[Federal Register Volume 74, Number 109 (Tuesday, June 9, 2009)]
[Notices]
[Pages 27375-27379]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-13394]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60015; File No. SR-NYSEAmex-2009-19]
Self-Regulatory Organizations; NYSE Amex LLC; Notice of Filing of
Proposed Rule Change To Adopt Rules To Implement the Options Order
Protection and Locked/Crossed Market Plan
June 1, 2009.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on May 11, 2009, the NYSE Amex LLC (``NYSE Amex'' or
``Exchange''), filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. 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 proposes to adopt rules to implement the Options Order
Protection and Locked/Crossed Market Plan. The text of the proposed
rule change is available on the Exchange's Web site at http://www.nyse.com, at the Exchange's principal office and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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 those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to adopt rules to implement the Plan. These
rules will replace Rules 990NY through 993NY of the Exchange's rules in
their entirety. The proposed rules also will amend or remove various
other rules to accommodate the Plan.
Background to the Plan and the Implementing Rules
NYSE Amex filed the current version of the Plan on November 25,
2008.\3\ The Plan would replace the current Plan for the Purpose of
Creating and Operating an Intermarket Option Linkage (``Old Plan'').
The Old Plan requires its participant exchanges to operate a stand-
alone system or ``Linkage'' for sending order-flow between exchanges to
limit trade-throughs. The Options Clearing Corporation (``OCC'')
operates the Linkage system. The Linkage rules provide for unique types
of Linkage orders, with a complicated set of requirements as to who may
send such orders and under what conditions.
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\3\ The November 25, 2008 filing was Amendment No. 1 to the
Plan. The American Stock Exchange LLC (the predecessor to NYSE Amex
LLC) initially filed the Plan on June 17, 2008.
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While the Linkage largely has operated satisfactorily, it is under
significant strain. When the Commission approved the Old Plan in 2000,
average daily volume (``ADV'') in the options market was approximately
2.6 million contracts across all exchanges. Now the ADV has increased
to more than 10 million contracts, putting added strain on the ability
of market makers to comply with the complex Linkage rules. At the same
time, the options markets have been moving towards quoting in pennies,
and are quoting in pennies options representing over half the total
industry
[[Page 27376]]
volume. This greatly increases the number of price changes in an
option, giving rise to greater chances of trade-throughs and missing
markets as market makers send Linkage orders and have to wait for a
response.
Experience in the equities markets shows that there is a more
efficient way to provide price protection in options. When first
implemented, the Linkage represented a vast improvement over the then-
current equities price-protection system, which depended on the
operation of the Intermarket Trading System (``ITS''). The plan
governing ITS imposed long waiting times for filling ITS commitments
and a cumbersome method for satisfying trade-throughs. Learning from
the shortcomings of ITS, the options Linkage has shorter waiting
periods and more efficient trade-through protections.
The equity price-protection mechanisms have now leapfrogged the
options Linkage. By adopting Regulation NMS in 2005 the Commission
effectively terminated ITS, replacing it with a rules-based price-
protection system.\4\ The key to Regulation NMS's price-protection
provisions is the Intermarket Sweep Order, or ISO. Each equity exchange
must adopt rules ``reasonably designed to prevent trade-throughs.'' \5\
Exempted from trade-through liability is an ISO, which is an order a
member sends to an exchange displaying a price inferior to the national
best bid and offer (``NBBO''), while simultaneously sending orders to
trade against the full size of any other exchange that is displaying
the NBBO.\6\
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\4\ Release No. 34-51808 (June 9, 2005), 70 FR 37496 (June 29,
2005).
\5\ Regulation NMS Rule 611(a).
\6\ Regulation NMS Rule 600(b)(30).
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The Regulation NMS rules-based price-protection system is working
well. It requires neither a central linkage mechanism nor a complex set
of operating rules. It also has eliminated the need for achieving
unanimity to change even the most minor aspects of a linkage mechanism.
