[Federal Register: September 25, 2003 (Volume 68, Number 186)]
[Notices]
[Page 55422-55428]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25se03-99]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48495; File No. SR-Amex-2002-09]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendments No. 1 Through 11 Thereto by the American Stock
Exchange LLC Relating to Automated Quotation and Execution Systems
September 16, 2003.
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 February 12, 2002, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange.
[[Page 55423]]
The Exchange submitted Amendments No. 1, 2, 3, 4, 5, 6, 7, 8,\3\ 9,\4\
10,\5\ and 11 \6\ on February 25, 2002, May 6, 2002, May 29, 2002, June
18, 2002, July 17, 2002, September 16, 2002, January 21, 2003, July 15,
2003, July 25, 2003, August 26, 2003, and September 12, 2003,
respectively. The Commission is publishing this notice to solicit
comments on the proposed rule change, as amended, from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ For Amendments No. 1 through 8, the Exchange filed a new
Form 19b-4 each time, which replaced and superseded the original
proposal and all previous amendments in their entirety.
\4\ Letter from Claire P. McGrath, Senior Vice President and
Deputy General Counsel, Amex, to Elizabeth King, Associate Director,
Division of Market Regulation (``Division''), Commission, dated July
24, 2003 (``Amendment No. 9''). Amendment No. 9 transfers to the
list of rules enforced by the Amex Enforcement Department under
paragraph (g) of Amex Rule 590 the requirement set forth in proposed
Amex Rule 933, Commentary .04(d) that the specialist use his best
efforts to attempt to ensure that the registered options trader
responsible for disseminating the best bid or offer receives an
allocation of the next automatic execution.
\5\ The Exchange filed a new Form 19b-4, which replaced and
superseded the original proposal and all previous amendments in
their entirety.
\6\ Letter from Claire P. McGrath, Senior Vice President and
Deputy General Counsel, Amex, to Elizabeth King, Associate Director,
Division, Commission, dated September 11, 2003 (``Amendment No.
11''). Amendment No. 11 revises proposed changes to Amex Rule 590(g)
to clarify that a specialist who fails to properly allocate executed
contracts to the price-improving registered options trader must pay
restitution in amount calculated by multiplying the number of
contracts that should have been allocated to the price-improving
registered options trader by the number of underlying shares
represented by each contract, which would then be multiplied by half
of the spread between the option's bid and offer at the time the
order was executed.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex proposes to amend Amex Rule 933 to adopt provisions
concerning the Exchange's automated quotation and execution systems. In
addition, the Exchange proposes to amend Amex Rule 590(g) to provide
that a violation of Rule 933, Commentary .04(d) will be a part of the
Exchange's Minor Floor Violation Disciplinary System. The text of the
proposed rule change is set forth below. Additions are in italics.
American Stock Exchange LLC
Rule 590 Minor Rule Violation Fine System
Part 1
General Rule Violations
(a) through (f) No change.
(g) The Enforcement Department may impose fines according to the
following schedule for the rule violations listed below:
* * * * *
[sbull] Failure to use best efforts to attempt to ensure that the
next Auto-Ex execution is appropriately allocated to the price
improving registered options trader. In addition to the applicable fine
imposed for violations of this provision, the specialist shall also be
required to pay restitution in amount calculated by multiplying the
number of contracts that should have been allocated to the price-
improving registered options trader by the number of underlying shares
represented by each contract and that amount is then multiplied by half
of the spread between the option's bid and offer at the time the order
was executed. (Rule 933, Commentary .04(d).''
* * * * *
Rule 933 Automatic Execution of Options Orders
(a) through (g) No change.
* * * Commentary
.01 through .03 No change.
