[Federal Register: January 26, 2006 (Volume 71, Number 17)]
[Notices]
[Page 4386-4387]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26ja06-81]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53148; File No. SR-Amex-2005-131]
Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing and Order Granting Accelerated Approval to a Proposed
Rule Change and Amendment No. 1 Thereto Relating to the Implementation
of a Quote Risk Manager
January 19, 2006.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 27, 2005, 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 and
II below, which Items have been prepared by the Exchange. On January
13, 2006, the Amex filed Amendment No. 1 to the proposed rule
change.\3\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons. In
addition, the Commission is granting accelerated approval of the
proposed rule change, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1, which replaced and superseded the original
filing in its entirety, made certain additions to the purpose
section and minor changes to the text of the proposed rule change.
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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 Exchange Rule 958--ANTE to codify a
change to the Exchange's ANTE System to allow specialists and
registered options traders (``ROTs'') to establish an options ``Quote
Risk Manager.'' The text of the proposed rule change, as amended, is
below. Proposed new language is in italics.
Rule 958--ANTE Options Transactions of Registered Options Traders
(a)-(h) No Change.
. . . Commentary
.01-.09 No Change.
.10 ANTE Participant Quotations
Automated Quotation Adjustments--An ANTE Participant may establish
parameters by which ANTE will automatically restate the prices of ANTE
Participant quotations in all series of an options class, at prices
specified by the ANTE Participant, if within an Exchange-specified time
period such ANTE Participant, in the aggregate, executes a number of
trades, specified by the ANTE Participant, for that options class. The
threshold number of trades shall be pre-established by the ANTE
Participant for each options class.
* * * * *
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 Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it had received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III 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
Exchange rules require option specialists to continuously provide
and maintain a two-sided market of at least ten contracts for every
series of every option class they are allocated.\4\ Although not
required, ROTs often continuously provide and maintain two-sided
markets in every series of every option class they are assigned.\5\
This continuous quoting obligation can, at times, subject specialists
and ROTs to unintended and often unacceptable levels of risk. Each
option class has at least twelve (12) series and many option classes
have significantly more series.\6\
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\4\ See Exchange Rule 950--ANTE (1).
\5\ See Exchange Rule 958--ANTE (h)(iii)(A).
\6\ For a typical equity option class, the Exchange lists both
puts and calls in four expiration months with three strike prices
within each expiration month. Many option classes also have puts and
calls with numerous strike prices in two long-term expiration
series. As the underlying stock price moves, additional strike
prices are added for each expiration. Options on volatile stocks can
have well over 100 different series trading at any given time. For
example, there are over 400 different series traded in Google
(GOOG).
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The Exchange's ANTE System, which provides for the nearly
simultaneous execution of orders in these numerous series, subjects
specialists and ROTs to executions at their quoted market with little
or no ability to adjust the quote in response to the number of
contracts traded at a given price, particularly if orders arrive in
quick succession from multiple sources in various related option
series. Accordingly, specialists and ROTs are vulnerable to the risk
that, through an error in their pricing decisions or because of market
developments, they will receive multiple executions at disadvantageous
prices across all of the related option series in an option class--all
before they are able to react and adjust their quotes. As a result, the
quality of the markets available to customers may suffer because, under
such circumstances, specialists and ROTs are likely to quote less
aggressively and limit the size of their quotes to avoid the attendant
risks and costs.
In order to protect specialists and ROTs from this unreasonable
level of risk of multiple and nearly simultaneous executions in related
options series, the Exchange has developed an enhancement to the ANTE
System which is referred to as the ``Quote Risk Manager.'' The ``Quote
Risk Manager'' would provide the ability for specialists and ROTs to
automatically restate their quote to an inferior price (i.e., the
widening of quotes).\7\ The result of this ``widened quote'' would be
to prevent further executions, since in the ANTE System trades are
subject to execution at a price no worse than the national best bid or
offer.\8\
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\7\ Specialists and ROTs may not exceed the legal width
requirements as set forth in Exchange Rule 958--ANTE(c).
\8\ The Exchange established time period shall initially be five
(5) seconds. If the Exchange were to change this time period it
would provide notice to the specialists and ROTs.
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[[Page 4387]]
The Exchange's proposed rule requires that a certain number of
trades occur in an options class before the automatic widening of
quotes takes place. Proposed Commentary .10 to Rule 958--ANTE provides
that a specialist or ROT may establish specific parameters by which
their quotations in all series of an options class are automatically
repriced. ANTE would widen the quotes at the specialist's or ROT's
predetermined price, if the specialist or ROT executes a set number of
trades, to be specified by the specialist or ROT, within an Exchange
established time frame, in that class.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act,\9\ in general, and furthers the objectives of
Section 6(b)(5) of the Act,\10\ in particular, in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, and, in general, to protect
investors and the public interest.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change would impose no
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received by the Exchange on
this proposal.
III. 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. 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 SR-Amex-2005-131 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
All submissions should refer to File Number SR-Amex-2005-131. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than 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 Section, 100 F Street,
NE., Washington, DC 20549. Copies of such filing also will be available
for inspection and copying at the principal office of the Amex. 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 SR-Amex-2005-131 and should be
submitted on or before February 16, 2006.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder, applicable to a national
securities exchange.\11\ In particular, the Commission believes that
the proposed rule change is consistent with Section 6(b)(5) of the
Act,\12\ which requires among other things, that the rules of the
Exchange are designed to promote just and equitable principles of
trade, to remove impediments to and perfect the mechanism of a free and
open market and a national market system, and, in general, to protect
investors and the public interest. The Commission notes that the
proposal does not alter the obligations of specialists and ROTs. The
Commission believes that the proposed rule change should provide
specialists and ROTs assistance in effectively managing their
quotations.
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\11\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\12\ 15 U.S.C. 78f(b)(5).
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The Amex has requested that the Commission find good cause for
approving the proposed rule change prior to the thirtieth day after
publication of notice thereof in the Federal Register. The Commission
notes that similar proposals to provide protection from risk for market
makers have been approved for other options exchanges.\13\ The
Commission believes that granting accelerated approval of the proposal
should provide specialists and ROTs with similar protections from the
risk associated with an excessive number of near simultaneous
executions in a single options class. Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2) of the Act,\14\ for approving
the proposed rule change, as amended, prior to the thirtieth day after
the date of publication of notice thereof in the Federal Register.
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\13\ See Securities Exchange Act Release Nos. 51049 (January 18,
2005), 70 FR 3756 (January 26, 2005) (SR-BSE-2004-52); 51050
(January 18, 2005), 70 FR 3758 (January 26, 2005) (SR-ISE-2004-31);
and 51740 (May 25, 2005), 70 FR 32686 (June 3, 2005) (SR-PCX-2005-
64).
\14\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (SR-Amex-2005-131) and Amendment
No. 1 thereto be, and hereby are, approved on an accelerated basis.
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\15\ 15 U.S.C. 78s(b)(2).
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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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-942 Filed 1-25-06; 8:45 am]
BILLING CODE 8010-01-P