Document ID: SEC-2007-0079-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2007-01-17T05:00Z

[Federal Register: January 17, 2007 (Volume 72, Number 10)]
[Notices]               
[Page 2044-2047]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17ja07-85]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55068; File No. SR-Amex-2006-17]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto Relating to Procedures for At-Risk Cross Transactions

January 9, 2007.
    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 February 17, 2006, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by the 
Amex. On November 9, 2006, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ On December 1, 2006, the Exchange filed 
Amendment No. 2 to the proposed rule change.\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 renamed the proposed procedure for equity 
options as ``at-risk'' cross transactions; provided that the 
eligible order size would be at least 50 contracts; clarified 
certain descriptions of the proposal in Section II.A.1 below; and 
made minor revisions to the text of the proposed rule change. 
Amendment No. 1 replaced and superseded the original filing in its 
entirety.
    \4\ Amendment No. 2 revised the proposed rule text to clarify 
that, under Commentary .02(c) of Amex Rule 950--ANTE(d), the member, 
on behalf of the public customer whose order is subject to 
facilitation, must establish priority consistent with the Exchange's 
customer priority rules. Amendment No. 2 also made a technical 
correction to the Purpose section of the proposed rule change.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to revise the procedures applicable to cross 
transactions in equity options to provide procedures for at-risk cross 
transactions. The text of the proposed rule change is available at the 
Amex, on the Amex's Web site at http://amex.com, and at the 

Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Amex included statements 
concerning the purpose of, and basis for, the

[[Page 2045]]

proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The Amex has prepared summaries, 
set forth in Sections A, B, and C below, of the most significant 
aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to provide an alternative crossing procedure 
to supplement the existing facilitation cross procedure in Commentary 
.02 to Amex Rule 950--ANTE(d). In this manner, the Amex would permit 
``at-risk'' cross transactions by member firms.
    The proposal would establish an at-risk crossing procedure in 
equity options that permits a floor broker, after satisfying all public 
customer orders, to execute an at-risk cross on behalf of a member 
organization trading against its own customer's order between the 
quoted market once priority has been established. Currently, floor 
brokers are required to follow the facilitation crossing procedure set 
forth in Commentary .02(c) to Amex Rule 950--ANTE(d),\5\ whereby the 
floor broker representing the member organization must improve the 
quoted market on behalf of its customer to cross or facilitate the 
order. Notwithstanding the procedures set forth in Commentary .02(c), 
as described above, Commentary .02(d) to Amex Rule 950--ANTE(d) sets 
forth conditions and procedures by which the member firm facilitating 
the order is entitled to participate from its proprietary account as 
the contra-side of that order to the extent of 40 percent of the 
remaining contracts, provided the order trades at or between the quoted 
market.
---------------------------------------------------------------------------

    \5\ Telephone conversation between Jeffrey Burns, Vice President 
and Associate General Counsel, Amex; and Ira Brandriss, Special 
Counsel, and Sara Gillis, Attorney, Division of Market Regulation, 
Commission, on January 4, 2007. Certain additional technical 
corrections were made throughout the discussion of the proposed rule 
change pursuant to the January 4, 2007 telephone conversation with 
Amex staff.
---------------------------------------------------------------------------

