-ANTE(d).
    \5\ In Amendment No. 3, the Amex requested accelerated approval 
of the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex seeks to amend Amex Rules 950 and 950--ANTE to permit a 
limited exception to the existing split price priority requirement. The 
text of the proposed rule change is set forth below. Proposed new 
language is in italics; deletions are in [brackets].
* * * * *

Rule 950

Rules of General Applicability

    (a)-(c) No change.
    (d) The provisions of Rule 126, with the exception of subparagraphs 
(a) and (b) thereof, shall apply to Exchange option transactions and 
the following additional commentary shall also apply:
    Commentary . . .
    .01-.04 No change.
    .05 (a) Purchase or Sale Priority. If a member purchases (sells) 
one or more option contracts of a particular series at a particular 
price or prices such member shall, at the next lower (higher) price at 
which a member other than [an Exchange] a floor [B]broker or specialist 
representing a customer agency order entitled to priority pursuant to 
Rule 950(c), have priority in purchasing (selling) up to the equivalent 
number [(or a reasonably larger number)] of option contracts of the 
same series that he purchased (sold) at the higher (lower) price or 
prices, but only if his bid (offer) is made promptly and the purchase 
(sale) so effected represents the opposite side of a transaction with 
the same order or offer (bid) as the earlier purchase or purchases 
(sale or sales). This paragraph only applies to transactions effected 
in open outcry. [Sale Priority. If a member sells one or more option 
contracts of a particular series at a particular price or prices, he 
shall, at the next higher price at which a member other than an 
Exchange Broker or specialist representing a customer agency order 
entitled to priority pursuant to Rule 950(c), have priority in selling 
up to the equivalent number (or a reasonable larger number) of option 
contracts of the same series that he sold at the lower price or prices, 
but only if his offer is made promptly and the sale so effected 
represents the opposite side of a transaction with the same order or 
bid as the earlier sale or sales.]
    (b) Purchase or sale priority for orders of 100 contracts or more. 
If a member purchases (sells) fifty or more options contracts of a 
particular series at a particular price or prices, such member shall, 
at the next lower (higher) price have priority in purchasing (selling) 
up to the equivalent number of option contracts of the same series that 
he purchased (sold) at the higher (lower) price or prices, but only if 
his bid (offer) is made promptly and the purchase (sale) so effected 
represents the opposite side of a transaction with the same order or 
offer (bid) as the earlier purchase or purchases (sale or sales). The 
Options Trading Committee may increase the ``minimum qualifying order 
size'' above 100 contracts for all products under its jurisdiction. 
Announcements regarding changes to the minimum qualifying order size 
shall be made via Regulatory Circular. This paragraph only applies to 
transactions effected in open outcry.
    (c) Two or more members entitled to priority. If the bids or offers 
of two or more members are both entitled to priority in accordance with 
paragraph (a) or paragraph (b), it shall be afforded them insofar as 
practicable, on a pro-rata basis.
    (d) Floor brokers are able to achieve split price priority in 
accordance with paragraphs (a) and (b) above. Provided, however, that a 
floor broker who bids (offers) on behalf of a non-market-maker Amex 
member broker-dealer (``Amex member BD'') must ensure that the Amex 
member BD qualifies for an exemption from Section 11(a)(1) of the 
Exchange Act or that the transaction satisfies the requirements of 
Exchange Act Rule 11a2-2(T), otherwise the floor broker must yield 
priority to orders for the accounts of non-members.
    .06-.07 No change.
    (e)-(p) No change.
* * * * *

