[Federal Register Volume 71, Number 195 (Tuesday, October 10, 2006)]
[Notices]
[Pages 59546-59561]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-16628]



[[Page 59546]]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54552; File No. SR-Amex-2005-104]


Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Approving a Proposed Rule Change and Amendments No. 1, 2, 3, 4, and 5 
Thereto, and Notice of Filing and Order Granting Accelerated Approval 
to Amendment No. 6, To Establish a New Hybrid Trading System Known as 
AEMISM

 September 29, 2006.

I. Introduction

    On October 17, 2005, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to implement a new hybrid market 
structure for equities and exchange-traded funds (``ETFs'') known as 
the ``Auction & Electronic Market Integration'' (``AEMI''). Amex 
amended the proposal on January 19, 2006; \3\ March 10, 2006; \4\ March 
14, 2006; \5\ July 3, 2006; \6\ and July 13, 2006.\7\ The proposed rule 
change, as amended, was published for comment in the Federal Register 
on July 21, 2006.\8\ The Commission received no comments on the 
proposal. On September 29, 2006, Amex filed Amendment No. 6 to the 
proposal.\9\ This order approves the proposed rule change, as amended 
by Amendments No. 1, 2, 3, 4, and 5, grants accelerated approval to 
Amendment No. 6, and solicits comments from interested persons on 
Amendment No. 6.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Form 19b-4 dated January 19, 2006, which replaced the 
original filing in its entirety (``Amendment No. 1'').
    \4\ See Form 19b-4 dated March 10, 2006, which replaced 
Amendment No. 1 in its entirety (``Amendment No. 2'').
    \5\ See Form 19b-4 dated March 14, 2006, which replaced 
Amendment No. 2 in its entirety (``Amendment No. 3'').
    \6\ See Form 19b-4 dated July 3, 2006, which replaced Amendment 
No. 3 in its entirety (``Amendment No. 4''). Amendment No. 4, among 
other things: (1) Removed the Passive Price Improvement order type 
from the proposal; (2) stated the Exchange's commitment to make 
AEMI's depth-of-book information broadly available; (3) added 
additional size and value requirements for certain cross orders; (4) 
distinguished two quote indicators that may be disseminated in 
connection with the Exchange's publishing of non-firm quotes; (5) 
revised the procedures regarding the receipt of a partial fill or no 
response to an outgoing intermarket sweep order; and (6) made 
various other minor corrections and clarifications to the proposed 
rule change.
    \7\ See Partial Amendment to Form 19b-4 dated July 13, 2006. 
(``Amendment No. 5''). In Amendment No. 5, the Exchange, among other 
things: (1) Set forth a timeframe for the availability of depth-of-
book data; (2) clarified when Specialists may charge commissions; 
(3) clarified when the Exchange will send intermarket sweep orders 
to other markets; and (4) acknowledged that the Exchange's rules 
would not obviate or invalidate any trade made pursuant to another 
market's rules.
    \8\ See Securities Exchange Act Release No. 54145 (July 14, 
2006), 71 FR 41654 (``Notice'').
    \9\ See Partial Amendment to Form 19b-4 dated September 29, 2006 
(``Amendment 6''). See infra Section III.
---------------------------------------------------------------------------

II. Description of Proposal

    Utilizing AEMI, Amex proposes to implement a new hybrid market 
structure to integrate automated and floor-based trading for equities 
and ETFs. The Exchange has designed AEMI to enable it to comply with 
Regulation NMS,\10\ particularly Rules 610 (the Access Rule) and 611 
(the Order Protection Rule),\11\ and to operate as an automated trading 
center \12\ whose quotes would be protected by Rule 611. Although AEMI 
includes many new features, many of Amex's existing floor-based rules 
are being incorporated into the new AEMI rules.
---------------------------------------------------------------------------

    \10\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37495 (June 29, 2005) (``Regulation NMS Release'').
    \11\ 17 CFR 242.610 and 242.611.
    \12\ See 17 CFR 242.600(b)(3) (defining ``automated trading 
center'').
---------------------------------------------------------------------------

A. General Overview of AEMI

    Central to the AEMI system is the electronic order book where 
marketable trading interest will automatically execute. AEMI by default 
will publish an automated best bid and offer for the Exchange (also 
referred to as the ``Amex Published Quote'' or ``APQ''), and the 
default state of operation will be automatic execution (``auto-ex''). 
Generally, if an incoming order is marketable, it would automatically 
execute against any contra-side interest on the AEMI Book until its 
limit price, if any, is reached. Any remainder would be displayed on 
the AEMI Book as part of the new APQ. Market participants also can use 
the ``hit or take'' functionality to trade immediately against the APQ. 
Notwithstanding the foregoing, if an incoming order locks or crosses a 
protected quotation of another trading center and that protected 
quotation is better priced than the APQ, AEMI would send an intermarket 
sweep order (``ISO'') for the displayed quantity of the protected 
quotation. Any remaining size could execute on the AEMI system or be 
displayed in the AEMI Book, as appropriate. Executions would occur 
according to the Exchange's rules of parity and priority, discussed in 
more detail below.
    Amex will retain a physical trading floor, although verbal bids and 
offers have no standing until entered into the AEMI system.\13\ A trade 
negotiated on the floor, when entered into the system, can be broken up 
by electronic orders at the same price on the AEMI Book or by better-
priced protected quotations at other trading centers. In addition, 
auto-ex will be disabled in certain limited circumstances where Amex 
believes that an auction market is appropriate to seek additional 
liquidity or to dampen volatility in the market.
---------------------------------------------------------------------------

    \13\ See Rule 123-AEMI(a).
---------------------------------------------------------------------------

    In its new hybrid market, Amex will continue to have Specialists, 
Registered Traders, Floor Brokers, and off-floor members.\14\ Every 
equity security traded on the Exchange will be assigned to a 
Specialist. Like today, Specialists will have affirmative and negative 
obligations to maintain a fair and orderly market in the securities in 
which they are registered. Registered Traders will act as supplemental 
market makers in ETFs. Floor Brokers can trade in the crowd or submit 
orders directly to the book. Off-floor members can send orders directly 
to the book or to Floor Brokers for representation in the crowd. In 
addition, Amex proposes to create a number of new order types and 
retain or revise certain existing order types. Generally, all AEMI 
order types will be available to all members, except for reserve orders 
and percentage orders which may be used only by Floor Brokers.
---------------------------------------------------------------------------

    \14\ In a separate filing, Amex also has proposed rules relating 
to Registered Equity Market Makers (``REMMs''). See File No. SR-
Amex-2006-35.
---------------------------------------------------------------------------

B. Regulation NMS Compliance

1. Automated Trading Center
    Amex intends to operate AEMI as an automated trading center under 
Regulation NMS whose default state will be to disseminate automated 
quotations.\15\ However, Amex has designed AEMI to revert to an auction 
market to provide additional liquidity and price discovery, or to 
dampen volatility in the market, as determined by market conditions. 
Thus, the AEMI rules contemplate situations where the system would 
disable auto-ex and mark the Amex quotation as non-firm. The Exchange 
intends to continuously monitor the frequency and cause of automatic 
execution being disabled, and has represented that it would, as 
necessary and with the appropriate

[[Page 59547]]

regulatory approvals, adjust the conditions under which auto-ex could 
be disabled to maintain market quality for investors and retain its 
status as an automated trading center.\16\
---------------------------------------------------------------------------

    \15\ See 17 CFR 242.600(b)(3) (defining ``automated quotation'') 
and 242.600(b)(4) (defining ``automated trading center'').
    \16\ See Amendment No. 4, at 12.
---------------------------------------------------------------------------

a. Integration of Floor Trading
    The AEMI system will be augmented by a traditional trading floor. 
Verbal bids and offers in the crowd do not have standing in the AEMI 
Book. A trade negotiated in the crowd cannot be consummated until 
entered into the AEMI system, and such a trade could potentially be 
broken up by existing interest in the AEMI Book or by protected 
quotations at other trading centers. Negotiated trades are one-to-one 
trades between two crowd members (possibly including the Specialist) 
and are allowed only while auto-ex is enabled. Auction trades, on the 
other hand, may take place while auto-ex is enabled or while auto-ex is 
disabled. In the latter case, an auction trade may occur for the sole 
purpose of resolving the condition that caused auto-ex to be disabled.
    An auction trade is: (1) A trade executed between or among members 
on the floor by open outcry (which could incorporate orders on the AEMI 
Book); or (2) a cross trade executed by a member on the floor by open 
outcry.\17\ A Specialist would immediately enter an auction trade into 
AEMI if it participates in the trade. If the Specialist is not part of 
an auction trade, the member who initiates the trade would immediately 
be required to report the trade to the Specialist for input into AEMI. 
Upon input, AEMI would: (1) Send a report of the trade to the tape, 
less the size of any outbound ISOs; \18\ (2) execute any orders on the 
AEMI Book that could be executed at the price of the auction trade; (3) 
generate outbound ISO(s), as necessary; and (4) if auto-ex had been 
disabled, re-enable auto-ex and disseminate a new automated APQ. 
Auction trades could not take place outside the APQ when auto-ex is 
enabled.
---------------------------------------------------------------------------

    \17\ See Rule 128B-AEMI.
    \18\ See infra Section II(B)(2)(b) (discussing use of ISOs).
---------------------------------------------------------------------------

    The Specialist would confirm and conduct the post-trade allocation 
for trades with more than one contra-side member, and AEMI would then 
send notification of individual trades to active crowd participants. 
The Specialist is required to confirm the initial post-trade allocation 
(which is an estimate computed by AEMI based on assumed participation 
by all of the active crowd participants and the Exchange's priority and 
parity rules) to allow the active crowd participants to verbally 
confirm whether they participated. AEMI would compute any necessary 
adjustments in the Specialist's allocation. If the allocation is not 
confirmed by the Specialist within a three-minute period following the 
trade, AEMI's estimated allocation to the Specialist and the active 
crowd participants would be used.\19\
---------------------------------------------------------------------------

    \19\ See Rule 128B-AEMI(b).
---------------------------------------------------------------------------

b. Disabling Auto-Ex
    Automatic execution on AEMI would be disabled, resulting in the 
dissemination of a non-firm quote, in six enumerated circumstances 
generally relating to a large order imbalance, high volatility, or a 
systems malfunction. When auto-ex is disabled under the six 
circumstances, members may not trade in the open outcry market, other 
than to consummate an auction trade to remove the condition that caused 
auto-ex to be disabled. While auto-ex is disabled, market participants 
may enter or cancel bids, offers, and orders in AEMI.\20\
---------------------------------------------------------------------------

    \20\ See Amendment No. 6, supra note 9.
---------------------------------------------------------------------------

i. Spread Tolerance
    The spread tolerance would be breached and auto-ex disabled if an 
inbound order walks the book beyond a predefined price level relative 
to the price of the security at the time of the initial execution 
against the order.\21\ The spread tolerance is designed to mitigate 
volatility caused by the entry of a large order if there is no natural 
contra-interest on the book. The spread tolerance is an Exchange-set 
parameter per security and would be dynamically applied according to 
the first execution price of the security against the incoming order, 
based on the table below:
---------------------------------------------------------------------------

    \21\ See Rule 128A-AEMI(f)(i).

------------------------------------------------------------------------
                                                              Tolerance
                        Stock price                            (cents)
------------------------------------------------------------------------
Less Than $5...............................................            5
$5 to $15..................................................           15
More Than $15..............................................           25
------------------------------------------------------------------------

ii. Momentum Tolerance
    The momentum tolerance would be breached, and auto-ex disabled, if 
multiple orders moved the price of a security in one direction beyond a 
pre-defined boundary in a 30-second time period.\22\ The momentum 
tolerance is designed to mitigate volatility caused by a rapid 
succession of small orders in a short time frame. The Exchange designed 
the spread and momentum tolerances to work together to prevent 
excessive volatility. Thus, while a series of small orders might not 
individually trigger the spread tolerance, their combined effect could 
trigger the momentum tolerance.
---------------------------------------------------------------------------

    \22\ See Rule 128A-AEMI(f)(ii).
---------------------------------------------------------------------------

iii. Gap Trade Tolerance
    A gap trade tolerance would be breached if the gap between the 
current quotation and the last sale exceeded the parameters of the 
Exchange's ``1%, 2, 1, \1/2\'' point rule.\23\
---------------------------------------------------------------------------

    \23\ See Rule 128A-AEMI(f)(iv); Rule 154-AEMI(e). These rules do 
not apply to ETFs.
---------------------------------------------------------------------------

iv. Delayed Opening, Gap Quote, or Trading Halt
    AEMI also would disable auto-ex if the opening is delayed, Amex is 
disseminating a gap quote, or trading is halted in a security.\24\
---------------------------------------------------------------------------

    \24\ See Rule 128A-AEMI(f)(iii).
---------------------------------------------------------------------------

    A specialist may ``gap the quote'' when an order imbalance 
exists.\25\ A Specialist could gap the quote when either: (1) A large 
order has been represented in the crowd; or (2) an incoming electronic 
order has swept the book, disabled auto-ex, and left a large imbalance. 
If the Specialist gaps the quote, auto-ex would be disabled and a non-
firm quote disseminated to reflect the order imbalance. If auto-ex had 
already been disabled by a tolerance breach, it would remain disabled 
and the existing non-firm quote would be updated with a non-firm gapped 
quote. After publishing the gapped quote, the Specialist would be 
required to ask a Senior Floor Official or an Exchange Official to 
supervise the process.
---------------------------------------------------------------------------

    \25\ See Rule 170-AEMI(f).
---------------------------------------------------------------------------

