[Federal Register Volume 71, Number 17 (Thursday, January 26, 2006)]
[Notices]
[Pages 4388-4391]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-968]



[[Page 4388]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53161; File No. SR-Amex-2005-075]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change and Amendments No. 1, 2, and 3 
Thereto Relating to the Establishment of a New Class of Registered 
Options Trader Called a Supplemental Registered Options Trader 
(``SROT'')

January 20, 2006.
    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 July 14, 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, II, 
and III below, which Items have been prepared by the Amex. On November 
4, 2005, the Amex filed Amendment No. 1 to the proposed rule change.\3\ 
On December 7, 2005, the Amex filed Amendment No. 2 to the proposed 
rule change.\4\ On January 13, 2006, the Amex filed Amendment No. 3 to 
the proposed rule change.\5\ The Commission is publishing this notice 
to solicit comments on the proposed rule change, as amended, from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1, which replaced and superseded the original 
filing in its entirety, is incorporated in this notice.
    \4\ Amendment No. 2, which replaced and superseded the original 
filing in its entirety, is incorporated in this notice.
    \5\ Amendment No. 3, which made clarifying changes to the 
Purpose section, as well as changes to the proposed rule text 
relating to allocation of executed contracts and affiliation 
limitations, is incorporated in this notice.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes new Amex Rule 993-ANTE and proposes to adopt 
amendments to existing Amex Rules 900-ANTE, 918-ANTE, 935-ANTE, 936-
ANTE, 936C-ANTE, 950-ANTE, 951-ANTE, 958-ANTE and 958A-ANTE to 
authorize a new category of registered options trader called a 
Supplemental Registered Options Trader (``SROT'').
    The text of the proposed rule change is available on the Amex's Web 
site at http://www.amex.com, at the Amex's principal office, and at the 
Commission's Public Reference Room.

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 Amex 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 Amex has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    The Exchange proposes to create a new category of Registered 
Options Trader (``ROT'') called an SROT. An SROT is a ROT which would 
be a member organization so designated by the Exchange which would be 
granted remote quoting rights to enter bids and offers electronically 
from off the Exchange's physical trading floor.
    The introduction of SROTs combines the electronic and open outcry 
trading models. Currently, the Exchange permits ROTs to submit quotes 
only from the physical trading floor. In this regard, the Exchange 
anticipates that offering the ability to enter offers and bids 
electronically away from the trading floor will increase the liquidity 
available in those classes which the SROT is assigned, as well as 
enhance the overall competitiveness of the Exchange. Rules applicable 
to ROTs would not apply to SROTs unless otherwise specified. The 
proposed rules and amendments to current rules discussed below would 
address the definition, approval process, obligations, and quoting 
rights of SROTs.
    i. Proposed Rule 993-ANTE. Proposed new Amex Rule 993-ANTE sets 
forth the method and the factors to be used in approving SROTs. Under 
the Exchange's proposal, an SROT would be defined as a ROT that is a 
member organization that would be granted remote quoting rights to 
trade in at least 300-400 option classes. A member organization 
requesting approval to act as an SROT would file an application with 
the Exchange. The Exchange intends to approve SROTs that demonstrate 
qualities which would encourage the development of the business of the 
Exchange. A maximum of six (6) SROTs would initially be chosen based 
upon the following criteria:
     Adequacy of resources including capital, technology and 
personnel;
     History of stability, superior electronic capacity, and 
superior operational capacity;
     Level of market-making and/or specialist experience in a 
broad array of securities;
     Ability to interact with order flow in all types of 
markets;
     Existence of order flow commitments;
     Willingness to accept allocations as an SROT in at least 
300-400 options; and
     Willingness and ability to make competitive markets on the 
Exchange and otherwise promote the Exchange in a manner that is likely 
to enhance the ability of the Exchange to compete successfully for 
order flow in the options it trades.
    The Exchange, through a committee designated by the Exchange's 
Board of Governors (the ``Committee''), expects to approve SROTs that 
demonstrate the foregoing criteria. The Committee would include 
representatives from the Options Market Maker Association and the 
Options Specialist Association. In approving an applicant as an SROT, 
the Committee would be permitted to consider a member organization's 
operations to determine the number of option classes an applicant would 
be assigned.
    The Committee would use the factor relating to the existence of 
order flow commitments to evaluate existing order flow commitments 
between an SROT applicant and order flow providers. A future change to, 
or termination of, any such commitments would not be used by the 
Exchange at any point in the future to terminate or take remedial 
action against an SROT. Furthermore, the Committee would not take 
remedial action solely because orders subject to any such commitments 
were not subsequently routed to the Exchange.
    The final criterion, ``willingness to promote the Exchange,'' would 
include assisting in meeting and educating market participants, 
maintaining communications with member firms in order to be responsive 
to suggestions and complaints, responding to suggestions and 
complaints, and other similar activities. The Committee would use the 
final criterion listed to determine which applicants would best be able 
to enhance the competitiveness of the Exchange. The Committee would not 
apply this factor to in any way restrict, either directly or 
indirectly, an SROT's activities as a market maker or specialist on 
other exchanges, or to

