1942 Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Notices

5NASD Rule 6610.

6NASD Rule 6620(a).

7See letter from Anne H. Wright, Associate

General Counsel, NASD, to James T. McHale, Esq.,

Office of Market Supervision, Division of Market

Regulation, Commission, dated January 6, 1997

(‘‘Clarification Letter’’).

8See Securities Exchange Act Release No. 38073

(December 23, 1996), 61 FR 68590 (December 30,

1996), at footnote 27.

9See Clarification Letter, supra note 7.

10 15 U.S.C. 78o–3. 11 17 CFR 200.30–3(a)(12).

Market, with the exception of listed

convertible debt. Therefore, the types of

Nasdaq securities subject to the fees

include: common, preferred, ADRs,

foreign, Canadian foreign, warrants,

rights, and units.

Because NASD rules also require such

prompt last sale reporting for

transactions involving all domestic,

Canadian, and ADRs that are nonNasdaq OTC Equity Securities,5 the

transaction fee applies to these

securities as well. This includes many

securities quoted in the OTC Bulletin

Board or in the National Quotation

Bureau’s ‘‘Pink Sheets.’’ Conversely,

foreign securities (other than Canadian

securities and ADRs) that are nonNasdaq OTC Equity Securities are not

subject to the SEC fee, because NASD

rules currently permit members to

report transactions in these securities on

the day after trade date (T+1).6

The fee also applies to transactions in

covered securities executed outside

normal hours. These transactions are

reported into ACT pursuant to NASD

Rules 4632(a)(4), 4642(a)(4), 6420(a),

and 6620(a)(3).7

The NASD also will be collecting the

SEC fee for odd-lot transactions and

transactions effected pursuant to the

exercise of an option on a covered

security. The NASD notes that although

these types of transactions generally are

not reported into ACT, they are

nonetheless subject to the SEC fee.8

With respect to transactions that result

from the exercise of a listed option

cleared through Options Clearing Corp

(‘‘OCC’’) where the underlying security

is subject to the fee (e.g., because it is

a Nasdaq security or is otherwise subject

to prompt last sale reporting), the fee

will be collected by OCC on behalf of

the NASD. With respect to odd-lot

transactions and transactions pursuant

to the exercise of a conventional or

‘‘OTC’’ option where the underlying

security is subject to the fee, there

currently is no automated means to

calculate and assess the fee. Therefore,

for these types of transactions only, the

NASD will require NASD clearing firms

to account and submit payment for such

activity by them and their respective

correspondents on a monthly basis. Selfclearing firms also will be required to

account and submit payment for such

activity on a monthly basis.9

Each NASD member firm will be

responsible for determining whether the

securities they trade are subject to

prompt last sale reporting requirements,

and thus subject to the transaction fee.

Nonetheless, the NASD recognizes that

member firms may experience difficulty

in modifying their systems by January 1,

1997 to distinguish between Canadian

and other foreign non-Nasdaq OTC

equity securities. To assist members in

determining which foreign non-Nasdaq

OTC Equity Securities are subject to the

transaction fee, the NASD will initially

make available a list of non-Nasdaq

Canadian securities on which it intends

to assess the transaction fee.

The transaction fee applies to all

transactions in covered securities by or

through any member otherwise than on

a national securities exchange,

regardless of the capacity in which the

member is trading. For transactions

between two NASD members, the NASD

generally will assess the fee on the

member on the sell side. For

transactions between an NASD member

and a customer, the NASD will assess

the fee on the NASD member.

The NASD believes that the proposed

rule change is consistent with the

provisions of Section 15A(b)(5) of the

Act,10 which requires, inter alia, that the

NASD’s rules provide for the equitable

allocation of reasonable fees among

members. The proposed fees are

consistent with the appropriations Act

and the Improvement Act, and are

similar to the transaction fees that have

applied to exchange transactions for

many years.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD does not believe that the

proposed rule change will impose any

inappropriate burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Other

No written comments were solicited

or received with respect to the proposed

rule change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Because the foregoing rule change

establishes or changes a due, fee, or

other charge imposed by the Exchange,

it has become effective pursuant to

Section 19(b)(3)(A) of the ACt and Rule

19b–4 thereunder. At any time within

60 days of the filing of the proposed rule

change, the Commission may summarily

abrogate such rule change if it appears

to the Commission that such action is

necessary or appropriate in the public

interest, for the protection of investors,

or otherwise in furtherance of the

purposes of the Act.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. 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, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the NASD. All submissions

should refer to the File No. SR–NASD–

96–57 and should be submitted by

January 27, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.11

[FR Doc. 97–861 Filed 1–13–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38149; File No. SR–NASD–

