[Federal Register Volume 67, Number 180 (Tuesday, September 17, 2002)]
[Notices]
[Pages 58654-58658]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-23531]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46479; File No. SR-Amex-2002-57]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval to Proposed Rule Change and Amendment
Nos. 1 and 2 Thereto by the American Stock Exchange LLC Relating to the
Automatic Execution of Broker-Dealer Options Orders
September 10, 2002.
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 June 24, 2002, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Amex. On
August 2, 2002, the Exchange filed Amendment No. 1 to the proposed rule
change.\3\ On
[[Page 58655]]
September 4, 2002, the Exchange filed Amendment No. 2 to the proposed
rule change.\4\ The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons and to
grant accelerated approval to the proposed rule change.
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\1\ 15 U.S.C 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Jeffrey P. Burns, Assistant General Counsel,
Amex, to Jennifer L. Colihan, Special Counsel, Division of Market
Regulation (``Division''), Commission, dated August 1, 2002
(``Amendment No. 1''). In Amendment No. 1, the Exchange: (1) Re-
numbered the last paragraph of Amex Rule 933 as ``(e)''; (2)
clarified that options orders that are routed to the specialist's
Amex Options Display Book (``AODB'') are manually executed; (3)
deleted a footnote relating to trading on the International
Securities Exchange; and (4) replaced the order designation
described as ``CUST/BD'' with ``BD.''
\4\ See Letter from Jeffrey P. Burns, Assistant General Counsel,
Amex, to Jennifer L. Colihan, Special Counsel, Division, Commission,
dated September 3, 2002 (``Amendment No. 2''). In Amendment No. 2,
the Exchange deleted the reference to ``other broker-dealers'' in
proposed subparagraph (d) of Amex Rule 933.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Amex Rule 933 to permit off-floor
and on-floor broker-dealer options orders to be executed, on a case-by-
case basis, through the Exchange's automatic execution system (``Auto-
Ex''). Below is the text of the proposed rule change. Proposed new
language is italicized; deletions are bracketed.
Rule 933. Automatic Execution of Options Orders
(a) Only non-broker/dealer customer orders shall be eligible for
execution on the Exchanges Automatic Execution System (Auto-Ex), except
that the Options Floor Trading Committee (``Floor Committee'') may
determine, on an issue-by-issue basis, to allow the following types of
orders to be executed on Auto-Ex:
(1) Broker-dealer orders; or
(2) Broker-dealer orders that are not for the accounts of market
makers or specialists on an exchange who are exempt from the provisions
of Regulation T of the Federal Reserve Board pursuant to Section
7(c)(2) of the Securities Exchange Act of 1934.
For the purposes of this Rule, the term broker/dealer includes
foreign broker/dealers.
(b) Broker-dealer orders entered through the Exchange's order
routing system will not be automatically executed against orders in the
limit order book. Broker-dealer orders may interact with orders in the
limit order book only after being re-routed to the Amex Options Display
Book (AODB) for execution.
(c) If the Floor Committee permits broker-dealer orders to be
automatically executed in an issue pursuant to this Rule, then it may
also permit the following with respect to such orders:
(1) The maximum order size eligibility for broker-dealer orders may
be less than the applicable order size eligibility for non-broker-
dealer customer orders; and
(2) Non-broker-dealer customer orders may be eligible for automatic
execution at the current best bid or offer displayed by another options
exchange pursuant to Commentary .01 while broker-dealer orders are not
so eligible.
(d) Exchange Registered Options Traders must assure that orders for
their own accounts are not entered on the Exchange and represented or
executed in violation of the following provisions: Rule 157 (Orders
With More Than One Broker), Rule 103(b) (Initiation of Transaction for
Joint Acct), Rule 111(c) (Concurrent Representation), and Section 9 of
the Securities Exchange Act of 1934 (Wash Sales).
(e) [(b)] The Exchange shall determine the size parameters of
orders eligible for entry into its Automatic Execution System (Auto-
Ex). An Auto-Ex eligible order for any account in which the same person
is directly or indirectly interested may only be entered at intervals
of no less than 15 seconds between entry of each such order in a call
class and/or a put class for the same option issue. Members and member
organizations are responsible for establishing procedures to prevent
orders in a call class and/or a put class for the same option issue for
any account in which the same person is directly or indirectly
interested from being entered at intervals of less than 15 seconds.
