Federal Register / Vol. 66, No. 111 / Friday, June 8, 2001 / Notices 30959

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

2 17 CFR 240.19b–4.

3 17 CFR 240.11Ac1–1.

4Securities Exchange Act Release No. 43591

(November 17, 2000), 65 FR 75439 (December 1,

2000) (‘‘Adopting Release’’).

5See letter from Claire P. McGrath, Vice President

and Special Counsel, Derivative Securities, Amex,

to Nancy Sanow, Assistant Director, Division of

Market Regulation (‘‘Division’’), Commission, dated

March 20, 2001 (‘‘Amex Amendment No. 1’’).

6See letter from Claire P. McGrath, Vice President

and Special Counsel, Derivative Securities, Amex,

to Nancy Sanow, Assistant Director, Division,

Commission, dated March 27, 2001 (‘‘Amex

Amendment No. 2’’).

7See letter from Madge M. Hamilton, Legal

Division, CBOE, to Nancy Sanow, Assistant

Director, Division, Commission, dated March 30,

2001 (‘‘CBOE Amendment No. 1’’). 8See letter from Michael Simon, Senior Vice

President and General Counsel, ISE, to Nancy

Sanow, Assistant Director, Division, Commission,

dated March 29, 2001 (replacing Form 19b–4 in its

entirety) (‘‘ISE Amendment No. 1’’). 9See letter from Michael D. Pierson, Senior Vice

President Regulatory Policy, PCX, to John Roeser,

Division, Commission, dated March 29, 2001 (‘‘PCX

Amendment No. 1’’). 10See letter from Richard S. Rudolph, Counsel,

Phlx, to Nancy J. Sanow, Assistant Director,

Division, Commission, dated March 15, 2001 (‘‘Phlx

Amendment No. 1’’). 11See letter from Richard S. Rudolph, Counsel,

Phlx, to Nancy J. Sanow, Assistant Director,

Division, Commission, dated March 28, 2001 (‘‘Phlx

Amendment No. 2’’). 12Securities Exchange Act Release No. 44145

(April 2, 2001), 66 FR 18662 (April 10, 2001) (‘‘Pilot

Approval Order’’).

13See letter from Meyer S. Frucher, Chairman and

Chief Executive Officer, Phlx, to Jonathan G. Katz,

Secretary, Commission, dated May 2, 2001 (‘‘Phlx

Letter’’) and electronic mail message from Mike

Ianni, sent May 17, 2001 (‘‘Ianni Letter’’).

14See letter from Claire P. McGrath, Vice

President and Special Counsel, Derivative

Securities, Amex, to Nancy J. Sanow, Assistant

Director, Division, Commission, dated May 30, 2001

(‘‘Amex Amendment No. 3’’). In Amex Amendment

No. 3, Amex requested permanent approval of its

pilot rules, codified an exemption granted by the

Commission regarding the treatment of foreign

broker-dealers, made conforming changes to better

reference the Quote Rule, and clarified that when

there is an error in size, the responsible broker or

dealer is obligated for ten contracts.

15See letter from Madge M. Hamilton, Legal

Division, CBOE, to Nancy Sanow, Assistant

Director, Division, Commission, dated May 31, 2001

(‘‘CBOE Amendment No. 2’’). In CBOE Amendment

No. 2, CBOE requested permanent approval of its

pilot rules, implemented non-substantive

reorganization to the rule text, and deleted a

provision proposed in its initial filing that had not

been approved as part of the Pilot Approval Order

relating to multiple orders from the same beneficial

owner.

16See letter from Madge M. Hamilton, Legal

Division, CBOE, to Nancy Sanow, Assistant

Director, Division, Commission, dated June 1, 2001

(‘‘CBOE Amendment No. 3’’). In CBOE Amendment

No. 3, CBOE clarified that it is requesting

accelerated approval of CBOE Amendment No. 2,

pursuant Section 19(b)(2) of the Exchange Act.

17See letter from Michael Simon, Senior Vice

President and General Counsel, ISE, to John Roeser,

Attorney, Division, Commission, dated May 29,

2001 (‘‘ISE Amendment No. 2’’). In ISE Amendment

No. 2, ISE requested permanent approval of its pilot

rules and deleted its provision relating to obvious

errors.

18See letter from Michael D. Pierson, Senior Vice

President Regulatory Policy, PCX, to John Roeser,

Attorney, Division, Commission, dated May 23,

2001 (‘‘PCX Amendment No. 2’’). In PCX

Amendment No. 2, PCX requested permanent

approval of its pilot rules and made a technical

change to its rule text regarding unusual market

conditions.

19See letter from Richard S. Rudolph, Counsel,

Phlx, to Nancy J. Sanow, Assistant Director,

Division, Commission, dated May 11, 2001 (‘‘Phlx

Amendment No. 3’’). In Phlx Amendment No. 3,

Phlx requested permanent approval of its pilot

rules, provided more detailed procedures for

determining and monitoring when quotes are not

firm, clarified in its rule text that Phlx will notify

specified persons when quotes are not firm through

the Options Price Reporting Authority (‘‘OPRA’’)

using an agreed upon indicator, clarified that it will

publish size for customer orders through OPRA and

on its website, and specified that the designee of the

Director of Surveillance may be any person

employed by the Phlx in the Options Surveillance

Department.

20See letter from Richard S. Rudolph, Counsel,

Phlx, to Nancy J. Sanow, Assistant Director,

Division, Commission, dated May 21, 2001 (‘‘Phlx

Amendment No. 4’’). Phlx Amendment No. 5

supersedes and replaces Phlx Amendment No. 4.

21See letter from Richard S. Rudolph, Counsel,

Phlx, to Nancy J. Sanow, Assistant Director,

Division, Commission, dated May 29, 2001 (‘‘Phlx

Amendment No. 5’’). In Phlx Amendment No. 5,

Phlx made conforming changes to its floor

procedure advices to reflect Phlx Amendment No.

3 and deleted a provision proposed in its initial

filing that had not been approved as part of the Pilot

Approval Order regarding the unbundling of orders

for the primary purpose of availing upon the

execution guarantee requirement.

22For ease of comparison and review, the

Commission has consolidated the Exchanges’

proposed amendments into one notice, which

combines and summarizes the main provisions of

such amendments.

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–44383; File Nos. SR–Amex–

2001–18; SR–CBOE–2001–15; SR–ISE–

2001–07; SR–PCX–2001–18; and SR–Phlx–

2001–37]

Self-Regulatory Organizations: Order

Aproving Proposed Rule Changes, as

Amended, and Notice of Filing and

Order Granting Accelerated Approval

of Amendment No. 3 to Proposed Rule

Changes by the American Stock

Exchange LLC, Amendment Nos. 2 and

3 by the Chicago Board Options

Exchange, Inc., Amendment No. 2 by

the International Securities Exchange

LLC, Amendment No. 2 by the Pacific

Exchange, Inc., and Amendments Nos.

3, 4, and 5 by the Philadelphia Stock

Exchange, Inc. Relating to the

Application of the Quote Rule to

Options Trading

June 1, 2001.

On March 15, 2001, the American

Stock Exchange LLC (‘‘Amex’’); on

March 30, 2001, the Chicago Board

Options Exchange, Inc. (‘‘CBOE’’); on

February 28, 2001, the International

Securities Exchange LLC (‘‘ISE’’); on

March 29, 2001, the Pacific Exchange,

Inc. (‘‘PCX’’); and on March 12, 2001,

the Philadelphia Stock Exchange, Inc.

(‘‘Phlx’’) (referred to collectively as

‘‘Exchanges’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’), pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Exchange

Act’’) 1 and Rule 19b–4 thereunder,2

proposed rule changes relating to the

implementation of sixty-day pilot

programs to conform the Exchanges’

rules to Rule 11Ac1–1 under the

Exchange Act (‘‘Quote Rule’’) 3 by the

compliance date of April 1, 2001.4

Amex submitted to the Commission

Amex Amendment No. 1 to its proposed

rule change on March 21, 2001 5 and

Amex Amendment No. 2 on March 28,

2001.6 CBOE filed CBOE Amendment

No. 1 to its proposed rule change on

March 30, 2001.7 ISE submitted ISE

Amendment No. 1 to its proposal on

March 30, 2001.8 The PCX submitted

PCX Amendment No. 1 on March 29,

2001.9 The Phlx submitted Phlx

Amendment No. 1 to its proposal on

March 16, 2001 10 and Phlx Amendment

No. 2 on March 29, 2001.11 Notice of the

Exchanges’ proposed rule changes, as

amended, and an order granting partial

accelerated approval of the proposed

rule changes on a sixty-day basis (‘‘Pilot

Programs’’) was published in the

Federal Register on April 10, 2001.12

The Commission received two comment

letters regarding the Exchanges’

proposed rule changes, as amended.13

On May 30, 2001, the Amex

submitted Amex Amendment No. 3 to

its pilot program; 14 on June 1, 2001, the

CBOE submitted CBOE Amendment No.