Rule 950--ANTE

Rules of General Applicability

    (a)-(c) No change.
    (d) The provisions of Rule 126, with the exception of subparagraphs 
(a) and (b) of such Rule, shall apply to Exchange option transactions 
as modified by Commentaries .01 and .02 to Rule 950(c), and the 
following additional commentary shall also apply:
    Commentary . . .
    .01-.05 No change.
    .06 (a) Purchase or Sale Priority--For trades occurring outside the 
ANTE System only, if a member purchases (sells) one or more option 
contracts of a particular series at a particular price or prices such 
member shall, at the next lower (higher) price at which a member other 
than [an Exchange] a floor [B]broker or specialist representing a 
customer agency order entitled to priority pursuant to Rule 950--
ANTE(c), have priority in purchasing (selling) up to the equivalent 
number [(or a reasonably larger number)] of option contracts of the 
same series that he purchased (sold) at the higher (lower) price or 
prices, but only if his bid (offer) is made promptly and the purchase 
(sale) so effected represents the opposite side of a transaction with 
the same order or offer (bid) as the earlier purchase or purchases 
(sale or sales). This paragraph only applies to transactions effected 
in open outcry.
    [(b) Sale Priority--For trades occurring outside the ANTE System 
only, if a member sells one or more option contracts of a particular 
series at a particular price or prices, he shall, at the next higher 
price at which a member other than an Exchange Broker or specialist 
representing a customer agency order entitled to priority pursuant to 
Rule 950--ANTE(c), have priority in selling up to the equivalent number 
(or a reasonable larger number) of option contracts of the same series 
that he sold at the lower price or prices, but only if his offer is 
made promptly and the sale so effected represents the opposite side of 
a transaction with the same order or bid as the earlier sale or sales.]
    (b) Purchase or sale priority for orders of 100 contracts or more. 
If a member purchases (sells) fifty or more options contracts of a 
particular series at a particular price or prices, such member shall, 
at the next lower (higher) price have priority in purchasing (selling) 
up to the equivalent number of option contracts of the same series that 
he purchased (sold) at the higher (lower) price or prices, but only if 
his bid (offer) is made promptly and the purchase (sale) so effected 
represents the opposite side of a transaction with the same order or 
offer (bid) as the earlier purchase or purchases (sale or sales). The 
Options Trading Committee may increase the ``minimum qualifying order 
size'' above 100 contracts for all products under its jurisdiction. 
Announcements regarding changes to

[[Page 12914]]

the minimum qualifying order size shall be made via Regulatory 
Circular. This paragraph only applies to transactions effected in open 
outcry.
    (c) Two or more members entitled to priority. If the bids or offers 
of two or more members are both entitled to priority in accordance with 
paragraph (a) or paragraph (b), it shall be afforded them insofar as 
practicable, on a pro-rata basis.
    (d) Floor brokers are able to achieve split price priority in 
accordance with paragraphs (a) and (b) above. Provided, however, that a 
floor broker who bids (offers) on behalf of a non-market-maker Amex 
member broker-dealer (``Amex member BD'') must ensure that the Amex 
member BD qualifies for an exemption from Section 11(a)(1) of the 
Exchange Act or that the transaction satisfies the requirements of 
Exchange Act Rule 11a2-2(T), otherwise the floor broker must yield 
priority to orders for the accounts of nonmembers.
    .07 No change.
    (e)-(n) No change.
* * * * *