97–01]

Self-Regulatory Organizations; Notice

of Proposed Rule Changes by the

National Association of Securities

Dealers, Inc. Relating to SelectNet

Orders

January 10, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on January 8, 1997,

the National Association of Securities

Dealers, Inc. (‘‘NASD’’ or

‘‘Association’’), through its subsidiary,
Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Notices 1943

1See Securities Exchange Act Release No.

37619A (September 6, 1996), 61 FR 48290

(September 12, 1996) (‘‘Order Execution Rules

Adopting Release’’) adopting Rule 11Ac1–4 and

amendments to Rule 11Ac1–1 (‘‘Quote Rule’’)

(collectively ‘‘Order Execution Rules’’).

2See Securities Exchange Act Release No. 38008

(December 2, 1996), 61 FR 64550 (December 5,

1996) notice of NASD filing of proposed rule

change, file number 96–43.

The Nasdaq Stock Market, Inc., filed

with the Securities and Exchange

Commission (‘‘Commission’’ or ‘‘SEC’’)

the proposed rule change as described

in Items I, II, and III below, which Items

have been prepared by the NASD. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

Nasdaq requests the Commission to

find good cause pursuant to Section

19(b)(2) for approving the proposed rule

change prior to the 30th day after

publication in the Federal Register. The

Order Execution Rules become effective

January 20, 1997. The rule change

proposed in this filing is essential to

ensure the successful implementation

and operation of Nasdaq’s system

designed to facilitate the ECN Display

Alternative envisioned by the Order

Execution Rules. Accordingly, Nasdaq

requests the Commission to accelerate

the effectiveness of the proposed rule

change prior to the 30th day after its

publication in the Federal Register.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule

Pursuant to Section 19(b)(1) under the

Securities Exchange Act of 1934 (‘‘Act’’)

and Rule 19b–4 thereunder, the NASD

is submitting this rule filing to adopt

certain rules regarding The Nasdaq

Stock Market’s (‘‘Nasdaq’’) SelectNet

Service to clarify members’ obligations

regarding the use of the service as it will

operate under the Commission’s new

limit order display rule, Rule 11Ac1–4

(‘‘Display Rule’’) and amendments to

Rule 11Ac1–1(c)(5) (‘‘ECN

Amendment’’).1 (New Text is italicized.)

* * * * *

Conduct Rules

* * * * *

3300. TRADING

* * * * *

3380. SELECTNET SERVICE

(a) Cancellation of a SelectNet Order

No member shall cancel or attempt to

cancel an order, whether preferenced to

a specific market maker or electronic

communications network, or broadcast

to all available members, until a

minimum time period of ten seconds

has expired after the order to be

canceled was entered. Such ten second

time period shall be measured by the

Nasdaq processing system processing

the SelectNet order.

(b) Prohibition Regarding The Entry of

Conditional Orders

No member shall enter an order into

SelectNet that is preferenced to an

electronic communications network

covered by Rule 4623 that has any

conditions regarding responses to the

order, e.g., preferenced SelectNet orders

sent to electronic communications

networks shall not be all or none, or

subject to minimum execution size

above a normal unit of trading, or

deemed non-negotiable.

* * * * *

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

NASD 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. The NASD 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

On November 18, 1996, the NASD

and Nasdaq proposed several changes to

their rules and systems to address

changes to the Nasdaq Stock Market

stemming from the Commission’s

adoption of the Order Execution Rules. 2

The Display Rule requires the display in

a market maker’s quote of certain

customer limit orders and the ECN

Amendment requires a market maker to

display in its quote any better priced

order the market maker places into an

electronic communication network

(‘‘ECN’’). Alternatively, the ECN

Amendment provides an exception to

the market maker’s display obligation

that depends upon the ECN itself

displaying its best-priced orders in

Nasdaq and allowing brokers and

dealers to access such orders (‘‘ECN

Display Alternative’’).

