[Federal Register: January 31, 2003 (Volume 68, Number 21)]
[Notices]
[Page 5060-5066]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31ja03-137]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47229; File No. SR-Amex-00-30]
Self-Regulatory Organizations; Notice of Filing of Amendments to
Proposed Rule Change by the American Stock Exchange LLC Relating to the
Allocation of and Participation in Options Trades
January 22, 2003.
On May 30, 2000, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``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 relating to the allocation of and participation in
options trades on the Exchange. The proposed rule change was published
for comment in the Federal Register on June 28, 2000.\3\ On August 25,
2000, August 30, 2001, February 19, 2002, April 22, 2002, September 16,
2002, and December 20, 2002, respectively, the Amex filed Amendment
Nos. 1, 2, 3, 4, 5, and 6 to the proposed rule change.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 42964 (June 20,
2000), 65 FR 39972 (June 28, 2000).
\4\ See letters from Claire P. McGrath, Vice President and
Special Counsel, Amex, to Nancy Sanow, Assistant Director, Division
of Market Regulation (``Division''), Commission, dated August 24,
2000 (Amendment No. 1) and August 29, 2001 (Amendment No. 2); and
from Claire P. McGrath, Senior Vice President and Deputy General
Counsel, Amex, to Elizabeth King, Associate Director, Division,
Commission, dated February 15, 2002 (Amendment No. 3), April 22,
2002 (Amendment No. 4), September 13, 2002 (Amendment No. 5), and
December 19, 2002 (Amendment No. 6).
Amendment No. 1 added proposed rule text concerning the
allocation of an incoming order when a customer is on parity with
the specialist and registered options traders. Amendment No. 2
provided further explanation of the interaction of existing and
proposed rules in this situation. Amendment Nos. 03, 4, and 5
further clarified how options trades on the Exchange are allocated,
and were submitted by Amex in compliance with Section IV.B.j. of the
Commission's Order Instituting Public Administrative Proceedings
Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934,
Making Findings and Imposing Remedial Sanctions, Securities Exchange
Act Release No. 43268 (September 11, 2000) (``Order''). Section
IV.B.j. of the Order requires that respondent options exchanges
adopt new, or amend existing, rules to set forth any practice or
procedure ``whereby market makers trading any particular option
class determine by agreement the spreads or option prices at which
they will trade any option class, or the allocation of orders in
that option class.'' Amendment No. 6 made minor modifications and
non-substantive changes to the proposal.
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[[Page 5061]]
The proposed rule change, in its amended version, is 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, as amended, from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex proposes to codify in Rule 933(d), Rule 950(d), Commentary
.06, and Rule 950(n), Commentary .03 current practices regarding the
participation in option trades executed on the Exchange by registered
options traders and specialists and the allocation of those trades to
the appropriate party. The text of the proposed rule change is set
forth below. Deleted language is in brackets. Proposed new language is
italicized.
* * * * *
Rule 933 Automatic Execution of Options Orders
(a)-(c) No change.
(d) Options orders executed through Auto-Ex shall be automatically
allocated on a rotating basis to the specialist and to each trader that
has signed on to Auto-Ex. Auto-Ex trades of ten contracts or less are
allocated to each Auto-Ex participant as set forth below. If an Auto-Ex
trade is greater than ten contracts, the Auto-Ex system divides the
execution into lots of ten or fewer contracts and allocates a lot to
each Auto-Ex participant. Each lot is considered a separate trade for
purposes of allocating trades within Auto-Ex. The rotation is designed
to provide that the allocation of Auto-Ex trades between the specialist
and traders signed on to Auto-Ex in a given option class is as follows:
------------------------------------------------------------------------
Approximate
number of
Approximate trades
number of allocated to
Number of traders signed on to Auto-Ex trades the traders
allocated to signed on to
the specialist Auto-Ex (as a
(percent) group)
(percent)
------------------------------------------------------------------------
1....................................... 60 40
2-4..................................... 40 60
5-7..................................... 30 70
8-15.................................... 25 75
16 or more ............................. 20 80
------------------------------------------------------------------------
* * * Commentary
.01-.02 No change.