2 to its pilot program; 15 on June 1, 2001,

the CBOE submitted CBOE Amendment

No. 3 to its pilot program; 16 on May 30,

2001, the ISE submitted ISE

Amendment No. 2 to its pilot

program; 17 on May 23, 2001, the PCX

submitted PCX Amendment No. 2 to its

pilot program, 18 on May 11, 2001, the

Phlx submitted Phlx Amendment No. 3

to its pilot program; 19 on May 21, 2001,

Phlx submitted Phlx Amendment No.

4; 20 and on May 29, 2001, the Phlx

submitted Phlx Amendment No. 5 to its

pilot program.21 The Commission is

approving the Pilot Program on a

permanent basis, as amended, and

publishing this notice to solicit

comments on Amex Amendment No. 3,

CBOE Amendment Nos. 2 and 3, ISE

Amendment No. 2, PCX, Amendment

No. 2, and Phlx Amendment Nos. 3, 4,

and 5 from interested persons.22 As

discussed below, the Commission also

30960 Federal Register / Vol. 66, No. 111 / Friday, June 8, 2001 / Notices

is granting accelerated approval to the

amended proposals.

I. Text of the Proposed Amendments to

the Pilot Program

The Exchange propose to amend their

Pilot Programs to conform to the

requirements of the Quote Rule. The

text of the proposed rule changes

follows. Text added by amendments

since the publication of the Exchanges’

proposals is italicized and deleted text

is bracketed.

A. Amex Proposed Rule Text

Rule 958A. Application of the Firm

Quote Rule

(a) Definitions—(i) For purposes of

this rule the temrs ‘‘aggregated

quotation size’’, ‘‘best bid and best

offer’’, ‘‘bid and offer’’, ‘‘quotation size’’,

‘‘quotation vendor’’, ‘‘reported

security’’, ‘‘listed option’’, ‘‘option

class’’, ‘‘option series’’, and ‘‘trading

rotation’’ shall have the meanings set

forth in SEC Rule 11Ac1–1.

(ii) For purposes of this rule and SEC

Rule 11Ac1–1 as applied to the

Exchange and its members, the term

‘‘responsible broker or dealer’’ shall

mean, with respect to any bid or offer

for any listed option made available by

the Exchange to quotation vendors, the

specialist and any registered options

traders constituting the trading crowd in

such option series shall collectively be

the responsible broker or dealer to the

extent of the aggregate quotation size

specified.

(b) Dissemination Requirements of the

Exchange—(i) WIth respect to paragraph

(b) of SEC Rule 11Ac1–1 [and except as

set forth in Commentary .01 of this

rule], the Exchange shall, at all times it

is open for trading:

(A) Collect, process and make

available to quotation vendors the best

bid, the best offer, quotation sizes and

aggregate quotation sizes associated

therewith for each option series that is

a reported security and for which a

responsible broker or dealer is obligated

to execute any customer order as set

forth in paragraph (c)(1)(A) below; and

(B) Shall for each listed option class,

establish [by rule] and periodically

published the quotation size for which

the responsible broker or dealer is

obligated to execute an order for the

account of a U.S. registered or foreign

registered broker or dealer to buy or sell

an option series that is a reported

security at its publish bid or offer as set

forth in paragraph (c)[(ii)] (i)(B) below.

The exchange may collect, process and

make available to quotation vendors a

best bid or best offer determined by an

automated quotation system.

(ii) The Exchange’s obligations to

collect, process and make available data

as set forth above shall not include:

(A) collecting, processing or making

available any such bid or offer which is

executed immediately after being made

in the crowd and any such bid or offer

which is cancelled or withdrawn if not

executed immediately after being made;

or

(B) data communicated during any

period when trading in such reported

security has been suspended or halted;

prior to the commencement of trading in

such reported security on any trading

day; or during a trading rotation.

[The minimum quotation size made

available to quotation vendors

established by rule and published by the

Exchange shall be ten contracts for each

option series.]

(c) Obligations of a Responsible

Broker or Dealer—(i) Pursuant to SEC

Rule 11Ac1–1 each responsible broker

or dealer for each series of each listed

option class shall promptly

communicate to the Exchange its best

bid, best offer, quotation size and

aggregate quotation size. No responsible

broker or dealer shall communicate a

quotation size or aggregate quotation

size for less than ten contracts. This

obligation may be fulfilled by the use of

an automated quotation system.

[i](A) Subject to the provisions of

paragraph (d) of this rule, each

responsible broker or dealer shall be

obligated to execute any customer order

in an option series in an amount up to

its published quotation size.

[ii](B) Subject to the provisions of

paragraph (d) of this rule, each

responsible broker or dealer shall be

obligated to execute any order for the

account of a U.S. registered or foreign

broker or dealer in a listed option in an

amount up to the quotation size

established [by rule] and periodically

published by the Exchange which

quotation size shall be for at least one

contract.

[iii](C) Subject to the provisions of

paragraph (d) of this Rule, each

responsible broker or dealer shall

comply with the Thirty Second

Response provisions set forth in

paragraph (d)(3) of SEC Rule 11Ac1–1.

(ii) Non responsible broker or dealer

shall be obligated to execute a

transaction for any listed option as

provided in paragraph (c)(i) when:

(A)(1) Prior to the presentation of an

order to sell (buy), a responsible broker

or dealer has communicated to the

exchange, a revised quotation size;

(2) At the time an order to sell (buy)

is presented, a responsible broker or

dealer is in the process of effecting a

transaction in such class and/or series

of option, and immediately after the

completion of such transaction it

communicates to the Exchange a

revised quotation size, such responsible

broker or dealer shall not be obligated

by paragraph (c)(i) of this Rule to sell

(buy) that option in an amount greater

than such revised quotation size.

(3) Before the order sought to be

executed is presented, a responsible

broker or dealer has communicated to

the Exchange a revised bid or offer; or

(4) At the time the order sought to be

executed is presented, a broker or dealer

is in the process of effecting a

transaction in such class and/or series

of option, and, immediately after the

completion of such transaction, a

responsible broker or dealer

communicates to the exchange a revised

bid or offer; provided, however, that the

responsible broker or dealer shall

nonetheless be obligated to execute any

such order as provided in paragraph

(c)(i) at its revised bid or offer in any

amount up to its published quotation

size or revised quotation size; or

(B) The order for the purchase or sale

of a listed option is presented during a

trading rotation in that listed option.

(d) Use of Unusual Market

Exception—Nothwithstanding

paragraphs (b) and (c) above and

pursuant to paragraph (b)(3) of SEC Rule

11Ac1–1, if the Exchange determines, in

accordance with the procedures set

forth below, that the level of trading

activity or the existence of unusual

market conditions is such that the

Exchange [cannot] is incapable of

collecting, processing and making

available to quotation vendors quotation

data in a manner which accurately

reflects the current state of the market

at the Exchange, the Exchange shall

immediately notify the persons

specified in paragraph (b)(3) of SEC

Rule 11Ac1–1 [below] and, upon such

notification, the obligation imposed

upon Exchange members under

paragraph (c)(2) of SEC Rule 11Ac1–1

and the Exchange under paragraphs

(b)(1) and (2) of SEC Rule 11Ac1–1 shall

be suspended, until a determination by

the Exchange that the unusual market

activity or condition has terminated and

the specified persons have been notified

that the usual market activity or

condition has terminated:

(i) If a responsible broker or dealer is

unable to update his quotations on a

timely basis due to the high level of

trading activity or the existence of an

unusual market conditions, he shall

promptly notify a Floor Official.

(ii) Upon notification by a responsible

broker or dealer, the Floor Official shall

promptly verify the existence of the

unusual market activity or condition

Federal Register / Vol. 66, No. 111 / Friday, June 8, 2001 / Notices 30961

and if, in his judgment, the responsible

broker or dealer is unable to update his

quotations on a timely basis, the Floor

Official shall promptly notify the

Market Operations Division of the

Exchange. If a Floor Official,

independent of notification by a

responsible broker or dealer, becomes

aware of any unusual market activity or

condition which adversely affects a

responsible broker or dealer’s ability to

promptly communicate quotation data,

he shall likewise promptly advice the

Market Operations Division.