    In such a situation, the Specialist would display on the imbalance 
side a bid or offer equal to the price of the automated NBBO on the 
same side corresponding to the order causing the imbalance and show the 
full size of the electronic imbalance or the order represented in the 
crowd. The Specialist would display one round lot for the contra-side 
size. If the gapped quote were the result of an order represented in 
the crowd, the Floor Broker whose order imbalance caused the quote to 
be gapped would be required to enter his order into AEMI immediately. 
The price of the contra-side of the quotation would represent the 
Specialist's determination of the price at which the stock would trade 
if no contra-interest develops or no cancellations occur as a result of 
the gapped quotation. A gapped quote could be displayed up to two 
minutes or until offsetting interest is received electronically, such 
that the Specialist could pair off the imbalance and re-enable auto-ex. 
Auto-ex would be

[[Page 59548]]

disabled until the Specialist performs a pair-off trade and the APQ is 
updated and re-automated. While the quotation is gapped, orders, 
cancellations, and other messages would continue to enter AEMI, but 
would not update the APQ and no trades would occur. In addition, 
commitments received via the Intermarket Trading System (``ITS'') 
during a gapped quote would be canceled.
    The Senior Floor Official or Exchange Official supervising the 
process will determine whether: (1) To execute the orders immediately 
and terminate the gapped quote; (2) direct the Specialist to maintain 
the gapped quotation to allow time for contra-side interest to develop 
or cancellations to occur (but in any event not more than two minutes); 
or (3) halt trading in the stock. At the end of the two minutes from 
the initiation of the gapped quote, the Specialist, in consultation 
with the supervising Senior Floor Official or Exchange Official, must 
either: (1) Conduct an auction trade and disseminate an automated 
quotation; or (2) halt trading in the stock.
    The size of an imbalance suitable for gapped quoting is at least 
10,000 shares or a quantity of stock having a value of $200,000 or 
more. However, ``depending on the trading characteristics of the 
security, the appropriate conditions for gapped quoting may be 
higher.''\26\
---------------------------------------------------------------------------

    \26\ Rule 170-AEMI(f).
---------------------------------------------------------------------------

v. Unusual Market Conditions
    AEMI also will disable auto-ex when the Exchange determines that 
unusual market conditions exist in one or more securities.\27\ If the 
Exchange is unable to accurately collect, process, and/or disseminate 
quotation data in one or more securities due to a high level of trading 
activity or the existence of unusual market conditions, AEMI would 
immediately disable auto-ex and disseminate the indicator ``N'' to 
indicate that Amex's quotation, if a trading halt has not been declared 
and quotations are being published for such security or securities, is 
not firm. An unusual market condition affecting the Exchange's ability 
to disseminate quotation data would include, but not be limited to, 
situations where the equipment used to collect, process, and 
disseminate quotation data becomes inoperable.\28\
---------------------------------------------------------------------------

    \27\ See Rule 128A-AEMI(f)(vi).
    \28\ See Rule 115-AEMI, Commentary .01(2).
---------------------------------------------------------------------------

    If a Specialist were unable to update its quotation on a timely 
basis due to the high level of trading activity or the existence of an 
unusual market condition, it would be required to promptly notify a 
Floor Official.\29\ Once the Floor Official, with the involvement of a 
member of the Amex regulatory staff, promptly verifies the existence of 
the unusual market activity or condition, the Floor Official would 
notify Amex's Market Operations Division, which would then promptly 
disable auto-ex and disseminate the indicator ``N'' to indicate that 
Amex's quotation, if a trading halt has not been declared and 
quotations are being published for such security or securities, is not 
firm. The Floor Official also would consult with Amex's Market 
Operations Division to determine whether to declare a non-regulatory 
halt in such security or securities if the ability of the Specialist to 
promptly communicate quotation data is adversely affected. In the 
absence of such a non-regulatory halt, incoming orders would continue 
to execute against orders for the security or securities in the AEMI 
Book.
---------------------------------------------------------------------------

    \29\ See Rule 115-AEMI, Commentary .01(1)(a) and .01(1)(b).
---------------------------------------------------------------------------

vi. Cash-Close Pair-Off in ETFs
    For automatic execution eligible securities that trade until 4 
p.m., auto-ex would be disabled one second prior to 4 p.m. if there 
were any on-close orders in the AEMI Book. However, for ETFs that trade 
until 4:15 p.m., auto-ex would be disabled: (1) One second prior to 4 
p.m., if there were any cash close orders in the AEMI Book, and resume 
immediately after the Specialist performed the cash close; and/or (2) 
one second prior to 4:15 p.m., if there were on-close orders in the 
AEMI Book.\30\
---------------------------------------------------------------------------

    \30\ See Rule 131-AEMI, Commentary .03.
---------------------------------------------------------------------------

vii. Re-Enabling Auto-Ex
    If auto-ex were disabled due to any tolerance breach, the 
Specialist would have ten seconds to attempt to re-enable auto-ex and 
disseminate a new automated APQ.\31\ Thereafter, AEMI would 
periodically attempt to resume auto-ex and disseminate a new automated 
APQ. If the remainder of the aggressing order causing the breach 
expires or cancels, or if the AEMI Book is not locked or crossed, the 
Specialist could re-enable auto-ex prior to the expiration of the ten-
second period through a ``front end'' device. If the order imbalance 
remains or if the AEMI Book remains locked or crossed, the Specialist 
could conduct an auction for the imbalance, and the action of printing 
the auction trade or performing a pair-off would automatically re-
enable auto-ex and publish an automated quote. If the Specialist does 
not take such action or gap the quote by the end of the ten-second 
period, auto-ex would automatically resume if the AEMI Book is not 
locked or crossed. If the AEMI Book is still locked or crossed after 
the initial ten-second period and the Specialist has not acted, AEMI 
would attempt to re-enable auto-ex in ten-second intervals. When auto-
ex is disabled due to the breach of a spread or momentum tolerance or a 
gap trade, orders and quotations (with the exception of the 
Specialist's quotation) that enter the AEMI Book and are priced better 
than the contra-side of the APQ would participate in the auction trade 
to eliminate the locked or crossed market. Once the pair-off is 
completed, AEMI would automatically disseminate a new automated APQ.
---------------------------------------------------------------------------

    \31\ See Rule 128A-AEMI(g).
---------------------------------------------------------------------------

2. Compliance with Rule 611 of Regulation NMS
a. Generally
    AEMI would generate an ISO to clear the displayed size of any 
better-priced protected quotation of another automated trading center 
before executing a trade at an inferior price, except as set forth 
below.\32\ ISOs may be sent or received through ITS or private 
linkages.\33\ However, AEMI would not generate an ISO when one of the 
exceptions in Rule 611 applies.
---------------------------------------------------------------------------

    \32\ See Rule 126A-AEMI.
    \33\ See Amendment No. 4, at 111.
---------------------------------------------------------------------------

b. Intermarket Sweep Orders
    The AEMI rules contemplate both inbound and outbound ISOs.\34\ An 
inbound ISO is a limit order for an NMS stock received by AEMI from a 
member which is to be executed: (1) Immediately at the time such order 
is received in the AEMI Book; (2) without regard for better-priced 
protected quotations displayed at one or more other trading centers; 
and (3) at prices equal to or better than the limit price, with any 
portion not so executed to be treated as canceled. An inbound ISO could 
trade at multiple prices on AEMI up to its limit price, except for an 
inbound ISO received through the ITS or any successor thereto, which 
would trade only at a single price, the Amex best bid or offer.\35\
---------------------------------------------------------------------------

    \34\ See Rule 131-AEMI(j).
    \35\ See id.
---------------------------------------------------------------------------

    An outbound ISO would be generated by AEMI to execute against all 
better-priced protected quotations displayed by other trading centers 
up to their displayed size.\36\ An ISO would be marked as such to 
inform the receiving trading center that it can be executed immediately 
without regard to protected

[[Page 59549]]

quotations in other trading centers. Unless an appropriate exception 
applied, AEMI would send ISOs for the full displayed size of any 
better-priced protected quotation of another trading center before 
executing a trade at a worse price.\37\ An outbound ISO also would be 
generated if an order entered into the AEMI system would lock or cross 
a protected quotation in an away market.\38\
---------------------------------------------------------------------------

    \36\ See id.
    \37\ See Rule 126-AEMI.
    \38\ See Rule 126A-AEMI.
---------------------------------------------------------------------------

    Each outbound ISO would be designated as immediate-or-cancel and 
carry an expiration delay timer.\39\ If AEMI receives a no-fill or 
partial fill in response to the outbound ISO and the quotation at the 
away market is not updated, AEMI would release the corresponding order 
that had been suspended so that it may re-aggress the AEMI Book (and 
generate new ISOs to other trading centers, if necessary). AEMI would, 
however, continue to route ISOs to that particular trading center's 
protected quotation in that security.\40\
---------------------------------------------------------------------------

    \39\ The expiration delay timer would control how long AEMI 
would wait before attempting to cancel the ISO. See id.
    \40\ See id.
---------------------------------------------------------------------------

    If AEMI receives no response at all to an outbound ISO and assuming 
no system errors have been detected, AEMI would issue a cancellation at 
the expiration of the delay timer. This action would release the 
corresponding order that had been suspended on the AEMI Book pending 
the response to the ISO.\41\ The released order would then re-aggress 
the AEMI Book (and generate new ISOs to other away markets, if 
necessary). Amex has acknowledged that, if it ultimately receives a 
trade report from the away market, it will be bound by the away 
market's rules regarding such trades.\42\
---------------------------------------------------------------------------

    \41\ See id. See also Rule 128B-AEMI(c) (describing similar 
procedure when Amex does not receive a response to an outbound ISO 
generated by an auction trade).
    \42\ See Amendment No. 4, Item 9.
---------------------------------------------------------------------------

c. Trade Reporting of Rule 611 Exceptions
    Following the ``Trading Phase Date'' of Regulation NMS (February 5, 
2007),\43\ the Exchange will identify all trades executed pursuant to 
an exception or exemption from Rule 611 of Regulation NMS in accordance 
with specifications approved by the operating committee of the relevant 
national market system plan for an NMS stock.\44\ If a trade is 
executed pursuant to both the intermarket sweep order exception of Rule 
611(b)(5) or (6) \45\ and the self-help exception of Rule 
611(b)(1),\46\such trade shall be identified as executed pursuant to 
the ISO exception.
---------------------------------------------------------------------------

    \43\ By no later than February 5, 2007, all trading centers 
intending to qualify their quotations for trade-through protection 
must bring a Regulation NMS-compliant trading system into full 
operation for all NMS stocks intended to be traded during the phase-
in period (i.e., through October 8, 2007). See Securities Exchange 
Act Release No. 53829 (May 18, 2006), 71 FR 30038 (May 24, 2006) 
(extending compliance dates for Rules 610 and 611 of Regulation 
NMS).
    \44\ See Rule 126A-AEMI(a).
    \45\ 17 CFR 242.611(b)(5) or (6).
    \46\ 17 CFR 242.611(b)(1).
---------------------------------------------------------------------------

d. Self Help
    The AEMI rules also provide that the Exchange may invoke ``self 
help'' in certain circumstances and thereby disregard what appears to 
be a protected quotation of another trading center. In Amendment No. 6, 
Amex added new language to Rule 126A-AEMI to provide that, in 
accordance with Rule 611(a) of Regulation NMS,\47\ the Exchange may, 
pursuant to objective industry-wide established interpretations and 
policies, determine to bypass the quotations displayed by another 
trading center if such trading center repeatedly fails to respond 
within one second to orders attempting to access such trading center's 
protected quotations, provided such failures are attributable to such 
trading center and are not attributable to transmission outside the 
control of such trading center. In connection with any such 
determination, the Exchange will immediately notify the non-responding 
trading center of such determination.
---------------------------------------------------------------------------

    \47\ 17 CFR 242.611(a).
---------------------------------------------------------------------------

e. Order Routing
    Amex would route orders to other trading centers under certain 
circumstances. Such routing services would occur pursuant to three 
separate agreements: (1) An agreement between the Exchange and each 
member on whose behalf orders would be routed; (2) an agreement between 
the Exchange and each third-party broker-dealer that would serve as a 
``give-up'' on an away trading center when the member on whose behalf 
an order is routed is not also a member or subscriber of the away 
trading center; and (3) an agreement between the Exchange and a third-
party service provider pursuant to which the Exchange licenses the 
routing technology used by the Exchange for its routing services.\48\
---------------------------------------------------------------------------

    \48\ See Rule 126B-AEMI.
---------------------------------------------------------------------------

    With respect to these routing services, Amex would establish and 
maintain procedures and internal controls reasonably designed to 
adequately restrict the flow of confidential and proprietary 
information between the Exchange (including its facilities) and the 
third-party service provider. To the extent the provider reasonably 
receives confidential and proprietary information, its use of such 
information would be restricted to legitimate business purposes 
necessary for the licensing of routing technology.
f. Locked and Crossed Markets
    Amex has proposed rules regarding locked and crossed markets, as 
required by Rule 610(d) of Regulation NMS.\49\ Exchange members shall 
reasonably avoid displaying, and shall not engage in a pattern or 
practice of displaying, any quotations that lock or cross a protected 
quotation, and any manual quotations that lock or cross a quotation 
previously disseminated pursuant to an effective national market system 
plan,\50\ except if one of the following exceptions applies: \51\
---------------------------------------------------------------------------

    \49\ 17 CFR 242.610(d).
    \50\ See Rule 128C-AEMI(b).
    \51\ See Rule 128C-AEMI(d).
---------------------------------------------------------------------------