.04 (a) With respect to all option classes and series traded on the
Exchange, market and marketable limit orders otherwise eligible for an
Auto-Ex execution will by-pass Auto-Ex if the best bid or offer is
represented by a registered options trader in the trading crowd. The
price improving registered options trader shall have priority for and
be the contra-party to the next Auto-Ex execution at the disseminated
bid or offer up to the price improving registered options trader's
disseminated size provided:
(i) the price improving registered options trader has (a) inputted
directly his improved quote into the Electronic Entry Device (``EE
Device''); (b) instructed an Exchange Systems clerk to input the
improved quote; or (c) requested the specialist to disseminate his
improved quote. In each instance the inputted quote is disseminated
through the Exchange's Market Data System to the Options Price
Reporting Authority;
(ii) the price improving registered options trader is physically
located in the trading crowd at the time the improved quote is
inputted. To reduce the possibility of remote market making, registered
options traders will only be allowed to place one order or quote per
series on the same side of the market. If the registered options trader
leaves the trading crowd, he must remove his quotes in all series. If
the registered options trader fails to remove his quotes and an
incoming order executes against one or more of those quotes, the
registered options trader will not be able to participate in the trade.
Unless, however, the specialist is unable to otherwise allocate the
trade to other market participants at the same price, the registered
options trader responsible for causing the quote to be disseminated
shall be assigned as contra-party to the incoming trade;
(iii) the price improving registered options trader has announced
loudly and audibly in the crowd that he has improved the disseminated
bid or offer;
(iv) the specialist was alerted by the price improving registered
options trader or the Systems clerk to provide for the by-pass of Auto-
Ex;
(v) the price improving registered options trader has improved the
best bid or offer by an amount equal to at least the minimum price
variation set forth in Rule 952; and
(vi) the price improving registered options trader has disseminated
the minimum quote size. The minimum quote size of the improved bid or
offer shall be 20 contracts unless the Auto-Ex eligible size parameter
for that option class is less than 20 contracts, in which case the
minimum quote size would be the same as the lesser Auto-Ex eligible
size parameter for that option class.
(b) A registered options trader who has disseminated or caused to
be disseminated a price improving quote shall be the responsible broker
or dealer as that term is defined in Rule 958A and shall have all
obligations of a responsible broker or dealer as set forth in that
Rule. A price improving registered options trader may cancel his quote
in the same method in which it was entered: (i) Through the use of the
EE Device (regardless of whether inputted by the registered options
trader or the systems clerk), if that was the method in which the quote
was entered or through the specialist, if that was the method chosen;
(ii) by announcing loudly and audibly that he is canceling the quote;
and (iii) by alerting the specialist so that the Auto-Ex by-pass
feature can be removed.
(c) The specialist in a given option class may also disseminate or
cause to be disseminated his own individual, price improving quote
separate from the auto-quote, provided he complies with the provisions
of paragraph (a), subparagraphs (ii), (iii), (v) and (vi) above. The
specialist will not be able to use the EE Device to disseminate his
individual price improving quote.
(d) The specialist shall use best efforts to attempt to ensure that
the registered options trader responsible for disseminating the best
bid or offer (i) is allocated the next Auto-Ex execution in its
entirety if that execution is less than or equal to the price improving
registered options trader's disseminated size; or (ii) is allocated
that portion of the next Auto-Ex execution equal to the price improving
registered options
[[Page 55424]]
trader's disseminated size if that size is less than the size of the
next Auto-Ex execution. With respect to subparagraph (i), if the size
of the next Auto-Ex execution is less than the minimum quote size
established pursuant to paragraph (a)(vi) above, the price improving
registered options trader shall receive priority on subsequent Auto-Ex
executions until he has received the minimum quote size.
(e) If more than one registered options trader and/or the
specialist has disseminated or caused to be disseminated the same price
improving quote, priority will be established for the registered
options traders and specialist in the order in which the quotes were
loudly and audibly announced to the crowd. If, however, the sequence in
which the disseminated quotes were made cannot be reasonably
determined, priority will be afforded to the price improving registered
options traders and/or the specialist as a group. In accordance with
paragraphs (a)(vi) and (d)(i) above, the minimum quote size for the
price improving registered options traders and/or the specialist
participating as a group shall be 20 contracts unless the Auto-Ex
eligible size parameter for that option class is less than 20
contracts, in which case the minimum quote size would be the same as
the lesser Auto-Ex eligible size parameter for that option class.
Exchange rules shall cover allocations of contracts when more than one
registered options trader and/or the specialist has disseminated the
same price improving quote and time priority can not be established.
