[Federal Register: February 7, 2005 (Volume 70, Number 24)]
[Notices]
[Page 6471-6473]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07fe05-111]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51108; File No. 4-429]
Joint Industry Plan; Notice of Summary Effectiveness on a
Temporary Basis of Joint Amendment No. 14 to the Plan for the Purpose
of Creating and Operating an Intermarket Option Linkage Relating to the
Limitation in Liability for Filling Satisfaction Orders Sent Through
the Linkage at the End of the Trading Day, and Notice of Filing of Such
Amendment
January 31, 2005.
I. Introduction
On January 28, 2005, January 31, 2005, January 26, 2005, January
27, 2005, January 28, 2005, and January 28, 2005, the American Stock
Exchange LLC (``Amex''), the Boston Stock Exchange, Inc. (``BSE''), the
Chicago Board Options Exchange, Inc. (``CBOE''), the International
Securities Exchange (``ISE''), the Pacific Exchange, Inc. (``PCX''),
and the Philadelphia Stock Exchange, Inc. (``Phlx'') (collectively,
``Participants''), respectively, filed with the Securities and Exchange
Commission (``Commission'') pursuant to Section 11A of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 11Aa3-2 thereunder,\2\ an
amendment (``Joint Amendment No. 14'') to the Plan for the Purpose of
Creating and Operating an Intermarket Option Linkage (``Linkage
Plan'').\3\ In Joint Amendment No. 14, the Participants propose to
extend the pilot provision limiting Trade-Through \4\ liability at the
end of the trading day for an additional year, until January 31, 2006,
and to increase the limitation on liability from 25 contracts to 50
contracts. This order summarily puts into effect Joint Amendment No. 14
on a temporary basis not to exceed 120 days, and solicits comment on
Joint Amendment No. 14 from interested persons.\5\
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\1\ 15 U.S.C. 78k-1.
\2\ 17 CFR 240.11Aa3-2.
\3\ On July 28, 2000, the Commission approved a national market
system plan for the purpose of creating and operating an intermarket
options market linkage (``Linkage'') proposed by Amex, CBOE, and
ISE. See Securities Exchange Act Release No. 43086 (July 28, 2000),
65 FR 48023 (August 4, 2000). Subsequently, Phlx, PCX, and BSE
joined the Linkage Plan. See Securities Exchange Act Release Nos.
43573 (November 16, 2000), 65 FR 70851 (November 28, 2000); 43574
(November 16, 2000), 65 FR 70850 (November 28, 2000); and 49198
(February 5, 2004), 69 FR 7029 (February 12, 2004). On June 27,
2001, May 30, 2002, January 29, 2003, June 18, 2003, January 29,
2004, June 15, 2004, June 17, 2004, July 2, 2004, and October 19,
2004, the Commission approved joint amendments to the Linkage Plan.
See Securities Exchange Act Release Nos. 44482 (June 27, 2001), 66
FR 35470 (July 5, 2001); 46001 (May 30, 2002), 67 FR 38687 (June 5,
2002); 47274 (January 29, 2003), 68 FR 5313 (February 3, 2003);
48055 (June 18, 2003), 68 FR 37869 (June 25, 2003); 49146 (January
29, 2004), 69 FR 5618 (February 5, 2004); 49863 (June 15, 2004), 69
FR 35081 (June 23, 2004); 49885 (June 17, 2004), 69 FR 35397 (June
24, 2004); 49969 (July 2, 2004), 69 FR 41863 (July 12, 2004); and
50561 (October 19, 2004), 69 FR 62920 (October 28, 2004).
\4\ A ``Trade-Through'' is defined as a transaction in an
options series at a price that is inferior to the national best bid
and offer. See Section 2(29) of the Linkage Plan.
\5\ A proposed amendment may be put into effect summarily upon
publication of notice of such amendment, on a temporary basis not to
exceed 120 days, if the Commission finds that such action is
necessary or appropriate in the public interest, for the protection
of investors or the maintenance of fair and orderly markets, to
remove impediments to, and perfect mechanisms of, a national market
system or otherwise in furtherance of the purposes of the Act. See
17 CFR 240.11Aa3-2(c)(4).
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[[Page 6472]]
II. Description of the Proposed Amendment
In Joint Amendment No 14, the Participants propose to extend the
pilot contained in Section 8(c)(ii)(B)(2)(b) of the Linkage Plan, which
limits Trade-Through liability at the end of the trading day for an
additional year, until January 31, 2006, and to increase the limitation
on liability from 25 contracts to 50 contracts, per Satisfaction
Order.\6\ The proposed increase in the limit on liability would become
effective on February 1, 2005, when the current pilot expires. Pursuant
to the pilot as currently in effect, the Trade-Through liability of a
member of a Participant is limited to 25 contracts per Satisfaction
Order for the period between five minutes prior to the close of trading
in the underlying security and the close of trading in the options
class.