* * * * *
Rules of General Applicability
Rule 950
(a)-(c) No change.
(d) The provisions of Rule 126, with the exception of subparagraphs
(a) and (b) thereof, shall apply to Exchange option transactions and
the following additional commentary shall also apply.
* * * Commentary
.01-.05 No change.
.06 (i) When two or more bids (offers) are made simultaneously by
the specialist dealing for his own account and by registered options
traders, all such bids (offers) shall be on parity and any contracts
sold (bought) in execution of such bids (offers) shall be divided among
the specialist and registered options trader(s) so that the specialist
shall receive the following percentage of contracts executed and the
registered options traders shall divide the remainder in accordance
with Rule 950(n), Commentary .03(a)(iii):
------------------------------------------------------------------------
Approximate
Approximate number of
number of contracts
Number of traders on parity contracts allocated to
allocated to the traders
the specialist (as a group)
(percent) (percent)
------------------------------------------------------------------------
1....................................... 60 40
2-4..................................... 40 60
5-7..................................... 30 70
8-15.................................... 25 75
16 or more.............................. 20 80
------------------------------------------------------------------------
Notwithstanding the foregoing, neither the specialist nor a
registered options trader will be allocated more executed contracts
than the number of contracts representing the specialist's or
registered options trader's portion of the aggregate quotation size, as
that term is used in Rule 958A, except, when the number of executed
contracts to be allocated exceeds the aggregate quotation size
disseminated for that options series.
(ii) The above provision applies only when the specialist and
registered options trader(s) are on parity and does not include
situations where a customer order is also on parity with the specialist
and registered options traders. When a customer is on parity with the
specialist and registered options traders, the specialist will allocate
executed contracts (1) to the customer and to those registered options
traders or specialist on parity with the customer on an equal basis
subject to Rule 950(n), Commentary .03(a)(v); and then (2) to the
specialist and the registered options traders in accordance with Rule
950(n), Commentary .03(a)(iii). The following rules set forth
provisions regarding priority and parity of registered options traders
and specialists when customer orders are involved: Rule 111, Commentary
.07, which is made applicable to options trading by Rule 950(c),
provides that registered options traders in establishing or increasing
a position may not retain priority over or have parity with a customer
order, and Rule 155, which is made applicable to options trading by
Rule 950(a), requires a specialist to yield precedence to orders
entrusted to him as agent before executing a purchase or sale at the
same price for an account in which he has an interest.
(e)-(m) No change.
(n) The provisions of Rule 170 and Commentaries .03 and .04
thereto, shall apply to [e]Exchange option transactions. In addition,
the following Commentary shall also apply:
* * * Commentary
[.10] .01 A specialist in the course of maintaining a fair and
orderly market shall adhere to the maximum permissible bid/ask
differentials set forth in Rule 958(c).
.02 No change.
.03 (a) It is the responsibility of the specialist to allocate
executed contracts among all participants to a trade.
(i) In order for specialists to fulfill this function, registered
options traders must announce either at the start of the trading day,
upon entry into the trading crowd or prior to the dissemination of a
quotation, the number of contracts for each option series in which they
are willing to participate. The specialist may not assume a size for
any registered options trader and only those registered options traders
that have announced their sizes as discussed above will be allocated
any executed contracts.
(ii) The registered options traders announced sizes shall be
promptly
[[Page 5062]]
communicated to the Exchange as required by Rule 958A(c)(i).
(iii) As transactions occur the specialist shall allocate to the
extent mathematically possible (A) the portion of the executed
contracts that the customer is entitled to and the portion of the
executed contracts to those on parity with the customer on an equal
basis subject to subparagraph (v) of this paragraph (a); (B) the
portion of the executed contracts that the specialist is entitled to
pursuant to the participation percentages set forth in Rule 950(d),
Commentary .06; and then (C) the portion of the executed contracts
participating registered options traders are entitled to individually.