     The locking or crossing quotation was displayed at a time 
when the trading center displaying the locked or crossed quotation was 
experiencing a failure, material delay, or malfunction of its systems 
or equipment.
     The locking or crossing quotation was displayed at a time 
when a protected bid was higher than a protected offer in the NMS 
stock.
     The locking or crossing quotation was an automated 
quotation, and the member displaying such automated quotation 
simultaneously routed an ISO to execute against the full displayed size 
of any locked or crossed protected quotation.
     The locking or crossing quotation was a manual quotation 
that locked or crossed another manual quotation, and the member 
displaying the locking or crossing manual quotation simultaneously 
routed an ISO to execute against the full displayed size of the locked 
or crossed manual quotation.
    The rule addresses intentional locks and crosses by requiring that 
all locks and crosses of protected quotations be reasonably avoided and 
prohibiting a pattern or practice of locks or crosses. The rule also 
restricts the display of manual quotations that would lock or cross any 
type of quotation, whether automated or manual. There is no restriction 
on the display of automated quotations that lock or cross manual 
quotations.\52\
---------------------------------------------------------------------------

    \52\ See Rule 128C-AEMI, Commentary .01.
---------------------------------------------------------------------------

g. MPV
    The minimum price variation (``MPV'') on AEMI for quotations and

[[Page 59550]]

orders priced above $1.00 per share is $0.01.\53\ For quotations and 
orders priced below $1.00 per share, the MPV on AEMI is $0.0001.
---------------------------------------------------------------------------

    \53\ See Rule 127-AEMI.
---------------------------------------------------------------------------

h. AEMI Implementation
    Rule 1A-AEMI describes the roll-out of the AEMI system. AEMI's 
anticipated roll-out would commence prior to the Trading Phase Date for 
Regulation NMS (February 5, 2007). By the Trading Phase Date, all ETFs, 
equities, and securities that trade like equities that are traded on 
the Exchange would be on the AEMI platform. During the roll-out period, 
while the Exchange has securities trading on its legacy and AEMI 
platforms, the Exchange's current rules (as amended from time to time) 
would apply to those securities continuing to trade on the legacy 
platform. The AEMI rules would apply to those securities trading on the 
new trading platform. When a security transfers to AEMI, the AEMI rules 
will govern trading in that security and the corresponding legacy rule 
would no longer have any applicability. When all securities have 
transferred off the legacy platform, Amex will submit a proposed rule 
change to delete any unnecessary legacy rules.
    The AEMI rules would cover the operation of the AEMI platform to 
become effective on and after the Trading Phase Date. However, Amex 
intends to operate a modified early version of the AEMI platform to 
operate prior to the Trading Phase Date. Amex has submitted a separate 
rule change for this interim system, which would be referred to as 
``AEMI-One.'' That proposal makes minor modifications to the AEMI rules 
to account for the fact that other trading centers may not have fully 
implemented their Regulation NMS-compliant trading systems.\54\
---------------------------------------------------------------------------

    \54\ See Securities Exchange Act Release No. 54413 (September 8, 
2006), 71 FR 54318 (September 14, 2006) (``AEMI-One Notice'')..
---------------------------------------------------------------------------

C. Other Rules

1. Role of Specialists
    Amex would have a Specialist for each security traded on AEMI. A 
Specialist is required ``to engage in a course of dealings for its own 
account to assist in the maintenance, insofar as reasonably 
practicable, of a fair and orderly market on the Exchange.'' \55\ The 
Specialists must, among other things, maintain a two-sided quotation in 
every security in which it is registered.\56\ To facilitate the 
Specialists' obligation to maintain a continuous two-sided quotation, 
AEMI would provide an emergency quote function. If the Specialist's 
quote were exhausted or decremented below a specified size, and a new 
quote were not automatically generated, AEMI would generate an 
emergency quote based on the parameters programmed by the Specialist.
---------------------------------------------------------------------------

    \55\ Rule 170-AEMI(b). Thus, a Specialist's quotation in an ETF 
or other derivatively priced security should bear a proper relation 
to the value of underlying or related securities. See Rule 170-AEMI, 
Commentary .03.
    \56\ Specialists would have a variety of ways to submit 
quotations into AEMI. They could: (1) Stream two-sided quotes up to 
five price points on each side (one quote per price point) of the 
AEMI Book; (2) generate automatic quotes (``auto-quotes'') within 
AEMI based on user-specified parameters relating to size, ticks, and 
underlying market data; or (3) physically enter single, two-way 
quotes into AEMI (``solo quotes''). A Specialist could enter solo 
quotes at any time, which would override the best existing auto-
quote or streaming quote.
---------------------------------------------------------------------------

a. Openings
    At the opening, the Specialist is required to perform a pair-off of 
orders in the AEMI Book.\57\ AEMI will permit the opening pair-off 
session to last no more than three seconds. During the opening pair-off 
session, the Specialist must select a single opening pair-off price at 
which AEMI will execute all market and marketable limit orders. 
Incoming orders, cancellations, and other messages will be held in a 
Message Queue and not included in the opening pair-off. If the 
Specialist has not completed the opening pair-off within three seconds, 
the pair-off session will terminate, all messages in the Message Queue 
will enter the AEMI Book, and the Specialist will have to reinitiate 
the opening pair-off session to open the security. During the actual 
pair-off, orders that are being processed as part of the pair-off 
cannot be altered or canceled. If no orders on the AEMI Book are 
eligible for execution on the open, the Specialist will open the 
security on a quotation without a trade.
---------------------------------------------------------------------------

    \57\ See Rule 108-AEMI(d).
---------------------------------------------------------------------------

b. Closings
    The Specialist also will conduct a pair-off session at the closing. 
In both UTP and listed securities, an on-close imbalance of 25,000 
shares or more would be automatically published to the tape at 20 and 
then at ten minutes before the market close at 4 p.m.\58\ In all 
securities, the closing pair-off session would commence automatically 
at the official closing time and disable auto-ex. To participate in the 
close, all orders must have been entered electronically. The Specialist 
will manually close each security.
---------------------------------------------------------------------------

    \58\ The imbalances would be published to Consolidated Tape 
Association (``CTA'') Tape B for Amex listed securities. Amex is 
working with the Nasdaq SIP to publish the imbalances in Nasdaq UTP 
securities to Tape C.
---------------------------------------------------------------------------

    The Specialist would execute any imbalance at an auction price in 
accordance with auction market procedures and pair off and execute the 
remaining executable orders at that closing price. Percentage orders 
and stop orders elected at the closing price could be included in the 
close. The Specialist would conduct a post-trade allocation with 
respect to the shares necessary to offset the imbalance, as with a 
regular auction. Until this post-trade allocation process is completed, 
the Specialist would be responsible for the contra-side of the 
imbalance traded. If there are no on-close orders, the closing price 
would be the last sale in the security. If at the close the imbalance 
is too large for the Specialist and the crowd to offset, the Exchange 
would declare a trading halt and there would be no closing rotation for 
that security.
    In the case of certain ETFs that trade until 4:15 p.m., the 
Specialist could perform a ``cash close'' pair-off during the regular 
trading session at 4 p.m. prior to the official closing session on the 
Exchange. This would be an added service for investors wishing to mark 
positions to the cash close. In the event there are ``market at 4 p.m. 
cash close'' orders for an ETF, auto-ex would be disabled for that 
security at 4 p.m. Once the pair-off is concluded, auto-ex would resume 
until it is disabled for the official closing pair-off at 4:15 p.m.
c. Stabilization
    Because of the AEMI automated environment, Amex proposes to modify 
certain existing rules related to Specialist obligations, in particular 
its existing requirements for certain transactions for the Specialist's 
own account involving destabilizing ticks requiring Floor Official 
approval.\59\ In Rule 170-AEMI, Commentary .01, Amex proposes to ease 
the restrictions relating to a Specialist effecting transactions for 
its own account for the purpose of establishing or increasing a 
position. The following types of transactions generally would be 
prohibited, except with the approval of a Floor Official:
---------------------------------------------------------------------------

    \59\ See Rule 170-AEMI.
---------------------------------------------------------------------------

     A purchase on the offer at a price above the last regular 
way trade in the same trading session, or a sale short to the bid at a 
price below the last regular way trade in the same trading session 
where permitted by the Commission's short sale regulations;
     The purchase of all or substantially all of the stock 
offered on the AEMI Book on a zero plus tick, when the stock

[[Page 59551]]

so offered represents all or substantially all the stock offered in the 
market;
     The supplying short of all or substantially all the stock 
bid for on the AEMI Book on a zero minus tick where permitted by the 
Commission's short sale regulations, when the stock so bid for 
represents all or substantially all the stock bid for in the market; 
and
     Failing to re-offer or re-bid where necessary after 
effecting the transactions described above.
    A Specialist may also effect an auto-ex transaction on a 
destabilizing tick without the approval of a Floor Official in the 
situations described above if: (1) The buy is on the APQ (which must be 
equal to the Specialist's bid) when its bid is accessed by a sell 
order; or (2) the sale is on the APQ (which must be equal to its offer) 
when its offer is accessed by a buy order.\60\
---------------------------------------------------------------------------

    \60\ See Rule 170-AEMI, Commentary .01.
---------------------------------------------------------------------------

    In addition, Amex proposes to ease the restrictions relating to a 
Specialist's transactions for its own account in liquidating or 
decreasing a position in a registered stock.\61\ Unless such 
transactions are reasonably necessary in relation to the Specialist's 
overall position and prior approval of a Floor Official has been 
obtained, a position may not be liquidated by selling stock to the bid 
on a direct minus tick or by purchasing stock on the offer on a direct 
plus tick. The Specialist would be permitted to effect an auto-ex 
transaction on a destabilizing tick without Floor Official approval if: 
(1) The buy is on the Amex Published Bid (which must be equal to its 
bid) when its bid is accessed by a sell order; or (2) the sale is on 
the Amex Published Offer (which must be equal to its offer) when the 
offer is accessed by a buy order. Furthermore, a Specialist's quotation 
should be such that a transaction effected at its quoted price or 
within the quoted spread, whether having the effect of reducing or 
increasing the Specialist's position, ``would bear a proper relation to 
preceding transactions and anticipated succeeding transactions.'' \62\ 
In the case of ETFs or other derivatively priced securities, the 
Specialist's quotation should bear a proper relation to the value of 
the underlying or related securities.\63\
---------------------------------------------------------------------------

    \61\ See Rule 170-AEMI, Commentary .02.
    \62\ Rule 170-AEMI, Commentary .03.
    \63\ See id.
---------------------------------------------------------------------------

d. Duty to Yield
    A Specialist must give precedence to orders in the Specialist Order 
Book, which is a subset of the AEMI Book, in any security in which it 
is registered before executing at the same price any trade in the same 
security in which it has an interest.\64\ Three types of trades are 
excepted from that general rule:
---------------------------------------------------------------------------

    \64\ See Rule 155-AEMI. See also Rule 126-AEMI(2)(a)(iv)(A)(I) 
(requiring an in-parity Specialist quotation to yield to any public 
order at the same price).
---------------------------------------------------------------------------

     The member entering a percentage order has permitted the 
Specialist to be on parity.
     In ETFs, the Specialist may be on parity with a broker-
dealer order pursuant to Rule 126-AEMI.
     The Specialist need not give precedence to an order that 
has been suspended in AEMI because an outbound ISO has been routed to 
another trading center on its behalf.
    The Exchange anticipates allowing a Specialist to charge 
commissions under AEMI for orders that require special handling or for 
which the Specialist otherwise provides a service as agent for the 
order (e.g., percentage orders).\65\ However, existing Amex Rule 152(c) 
prohibits the Specialist from charging a commission if it is a party to 
the trade. Furthermore, Amex has represented that the Specialist will 
not be allowed to charge a commission on any transaction in AEMI to 
which the Specialist's proprietary position is not required to yield by 
AEMI rules or the Specialist's agency responsibility. For instance, an 
ETF Specialist will be allowed to trade on parity with, but not charge 
a commission for, a broker-dealer order in that ETF.
---------------------------------------------------------------------------

    \65\ See Amendment No. 5, Item 3.
---------------------------------------------------------------------------

2. Role of Registered Traders
    Registered Traders will act as supplemental market makers in ETFs 
and certain other related securities.\66\ The functions of a Registered 
Trader would essentially remain the same as today,\67\ although its 
quote would not be imbedded in the Specialist's quote.\68\ Instead, a 
Registered Trader would be required to maintain a quote that is 
competitive and separate from the Specialist. Registered Traders and 
Specialists are required to compete with each other to improve the 
quoted markets in all securities in which they trade.\69\
---------------------------------------------------------------------------

    \66\ See Rule 1A-AEMI(g) (defining ``Registered Trader''); Rule 
110-AEMI(o).
    \67\ See Rule 110-AEMI.
    \68\ Like a Specialist, a Registered Trader could: (1) Stream 
two-sided quotes up to five price points on each side (one quote per 
price point) of the AEMI Book; (2) auto-quote within AEMI based on 
user-specified parameters relating to size, ticks, and underlying 
market data; or (3) manually enter solo quotes. The entry of a 
Registered Trader's solo quotes would override its best existing 
auto-quote or streaming quote.
    \69\ See Rule 110-AEMI(u).
---------------------------------------------------------------------------