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\6\ A ``Satisfaction Order'' is defined as an order sent through
the Linkage to notify a Participant of a Trade-Through and to seek
satisfaction of the liability arising from that Trade-Through. See
Section 2(16)(c) of the Linkage Plan.
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III. Discussion
When the Participants proposed Joint Amendment No. 4 to the Linkage
Plan,\7\ the Participants represented to the Commission that their
members had expressed concerns regarding their obligations to fill
Satisfaction Orders (which may be sent by a Participant's member that
is traded through) at the close of trading in the underlying security.
Specifically, the Participants represented that their members were
concerned that they may not have sufficient time to hedge the positions
they acquire.\8\ The Participants stated that they believed that their
proposal to limit liability at the end of the options trading day to
the filling of 10 contracts per exchange, per transaction would protect
small customer orders, but still establish a reasonable limit for their
members' liability. The Participants further represented that the
proposal should not affect a member's potential liability under an
exchange disciplinary rule for engaging in a pattern or practice of
trading through other markets under Section 8(c)(i)(C) of the Linkage
Plan.
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\7\ See Securities Exchange Act Release Nos. 47028 (December 18,
2002), 67 FR 79171 (December 27, 2002) (Notice of Proposed Joint
Amendment No. 4).
\8\ See letter from Michael Simon, Senior Vice President and
General Counsel, ISE, to Annette Nazareth, Director, Division of
Market Regulation, Commission, dated November 19, 2002.
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The Commission approved the proposed amendment for a one-year pilot
\9\ to give the Participants and the Commission an opportunity to
evaluate: (1) The need for the limitation on liability for Trade-
Throughs near the end of the trading day; (2) whether 10 contracts per
Satisfaction Order is the appropriate limitation; and (3) whether the
opportunity to limit liability for Trade-Throughs near the end of the
trading day leads to an increase in the number of Trade-Throughs.
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\9\ See Securities Exchange Act Release Nos. 47298 (January 31,
2003), 68 FR 6524 (February 7, 2003) (Temporary effectiveness of
pilot program on a 120-day basis); and 48055 (June 18, 2003), 68 FR
37869 (June 25, 2003) (Order approving Joint Amendment No. 4). The
Commission subsequently extended the pilot program twice, until June
30, 2004 and January 31, 2005, respectively. See Securities Exchange
Act Release Nos. 49146 (January 29, 2004), 69 FR 5618 (February 5,
2004) (Order approving Joint Amendment No. 8); and 49863 (June 15,
2004), 69 FR 35081 (June 23, 2004) (Order approving Joint Amendment
No. 12).
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In the order approving Joint Amendment No. 4, the Commission stated
that in the event the Participants chose to seek permanent approval of
this limitation, the Participants must provide the Commission with a
report regarding data on the use of the exemption no later than 60 days
before seeking permanent approval (``Report'').\10\ The Commission
specified that the Report should include information about the number
and size of Trade-Throughs that occur during the last seven minutes of
the equity options trading day and during the remainder of the trading
day, the number and size of Satisfaction Orders that Participants might
be required to fill without the limitation on liability and how those
amounts are affected by the limitation on liability, and the extent to
which the Participants use the underlying market to hedge their options
positions.\11\ In a subsequent amendment to the Linkage Plan for the
purpose of extending the pilot, Joint Amendment No. 8, the Participants
represented that if they were to seek to make the limitation on Trade-
Through liability permanent, they would submit the Report to the
Commission no later than March 31, 2004.\12\
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\10\ See Order approving Joint Amendment No. 4, supra note 9.
\11\ Id.
\12\ See Order approving Joint Amendment No. 8, supra note 9.