The allocation pursuant to (C) is subject to the following provisions:
1. where all participants have equal stated sizes, their
participations shall be equal;
2. where participants' stated sizes are not equal, their
participations will depend upon whether the number of executed
contracts left to be allocated exceeds the participants' aggregate
stated sizes;
3. if the number of executed contracts left to be allocated does
not exceed the participants' aggregate stated sizes, the specialist
will allocate the executed contracts equally, unless a participant's
stated size is for an amount less than an equal allocation, then the
smallest sizes will be allocated first, until the number of executed
contracts remaining to be allocated requires an equal allocation.
4. if the number of executed contracts left to be allocated does
exceed the participants' aggregate stated sizes, the specialist will
allocate the executed contracts by first allocating to each participant
the number of executed contracts equal to each participant's stated
size with the remainder being allocated based on the percentage a
participant's stated size is of the participants' aggregate stated
size.
5. The following chart illustrates how different numbers of
executed contracts will be allocated to participants whose aggregate
stated size is 100 contracts:
Number of Executed Contracts To Be Allocated
----------------------------------------------------------------------------------------------------------------
Each participant's stated size 200 90 70 50
----------------------------------------------------------------------------------------------------------------
50.............................................. 100 40 25 17
30.............................................. 60 30 25 17
20.............................................. 40 20 20 16
----------------------------------------------------------------------------------------------------------------
(iv) In the event a specialist or registered options trader
declines to accept any portion of the available contracts, any
remaining contracts shall be apportioned among the remaining
participants who bid or offered at the best price at the time the
market was established in accordance paragraph (iii) above, until all
contracts have been allocated.
(v) Specialists may direct some or all of their participation
amount to competing public orders in the trading crowd.
(b) Notwithstanding the foregoing, when the transaction occurs
without the participation of the specialist (either as principal or
agent), the floor broker representing the contra-side of the trade
shall distribute the executed contracts equally among the participating
registered options traders, unless a registered options trader's
portion of the disseminated size is less than an equal distribution.
That registered options trader will be given a less than equal
distribution and the remaining contracts will allocated equally among
the remaining participants to the trade. In addition, if neither the
specialist nor a floor broker representing a customer is participating
in the trade, the participating registered options traders shall
allocate the executed contracts among themselves in accordance with
subparagraph (a)(iii) above.
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, as
amended, and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The Exchange has prepared summaries, set
forth in Sections A, B, and C below, of the most significant aspects of
such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Since the inception of options trading at the Exchange in 1975,
both specialists and registered options traders (``traders'') have had
the responsibility of making markets in options. Exchange rules require
that both specialists' and traders' transactions constitute a course of
dealings reasonably calculated to contribute to the maintenance of a
fair and orderly market and they should not enter into transactions or
make bids or offers that are inconsistent with such a course of
dealings. Specialists and traders shall engage, to a reasonable degree
under the existing circumstances, in dealings for their own accounts
when there exists a lack of price continuity, a temporary disparity
between the supply of and demand for option contracts of a particular
series, or a temporary distortion of the price relationships between
option contracts of the same class. As the Commission stated in its
Order announcing the effectiveness of the Exchange's plan to list and
trade options, the Amex's ``* * * registered floor traders will be
expected to trade in a way that assists the specialist in maintaining a
fair and orderly market * * *'' \5\ (emphasis supplied). Specialists
do, however, have additional obligations which include, among other
things, the obligation to (1) assure that disseminated market
quotations are accurate; (2) assure that each disseminated market
quotation in appointed options classes is honored up to the
disseminated size; (3) determine any formula for generating the
automatically updated market quotations and disclosing the elements of
that formula to the members of the trading crowd; (4) be present at the
trading post throughout every business day; (5) participate at all
times in the automated execution system for each assigned option class;
and (6) resolve trading disputes, subject to Floor Official review upon
the request of any party to the dispute.
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\5\ See Securities Exchange Act Release No. 11144 (December 19,
1974), 40 FR 3258 (January 20, 1975).