(iii) If the Exchange is unable to

accurately collect, process, and/or

disseminate quotation data owing to the

high level of trading activity or the

existence of unusual market conditions,

the Market Operations Division of the

Exchange, after consultation with a

Floor Official, shall make a

determination that this is the case.

(iv) The Market Operations Division,

after receiving notification from a Floor

Official pursuant to either

subparagraphs (i) and (iii) above, shall

notify the persons specified in

paragraph (b)(3) of SEC Rule 11Ac1–1

regarding the Exchange’s inability to

accurately collect, process, and make

available the quotation data required by

SEC Rule 11Ac1–1. The Exchange shall

append to each quotation made

available to a quotation vendor an

identifier which will indicate that the

obligation imposed upon Exchange

members and the Exchange by SEC Rule

11Ac1ndash;1 has been suspended.

(v) The Floor Official or the Market

Operations Division (as the case may be)

shall monitor the unusual market

activity or condition until it has

terminated. Thereupon, the Market

Operations Division shall immediately

notify the persons specified in

paragraph (b)(3) of SEC Rule 11Ac1–1

that the Exchange is once again capable

of disseminations the quotation data

required by Rule SEC 11Ac1–1 and

responsible brokers or dealers shall be

once again obligated under SEC Rule

Rule 11Ac1–1 as made applicable to

Exchange members pursuant to this

Rule 958A.

* * * * *

* * * Commentary

[.01 As of April 1, 2001, the

compliance date for application of SEC

Rule 11Ac1–1 to the trading of options,

the Exchange is able to disseminate to

quotation vendors the quotation size or

aggregate quotation size of the best bid

or best offer in most, but not all, option

classes. This is not expected to be a

permanent condition and it is

anticipated that quotation sizes will be

available for all option classes shortly

after the compliance date. However,

until such time as the Exchange is able

to disseminate quotation size for all

option classes, for those option classes

for which it is unable to do so, it will

collect, process and disseminate the best

bid and best offer, and establish by rule

and periodically publish the quotation

size for which the responsible broker or

dealer is obligated to execute a customer

order to buy or sell an option series in

that class.]

[.02] .01 No specialist shall be

deemed to be a responsible broker or

dealer with respect to a published bid

or offer that is erroneous as a result of

an error or omission made by the

Exchange or any quotation vendor. If a

published bid or published offer is

accurate but the published quotation

size (or published aggregate quotation

size, as the case may be) associated with

it is erroneous as a result of an error or

omission made by the Exchange or any

quotation vendor, then the specialist

who is responsible for the published bid

or published offer shall be obligated to

the extent set forth in paragraph (c) of

Rule 11Ac1–1 but only to the extent of

[one unit of trading in the reported

security in question] ten contracts.

[.03].02 Absent unusual market

conditions, the responsible broker or

dealer shall honor any bid or offer then

being displayed by quotation vendors

which is erroneous, up to the quotation

size then being so displayed, which has

been displayed for six minutes or more.

Provided, however, that the specialist

shall not be required to honor such a bid

or offer which is erroneous as to either

price or size or both if:

(i) As a matter or record, an execution,

cancellation or update of such bid or

offer was in effect or in process;

(ii) In honoring such a bid or offer, the

resulting transaction would violate

applicable Exchange rules or federal

regulations;

(iii) Equipment failure prevents the

specialist from monitoring such bid or

offer; or

(iv) The price sought upon such

quotation is above the current bid or

below the current offer, on the Floor, by

(a) $.25 or more in the case of a reported

security trading at $3 or less or

(b) $.50 or more in the case of a

reported security trading at more than

$3.

* * * * *

Rule 590—Minor Rule Violation Fine

System

Part 1 General Rule Violations

(a) through (g) No change.

(h) The following is a list of the rule

violations and applicable fines that may

be imposed by the Exchange’s Minor

Floor Violation Disciplinary Committee

pursuant to Part 1 of this Rule.

1. Failure to comply with the SEC

firm quote rule land honoring 10-up

market for customer option orders].

(SEC Rule 11 Ac1–1 and Rule 958A.)

B. CBOE Propose Rule Text

Rule 8.51.—Firm Disseminated Market

Quotes

(a) Definitions.

(1) For the purposes of this rule, and

SEC Rule 11Ac1–1 as applied to the

Exchange and members on the floor, the

term ‘‘responsible broker or dealer’’

shall mean, with respect to any bid or

offer for any reported security made

available by the Exchange to quotation

vendors, the trading crowd in a series or

class of option, which shall be the

responsible broker or dealer to the

extent of the quotation size specified in

[(b) or] (c) of this rule.

(2) For purposes of this rule, the term

‘‘reported security’’ means any security

or class of securities for which

transactions reports are collected,

processed and made available pursuant

to an effective national market system

plan for reporting transactions in listed

options.

(b) Firm Quote Requirement [for Nonbroker-dealer Orders]. [All classes and

series shall be subject to the

requirements of this rule.

(1) The appropriate Floor Procedure

Committee may establish the firm quote

requirement for each series of option,

which shall be for at least one contract,

for non-broker-dealer orders. The

Exchange will periodically publish the

firm quote requirement for each series of

option. In the event the Exchange

disseminates quotation size, the firm

quote requirement would be for up to

the disseminated size.]

(1[2]) The firm quote requirement

obligates the responsible broker or

dealer to sell (buy) at least the

established number of contracts at the

offer (bid) which is displayed when the

responsible broker or dealer receives a

buy (sell) order at the trading station

where the reported security [particular

option class] is located for trading.

[(3) When orders for the same class

(whether for the same series or different

series) from the same beneficial owner

are represented at the trading station at

approximately the same time, then only

the first of such orders that

cumulatively equal or add up to less

than the firm quote requirement shall be

entitled to an execution pursuant to

paragraphs (b) and (c) above.]

(c) Firm Quote Size [Requirement for

Broker-Dealer Orders].

30962 Federal Register / Vol. 66, No. 111 / Friday, June 8, 2001 / Notices

23This section is pursuant to SEC Rule 11Ac1–

1(d)(4). The responsible broker or dealer shall also

be relieved of its [their] obligations under SEC Rule

11 Ac1–1(c)(2).

(1) The appropriate Floor Procedure

Committee may establish separate [the]

firm quote requirements for each series

of option, which shall be for at least one

contract, for (i) non-broker-dealer orders

and (ii) broker-dealer orders. [The

Exchange will periodically publish the

firm quote requirement for each series of

option. In the event the Exchange

disseminates quotation size, if the

disseminated quotation size is for a

lesser amount than the firm quote

requirement, then the broker-dealer firm

quote requirement would be for the

disseminated size.] For purposes, of this

Rule, the term broker-dealer includes

foreign broker-dealers as defined in Rule

1.1(xx). The Exchange will periodically

publish the firm quote size requirement

for each series of option for both order

types.

(2) The firm quote requirement size

for non-broker-dealer orders shall be the

size that the Exchange periodically

publishes along with the quotes

disseminated to vendors. In the event

the Exchange has not published a size

along with its quotes for a particular

series, then the firm quote requirement

size for non-broker-dealer orders shall

be that size published by the Exchange

in a different manner (e.g., on its

website). The Exchange also publish

separately the firm quote requirement

size for broker-dealers orders. In the

case of broker-dealer orders, it the size

for a particular series disseminated

along with the quotes is less than the

size published for broker-dealer orders,

then the firm quote requirement for

broker-dealer orders shall be the size

published along with the quotes.

(d) Thirty Seconds Rule. Each

responsible broker or dealer within

thirty seconds from receiving an order

that is greater than the quotation size

established by paragraph [(b) or] (c) of

the rule must:

(1) Execute the entire order; or

(2) (i[A]) Executive that portion of the

order equal to at least the quotation size

established by paragraph[s (b) or] (c) of

this rule; and

(ii[B]) Revise its bid or offer.

(e) Exemptions to Firm Quote

Requirement. Non-Firm Mode.