(f) The price improving registered options trader's quote will
retain priority until one of the following occurs: (i) Auto-Ex
executions deplete the disseminated size; (ii) an amount equal to the
minimum quote size has been allocated; (iii) the registered options
trader withdraws the quote; (iv) the quote is matched or improved by
the specialist's automated quotation system quote, provided specialists
using an Exchange-approved proprietary automated quotation updating
system have not programmed the system to immediately match or improve
the price improving registered options trader's quote; (v) the quote is
improved by another registered options trader; or (vi) the market is
improved by an order placed on the limit order display book.
(g) Notwithstanding the foregoing, (i) pursuant to Rule 111,
Commentary .07 and Rule 950(c) a registered options trader, when
establishing or increasing a position, may not retain priority over or
have parity with an off-Floor order and, thus, only registered options
traders closing or decreasing a position may be on parity with a
customer order; (ii) paragraph (d) above, supersedes Rule 126(e) and
(f), which provide that a trade removes all bids and offers from the
floor, to the extent that a price improving registered options trader's
priority is not satisfied with the next Auto-Ex execution(s); and (iii)
Rule 950(d), Commentary .05 regarding purchase priority and sale
priority, will apply to any remaining contracts in the improving
trader's disseminated size. Finally, Rule 958A shall apply to quotes
disseminated pursuant to this Commentary.
* * * * *
.04 Temporary Commentary--As of the date of the adoption of this
Commentary, the Exchange is in the process of developing a new
integrated trading system that will replace many of its existing floor
trading systems. Current systems, which include order routing,
automated quotation calculation and dissemination, specialist ``book''
functions including limit order display, automatic order execution and
allocation of trades are to be replaced by a fully integrated and
automated system. The system will continue to have an ``auto-quote''
function similar to XTOPS, which will be made available to both the
specialist and registered options traders for the inputting of
competitive quotes. The auto-quote function will be available to
registered options traders through their hand-held devices. Unlike
XTOPS, the specialist's auto-quote in a given option series will
represent only the specialist's trading interest. In order to enter
quotes for dissemination through the Exchange's Market Data System to
the Options Price Reporting Authority, the registered options trader
must (i) be physically present in the trading crowd; and (ii)
disseminate a quote for at least the minimum quote size. The required
minimum size of the improved bid or offer shall not be less than 10
contracts. The improved quotes will have an identifier so that orders
executed against such quotes can be allocated automatically to the
appropriate registered options trader. To reduce the possibility of
remote market making, registered options traders will only be allowed
to place one order or quote per series on the same side of the market.
If the registered options trader leaves the trading crowd, he must
remove his quotes in all series. If the registered options trader fails
to remove his quotes and an incoming order executes against one or more
of those quotes, the registered options trader will not be able to
participate in the trade. Unless, however, the system is unable to
otherwise allocate the trade to other market participants at the same
price, the registered options trader responsible for causing the quote
to be disseminated shall be assigned as contra-party to the incoming
trade.
The system, which will include algorithms established according to
Exchange rules of priority and parity for customers, and the
participation rights of registered options traders and specialists then
in effect, will automatically allocate executed trades to each market
participant. It is anticipated that these algorithms together with
Exchange rules will provide that: (i) When the specialist or registered
options trader (price improver) is quoting alone at the best bid or
offer, he will be automatically allocated 100% of incoming orders for
as long as he is alone at the best bid or offer and up to his
disseminated size; and (ii) if any other trading crowd participants
subsequently join or match the initial price improver's best bid or
offer, contracts executed at that price will be allocated in accordance
with priority and parity rules then in effect.
This Temporary Commentary will be replaced upon the adoption of
rules and procedures governing the new integrated trading system. It is
anticipated that this new system will begin to be implemented on the
trading floor in November 2003. When fully implemented, which is
expected to occur over an eighteen-month period, the system and the
provisions discussed above will apply to all option classes and series
traded on the Exchange.