    A Registered Trader's transactions should constitute a course of 
dealings reasonably calculated to contribute to the maintenance of a 
fair and orderly market, and no Registered Trader should enter into 
transactions to make bids or offers that are inconsistent with such a 
course of dealings.\70\ Whenever a Registered Trader enters the trading 
crowd in other than a floor brokerage capacity, or is called upon by a 
Floor Official or a Floor Broker, the Registered Trader is required to 
make competitive bids and offers as reasonably necessary to contribute 
to the maintenance of a fair and orderly market and shall engage, to a 
reasonable degree under the circumstances, in dealings for its own 
account when there exists a lack of price continuity in, or a temporary 
disparity between the supply of and demand for, the security it is 
trading.\71\ A Registered Trader must meet certain trading thresholds 
in the securities it trades to be designated a specialist under the 
Act.\72\
---------------------------------------------------------------------------

    \70\ See Rule 110-AEMI(r).
    \71\ See Rule 110-AEMI(s).
    \72\ See Rule 110-AEMI, Commentary .02 and .03.
---------------------------------------------------------------------------

3. Role of Floor Brokers
    Floor Brokers on AEMI would be able to participate in automatic 
execution while continuing to represent orders in the crowd.\73\ To 
represent a crowd order, a Floor Broker would have to be physically 
present. Upon leaving a crowd or logging out, a Floor Broker would be 
required to: (1) Cancel all crowd orders in the AEMI Book for 
securities in the crowd it is leaving; (2) electronically submit the 
orders in the form of percentage or limit orders to the Specialist for 
handling; or (3) electronically route the crowd orders to another Floor 
Broker in the crowd, via a hand-held terminal. In addition, as 
described in greater detail below, Floor Brokers would have exclusive 
use of percentage orders and reserve orders.
---------------------------------------------------------------------------

    \73\ See Amendment No. 4, at 6.
---------------------------------------------------------------------------

4. Priority and Parity
    As a general matter, the highest bid and the lowest offer shall 
have priority on AEMI.\74\ Among orders and quotations at the same 
price, execution priority depends on a number of factors, including 
time priority, whether the order is public (i.e., it is submitted the 
Specialist Book) or crowd (i.e., it is represented by a Floor Broker in 
the crowd), whether it is a customer or broker-dealer order, and 
whether the order is deemed to be ``in parity.''
---------------------------------------------------------------------------

    \74\ See Rule 126-AEMI(1).
---------------------------------------------------------------------------

a. Parity Generally
    Orders in parity are deemed to have been received by the AEMI 
system

[[Page 59552]]

simultaneously. Therefore, an order in parity generally cannot have 
time priority over another order in parity. By allowing later-arriving 
orders to be deemed in parity, Amex seeks to mitigate the effects of 
minute differences in processing time or latency between competing 
order routing systems. Parity can be established in the following 
circumstances: \75\
---------------------------------------------------------------------------

    \75\ See Rule 126-AEMI(2)(a).
---------------------------------------------------------------------------

     If a bid (offer) in a security establishes a new highest 
bid (lowest offer), any bid (offer) in that security communicated to 
AEMI within two seconds of AEMI's receipt of the original bid (offer) 
shall be in parity with the original bid (offer) for the next trade.
     If AEMI effects a trade in a security, all visible bids 
and offers in that security at each price point shall be in parity for 
the next trade, as well as any bid (offer) in that security 
communicated to AEMI within two seconds of the original trade.
     If all bids (offers) at the APQ are canceled, all visible 
bids (offers) at each lower (higher) price point shall be in parity for 
the next trade, as well as any bid (offer) in that security 
communicated to AEMI within two seconds of the cancellation of the last 
remaining bid (offer).\76\
---------------------------------------------------------------------------

    \76\ However, priority and parity of orders on one side of the 
book shall not be affected by the cancellation of orders at the APQ 
on the other side. See Rule 126-AEMI(2)(a)(iii).
---------------------------------------------------------------------------

    There are some exceptions to these rules for establishing parity. 
In ETFs, a broker-dealer (including the Specialist) whose order is in 
parity must yield to any customer order at the same price (regardless 
of whether it is a public or crowd customer order).\77\ In equities, 
the Specialist whose order is in parity must yield to a public order at 
the same price, regardless of when the public order was entered into 
the AEMI system.\78\
---------------------------------------------------------------------------

    \77\ See Rule 126-AEMI(2)(a)(iv)(B)(I).
    \78\ See Rule 126-AEMI(2)(a)(iv)(A)(I).
---------------------------------------------------------------------------

b. Allocation Rules for ETFs
    For a transaction in an ETF, all customer orders (regardless of 
whether they are crowd customer orders or public customer orders) will 
be filled ahead of all broker-dealer orders at the same price.\79\ Any 
customer orders in parity will be filled ahead of any customer orders 
not in parity at that price. In determining the allocation for all in-
parity orders, AEMI will count all of the crowd customer orders in 
parity at that price point, deeming all public customer orders in 
parity on the Specialist Order Book as a single crowd customer order 
for this purpose.\80\ AEMI will then allocate the remaining size of the 
aggressing order pro rata between the ``crowd bucket'' and the ``public 
bucket.'' If there are multiple public customer orders in the public 
bucket, they will be filled from the allocation given to the public 
bucket in time priority.\81\ In-parity crowd customer orders in the 
crowd bucket will be distributed pursuant to an ``allocation wheel.'' 
\82\ If any size remains to the aggressing order, any crowd customer 
orders and public customer orders not in parity will then be filled 
based on time priority.\83\
---------------------------------------------------------------------------

    \79\ See Rule 126-AEMI(2)(c).
    \80\ See Rule 126-AEMI(2)(d)(v)(A).
    \81\ See Rule 126-AEMI(2)(d)(v)(B).
    \82\ See Rule 126-AEMI(2)(d)(vii). In general, the allocation 
wheel works by ranking the orders participating in the wheel in time 
priority. The system distributes round lots of the incoming order 
against the orders in the wheel through successive ``rounds'' until 
it is executed in full.
    \83\ See Rule 125-AEMI(2)(c)(i)(C).
---------------------------------------------------------------------------

    If any size remains to the aggressing order after any remaining 
customer orders have been filled, or if there were no customer orders 
to begin with, AEMI will give execution priority to crowd broker-dealer 
orders and public broker-dealer orders (including the Specialist's 
quote) in a manner similar to its handling of crowd customer order and 
public customer orders. However, if the Specialist quote is in parity 
with the broker-dealer orders, AEMI will first provide an allocation to 
the Specialist based on the following table set forth in Rule 126-
AEMI(2)(d)(vi)(B):

------------------------------------------------------------------------
                                                                Crowd/
                                                 Specialist     Public
         Number of crowd participants            allocation   allocation
                                                 (percent)    (percent)
------------------------------------------------------------------------
1.............................................           60           40
2-4...........................................           40           60
5-7...........................................           30           70
8-15..........................................           25           75
16+...........................................           20           80
------------------------------------------------------------------------

    Regardless of whether or not there are any customer orders, 
replenished reserve size will be executed after any visible size at 
that price. Any percentage orders elected by the trade event will have 
last priority at that price point.\84\
---------------------------------------------------------------------------

    \84\ See Rules 126-AEMI(2)(c)(i) and 126-AEMI(2)(c)(ii).
---------------------------------------------------------------------------

c. Allocation Rules for Equity Securities
    For transactions in a non-ETF equity securities, execution priority 
under the AEMI rules depends to a greater extent on whether the order 
is crowd or public rather than, in ETFs, whether it is customer or 
broker-dealer. If there are no public orders, the crowd orders and 
Specialist quote could be in parity. Any such in-party orders would be 
distributed pursuant to an allocation wheel.\85\ Any crowd orders or 
the specialist quote not in parity would then trade based on time 
priority.\86\
---------------------------------------------------------------------------

    \85\ See Rule 126-AEMI(2)(d)(i).
    \86\ See Rule 126-AEMI(2)(b)(i)(B).
---------------------------------------------------------------------------

    If there are public orders, execution priority would depend on 
whether the public orders are in parity or not in parity, or whether 
some public orders are in parity and some not. If there are any public 
orders not in parity, the Specialist--even if its quote is in parity--
will not receive any allocation until all public orders are filled.\87\ 
For orders that are in parity, AEMI will divide the aggressing order 
into allocations for the ``crowd bucket'' and the ``public bucket,'' 
similar to the process for ETFs. All of the public orders and the 
Specialist's quote together count as a single crowd order for purposes 
of this allocation.\88\ For distribution within the public bucket, the 
Specialist quote must yield to all public orders, regardless of the 
Specialist's time priority.\89\ Any orders not in parity, regardless of 
whether they are crowd orders or public orders, will be filled in time 
priority, with the exception of the not-in-parity Specialist quote, 
which must yield to all public orders regardless of time priority.\90\ 
As with ETFs, replenished reserve size would be executed after any 
visible size at that price. Any percentage orders elected by the trade 
event would have last priority at that price point.\91\
---------------------------------------------------------------------------

    \87\ See Rules 126-AEMI(2)(b)(iii)(C) and 126-AEMI(2)(b)(iv)(C).
    \88\ See Rule 126-AEMI(2)(d)(ii)(A).
    \89\ See Rule 126-AEMI(2)(d)(ii)(B).
    \90\ See Rules 126-AEMI(2)(b)(iii)(B) and 126-AEMI(2)(b)(iv)(B).
    \91\ See Rule 126-AEMI(b).
---------------------------------------------------------------------------

5. Order Types
    Amex proposes to retain several of its current order types in AEMI, 
including market orders, limit orders, stop orders, stop limit orders, 
good-til-canceled orders, fill-or-kill orders, and immediate-or-cancel 
orders.\92\ In addition, Amex would eliminate certain order types that 
exist in its current equity trading rules.\93\ Amex also proposes to 
create, or modify, the following order types.
---------------------------------------------------------------------------

    \92\ See Rule 131-AEMI.
    \93\ The AEMI system would not accept the following order types, 
although such orders would still be acceptable on the floor: not 
held orders, company buy-back orders in conformity with the safe 
harbor provisions of Commission Rule 10b-18, and stabilizing orders 
entered pursuant to Rule 104 of Regulation M in connection with 
purchases of a security in distribution. The following order types 
would no longer be permitted on the Exchange generally: 
``alternative'' or ``either/or'' orders, ``all-or-none orders,'' 
``good until a specified time'' orders, ``scale'' orders, ``switch'' 
or ``contingent'' orders, ``time'' orders, and ``G'' orders.

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

[[Page 59553]]

a. Electronic Cross Orders
    The Exchange proposes to introduce the following types of 
electronic cross orders exclusively for ETFs and Nasdaq securities 
admitted to dealings on an unlisted basis: (1) Cross; (2) cross only; 
(3) mid-point cross; (4) IOC cross; (5) PNP cross; and (6) auction 
cross.\94\ The electronic cross order type selected by the market 
participant would dictate whether the cross order could be broken up by 
orders on the AEMI Book, whether price improvement is being sought for 
the cross order, and how any residual of the cross order would be 
handled. For instance, ``cross'' and ``cross only'' orders are 
differentiated by their interaction with the book. A cross order could 
interact with orders in the AEMI Book at the cross price whereas a 
cross only order would not. Thus, if there were interest on the AEMI 
Book at the proposed price of a cross only transaction, AEMI would 
cancel the proposed cross.
---------------------------------------------------------------------------

    \94\ See Rule 131-AEMI(r).
---------------------------------------------------------------------------

    An auction cross order would actively seek price improvement, and 
the sender of the order would designate which side (or sides) of the 
cross is eligible for price improvement. AEMI would display the 
selected side(s) for a three-second ``Auction Cross Duration.'' The 
side(s) of the cross selected for price improvement would be displayed 
one minimum trading increment worse than the proposed cross price 
(i.e., the buy side of the cross must be displayed one tick below the 
proposed cross price and/or the sell side of the cross must be 
displayed one tick above the proposed cross price). During the three 
second Auction Cross Duration, the displayed order could be price 
improved by new bids, offers, or orders entering the AEMI Book. If the 
cross price is equal to or better than the automated NBBO and is 
between the APQ at the end of the Auction Cross Duration, AEMI would 
execute the auction cross at the cross price. If not, the order would 
be cancelled to avoid trading through the automated NBBO or at or 
through the APQ. If one or both sides selected for display were 
executed in part during the Auction Cross Duration, the unfilled 
balance would continue to be displayed and be executed at the end of 
the Auction Cross Duration at the cross price, so long as it continues 
to be equal to or better than the automated NBBO and between the APQ. 
Any remainder would be canceled at the end of the Auction Cross 
Duration unless the order were designated Cross and Post (``CNP''), in 
which case the unexecuted balance would be added to the AEMI Book. If a 
side selected for display is executed in full during the Auction Cross 
Duration, the other side of the auction cross order would be canceled 
unless the order is designated CNP. AEMI would reject an auction cross 
order if the proposed cross price were at or outside the APQ or outside 
the automated NBBO.
b. Floor Crosses
    A cross with size precedence \95\ could not be broken up at the 
cross price by resting bids, offers or orders in the AEMI Book. In 
executing a cross trade by open outcry, members would be required to 
follow the crossing procedures set forth in Rule 152-AEMI (if a member 
or member organization is taking or supplying stock to fill a 
customer's order) or Rule 151-AEMI (in all other situations). A clean 
agency cross, satisfying the size and value parameters in Commentaries 
.02 and .03 to Rule 126-AEMI, could not be broken up at the cross price 
by resting orders on the book. Only the member who executed the cross 
would receive a trade notification from AEMI in the event that the 
cross is not broken up at the cross price by the crowd (verbally) or by 
resting orders on the book.
---------------------------------------------------------------------------