(1) The responsible broker or dealer

shall be relieved of its obligations under

this Rule 8.51 [with respect to such

reported security] and with[With]

respect to paragraph (b)(3) of SEC Rule

11Ac1–1:

(i) When[Any] two Floor Officials, on

a case by case basis, for either a class or

series within a class, [may] make a

determination[,] that the level of trading

activity or the existence of unusual

market conditions are such that the

Exchange is incapable of collecting,

processing and making available to

quotation vendors bids, offers and

quotation sizes with respect to one or

more class or series within a class of

option in a manner which accurately

reflects the current state of the market

on the floor[.]; [During any period that

the market in a reported security is in

a non-firm mode, the responsible broker

or dealer shall be relieved of their

obligations under SEC Rule 11Ac1–1 as

applicable to such members under this

Rule 8.51 with respect to such reported

security, but the responsible broker or

dealer shall report bids and offers or

revised bids and offers in such reported

security, for publication, on a ‘‘best

efforts’’ basis; or]

(ii) When the [The] senior person,

then in charge of the Exchange’s Control

Room, suspends the firm quote

requirements of paragraph[s] (b) [or (c)]

with respect to a class of options if he

or she determines that the level of

trading activity or the existence of

unusual market conditions are such that

the Exchange is incapable of collecting,

processing and making available to

quotation vendors bids, offers and

quotation sizes with respect to one or

more class or series of option in a

manner which accurately reflects the

current state of the market on the floor.

After exercising such authority, that

senior person shall immediately seek

approval by two Floor Officials, who

may confirm or overrule the decision; or

[. During any period that the market in

a reported security is in a non-firm

mode, the responsible broker dealer

shall be relieved on their obligations

under SEC Rule 11Ac1–1 as applicable

to such members under this Rule 8.51

with respect to such reported security,

but the responsible broker or dealer

shall report bids and offers or revised

bids and offers in such reported

security, for publication, on a ‘‘best

efforts’’ basis.]

(iii) When the order for the purchase

or sale of a reported security is

presented during a trading rotation in

that reported security.

(2) When it has been relieved of its

firm quote obligation, the responsible

broker or dealer shall report bids and

offers or revised bids and offers in a

reported security, for publication, on a

‘‘best effort’’ basis.

(3)[(iii)] Whenever two Floor Officials

or the senior person then in charge of

the Exchange’s Control Room make a

determination under subparagraphs (i)

or (ii) above with respect to any

reported security, the Exchange’s

Control Room will disseminate a

message notifying the specified persons

that the displayed quotes are not firm.

(4)[(iv)] During any period that the

market in a reported security is in a

non-firm mode, the Floor Officials shall

monitor the activity or condition, which

formed the basis for [his or]their

determination. No more than 30

minutes after such market has been

designated to be in a non-firm mode, the

DPM shall review the condition of such

market with the Floor Officials.

Continuation of the non-firm mode for

longer than 30 minutes shall require the

reaffirmation of the reviewing Floor

Officials. Such review and reaffirmation

shall occur not less frequently than

every 30 minutes thereafter while the

non-firm mode is effect.

(5)[(v)] When the Exchange is once

again capable of collecting, processing

and making available to quotation

vendors bids and offers with respect to

a reported security that is in non-firm

mode in a manner which accurately

reflects the current state of the market

on the floor then the senior person then

in charge of the Exchange’s Control

Room, or two Floor Officials shall lift

the non-firm mode designation. Once

the non-firm mode designation has been

lifted, the responsible broker or dealer[s]

shall be obligated for the firm quote

requirements as stated in paragraph[s]

(b) [or (c)].

(6)[(2)] No responsible broker or

dealer shall be obligated to execute a

transaction for any listed option as

provided in paragraph[s] (b) [and (c)] of

this rule 23 when:

(i) Revised Quotation Size

(A) Prior to the presentation of an

order to sell(buy), a responsible broker

or dealer has communicated to the

exchange, a revised quotation size; or

(B) At the time an order to sell(buy)

is presented, responsible broker or

dealer is in the process of effecting a

transaction in such class and/or series of

option, and immediately after the

completion of such transaction, it

communicates to the exchange a revised

quotation size, such responsible broker

or dealer shall not be obligated by

paragraph (b), [(c)] or (d) of this Rule to

sell(buy) that option in an amount

greater than such revised quotation size.

(ii) Revised Bid or Offer

(A[C]) Before the order sought to be

executed is presented, a responsible

broker or dealer has communicated to

the exchange, a revise bid or offer; or

(B[D]) At the time order sought to be

executed is presented, a responsible

broker or dealer is in the process of

Federal Register / Vol. 66, No. 111 / Friday, June 8, 2001 / Notices 30963

24See SEC Rule 11Ac1–1.

effecting a transaction in such class or

series of option, and, immediately after

the completion of such transaction, a

responsible broker or dealer

communicates to the exchange, a

revised bid or offer; provided, however,

that the responsible broker or dealer

shall nonetheless be obligated to

execute any such order as provided in

paragraph[s] (b) [or (c)] of this rule at its

revised bid or offer in any amount up

to its published quotation size or

revised quotation size.[; or]

[(ii) The order for the purchase or sale

of a listed option is presented during a

trading rotation in that listed option.]

(f) Each member on the floor shall

abide by such rules and procedures

adopted by the Exchange, in order to

enable the Exchange to meet its

quotation dissemination requirements.24

* * * Interpretations and Policies.

.01 With respect to subsection (b) of

this Rule, if the disseminated bid (offer)

is on behalf of an order represented by

a Floor Broker, DPM, or OBO and is for

less than the firm quote requirement

applicable for that class of options, a

responsible broker or dealer is obligated

to buy or sell the necessary number of

contracts needed to make the

disseminated quote firm for the firm

quote requirement for that class of

options.

.02 Where a Floor Broker, DPM, or

OBO has caused a bid or offer to be

disseminated and the order is

subsequently filled or canceled, the

Floor Broker, DPM, or OBO will be

responsible for causing such

disseminated bid or offer to be removed.

Failure to do so will result in the Floor

Broker, DPM, or OBO being responsible

for satisfying the firm disseminated

quote commitment pursuant to

subsection (b) [or (c)] of this Rule. Any

member who has caused a bid or offer

to be disseminated is equally

responsible for removing such bid or

offer when he leaves the trading crowd.

.03 Where a disseminated market

quote is revised, as provided for in

paragraph (e) of this Rule, it shall be

considered conduct inconsistent with

just and equitable principles of trade for

a responsible broker or dealer

immediately to re-display the

previously disseminated market quote,

unless such action is warranted by a

change in market conditions.

.04 Floor Officials may, as provided

for under Rules 6.20(c) and 17.50(g)(6),

impose a fine on members of the trading

crowd for violations of this Rule and its

Interpretations and Policies.

.05 The requirement of paragraph[s]

(b) [and (c)] of this Rule that the

responsible broker or dealer must honor

displayed quotations up to the firm

quote requirement subject to the

conditions of the Rule applies not only

to orders to buy or to sell options, but

also to two-part spread or straddle for

all options orders which may be

executed at displayed quotations for

both parts of the order. This obligation

of a responsible broker or dealer applies

to two-part orders where the two sides

are on opposite sides of the market in

a one-to-one ratio, and extends to the

amount of the firm quote requirement

on each side of the order.

.06 Pursuant to Rule 6.20

Interpretation .09, the reference to any

two Floor Officials in Rule 8.51 and its

Interpretations and Policies includes,

but is not limited to, members of the

appropriate Market Performance

Committee.

.07 Under paragraph (e) of this Rule,

when two Floor Officials [may]

determine that a market in a class of

series of option is fast pursuant to Rule

6.6, the Floor Officials may determine

the market constitutes a level of trading

activity or such unusual market

conditions that the Exchange is

incapable of collecting, processing and

making available to quotation vendors

bids, offers and quotation sizes in a

manner that accurately reflects the

current state of the market on the floor,

and thus, suspend the firm quote

requirement.

.08 The trading crowd shall not be

deemed to be a responsible broker or

dealer with respect to a published bid

or offer that is erroneous as a result of

an error or omission made by the

Exchange or any quotation vendor. If a

published bid or published offer is

accurate but the published quotation

size (or published aggregate quotation

size, as the case may be) associated with

it is erroneous as a result of an error or

omission made by the Exchange or any

quotation vendor, then the [trading

crowd] responsible broker or dealer is

responsible for the published bid or

published offer shall be obligated to the

extent set forth in paragraph (c) of Rule

11Ac1–1 but only to the extent of one

contract of the listed option in question.