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 statutory basis for, the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The Amex has prepared summaries, set forth
in sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In order to substantially increase incentives to quote
competitively and reduce disincentives for market
[[Page 55425]]
participants to act competitively,\7\ the Exchange is proposing a two-
step program: (1) Providing a method for registered options traders to
input and have disseminated quotes that better the current best bid or
offer, together with a means for ensuring that the next execution
occurring at that bid or offer is specifically allocated to the
registered options traders that caused the improved bid or offer to be
disseminated; and (2) the development and implementation of an
integrated system that will allow registered options traders through
the use of a hand-held auto-quote device to input quotes that better
the current market and provide for the automated allocation of trades
to that registered options trader. The first step could be implemented
upon approval of the proposed rule filing and the second step at a
future date to be discussed below.
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\7\ Subparagraph IV.B.h(i)(aa) of the Commission's September 11,
2000 Order (``Order'') requires the Exchange to ``adopt new, or
amend existing, rules concerning its automated quotation and
execution systems which substantially enhance incentives to quote
competitively and substantially reduce disincentives for market
participants to act competitively.'' 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).
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Registered Options Traders Use of the Electronic Entry Device
Given the number of series traded for each option class and the
necessity for the re-calculating and re-quoting of each series in
response to changes in the price of the underlying security, the
Exchange developed an automated quotation updating system known as
XTOPS. The specialist and registered options traders rely upon XTOPS to
calculate and disseminate a single immediately updated quotation for
each option series. XTOPS uses option valuation formulas (such as the
Black-Scholes Model) to generate options quotations based on a number
of variables.\8\ It is the specialist's responsibility to determine for
each option class the variables used in the XTOPS formula. However, the
quotations generated and displayed by XTOPS may result in firm quote
obligations of both the specialist and registered options traders to
buy or sell options at quoted prices and sizes.\9\ The dissemination of
an XTOPS quote can be overridden when a customer limit order represents
the best bid or offer or when a registered options trader chooses on a
series-by-series basis to better the disseminated bid or offer.
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\8\ These variables include the price of the underlying stock,
time remaining to expiration, interest rates (or ``cost to carry'',
the amount of interest on the money used to pay for the options
position during the period prior to expiration of the option
series), dividends (both declared and anticipated) and volatility.
\9\ See Rule 11Ac1-1 under the Act (``Quote Rule''), 17 CFR
240.11Ac1-1, and Amex Rule 958A.
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In order to more effectively and efficiently enable registered
options traders to cause their own quotes to be disseminated, the
Exchange proposes to expand the use of the Electronic Entry Device
(``EE Device''). The EE Device is currently used by Exchange-employed
systems clerks in busy option classes to input individual quotes from
the specialist on a series by series basis that better the quote being
calculated and disseminated by XTOPS. A quote entered using the EE
Device is sent directly to the Exchange's Market Data System for
immediate dissemination to the Options Price Reporting Authority. This
quote, when it betters the market being disseminated by XTOPS, will
override or displace the XTOPS quote. Today, the Exchange-employed
systems clerks generally receive their instructions to input quotes
from the specialist. The EE Device is also used by the systems clerks
to input trades that have been executed outside the Amex Options
Display Book.
The Exchange is now proposing to allow registered options traders'
direct access to the EE Device to input their own quotes for
dissemination as the best bid or offer. The EE Device would be
available for registered options traders use in all option classes
traded on the Exchange. In active option classes where there is
currently an Exchange-employed systems clerk, registered options
traders would either input their own quotes or instruct a systems clerk
to do so on their behalf. Only registered options traders physically
located in the trading crowd would be permitted to directly input
quotes into the EE Device or give such instructions to a systems clerk.
Once the registered options trader or systems clerk inputs the
quote into the EE Device, the proposed rule would require that: (i) The
price improving registered options trader announce loudly and audibly
in the crowd that he has improved the displayed market to ensure that
other crowd participants are aware that the market has been improved,
enabling other crowd participants to also quote competitively, adding
liquidity to the market; and (ii) the specialist be specifically
alerted so that a ``book bid or offer'' indicator is activated and the
next otherwise Auto-Ex eligible trade is routed directly to the AODB
for allocation to the registered options trader that caused the
improved quote to be disseminated. In addition to blocking an otherwise
eligible Auto-Ex order from being executed and allocated by the Auto-Ex
system, activation of the ``book bid or offer'' indicator would block
an XTOPS calculated quote that is worse than the registered options
trader's disseminated quote from being disseminated. Activation would
not, however, block a quote that is better than the registered options
trader's disseminated quote from being disseminated.