A simple prohibition against most trade-throughs, coupled with the ISO
mechanism, has given the equities markets a straight-forward system to
provide customers with price protection in a fast-moving, high-volume
market that is quoted in pennies. NYSE Amex and the other options
exchange participants in the Plan intend for the Plan, and the
implementing rules, to bring the efficiencies of Regulation NMS to the
options market.
Operation of the Plan
The Plan effectively would apply the Regulation NMS price-
protection provisions to the options markets. Similar to Regulation
NMS, the Plan would require participants to adopt rules ``reasonably
designed to prevent Trade-Throughs,'' while exempting ISOs from that
prohibition.\7\ The definition of an ISO is essentially the same as
under Regulation NMS,\8\ and there are a number of additional
exceptions to the trade-through prohibition. Like Regulation NMS,\9\
the Plan requires participating exchanges to take reasonable steps to
establish that ISOs meet the requirements of the Plan.
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\7\ Sections 5(a)(i) and 5(b)(iv) of the Plan.
\8\ Section 2(9) of the Plan.
\9\ Regulation NMS Rule 611(c) and Section 5(c) of the Plan.
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With respect to locked and crossed markets, similar to Regulation
NMS the Plan requires its participants to adopt, maintain and enforce
rules requiring members: to avoid displaying locked and crossed
markets; to reconcile such markets; and to prohibit members from
engaging in a pattern or practice of displaying locked and crossed
markets.\10\ With respect to locked markets, the Plan differs from
Regulation NMS in that it specifically permits exceptions to the locked
market prohibitions ``as contained in the rules of a Participant
approved by the Commission.'' \11\
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\10\ Section 6 of the Plan.
\11\ Id.
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Description of the Implementing Rules
The Exchange proposes to define ``Intermarket Sweep Order'' as a
new order type in proposed Rule 900.3NY(t).
Other proposed rule changes would amend and replace NYSE Amex's
current Linkage rules in Rules 940 and 990NY-993NY as described below:
Rule 990NY--Definitions
This proposed rule incorporates all the operative definitions from
the Plan into the NYSE Amex rulebook. With one exception, the parties
to the Plan derived all such definitions either from the Old Plan \12\
or Regulation NMS.\13\ The one exception is the definition of ``complex
trade'' in Rule 990NY(4). A ``complex trade'' is exempt from trade-
through liability. The exemption in the Old Plan simply refers to
complex trades ``as that term may be defined by the Operating Committee
from time to time.'' Based on that provision, the Exchange had
previously adopted current Rule 940(b)(3), which is substantially
identical among all the options exchanges. We propose to carry that
definition into the revised Rule 990NY unchanged.
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\12\ See, e.g., the definitions of ``Broker-Dealer'' in Rule
990NY(3), NBBO in Rule 990NY(10), Non-Firm in Rule 990NY(11), OPRA
Plan in Rule 990NY(12), and Participant in Rule 990NY(13).
\13\ See, e.g., the definitions of ``Best Bid''/``Best Offer''
in Rule 990NY(1), ``Bid''/``Offer'' in Rule 990NY(2), ``Intermarket
Sweep Order (``ISO'')'' in Rule 900.3NY(t), and ``Quotation'' in
Rule 990NY(16).
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Rule 991NY--Order Protection
Paragraph (a) of Rule 991NY provides that, subject to specified
exceptions, NYSE Amex ATP Holders shall not effect trade-throughs.
Paragraph (b) provides for the following trade-through exceptions:
System Issues: Rule 991NY(b)(1) implements Section 5(b)(i)
of the Plan by establishing an exception for trade-throughs due to
system-failures. This is akin to the exception in Regulation NMS for
equity securities and permits trading through an Eligible Exchange that
is experiencing system problems.\14\ The Exchange is proposing ``self-
help'' rules similar to its NYSE Amex Equities Rule 126A-AEMI, adopted
pursuant to Regulation NMS.