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In the course of making markets, specialists are often on parity
with registered options traders, that is, bidding and offering
simultaneously to provide liquidity. Generally, Exchange Rule 126 (made
applicable to options
[[Page 5063]]
trading by Rule 950 (d)) provides that when bids (offers) are made
simultaneously, all such bids (offers) are on parity, and any
securities sold (bought) in execution of such bids (offers) shall be
divided as equally as possible between those on parity up to the
participants' stated or generally known sizes. In addition, as further
discussed below, the trading crowds in many option classes give the
specialist a greater than equal share when on parity with registered
options traders. This proposal seeks to codify in the Exchange's rules
these current allocation practices.
Although this rule proposal seeks to codify specifically the
participation in and allocation of trades among specialists and
registered options traders on parity, the Exchange notes that the
Commission staff has requested a general description of the Exchange's
rules regarding customer priority and parity. The following is a
discussion of those rules: Exchange Rules 155 and 111 \6\ set forth the
obligations and responsibilities of specialists and registered options
traders, respectively, when they handle or interact with customer
orders. Rule 155 requires a specialist to yield precedence to orders
entrusted to him as agent before executing a purchase or sale at the
same price for an account in which he has an interest. Rule 111,
Commentary .07 provides that registered options traders in establishing
or increasing a position may not retain priority over or have parity
with a customer order. Thus, Rules 155 and 111 require that, when the
specialist as agent receives a customer marketable limit order, he and
any registered options trader establishing or increasing a position
must yield precedence to the customer order. Registered options traders
closing or reducing a position and specialists not acting in an agency
capacity can be on parity with a customer order.
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\6\ Rule 155 is made applicable to options trading by Rule
950(a) and Rule 111 is made applicable by Rule 950(c).
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Amendment No. 2 to the proposed rule change, which was submitted to
the Commission in response to a specific question from the staff,
sought to further describe how customer orders are handled when they
are on parity with registered options traders. The example given in
Amendment No. 2 stated the general proposition that if a customer order
can be filled completely, it will be, before the specialist and
registered options traders participate for their own accounts. The
example is a correct description of what generally occurs on the
Exchange's trading floor as the specialist and traders comply with the
requirement that they generally deal for their own account only when
there is a disparity between the supply of or demand for option
contracts of the same series. Exchange priority and parity rules do not
require the specialist and registered options trader to yield priority
or parity in all circumstances to completely fill a customer order.
Thus, if Exchange rules were strictly applied to the two examples posed
in Amendment No. 2, the following would result:
(1) The specialist, one registered options trader (closing) and a
customer (represented by a floor broker) are all bidding the same
price, at the same time, for the same series of XYZ options and are,
therefore, on parity. An incoming order to sell 300 XYZ contracts would
be split evenly among the three participants.
(2) The specialist and a customer (represented by a floor broker)
are bidding the same price, at the same time, for the same series of
ABC options, and a registered options trader (opening) is also bidding
at that same price and, thus, is not on parity. An incoming order for
300 ABC contracts would be split evenly between the specialist and the
customer up to the size of the customer's order with the specialist
receiving the same amount as the customer. Any remaining contracts
would be split between the specialist and trader according to the
percentages set forth in the proposed rules.
Notwithstanding the foregoing, specialists and registered options
traders often do accommodate customer orders beyond what is required by
Exchange rules as a means for attracting and retaining order flow in
the increasingly competitive options markets. As a result, proposed
Rule 950(n), Commentary .03(a)(v) would provide that the specialist
and/or registered options traders may direct some or all of their
participation to competing public orders (i.e., competing orders for
the accounts of non-broker-dealers) in the crowd. The Amex believes
that this proposed provision would help to result in customers
receiving allocations as described in Amendment No. 2, i.e., an
allocation beyond what is required by Exchange rules. In addition,
specialists and registered options traders must comply with the
requirement, noted above, that they trade for their own accounts only
when there is a lack of supply and demand.