Once an execution occurs and/or the price improving registered
options trader is no longer entitled to priority, the specialist would
be required to remove the ``best bid or offer'' indicator so that Auto-
Ex eligible orders would again be sent to Auto-Ex and the dissemination
of XTOPS calculated quotes is resumed. The EE Device would not
automatically decrement the size of the disseminated quote when an
execution occurs. The quote would be required to be manually adjusted
to reflect any revision to the disseminated size.
The price improving registered options trader would be permitted to
cancel his quote at any time prior to the execution of a trade using
the same method in which it was entered--through the use of the EE
Device (regardless of whether inputted by the registered options trader
or the systems clerk), if that was the method in which the quote was
entered or through the specialist, if that was the method chosen. The
registered options trader would be required also to alert the
specialist that he is removing his quote, so the specialist can in turn
remove the ``book bid or offer'' indicator in XTOPS, and announce
loudly and audibly that he is canceling his quote.
Pursuant to the requirements of the Quote Rule and Exchange Rule
958A, the registered options trader as the responsible broker or dealer
is obligated to execute any customer order at his bid or offer up to
the disseminated size. To be relieved of that obligation with respect
to a specific quote, one of the exceptions to the Quote Rule must
apply, which generally provide that the responsible broker or dealer
must communicate a revised quotation to the Exchange prior to the
presentation of an order. Thus, a registered options trader using the
EE Device to disseminate quotes would continue to be obligated pursuant
to the Quote Rule until he has communicated a revised quote to the
Exchange through the removal or cancellation of the quote on the EE
Device.
Registered options traders would be required to improve the best
bid or offer by an amount equal to at least the
[[Page 55426]]
minimum price variation as set forth in Exchange Rule 952 for the quote
to be inputted into the EE Device. The minimum size quote that could be
inputted into the EE Device by or on behalf of a registered options
trader would be 20 contracts, unless the Auto-Ex eligible size
parameter for that option class is less than 20 contracts, in which
case the minimum quote size would be the same as the lesser Auto-Ex
eligible size parameter for that option class. Currently, the EE Device
disseminates a default size for each new quote. The disseminated size
may be set at a higher or lower amount or increased by the specialist
to reflect additional liquidity at that quote. The default size would
be set at the minimum quote size as discussed above.
There is at least one EE Device unit at every trading post and
multiple units at posts where active option classes trade. The Exchange
believes the number of devices currently in place on the trading floor
would be sufficient to provide registered options traders with ready
and easy access to a means for disseminating their quotes. However,
since this is a new use for the EE Device, the Exchange will monitor
the uses of the EE Device by registered options traders and activity in
the option classes at each trading post and will add additional devices
when necessary. The Exchange is able to install additional EE Devices
at the trading posts with, preferably, a one-day notice so that they
can be installed either before or after trading hours.
The specialist in a given option class may also disseminate or
cause to be disseminated his own individual, price improving quote
separate from the XTOPS calculated quote, provided he is physically
located at the trading post at the time he inputs his quote, has only
disseminated one quote per series on the same side of the market, has
announced loudly and audibly to the crowd that he has improved the
disseminated bid or offer, has improved the best bid or offer by an
amount equal to at least the minimum price variation set forth in Rule
952, and has disseminated the minimum quote size. The specialist would
not be able to use the EE Device to disseminate his individual price
improving quote since he already has the means to input a quote into
the Market Data System through XTOPS in the same manner used today to
disseminate a customer limit order. Once the specialist has caused his
individual quote to be disseminated, he will activate the ``book bid or
offer'' indicator and the next otherwise Auto-Ex eligible trade is
routed directly to the AODB for allocation to the specialist.