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\14\ See Regulation NMS Rule 611(b)(1).
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Trading Rotations: Rule 991NY(b)(2) implements Section
5(b)(ii) of the Plan and carries forward the current trade-through
exception in the Old Plan \15\ and current Rule 991NY (b)(5) related to
the opening of markets. It is the options equivalent to the single
price opening exception in Regulation NMS for equity securities.\16\
NYSE Amex uses a trading auction to open an option for trading, or to
reopen an option after a trading halt. The opening is effectively a
single price auction to price the option and there are no practical
means to include prices on other exchanges in that auction.
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\15\ See Old Plan Section 8(c)(iii)(E).
\16\ See Regulation NMS Rule 611(b)(3) under the Securities
Exchange Act of 1934, as amended (``Exchange Act'').
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Crossed Markets: Rule 991NY(b)(3) implements Section
5(b)(iii) of the Plan and is the functional equivalent to NYSE
Alternext Equities Rule 128C-AEMI for equity securities. If the best
intermarket bid is higher than the best intermarket offer, it indicates
that there is some form of market dislocation or inaccurate quoting.
Permitting transactions to be executed without regard to trade-throughs
in a Crossed Market will allow the market quickly return to
equilibrium.
Intermarket Sweep Orders (``ISOs''): Rule 991NY(b)(4) is
the ISO exemption and implements Sections 5(b)(iv) and (v) of the Plan.
Section 5(b)(iv) of the Plan permits a Participant to execute
[[Page 27377]]
orders it receives from other Participants or members that are marked
as ISO even when it is not at the NBBO. Section 5(b)(v) of the Plan
allows a Participant to execute inbound orders when it is not at the
NBBO, provided it simultaneously ``sweeps'' all better-priced interest
displayed by Eligible Exchanges. These provisions are the options
equivalents of the corresponding Regulation NMS equity rules.\17\
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\17\ See Regulation NMS Rules 611(b)(5) and (6).
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Quote Flickering: Rule 991NY(b)(5) implements Section
5(b)(vi) of the Plan and corresponds to the flickering quote exception
in Regulation NMS for equity securities.\18\ Options quotations change
as rapidly, if not more rapidly, than equity quotations. Indeed, they
track the price of the underlying security and thus change when the
price of the underlying security changes. This exception provides a
form of ``safe harbor'' to market participants to allow them to trade
through prices that have changed within a second of the transaction
causing a nominal trade-through.
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\18\ See Regulation NMS Rule 611(b)(8).
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Non-Firm Quotes: Rule 991NY(b)(6) implements Section
5(b)(vii) of the Plan and carries forward the current non-firm quote
trade-through exception in the Old Plan.\19\ By definition, an
exchange's quotations may not be firm for automatic execution during
this trading state and thus should not be protected from trade-
throughs. In effect, these quotations are akin to ``manual quotations''
under Regulation NMS.
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\19\ See Old Plan Section 8(c)(iii)(C).
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Complex Trades: Rule 991NY(b)(7) implements Section
5(b)(viii) of the Plan and carries forward the current complex trade
exception in the Old Plan.\20\ Complex trades consist of multiple
transactions (``legs'') effected at a net price, and it is not
practical to price each leg at a price that does not constitute a
trade-through.
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\20\ See Old Plan Section 8(c)(iii)(G).
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Customer Stopped Orders: Rule 991NY(b)(8) implements
Section 5(b)(ix) of the Plan and corresponds to the customer stopped
order exception in Regulation NMS for equity securities.\21\ It permits
broker-dealers to execute large orders over time at a price agreed upon
by a customer, even though the price of the option may change before
the order is executed in its entirety.
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\21\ See Regulation NMS Rule 611(b)(9).