    \95\ See Rule 126-AEMI, Commentary .01.
---------------------------------------------------------------------------

c. Reserve Orders
    AEMI would accept the reserve order, which is a limited price order 
submitted to AEMI by a Floor Broker standing in the crowd consisting of 
both a visible and an undisplayed (reserve) size.\96\ The Floor Broker 
would specify the visible size of the order subject to a visible size 
minimum established by the Exchange. If the visible size of a reserve 
order is decremented, AEMI would replenish the displayed size from the 
order's reserve quantity up to the lesser of the displayed size or the 
remainder of the reserve size. The reserve size would not be visible to 
market participants--and thus not would not be included in the APQ--but 
the cumulative reserve size at each price point would be visible to the 
Specialist. The Specialist would not be allowed to disclose reserve 
size in response to a market probe by a member or in response to an 
inquiry from a representative of the security's issuer.
---------------------------------------------------------------------------

    \96\ See Rule 131-AEMI(s).
---------------------------------------------------------------------------

d. Hit or Take Orders
    AEMI would have a ``hit or take'' order, which would trade against 
the APQ and could be entered by any member on or off the floor of the 
Exchange.\97\ Members who wish to use the hit or take functionality 
must specify the price and quantity of the hit or take order. A hit or 
take order would expire if not immediately executed, but unlike an IOC 
order it is capable of generating ISOs to clear better away markets 
before executing on the Exchange. A hit or take order could be 
specified as ``sell short.''
---------------------------------------------------------------------------

    \97\ See Rule 131-AEMI(t).
---------------------------------------------------------------------------

e. Percentage Orders
    AEMI would support percentage orders, which are limited price, day 
orders to buy (or sell) 50% of the Amex volume of a specified stock 
after entry into the Specialist Order Book.\98\ Such orders may be 
entered only with ``last sale'' or buy-minus/sell-plus election 
instructions. Only a Floor Broker may enter a percentage order. A 
percentage order is a public order represented by the Specialist. For 
ETFs, a percentage order must be for a customer as opposed to a broker-
dealer. Percentage orders would be executed after a ``trade event'' 
through ``election'' or ``conversion.'' Every execution due to an 
aggressing order is considered to be a trade event by AEMI. The elected 
portion of every percentage order would be executed immediately in 
whole or in part at the price of the electing transaction, or better. 
Any elected portion not so executed would revert to an unelected 
percentage order and could subsequently be elected or converted.
---------------------------------------------------------------------------

    \98\ See Rule 131-AEMI(m).
---------------------------------------------------------------------------

    A percentage order could also be automatically converted into an 
IOC order or manually converted into either an IOC order (active manual 
conversion) or a regular limit order (passive manual conversion). 
Automatic conversions could occur during an opening, a re-opening, or 
the closing pair-off, and would be governed by conditions in the AEMI 
Book. The parameters triggering automatic conversions would be 
configurable. The automatically converted portion of a percentage order 
would be executed immediately, in whole or in part, at the price of the 
conversion, or better. Any portion not so executed would revert to its 
status as an unelected percentage order and be subject to subsequent 
election or conversion. The Specialist would manually convert 
percentage orders depending on the instruction on the percentage order. 
A manually converted percentage order would become an IOC order and 
immediately aggress the AEMI Book. A passive, manually converted 
percentage order would become a limit order at the APQ, and could set a 
new APQ or join the existing APQ.
    Amex proposes to remove the current restriction requiring a 5,000 
share

[[Page 59554]]

minimum order size for certain conversions. Because the average trade 
size at the Amex is substantially less than 5,000 shares, Amex believes 
that eliminating this restriction would increase the execution 
opportunities for percentage orders.
6. Trade Nullification and Revision
    Rule 135-AEMI sets forth procedures for revising the terms of a 
transaction or cancelling it entirely if both parties agree to the 
revision or cancellation. A transaction may not be canceled or revised 
unless it was made in error or the cancellation or revision is made for 
another proper reason, and prior approval of the cancellation or 
revision is obtained from a Floor Official.\99\
---------------------------------------------------------------------------

    \99\ See Rule 135-AEMI(a).
---------------------------------------------------------------------------

    The AEMI rules also provide that a Floor Official can cancel or 
revise a trade, even when one party does not agree to doing so, if the 
transaction is clearly erroneous.\100\ The terms of a transaction are 
clearly erroneous when there is an obvious error in any term, such as 
price, number of shares or other unit of trading, or identification of 
the security. In reviewing a trade that is claimed to be clearly 
erroneous, the Floor Official shall have a view toward maintaining a 
fair and orderly market and the protection of investors and the public 
interest. A member of the Exchange's regulatory staff shall advise and 
participate in all steps of the Floor Official's review of the 
transaction. If the Floor Official determines to revise the terms of 
the transaction, he or she shall seek equitable rectification of the 
error that would place the parties in the same position, or as close as 
possible to the same position, as they would have been in had the error 
not occurred. The AEMI rules also set out procedural requirements for 
requesting review of a trade on the grounds that it is clearly 
erroneous and a procedure for appealing the Floor Official's 
determination.
---------------------------------------------------------------------------

    \100\ See Rule 118-AEMI(k) (clearly erroneous transactions in 
Nasdaq securities); Rule 135A-AEMI (clearly erroneous transactions 
non-Nasdaq securities).
---------------------------------------------------------------------------

7. Policy Regarding Communication to and on the Floor
    Amex has proposed to update its policy regarding communications to 
and on the floor in light of AEMI implementation.\101\ These changes, 
among other things, would require Registered Traders to develop, or 
secure for use, hand-held terminals that would allow: (1) Communication 
of their bids and offers to AEMI; (2) execution of trades against 
orders in AEMI; and (3) notifications from the Specialist regarding the 
Registered Trader's post-trade allocation. Members, their employees, 
and their approved persons would be required to maintain a record of 
each transmission to or from a hand-held terminal. In addition, members 
would be required to implement firewalls to ensure that inappropriate 
communications are not sent to the floor. All clock sources would be 
required to be synchronized to a Stratum-1 time source using 
millisecond increments. The Exchange would use industry standard radio 
frequencies for the wireless portion of the data communications 
infrastructure. Amex would eliminate the current restriction on image 
transmission through the data communications infrastructure.
---------------------------------------------------------------------------

    \101\ See Rule 220-AEMI.
---------------------------------------------------------------------------

8. Carry-Over Rules
    Rule 1A-AEMI(d) provides that, except to the extent governed by the 
AEMI rules or unless the context otherwise requires, the provisions of 
the Amex Constitution, the current Amex Rules, and the policies of the 
Board of Governors would be applicable to securities traded on AEMI. 
Rule 1A-AEMI(d) also expressly notes that certain current Amex rules 
would be applicable to trading on AEMI, including Rule 117 (relating to 
trading halts), Rule 190 (relating to Specialist transactions with 
public customers), and Rules 230 through 236 (relating to the ITS 
Plan). The following other rules, principally applicable to floor 
transactions, would continue to apply after AEMI is implemented: Rules 
100, 101, 102, 103, 104, 105, 120, 122, 125, 128, 129, 153A, 171, 172, 
173, 175, 176, 177, 183, 184, 185, 186, 191, 192, 193, 208, 221, and 
222.
    III. Amendment No. 6
    In Amendment No. 6, Amex proposed the following:
     To replace an old Amex rule with a new Rule 24-AEMI to 
place limitations on proprietary trading by members and member 
organizations if the person entering the order has knowledge of an 
unexecuted customer order that could be executed at the same 
price;\102\
---------------------------------------------------------------------------

    \102\ The new Rule 24-AEMI is substantially similar to NYSE Rule 
92.
---------------------------------------------------------------------------

     To add Commentary .01, paragraph 1(b) to Rule 115-AEMI 
providing for the prompt disabling of auto-ex and the dissemination of 
a non-firm quote indicator if a Specialist or Registered Trader is 
unable to update its quotations on a timely basis due to a high level 
of trading activity or an unusual market condition;
     To amend Rule 126A-AEMI requiring the Exchange to identify 
all trades executed pursuant to an exception or exemption from Rule 611 
of Regulation NMS;
     To amend Rule 126A-AEMI providing that the Exchange may 
invoke ``self-help'' under Rule 611(a) of Regulation NMS, pursuant to 
objective industry-wide established interpretations and policies;
     To add Rule 126B-AEMI relating to agreements that govern 
the routing of orders to away markets; \103\
---------------------------------------------------------------------------

    \103\ The Commission recently noticed another Exchange proposal 
to establish a modified initial version of AEMI that the Exchange 
expects to become operational prior to the Trading Phase Date. See 
AEMI-One Notice, supra note 54. The routing arrangements specified 
in the AEMI-One Notice are the same routing arrangements that the 
Exchange has described in Amendment No. 6, to which the Commission 
is granting accelerated approval. Thus far, the Commission has 
received one comment letter on the AEMI-One filing. See Letter to 
Nancy M. Morris, Secretary, Commission, from Michael A. Barth, 
Senior Vice President, Exchange and Market Centers, Order Execution 
Services, Inc., dated September 22, 2006. The commenter asserts that 
Amex will inappropriately perform duties required to be performed by 
a broker-dealer, such as making decisions on when, how, and where 
orders are routed. Rule 611(a) of Regulation NMS requires trading 
centers to adopt policies and procedures reasonably designed to 
prevent trade-throughs on that trading center of protected 
quotations in NMS stocks displayed by other trading centers. In 
addition, an exception in Rule 611(b) requires that ISOs be routed 
to other market's better priced protected quotations. See Regulation 
NMS Release, 70 FR at 37501-02. The Exchange has developed its 
outbound routing functionality to facilitate its compliance with 
Regulation NMS. The Commission believes that the Exchange's 
arrangements for providing this functionality are consistent with 
the Act.
---------------------------------------------------------------------------

     To delete certain rule text in Rule 126-AEMI relating to 
the Specialist allocation table;
     To delete Commentaries .08 and .09 to Rule 170-AEMI;
     To make minor, technical or clarifying changes to Rules 
115-AEMI, 118-AEMI, Rule 128A-AEMI, 128B-AEMI, 131-AEMI, 131A-AEMI, 
170-AEMI (Commentary .02(b)), and 170B-AEMI;
     To make minor changes to Rule 128A-AEMI to clarify that 
members may not trade in the open outcry market but may enter and 
cancel bids, offers, and orders in AEMI under all six of the specified 
circumstances in the rule when auto-ex is unavailable; and
     To confirm that, during the period when the Specialist is 
performing a pair-off under the proposed AEMI rules, the Specialist has 
agency responsibility to orders on the AEMI Book and is subject to 
traditional agency obligations and to further confirm that, when the 
Specialist is performing a pair-off, the Specialist may participate at 
the pair-off price but only after all other orders at the pair-off 
price trade first and that participation by the Specialist is for the

[[Page 59555]]

purpose of absorbing the imbalance of shares that cannot participate in 
the pair-off.

IV. Discussion

    After careful review, 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 and, in particular, with the requirements of 
Section 6(b) of the Act.\104\ Specifically, the Commission finds that 
approval of the proposal is consistent with Section 6(b)(5) of the Act 
\105\ in that the proposal is designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest. The Commission 
also finds that the proposal is consistent with Section 6(b)(8) of the 
Act,\106\ which prohibits an exchange's rules from imposing a burden on 
competition that is not necessary or appropriate in furtherance of the 
Act. Finally, the Commission believes that the proposal is consistent 
with Section 11A(a)(1)(C) of the Act,\107\ in which Congress found that 
it is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure: 
(1) Economically efficient execution of securities transactions; (2) 
fair competition among brokers and dealers and among exchange markets, 
and between exchange markets, and markets other than exchange markets; 
(3) the availability to brokers, dealers, and investors of information 
with respect to quotations and transactions in securities; (4) the 
practicability of brokers executing investors' orders in the best 
market; and (5) an opportunity for investors' orders to be executed 
without the participation of a dealer. This Order approves the proposed 
rule change, as amended, in its entirety, although only certain more 
significant aspects of the proposed rules governing AEMI are discussed 
below.\108\
---------------------------------------------------------------------------

    \104\ 15 U.S.C. 78f(b). In approving this proposal, the 
Commission has considered the proposed rules' impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \105\ 15 U.S.C. 78f(b)(5).
    \106\ 15 U.S.C. 78f(b)(8).
    \107\ 15 U.S.C. 78k-1(a)(1)(C).
    \108\ The Commission notes that certain of the proposed AEMI 
rules are substantially similar to existing Amex rules but with 
reasonable modifications for the new AEMI system. The Commission 
believes that these rules are reasonable and consistent with the 
Act. Some of these rules relate to the hours of business (Rule 1-
AEMI; the authority of Floor Officials (Rule 3-AEMI); handling of 
odd lots (Rule 205-AEMI); and trade reporting (Rule 719-AEMI). 
Various rules relate to openings, closings, and states of operation, 
including: priority and parity at opening and reopenings (Rule 108-
AEMI); trading in Nasdaq securities (Rule 118-AEMI); indications, 
openings, and reopenings (Rule 119-AEMI); manner of bidding and 
offering (Rule 123-AEMI); types of bids and offers (Rule 124-AEMI); 
and market-on-close policy and expiration procedures (Rule 131A-
AEMI).
---------------------------------------------------------------------------