The specialist would be required to use best efforts to attempt to
ensure that the registered option trader responsible for disseminating
the best bid or offer receives an allocation of the next incoming order
for the amount he is entitled to pursuant to Exchange rules. The
Exchange believes that there are a number of safeguards that would help
ensure that the manual allocation of orders to the appropriate
registered options trader occurs. First, both the registered options
trader, the other members in the crowd and the Exchange employed
systems clerk, if present, would be able to hear the registered options
trader's alert to the specialist and be able to advise the specialist
whose quote was entered into EE Device and disseminated. Second, the
registered options trader inputting the quote would have a strong
incentive to step forward and claim the contracts for which he has just
bid or offered. Third, the quote entered into the EE Device may not be
representative of the specialist's market in that series and as such,
the specialist would have a strong incentive to determine which
registered options trader's quote against which the incoming order was
executed or else the specialist and other traders may be obligated.
A specialist who failed to use best efforts to attempt to ensure
that the next Auto-Ex execution is appropriately allocated to the price
improving registered options trader would be fined pursuant Amex Rule
590(g) of the Exchange's Minor Rule Violation Fine System. In addition
to the fine assessed pursuant to the Minor Floor Violation Fine System,
violations of this provision would require the payment of restitution.
Restitution would be calculated by multiplying the number of contracts
that should have been allocated to the price-improving registered
options trader by the number of underlying shares represented by each
contract, which would then be multiplied by half of the spread between
the option's bid and offer at the time the order was executed. For
example, the quote in XYZ options was 1.90 bid and 2.00 offered, and a
registered options trader entered the 1.90 bid for 20 contracts using
the EE Device. If the specialist failed to allocate the next incoming
order to sell executed at the registered options trader's bid, the
specialist would be obligated under the Minor Floor Violation Fine
System to pay restitution in the amount of $100 ($.05 x (20 x
100)=$100).
If more than one registered options trader and/or the specialist
has disseminated or caused to be disseminated the same price improving
quote, priority would be established for the registered options traders
in the order in which the quotes were announced loudly and audibly to
the trading crowd. If, however, the sequence in which the disseminated
quotes were made cannot be reasonably determined, priority would be
afforded to the price improving registered options traders and/or
specialist as a group. Exchange Rule 950(d), Commentary .06 and
Exchange Rule 950(n), Commentary .03 govern allocations of contracts
when more than one registered options trader and/or the specialist has
disseminated the same price improving quote and time priority cannot be
established.
However, pursuant to the proposed rule change, the price improving
registered options traders' quote would retain priority until one of
the following occurs: (i) Auto-Ex execution depleted the disseminated
size; (ii) an amount equal to the minimum quote size has been
allocated; (iii) the registered options trader withdraws the quote;
(iv) the quote is matched or improved by the specialist's automated
quotation system quote, provided specialists using an Exchange-approved
proprietary automated quotation updating system have not programmed the
system to immediately match or improve the price improving registered
options trader's quote; (v) the quote is improved by another registered
options trader; or (vi) the market is improved by an order placed on
the limit order display book. With respect to subparagraph (iv) above,
the Exchange will monitor the use of proprietary automated quotation
updating systems through the review of complaints from members in the
trading crowd as well as observations of Floor Officials and Exchange
personnel to determine if the system has been programmed to immediately
match or improve the price improving registered options trader's quote.
The Exchange notes that Exchange rules regarding customer priority
and parity would continue to apply to the allocation of trades pursuant
to the proposed rule change. Exchange Rule 111, Commentary .07 provides
that a registered options trader, when establishing or increasing a
position, may not retain priority over or have parity with an off-Floor
order. Thus, only registered options traders closing or decreasing a
position may be on parity with a customer order. As a result, the
specialist when allocating executed trades pursuant to the proposed
rule would continue to take into consideration the rights of customers
and the obligations of a
[[Page 55427]]
registered options trader to ``engage * * * in dealings for his own
account 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.''\10\ In addition, the
Exchange has a proposal pending with the Commission to provide that
specialists and registered options traders may not have priority over
or be on parity with a public customer order.\11\
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\10\ Amex Rule 958(c).
\11\ See SR-Amex-2003-07.