[[Page 4389]]

restrict how SROTs handle orders held by them in a fiduciary capacity 
to which they owe a duty of best execution. The Committee would use its 
discretion in conjunction with the foregoing factors to determine which 
SROTs should be initially chosen.
    Under the Exchange's proposal, determinations regarding granting or 
withdrawing approval to act as an SROT would be made by the Committee. 
Furthermore, the Exchange proposes that an SROT application would not 
be approved by the Committee without written certification signed by an 
officer of the Exchange's Technology department indicating that an SROT 
applicant has sufficient technological ability to support the 
continuous quoting requirement set forth in 993--ANTE (c) and 958--ANTE 
(c), and that an SROT applicant has successfully completed, or is 
scheduled to complete, testing of its quoting system with the Exchange.
    The Exchange's proposal further provides that if the Committee 
decides not to approve the applicant, it would notify the applicant of 
its denial. The applicant would be entitled to a hearing under Article 
IV, Section 1(g) of the Amex Constitution and Amex Rule 40.
    The Committee would be permitted to defer an SROT applicant that 
satisfies the technological readiness and testing requirements 
described in proposed Amex Rule 993--ANTE subparagraph (a)(iv) based on 
system constraints, capacity restrictions, or other factors to ensure 
the maintenance of a fair and orderly market, for a period to be 
determined at the Committee's discretion. The Committee may not defer a 
determination of the approval of the application of an SROT applicant 
unless the basis for such deferral has been objectively determined by 
the Committee, subject to the Commission's approval or effectiveness 
pursuant to a rule change filing under Section 19(b) of the Act. The 
Committee would provide written notification to any SROT applicant 
whose application is the subject of such deferral, describing the 
objective basis for such deferral.
    The Exchange's proposal requires an SROT applicant that seeks to 
withdraw as such to notify the Exchange at least ten business days 
prior to the desired effective date of such withdrawal.
    The Exchange would also be permitted to suspend or terminate any 
appointment of an SROT in one or more classes whenever, in the 
Exchange's judgment, the interests of a fair and orderly market are 
best served by such action. An SROT would be permitted to seek review 
of the termination or suspension of its status by the Exchange pursuant 
to Article IV, Section 1(g) of the Amex Constitution and Amex Rule 40.
    The proposal provides that the Exchange would determine the number 
and type of option classes assigned to an SROT as currently set forth 
under Commentary .05 of Amex Rule 958--ANTE. Under the proposal, the 
Exchange would assign a minimum of 300 option classes per SROT.
    Under the Exchange's proposal, SROTs would be required to purchase 
or lease one seat for every thirty (30) option classes quoted. SROTs 
also would be required to provide continuous two-sided quotations in 
accordance with the parameters set forth in Amex Rule 958--ANTE (c) in 
at least 60% of the series of their assigned classes.
    The Exchange's proposal requires that, in addition to other 
obligations, no SROT would be assigned to an options class where the 
SROT has a direct or indirect affiliate who is a specialist, ROT or 
SROT in such option class. Additionally, no person who is either 
directly or indirectly affiliated with an SROT may submit quotations as 
an SROT, ROT or specialist in options in which the affiliate SROT is 
assigned. Furthermore, SROTs would maintain information barriers that 
are reasonably designed to prevent the misuse of material, non-public 
information with any affiliates that may conduct a brokerage business 
in option classes assigned to an SROT, or that may act as a market 
maker in any security underlying options assigned to an SROT. The 
proposal further requires SROTs to comply with Amex Rule 193 regarding 
the misuse of material non-public information between the affiliate and 
the specialist organization. The purpose of this provision is to 
prevent affiliated parties from quoting electronically in the same 
option class and receiving multiple automatic allocations for the same 
or affiliated beneficial account owners.
    Under the proposal, quoting rights and designation of an SROT would 
be non-transferable. An SROT would be permitted to submit electronic 
quotations only from off the floor of the Exchange. The proposal 
further provides that an SROT may trade in a market making capacity 
only in the classes of options in which the SROT is assigned.
    ii. 900--ANTE. Amex Rule 900--ANTE currently sets forth the 
applicability, definitions and references on ANTE. The Exchange 
proposes to include the definition of an SROT in 900--ANTE. The 
Exchange defines a ROT as a regular member of the Exchange as defined 
by Article I, Section 3 of the Amex Constitution, located on the 
trading floor, who has permission to trade in options for his or her 
own account in accordance with Amex Rule 958--ANTE. An SROT is defined 
as a ROT that is a member organization so designated by the Exchange 
that would be granted remote quoting rights to enter bids and offers 
electronically from off the Exchange's physical trading floor. 
Furthermore, SROTs would be subject to the obligations set forth under 
proposed Amex Rule 993--ANTE. Exchange rules applicable to ROTs would 
not apply to SROTs unless otherwise specified.
    The Exchange also proposes to amend the terms ``Designated Options 
Area'' and ``Designated Stock Area'' to include only the area of the 
Exchange's physical trading floor where the option and stock, 
respectively, of a Paired Security are traded. The term ``ANTE 
Participant'' also would be amended to include an SROT assigned to 
trade a specific options class on the ANTE System.
    iii. 918--ANTE. Amex Rule 918--ANTE currently sets forth the 
automated opening, reopening and closing rotation procedures, trading 
halts and the supervision of such procedures. The Exchange proposes to 
amend Commentary .01 to Amex Rule 918--ANTE to include paragraph (c), 
which provides that SROTs may not submit market orders prior to the 
opening and that SROTs may submit quotes or limit orders prior to the 
opening.
    iv. 935--ANTE. Amex Rule 935--ANTE currently provides for the 
allocation of all contracts executed through the ANTE system. The 
Exchange proposes to amend Amex Rule 935--ANTE to include SROTs. Under 
the Exchange's proposal, the ANTE System would allocate executed 
contracts to non-broker-dealer customers, broker-dealers, competing 
market makers, specialists, registered options traders and SROTs in 
accordance with the provisions therein. The Exchange further proposes 
that when more than one market participant is quoting at the Amex Best 
Bid and Offer (``ABBO''), and an SROT is not interacting with its own 
firm's orders, the allocations in the current Amex Rule 935--ANTE 
(a)(1)-(4) would apply. Proposed paragraph (5) states that when more 
than one market participant is quoting at the ABBO, and an SROT is 
interacting with its own firm's orders, the ANTE System would allocate 
the remaining contracts after non-broker dealer customer orders as 
follows: (i) 40% to an SROT interacting with its own firm's orders and 
(ii) the balance to