C. ISE Proposed Rule Test

Rule 804. Market Maker Quotations

***

(d) Firm Quotes. Market maker bids

and offers are firm for Public Customer

Orders and Non-Customer Orders Both

under this Rule and Rule 11Ac1–1

under the Exchange Act (‘‘Rule 11Ac1–

1’’) for the number of contracts specified

for each according to the requirements

of paragraph (b) above. Market Maker

bids and offers are not firm under this

Rule and Rule 11Ac1–1 if:

[(i) the Exchange determines that an

exception is warranted, on a case by

case basis, because of an obvious error;]

[(ii)] (i) a system malfunction or other

circumstance impairs the Exchange’s

ability to disseminate or update market

quotes in a timely and accurate manner;

[(iii)] (ii) The level of trading activities

or the existence of unusual market

conditions is such that the Exchange is

incapable of collecting, processing, and

making available to quotation vendors

the data for the option in a manner that

accurately reflects the current state of

the market on the Exchange, and as a

result, the market in the option is

declared to be ‘‘fast’’ pursuant to Rule

704;

[(iv] (iii) during trading rotations; or

[(v)] (iv) any of the circumstances

provided in paragraph (c)(3) of Rule

11Ac1–1 exist.

* * * * *

D. PCX Proposed Rule Text

¶ 5221—Firm Quotes.

Rule 6.86(a)–(c)—No change.

(d) Exception for Unusual Market

Conditions

(1) If the Exchange determinations, in

accordance with the procedures set

forth below, that the level of trading

activity or the existence of unusual

market conditions is such that the

Exchange is incapable of collecting,

processing and making [cannot collect,

process and make] available to

quotation vendors quotation data in a

manner that accurately reflects the

current state of the market at the

Exchange, the Exchange will

immediately notify the persons

specified in SEC Rule 11Ac1–1(b)(3)

and, upon such notification, the

obligation imposed upon Exchange

members under SEC Rule 11Ac1–1(c)(2)

and the Exchange under subsection (b),

above, will be suspended, until the

Exchange determines that the unusual

market activity or condition has

terminated and the specified persons

have been notified that the unusual

market activity or condition has

terminated.

***

E. Phlx Proposed Rule Text

Rule 1082 Firm Quotations.

(a) Definitions.

(i) The term ‘‘disseminated price’’

shall mean the bid (or offer) price for an

options series that is made available by

the Exchange and displayed by a

quotation vendor on a terminal or other

display device.

30964 Federal Register / Vol. 66, No. 111 / Friday, June 8, 2001 / Notices

(ii) The term ‘‘disseminated size’’

shall mean with respect to the

disseminated price for any quoted

options series, the AUTO–X guarantee

for the quoted option, except that the

disseminated size of bids and offers of

limit orders on the book shall be ten (10)

contracts.

(iii) The term ‘‘SEC Quote Rule’’ shall

mean Rule 11Ac1–1 under the

Securities Exchange Act of 1934, as

amended.

(iv) The terms ‘‘customer,’’

‘‘responsible broker or dealer,’’ and

‘‘specified persons’’ shall have the

meaning set forth in the SEC Quote

Rule.

(b) Except as provided in paragraph

(c) of this Rule, all quotations made

available by the Exchange and displayed

by quotation vendors shall be firm for

customer orders at the disseminated

price in an amount up to the

disseminated size. Responsible brokers

or dealers bidding (or offering) at the

disseminated price shall be collectively

required to execute orders presented to

them at such price up to the

disseminated size in accordance with

Rule 1015, or, if the responsible broker

or dealer is representing (as agent) a

limit order, such responsible broker or

dealer shall be responsible (as agent) up

to the size of such limit order, but may

be responsible as principal for all or a

portion of the excess of the

disseminated size over the size of such

limit order to the extent provided in

Rule 1015.

(c) The requirements of paragraph (b)

or (d) of this Rule shall not apply to

displayed quotations: (i) When the level

of trading activities or the existence of

unusual market conditions is such that

the Exchange is incapable of collecting,

processing, and making available to

quotation vendors the data for a subject

security required to be made available

pursuant to the SEC Quote Rule in a

manner that accurately reflects the

current market on the Exchange as

determined in accordance with

paragraph (f) of this Rule; [by two Floor

Officials, with the concurrence of the

Director of Surveillance, or his

designee] (ii) during a trading rotation;

(iii) if any of the circumstances

provided in paragraph (c)(3) of the SEC

Quote Rule exist; or (iv) on a case by

case basis where it is determined that an

exemption is warranted for an obvious

error in the posting of the disseminated

price or disseminated size due to

reporter error or system malfunction.

[The Exchange shall immediately notify

all specified persons of such a

determination. Regular trading

procedures shall be resumed when two

Floor Officials determine that the

conditions supporting that

determination no longer exist. The

Exchange shall immediately notify all

specified persons of such a

determination.] Any exemption granted

pursuant to paragraph (c)(iv) shall be in

writing and shall set forth the basis

upon which the exemption is granted.

(d) In accordance with paragraph

(d)(1)(ii) of the SEC Quote Rule, the

quotation size for a disseminated price

with respect to an order for the account

of a broker or dealer (‘‘broker-dealer

order’’) shall be one (1) contract

(‘‘quotation size’’), and all quotations

made available by the Exchange and

displayed by quotation vendors shall be

firm for broker-dealer orders at the

disseminated price in an amount up to

the quotation size. The quotation size

for broker-dealer orders provided in this

paragraph (d) shall be periodically

published by the Exchange. Responsible

brokers or dealers bidding (or offering)

at the disseminated price shall be

collectively required to execute brokerdealer orders at such price up to the

quotation size.

(e) If responsible brokers or dealers

receive an order to buy or sell a listed

option at the disseminated price in an

amount greater than the disseminated

size (for customer orders) or the

quotation size (for broker-dealer orders),

such responsible broker or dealer shall,

within thirty (30) seconds of receipt of

the order, (i) execute the entire order at

the disseminated price (or better), or (ii)

execute that portion of the order equal

to the disseminated size (in the case of

a customer order) or the quotation size

(in the case of a broker-dealer order) at

the disseminated price (or better), and

revise its bid or offer.

(f) With respect to subparagraph (c)(i)

of this Rule, two Floor Officials

(‘‘Initiating Officials’’), with the

concurrence of the Director of

Surveillance (or his designee), may

determine (either on their own motion

or at the request of a responsible broker

or dealer) that the level of trading

activities or the existence of unusual

market conditions is such that the

Exchange is incapable of collecting,

processing and making available to

quotation vendors the data for a subject

security required to be made available

pursuant to the SEC Quote Rule in a

manner that accurately reflects the

current market on the Exchange. Upon

the making of such a determination, the

Exchange shall designate the market in

such security to be ‘‘non-firm,’’ and

shall immediately notify all specified

persons of that determination through

the Options Price Reporting Authority,

using the industry agreed-upon

indicator for ‘‘non-firm’’ status. Upon

such notification, responsible brokers or

dealers shall be relieved of their

obligations under paragraph (c)(2) the

SEC Quote Rule and this Rule 1082 with

respect to such security until a

determination by the Exchange that the

unusual market conditions have

terminated and the specified persons

have been notified that the unusual

market conditions have terminated.

During any period that the market for a

subject security is ‘‘non-firm,’’ the

Exchange shall continue to the

maximum extent practicable under the

circumstances, to collect, process, and

make available to quotation vendors

data for that security as required under

the SEC Quote Rule.

During any period that the market in

a subject security is ‘‘non-firm,’’ the

Exchange shall monitor the activity or

condition which formed the basis for

such determination. Continuation of the

‘‘non-firm’’ designation for longer than

15 minutes shall require the

reaffirmation of two floor officials (the

‘‘Reviewing Floor Officials’’), with the

concurrence of the Director of

Surveillance (or his designee). Such

review and reaffirmation shall occur not

less frequently than every 15 minutes

thereafter while the quotations in the

subject security are deemed ‘‘non-firm.’’

When the Exchange determines that

the unusual market conditions have

terminated, the Exchange shall

immediately notify all specified persons

that the Exchange is once again capable

of collecting, processing and making

available to quotation vendors the

quotation data required by the SEC

Quote Rule, and responsible brokers

and dealers shall once again be

obligated under the SEC Quote Rule and

this Rule 1082 with respect to the

subject security.

