[Federal Register Volume 69, Number 171 (Friday, September 3, 2004)]
[Notices]
[Pages 53963-53966]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2067]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50283; File No. SR-Amex-2003-82]
Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing of Proposed Rule Change and Amendment No. 1 Relating
to Auto-Match
August 27, 2004
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 September 9, 2003, 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 Amex. On August
16, 2004, the Amex amended the proposed rule change.\3\ 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\ See letter from Jeffrey P. Burns, Associate General Counsel,
Amex, to Nancy Sanow, Assistant Director, Division of Market
Regulation (``Division''), Commission, dated August 13, 2004
(``Amendment No. 1''). In Amendment No. 1, the Exchange modified
proposed Commentary .04 to Amex Rule 933 by providing that orders of
a broker-dealer that submitted a customer order for placement on the
limit order book, orders from affiliates of a broker-dealer, or
orders solicited by a broker-dealer from member or non-member
broker-dealers may not execute against the customer limit order on
the limit order book, unless the customer limit order is exposed on
the book for at least 30 seconds. The Exchange also represented
that, similar to the Exchange's automatic execution system (``Auto-
Ex''), orders executed through Auto-Match will be at the current
national best bid or offer (``NBBO'') so that such orders do not
trade through the NBBO.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to add Commentary .04 to Amex Rule 933 for
the purpose of enhancing the Auto-Match feature of the Amex Order
Display Book (``AODB'') and to amend Amex Rule 590 to include the
failure to sign on and use Auto-Match in the Minor Rule Violation Fine
System. Proposed new text is italicized, and proposed deletions are
[bracketed].
* * * * *
Rule 590. Minor Rule Violation Fine Systems
Part 1 General Rule Violations
(a)-(f) No Change.
(g) The Enforcement Department may impose fines according to the
following schedule for the rule violations listed below:
Failure to sign on and use the Auto-Match feature of the
Amex Options Display Book
* * * * *
Rule 933. Automatic Execution of Options Orders
(a) No Change.
(b) Broker-dealer orders entered through the Exchange's order
routing system will not be automatically executed against orders in the
limit order book unless permitted on a class-by-class basis by the
appropriate Options Floor Procedure Committee. 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 unless permitted
to be automatically executed on a class-by-class basis by the
appropriate Options Floor Procedure Committee.
(c) through (h) No Change.
Commentaries
.01 through .03 No Change.
[[Page 53964]]
.04. Auto-Ex eligible orders that by-pass Auto-Ex pursuant to Rule
933(f)(i)(F) will be automatically matched and executed with orders in
the limit order book representing the best bid or offer (``Auto-
Match''). Specialists are required to use the Auto-Match feature for
all option classes in which such specialist is registered. The failure
to sign on to Auto-Match is a rule violation subject to the Minor Rule
Violation Plan set forth in Rule 590(g). The Auto-Match feature
operates in the following manner:
If the size of the by-passed Auto-Ex eligible order is
less than the size of the customer limit order representing the best
bid or offer in the limit order book (the ``Auto-Match Order''), the
entire Auto-Ex eligible order will be executed against the Auto-Match
Order.
If the size of the by-passed Auto-Ex eligible order is
greater than the size of the Auto-Match Order, the Auto-Ex eligible
order will be executed against the Auto-Match Order for the number of
contracts of the Auto-Match Order. The remaining contracts of the Auto-
Ex eligible order would then be routed to the specialist for manual
handling or subject to Quick Trade, if applicable.
Auto-Match will not be engaged if Auto-Ex is disengaged
due to market delays, unusual markets or system malfunctions pursuant
to Rule 933(f)(i)(A)-(D).
In classes of options where broker-dealer orders are
permitted to be automatically executed against orders in the limit
order book pursuant to Rule 933(b) above, neither proprietary orders of
an order entry firm that submitted a customer order for placement in
the limit order book, orders from any affiliated firm with such order
entry firm, or orders solicited by the order entry firm from members or
non-member broker-dealers, may execute against the customer order on
the book unless the customer order on the book is exposed for at least
thirty (30) seconds. It shall be a violation of this Rule for any
member or member organization to be party to any arrangement designed
to circumvent this Rule by providing an opportunity for a customer,
member or non-member broker-dealer to execute immediately against an
agency order delivered to the Exchange, whether such orders are
delivered electronically or represented in the trading crowd by a
member or member organization.
.05 For purposes of the Rule, the term ``order entry firm'' means a
member organization of the Exchange that is able to route orders
through the Exchange's order routing system.
* * * * *
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 IV below. 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 April 2000, the Exchange enhanced the AODB to provide for
automatic matching and execution of limit orders on the specialist's
book representing the displayed best bid or offer in select option
classes (``Auto-Match''). The Auto-Match functionality provides that
limit orders residing on the AODB are automatically matched and
executed with market or marketable limit orders that have by-passed the
Exchange's Auto-Ex at the limit order's displayed best bid or offer.\4\
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\4\ Auto-Ex is by-passed pursuant to Amex Rule 933(f)(i)(F) in
the following situations: (1) Whenever the bid or offer in a
specific option series represents a limit order on the specialist's
book; (2) whenever a crossed or locked market causes an inversion in
the quote; and (3) whenever a better bid or offer is being
disseminated by another options exchange and the order is not
eligible for automatic price matching as set forth in Commentary
.01(b).