Commentary
.01 No change
.02 No change
.03 No change
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 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 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Amex initiated Auto-Ex in certain index options in the mid-
1980s and later extended its application to equity options.\5\ The
introduction of the Exchange's Auto-Ex system was a response to member
firm initiatives indicating that customers would gain confidence in the
listed options markets if quick, single-price executions at posted
prices were available.
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\5\ See Securities Exchange Act Release Nos. 22610 (November 8,
1985), 50 FR 47480 (November 18, 1985) (pilot program for XMI
options); 23544 (August 20, 1986), 51 FR 30601 (August 27, 1986)
(permanent approval of XMI pilot); and 24714 (July 17, 1987), 52 FR
28396 (July 29, 1987) (expansion to competitively traded options).
Auto-Ex is an automated execution system that enables member firms
to route public customer market and limit orders in options for
automatic execution at the bid or offer displayed at the time the
order is entered. According to the Exchange, Auto-Ex executes, at
the displayed bid or offer, customer market and immediately
executable limit option orders up to a specified number of contracts
routed through the Common Message Switch (``CMS'') and the Amex
Order File (``AOF''). There are, however, some situations in which
orders otherwise eligible for execution on Auto-Ex are routed to the
specialist's book, known as the ``AODB,'' for an execution. These
situations occur when (i) the best bid or offer is represented by a
limit order on the AODB, (ii) the best bid or offer is locked or
crossed, (iii) there is a better bid or offer being displayed by a
competing market or (iv) when certain systems allowable parameters
have been exceeded. Automatic executions through Auto-Ex are
currently available for public customer orders of 250 contracts or
less in all series of options traded on the Exchange except for
options on the QQQ. For QQQ options, automatic executions are
available up to 2,000 contracts for the two near term series and
1,000 contracts for all other series. See Securities Exchange Act
Release Nos. 45756 (April 15, 2002), 67 FR 19603 (April 22, 2002)
and 45828 (April 25, 2002), 67 FR 22140 (May 2, 2002).
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Due to technological advances over the past several years, a
greater number of customers and other market participants now have
obtained the ability to use a combination of high speed automated
market watch and electronic order routing systems to enter orders
directly and indirectly into Auto-Ex. In recent years, the Exchange
received Commission approval to enhance Auto-Ex by providing automatic
price matching and improvement for orders executed through Auto-Ex,
thereby eliminating the need for certain orders to be routed to the
specialist's AODB.\6\
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\6\ In particular, the recent Auto-Ex enhancements provide: (1)
automatic price matching when the best bid or offer for that series
being displayed by a competing market is within a specified number
of trading increments or ``ticks'' of the bid or offer being
displayed by the Amex; and (2) automatic price improvement on Auto-
Ex for orders within the established order size parameters when Amex
is displaying the best bid or offer and specialists and ROTs wish to
improve upon their own bid or offer by a specified number of trading
increments. See Commentary .01 to Amex Rule 933.
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For the purpose of permitting both on-floor and off-floor broker-
dealer orders access to the Exchange's Auto-Ex system, the Exchange is
proposing to permit entry of broker-dealer orders in Auto-Ex, subject
to Options Floor
[[Page 58656]]
Committee (the ``Floor Committee'') approval. The Floor Committee would
be permitted to approve a specialist's request for: (a) automatic
execution of broker-dealer orders, regardless of type, in particular
options issues; or (b) automatic execution of broker-dealer orders in
particular options issues, excluding those orders that are for the
accounts of registered market makers \7\ and specialists.
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\7\ Section 3(a)(38) of the Act defines ``market maker'' as any
specialist permitted to act as a dealer, any dealer acting in the
capacity of a block positioner, and any dealer who, with respect to
a security, holds himself out (by entering quotations in an inter-
dealer communications systems or otherwise) as being willing to buy
and sell such security for his own account on a regular or
continuous basis. 15 U.S.C. 78c(3)(38).