    The purpose of the proposed revision is to provide floor brokers 
with a greater incentive to attract and maintain order flow on the 
Exchange by permitting at-risk cross transactions in between the quoted 
market. With an at-risk cross transaction, a customer order has the 
opportunity for price improvement that does not always exist under the 
Exchange's current facilitation cross procedure because, under the 
proposed at-risk cross provisions, the floor broker must cross at a 
price at least one minimum price variation (``MPV'') better than the 
best price communicated by the trading crowd. In addition, the at-risk 
cross procedure will provide the trading crowd with either the 
opportunity to buy or sell the entire customer order when represented, 
or trade against the member firm's quote, which will be at risk to the 
market.
    A facilitation order is currently defined by Amex Rule 950--ANTE(e) 
as ``an order which is only executed, in whole or in part, in a cross 
transaction with an order for a public customer of the member 
organization.'' Commentary .02 to Amex Rule 950--ANTE(d) provides the 
current procedure for executing facilitation cross transactions. 
According to the Commentary, a floor broker holding an order for a 
member firm's public customer and a facilitation order is permitted to 
cross the orders if: (1) The floor broker discloses on its order ticket 
for the public customer order which is subject to facilitation, all the 
terms of such order, including, if applicable, any contingency 
involving other options, underlying securities, or related securities; 
(2) the floor broker requests bids and offers for the option series 
subject to facilitation, then discloses the public customer order and 
any contingency respecting such order which is subject to facilitation 
and identifies the order as being subject to facilitation; and (3) 
after providing an opportunity for such bids and offers to be made, the 
floor broker on behalf of the public customer whose order is subject to 
facilitation, either bids above the highest bid or offers below the 
lowest offer on the market. After all other market participants are 
given an opportunity to accept the bid or offer made on behalf of the 
public customer whose order is subject to facilitation, the floor 
broker may then cross all or any remaining part of such order and the 
facilitation order at such customer's bid or offer by announcing in 
public outcry that he is crossing such orders stating the quantity and 
price(s).
    In cases where a floor broker is seeking to facilitate its own 
public customer order, Commentary .02(d)(1) to Amex Rule 950--ANTE(d) 
provides that the member firm is entitled to participate in the firm's 
proprietary account as the contra-side of that order up to 40 percent 
of the remaining contracts (the ``Member Firm Guarantee''), provided 
that the order trades at a price that matches or improves the market, 
after public customer orders on the specialist's book or customer 
orders represented by a floor broker in the crowd have been filled. 
This Member Firm Guarantee provides, under certain conditions, the 
ability to cross 40 percent of the customer order on behalf of a member 
organization before the specialist and/or registered options traders in 
the crowd can participate in the transaction. The provision generally 
applies to orders of 400 contracts or more. However, the Exchange is 
permitted to establish smaller eligible order sizes, on a class-by-
class basis, although the size may not be for fewer than 50 contracts. 
Under the proposal, the Member Firm Guarantee will remain unchanged. 
However, an at-risk cross transaction will not be subject to the Member 
Firm Guarantee.
    The Amex proposes to adopt at-risk crossing procedures by revising 
its current facilitation cross procedures in two parts. First, the 
Exchange proposes to change the definition of ``facilitation order'' 
such that floor brokers may choose which procedure to use, either the 
facilitation or the at-risk cross procedure. Amex Rule 950--ANTE(e)(iv) 
defines a facilitation order as an ``order which is only executed, in 
whole or in part, in a cross transaction with an order for a public 
customer of the member organization'' (emphasis added). The proposed 
rule change would revise the definition so that it is ``an order which 
may be executed in a cross transaction with an order for a public 
customer of the member organization'' (emphasis added). Allowing for 
this change would provide floor brokers with the ability to continue 
using the facilitation cross procedure set forth in Commentary .02(d) 
to Amex Rule 950--ANTE(d).
    Second, the Exchange proposes the following procedure for the use 
of members who choose to execute at-risk cross transactions. The at-
risk cross transaction procedure may only be used by floor brokers 
attempting to cross an order of a public customer from the same member 
organization.\6\ Floor brokers will be required to take the following 
steps:
---------------------------------------------------------------------------

    \6\ The minimum eligible order size for the at-risk cross 
transaction will be 50 contracts.
---------------------------------------------------------------------------

     Disclose on its order ticket for the public customer order 
which is subject to the cross, all the terms of the order, including, 
if applicable, any contingency involving other options, underlying 
securities or related securities;
     The floor broker must request bids and offers for all 
components of the customer order;
     In response to the quoted market from the trading crowd, 
the floor broker,

[[Page 2046]]

on behalf of the member organization, must first represent the public 
customer order to the trading crowd as customer providing the side, 
size and a price of the order, giving the customer an opportunity for 
price improvement;
     Once the trading crowd has provided a quote in response to 
the customer order, it will remain in effect until: (i) A reasonable 
amount of time has passed, (ii) there is significant change in the 
price of the underlying security or (iii) the market given in response 
to the request has been improved. In the case of a dispute, the term 
``significant change'' will be interpreted on a case-by-case basis by 
two Floor Officials based upon the extent of the recent trading in the 
option and in the underlying security and any other relevant factors;
     In response to the trading crowd's quoted market, the 
floor broker may on behalf of the member organization improve the 
quoted market establishing priority; and
     The floor broker may then attempt to consummate a cross 
transaction at risk to the market by bidding or offering on behalf of 
the member firm at one MPV away from the public customer order.\7\
---------------------------------------------------------------------------

    \7\ The Exchange has represented that if there is a public 
customer order on the book or represented in the trading crowd that 
has priority over the at-risk cross, the member firm may only 
participate in those contracts remaining after the public customer's 
order has been filled. Telephone conversation between Jeffrey Burns, 
Vice President and Associate General Counsel, Amex; and Ira 
Brandriss, Special Counsel, and Sara Gillis, Attorney, Division of 
Market Regulation, Commission, on November 28, 2006.
---------------------------------------------------------------------------