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Stopped Orders and Price Improvement: Rule 991NY(b)(9)
implements Section 5(b)(x) of the Plan and would apply if an order is
stopped at price that did not constitute a trade-through at the time of
the stop. This exception applies to those exchanges that offer a
``Price Improvement Mechanism'' by which members could seek price
improvement for that order, even if the market moves in the interim,
and the transaction ultimately is effected at a price that would trade
through the then currently-displayed market.\22\ NYSE Amex does not
currently permit these types of options trades, and any transaction-
type relying on this exemption would require the Exchange to adopt
implementing rules, subject to Commission review and approval.
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\22\ See, for instance, ISE Rule 723.
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Benchmark Trades: Rule 991NY(b)(10) implements Section
5(b)(xi) of the Plan and would cover trades executed at a price not
tied to the price of an option at the time of execution, and for which
the material terms were not reasonably determinable at the time of the
commitment to make the trade. An example would be a volume-weighted
average price trade, or ``VWAP.'' This corresponds to a trade-through
exemption in Regulation NMS for equity trades.\23\ NYSE Amex does not
currently permit these types of options trades, and any transaction-
type relying on this exemption would require the Exchange to adopt
implementing rules, subject to Commission review and approval.
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\23\ See Regulation NMS Rule 611(b)(7).
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Rule 992NY--Locked and Crossed Markets
Proposed Rule 992NY implements Section 6 of the Plan, which
requires Plan participants to establish, maintain and enforce rules
that: require their members reasonably to avoid displaying locked and
crossed markets; are reasonably designed to assure reconciliation of
locked and crossed markets; and prohibit their members from engaging in
a pattern or practice of displaying locked and crossed markets. Section
6 of the Plan further allows an exchange to provide exceptions to these
limitations as ``contained in the rules of a Participant approved by
the Commission.''
Proposed Rule 992NY(a) contains the general prohibition that NYSE
Amex ATP Holders shall reasonably avoid displaying, and shall not
engage in a pattern or practice of displaying, any quotations that lock
or cross the best bid or offer of another exchange. We propose four
exceptions to this general prohibition.\24\
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\24\ See e-mail from Andrew Stevens, Chief Counsel--U.S.
Equities & Derivatives, NYSE Euronext, to David Liu, Assistant
Director, Division of Trading and Markets, Commission, dated May 29,
2009.
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The first exception would apply when we are experiencing system
issues, and is similar to the systems issues exception to the trade-
through rule. The second exception applies when there is a crossed
market, and also is similar to the corresponding trade-through
exception. The third exception would apply when an ATP Holder has
simultaneously routed an ISO to execute against the full displayed size
of any locked or crossed Protected Bid or Protected Offer. The fourth
proposed exception applies to locked markets in the following
circumstances: \25\
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\25\ See id.
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Neither the locking or locked quote represents, in whole
or in part, a customer order; or
A customer enters a bid or offer that locks a non-customer
quotation on another market, and the customer, on a case-by-case basis,
authorizes the locking of the other market's quotation.
This fourth \26\ exemption recognizes an important distinction
between the equities and options markets. Options market makers compete
for order flow by disseminating quotations in multiple series with
respect to each underlying security, distributing liquidity over a much
greater universe of products than in the equity markets. As a result,
the options markets are more reliant on market maker quotations to
provide liquidity, with fewer customer orders in each series than in
each underlying security, where liquidity is concentrated in one
product.
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\26\ See id.
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With market makers on multiple exchanges constantly updating their
quotations in all these series based on mathematical formulae there is
a greater likelihood of market maker quotations locking. We believe
that in most cases locked market maker quotations are good for the
investing public. Effectively locked markets provide a ``zero spread,''
allowing market participants to buy and sell an option at the same
price. On NYSE Amex these quotations are firm, and are fully executable
on an automated basis.
We recognize that locked markets are more complicated where one or
both of the locking quotations represents a customer order. Where there
is contra-side market interest willing to trade with a customer, the
customer order should be filled. Thus, we would not exempt from the
locked market prohibition situations involving customer orders unless
the customer entering the locking order specifically
[[Page 27378]]
authorizes the lock on a case-by-case basis.\27\
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\27\ We can envision a customer authorizing a lock when the fees
associating with trading against the locked market make the
execution price uneconomical to the customer.