[[Page 4390]]

registered options traders and to the specialist.
    v. 936--ANTE and 936C--ANTE. Amex Rule 936--ANTE and Amex Rule 
936C--ANTE govern the cancellation and adjustment of equity options 
transactions and the cancellation and adjustment of index option 
transactions, respectively. The Exchange proposes to amend Amex Rule 
936--ANTE and Amex Rule 936C--ANTE to include SROTs in the transactions 
that may be cancelled or adjusted. The proposal further modifies the 
notification requirement to allow Trading Officials and/or the Obvious 
Error Panel reviewing the transactions to both orally or electronically 
notify the members involved in the transaction of their determination. 
The purpose of the proposed electronic notification requirement is to 
provide notice to SROTs which are engaging in transactions off the 
Exchange's physical trading floor.
    vi. 950--ANTE. Amex Rule 950--ANTE (b) currently provides rules for 
priority and parity at the opening. Paragraph (b)(i) specifically 
provides that after the opening, an options specialist acting as 
principal may only retain priority over, or be on parity with, orders 
for the accounts of broker-dealers, but may not retain priority over, 
or be on parity with, off-floor orders for the accounts of public 
customers. The Exchange proposes to amend 950--ANTE (b)(i) to identify 
SROTs as broker-dealers. Commentary .01 of paragraph (c) currently 
provides that after the opening, an options specialist acting as 
principal, may only retain priority over or be on parity with orders 
for the accounts of broker-dealers but may not retain priority over or 
be on parity with off-floor orders for the accounts of public 
customers. Commentary .02 of paragraph (c) provides that options orders 
for the accounts of broker-dealers may only retain priority over or be 
on parity with orders for the accounts of broker-dealers but may not 
retain priority over or be on parity with off-floor orders for the 
accounts of public customers. The proposed amendments to Commentaries 
.01 and .02 of paragraph (c) would also categorize an SROT as a broker-
dealer. Finally, the proposed amendment to Commentary .02 of paragraph 
(l) would require SROTs to compete with one another to improve the 
quoted markets in all series of option classes in which they trade.
    vii. 951--ANTE. Amex Rule 951--ANTE currently governs the bids and 
offers of options contracts. Commentary .01 to Amex Rule 951--ANTE 
provides that if the bid or offer of a specialist or registered options 
trader locks or crosses the ABBO, the ANTE System would revise the bid 
by one or more minimum price variations lower than the bid submitted, 
or revise the offer by one or more minimum price variations higher than 
the offer submitted, so that the bid or offer submitted does not lock 
or cross the ABBO provided.\6\ The Exchange proposes to amend 
Commentary .01 to Amex Rule 951--ANTE to apply to SROTs.
---------------------------------------------------------------------------