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Following another extension of the pilot program, certain
Participants provided the Commission with portions of the data required
in the Report, but were unable to provide sufficient information to
enable the Commission to evaluate whether permanent approval would be
appropriate. The Commission extended the pilot program until January
31, 2005, to allow the limitation to continue in effect, with an
increase in liability to 25 contracts, to enable the Participants to
continue to gather and the Commission to evaluate the data relating to
the effect of the operation of the pilot program.\13\
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\13\ See Order approving Joint Amendment No. 12, supra note 9.
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Since this last extension of the pilot program, the Participants
have provided no additional data to the Commission to justify permanent
approval of the limitation on liability. The Participants have
represented that they are currently considering amendments to the
Linkage Plan that, if proposed and approved, could obviate the need for
the limitation on liability for Trade-Throughs at the end of the
trading day. Specifically, the amendments the Participants are
considering are intended to minimize the incidence of Trade-Throughs,
and subsequently decrease the incidence of Satisfaction Orders. The
Participants have represented that these amendments could be in effect
within a year, and at that time, Participants would either allow the
pilot program to lapse, or, if they believed that a continuation of the
limitation was appropriate, would discuss that matter with the
Commission staff. In this regard, the Commission notes that the
Participants must submit sufficient information to enable the
Commission to evaluate whether permanent approval would be appropriate
no later than 60 days prior to seeking permanent approval before the
Commission will consider permanent approval of the pilot program.
After careful consideration, the Commission finds that the proposed
amendment to the Linkage Plan seeking to extend the pilot provision
limiting Trade-Through liability for the period between five minutes
prior to the close of trading in the underlying security and the close
of trading in the options class for an additional year, and to increase
the limitation on liability from 25 contracts to 50 contracts per
Satisfaction Order, is consistent with the requirements of the Act and
the rules and regulations thereunder.\14\ Specifically, the Commission
finds that the proposed amendment to the Linkage Plan is consistent
with Section 11A of the Act \15\ and Rule 11Aa3-2 thereunder,\16\ in
that it is appropriate in the public interest, for the protection of
investors and the maintenance of fair and orderly markets.
Specifically, the Commission believes that extending the pilot program
and raising the limitation on liability to 50 contracts per
Satisfaction Order will afford the Participants the opportunity to
either
[[Page 6473]]
gather sufficient information to justify the need for the pilot program
or determine that the exemption from Trade-Through liability is no
longer necessary. The Commission believes that raising the limitation
on liability to 50 contracts per Satisfaction Order will increase the
average size of Satisfaction Order fills during the end of the options
trading day, thereby enhancing customer order protection. In addition,
the Commission finds, as described further below, that it is
appropriate to put into effect summarily Joint Amendment No. 14 upon
publication of this notice, on a temporary basis for 120 days. The
Commission believes that such action is appropriate in the public
interest, for the protection of investors and the maintenance of fair
and orderly markets because it will allow the pilot to continue without
interruption during the comment period.\17\ Therefore, the Commission
is extending the effectiveness of Section 8(c)(ii)(B)(2)(b) of the
Linkage Plan on a temporary basis for 120 days, with the increase in
the limitation in liability to 50 contracts per Satisfaction Order, for
an additional year, until January 31, 2006.
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\14\ In approving this Joint Amendment No. 14, the Commission
has considered its impact on efficiency, competition and capital
formation.
\15\ 15 U.S.C. 78k-1.
\16\ 17 CFR 240.11Aa3-2.
\17\ 17 CFR 240.11Aa3-2(c)(4).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether proposed Joint
Amendment No. 14 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 rule-comments@sec.gov. Please include
File Number 4-429 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number 4-429. 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 proposed Joint Amendment No. 14 that are
filed with the Commission, and all written communications relating to
proposed Joint Amendment No. 14 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
filings also will be available for inspection and copying at the
principal offices of the Amex, BSE, CBOE, ISE, PCX and Phlx. 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 publicly available. All
submissions should refer to File Number 4-429 and should be submitted
on or before February 28, 2005.
V. Conclusion
It is therefore ordered, pursuant to Section 11A of the Act \18\
and Rule 11Aa3-2(c)(4) thereunder,\19\ that Joint Amendment No. 14 is
summarily put into effect until May 31, 2005.
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\18\ 15 U.S.C. 78k-1.
\19\ See supra note 17.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-477 Filed 2-4-05; 8:45 am]
BILLING CODE 8010-01-P