Among the changes to Nasdaq’s rules

and systems to accommodate trading in

the new environment the Order

Execution Rules create, Nasdaq has

proposed a mechanism to allow ECNs to

take advantage of the ECN Display

Alternative by providing a linkage to

Nasdaq. A critical portion of Nasdaq’s

mechanism involves an existing Nasdaq

system, SelectNet, which will be the

means by which NASD members that

are not subscribers to a particular ECN

may access the ECN’s orders that are

being displayed in Nasdaq’s quote

montage pursuant to the ECN Display

Alternative. To access those orders,

NASD members will be permitted to

enter SelectNet preferenced orders, i.e.,

orders that are directed to a particular

ECN at its displayed price. Under the

terms of agreements Nasdaq will enter

into with each ECN choosing to utilize

this SelectNet linkage (‘‘ECN

agreements’’), the ECN will be required

to respond as soon as possible within

seconds to the preferenced order.

In the course of working with ECNs

on this access linkage via SelectNet,

Nasdaq and the ECNs have discovered

that problems occur when members

entering orders into SelectNet, whether

preferenced orders or broadcast,

immediately cancel such orders. In

addition, there are problems when

members impose conditions, restrictions

or limitations on the orders entered. For

example, an ECN operating an

automated response system develops

response difficulties when it receives an

all or none preferenced order. Nasdaq

proposes, through this proposed rule

change, to prohibit members from

entering conditional orders into

SelectNet when they are preferenced to

an ECN. Nasdaq plans to develop

system changes that will prevent the

entry of such conditional orders as soon

as possible.

Additionally, the immediate

cancellation of an order entered in

SelectNet causes significant problems

for the ECN that had received such

order and was attempting to accept that

order. All ECNs will be required,

pursuant to performance standards that

will be in the ECN agreements, to

operate an automated system for

accepting orders via SelectNet. The ECN

automated system must be able to

accept the SelectNet preferenced order

and send a message to Nasdaq and to

the ECN’s own customer indicating that

an execution has occurred. However,

because an execution does not occur

until the Nasdaq system processor

receives the ECN acknowledgement that

it has in fact accepted the order, a

member’s cancellation message may

arrive at the Nasdaq processor first.

Consequently, by the time the

acceptance message arrives at Nasdaq’s

processor for its acknowledgement, the

Nasdaq processor may have already

accepted the cancellation. This will

result in Nasdaq rejecting the execution

acknowledgement from the ECN and

hence harm the customer of the ECN
1944 Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Notices

3The NASD believes that the Commission has

expressed concern over the value of ‘ephemeral’

quotes, noting that while certain non-specialists in

the trading crowd may make bids or offers that

temporarily change the market’s quote for ‘‘an

instant in time,’’ they do not really become part of

the market quote because they are withdrawn

immediately if not accepted. Such price

information, if broadcast to the world via a

consolidated quotation system, is essentially

inaccessible, confusing to the market, and

ultimately, potentially misleading. See Securities

Exchange Act Release No. 14415 (January 26, 1978),

43 FR 4342, 4345 (February 1, 1978) release

adopting the Quote Rule. See also Securities

Exchange Act Release No. 15771 (April 26, 1979),

44 FR 26067 (May 4, 1979) and Securities Exchange

Act Release No. 18482 (February 11, 1982), 47 FR

7399 (February 19, 1982) adopting amendments to

the Quote Rule.

The NASD also maintains that, in determining

not to adopt its price improvement rule, proposed

Rule 11Ac1–5, the Commission stated that the

inaccessibility of quotes created pursuant to this

proposal weighed against its adoption at this time.

See Order Execution Rules Adopting Release.

Lastly, the NASD notes that in recent news report

that SEC Commissioner Wallman had concerns

with flickering quotes and caused the Commission

to rethink its proposed Rule 11Ac1–5 regarding

price improvement and a proposed safe harbor

mechanism that would have required members to

change their quotes for 30 seconds in an effort to

obtain price improvement for market orders when

spreads are wider than a minimum increment. See

Bloomberg, ‘‘SEC Commissioner Voices Concern

About Nasdaq Access Rule Plan,’’ August 14, 1996.