It is the specialist's responsibility to allocate executed
contracts among all participants to a trade. This is generally a manual
process involving the inputting of participant information into the
Amex Order Display Book (``AODB'').\7\ However, as provided in proposed
Commentary .03(b) to Rule 950(n), whenever a trade occurs without the
participation of the specialist (e.g., the order is represented by a
floor broker with registered options traders as contra-parties to the
trade), the Floor Broker representing the contra-side of the trade
would distribute the executed contracts equally among the participating
registered options traders, unless a registered options trader's
portion of the disseminated quote size is less than an equal
distribution. That registered options trader would be given a less than
equal distribution and the remaining contracts would be allocated
equally among the remaining participants to the trade. In addition,
when only registered options traders are on both sides of a trade
(i.e., neither the specialist nor a customer is participating in the
trade), the registered options traders would allocate the executed
contracts among themselves in accordance with the same provisions
setting forth allocations by the specialist. (See proposed Rule 950(n),
Commentary .03(a)(iii) 1.-5.) In these situations, as well as others,
registered options traders are only required to participate up to their
portion of the Exchange's disseminated quote size. (See Amex Rule
958A).
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\7\ The Exchange recently implemented Quick Trade, an
enhancement to the Amex Order File (AOF) and AODB, which automates
in certain situations the process of allocating trades to
participating registered options traders. See Securities Exchange
Act Release No. 45974 (May 22, 2002) 67 FR 37886 (May 30, 2002).
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Depending upon the level of activity and volatility of a particular
option series, the level of participation of an individual registered
options trader in each options series will vary. Registered options
traders who regularly or only occasionally trade a particular option
series are currently expected to and will be required under the
proposed codification in Rule 950 (n), Commentary .03(a), to announce,
either at the start of the trading day, upon entry into the trading
crowd, or prior to the dissemination of a quotation, the number of
contracts for which they are willing to participate. These generally
known sizes will be aggregated into the size disseminated by the
Exchange pursuant to the firm quote rule (see Exchange Rule 958A and
Rule 11Ac1-1 under the Act, 17 CFR 240.11Ac1-1) so that the
disseminated quote in each option series would reflect the level of
participation by the specialist and each registered options trader.
While the specialist would not be required to
[[Page 5064]]
announce his size to the trading crowd, his size could be determined
from the disseminated quote size.
The Exchange states that over the years, it, as well as registered
options traders and specialists, have recognized that, given their
role, specialists should be entitled to a greater than equal share when
on parity with registered options traders. As a result, a practice has
developed in Amex trading crowds for many option classes to give the
specialist a greater than equal share when on parity with registered
options traders. The Exchange now seeks to codify this practice.
The Exchange believes that it is appropriate to provide a greater
participation to specialists because they have responsibilities that
registered options traders do not have. For example, they have a
continuous obligation to the market; to update and disseminate quotes
in all securities; to reflect all market interest in the displayed
quotes; and to act as contra-party on Auto-Ex at all times.\8\ In
addition, specialists incur costs that registered options traders do
not, such as the fixed staffing costs committed to market making in a
particular option whether it is actively traded or not, and the costs
associated with participating in educational and marketing functions to
attract order flow. In order to attract to the Exchange specialist
units that are willing to accept these responsibilities, the Amex
believes that it is necessary to provide specialists with an enhanced
participation. The Exchange also believes that it must provide these
enhanced participations in order to be competitive with other options
exchanges that currently offer enhanced participation to their
specialists and primary market makers.\9\ In the Exchange's view, the
enhanced participation would also give specialists the ability to
attract order flow to the Exchange and its customers with tighter, more
competitive markets. The Exchange states that, as a result, it would be
able to attract new specialist units and retain the services of
existing units.
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\8\ See also Amex Rule 26.
\9\ See Chicago Board Options Exchange Rule 8.80; Pacific
Exchange Rule 6.82, and Philadelphia Stock Exchange Rule 1014(g).