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As originally proposed, Auto-Match was to be used in selected less-
active option classes.\5\ At that time, the Exchange indicated that
after it had gained experience with Auto-Match, the program would be
reviewed in consultation with the membership to determine whether Auto-
Match should be expanded to additional option classes.\6\ The Exchange
represents that Auto-Match has never been used or expanded as
originally intended. The Exchange believes that the proposed
enhancements to Auto-Match and the evolving nature of the options
market supports an expansion of the feature as detailed below.
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\5\ See Securities Exchange Act Release No. 42652 (April 7,
2000), 65 FR 20235 (April 14, 2000).
\6\ Id.
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The Exchange submits that an expansion of Auto-Match is necessary
given the current competitive environment, and therefore, believes the
limited nature of Auto-Match should be expanded to provide faster, more
efficient execution of market and marketable limit orders as well as
more efficient handling of limit orders on the specialist's book. As a
result, the Exchange proposes to add Commentary .04 to Amex Rule 933 in
order to significantly enhance the current Auto-Match feature as
follows.
First, Auto-Match would be expanded to all option classes traded on
the Exchange. Second, specialist participation in Auto-Match would be
mandatory. Third, Auto-Match would be enhanced to provide the ability
to automatically match and partially execute an incoming Auto-Ex
eligible order when the disseminated limit order is for less contracts
than the incoming Auto-Ex eligible order. In such a situation, the
remaining contracts of the incoming Auto-Ex eligible order would be
routed to the specialist AODB ACK Box \7\ for manual handling. Fourth,
Auto-Match would be disengaged if the Exchange's Auto-Ex system is
disengaged or operated in a manner other than the normal manner, due to
market data delays, unusual markets, or system malfunctions pursuant to
Amex Rule 933(f)(i)(A)-(D). Finally, in classes of options where
broker-dealer orders are permitted to be automatically executed against
orders in the limit order book pursuant to proposed Amex Rule 933(b),
the Exchange proposes that neither proprietary orders of an order entry
firm that submitted a customer order for placement in the limit order
book, orders from any affiliated firm with such order entry firm, or
orders solicited by the order entry firm from members or non-member
broker-dealers could execute against the customer order on the book,
unless the customer order on the book is exposed for at least thirty
(30) seconds.\8\ Furthermore, the Exchanges proposes that it would be a
violation for any member or member organization to be party to any
arrangement designed to circumvent this rule by providing an
opportunity for a customer, member, or non-member broker-dealer to
execute immediately against an agency order delivered to the Exchange,
whether such orders are delivered electronically or represented in the
trading crowd by a member or member organization.\9\ The Exchange
believes that these changes to Auto-Match would benefit market
[[Page 53965]]
participants by providing greater certainty and efficiency in the
handling of options orders.
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\7\ The ``Acknowledgement Box'' or ``ACK Box'' is a feature of
the AODB that displays incoming market executable limit orders as
well as any other orders directed by filter settings. Orders in the
ACK BOX are displayed in the trading crowd by means of overhead
screens.
\8\ See Amendment No. 1, supra note 3.
\9\ Id.
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As previously stated, the AODB is the specialist's electronic book
which provides for the handling of options orders and the executing and
reporting of options transactions. Limit orders that better the current
displayed bid or offer become the Amex's displayed best bid or offer,
and it is at these prices that market orders to buy or sell are
executed. However, when the displayed best bid or offer is represented
by a limit order, market and marketable limit orders sent through the
Amex Order File (``AOF'') to Auto-Ex for execution at the displayed bid
or offer will by-pass Auto-Ex and be sent directly to the AODB for
handling and execution by the specialist with the limit order as
contra-party to the trade.\10\ The Auto-Ex system is by-passed in these
situations in order to prevent the specialist and any registered
options traders (``ROTs'') signed on as contra-parties to transactions
executed on Auto-Ex from trading ahead of customer limit orders on the
specialist's book, in violation of Amex Rules 950(c) and (d).
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\10\ As discussed above, this process of routing the Auto-Ex
order to the limit order book and executing it against a customer
limit order in the book is automated via Auto-Match. Telephone
conversation between Jeffrey P. Burns, Associate General Counsel,
Amex and Kelly Riley, Assistant Director, Division, Commission
(August 27, 2004).