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Under the proposed rule change, if the Floor Committee permits
automatic execution of all broker-dealer orders, then any order,
regardless of type in a particular option issue, for the account of a
registered market maker or specialist, including orders for Amex
Registered Options Traders (``ROTs''), would be eligible for automatic
execution through Auto-Ex. However, execution of broker-dealer orders
would be provided outside of Auto-Ex when orders reside in the limit
order book.\8\ Specifically, if there is a customer limit order in the
in the limit order book that is priced at the national best bid or
offer (``NBBO''), then an inbound market or limit order for the account
of a broker-dealer will be re-routed to the specialist's AODB for
manual execution.
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\8\ Similar to the Pacific Exchange, Inc. (``PCX'') and the
Chicago Board Options Exchange, Inc. (``CBOE''), the Amex will not
automatically execute broker-dealer orders against orders residing
in the limit order book, but instead, such broker-dealer orders will
be routed to the AODB for manual execution. The PCX and CBOE both
prohibit broker-dealer orders from an automatic execution against
orders residing in the limit order book. Accordingly, at the PCX and
CBOE broker-dealer orders are required to be re-routed to a floor
broker for representation in the trading crowd in order to interact
with orders in the limit order book. In addition, the rules of the
PCX and CBOE both prohibit broker-dealer orders from being placed in
the limit order book. See Securities Exchange Act Release Nos. 45032
(November 6, 2001), 66 FR 57145 (November 14, 2001) (SR-PCX-00-05)
and 45967 (May 20, 2002), 67 FR 37888 (May 30, 2002) (SR-CBOE-2002-
22).
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Under the proposed rule, automatically executed broker-dealer
orders may be subject to certain limitations. First, broker-dealer
orders may have a smaller order size eligibility parameter for
automatic execution than public customer orders. Second, broker-dealer
orders in an issue may be ineligible for NBBO step-up while customer
orders in that issue are eligible for NBBO step-up pursuant to
Commentary .01 to Amex Rule 933.\9\ Accordingly, unless automatic step-
up executions on Auto-Ex are authorized by the Floor Committee for
eligible broker-dealer orders, such orders would be rejected and re-
routed to the specialist's AODB for manual execution.
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\9\ This would provide the Floor Committee with the discretion
to permit automatic ``step-up'' for eligible Auto-Ex broker-dealer
orders or distinguish between public customer orders and eligible
broker-dealer orders.
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The Exchange's electronic order routing system currently
distinguishes between customer and non-customer orders based upon the
provided order origin information. Consistent with Amex Rules, order
tickets are required to designate the type of account as part of the
terms for each order. For example, the current account type codes for
options transactions are as follows: (1) ``BD'' indicates a broker-
dealer order for a customer order; (2) ``CUST'' identifies a clearing
member's account that handles only transactions cleared and positions
carried by a clearing member on behalf of its customers; such an
account does not handle transactions of market makers and specialists,
which are cleared through their own accounts; (3) ``FIRM'' identifies a
clearing member's account that handles only transactions cleared and
positions carried on behalf of non-customers; (4) ``PRIN'' identifies a
member's market maker account that handles only transactions cleared
and positions carried on behalf of an Amex ROT; and (5) ``NMEM''
identifies a non-member's market maker account that handles only
transactions cleared and positions carried on behalf of a non-member
market maker. Currently, only orders with ``CUST'' designations, and
which are not designated ``BD,'' are permitted to be automatically
executed through Auto-Ex. The proposal would give the Floor Committee
the discretion to allow orders with ``BD,'' ``FIRM, ``PRIN,'' and
``NMEM'' designations to be automatically executed.