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The Exchange believes the expansion of the EE Device for direct use
by registered options traders and the adoption of rules requiring the
allocation of trades to quote-improving registered options traders will
substantially enhance incentives for registered options traders to
quote competitively by providing for a means to by-pass the Auto-Ex
system and the Auto-Ex allocation algorithm that may not reward the
improving registered options trader and allow the allocation of trades
to such registered options traders against quotes they caused to be
disseminated.
Integration of Automated Quote Dissemination and Trade Allocation
The Exchange is in the process of developing a new integrated
trading system that will replace many of its existing floor trading
systems. Current systems, which include order routing, automated
quotation calculation and dissemination, specialist ``book'' functions
including limit order display, automatic order execution and allocation
of trades are to be replaced by a fully integrated and automated
system. The system will continue to have an ``auto-quote'' function
similar to XTOPS, which would be made available to both the specialist
and registered options traders for the inputting of competitive quotes.
The auto-quote function would be available to registered options
traders through their hand-held devices. Unlike XTOPS, the specialist's
auto-quote in a given option series would represent only the
specialist's trading interest. In order to enter quotes for
dissemination through the Exchange's Market Data System to the Options
Price Reporting Authority, the registered options trader would be
required to: (i) Be physically present in the trading crowd;\12\ and
(ii) disseminate a quote for at least the minimum quote size. The
required minimum size of the improved bid or offer would not be less
than 10 contracts. The improved quotes would have an identifier so that
orders executed against such quotes could be allocated automatically to
the appropriate registered options trader.
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\12\ To reduce the possibility of remote market making,
registered options traders would only be allowed to place one order
or quote per series on the same side of the market. If the
registered options trader leaves the trading crowd, he would be
required to remove his quotes in all series. If the registered
options fails to remove his quotes and an incoming order executes
against one or more of those quotes, the registered options trader
would not be able to participate in the trade. Unless, however, the
system is unable to otherwise allocate the trade to other market
participants at the same price, the registered options trader
responsible for causing the quote to be disseminated would be
assigned as contra-party to the incoming trade.
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The system, which would include algorithms established according to
Exchange rules of priority and parity for customers, and the
participation rights of registered options traders and specialists then
in effect as set forth in Rule 950(d), Commentary .06, would
automatically allocate executed trades to each market participant. It
is anticipated that these algorithms together with Exchange rules would
provide that: (i) When the specialist or registered options trader
(price improver) is quoting alone at the best bid or offer, he would be
automatically allocated 100% of incoming orders for as long as he is
alone at the best bid or offer and up to his disseminated size; and
(ii) if any other trading crowd participants subsequently join or match
the initial price improver's best bid or offer, contracts executed at
that price would be allocated in accordance with rules of priority and
parity then in effect.
It is currently anticipated that the Exchange will be able to begin
its rollout of the new trading system during November 2003. In
addition, it is anticipated that the rollout period could be a lengthy
one. Since the system would not only be replacing systems in use today,
different elements of the system would be used by every trading floor
participant--specialists, registered options traders and floor brokers.
The Exchange anticipates that the rollout will be completed by the
first quarter of 2005. Once rolled out, the new system would be used
for all option classes traded on the Exchange.
The Exchange believes that its initial step of expanding the use of
the EE Device and its method for ensuring that trades executed at a
registered options trader disseminated quote are properly allocated
together with the development and implementation of a new integrated
trading system that would automate and integrate all of these
processes, would substantially enhance incentives to quote
competitively and substantially reduce disincentives for market
participants to act competitively. The Exchange believes that its
customers would continue to benefit from instantaneous, automatic
executions at the best available prices for option classes traded on
the Exchange.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6(b) of the Act \13\ in general and furthers the
objectives of section 6(b)(5) of the Act \14\ in particular in that it
is designed to prevent fraudulent and manipulative acts and practices
and to promote just and equitable principles of trade.
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Amex does not believe that the proposed rule change will impose
any burden on competition 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 Amex 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-
[[Page 55428]]
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 such filing will also be
available for inspection and copying at the principal office of Amex.
All submissions should refer to File No. SR-Amex-2002-09 and should be
submitted by October 16, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-24225 Filed 9-24-03; 8:45 am]
BILLING CODE 8010-01-P