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The adoption of Commentary .06 to Rule 950(d) would provide that a
specialist's participation in the number of option contracts executed
varies depending upon the number of traders on parity. The proposed
distribution of option contracts between the specialist and the traders
on parity is as follows:
------------------------------------------------------------------------
Approximate
Approximate number of
number of option
option contracts
Number of traders on parity contracts allocated to
allocated to the traders
the specialist (as a group)
(percent) (percent)
------------------------------------------------------------------------
1 60 40
2-4 40 60
5-7 30 70
8-15 25 75
16 or more 20 80
------------------------------------------------------------------------
It should be emphasized that the above percentages would apply only
when the specialist and/or registered options traders are on parity and
would not include situations where a customer order is also on parity
with the specialist and registered options traders. It should be noted,
however, that a specialist cannot be on parity with an order for which
he is acting as agent, and registered options traders (who never act as
agents and trade only for their own accounts) cannot be on parity with
a customer when either establishing or increasing their position in the
option. In such situations, as provided in proposed subparagraph
(a)(iii)(A) of Commentary .03 to Rule 950(n), the specialist would
first allocate executed contracts to the customer and to the specialist
and/or those registered options traders on parity with the customer.
Any contracts that remain would be allocated among the specialist and
registered options traders in accordance with proposed subparagraph
(a)(iii)(B) of Commentary .03 to Rule 950(n), which would provide that
the specialist would receive a participation in the remaining contracts
in accordance with the table set forth above and in proposed Commentary
.06(i) to Rule 950(d).
In addition, as specified in Commentary .06(i) to Rule 950(d),
neither the specialist nor a registered options trader would be
allocated more executed contracts than the number of contracts
representing the specialist's or registered options trader's portion of
the aggregate quotation size that the responsible broker or dealer
would be obligated to communicate to the Exchange pursuant to Exchange
Rule 958A(c), except when the number of executed contracts to be
allocated exceeded the aggregate quotation size disseminated for that
options series. Thus, for the following two examples, assume that the
aggregate quotation size is 100 contracts, the specialist's portion is
25 contracts and the registered options trader's portion is 75
contracts.
First example. An off-floor to sell 80 contracts is submitted for
execution at the disseminated bid. Pursuant to the chart set forth
above, the specialist would be entitled to 60% of the executed
contracts. The specialist, however, would only be allocated 25 executed
contracts and the registered options trader would be allocated 55
executed contracts.
Second example. An off-floor order to sell 200 contracts is
submitted for execution at the disseminated bid. The specialist and
registered options trader would first be allocated 25 contracts and 75
contracts respectively, plus the specialist would receive 60% of the
remaining 100 contracts for a total of 85 contracts, and the registered
options trader would receive 40% for a total of 115 contracts.
Once the specialist determined his portion of the trade depending
upon the number of traders on parity, he would deduct his portion and
allocate the remaining contracts to the registered options traders
based upon: (i) An equal distribution, as described in the first
example below; (ii) filling the smallest size(s) first, as described in
the second example below; (iii) a combination based on filling the
smallest size first and equal distribution, as described in the third
example below; or (iv) prorated based on the registered options
traders' generally known sizes and the percentage those sizes represent
of their aggregate disseminated size, as described in the fourth
example below. The number of contracts in the incoming order would
determine which of the methods would be used in the allocation.
Assume the following information for each of the following four
examples: The disseminated bid for a particular option series has an
aggregate size of 1,000 contracts. The specialist is bidding for 650
contracts, and four registered options traders' generally known sizes
are as follows: Trader A--200 contracts; Trader B--100 contracts;
Trader C--30 contracts; and Trader D--20 contracts. There are no
customer orders participating in the bid.
First example. An off-floor order to sell 100 contracts is
submitted for execution at the disseminated bid. The specialist would
allocate the executed contracts as follows: The specialist would
receive 40 contracts (or 40%), and would allocate the remaining
executed contracts equally to each of the four traders 15 contracts (or
25% of the remaining 60 contracts).