In connection with permitting the automatic execution of orders for
the accounts of Amex ROTs and other Amex broker-dealers, certain
limitations under current Amex rules will apply. First, Amex Rule 157
prohibits members, member firms or subsidiaries of such firms to use
more than one broker for the same order or orders for the same
principal. Amex Rule 157, designed to prohibit unfair competition,
would prohibit a member from entering an electronic order that could
match against an order for an affiliated account represented by a
broker or affiliated trader in the crowd.\10\ Second, Amex Rule 103(b)
prohibits on-floor transactions for joint accounts with non-members and
other persons over which the Exchange does not have jurisdiction.\11\
Therefore, a member cannot enter an order for a joint account in which
a non-member has an interest.\12\ Third, Amex Rules 111(c), 950(c) and
Commentary .06 to Amex Rule 958 prohibit a ROT, while on the floor of
the Exchange, from effecting transactions for his own account while
also handling as a broker off-floor orders in the same security during
the same trading session. Fourth, Amex Rules 111(d), 950(c), Commentary
.01 to Amex Rule 950(c) and Commentary .06 to Amex Rule 958 restrict
ROTs and market makers located on an exchange or trading floor other
than the Amex (``Competing Market Makers'') from retaining priority
over, or having parity with, an off-floor order when establishing or
increasing positions.\13\ Accordingly, pursuant to Amex Rule 950(c) and
Commentary .01 to Amex Rule 950(c), orders establishing or increasing
positions for ROTs and Competing Market Makers are required to be so
identified so that such orders are routed to the specialist's AODB for
manual handling. However, orders to liquidate or cover an existing
position could be permitted an automatic execution via Auto-Ex. Lastly,
the automatic execution of orders for the accounts of Amex ROTs and
other Amex broker-dealers would not be permitted if that same ROT or an
associated market maker or specialist has signed onto Auto-Ex in that
security as a ``wash sale'' may result in violation of Article V,
Section 4(c) of the Exchange's Constitution as well as section 9 of the
Act.\14\
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\10\ Telephone call between Jeffrey P. Burns, Assistant General
Counsel, Amex and Jennifer Colihan, Special Counsel, Division,
Commission, on August 13, 2002.
\11\ This prohibition does not apply to a joint account
maintained solely for effecting bona fide arbitrage or to any
purchase or sale by a specialist or odd-lot dealer for any joint
account permitted by Amex Rules 175(b) or 203.
\12\ Telephone call between Jeffrey P. Burns, Assistant General
Counsel, Amex and Jennifer Colihan, Special Counsel, Division,
Commission, on August 13, 2002.
\13\ Commentary .03 to Amex Rule 950(c) provides an exception
for orders for the account of a member or broker-dealer, which
establish or increase a position.
\14\ 15 U.S.C. 78i.
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These prohibitions against ``dual representation'' would be
violated in the following situation: A ROT in the XYZ trading crowd
enters an order in XYZ options for his own account with a floor broker.
The floor broker then represents the order while the market maker is
still present in the XYZ trading crowd. A similar violation would occur
if, a ROT in the XYZ trading crowd initiated an order in XYZ options
with his upstairs
[[Page 58657]]
brokerage firm and the brokerage firm routed the order to the Amex
where it was either automatically executed or routed to the AODB. In
either case, the ROT will have violated Amex Rule 111(c). Likewise, if
the ROT were trading in person for a joint account in that situation,
and that same ROT initiated the order on behalf of the same joint
account which order was then routed to the Amex for execution then that
ROT would have violated Amex Rule 111(c) and Amex Rule 103(b), which
provide a similar prohibition on concurrent representation when a ROT
is trading in a joint account. In addition, if a ROT enters an order
for his own account with a brokerage firm, and the order is routed to
the Amex where it is executed against the same ROT's account, there
will be a possible ``wash sale'' rule violation regardless of whether
the trade was subsequently nullified.
The Exchange believes that the proposal is consistent with the
Commission's approval of the Options Intermarket Linkage Plan (the
``Linkage Plan'').\15\ Although the Linkage Plan limits access to
eligible market makers on behalf of public customer orders and market
maker and specialist principal accounts, the Commission in the Linkage
Plan Release indicated its support for broader access between options
markets, i.e. non-market maker broker-dealers.\16\ The Exchange submits
that by potentially permitting all broker-dealers to utilize Auto-Ex,
the instant proposal furthers the goals of a national market system by
assuring that quotes can be promptly accessed by all market
participants.
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\15\ See Securities Exchange Act Release No. 43086 (July 28,
2000), 65 FR 48023 (August 4, 2000)(``Linkage Plan Release'').
\16\ Id. See also Amex Rule 940 (Interim Options Linkage
Program) and Securities Exchange Act Release No. 44271 (May 7,
2001), 66 FR 26887 (May 15, 2001).