F–10 Unusual Market Conditions

In the interest of maintaining a fair

and orderly market under unusual

market conditions for one or more

classes of options, [two Floor Officials,

with the concurrence of the Director of

Surveillance or his designee, may

determine that the level of trading

activities or the existence of unusual

market conditions is such that the

Exchange is incapable of collecting,

processing, and making available to

quotation vendors the data for a subject

security required to be made available

pursuant to the SEC Quote Rule in a

manner that accurately reflects the

current market on the Exchange. The

Exchange shall immediately notify all

specified persons of such a

determination. Regular trading

procedures shall be resumed when two

Floor Officials determine that the

Federal Register / Vol. 66, No. 111 / Friday, June 8, 2001 / Notices 30965

conditions supporting that declaration

no longer exist.] two Floor Officials

(‘‘Initiating Officials’’), with the

concurrence of the Director of

Surveillance (or his designee), may

determine (either on their own motion

or at the request of a responsible broker

or dealer) that the level of trading

activities or the existence of unusual

market conditions is such that the

Exchange in incapable of collecting,

processing and making available to

quotation vendors the data for a subject

security required to be made available

pursuant to the SEC Quote Rule in a

manner that accurately reflects the

current market on the Exchange.

Upon the making of such a

determination, the Exchange shall

designate the market in such security to

be ‘‘non-firm,’’ and shall immediately

notify all specified persons of that

determination, the Exchange will notify

specified persons through the Options

Price Reporting Authority, using the

agreed-upon indicator. Upon such

notification, responsible brokers or

dealers shall be relieved of their

obligations under paragraph (c)(2) the

SEC Quote Rule and Exchange Rule

1082 with respect to such security until

a determination by the Exchange that

the unusual market conditions have

terminated and the specified persons

have been notified that the unusual

market conditions have terminated.

During any period that the market for a

subject security is ‘‘non-firm,’’ the

Exchange shall continue, to the

maximum extent practicable under the

circumstances, to collect, process, and

make available to quotation vendors

data for that security as required under

the SEC Quote Rule.

During any period that the market in

a subject security is ‘‘non-firm,’’ the

Exchange shall monitor the activity or

condition which formed the basis for

such determination. Continuation of the

‘‘non-firm’’ designation for longer than

15 minutes shall require the

reaffirmation of two floor officials (the

‘‘Reviewing Floor Officials’’), with the

concurrence of the Director of

Surveillance (or his designee). Such

review and reaffirmation shall occur not

less frequently than every 15 minutes

thereafter while the quotations in the

subject security are deemed ‘‘non-firm.’’

When the Exchange determines that

the unusual market conditions have

terminated, the Exchange shall

immediately notify all specified persons

that the Exchange is once again capable

of collecting, processing and making

available to quotation vendors the

quotation data required by the SEC

Quote Rule, and responsible brokers

and dealers shall once again be

obligated under the SEC Quote Rule and

this Advice with respect to the subject

security.

During the period for which such a

determination has been made, displayed

quotes for the respective options are not

firm (as required by Rule 1082) and

volume guarantees of Advice A–11 and

Rule 1015 are not applicable, but the

respective specialists and trading

crowds are required to use best efforts

to update quotes and fill incoming

orders in accordance with Advice A–11

and Rule 1015.

Fine Schedule—F–10

Fine Not Applicable

* * * * *

Rule 1015. Execution Guarantees

(a) Execution Guarantees—Customer

market or marketable limit orders in any

options series on the Exchange are to be

filled at the best market, in accordance

with Rule 1082, to a minimum of the

disseminated size by floor traders (i.e.,

Specialists and ROTs) in the crowd as

follows:

(i) If only one floor traders is quoting

the availed upon best bid (or offer), that

floor trader is responsible for providing

a fill for the disseminated size.

(ii) If more than one floor trader is

quoting the availed upon best bid (or

offer), and their combined quote size is

less than the disseminated size,

participation for the additional contracts

needed to meet the disseminated size

requirement shall be decided upon

agreement by those floor traders or

otherwise divided proportionately

among them.

(iii) If the availed upon best bid (or

offer) is established by someone other

than a floor trader and is not for at least

the disseminated size, participation for

the additional contracts needed to meet

the disseminated size requirement shall

be supplied at that same price by the

floor trader with the immediately prior

best bid (or offer). If more than one floor

trader was on the prior bid (or offer),

participation for the additional contracts

shall be decided upon agreement by

those floor traders or otherwise divided

proportionately among them. For

example, if a 21⁄4 or 2.25 bid by an ROT

is followed by a 21⁄2 or 2.50 bid for five

contracts by a customer, the ROT who

was bidding 21⁄4 or 2.25 will be

responsible for buying the other five

contracts at 21⁄2 or 2.50.

(iv) The ‘‘availed upon best bid (or

offer)’’ for purposes of this Rule shall be

the disseminated price (as defined in

Rule 1082).

[(v) Orders received by a member

from a customer may not be unbundled

for the primary purpose of availing

upon the execution guarantee

requirement, nor may a Firm solicit a

customer to unbundle an order for the

primary purpose of availing upon the

execution guarantee.]

(v[i]) Floor Brokers must make

reasonable efforts to ascertain whether

each order entrusted to them is for the

account of a customer or a brokerdealer. If it is ascertained that the order

is for the account of a broker-dealer, the

responsible Floor Broker must advise

the crowd of that fact prior to bidding/

offering on behalf of the order or

executing the order. The responsible

floor agent must legibly mark the floor

ticket as ‘‘B/D’’ when it has been

determined that the order is for an

account of a broker/dealer.

(vi[i]) The disseminated size

requirement shall not apply when

Exchange quotations are not required to

be firm pursuant to paragraph (c) of

Rule 1082.

(b) Trade or Fade—When paragraph

(e) of Rule 1082 is applicable to an order

received by a responsible broker or

dealer, participation by Specialists or

ROTs above their stated size to fill the

order completely or meet the

disseminated size requirement (for

customer orders) or the quotation size

requirement (for broker-dealer orders)

shall be decided upon agreement by

such Specialists or ROTs or otherwise

divided proportionately among them.

Where the disseminated market quote of

a responsible broker or dealer is revised,

ad provided for in Rule 1082, it shall be

considered conduct inconsistent with

just and equitable principles of trade for

such responsible broker or dealer to

immediately re-display its previously

disseminated market quote, unless such

action is warranted by a change in

market conditions.

* * * * *

A–11 Responsibility To Fill Customer

Orders

(a) Execution Guarantees—Customer

market or marketable limit orders in any

options series on the Exchange are to be

filled at the best market, in accordance

with Rule 1082, to a minimum of the

disseminated size by floor traders (i.e.,

Specialists and ROTs) in the crowd as

follows:

(i) If only one floor trader is quoting

the availed upon best bid (or offer), that

floor trader is responsible for providing

a fill for the disseminated size.

(ii) If more than one floor trader is

quoting the availed upon best bid (or

offer), and their combined quote size is

less than the disseminated size,

participation for the additional contracts

needed to meet the disseminated size

30966 Federal Register / Vol. 66, No. 111 / Friday, June 8, 2001 / Notices

25Exchange Act Rule 11Ac1–1, 17 CFR

240.11Ac1–1.

26See Adopting Release, supra note 4.

27See Pilot Approval Order, supra note 12.

28See Letter from Annette L., Nazareth, Director,

Division, Commission, to Timothy H. Thompson,

Esq., Assistant General Counsel, CBOE, dated April

2, 2001.

29See Pilot Approval Order, supra note 12.

30See Letter to Annette L. Nazareth, Director,

Division, Commission, from Timothy H. Thompson,

Esq., Assistant General Counsel, CBOE, dated

March 29, 2001.

31Securities Exchange Act Release No. 44376

(June 1, 2001).

requirement shall be decided upon

agreement by those floor traders or

otherwise divided proportionately

among them.

(iii) If the availed upon best bid (or

offer) is established by someone other

than a floor trader and is not for at least

the disseminated size, participation for

the additional contracts needed to meet

the disseminated size requirement shall

be supplied at that same price by the

floor trader with the immediately prior

best bid (or offer). If more than one floor

trader was on the prior bid (or offer),

participation for the additional contracts

shall be decided upon agreement by

those floor traders or otherwise divided

proportionately among them. For

example, if a 21⁄4 or 2.25 bid by an ROT

is followed by a 21⁄2 or 2.50 bid for five

contracts by a customer, the ROT who

was bidding 21⁄4 or 2.25 will be

responsible for buying the other five

contracts at 21⁄2 or 2.50.

(iv) The ‘‘availed upon best bid (or

offer)’’ for purposes of this Advice shall

be the disseminated price (as defined in

Rule 1082).

[(iv Orders received by a member

from a customer may not be unbundled

for the primary purpose of availing

upon the execution guarantee

requirement, nor may a Firm solicit a

customer to unbundle an order for the

primary purpose of availing upon the

execution guarantee.]