4See Securities Exchange Act Release No. 36310

(September 29, 1995), 60 FR 52792 (October 10,

1995) release proposing Order Execution Rules

which included a proposed price improvement

rule.

who believed an execution had

occurred. Nasdaq believes it is

appropriate, therefore, to require a

member that has entered any order into

SelectNet, a preferenced order or

broadcast, to wait at least ten seconds

before cancelling that same order. In

this manner, the ECN or market maker

operating a rapidly responding system

will not be adversely disadvantaged.

Nasdaq notes that the establishment

of a minimum life of an order at ten

seconds is its initial response to a

significant concern that it has had with

the use of SelectNet and the rapid

cancellation of orders. The entry of large

numbers of preferenced and broadcast

orders into SelectNet that are cancelled

within a very short time span creates

serious market quality concerns. Two

particular problems occur: (1) the rapid

entry and almost immediate

cancellation of SelectNet orders causes

a misleading appearance of activity that

is virtually impossible to access (i.e.

‘‘flickering’’ orders); and (2) because of

the system design of SelectNet, the large

number of order sent to the SelectNet

window on Nasdaq Workstation II

(‘‘NWII’’) rapidly scroll off the screen

before a market maker can see the order

and react to it (the ‘‘scroll-off’’ problem).

Two issues arise because of the many

SelectNet orders that are cancelled

almost as soon as they have been

entered. First, the market may be misled

by an appearance of significant activity

in a particular issue, when, in fact, very

few orders actually are accessible or

carry any real price discovery

information. The appearance of massive

numbers of buy or sell orders first

showing up on the screen could cause

market makers and other members to

believe that significant news on an issue

is causing the order flow, leading

market makers to adjust their quotations

and order entry firms to incorrectly

make order entry decisions based on

their observation of the heavy influx of

orders. The entry of these particular

SelectNet orders is essentially a

distracting and potentially harmful

‘‘noise’’ that disrupts the efficient price

discovery process. Indeed, because

these orders are so rapidly cancelled, it

appears that many of these orders were

not entered with the intention of being

executed.

Additionally, assuming that each

order is entered with the intention that

it is to be executed, the almost

immediate cancellation often prevents

other market participants from reacting

effectively to the display of customer

order interest. Nasdaq believes that the

flurry of SelectNet orders being entered

with almost immediate cancellations is

the functional equivalent of the

‘‘flickering quote’’ problem.3

Nasdaq believes that the immediate

cancellation of orders entered into

SelectNet poses problems similar to

those caused by flickering quotations.

Essentially, if orders entered through

SelectNet are immediately cancelled

they are thus virtually inaccessible and

therefore misleading. If orders entered

into SelectNet are to have any meaning,

particularly when they are broadcast to

the entire market, it seems that such

orders should have a reasonable

minimum period of life that permits

other market participants to access

them.

In addition to the problems caused by

the basic inaccessibility of such orders,

the unique design by which SelectNet

orders are displayed is adversely

effected by the heavy influx of such

orders and subsequent cancellations.

The NWII displays SelectNet orders on

a four-line window at the bottom. Each

SelectNet order occupies one line of the

four-line window. Thus, when more

than four orders are sent to a market

maker through SelectNet, the oldest

order scrolls off the display to be

replaced by the newest order. When

many SelectNet orders are sent through

the system it causes the SelectNet

window to scroll orders up and off the

four-line window. Consequently, it is

virtually impossible for the market

maker to effectively interact with the

orders. Even if a market maker were to

observe an order that it wanted to

interact with, it is likely that, due to the

high rate of SelectNet cancellations, the

order may be cancelled before the

market maker is able to act on it. The

scrolling, coupled with the almost

immediate cancellation of orders, leads

some market participants to regard

SelectNet as a less viable trading

mechanism.

The large influx of orders and

cancellations exacts a heavy toll on the

capacity of Nasdaq’s host processors

and the Enterprise-Wide Network II

(‘‘EWN’’). All of the components have

had to be upgraded significantly in the

last year, an upgrade driven in

significant part by the amount of traffic

caused by the SelectNet Broadcast

feature and the requirement to process

the messages generated in entry and

cancellation of SelectNet orders.