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The Exchange believes that the proposed rule change to permit the
automatic execution of all broker-dealer orders, subject to Floor
Committee approval, is a legitimate means for the Amex to compete for
orders for the accounts of Competing Market Makers, as well as other
broker-dealers. The Exchange notes that the CBOE, PCX, and the
Philadelphia Stock Exchange, Inc. (``Phlx'') all have the ability to
automatically execute broker-dealer orders in varying degrees.\17\
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\17\ See supra note 8. The Phlx also received approval on a six-
month pilot basis permitting off-floor broker-dealer orders to have
electronic access to the specialist's limit order book and automatic
execution under certain conditions. See Securities Exchange Act
Release No. 45758 (April 15, 2002), 67 FR 19610 (April 22, 2002).
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2. Basis
The Exchange believes that the proposed rule change is consistent
with section 6(b) of the Act,\18\ in general, and furthers the
objectives of Section 6(b)(5),\19\ in particular, in that it is
designed to perfect the mechanisms of a free and open market and the
national market system, protect investors and the public interest and
promote just and equitable principles of trade by providing broker-
dealers access to the Exchange's Auto-Ex system. The Exchange believes
that this should provide additional incentives for Amex market
participants to quote competitively, and in turn, should result in
competitive pricing and enhanced liquidity on the Exchange and the
options markets. In addition, the Exchange further represents that the
proposed rule change is consistent with section 11(a) of the Act \20\
and Rule 11a2-2(T) thereunder.\21\
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
\20\ 15 U.S.C. 78k(a).
\21\ 17 CFR 240.11a2-2(T).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change 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.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change 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 such filing will also be
available for inspection and copying at the principal office of the
Amex. All submissions should refer to File No. SR-Amex-2002-57 and
should be submitted by October 8, 2002.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\22\ In
particular, the Commission finds that the proposed rule change is
consistent with the requirements of section 6(b)(5) of the Act \23\
which requires, among other things, that the rules of an exchange be
designed to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market, and
to protect investors and the public interest.\24\
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\22\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\23\ 15 U.S.C. 78f(b)(5).
\24\ The Exchange submitted a letter to the Division
representing that the proposal is consistent with section 11(a) of
the Act and Rule 11a2-2(T) under the Act. See letter to Catherine
McGuire, Chief Counsel, Division, Commission, from Jeffrey P. Burns,
Assistant General Counsel, Amex, dated June 27, 2002. In response to
the Exchange's request, Commission staff has provided interpretive
guidance to the Exchange under section 11(a) of the Act, 15 U.S.C.
78k(a). See letter from Paula R. Jenson, Deputy Chief Counsel,
Division, Commission, to Jeffrey P. Burns, Assistant General
Counsel, Amex, dated July 9, 2002.
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The Commission finds that it is consistent with the Act to allow
broker-dealer orders to be eligible for automatic execution through the
Exchange Auto-Ex system, subject to the approval for the Floor
Committee, and limitations on dual representation and wash sales. The
Commission believes that the proposal should allow the Exchange to
improve the efficiency with which orders for the accounts of broker-
dealers are executed. By providing prompt execution for broker-dealer
orders, the proposal also may help attract broker-dealer options orders
to the Exchange, and thus help improve the depth and liquidity of the
Exchange's options market. Further, the Commission notes that the Amex
represented that Auto-Ex has sufficient capacity to handle the
processing of the potential increased order flow.\25\
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\25\ Telephone call between Jeffrey P. Burns, Assistant General
Counsel, Amex and Jennifer Colihan, Special Counsel, Division,
Commission, on August 13, 2002.
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The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date
[[Page 58658]]
of publication of the notice thereof in the Federal Register. CBOE,
Phlx, and PCX all permit, to some extent, broker-dealer orders to be
executed on their automatic execution systems. Accordingly, the
Commission believes that no new issues are being raised by Amex's
proposed rule change. The Commission believes, therefore, that granting
accelerated approval of the proposed rule change is appropriate and
consistent with sections 6 and 19(b) of the Act.\26\
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\26\ 15 U.S.C. 78f and 78s(b).
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V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\27\ that the proposed rule change (SR-Amex-2002-57) is approved on
an accelerated basis.
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\27\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-23531 Filed 9-16-02; 8:45 am]
BILLING CODE 8010-01-P