(v[i]) Floor Brokers must make

reasonable efforts to ascertain whether

each order entrusted to them is for the

account of a customer or a brokerdealer. If it is ascertained that the order

is for the account of a broker-dealer, the

responsible Floor Broker must advise

the crowd of that fact prior to bidding/

offering on behalf of the order or

executing the order. The responsible

floor agent must legibly mark the floor

ticket as ‘‘B/D’’ when it has been

determined that the order is for an

account of a broker/dealer.

(vi[i]) The disseminated size

requirement shall not apply when

Exchange quotations are not required to

be firm pursuant to paragraph (c) of

Rule 1082.

(b) Trade or Fade—When paragraph

(e) of Rule 1082 is applicable to an order

received by a responsible broker or

dealer, participation by Specialists or

ROTs above their stated size to fill the

order completely or meet the

disseminated size requirement (for

customer orders) or the quotation size

requirement (for broker-dealer orders)

shall be decided upon agreement by

such Specialists or ROTs or otherwise

divided proportionately among them.

Where the disseminated market quote of

a responsible broker or dealer is revised,

as provided for in Rule 1082, it shall be

considered conduct inconsistent with

just and equitable principles of trade for

such responsible broker or dealer to

immediately re-display its previously

disseminated market quote, unless such

action is warranted by a change in

market conditions.

Fine Schedule—A–11

Fine Not Applicable

II. Description of the Proposals

A. Background

On November 17, 2000, the

Commission adopted amendments to its

Quote 25 to require options exchanges

and options market markers to publish

firm quotes beginning on April

1,2001. 26 As a result of the amendments

to the Quote Rule, the Exchanges

needed to make conforming

amendments to their rules. Accordingly,

the Exchanges submitted proposals to

the Commission to conform their rules

to the provisions of the Quote Rule. On

April 2, 2001, the Commission approved

portions of the Exchange’s proposed

rule changes for a 60-day pilot period

expiring on June 1, 2001.27 The

Exchanges now seek permanent

approval of their respective Pilot

Programs. In addition, the Exchanges

seek to make additional modifications to

their proposals to conform their

respective rules to the requirements of

the Quote Rule.

A brief summary of the additional

modification to the proposed rule

changes filed by each of the Exchanges

is provided below.

B. Amex

The Amex proposes a number of nonsubstantive revisions to its Pilot

Program. Specifically, Amex proposes to

delete the last sentence of Amex Rule

958A(b) because it is already an

obligation of the responsible broker or

dealer to communicate a quotation size

or aggregate quotation size of not less

than ten contracts. Amex also proposes

to revise Amex Rule 958A(c)(i)(B) to

codify the Commission’s grant of

exemptive relief to permit responsible

brokers or dealers to be firm for foreign

broker-dealers to the same extent that

the rules require their quotes to firm for

U.S. broker-dealers,28 and to establish

that the quotation size established by

the Amex would be at least one

contract.

In addition, Amex proposes to codify

in its rules the provisions found in

paragraph (c)(3) of the Quote Rule and

to delete Commentary .01 to Amex Rule

958A because the Amex is now able to

disseminate quotations with size for all

option classes it trades. Finally, the

Amex proposes to revise Commentary

.02 to Amex Rule 958A to be consistent

with Amex’s requirement that

responsible brokers or dealers be firm to

customers for at least ten contracts.

C. CBOE

CBOE proposes to amend CBOE Rule

8.51 to delete paragraph (b)(3), which it

proposed in its initial filing but which

was not approved by the Commission as

part of the Pilot Approval Order.29 This

proposal states that ‘‘[w]hen orders for

the same class (whether for the same

series or different series) from the same

beneficial owner are represented at the

trading station at approximately the

same time, then only the first of such

orders that cumulatively equal or add

up to less than the firm quote

requirement shall be entitled to an

execution pursuant to paragraphs (b)

and (c) above.’’ The Commission did not

approve this proposed provision

because it is not consistent with the

Quote Rule. However, the CBOE,

pursuant to paragraph (e) of Rule

11Ac1–1 under the Exchange Act, has

submitted to the Commission a letter

requesting on behalf of their members

an exemption from the Quote Rule in

such circumstances.30

D. ISE

ISE proposes to delete subparagraph

(d)(i) from ISE Rule 804 to remove

obvious errors from the circumstances

under which market maker bids and

offers are not firm under ISE Rule 804

and the Quote Rule. The Commission

has separately approved ISE Rule 720 to

address obvious errors and, therefore,

reference to obvious errors under ISE

Rule 804 is unnecessary.31

E. PCX

PCX proposes a non-substantive

amendment to its rule text regarding an

exception from its obligation to collect,

process, and make available to quotation

vendors quotation data. Specifically, the

PCX proposes to amended PCX Rule

6.86(d)(1) by replacing the phrase

Federal Register / Vol. 66, No. 111 / Friday, June 8, 2001 / Notices 30967

32 In approving these proposals, the Commission

has considered the proposals’ impact on efficiency,

competition, and capital formation. 15 U.S.C. 78c(f).

33 15 U.S.C. 78f(b)(5).

34See supra note 13. One commenter raised

concerns about the provisions of Amex, CBOE, and

Phlx rules relating to when an order ‘‘reaches’’ the

trading post. See Ianni Letter, supra note 13. The

Commission notes that such provisions have been

eliminated from the Amex, CBOE, and Phlx rules.

See supra note 12.

35See Pilot Approval Order, supra note 12. The

Commission notes that a determination that a

market is ‘‘fast’’ does not necessarily indicate a

level of trading activity or unusual market

condition that would relieve an exchange’s or

responsible broker or dealer’s obligation under the

Quote Rule. See e.g., Proposed CBOE Rule 8.51

Interpretation and Policy .07.

36The Commission notes that CBOE, ISE, and

Phlx proposed to establish specific time parameters

for reviewing market conditions. See Proposed

CBOE Rule 8.51(e)4) (requiring review no more than

thirty minutes after the market has been designated

non-firm); Proposed ISE Rule 704(c)(3) (requiring

review at least every thirty minutes after the market

has been designated non-firm); and Proposed Phlx

Rule 1082(f) (requiring review at least every fifteen

minutes after the market has been designated nonfirm). Amex and PCX have, instead, proposed to

continuously monitor their markets until the market

condition or activity has terminated. See Proposed

Amex Rule 958A(d)(v) (requiring the exchange to

‘‘monitor the unusual market activity or condition

until it has terminated’’) and Proposed PCX Rule

6.86(d)(1)(E) (requiring the exchange to ‘‘monitor

the unusual market activity or condition until it has

terminated’’). The Commission believes that both

approaches are consistent with the Exchange Act.

37See Phlx Amendment Nos. 3 and 5, supra notes

19 and 21, respectively.

38See Proposed ISE Rule 804(d)(iv) and Phlx Rule

1082(c).

‘‘cannot collect, process, and make

available’’ with the phrase ‘‘is incapable

of collecting, processing, and making

available.’’

F. Phlx

In general, Phlx proposes two

amendments to its rules. First, Phlx

proposes to adopt Phlx Rule 1082(f) and

to amend Options Floor Procedure

Advice (‘‘OFPA’’) F–10 to: (1) Include

procedures to be followed in making a

determination that unusual market

conditions exist with respect to an

option; (2) grant relief from firm quote

obligations during periods of unusual

market conditions; (3) monitor the

existence of unusual market conditions;

and (4) provide notification to specified

persons that unusual market conditions

exist or that the conditions supporting

that determination no longer exist.

Second, Phlx proposes to amend Phlx

Rule 1015 and OFPA A–11 by deleting

Phlx Rule 1015(a)(v) and OFPA A–

11(a)(v), relating to the unbundling of

orders for the purpose of availing upon

the execution guarantee requirement,

and renumbering that subsequent

sections of Phlx Rule 1015(a) and OFPA

A–1(a).

III. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing,

including whether Amex Amendment

No. 3, CBOE Amendment Nos. 2 and 3,

ISE Amendment No. 2, PCX

Amendment No. 2, and Phlx

Amendment Nos. 3, 4, and 5 are

consistent with the Exchange 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

changes that are filed with the

Commission, and all written

communications relating to the

proposed rule changes 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 Exchanges.

All submissions should refer to the File

Nos. SR–Amex–2001–18, SR–CBOE–

2001–15, SR–ISE–2001–07, SR–PCX–

2001–18, and SR–Phlx–2001–37 and

should be submitted by June 29, 2001.