    \6\ The ANTE System collects all of the quotes being calculated 
by the specialist and each registered options trader, and determines 
the best bid and best offer for dissemination pursuant to the firm 
quote rule, as the ABBO. The ANTE System never allows a locked or 
crossed market to occur in the ABBO. If a quote is submitted that 
would lock or cross the ABBO, the ANTE System will revise the bid or 
the offer by the minimum price variant(s) so that the ABBO is not 
locked or crossed.
---------------------------------------------------------------------------

    viii. 958--ANTE. Amex Rule 958--ANTE governs ANTE options 
transactions of registered options traders. Pursuant to 958--ANTE (a), 
registered options traders are assigned classes of options in 
accordance with the existing procedures set forth in Commentary .05. 
Amex Rule 958--ANTE (a) also provides that any option transactions 
initiated by a registered options trader on the Floor and through the 
facilities of the Exchange for any account in which the registered 
options trader has an interest would be in such assigned classes. 
Paragraph (b) of Amex Rule 958--ANTE provides that transactions of a 
registered options trader must be reasonably calculated to contribute 
to the maintenance of a fair and orderly market, and no registered 
options trader should enter into transactions or make bids or offers 
that are inconsistent with such a course of dealings. Paragraph (c) of 
Amex Rule 958--ANTE provides that whenever a registered options trader 
participates in the trading of options in other than a floor brokerage 
capacity, or is called upon by a floor official or floor broker acting 
in an agency capacity, they would be required to make competitive bids 
and offers necessary, in a market making capacity, to contribute to the 
maintenance of a fair and orderly market. The Exchange proposes to 
apply paragraphs (a), (b) and (c) of 958--ANTE to SROTs as they 
currently apply to registered options traders.
    Paragraph (h) currently provides that registered options traders 
may choose to use an Exchange provided or proprietary automated quote 
system to calculate and disseminate quotes, or join the specialist's 
disseminated quotation in some or all of his assigned classes or 
series. Paragraph (h) further provides that registered options traders 
must be physically present at the specialist's post on the floor of the 
Exchange where that options class is traded.
    Under the Exchange's proposal, SROTs would not be permitted to use 
the ``join quote'' feature in ANTE. The Exchange believes that 
requiring SROTs to submit their own quotes in options that an SROT is 
assigned would serve to further foster active quote competition. 
Finally, the Exchange proposes that SROTs, as well as registered 
options traders and specialists, must compete with each other to 
improve the quoted markets in all series of option classes which they 
trade. The Exchange further proposes to amend its original filing to 
remove the in-person requirement for SROTs as provided in paragraph (h) 
because they would not be physically present.
    ix. 958A--ANTE. Amex Rule 958A--ANTE, the Exchange's Firm Quote 
Rule, currently provides that registered options traders, when 
inputting their own quotes through an Exchange provided or proprietary 
automated quote calculation system, would each be considered a 
responsible broker or dealer for their bids or offers to the extent of 
their quotation size. The Exchange proposes to amend Amex Rule 958A--
ANTE (a)(ii)(C) to include SROTs as responsible broker-dealers to the 
extent of their quotation size for the purposes of this rule.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act,\7\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act,\8\ in particular, in that 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principals of trade, and, in 
general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change 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.

[[Page 4391]]

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-Amex-2005-075 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.

    All submissions should refer to File Number SR-Amex-2005-075. 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, Station 
Place, 100 F Street, NE., 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-2005-075 and should be submitted on or before February 16, 
2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-968 Filed 1-25-06; 8:45 am]
BILLING CODE 8010-01-P