Nasdaq believes that the immediate

cancellation of SelectNet orders causes

a myriad of problems, any of which

warrants the imposition of a minimum

period for the life of a priced order

entered into SelectNet. At this juncture,

to prevent harmful market quality

effects, Nasdaq believes that orders

entered into SelectNet should be

accessible for at least a 10 second

minimum period of time before such

order should be permitted to be

cancelled.

Nasdaq has reviewed other possible

time periods for examples of minimum

time periods that permit reasonable

access. One such example is drawn from

the Commission’s proposed price

improvement rule which included a

proposed safe harbor.4 The proposed

safe harbor provided that to obtain price

improvement for a customer’s market

order when the spread in the best bid

and offer was greater than the smallest

quote increment (e.g., larger than 1/8th),

the market maker should change its

quote for 30 seconds to a price better

than the current bid or offer to see if it

could obtain a more favorable

execution. Another example of a

minimum time period is in the

Intermarket Trading System (‘‘ITS’’)

Plan where the exchanges and the

NASD have agreed to minimum time

periods for orders sent from one market

center to another via ITS. ITS rules

specifically provide that orders sent by

a specialist or market maker in one

market center to a specialist or market

maker in another market are

‘‘irrevocable’’ for either one or two
Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Notices 1945

5 17 CFR 200.30–3(a)(12) (1989).

1 15 U.S.C. 78s(b)(1) (1982).

2 17 CFR 240.19b–4 (1991).

minutes, depending on the time period

that the sending market establishes.

Nasdaq notes that once the Order

Execution Rules become effective,

experience may determine that the ten

second time period is too brief to

effectively address the market quality

concerns that present problems to

market markers and investors alike that

are seeking to trade at published prices

that are withdrawn before they can be

accessed. Nasdaq will continue to

review SelectNet cancellation patterns

to determine whether a longer minimum

period is necessary. If it determines that

market quality is being harmed by

cancellations that indicate such orders

are ephemeral, not executable or

perhaps fictitious or manipulative

Nasdaq will propose additional means

to eliminate the harm. Accordingly,

Nasdaq may revisit its initial

determination to establish 10 seconds as

the minimum life of a SelectNet order.

The NASD believes that the proposed

rule change is consistent with Section

15A(b)(6) of the Act and Rule 11Ac–1.

Section 15A(b)(6) requires that the rules

of a national securities association be

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

regulating, clearing, settling, processing

information with respect to, and

facilitating transactions in securities, 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. Specifically, by

imposing limits on SelectNet orders as

proposed herein, Nasdaq believes the

proposal will promote fair and orderly

markets and the protection of investors.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD believes that the proposed

rule change will not result in any

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

Comments were neither solicited nor

received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the publication of

this notice in the Federal Register or

within such other 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 doing so or (ii) to which

the self-regulatory organization

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.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. 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 NASD. All

submissions should refer to the file

number in the caption above and should

be submitted by [insert date 21 days

from the date of this publication].

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.5

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–986 Filed 1–10–97; 12:29 pm]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38127; File No. SR–PSE–

96–48]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Pacific Stock Exchange

Incorporated Relating to A.M.-

Settlement

January 6, 1997.

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

18, 1996, the Pacific Stock Exchange

Incorporated (‘‘PSE’’ 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 selfregulatory organization. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The PSE is proposing to amend its

rules to codify certain existing

procedures relating to a.m.-settled index

options. The text of the proposed rule

change is available at the Office of the

Secretary, PSE and at the Commission.

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

self-regulatory organization 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

places specified in Item IV below. The

self-regulatory organization 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

The Exchange is proposing to adopt

new Rule 7.8(e), entitled ‘‘A.M.-Settled

Index Options.’’ This rule provides that

the last day of trading for A.M.-settled

index option shall be the business day

preceding that last day of trading in the

underlying securities prior to

expiration. It states that the current

index value at the expiration of an A.M.-

settled option shall be determined on

the last day of trading in the underlying

securities prior to expiration. It states

that the current index value at the

expiration of an A.M.-settled option

shall be determined on the last day of

trading in the underlying securities

prior to expiration. It further provides

that the current index value shall be

determined by reference to the reported

level of such index as derived from first

reported sale (opening) prices of the

underlying securities on such day. In

addition, in any case where the security