A. Rules Designed To Comply With Regulation NMS Requirements

1. Automated Quotations/Automated Trading Center
    Amex has designed the AEMI system to display automated quotations 
and qualify the Exchange as an automated trading center under Rule 
600(b)(3) of Regulation NMS.\109\ Amex has stated that the visible size 
of the top of book for each security traded on AEMI will by default be 
marked as an automated quotation, and auto-ex will be the default state 
of operation. The AEMI platform will accept electronic bids and offers 
from both the Specialist and Registered Traders and include them in the 
AEMI Book. The AEMI platform also will accept Crowd Orders from Floor 
Brokers standing in the crowd and other off-floor orders transmitted to 
AEMI electronically, and file all such orders in the AEMI Book. On the 
basis of this input of bids, offers, and orders, AEMI will disseminate 
the Amex best quote, together with the associated visible size, to the 
tape. Members in the crowd can make verbal bids and offers, but these 
would have no standing in the AEMI Book. A trade negotiated on the 
floor could not be consummated until it were entered into the AEMI 
system.
---------------------------------------------------------------------------

    \109\ 17 CFR 242.600(b)(3).
---------------------------------------------------------------------------

    Orders sent to the AEMI system will be processed immediately and 
automatically without human intervention, except in certain limited 
circumstances. As described in Section II(B)(1)(b) above, four of these 
situations involve trading circumstances that could otherwise result in 
price volatility in an individual security. Of the four trading 
situations, three relate to breaching predefined tolerance levels held 
within the system, namely ``spread tolerance,'' ``momentum tolerance,'' 
and a ``gap trade tolerance.'' In the fourth circumstance (``gapping 
the quote''), the Specialist would manually take certain steps to 
address a large order imbalance. The fifth situation is the ``cash 
close'' for certain ETFs, and the sixth situation is when unusual 
market conditions (as defined in Rule 602 of Regulation NMS) occur.
    The Commission believes that Amex's general approach to integrating 
auto-ex with a traditional floor is reasonable and consistent with the 
Act. The Commission previously has found similar hybrid trading rules 
of another exchange, the NYSE, to be consistent with the Act.\110\ The 
increased availability of auto-ex should facilitate the efficient 
execution of orders on the Exchange and enhance the opportunity for 
executions to occur without the participation of a dealer.
---------------------------------------------------------------------------

    \110\ See Securities Exchange Act Release No. 53539 (March 22, 
2006); 71 FR 16353 (March 31, 2006) (``NYSE Hybrid Approval 
Order'').
---------------------------------------------------------------------------

    Amex believes that disabling auto-ex under certain specific and 
published circumstances--such as where market volatility results in a 
breach of a spread, momentum, or gap trade tolerance--would balance the 
demand for speed of execution with the need to provide a stable and 
fair marketplace. In such circumstances, no execution, automatic or 
manual, would be available, except to consummate an auction trade to 
remove a condition that caused auto-ex to be disabled.\111\ NYSE's 
Hybrid rules contemplate the disabling of auto-ex in similar 
circumstances.\112\ As the Commission stated in the NYSE Hybrid 
Approval Order, a hybrid market model--where auto-ex is disabled in 
limited circumstances to reduce market volatility--is within the realm 
of judgment generally left to the discretion of individual markets and 
is consistent with the Act.\113\ Accordingly, the Commission finds that 
Amex's use of the ``spread tolerance,'' ``momentum tolerance,'' and 
``gap trade tolerance'' in the context of the Amex's hybrid market is 
consistent with the requirements of the Act.
---------------------------------------------------------------------------

    \111\ See Rule 128A-AEMI(f).
    \112\ See NYSE Rule 1000(a)(i)-(vi).
    \113\ See NYSE Hybrid Approval Order, 71 FR at 16377.
---------------------------------------------------------------------------

    Amex's proposed rule regarding ``gapping the quote'' is similar to 
a rule on NYSE's Hybrid trading system.\114\ Under the proposed rule, 
an Amex Specialist would gap the quote when either: (1) A large order 
has been represented in the crowd; or (2) an incoming order has swept 
the book, disabled auto-ex, and left a large order imbalance in the 
security.\115\ Similar to NYSE, Amex has sought to ensure that a 
Specialist does not frequently enter gapped quotations for the purpose 
of disabling auto-ex by requiring that, when the Specialist gaps the 
quote, it must follow certain procedures and

[[Page 59556]]

consult with a Senior Floor Official or an Exchange Official to 
supervise the process.\116\ As it noted in the NYSE Hybrid Approval 
Order, the Commission believes that this limited ability to disable 
auto-ex is a reasonable approach for addressing the practical 
difficulties of integrating orders on the electronic book with large 
orders on the floor and addressing large order imbalances 
generally.\117\
---------------------------------------------------------------------------

    \114\ See NYSE Rule 1000(a)(iv).
    \115\ Rule 170-AEMI(f) provides that the size of an imbalance 
suitable for gapped quoting must be at least 10,000 shares or a 
quantity of stock having a value of $200,000 or more, although 
depending on the trading characteristics of the security, the 
appropriate conditions for gapped quoting may be higher.
    \116\ See NYSE Info Memo 04-27 (June 9, 2004) (specifying that 
the size of an imbalance suitable for gap quoting is at least 10,000 
shares or a quantity of stock having a value of $200,000 or more 
although, depending on the conditions, these levels could be 
higher).
    \117\ See NYSE Hybrid Approval Order, 71 FR at 16377.
---------------------------------------------------------------------------

    The Commission also believes that the other limited instances when 
auto-ex will be turned off are reasonable and consistent with the Act. 
Auto-ex would be disabled to allow the Specialist to perform a ``cash 
close'' pair-off during the regular trading session at 4 p.m., which 
would occur prior to the official closing session on the Exchange and 
would be an added service for those investors who wish to mark 
positions to the cash close.
    When auto-ex is disabled, whether due to a breach of a tolerance or 
any of the other events that cause the AEMI to revert to a manual 
market, the Amex quote would not be an ``automated quotation,'' and 
thus not entitled to protection under Rule 611 of Regulation NMS. When 
this occurs, Amex also would be required under Regulation NMS to 
immediately identify its quotation as a manual quotation if it is to be 
considered an ``automated trading center.'' \118\ When the Amex 
quotation is not available for automatic execution because of a breach 
of a tolerance or gapped quotation, Amex would identify such quotes as 
non-firm.\119\ Specifically, Rule 123-AEMI(h) provides that: (1) Bids 
and offers disseminated through AEMI, such as when the Exchange is 
conducting an auction or when the Exchange is unable to accurately 
collect, process, and/or make available quotations under certain 
circumstances, are non-firm; \120\ and (2) AEMI will disseminate a 
specified indicator \121\ whenever the APQ is not firm. In addition, 
the Specialist is required by Rule 128A-AEMI to take steps to re-enable 
auto-ex and could be subject to discipline for not acting 
appropriately. The Commission believes that these rules are reasonably 
designed to minimize the frequency and length of auto-ex unavailability 
and are consistent with the Act. The Commission also believes that 
Amex's procedures for marking its quotations as automated or non-firm 
are reasonable and consistent with the Act.
---------------------------------------------------------------------------

    \118\ See 17 CFR 242.600(b)(4)(iii).
    \119\ See Notice, 71 FR at 41655. The Commission also notes that 
proposed Rule 115-AEMI addresses situations where Amex has reason to 
believe it is not capable of displaying automated quotations, 
including communicating to members its procedures concerning a 
change from automated to manual quotations. See Rule 115-AEMI.
    \120\ On the other hand, automated bids and offers disseminated 
through AEMI are firm until revised or withdrawn. Rule 123-AEMI(h).
    \121\ The Exchange has represented that it will use: (1) The 
indicator ``N'' to denote a non-firm quote when the Exchange is 
unable to accurately collect, process, and/or make available 
quotations; and (2) the indicator ``U'' to denote a non-firm quote 
(and that the Specialist is arranging an auction) when (a) auto-ex 
has been disabled due to the breach of a tolerance, and auto-ex and 
the dissemination of an automated quotation have not yet resumed, or 
(b) a gap quote situation exists due to an order imbalance. These 
quote indicators are not to be confused with the indicators ``A,'' 
``B'' and ``H,'' which are for firm quotes and denote that a trading 
center is not meeting the Regulation NMS definition of an automated 
trading center even though auto-ex is on. See Rule 123-AEMI(h).
---------------------------------------------------------------------------

2. Means of Protecting of Protected Quotations
    The AEMI platform and rules were designed to enable Amex to comply 
with Rule 611 of Regulation NMS, which requires, among other things, 
that the Exchange adopt and enforce written policies and procedures 
that are reasonably designed to prevent trade-throughs of protected 
quotations.\122\ Therefore, when the APQ is not at the automated NBBO, 
AEMI would first determine whether a trade-through may nevertheless 
occur pursuant to one of eight enumerated circumstances stated in Rule 
126A-AEMI.\123\ If there is no applicable exception, AEMI would 
generate an ISO, consistent with the requirements of Rule 611 of 
Regulation NMS, to any trading center displaying better-priced 
protected quotations simultaneously with the execution of any 
transaction on Amex that would constitute a trade through.\124\
---------------------------------------------------------------------------

    \122\ The Exchange has filed separate rules with the Commission 
for a modified version of the AEMI platform to be in effect during 
the roll-out period and prior to the Trading Phase Date. See 
Securities Exchange Act Release No. 54413 (September 7, 2006), 71 FR 
54318 (September 14, 2006) (noticing SR-Amex-2006-72). Prior to the 
Trading Phase Date, the Exchange would still be required to comply 
with the applicable provisions of the ITS Plan unless and until 
appropriate exemptions are obtained.
    \123\ The Commission notes that each of these eight enumerated 
circumstances corresponds to one of the trade-through exceptions 
listed in Rule 611(b) of Regulation NMS.
    \124\ However, if the incoming order is designated IOC, AEMI 
would cancel it and not route it to another market. See Rules 126A-
AEMI and 131-AEMI.
---------------------------------------------------------------------------

a. Intermarket Sweep Orders
    To implement the requirements of Rule 600(b)(30) of Regulation 
NMS,\125\ the Exchange is adopting Rule 131-AEMI(k) that sets out the 
requirements for ISOs. An ISO is a limit order designated for automatic 
execution in an NMS stock that is: (1) Received on the Exchange by AEMI 
from a member or another market center which is to be executed: (a) 
Immediately at the time such order is received in the AEMI Book, (b) 
without regard for better-priced protected quotations displayed at one 
or more other trading centers, and (c) at prices equal to or better 
than the limit price, with any portion not so executed to be treated as 
canceled; \126\ or (2) generated by AEMI in connection with the 
execution of an order by AEMI and routed to one or more trading centers 
to execute against all better-priced protected quotations displayed by 
the other trading centers up to their displayed size. An ISO would have 
to be marked as such to inform the receiving trading center that it 
could be immediately executed without regard to protected quotations in 
other markets. The Commission believes that Amex's definition of ISO is 
consistent with the Act because it is reasonably designed to meet the 
requirements of Regulation NMS. The Commission notes that it previously 
approved similar provisions for ISOs.\127\
---------------------------------------------------------------------------

    \125\ 17 CFR 242.600(b)(30).
    \126\ However, if an order is received through the 
communications network operated pursuant to the ITS Plan or any 
successor to the ITS Plan, the order would trade only at a single 
price. See Rule 131-AEMI(k).
    \127\ See, e.g., NYSE Hybrid Approval Order, 71 FR at 16383.
---------------------------------------------------------------------------

    The rules governing the usage of ISOs are reasonably designed to 
meet the requirements of Rule 611 and, thus, are consistent with the 
Act. For example, Rule 126A-AEMI provides that the system would 
generate an ISO to any away market displaying a protected quotation 
simultaneously with the execution of a trade on Amex that would 
constitute a trade-through. Similarly, Rule 128A-AEMI(d) provides that 
an ``[a]utomated execution will not occur without protected quotations 
in away markets being satisfied through the issuance of intermarket 
sweep orders'' and proposed Rule 128B-AEMI includes provisions to 
generate ISOs to away markets.
b. Routing of Orders
    As described in Section II(B)(2)(e) above, Amex would enter into 
agreements that govern the routing of an order to away markets with 
automated quotations displaying better prices. Rule

[[Page 59557]]

126B-AEMI describes the arrangement between the Exchange and a third-
party non-facility provider of routing services. The Commission 
believes that engaging such a provider is a reasonable means of 
assuring compliance with Rule 611 of Regulation NMS. The Commission 
notes that the Exchange would retain control of the routing logic, 
which would help the Exchange assure compliance with Rule 611.\128\ The 
Commission also notes that the rule provides for the establishment and 
maintenance of procedures and internal controls designed to protect 
confidential and proprietary information, which should help ensure that 
the third party does not use such information for purposes other than 
legitimate business purposes necessary for the licensing of routing 
technology. In addition, the rule provides for the equitable allocation 
of reasonable dues, fees, and other charges among Exchange members and 
issuers and other persons using the Exchange's facilities.
---------------------------------------------------------------------------

    \128\ See supra note 103.
---------------------------------------------------------------------------

c. Self Help
    Rule 611 of Regulation NMS protects only quotations that are 
immediately and automatically available and, as such, includes 
exceptions designed to assure that marketable orders are routed only to 
well-functioning trading centers displaying automated quotations. In 
this regard, Rule 611(b)(1) of Regulation NMS permits a trade through 
of a protected quotation if the trading center displaying the protected 
quotation were experiencing a failure, material delay, or malfunction 
of its systems or equipment when the trade-through occurred. The 
Commission stated in the Regulation NMS Adopting Release that this 
exception ``gives trading centers a self-help remedy if another trading 
center repeatedly fails to provide an immediate response (within one 
second) to incoming orders attempting to access its quotes.'' \129\ The 
Commission believes that the self-help provisions of Rule 126A-AEMI--
stating that the Exchange may, pursuant to objective, industry-wide 
established interpretations and policies and subject to certain 
conditions, bypass the quotations displayed by another trading center 
if such trading center repeatedly fails to respond within one second to 
orders attempting to access such trading center's protected 
quotations--is reasonably designed to allow Amex to invoke self-help in 
a manner consistent with Rule 611 of Regulation NMS. The Commission 
believes, therefore, that these provisions are consistent with the Act.
---------------------------------------------------------------------------