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The Exchange will not implement this proposed exception to the
locked market prohibition unless the Exchange can identify that an
order on another exchange is for the account of a customer. The options
exchanges currently are working on a method to so identify customer
quotations through the Options Price Reporting Authority. Absent the
ability to identify a customer quote as part of an exchange's BBO, NYSE
Amex will assume that the quote represents, in whole or in part, a
customer order. That is, NYSE Amex will not permit its members to avail
themselves of this exemption unless another exchange has informed the
Exchange that it will designate all customer orders as such at OPRA,
and such exchange's quotation does not contain such designation. If an
exchange opts not to identify its customer quotations, the Exchange
will treat all of that exchange's quotations as customer orders and,
absent application of another exception, will not permit locks of such
quotations.
The Exchange also proposes that the exemption is only operative for
as long as the Exchange is willing to identify Customer orders in its
own quote.
Temporary Rule 993NY--Temporary Rule Governing P and P/A Orders
When the Plan and implementing rules become operative it is
possible that not all the options exchanges will be functionally able
to operate pursuant to the Plan. Thus, in order to ensure there is full
intermarket trade-through protection during this interim period, we
propose to retain certain minimum trade-through rules based on the Old
Plan until all the options exchanges are operating pursuant to the
Plan. When that occurs we will file a rule change with the Commission
to delete Temporary Rule 993NY.
Temporary Rule 993NY provides that NYSE Amex will continue to
accept Principal Acting as Agent (``P/A'') and Principal Orders from
options exchanges which have not fully discontinued use of the OCC
managed routing hub. The handling of these orders will be subject to
Temporary Rule 993NY.
Amendment of Other NYSE Amex Rules To Accommodate the Plan
We propose to amend four NYSE Amex rules in addition to those
described above. First, Rule 921NY, Registration of Market Makers,
allows certain Market Makers to act in an agency capacity for the
purpose of sending Principal Acting as Agent (``P/A'') Orders through
the Linkage. With the termination of the Linkage such provision no
longer will be necessary and we thus propose to delete this provision.
Second, Rule 923NY, Appointment of Market Makers, Commentaries
.01-.03 describes Intermarket Linkage Market Makers (``IMM'') and
described when and how IMMs would be appointed, and the procedures that
governed their appointment. With the termination of the Linkage such
provisions will no longer be necessary and we thus propose to delete
them.
Rule 964NY, Display, Priority and Order Allocation--Trading
Systems, will be amended to remove references to the Intermarket
Linkage.
Finally, Rule 476A, Minor Rule Plan, describes certain violations
which are part of an expedited disciplinary process, and their
attendant fines. The Exchange proposes to modify those violations which
are related to the Linkage and make them applicable to the Plan and the
proposed Rules.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Securities Exchange Act of 1934 (the ``Act'').\28\ The
basis under the Act for this proposed rule change is found in Section
6(b)(5) of the Act,\29\ in that the proposed rule change is designed to
promote just and equitable principles of trade, remove impediments to
and perfect the mechanisms of a free and open market and a national
market system and, in general, to protect investors and the public
interest. In particular, the Exchange believes that adopting rules that
implement the Plan will facilitate the trading of options in a national
market system by establishing more efficient protection against trade-
throughs and locked and crossed markets.
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\28\ 15 U.S.C. 78f(b).
\29\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
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
No written comments were solicited or received with respect to the
proposed rule change.
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 the 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-NYSEAmex-2009-19 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEAmex-2009-19. 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
[[Page 27379]]
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, on official business
days between the hours of 10 a.m. and 3 p.m. 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-
NYSEAmex-2009-19 and should be submitted on or before June 30, 2009.
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\30\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-13394 Filed 6-8-09; 8:45 am]
BILLING CODE 8010-01-P