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The Auto-Match feature currently operates as follows. If the
customer limit order representing the best bid or offer displayed in
the AODB (the ``Auto Match Order'') is a greater size than the inbound
order, the entire incoming order is executed against the Auto-Match
Order. The remaining contracts on the book continue to reside on the
AODB until canceled, replaced by a more competitive bid or offer, or
completely executed. If the inbound order is greater than the Auto-
Match Order represented on the AODB, the entire order is routed to the
specialist for manual handling and by-passes Auto-Match. For example,
if the best bid is represented by a limit order to buy 10 contracts in
an option class whose Auto-Ex eligible size is 20 contracts, a market
order of 20 contracts to sell will be routed to the AODB with the
entire order of 20 contracts executed by the specialist without the use
of the Auto-Match feature.\11\ The new proposal will provide that if
the size of an incoming order is greater than the Auto-Match Order,
Auto-Match would automatically match and execute the limit orders
residing on the AODB with the incoming order. Any remaining contracts
would be allocated via Quick Trade, if applicable, to the ROTs and
specialist,\12\ or routed to the specialist for manual handling.
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\11\ The Quick Trade feature of AODB, if applicable,
automatically allocates trades to ROTs and the specialist. If there
are remaining contracts of an Auto-Ex eligible order after Auto-
Match is completed, Quick Trade would distribute the remaining
excess among the ROTs and specialist. See Securities Exchange Act
Release No. 45974 (May 22, 2002), 67 FR 37886 (May 30, 2002) and
45180 (December 20, 2001) 66 FR 67585 (December 31, 2001).
\12\ For example, assume that the best bid is represented by a
limit order to buy 20 contracts in an option class in which the
Auto-Ex eligible size is 50 contracts. A market order of 50
contracts to sell would by-pass Auto-Ex and be routed to the AODB.
20 contracts would be matched and executed with the limit order on
the AODB, and the remaining 30 contracts would be allocated through
Quick Trade to the specialist and ROTs according to the allocation
ratios set forth in the Amex Rule. See Commentary .07 to Rule
950(d).
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Since the introduction of Auto-Match in April 2000, there have been
no option classes that have employed the Auto-Match system. Specialists
have chosen not to use Auto-Match based on the belief that the
inability to provide partial executions renders the system
unattractive. For example, if an inbound order exceeds the size of the
Auto-Match Order, the current system will send the entire order to the
specialist for manual handling. Because an eligible Auto-Ex order size
can be as large as 500 contracts (1,000 contracts for the QQQ option),
Auto-Match, in many cases, will not operate because the Auto-Match
Order will be less than the incoming order.
Therefore, the Exchange's proposal would modify Auto-Match to
provide a partial execution, so that if the inbound order is greater
than the Auto-Match Order, Auto-Match would execute the Auto-Match
Order and route the remaining contracts to the specialist AODB ACK Box
for manual handling. As noted above, the Quick Trade function of AODB,
if applicable, would automatically allocate the remaining contracts to
the ROTs and specialist based upon a pre-set allocation ratio. The
Exchange represents that its staff would conduct periodic reviews to
ensure that specialists are employing Auto-Match. In connection with
these reviews, any failure to sign on and use Auto-Match would be a
violation of Amex Rule 590 and handled by the Exchange's Enforcement
Department as part of the Minor Rule Violation Fine System. Finally,
the Exchange proposes to permit certain broker-dealer Auto-Ex orders to
execute against orders in the limit order book via Auto-Match.\13\ In
classes of options where broker-dealer orders would be permitted to be
automatically executed against orders in the limit order book pursuant
to Amex Rule 933(b), the Exchange's proposal would prohibit proprietary
orders of an order entry firm that submitted a customer order for
placement in the limit order book, orders from any affiliated firm with
such order entry firm, or orders solicited by the order entry firm from
members or non-member broker-dealers from executing against the
customer order on the book, unless the customer order on the book is
exposed for at least thirty (30) seconds.\14\
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\13\ Amex proposes that the appropriate Options Floor Procedure
Committee would determine in which classes broker-dealer orders can
be automatically executed against orders in the limit order book.
\14\ See Amendment No. 1, supra note 3.
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The Exchange believes that the proposed revision to Auto-Match
would provide for faster, more efficient executions of market and
marketable limit orders, as well as more efficient handling of limit
orders on the specialist's book. More importantly, it would also assure
that the limit order on the specialist's book would retain its priority
over the specialist and ROTs. Thus, the proposed rule change would
benefit customers using the Auto-Ex system, as well as those customers
whose orders are on the specialist's book.
2. Statutory Basis
The Exchange believes that its proposed rule change, as amended, is
consistent with section 6(b) of the Act,\15\ in general, and furthers
the objectives of section 6(b)(5) of the Act,\16\ in particular,
because it is designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transactions in securities, and to remove impediments to and perfect
the mechanism of a free and open market and a national market system.
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\15\ 15 U.S.C. 78f(b).
\16\ 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, as amended,
will impose no 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, as amended.
[[Page 53966]]
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 the 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. 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 [email protected]. Please include
File Number SR-Amex-2003-82 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 SR-Amex-2003-82. 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 Room. Copies of the
filing also will be available for inspection and copying at the
principal offices 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 available publicly. All submissions should refer to
File Number SR-Amex-2003-82 and should be submitted on or before
September 24, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-2067 Filed 9-2-04; 8:45 am]
BILLING CODE 8010-01-P