    The following is an example of how the at-risk cross procedure will 
operate. Assume that the posted market at the Amex is 1.00-bid/1.15-
offer for 250 contracts. A customer has a limit order to buy 500 
contracts at 1.10. The floor broker enters the trading crowd and 
requests a larger size market and receives 1.00-bid/1.15-offer for 500 
contracts. In response to the trading crowd's market, the floor broker 
bids 1.05 for 500 contracts for the customer.
    Absent the specialist and/or Registered Options Traders selling to 
the customer at 1.05, thereby improving the customer's limit price, or 
improving the offer to 1.10 in response to the customer bid, the floor 
broker may then make a better offer on behalf of the member 
organization at 1.10 establishing priority. At this point, the floor 
broker could invoke the Member Firm Guarantee at 1.10 and would be 
unable to employ the at-risk crossing procedure.
    The floor broker may then attempt to cross the customer order at 
1.10. In the process of attempting the cross, the crowd could still 
``break up'' the cross by selling to the customer's 1.05 bid or buying 
the firm's 1.10 offer, which is ``at-risk''. As a result, the customer 
is provided the opportunity to pay 1.05 and achieve price improvement 
while the marketplace is provided an opportunity for the trading crowd 
to purchase the firm's offer at 1.10. The member firm effectively 
relinquishes its guaranteed participation rights (i.e., the Member Firm 
Guarantee) in an attempt to cross the entire order.
    The Exchange believes that the proposed at-risk cross procedure 
better supports the auction market and provides an opportunity for 
customers to achieve meaningful price improvement that otherwise may 
not occur when a member firm is forced to use the current facilitation 
procedure to interact with its customer's order. Under the current 
facilitation cross procedure, the floor broker (in the above example) 
would request a market from the trading crowd and then facilitate the 
customer order at 1.10 subject to the Member Firm Guarantee. As 
proposed, in response to the trading crowd's quoted market, the floor 
broker may determine which procedure best represents the customer and 
the member firm.
    For a floor broker to use the at-risk cross procedure outlined 
above, the floor broker must be attempting to cross an order of a 
public customer from the same member organization. Once the cross 
transaction has occurred, the order cannot then be broken up by a 
superior bid or offer from the trading crowd.
    As noted above, the Exchange proposes to revise the procedures 
applicable to cross transactions in equity options to provide 
procedures for at-risk cross transactions. The purpose of the proposed 
revision is to provide floor brokers with a greater incentive to 
attract and maintain order flow on the Exchange and improve the auction 
marketplace because the at-risk cross procedure allows floor brokers 
the ability to cross transactions in between the quoted market. The 
Exchange believes that the at-risk cross procedure will also encourage 
price improvement because the trading crowd will have a greater 
incentive to make larger, tighter markets in response to customer 
orders that it wants to trade against.
    Section 11(a)(1) of the Act \8\ makes it unlawful for a member of 
an exchange to effect a transaction for its own account on that 
exchange unless a specific exception applies. The exceptions are set 
forth in Section 11(a)(1) and in various rules adopted by the 
Commission subsequent to the enactment of Section 11. In connection 
with the use of affiliated or ``house'' floor brokers by Amex members, 
Section 11(a)(1)(G) of the Act provides an exemption from the 
prohibitions of Section 11(a) for transactions effected for a member's 
own account (``G Orders'') if the member meets a business mix test that 
requires it to be primarily engaged in the business of underwriting and 
distributing securities, selling securities to customers and/or acting 
as a broker and provided more than 50 percent of its gross revenues is 
derived from such businesses and related activities.\9\ However, all G 
Orders must yield priority to any bid or offer at the same price for 
the account of a person who is not, or is not associated with, a 
member. Therefore, if a G Order is entered by a floor broker as part of 
an at-risk cross transaction, the G Order will not be permitted an 
execution ahead of any non-member order on the book.\10\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78k(a)(1).
    \9\ Rule 11a1-1(T)(b) under the Act provides additional guidance 
to members seeking to meet the business mix test requirements of 
Section 11(a)(1)(G)(i). 17 CFR 240.11a1-1(T).
    \10\ Because the ANTE System is not programmed to recognize 
``G'' orders and provide for the order to yield to all non-member 
accounts, affiliated floor brokers are prohibited from sending ``G'' 
orders in options into the ANTE System. This prohibition is 
necessary in order to prevent a violation of Section 11(a)(1) of the 
Act by a member using an affiliated broker to represent a ``G'' 
order.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act \11\ in general and furthers the objectives 
of Section 6(b)(5) \12\ in particular in that it is designed to perfect 
the mechanisms of a free and open market and the national market 
system, protect investors and the public interest, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities and promote just and equitable principles of 
trade.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will impose no burden on competition that 
is not necessary or appropriate in furtherance of the purposes of the 
Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received by the Exchange on 
this proposal.

[[Page 2047]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-Amex-2006-17 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-Amex-2006-17. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, 

all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room. Copies of the 
filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-Amex-2006-17 and should be submitted on or before 
February 7, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-538 Filed 1-16-07; 8:45 am]

BILLING CODE 8011-01-P