[Federal Register: March 26, 2003 (Volume 68, Number 58)]
[Notices]
[Page 14722-14723]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26mr03-169]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47531; File No. SR-Amex-2002-33]
Self-Regulatory Organizations; American Stock Exchange LLC; Order
Approving Proposed Rule Change as Amended by Amendment No. 1 Thereto
Relating to Proprietary Order Routing Facilities for Amex Listed
Options and Notice of Filing and Order Granting Accelerated Approval to
Amendment No. 2 Thereto
March 19, 2003.
I. Introduction
On April 16, 2002, 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 to prohibit members from using facilities that are
not owned or operated by the Exchange to transmit orders electronically
from the Amex floor to other exchanges through a direct electronic
link, and to receive orders transmitted electronically to the Amex
floor from other exchanges through a direct electronic link for the
purchase or sale of Amex listed options after the complete
implementation of the permanent intermarket linkage in the options
market (``Options Linkage''). On April 30, 2002, Amex submitted
Amendment No. 1 to the proposed rule change.\3\ The proposed rule
change, as amended, was published in the Federal Register on May 8,
2002.\4\ The Commission received one comment letter on the proposed
rule change.\5\ On May 28, 2002, Amex submitted Amendment No. 2 to the
proposed rule change.\6\ On September 13, 2002, Amex submitted a
response to the ISE Letter.\7\ On December 30, 2002, Amex submitted an
additional response to the ISE Letter.\8\ This order approves the
amended proposed rule change, provides notice of filing of Amendment
No. 2 and grants accelerated approval to Amendment No. 2.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Geraldine M. Brindisi, Vice President and
Corporate Secretary, Amex, to Nancy J. Sanow, Assistant Director,
Division of Market Regulation (``Division''), Commission, dated
April 29, 2002 (``Amendment No. 1''). In Amendment No. 1, Amex
included the text of the proposed rule change.
\4\ See Securities Exchange Act Release No. 45864 (May 2, 2002),
67 FR 30985.
\5\ See letter from Michael J. Simon, Senior Vice President and
Secretary, International Securities Exchange, Inc. (``ISE''), to
Jonathan Katz, Secretary, Commission, dated May 28, 2002 (``ISE
Letter'').
\6\ See letter from Geraldine M. Brindisi, Vice President and
Corporate Secretary, Amex, to Nancy J. Sanow, Assistant Director,
Division, Commission, dated May 24, 2002 (``Amendment No. 2'').
\7\ See letter from Bill Floyd-Jones, Assistant General Counsel,
Amex, to Deborah Flynn, Division, Commission, dated September 13,
2002 (``Amex Initial Response'').
\8\ See letter from Bill Floyd-Jones, Assistant General Counsel,
Amex, to Deborah Flynn, Division, Commission, dated December 27,
2002 (``Amex Supplemental Response'').
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II. Description of the Proposal and Amendment No. 2
As originally filed, Amex proposed to prohibit members from using
facilities that are not owned or operated by the Exchange to transmit
orders \9\ electronically from the Amex floor to other exchanges
through a direct electronic link, and to receive orders transmitted
electronically to the Amex floor from other exchanges through a direct
electronic link for the purchase or sale of Amex listed options upon
the complete implementation of the Options Linkage.\10\
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\9\ These facilities cannot be used for listed equities and
Exchange-Traded Funds as the Intermarket Trading System serves as
the mechanism for routing trading interest in these securities
between exchanges.
\10\ The Commission approved the Plan for the Purpose of
Creating and Operating an Intermarket Options Linkage (``Linkage
Plan'') in July 2000. See Securities Exchange Act Release No. 43086
(July 28, 2000), 65 FR 48023 (August 4, 2000).
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In Amendment No. 2, Amex limited the proposed rule change to apply
only to facilities and services of another registered exchange on the
Amex floor that provide a direct electronic link to the other exchange.
The proposed rule change would not alter the current ability of members
and member organizations, with the prior written approval of Amex, to
use an electronic order routing facility or service owned and operated
by a registered broker-dealer to transmit orders for Amex listed
options to another registered exchange for execution.
III. ISE Letter and Amex Responses
ISE Letter
In the ISE Letter, ISE argues that Amex's proposal has significant
customer protection and competitive implications because it would
require an Amex floor broker that sees an ISE price that is superior to
the Amex price to route the order off-floor for transmission to the
ISE. ISE believes the delay caused by off-floor transmissions raises
serious risks that the ISE market may not be available when the
customer order reaches ISE. In addition, ISE believes the Amex floor
broker may determine that the delay makes the possibility of ISE
execution too risky and may execute the order on the Amex at the
inferior price. ISE points out that once the Options Linkage is
implemented, the Amex broker could incur trade-through liability if the
broker executes the order on the Amex at the inferior price.
