[Federal Register Volume 71, Number 223 (Monday, November 20, 2006)]
[Notices]
[Pages 67176-67178]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-19512]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54741; File No. SR-Amex-2006-106]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Relating to the Adoption of a 
Penny Quoting Pilot Program

November 9, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 9, 2006, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by the 
Amex. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to adopt a six month pilot program (the 
``Penny Quoting Pilot Program'') to quote a limited number of options 
classes in a minimum price variation (``MPV'') of $0.01.
    The text of the proposed rule change, including Exhibit 2 (a draft 
Regulatory Circular, which sets forth the list of the options classes 
that will be subject to the proposed Penny Quoting Pilot Program) to 
the proposed rule change is available on the Amex's Web site at http://www.amex.com, at the Office of the Secretary, the Amex, and at the 
Commission's Public Reference Room.

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

    In its filing with the Commission, the Amex included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

[[Page 67177]]

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

1. Purpose
    On June 7, 2006, Commission Chairman Cox submitted a letter (the 
``June 7th Letter'') to each options exchange supporting the 
introduction and implementation of a pilot program for the quoting of a 
limited number of options classes in pennies ($0.01 MPV). The Exchange, 
after meaningful discussion with the Commission staff, submits this 
proposed rule change for the purpose of adopting the Penny Quoting 
Pilot Program.
    Options classes are currently quoted in MPVs in nickels ($0.05) and 
dimes ($0.10). Amex Rule 952 provides that the MPV for an option on a 
stock or ETF share is as follows: (i) For option issues quoted under $3 
a contract, $0.05 MPV; and (ii) for option issues quoted at $3 a 
contract or greater, $0.10 MPV. As set forth in the June 7th Letter, 
quoting in penny increments ($0.01 MPV) is expected to benefit 
investors by allowing options quotes to be expressed at better prices 
and options orders to be executed at the best possible price. 
Furthermore, the Exchange submits that quoting in pennies would further 
enhance competition among the option exchanges.
Proposed Penny Quoting Pilot Program
    Selection of the Options Classes. The proposed Penny Quoting Pilot 
Program will initially consist of thirteen (13) options classes. 
Exhibit 2 to the proposed rule change is a draft Regulatory Circular 
which sets forth the list of the options classes that will be subject 
to the proposed Penny Quoting Pilot Program.
    Minimum Price Variations (MPVs). The quoting requirements in 
connection with the Penny Quoting Pilot Program will be as follows:
     MPVs of $0.01 for options with premiums of up to $3
     MPVs of $0.05 for options with premiums of $3 or greater 
except for the QQQQ options which will trade at an MPV of $0.01 for all 
premiums.
    Because quoting options in pennies will increase quote message 
traffic, which may overwhelm certain data systems of the options 
exchanges, market data vendors and securities firms, quoting options in 
pennies will begin in a limited number of options classes. The Exchange 
believes that the proposed introduction of a limited number of options 
classes that may quote in pennies under the Penny Quoting Pilot Program 
is reasonable given the system capacity constraints and concerns that 
exist industry-wide. The Amex believes that once experience has been 
gained from the proposed Penny Quoting Pilot Program, the Commission 
and the industry will be better able to assess the impact on market 
quality and systems capacity.
    The Commission's Office of Economic Analysis (``OEA'') and each 
participating options exchange will perform individual analysis of the 
initial pilot program options classes after a three (3) month interval 
(the ``Pilot Report''). The Pilot Report will be submitted to the 
Commission within thirty (30) days of the end of such three (3) month 
time period. The Pilot Report will compare quotation and trading 
activity in the three (3) months prior to the Penny Quoting Pilot 
Program to the first three (3) months of the Penny Quoting Pilot 
Program as follows: (1) Quotation spread, quotation size, average daily 
volume and other relevant factors; (2) the number of quotations in the 
Penny Quoting Pilot Program and the effect on Amex system's capacity; 
and (3) an assessment of trade-throughs and how they were addressed. 
The Exchange expects that the Pilot Report will be the subject of 
further discussions regarding status and next steps for the industry.
Quote Mitigation Strategy
    As a condition to participation in the Penny Quoting Pilot Program, 
the Commission expects that each options exchange provide a rational 
quote mitigation strategy because of the concerns regarding system 
capacity. The Amex has in place several quote mitigation mechanisms and 
continues to evaluate its need for enhanced system capacity and 
management. The Exchange believes that its current quote mitigation 
strategies are effective as set forth below.
     Join Quote. The Amex, through the ANTE system,\3\ provides 
that registered options traders (``ROTs'') may either stream their own 
quotes or join the specialist's disseminated quotation in some or all 
of his assigned classes or series (``join quote''). In order to 
participate in ``join quote,'' a ROT must be physically present in the 
trading crowd. The purpose of allowing ROTs to piggyback on 
specialists' quotes is partly to reduce market data traffic by allowing 
ROTs to join the specialist's quote in the less actively traded series 
(far out months, etc.) while auto-quoting the more actively traded 
series.
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    \3\ See Securities Exchange Act Release No. 49747 (May 20, 
2004), 69 FR 30344 (May 27, 2004) (SR-Amex-2003-89).
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     Monitoring. The Amex actively monitors the quotation 
activity of its market participants. When the Exchange detects that a 
market participant is disseminating significantly more quotes than the 
average market participant, the Exchange contacts the market 
participant and alerts them to potentially excessive quotation 
activity. Often such monitoring reveals that the market participant may 
have internal system issues or has incorrectly set system parameters. 
Alerting the market participant usually leads to the market participant 
to take steps to reduce the number of quotes for dissemination.
     Holdback Timers. The Amex has the systematic ability to 
limit the dissemination of quotations and other changes to the Amex 
Best Bid or Offer (``ABBO'') according to prescribed time criteria 
(``Holdback Timer''). For instance, if there is a change in the price 
of a security underlying an option, multiple market participants may 
adjust the price or size of their quotes. Rather than disseminating 
each individual change, the Holdback Timer permits the Exchange to wait 
until multiple market participants have adjusted their quotes and then 
to disseminate a new quotation. This helps to prevent the 
``flickering'' of quotations. The Amex proposes to codify the Holdback 
Timer in this rule filing. As proposed in Amex Rule 958A--ANTE, the 
Exchange will utilize a Holdback Timer that delays quotation updates 
for no longer than one (1) second.
     Delisting. The Amex commits to the Commission that it will 
delist options with an average daily volume (``ADV'') of less than 25 
contracts. However, it has been the policy of the Amex to be much more 
aggressive in delisting relatively inactive options, thereby 
eliminating the quotation traffic attendant to such listings.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\4\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\5\ in particular, in that the 
proposed rule change is designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts and 
practices, 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.

[[Page 67178]]

B. Self-Regulatory Organization's Statement on Burden on Competition
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    Written comments on the proposed rule change were neither solicited 
nor received.

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 No. SR-Amex-2006-106 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-Amex-2006-106. 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 at 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, 100 F Street, NE., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of the 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 No. SR-Amex-2006-106 and should be 
submitted on or before December 11, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-19512 Filed 11-17-06; 8:45 am]
BILLING CODE 8011-01-P