    \129\ See Regulation NMS Adopting Release, 70 FR at 37535.
---------------------------------------------------------------------------

d. Trade Reporting of Permissible Trade-Throughs
    Following the Trading Phase Date, one provision of Rule 126A-AEMI 
would require the Exchange to identify all trades executed pursuant to 
an exception or exemption from Rule 611 in accordance with 
specifications approved by the operating committee of the relevant 
national market system plan.\130\ This provision of Rule 126A-AEMI is 
designed to create uniformity across the markets regarding how 
permissible trade-throughs are reported, and should create more 
transparency for investors and regulators. The Commission believes, 
therefore, that this provision of Rule 126A-AEMI furthers the public 
interest and is consistent with the Act.
---------------------------------------------------------------------------

    \130\ In addition, if a trade is executed pursuant to both the 
ISO exception of Rule 611(b)(5) or (6) and the self-help exception 
of Rule 611(b)(1), such trade shall be identified as executed 
pursuant to the ISO exception. See Rule 126A-AEMI.
---------------------------------------------------------------------------

3. Access Rule
    Paragraph (a) of the Access Rule \131\ prohibits a national 
securities exchange from imposing unfairly discriminatory terms that 
prevent or inhibit any person from obtaining efficient access through a 
member of the exchange to a quotation in an NMS stock displayed through 
the SRO quoting facility. The Commission believes that the AEMI rules 
and the AEMI platform have been reasonably designed to meet the 
standard in paragraph (a) of the Access Rule.
---------------------------------------------------------------------------

    \131\ 17 CFR 242.610(a).
---------------------------------------------------------------------------

    In addition, paragraph (d) of the Access Rule \132\ requires a 
national securities exchange to establish, maintain, and enforce rules 
that generally require its members to avoid displaying quotations that 
lock or cross any protected quotation in an NMS stock and that are 
reasonably designed to assure the reconciliation of locked or crossed 
quotations in an NMS stock. Rule 128C-AEMI requires members of the 
Exchange, as of the Trading Phase Date of Regulation NMS, to reasonably 
avoid displaying, and to not engage in a practice of displaying, any 
quotations that lock or cross a protected quotation, and any manual 
quotations that lock or cross a quotation previously disseminated 
pursuant to an effective national market system plan, subject to 
certain limited exceptions.\133\ The rule also requires that, if a 
member of the Exchange displays a manual quotation that locks or 
crosses a quotation previously disseminated pursuant to an effective 
national market system plan, the member must promptly either withdraw 
the manual quotation or route an ISO to execute against the full 
displayed size of the locked or crossed quotation. The Commission 
believes that this rule is consistent with Rule 610(d) of Regulation 
NMS.
---------------------------------------------------------------------------

    \132\ 17 CFR 242.610(d).
    \133\ Prior to the Trading Phase Date, the Exchange would still 
be required to comply with the applicable provisions of the ITS Plan 
relating to locks and crosses, unless and until appropriate 
exemptions are obtained.
---------------------------------------------------------------------------

4. Sub-Penny Rule
    Paragraph (a) of the Sub-Penny Rule,\134\ among other things, 
prohibits an exchange from displaying, ranking, or accepting a 
quotation or order in any NMS stock priced in an increment smaller than 
$0.01 if the quotation or order is priced equal to or greater than 
$1.00 per share. If the quotation or order is priced less than $1.00, 
the minimum permissible increment is $0.0001.\135\ The AEMI rules 
require quotations and orders above $1.00 to be priced in increments of 
at least $0.01 and quotations and orders below $1.00 to be priced in 
increments of at least $0.0001.\136\ The Commission believes that the 
AEMI rules relating to minimum increments are consistent with the Sub-
Penny Rule and consistent with the Act.
---------------------------------------------------------------------------

    \134\ 17 CFR 242.612(a).
    \135\ See 17 CFR 242.612(b).
    \136\ See Rule 127-AEMI; Rule 1000-AEMI, Commentary .03(e); Rule 
1000A-AEMI, Commentary .02(e).
---------------------------------------------------------------------------

5. Transitioning from Legacy System to NMS Environment
    Amex intends a phased roll-out of AEMI beginning early in the 
fourth quarter of 2006. By the Trading Phase Date, all equities and 
ETFs traded by the Exchange would be on the AEMI platform. The Exchange 
has filed separate rules with the Commission for a modified version of 
the AEMI platform to be in effect during the roll-out period and prior 
to the Trading Phase Date.\137\ The Commission believes that the 
Exchange's proposal for a phased roll-out of AEMI should provide it 
with time to test AEMI in a real trading environment with a limited 
number of securities. The Commission believes that this is a reasonable 
approach in light of the extension of the Regulation NMS compliance 
dates and should help ensure that the appropriate Amex rules are in 
place at the time that Regulation NMS compliance is required.
---------------------------------------------------------------------------

    \137\ See supra note 122. The Commission has not taken any 
action on this proposal.

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

[[Page 59558]]

B. Other Rules

    Amex has proposed a number of rule changes in addition to those 
designed to promote compliance with Regulation NMS. These other rule 
changes primarily reflect the Exchange's proposed shift from a floor-
based auction market to a new hybrid market structure for equity 
products and ETFs.
1. Liquidity Available for Auto-Ex
    To facilitate automatic executions, the Exchange proposes to 
increase the ability of Specialists and, for ETFs, Registered Traders, 
to provide liquidity to the marketplace. In addition, the Exchange 
proposes to allow Floor Brokers to participate in automatic executions 
by permitting them to enter Crowd Orders, Reserve Orders, and 
Percentage Orders. In general, the Commission believes that allowing 
greater electronic access to liquidity is consistent with Section 
6(b)(5) of the Act in that it should help perfect the mechanism of a 
free and open market.\138\
---------------------------------------------------------------------------

    \138\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

a. Specialist and Registered Trader Liquidity
    A Specialist would be required to continue to provide liquidity to 
meet its obligation to assist in the maintenance of a fair and orderly 
market and of price continuity with reasonable depth. Under the 
proposal, Specialists and Registered Traders (in ETFs) can add 
liquidity to the AEMI Book at multiple price levels. Registered Traders 
also are permitted to participate in auctions, provided they are 
actively quoting. The Commission finds that the provisions allowing 
both Specialists and Registered Traders to electronically participate 
in AEMI is consistent with the requirements of the Act. This capability 
generally should increase the liquidity available for auto-ex and 
improve the prices at which orders that access the AEMI system may 
execute.
b. Floor Broker Liquidity
    Under the AEMI rules, off-floor members are permitted access to the 
electronic environment by sending orders directly to the AEMI Book or 
by directing orders to booths on the floor for representation by a 
Floor Broker. Floor Brokers are permitted to provide liquidity to the 
electronic environment in the form of Crowd Orders. In addition, Floor 
Brokers standing in the crowd would be able to enter Reserve Orders on 
behalf of their customers--which would consist of both a visible size 
and an undisplayed (reserve) size that would not be included in the 
APQ. As a Reserve Order receives executions, the displayed size would 
be replenished up to the maximum of the defined display size or the 
remainder of the order. A price point could not be traded through until 
all the reserve size has been exhausted. Amex also has proposed to 
allow Floor Brokers to use Percentage Orders.
    The Commission previously approved substantially similar rules 
relating to Floor Brokers in the NYSE Hybrid proposal.\139\ The 
Commission believes generally that Reserve Orders and Percentage Orders 
are consistent with the Act because they are designed to allow Floor 
Brokers to replicate in a more electronic environment the services they 
offer to customers today, and because they offer Floor Brokers a 
reasonable degree of flexibility in handling and working larger 
customer orders.
---------------------------------------------------------------------------

    \139\ See NYSE Hybrid Approval Order, 71 FR at 16378.
---------------------------------------------------------------------------

2. Role of Specialists and Registered Traders
a. Generally
    In AEMI, Specialists--and for transactions in ETFs, Registered 
Traders--will continue to be required to perform their obligations to 
maintain a fair and orderly market.\140\ For example, pursuant to Rule 
170-AEMI, a Specialist must trade for its own account when there is a 
lack of price continuity, depth, or a disparity between supply and 
demand. In addition, the Specialist must continue to oversee the 
auction market; pair-off orders at openings, closings, and the 
conclusion of auctions; and play an active role when large orders are 
routed to the floor for execution. However, Amex proposes to grant the 
Specialist additional flexibility in engaging in certain transactions 
in its specialty securities, without the need to obtain the prior 
approval of a Floor Official. Amex also proposes in Rule 110-AEMI to 
reduce some of the Registered Trader stabilization requirements.
---------------------------------------------------------------------------

    \140\ See Rules 110-AEMI and 170-AEMI.
---------------------------------------------------------------------------

    The Commission finds that these proposed changes are consistent 
with the requirements of the Act in light of the evolving 
responsibilities of Specialists and Registered Traders to the market. 
Because of the AEMI system, Floor Brokers and off-floor members will be 
able to see order and quotation information at the same time as 
Specialists and Registered Traders, thereby diminishing many time and 
place advantages currently enjoyed by the latter.\141\ Amex has 
committed to make AEMI depth-of-book information broadly available, and 
intends to implement this program with the rollout of AEMI prior to the 
Trading Phase Date.\142\ In addition, the expansion of auto-ex 
capabilities will provide market participants from off the floor much 
more efficient access to liquidity in AEMI. In light of these market 
structure changes, the Commission concludes that Amex's proposed 
revisions to certain of the stabilization requirements for Specialists 
and Registered Traders is reasonable and consistent with the Act.
---------------------------------------------------------------------------

    \141\ However, Specialists will be the only market participants 
to have information regarding stop orders, percentage orders, and 
the aggregate size of reserve orders.
    \142\ In approving Amex's proposed stabilization rules, the 
Commission relied on the Exchange's representation that it intends 
to provide depth-of-book information to vendors and direct 
subscribers simultaneously with the first day of AEMI operation. 
Moreover, the Exchange commits to providing vendors and limited 
direct subscribers sufficient information including technical 
specifications to permit them to obtain the depth-of-book data feed 
as of the first day of AEMI operation. See Notice, 71 FR at 41655.
---------------------------------------------------------------------------

b. Application of ``Effect v. Execute'' Exemption from Section 11(a) of 
the Act
    Section 11(a) of the Act \143\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises discretion 
(collectively, ``covered accounts'') unless an exception applies.\144\ 
In addition to the exemptions set forth in the Act,\145\ Rule 11a2-2(T) 
\146\ under the Act, known as the ``effect versus execute'' rule, 
provides exchange members with an exemption from the Section 11(a) 
prohibition. Rule 11a2-2(T) permits an exchange member, subject to 
certain conditions, to effect transactions for covered accounts by 
arranging for an unaffiliated member to execute the transactions on the 
exchange. To comply with Rule 11a2-2(T)'s conditions, a member (i) Must 
transmit the order from off the exchange floor; (ii) may not 
participate in the execution of the transaction once it has been 
transmitted to the member performing the execution; (iii) may not be 
affiliated with the executing member; and (iv) with respect to an 
account over which

[[Page 59559]]

the member has investment discretion, neither the member nor its 
associated person may retain any compensation in the connection with 
effecting the transaction except as provided in the Rule.
---------------------------------------------------------------------------

    \143\ 15 U.S.C. 78k(a).
    \144\ The Commission notes that Exchange members will no longer 
be able to enter ``G'' orders, i.e., orders for covered accounts 
that rely on the exemption provided in Section 11(a)(1)(G) of the 
Act and Rule 11a1-1(T) thereunder, for an exemption from the 
restrictions set forth in Section 11(a) of the Act. See Rule 131-
AEMI(u).
    \145\ 15 U.S.C. 78k(a)(1)(A) through (H).
    \1461\ 17 CFR 240.11a2-2(T).
---------------------------------------------------------------------------

    The Exchange represented that it believes that transactions for 
covered accounts effected in the AEMI system meet the requirements of 
Rule 11a2-2(T).\147\ Based upon these representations, and for the 
reasons set forth below, the Commission believes that transactions for 
covered accounts executed in the AEMI system satisfy the four 
conditions of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \147\ See Letter from Claire P. McGrath, Senior Vice President 
and General Counsel, Amex, to Kelly M. Riley, Assistant Director, 
Division, Commission, dated August 24, 2006 (``Amex Letter''); see 
also Amendment No. 6, supra note 9.
---------------------------------------------------------------------------

    First, the Exchange stated that all orders sent to the Exchange for 
execution through AEMI will be transmitted from remote locations (via 
the member firm's interface) directly to the Exchange floor by 
electronic means.\148\ The Commission has previously found that the 
off-floor transmission requirement may be met if a covered account 
order is transmitted from a remote location directly to an exchange's 
floor by electronic means,\149\ and believes that orders sent to the 
Exchange for execution through AEMI from remote locations by electronic 
means (via the member firm interface) similarly satisfy the off-floor 
transmission requirement.\150\
---------------------------------------------------------------------------