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, 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 III 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
    Amex Rules 950(d), Commentary .05 and 950--ANTE(d), Commentary .06 
establish priority principles for split-price transactions. Generally, 
a member buying (selling) at a particular price shall have priority 
over other members in purchasing (selling) up to an equivalent number 
of contracts of the same order at the next lower (higher) price. 
Awarding split price priority serves as an inducement to members to bid 
(offer) more aggressively for an order that may require a split-price 
execution by giving them priority at the next lower (higher) price 
point. For example, assume the market is $1.00-$1.20, 300-up when a 
floor broker (``FB'') receives instructions from a customer that he/she 
would like to buy 500 options at a price or prices no higher than 
$1.20. The FB could attempt to execute the order in open outcry at a 
price better than the displayed market of $1.20. Assume a Specialist is 
willing to sell 250 contracts at $1.15 provided he/she can also sell 
the remaining 250 contracts at $1.20. Under current rules, that 
Specialist could offer $1.15 for 250 contracts and then, by virtue of 
the split price priority rule, he/she would have priority for the 
balance of the order (up to 250 contracts) over other crowd members. If 
executed, the resulting net price of $1.175 is better than the current 
displayed market of $1.20, which results in a better fill for the 
customers.\6\
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    \6\ If successful, two trades will be reported (at $1.15 and 
$1.20) and the net price result to the customer will be $1.175.
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    One limitation on the ability of crowd participants to use the 
split price priority rule is the rule's requirement that orders in the 
limit order book (``book'') have priority over the member attempting to 
fill the balance of the order at the split price. Using the example 
above, if the $1.20 price represented orders in the book, those orders 
would have priority over the Specialist at $1.20. This means that a 
Specialist who is willing to trade at $1.15 and $1.20 may be completely 
unwilling to trade at the better price of $1.15 if he/she cannot trade 
the balance of the order at $1.20 because of the requirement to yield 
to existing customer interest in the book. This jeopardizes the FB's 
ability to execute the first part of the order at a price of $1.15, 
thereby potentially making it difficult to achieve price improvement 
for the customer on the Amex. Instead, the order may trade at another 
exchange that has no impediments, e.g., no customer interest at those 
price levels. Accordingly, the Exchange is proposing to adopt a limited 
exception to the existing priority requirement.
    Under newly-proposed paragraph (b) to Rules 950(d), Commentary .05 
and 950--ANTE(d), Commentary .06, a member with an order for at least 
100 contracts who buys (sells) at least 50 contracts at a particular 
price shall have priority over all others in purchasing (selling) up to 
an equivalent number of contracts of the same order at the next lower 
(higher) price.\7\
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    \7\ Orders for less than 100 contracts would be unaffected by 
this proposal. The Exchange also takes the opportunity to 
consolidate current paragraphs (a) and (b) of each of Commentary .05 
to Amex Rule 950(d) and Commentary .06 to Amex Rule 950--ANTE(d) 
into one paragraph (paragraph (a) in each). This consolidation would 
not effect the operation of the rule in any way; it simply would 
make the rule shorter.
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    Using the above example, the Specialist trading at $1.15 would have 
priority over members and orders in the book at $1.20 to trade at $1.20 
with the balance of the order in the trading crowd. The Exchange 
believes the proposal will lead to more aggressive quoting by 
Specialists, which in turn could lead to better executions. As 
indicated above, a Specialist may be willing to trade at a better price 
for a portion of an order if he/she is assured of trading with the 
balance of the order at the next pricing increment. As a result, FBs 
representing orders in the trading crowd may receive better-priced 
executions. As proposed, the Options Trading Committee (consisting of 
Floor Governors, Heads of the Specialist Association, FB Association, 
and the Options Market Maker Association) will have the ability to 
increase the minimum qualifying order size to a number larger than 100 
contracts. Any changes, which must apply to all products under the 
committee's jurisdiction, will be announced to the membership via 
Regulatory Circular.
    The Amex believes it is reasonable to make a limited exception to 
the customer priority rule to allow split price trading. In this 
regard, the proposed exception is similar in operation to the limited 
priority exception that exists for complex orders (contained in Rules 
950(d), Commentary .01 and 950--ANTE(d), Commentary .01). The complex 
order priority exception generally provides that a member affecting a 
qualifying complex order may trade ahead of the book on one side of the 
order provided the other side of the order betters the book. This 
exception was intended to facilitate the trading of complex orders, 
which by virtue of their multi-legged composition could be more 
difficult to trade without a limited exception to the priority rule for 
one of the legs. The purpose behind the proposed split-price priority 
exception is the same--to facilitate the execution of large orders, 
which by virtue of their size and the need to execute them at multiple 
prices operate in the same manner as the complex order exception by 
allowing a member affecting a trade that betters the market to have 
priority on the balance of that trade at the next pricing increment 
even if there are orders in the book at the same price.
    To address potential concerns regarding Section 11(a) of the 
Act,\8\ the Amex proposes to adopt new subparagraph (d) to Rules 
950(d), Commentary .05 and 950--ANTE(d), Commentary .06. Section 11(a) 
generally

