[Federal Register Volume 66, Number 111 (Friday, June 8, 2001)]
[Notices]
[Pages 30959-30968]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14463]



[[Page 30959]]

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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\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.11Ac1-1.
    \4\ Securities Exchange Act Release No. 43591 (November 17, 
2000), 65 FR 75439 (December 1, 2000) (``Adopting Release'').
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    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\
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    \5\ See 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'').
    \6\ See 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'').
    \7\ See letter from Madge M. Hamilton, Legal Division, CBOE, to 
Nancy Sanow, Assistant Director, Division, Commission, dated March 
30, 2001 (``CBOE Amendment No. 1'').
    \8\ See 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'').
    \9\ See letter from Michael D. Pierson, Senior Vice President 
Regulatory Policy, PCX, to John Roeser, Division, Commission, dated 
March 29, 2001 (``PCX Amendment No. 1'').
    \10\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated March 15, 
2001 (``Phlx Amendment No. 1'').
    \11\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated March 28, 
2001 (``Phlx Amendment No. 2'').
    \12\ Securities Exchange Act Release No. 44145 (April 2, 2001), 
66 FR 18662 (April 10, 2001) (``Pilot Approval Order'').
    \13\ See 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'').
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    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

[[Page 30960]]

is granting accelerated approval to the amended proposals.
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    \14\ See 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.
    \15\ See 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.
    \16\ See 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.
    \17\ See 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.
    \18\ See 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.
    \19\ See 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.
    \20\ See 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.
    \21\ See 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.
    \22\ For 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.
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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

[[Page 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 Non-broker-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].

[[Page 30962]]

    (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:
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    \23\ This 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).
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(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

[[Page 30963]]

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\
---------------------------------------------------------------------------

    \24\ See SEC Rule 11Ac1-1.
---------------------------------------------------------------------------

* * * 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

    para. 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.

[[Page 30964]]

    (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 broker-
dealer 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

[[Page 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 2\1/4\ or 2.25 bid by an ROT is followed 
by a 2\1/2\ or 2.50 bid for five contracts by a customer, the ROT who 
was bidding 2\1/4\ or 2.25 will be responsible for buying the other 
five contracts at 2\1/2\ 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 broker-dealer. 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

[[Page 30966]]

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 2\1/4\ or 2.25 bid by an ROT is followed 
by a 2\1/2\ or 2.50 bid for five contracts by a customer, the ROT who 
was bidding 2\1/4\ or 2.25 will be responsible for buying the other 
five contracts at 2\1/2\ 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 broker-dealer. 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.
---------------------------------------------------------------------------

    \25\ Exchange Act Rule 11Ac1-1, 17 CFR 240.11Ac1-1.
    \26\ See Adopting Release, supra note 4.
    \27\ See Pilot Approval Order, supra note 12.
---------------------------------------------------------------------------

    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 non-substantive 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.
---------------------------------------------------------------------------

    \28\ See Letter from Annette L., Nazareth, Director, Division, 
Commission, to Timothy H. Thompson, Esq., Assistant General Counsel, 
CBOE, dated April 2, 2001.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \29\ See Pilot Approval Order, supra note 12.
    \30\ See Letter to Annette L. Nazareth, Director, Division, 
Commission, from Timothy H. Thompson, Esq., Assistant General 
Counsel, CBOE, dated March 29, 2001.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \31\ Securities Exchange Act Release No. 44376 (June 1, 2001).
---------------------------------------------------------------------------

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

[[Page 30967]]

``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.
---------------------------------------------------------------------------

    \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).
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    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.
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    \34\ See 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.
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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.
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    \35\ See 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.
    \36\ The 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 non-firm). 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.
    \37\ See Phlx Amendment Nos. 3 and 5, supra notes 19 and 21, 
respectively.
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    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.
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    \38\ See Proposed ISE Rule 804(d)(iv) and Phlx Rule 1082(c).
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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

[[Page 30968]]

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.
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    \39\ See Pilot Approval Order, supra note 12.
    \40\ 17 CFR 240.11Ac1-1(c)(2) (emphasis added).
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    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\
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    \41\ See Phlx Letter, supra note 13.
    \42\ See supra note 30.
    \43\ See CBOE Amendment No. 2 and Phlx Amendment No. 5.
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    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.
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    \44\ 15 U.S.C. 78s(b)(2).
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    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.
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    \45\ 15 U.S.C. 78s(b)(2).

    For the Commmission, by the Division of Market Regulation, 
pursuant to delegated authority.\46\
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    \46\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-14463 Filed 6-7-01; 8:45 am]
BILLING CODE 8080-01-M