    \148\ See Amex Letter, supra note 147.
    \149\ See, e.g., Securities Exchange Act Release Nos. 29237 (May 
24, 1991), 56 FR 24853 (May 31, 1991) (regarding NYSE Off-Hours 
Trading Facility); 15533 (January 29, 1979), 44 FR 6084 (January 31, 
1979) (regarding the Amex Post Execution Reporting System, the Amex 
Switching System, the Intermarket Trading System, the Multiple 
Dealer Trading Facility of the Cincinnati Stock Exchange, the 
Pacific Exchange's (``PCX'') Communications and Execution System, 
and the Philadelphia Stock Exchange's (``Phlx'') Automated 
Communications and Execution System (``1979 Release'')); and 14563 
(March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the NYSE's 
Designated Order Turnaround System). See also Letter from Paula R. 
Jensen, Deputy Chief Counsel, Division, Commission, to Angelo 
Evangelou, Senior Attorney, Chicago Board Options Exchange 
(``CBOE''), dated March 31, 2003 (regarding CBOE's CBOEdirect system 
(``CBOEdirect Letter'')); Letter from Paula R. Jenson, Deputy Chief 
Counsel, Division, Commission, to Jeffrey P. Burns, Assistant 
General Counsel, Amex, dated July 9, 2002 (regarding Amex's Auto-Ex 
system for options); Letter from Paula R. Jenson, Deputy Chief 
Counsel, Division, Commission, to Richard S. Rudolph, Counsel, Phlx, 
dated April 15, 2002 (regarding Phlx's AUTOM System and its 
automatic execution feature AUTO-X); Letter from Paula R. Jensen, 
Deputy Chief Counsel, Division, Commission, to Kathryn L. Beck, 
Senior Vice President, Special Counsel and Antitrust Compliance 
Officer, PCX, dated October 25, 2001 (regarding Archipelago Exchange 
(``ArcaEx'') (``ArcaEx Letter'')); Letter from Brandon Becker, 
Director, Division, Commission, to George T. Simon, Foley & Lardner, 
dated November 30, 1994 (regarding Chicago Match (``Chicago Match 
Letter'')).
    \150\ The Commission notes that Amex members off of the Exchange 
floor may submit proprietary orders directly into the AEMI system or 
may send proprietary orders to the Amex physical floor for 
representation by Amex Floor Brokers.
---------------------------------------------------------------------------

    The second requirement of Rule 11a2-2(T) is that the exchange 
member and its associated persons may not participate in the execution 
of a transaction once the order has been transmitted to the exchange 
floor. The Exchange represented that orders submitted to AEMI will 
enter the queue and may be executed against a limit order on the 
Specialist's Book, or the account of a Registered Trader or Specialist. 
According to Amex, the execution of an order depends upon the other 
orders or quotes entered into AEMI at or around the same time as the 
subject order, the orders residing in the order book, and order ranking 
based upon the AEMI rules of precedence.\151\ The Exchange stated that 
at no time following the submission of an order will a member retain 
any ability to control the timing of an execution or otherwise enjoy 
any special order-handling advantage.\152\
---------------------------------------------------------------------------

    \151\ See Amex Letter, supra note 147.
    \152\ See Securities Exchange Act Release No. 44983 (October 25, 
2001), 66 FR 55225 (November 1, 2001) (Order approving ArcaEx as the 
equities trading facility of PCX Equities Inc.); 1979 Release, supra 
note 149. See also CBOEdirect Letter, supra note 149; Letter from 
Larry E. Bergmann, Senior Associate Director, Division, Commission, 
to Edith Hallahan, Associate General Counsel, Phlx, dated March 24, 
1999 (regarding Phlx's VWAP Trading System); Letter from Catherine 
McGuire, Chief Counsel, Division, Commission, to David E. Rosedahl, 
PCX, dated November 30, 1998 (regarding Optimark); and Chicago Match 
Letter, supra note 149.
---------------------------------------------------------------------------

    The third requirement of Rule 11a2-2(T) is that the order must be 
executed by an exchange member that is not affiliated with the 
initiating member. The Commission has recognized that this requirement 
is not applicable when automated systems are utilized.\153\ Amex 
represented that orders delivered directly to AEMI by Amex members will 
be automatically matched, routed, or executed. The Commission notes 
that Amex members that direct orders to Amex Floor Brokers for 
representation and execution in AEMI must use an unaffiliated Amex 
Floor Broker if they seek to rely on Rule 11a2-2(T) for an exemption 
from Section 11(a) of the Act.\154\ Finally, the Exchange has 
represented that, as a prerequisite to the use of AEMI, if a member is 
to rely on Rule 11a2-2(T) for a covered account transaction, the member 
must comply with the limitations on compensation set forth in the rule.
---------------------------------------------------------------------------

    \153\ For example, in considering the operation of automated 
execution systems operated by an exchange, the Commission noted that 
while there is no independent executing exchange member, the 
execution of an order is automatic once it has been transmitted into 
the systems. Because the design of these systems ensures that 
members do not possess any special or unique trading advantages in 
handling their orders after transmitting them to the exchange 
floors, the Commission has stated that executions obtained through 
these systems satisfy the independent execution requirement of Rule 
11a2-2(T). See Securities Exchange Act Release No. 15533 (January 
29, 1979). See also e.g., Securities Exchange Act Release No. 44983 
(October 25, 2001), 66 FR 55225 (November 1, 2001).
    \154\ See Amendment No. 6, supra note 9. The Commission notes 
Amex members will not be able to rely on Section 11(a)(1)(G) of the 
Act. See Amex Rule 131-AEMI(u).
---------------------------------------------------------------------------

3. Priority and Parity
a. Parity Joining Time
    Amex has indicated that the ``parity joining time'' feature is 
intended to replicate in a more electronic environment the more 
flexible way that parity is established on the trading floor. The 
Commission believes that Amex's proposal to provide for a two-second 
parity joining time is broadly consistent with the Act and within the 
realm of judgment generally left to the discretion of individual 
markets.
b. Priority and Parity for Equities
    The Commission believes that the proposed rules relating to order 
priority and order execution for non-ETF equities are consistent with 
the Act. The Commission notes that a Specialist's quotation must yield 
to any public order being represented in the Specialist Order Book. 
This approach is consistent with the traditional obligations of the 
Specialist and is consistent with the Act.\155\ The priority and parity 
rules for equities appear to reasonably balance the interests of the 
various classes of market participants in a manner consistent with the 
Act. The Commission believes these rules are not designed to permit 
unfair discrimination and do not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \155\ The Commission notes that a Specialist bid (offer) in a 
non-ETF equity security would yield to a public bid (offer) even 
when AEMI receives the public bid (offer) outside the in-parity time 
window.
---------------------------------------------------------------------------

c. Priority and Parity for ETFs
    The Commission also believes that the AEMI rules relating to order 
priority and order execution for ETFs are reasonable and consistent 
with the Act. These rules require customer orders, whether represented 
on the book or in the crowd, to be executed before any broker-dealer 
orders (including orders/quotations of the Specialist and Registered 
Traders) at

[[Page 59560]]

the same price, regardless of the customer orders' time priority. The 
Commission believes that giving priority to customer orders in this 
manner is consistent with the Act.
    After all visible customer orders at a price are exhausted, Amex 
will allocate to the Specialist (if the Specialist quote is on parity 
with other broker-dealer orders), a percentage of the remaining order 
pursuant to an allocation table. The precise allocation granted to the 
Specialist will be based on the number of crowd participants. In view 
of the Specialist's obligations, such as maintaining a fair and orderly 
market, the Commission believes that this allocation methodology is 
broadly consistent with the Act and is within the realm of judgment 
generally left to the discretion of individual markets.
4. Cross Orders
a. Electronic Crosses
    Amex is introducing new electronic cross order types in order to 
provide more trading opportunities to off-floor participants in ETFs 
and Nasdaq securities. The electronic cross order type selected by the 
market participant would dictate whether the cross could be broken up 
by interacting with orders on the AEMI Book, whether price improvement 
is being sought for the cross order, and how any residual of the cross 
order would be handled if it is broken up. One new cross order type in 
particular, the auction cross, is designed to seek price improvement 
for one or both sides of the cross.
    The Commission finds that the rules relating to electronic cross 
orders are consistent with the Act and should provide market 
participants additional flexibility in executing transactions while 
protecting displayed interest on the book. The auction cross order in 
particular would afford an opportunity for price improvement by 
allowing market participants to compete for one or both sides of the 
cross.
b. Floor Crosses
    The Exchange proposes to continue to permit Floor Brokers to 
negotiate crosses in the crowd. Rule 126-AEMI, Commentaries .01 
(Precedence Based on Size) and .02 (Clean Agency Cross) allow a cross 
to occur ahead of other orders on the book at the cross price if: (1) 
The cross order is valued at $100,000 or more; (2) in the case of 
precedence based on size, the cross order is greater than each 
individual Crowd Order, as well as greater than the aggregate size of 
all orders on the Specialist Order Book at the cross price; and (3) in 
the case of a Clean Agency Cross, the size of the cross order is 
greater than the largest customer order on the Specialist Order Book at 
the cross price.\156\ The Commission believes that these provisions are 
consistent with the Act. The Commission notes that it previously has 
approved similar crossing rules of other exchanges, and Amex's crossing 
rules raise no new issues.\157\
---------------------------------------------------------------------------

    \156\ Rule 126-AEMI, Commentaries .01 and .02, retain the 
existing requirement that the cross order must be for 5,000 shares 
or more.
    \157\ See Securities Exchange Act Release No. 54391 (August 31, 
2006), 71 FR 52836 (September 7, 2006) (approving SR-NSX-2006-08); 
Securities Exchange Act Release No. 54422 (September 11, 2006), 71 
FR 54537 (September 15, 2006) (approving SR-CBOE-2004-21).
---------------------------------------------------------------------------

5. Unusual Markets Rule
    The Commission believes that Rule 115-AEMI, setting forth Exchange 
procedures for the use of the Unusual Markets Exception provided by 
Rule 602 under Regulation NMS, is consistent with the Act. If the 
Exchange is unable to accurately collect, process, and/or disseminate 
quotation data in one or more securities owing to the high level of 
trading activity or the existence of unusual market conditions, Amex 
will immediately disable auto-ex and disseminate the indicator ``N'' to 
indicate that Amex's quotation, if a trading halt has not been declared 
and quotations are being published for such security or securities, is 
not firm. Similarly, if the Specialist were unable to update its 
quotation on a timely basis due to the high level of trading activity 
or the existence of an unusual market condition, it would be required 
to promptly notify a Floor Official and the Floor Official would notify 
Amex's Market Operations Division, which shall then promptly disable 
auto-ex and disseminate the indicator ``N'' to indicate that Amex's 
quotation, if a trading halt has not been declared and quotations are 
being published for such security or securities, if not firm. The 
Commission also believes that the procedures for declaring the 
existence of an unusual market condition are consistent with the Act in 
that these procedures appear to be reasonably designed to promote a 
fair and orderly market when unusual market conditions arise.
6. Trade Nullification and Revision
    The AEMI rules regarding nullification or revision of clearly 
erroneous trades\158\ are generally similar to the Exchange's current 
rules. In addition, new Rule 118-AEMI(k) would permit the Exchange to 
nullify or modify a trade if the Exchange determines that the 
transaction is erroneous as a result of the automatic execution of an 
order, bid, or offer by AEMI against an Amex quote that was not firm 
under one of the three exceptions to the firm quote requirement for 
bids and offers set forth in Rule 123-AEMI(h). The Commission believes 
that it is reasonable and consistent with the Act for an exchange to 
make transparent to its members the procedures for claiming that a 
trade is clearly erroneous, the standards for assessing such a claim, 
and the remedies available if the claim is substantiated. The AEMI 
rules also set forth procedures to be followed for the appeal of a 
determination made by a Floor Official or Floor Governor regarding such 
a claim.\159\ These appeals procedures also are consistent with the Act 
as they should contribute to the trade nullification and revision 
procedures being exercised in a fair and reasonable manner.
---------------------------------------------------------------------------

    \158\ Rules 118-AEMI(k) and 135A-AEMI.
    \159\ Rules 118-AEMI and 135A-AEMI.
---------------------------------------------------------------------------

C. Accelerated Approval

    Pursuant to Section 19(b)(2) of the Act, the Commission finds good 
cause to approve the proposal, as amended by Amendment No. 6, prior to 
the thirtieth day after the amended proposal is published for comment 
in the Federal Register. Many of the changes in Amendment No. 6 are 
technical in nature and are intended only to make minor clarifications 
to the rule text. Other changes are designed to make AEMI more 
transparent and raise no issues of new regulatory concern. Accordingly, 
the Commission finds good cause to accelerate approval of the amended 
proposal prior to the thirtieth day after publication in the Federal 
Register.

V. Solicitation of Comments on Amendment No. 6

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 6, including whether the amendment 
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-2005-104 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary,

[[Page 59561]]

Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-1090.

All submissions should refer to File Number SR-Amex-2005-104. 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 Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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-2005-104 and should be submitted on or before 
October 31, 2006.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and in particular with Sections 6(b)(5) and 6(b)(8) of the Act.\160\
---------------------------------------------------------------------------

    \160\ U.S.C. 78f(b)(5) and 78f(b)(8).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\161\ that the proposed rule change (SR-Amex-2005-105), as amended 
by Amendments No. 1, 2, 3, 4, and 5, be, and it hereby is, approved, 
and that Amendment No. 6 is approved on an accelerated basis.
---------------------------------------------------------------------------

    \161\ 15 U.S.C. 78s(b)(2).
    \162\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\162\
Nancy M. Morris,
Secretary.
[FR Doc. E6-16628 Filed 10-6-06; 8:45 am]
BILLING CODE 8011-01-P