Second example. An off-floor order to sell 500 contracts is
submitted for execution at the disseminated bid. The executed contracts
would be allocated by the specialist as follows: (i) The specialist
would receive 40% (200 contracts) of the 500 executed contracts
[[Page 5065]]
pursuant to the participation rates set forth above; and (ii) the
remaining 60% (300 contracts) would be divided among the registered
options traders based upon their generally known sizes with an attempt
to completely fill the smallest size(s) first, which in this example
would be 20 contracts for Trader D, 30 contracts for Trader C, and 100
contracts for Trader B. A total of 150 contracts would be deducted,
leaving 150 contracts to be allocated to Trader A.
Third example. An off-floor order to sell 200 contracts is
submitted for execution at the disseminated bid. The executed contracts
would be allocated by the specialist as follows: (i) The specialist
would receive 40% (80 contracts) of the 200 executed contracts pursuant
to the participation rates set forth above; and (ii) the remaining 60%
(120 contracts) would be divided among the registered options traders
based upon their generally known sizes with an attempt to completely
fill the smallest size(s) first and an equal distribution of any
remainder. Thus, the smallest sizes would be filled first--20 contracts
for Trader D and 30 contracts for Trader C--and the remaining 110
contracts would be divided equally, with 55 contracts distributed each
to Trader A and Trader B. Trader B would not receive 100 contracts (its
generally known size) because such size would be more than an equal
share of the remaining 110 contracts.
Fourth example. An off-floor order to sell 2,000 contracts is
submitted for execution at the disseminated bid. Pursuant to the firm
quote rule, the specialist and registered options traders, as the
responsible broker or dealers, would be obligated to execute order(s)
at the disseminated bid up to their disseminated size. The specialist
and traders would be able to execute the first 1,000 contracts at the
disseminated bid and execute the remaining contracts at a lower bid or
bids. If, however, the specialist and registered options traders have
determined, either individually or collectively (pursuant to Amex Rules
950(n), Commentary .02(b) and 958(h)(ii)), to execute the entire order
at their disseminated bid, the executed contracts will be allocated as
follows: (i) the specialist would receive 650 executed contracts
representing his portion of the aggregate quotation size, plus 40% of
the remaining 1,000 executed contracts pursuant to the participation
rates set forth above for a total of 1,050 executed contracts; and (ii)
the remaining 950 contracts would be divided among the registered
options traders proportionally based upon their generally known sizes,
the aggregate of which, in this example is 350 contracts: Trader A
would receive an allocation of approximately 542 contracts (200/350=57%
of the 950); Trader B would receive an allocation of approximately 275
contracts (100/350=29% of the 950 contracts); Trader C would receive an
allocation of approximately 81 contracts (30/350=8.5% of the 950
contracts); and Trader D would receive an allocation of approximately
52 contracts (20/350=5.5% of the 950 contracts).\10\
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\10\ The Commission notes that the allocation to each trader,
calculated above as a percentage of 950 contracts, is essentially
equivalent to the number of contracts each trader would receive by
allocating the contracts as follows: First, each trader would
receive his or her portion of the first 1000 contracts, based on the
size each trader was quoting. In addition to these contracts, each
trader would receive a percentage of the 600 contracts that would
remain out of the second 1000 contracts after the specialist's
percentage of 40% was allocated. The percentage each trader would
receive of those 600 contracts would be based on the percentage that
that trader's quote had represented out of the 350 contracts that
the traders were quoting in the aggregate originally.
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In addition, the proposed rule text sets forth a chart that
illustrates how various numbers of executed contracts would be
allocated to registered options traders after the specialist has
allocated portions to the customer and to the specialist. In each
example, the chart assumes the aggregate stated size is 100 contracts:
Number of Executed Contracts to be Allocated
----------------------------------------------------------------------------------------------------------------
Each participant's
stated size 200 90 70 50
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50 100 40 25 17
30 60 30 25 17
20 40 20 20 16
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The first column illustrates the situation when the number of
executed contracts exceeded the registered options traders' aggregate
stated size and each registered options trader had determined either
individually or collectively to participate for a larger size. The rest
of the columns illustrate situations when the number of executed
contracts was less than the registered options traders' aggregate
stated size: The second column illustrates the situation when two of
the three registered options traders' smaller sizes would be filled
first and the third registered options trader would be allocated the
remainder; the third column illustrates the situation when only one
registered options trader's smallest size would be filled and the
remaining executed contracts would be allocated equally between the two
remaining registered options traders; and the fourth column illustrates
the situation when all executed contracts would be allocated equally
among the participating registered options traders.