[[Page 12915]]

prohibits members of national securities exchanges from effecting 
transactions for the member's own account, absent an exemption. With 
respect to the proposal, there could be situations where because of the 
limited exception to customer priority, orders on behalf of members 
could trade ahead of orders of nonmembers in violation of Section 
11(a). The proposed rule text makes clear that FBs may avail themselves 
of the split-price priority rule, but that they will be obligated to 
ensure compliance with Section 11(a). In this regard, a FB that bids 
(offers) on behalf of a non-market-maker Amex member broker-dealer 
(``Amex member BD'') must ensure that the Amex member BD qualifies for 
an exemption from Section 11(a)(1) of the Act or that the transaction 
satisfies the requirements of Rule 11a2-2(T) under the Act. Otherwise, 
the FB must yield priority to orders for the accounts of non-members.
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    \8\ 15 U.S.C. 78k(a).
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    The Exchange further proposes to amend Amex Rule 905(d), Commentary 
.05(b) and Amex Rule 905--ANTE(d), Commentary .06(b) to remove the 
parenthetical ``(or a reasonably larger number) ''.\9\
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    \9\ See Amendment No. 1. The Exchange believes this language to 
be unnecessary to achieve the intent of the rule, which is to allow 
FBs to have priority for up to an equivalent number of contracts 
purchased or sold at the preceding price, as specified in the rule. 
Telephone conference on March 8, 2005, between Laura Clare, 
Assistant General Counsel, Amex and Ira Brandriss, Assistant 
Director, Division of Market Regulation, Commission.
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2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b) \10\ of the Act in general and furthers 
the objectives of Section 6(b)(5) \11\ in particular in that it is 
designed to perfect the mechanisms of a free and open market and the 
national market system, protect investors and the public interest and 
promote just and equitable principles of trade.
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    \10\ 15 U.S.C. 78(f)(b).
    \11\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change, as amended, will impose no burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.

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

    No written comments were solicited or received by the Exchange on 
this proposal.

III. 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-2004-109 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-Amex-2004-109. 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 the 
Amex. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
Amex-2004-109 and should be submitted on or before April 6, 2005.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\12\ In particular, the Commission believes that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\13\ which 
requires, among other things, that the rules of an exchange be designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade and, in general, to protect 
investors and the public interest. The Commission believes that the 
proposed rule change should encourage more aggressive quoting by market 
makers in competition for large-sized orders, and, in turn, lead to 
better-priced executions. The Commission notes that the proposed rule 
change includes interpretive language that clarifies that floor brokers 
who avail themselves of the split priority rule are obligated to ensure 
compliance with Section 11(a) of the Act.
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    \12\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b).
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    The Amex has requested that the Commission approve the proposed 
rule change prior to the thirtieth day after publication of notice 
thereof in the Federal Register. The Commission notes that granting 
accelerated approval of the proposal will allow the Amex to immediately 
implement a rule that is similar to rules already in place at other 
exchanges.\14\ Accordingly, the Commission finds good cause, pursuant 
to Section 19(b)(2) of the Act,\15\ for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register.
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    \14\ See Securities Exchange Act Release Nos. 51148 (February 8, 
2005), 70 FR 7783 (February 15, 2005) (SR-CBOE-2004-67) and 51318 
(March 4, 2005) (SR-PCX-2005-25).
    \15\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-Amex-2004-109), as amended, 
is hereby approved on an accelerated basis.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-1130 Filed 3-15-05; 8:45 am]
BILLING CODE 8010-01-P