ISE argues that in limiting members' ability to send orders
electronically to other markets, the Amex impedes competition because,
without this limitation, free market forces and price competition would
lead to the sending of order flow to exchanges displaying superior
prices. ISE stated its view that, under the proposal, market makers
could use only the Options Linkage to access competing exchanges
electronically, even if there may be more efficient methods of access,
and that the Options Linkage will provide only limited access because:
(1) Brokers will not have direct access to the Options Linkage; (2)
market makers are prohibited from using the Options Linkage as an order
delivery system for
[[Page 14723]]
customer orders; and (3) the number of principal orders market makers
may send through the Options Linkage is restricted. ISE claims that
Amex wrongly implies that the Options Linkage would render obsolete the
need for proprietary access systems.
Amex Initial Response
In the Amex Initial Response, Amex stated that it had addressed
ISE's concerns in Amendment No. 2. In Amendment No. 2, Amex clarified
that, after the Options Linkage is implemented, Amex members would
continue to have electronic access to ISE from the Amex floor through
broker-dealer order routing facilities; members would only be precluded
from using ISE terminals on the Amex floor.
Amex Supplemental Response
In the Amex Supplemental Response, Amex responded in greater detail
to ISE's concerns that the proposal is anti-competitive. Amex argues
that it is not required by any applicable law or regulation to
permanently maintain on its floor a separate, direct electronic link
operated by the ISE to transmit orders in options to that exchange.
In addition, Amex argues that more than adequate alternative means
exist for Amex member firms to route orders from the Amex floor to the
ISE. Even though its use is restricted, the Options Linkage would be
available. Furthermore, Amex's proposal would not alter the ability of
Amex member firms to route orders from the floor of Amex to ISE using
their own (or third party) proprietary order routing facilities. Amex
believes the proprietary routing systems available to most, if not
virtually all, Amex members on the Amex's floor are sufficiently fast
and efficient that they can essentially function as an exchange-to-
exchange system for orders sent from the floor of one exchange. Amex
points out that not one Amex member firm has complained that the
removal of the direct linkage with ISE when the Options Linkage is
implemented would make it difficult for it to route orders to ISE. With
respect to broker-dealers, they will have indirect access to the
Options Linkage by delivering an order to the Amex specialist, who will
have direct access to the Options Linkage.
IV. Discussion
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\ and, in particular, the requirements of
Section 6 of the Act \12\ and the rules and regulations thereunder. The
Commission finds specifically that the proposed rule change is
consistent with Section 6(b)(5) of the Act \13\ because it should
remove impediments to and perfect the mechanism of a free and open
market and a national market system and, in general, protect investors
and the public interest.
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\11\ In approving this proposed rule change, the Commission
notes that it has considered its impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\12\ 15 U.S.C. 78f.
\13\ 15 U.S.C. 78f(b)(5).
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Specifically, prohibiting Amex members from using the facilities
and services of another registered exchange on the floor of the Amex as
a direct electronic link to transmit orders electronically to the other
exchange for the purchase or sale of listed options once the Options
Linkage has been implemented is not an inappropriate burden on
competition. The Commission agrees that neither the Act nor Commission
rules require Amex to permit its members to have another exchange's
terminals on Amex's floor to provide direct electronic access to that
exchange. Finally, Amex represents that Amex members will be able to
access other exchanges, as they do today, through their own or another
registered broker-dealer's electronic order routing facility or
service, as well as through the Options Linkage.
The Commission also finds good cause for approving Amendment No. 2
prior to the thirtieth day after the date of publication of notice of
filing thereof in the Federal Register. Amendment No. 2 clarifies and
limits the scope of Amex's proposal in response to the ISE Letter.
Specifically, Amendment No. 2 addresses the concern raised in the ISE
Letter that the proposal would preclude an Amex member from using its
own or a third party's proprietary facility to access another exchange.
Accordingly, consistent with Section 19(b)(2) of the Act,\14\ the
Commission is accelerating approval of Amendment No. 2.
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\14\ 17 CFR 240.19b-4.
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V. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 2 to the proposed rule change,
including whether Amendment No. 2 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 Amendment No. 2 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 the Exchange. All submissions should refer
to File No. SR-Amex-2002-33 and should be submitted by April 16, 2003.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (SR-AMEX-2002-33), as amended by
Amendment No. 1, is approved, and that Amendment No. 2 to the proposed
rule change is 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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-7116 Filed 3-25-03; 8:45 am]
BILLING CODE 8010-01-P