IV. Commission Findings and Order

Granting Accelerated Approval of the

Proposed Rule Changes on a Permanent

Basis

After careful consideration, the

Commission finds that the proposed

rule changes, as amended, are consistent

with the Exchange Act and the rules and

regulations thereunder applicable to

national securities exchanges,32 and, in

particular, Section 6(b)(5) of the

Exchange Act.33 As noted in the

Adopting Release, the Commission

believes that the application of the

Quote Rule to the options market will

provide significant and immediate

benefits to investors. In particular,

market participants, including

customers and broker-dealers, will be

able to rely on options quotes up to the

published size when routing orders.

On April 2, 2001, the Commission

granted accelerated approval to the

Exchanges’ sixty-day pilot rule

proposals. During the sixty-day pilot

period, the Commission received two

comment letters on the proposals 34 and,

after considering the operating of the

Pilot Programs during the sixty-day

period, has determined to approve the

Pilot Programs, as amended, on a

permanent basis.

A. Rule 11Ac1–1(b)(3) and (c)(3) Under

the Exchange Act

The Commission approved the

Exchanges’ proposals to relieve

responsible brokers or dealers from their

obligations under the Quote Rule in

unusual market conditions.35 Paragraph

(b)(3)(i) of the Quote Rule provides that

responsible brokers or dealers on the

Exchanges will be relieved of their

obligations under their rules and the

Quote Rule when the level of trading

activities or the existence of unusual

market conditions is such that the

Exchange is incapable of collecting,

processing, and making available to

quotation vendors quotation data.36 The

Phlx now proposes to modify its rules

regarding unusual market conditions to

provide more detailed procedures for

determining and monitoring when

quotes are not firm.37 The Commission

believes that such rules are consistent

with the Exchange Act, and expects that

the Phlx will ensure that sufficient

monitoring procedures are in place to

fully implement the requirements of the

Quote Rule.

In addition, Amex proposes to

incorporate into its own rules the

exceptions from the Quote Rule under

Rule 11AC1–1(c)(3) regarding revised

bids, offers, and quotation sizes. The

Commission notes that CBOE Rule 8.51

contains similar provisions that were

approved by the Commission in

connection with the Pilot Programs, and

the ISE and Phlx proposals incorporate

by reference these Quote Rule

provisions.38 The Commission believes

that including such provisions in the

exchanges’ rules is consistent with the

Exchange Act, provided that the

Exchanges interpret them in a manner

consistent with paragraph (c)(3) of Rule

11AC1–1.

B. Proposed Deletion of CBOE Rule

8.51(b)(3), Phlx Rule 1015(a)(v) and

Phlx Options Floor Procedure Advice A–

11(a)(v)

As a part of its pilot program, the

CBOE proposed to retain a provision of

CBOE Rule 8.51 providing that when

multiple orders for the same class from

the beneficial owner are represented at

the trading station approximately the

same time, only the first of such orders

that cumulatively equal or add up to

less than the firm quote requirement

would be entitled to an execution

pursuant to CBOE’s rules. Similarly,

Phlx initially proposed to retain a

provision in its rules that would

prohibit orders from being ‘‘unbundled’’

for the primary purpose of availing

30968 Federal Register / Vol. 66, No. 111 / Friday, June 8, 2001 / Notices

39See Pilot Approval Order, supra note 12.

40 17 CFR 240.11Ac1–1(c)(2) (emphasis added).

41See Phlx Letter, supra note 13.

42See supra note 30.

43See CBOE Amendment No. 2 and Phlx

Amendment No. 5.

44 15 U.S.C. 78s(b)(2).

45 15 U.S.C. 78s(b)(2).

46 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See letter from Arthur B. Reinstein, Deputy

General Counsel, CBOE, to Sonia Patton, Attorney,

Division of Market Regulation, Commission, dated

May 22, 2001 (‘‘Amendment No. 1’’). Amendment

No. 1 designated the proposed rule change for

submission to the Commission under Section

19(b)(2) of the Act instead of under Section

19(b)(3)(A) of the Act.

upon the execution guarantee

requirement provided by the Phlx.

In the Pilot Approval Order, the

Commission stated its belief that rules

such as CBOE Rule 8.51(b)(3) and Phlx

Rule 1015(a)(v) are inconsistent with the

Quote Rule and cannot be used to

relieve exchange members from their

obligations under the Quote Rule.39 The

Commission noted that those provisions

had been approved prior to the adoption

of amendments to the Quote Rule that

extended its application to the options

market. Generally, the Quote Rule

requires each responsible broker or

dealer to ‘‘execute any order to buy or

sell a subject security * * * at a price

at least as favorable to such buyer or

seller as the responsible broker’s or

dealer’s published bid or offer * * * in

any amount up to its published

quotation size.’’ 40 Further, the Quote

Rule does not expressly provide an

exception for multiple orders submitted

by the same beneficial owner. And, in

fact, the Quote Rule requires, subject to

certain limitations, a responsible broker

or dealer to execute any up to its

published size.

At the same time, the Commission

specifically solicited comment on

whether it would be appropriate for the

Commission to grant an exception from

the requirement of the Quote Rule for

multiple orders submitted by the same

beneficial owner at approximately the

same time. One commenter addressed

this issue, arguing that without

providing an exemption from the Quote

Rule, options market makers would be

subject to unacceptable levels of risk.41

In addition, CBOE submitted a letter to

the Commission requesting exemptive

relief from the requirements of the

Quote Rule that, if granted, would

relieve responsible brokers and dealers

of their obligations under the Quote

Rule in these circumstances,42 The

Commission has determined not to grant

an exemption from the requirements of

the Quote Rule at this time.

Accordingly, the CBOE and Phlx now

propose to eliminate these provisions

from their rules.43

The Commission finds good cause,

consistent with Section 19(b)(2) of the

Exchange Act,44 for granting the

Exchanges’ request for permanent

approval of the Pilot Programs, as

amended, prior to the thirtieth day after

the day of publication of notice of filing

thereof in the Federal Register. The

Commission notes that the Changes’

Pilot Program expire on June 1, 2001.

The Commission believes that granting

accelerated approval to the proposed

amendments will allow the Exchanges

to permanently implement their rules in

compliance with the Quote Rule

without delay. In addition, the

Commission notes that the Exchanges

reported no complaints or problems

with the operation of the rules during

the 60-day pilot period. Finally, the

Commission notes that the proposed

amendments to the Pilot Programs

generally include only non-substantive

revisions and technical corrections to

the Exchanges’ rule text.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Exchange Act,45

the Exchanges’ proposed rule changes

(File Nos. SR–Amex–2001–18, SR–

CBOE–2001–15, SR–ISE–2001–07, SR–

PCX–2001–18, and SR–Phlx–2001–37),

as amended, are approved on a

permanent basis.

For the Commmission, by the Division of

Market Regulation, pursuant to delegated

authority.46

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–14463 Filed 6–7–01; 8:45 am]

BILLING CODE 8080–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–44385; File No. SR–CBOE–

2001–17]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by the Chicago Board

Options Exchange, Incorporated To

Change the Voting Requirement for

Approval of Membership Applications

and to Clarify a Notice Requirement

Relating to the Exercise of an

Authorization To Sell a Membership

June 1, 2001.

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 April 5,

2001, the Chicago Board Options

Exchange, Incorporated (‘‘CBOE’’ 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 CBOE. The CBOE

submitted an amendment to the

proposed rule change on May 22, 2001.3

The Commission is publishing this

notice to solicit comments from

interested persons on the proposed rule

change, as amended, and to approve the

proposal, as amended, on an accelerated

basis.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The CBOE proposes to change the

voting requirement for approval of

CBOE membership applications and to

clarify a notice requirement relating to

the exercise of an Authorization to Sell

a membership. Below is the text of the

proposed rule change. New language is

italicized, and deletions are bracketed.

* * * * *

Chicago Board Options Exchange,

Incorporated Rules

* * * * *

Chapter III—Membership

* * * * *

Application Procedures and Approval

or Disapproval

Rule 3.9.

(a)–(j) Unchanged.

(k) [Approval of an application

requires a vote of the majority of the

members of the Membership Committee

then in office.] Any applicant that is

approved to be a member by the

Membership Committee must be

approved by the Membership

Committee to perform in at least one of

the recognized capacities of a member

as stated in Rule 3.1(b). Written notice

of the action of the Membership

Committee, specifying in the case of

disapproval of an application the

grounds therefore, shall be provided to

the applicant.

* * * * *

Sale and Transfer of Membership

Rule 3.14.

(a)–(c) Unchanged.

(d) Authorizations to Sell. The owner

of a transferable membership may

voluntarily grant to another Exchange

member an Authorization to Sell the

membership. Authorizations to Sell

shall be subject to the following

provisions: