Document ID: SEC-2007-0813-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2007-06-13T04:00Z

[Federal Register: June 13, 2007 (Volume 72, Number 113)]
[Notices]               
[Page 32687-32688]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13jn07-118]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55875; File No. SR-Amex-2006-170]

 
Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Granting Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment Nos. 1, 2, 3, and 4 Thereto, Relating to Procedures for At-
Risk Cross Transactions

June 7, 2007.

I. Introduction

    On February 17, 2006, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt a new crossing procedure, the ``at-risk 
cross,'' as an alternative to the Exchange's existing facilitation 
cross procedure. On November 9, 2006, the Exchange filed Amendment No. 
1 to the proposed rule change, and on December 1, 2006, the Exchange 
filed Amendment No. 2 to the proposed rule change. The proposed rule 
change, as modified by Amendment Nos. 1 and 2, was published for 
comment in the Federal Register on January 17, 2007.\3\ On March 28, 
2007, the Exchange filed Amendment No. 3 to the proposed rule change, 
and on May 3, 2007, the Exchange filed Amendment No. 4 to the proposed 
rule change. Amendment Nos. 3 and 4 to the proposed rule change were 
published for comment in the Federal Register on May 14, 2007 for a 15-
day comment period.\4\ The comment period ended on May 29, 2007. The 
Commission received no comments on the proposal. This order grants 
accelerated approval to the proposed rule change, as modified by 
Amendment Nos. 1, 2, 3, and 4.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 55068 (January 9, 
2007), 72 FR 2044 (``Notice'').
    \4\ See Securities Exchange Act Release No. 55719 (May 3, 2007), 
72 FR 27155 (``Notice of Amendment Nos. 3 and 4'').
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II. Description of the Proposal

    The Exchange proposes to adopt an ``at-risk cross'' procedure for 
equity options by adding Commentary .03 to Amex Rule 950-ANTE(d). This 
new ``at risk cross'' procedure would supplement the existing 
facilitation cross procedure set forth in Commentary .02 to Amex Rule 
950-ANTE(d)\5\ The proposed at-risk crossing procedure would permit a 
floor broker, after satisfying all public customer orders, to execute a 
cross that is at-risk to the market on behalf of a member organization 
trading against its own customer's order between the quoted market, 
once priority has been established.
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    \5\ Commentary .02(c) to Amex Rule 950-ANTE(d) sets forth the 
facilitation cross procedures for options trading generally. 
Commentary .02(d) to Amex Rule 950-ANTE(d) sets forth conditions and 
procedures by which a member firm facilitating its own public 
customer's order is entitled to participate from its proprietary 
account as the contra-side of that order to the extent of 40 percent 
of the contracts remaining after public customers have been 
satisfied, provided the order trades at or between the quoted 
market.
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    The at-risk cross transaction procedure would be available for use 
only by floor brokers attempting to cross an order of a public customer 
against an order from the same member organization, and the minimum 
eligible order size for the at-risk cross transaction would be 50 
contracts. A floor broker attempting to execute an order as an at-risk 
cross would be required first to request bids and offers from the 
trading crowd for all components of the public customer order.\6\ After 
the trading crowd has provided a quote, the floor broker would then 
represent the customer order to the trading crowd, indicating that it 
is a customer order and providing the order's size, side of the market, 
and a price, giving the customer the opportunity for price improvement.
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    \6\ The floor broker would be required to disclose on the order 
ticket for the public customer order all the terms of the order, 
including, if applicable, any contingency involving other options, 
underlying securities, or related securities.
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    After the trading crowd has provided a quote in response to the 
customer order, the proposed rule would permit the floor broker to 
improve the trading crowd's quote on behalf of the member organization 
and thereby establish priority over the trading crowd at this new 
price.\7\ The bid or offer on behalf of the member organization would 
be required to be one minimum price variation (``MPV'') away from the 
customer order. The floor broker could then attempt to consummate a 
cross transaction with the customer at that price. However, the cross 
transaction would be ``at risk'' to the market, because the trading 
crowd would still have the ability to break up the cross before its 
consummation, either by trading with the customer order at the 
customer's price or trading with the member organization's order at its 
attempted cross price.
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    \7\ At this point, the floor broker may alternatively decide to 
follow the procedures of Commentary .02(d) to Amex Rule 950-ANTE(d).
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    Under the Exchange's existing facilitation crossing procedures, a 
member firm seeking to facilitate its own public customer's order 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.\8\ Under the proposed at-risk 
crossing procedure, the floor broker on behalf of the member firm 
effectively would relinquish the Member Firm Guarantee in an attempt to 
cross the entire order.
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    \8\ See Commentary .02(d)(1) to Amex Rule 950-ANTE(d).
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules

[[Page 32688]]

and regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b)(5) of the Act,\9\ which requires, 
among other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to, and perfect the mechanism of, a free and open market and a national 
market system and, in general, to protect investors and the public 
interest.\10\
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    \9\ 15 U.S.C. 78f(b)(5).
    \10\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    The Commission believes that the proposed at-risk cross procedure 
is consistent with the Act in that it is intended to provide public 
customer orders with additional opportunity for price improvement 
without affording unfair advantage to the member firms that submit such 
customer orders and seek to trade against them. Under the proposal, a 
floor broker may attempt to cross a public customer order entirely 
against an order from the member firm from which it originated only 
after the floor broker, on behalf of the member firm, improves the 
price quoted to the customer by the trading crowd, and thereafter 
affords the crowd an opportunity to break up the cross by improving the 
price still one MPV better. Moreover, the trading crowd alternatively 
could break up the attempted cross by trading with the member firm's 
order at the member firm's price.
    In addition, the Commission believes that the at-risk cross 
procedure may encourage the members of the trading crowd to put forth 
their best bids or offers when the customer order is first presented to 
the crowd. This is because the floor broker would be able to establish 
priority by improving the trading crowd's quoted market, and then would 
be permitted to cross the entire order at the improved price. 
Accordingly, the Commission believes that members of the trading crowd 
will have a greater incentive to make larger, tighter markets in 
response to customer orders, thereby improving the auction market.
    The Commission notes further that if a public customer order either 
on the book or represented in the trading crowd has priority over the 
at-risk cross, the member firm would be permitted to participate only 
in those contracts remaining after the public customer's order has been 
filled.\11\ In addition, if there is a public customer order on the 
book or represented in the trading crowd on the same side of the market 
as, and priced at or better than, the public customer order that is 
part of the at-risk cross, the public customer order on the book or 
represented in the trading crowd would have priority.\12\
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    \11\ See Commentary .03 to Amex Rule 950-ANTE(d) and Notice, 
supra note 3, at n.7. See also Notice of Amendment Nos. 3 and 4, 
supra note 4.
    \12\ See Notice of Amendment Nos. 3 and 4, supra note 4.
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    The Commission also finds that the Exchange's at-risk cross 
proposal is consistent with Section 11(a) under the Act.\13\ The 
Commission notes that orders relying on the exemption provided by 
Section 11(a)(1)(G) of the Act (for ``G Orders'') \14\ from the 
prohibitions of Section 11(a) may be executed as an at-risk cross only 
if the requirements of Section 11(a)(1)(G) are met. Specifically, the 
Exchange has noted that 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 
to execute ahead of any non-member order on the book.\15\
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    \13\ 15 U.S.C. 78k(a).
    \14\ 15 U.S.C. 78k(a)(1)(G).
    \15\ See Notice, supra note 3.
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    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the thirtieth day after publishing notice 
of Amendment Nos. 3 and 4 in the Federal Register. The Commission notes 
that the proposal, as modified by Amendment Nos. 1 and 2, was published 
for a full notice and comment period,\16\ and that the Commission 
received no comment letters on the proposal. Further, Amendment Nos. 3 
and 4 were published for a 15-day comment period, and the Commission 
received no comment letters. Amendment No. 3 made technical and 
clarifying changes and confirmed previous verbal representations made 
by the Exchange. The Commission believes that these clarifications 
serve to enhance the proposal and raise no new or novel issues. 
Amendment No. 4 proposed to permit the at-risk crossing procedure to 
apply to options classes that are part of the options penny pilot 
program (``penny pilot options'').\17\ The Commission believes that 
orders in the penny pilot options should be afforded the same potential 
for price improvement through the at-risk cross procedure as other 
options classes, and that applying the at-risk cross procedure to penny 
pilot options raises no additional significant regulatory issues that 
were not considered in the original proposal. Therefore, the Commission 
believes that no purpose is served by delaying approval of the 
proposal, as amended. Accordingly, the Commission finds good cause, 
consistent with Section 19(b)(2) of the Act,\18\ to approve the 
proposal, as modified by Amendment Nos. 1, 2, 3, and 4, on an 
accelerated basis.
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    \16\ See id.
    \17\ See Securities Exchange Act Release No. 55162 (January 24, 
2007), 72 FR 4738 (February 1, 2007) (SR-Amex-2006-106). Amendment 
No. 4 also made non-substantive rule text changes and showed the 
text of the final proposal as marked against the current text of 
Amex Rule 950-ANTE(d).
    \18\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-Amex-2006-17), as modified 
by Amendment Nos. 1, 2, 3, and 4, be, and hereby is, approved on an 
accelerated basis.
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    \19\ 5 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-11367 Filed 6-12-07; 8:45 am]

BILLING CODE 8010-01-P