The Exchange notes that the Commission staff has also asked whether
a specialist or registered options trader can decline an allocation of
executed contracts. As noted above, the firm quote rule requires
specialists and registered options traders to be ``firm'' up to their
disseminated size unless one of the exceptions set forth in the rule
applies. If a specialist or registered options trader declined an
allocation or ``backed away'' from his disseminated size in whole or in
part, he would be in violation of the firm quote rule, investigated,
and sanctioned accordingly. If the other participants to the
disseminated quote size determined to increase the size of their
participation to cover for the declining specialist or registered
options trader, the executed contracts would be allocated based upon
the principles discussed above, that is, the specialist's participation
would be based upon one less registered options trader participating
and the allocation among the registered options traders would be
increased proportionately. Moreover, if the size of the incoming order
was greater than the disseminated size and one or more registered
options traders were not willing to participate in a size larger than
their disseminated size, then the additional executed contracts would
be allocated to the remaining participants based upon their
participation rights as set forth in proposed Rule 950(d), Commentary
.06 and the principles set forth in proposed Rule 950(n),
[[Page 5066]]
Commentary .03 which sets forth the participation percentages allocated
to the specialist and registered options traders based upon the number
of registered options traders participating on the trade.
In addition, the Exchange proposes to codify in Rule 933(d) its
procedures regarding the allocation of Auto-Ex executed options trades
\11\, which are automatically allocated on a rotating basis to the
specialist and to each trader that has signed on to Auto-Ex \12\. Auto-
Ex trades of ten contracts or fewer would be allocated to each Auto-Ex
participant as set forth below.
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\11\ Auto-Ex automatically executes public customer market and
marketable limit orders of a minimum of 10 and a maximum of 500
option contracts or less. Both the specialist and registered options
traders are contra-parties to the trades executed on the Auto-Ex
system.
\12\ At the start of each trading day, the order in which trades
are allocated to the specialist and traders signed on to Auto-Ex is
randomly determined.
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If an Auto-Ex trade is greater than ten contracts, the Auto-Ex
system divides the execution into lots or ten or fewer contracts and
allocates a lot to each Auto-Ex participant \13\. Each lot is
considered a separate trade for purposes of allocating trades within
Auto-Ex. The rotation is designed to provide that the allocation of
Auto-Ex trades between the specialist and traders signed on to Auto-Ex
in a given option class is as follows:
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\13\ For example, an option class that allows up to 50 contracts
to be executed through Auto-Ex would have a trade of 25 contracts
divided into lots of 10, 10 and 5.
------------------------------------------------------------------------
Approximate
Approximate number of
number of traders
trades allocated
allocated to the
Number of trades signed on to auto-ex to the traders
specialist signed on
throughout to auto-ex
the day throughout
(percent) the day (as
a group)
------------------------------------------------------------------------
1............................................. 60 40
2-4........................................... 40 60
5-7........................................... 30 70
8-15.......................................... 25 75
16 or more.................................... 20 80
------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that the proposed rule change, as amended, is
consistent with Section 6(b) of the Act \14\ in general and furthers
the objectives of Section 6(b)(5) of the Act \15\ in particular in that
it is designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transactions in securities, and to remove impediments to and perfect
the mechanism of a free and open market and a national market system.
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\14\ 15 U.S.C. 78f(b).
\15\ 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, as
amended, will impose any burden on competition.
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 or the amendments.
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, as amended, is consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. 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 the filing
will also be available for inspection and copying at the principal
offices of the Amex. All submissions should refer to File No. SR-Amex-
00-30 and should be submitted by February 21, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-2292 Filed 1-30-03; 8:45 am]
BILLING CODE 8010-01-P