Document ID: SEC-2006-0517-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2006-04-20T04:00Z

[Federal Register: April 20, 2006 (Volume 71, Number 76)]
[Notices]               
[Page 20426-20428]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20ap06-65]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53640; File No. SR-Amex-2005-096]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto 
Relating to the Relocation of Registered Options Traders Assigned 
Options Classes

April 12, 2006.
    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 September 22, 2005, 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 prepared by the Exchange. On April 
5, 2006, the Amex submitted Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 (``Amendment No. 1'') supersedes and 
replaces the original filing in its entirety. The substance of 
Amendment No. 1 is incorporated into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to permit registered options traders 
(``ROTs'') to send proprietary electronic orders, representing a bona 
fide hedge or position liquidations, in an assigned option class for a 
period of up to three (3) months following a relocation of such option 
class when the ROT is no longer physically present in such trading 
crowd.
    Below is the text of the proposed rule change. Proposed new 
language is in italics.

Options Transactions of Registered Options Traders

    Rule 958-ANTE No registered options trader shall initiate an 
Exchange option transaction on the Floor and through the facilities of 
the Exchange for any account in which he has an interest except in 
accordance with the following provisions:
    (a) through (i) No Change
    Commentary * * *
    .01 through .09 No Change
    .10 A Registered Options Trader may apply to the Exchange for the 
ability to send electronic bona fide hedging and/or liquidating orders 
in a formerly assigned option class(es) that have been relocated to a 
different location on the trading floor, for up to a three (3) month 
period from the date the application is granted. The Registered Options 
Trader will not be required to be physically present in the new trading 
location for the purpose of sending bona fide hedging and/or 
liquidating orders to the option class(es) that have been relocated. 
Application is required to be made in writing to the Exchange's 
Division of Regulation and Compliance. The Exchange's Division of 
Regulation and Compliance is required to approve each application 
before a Registered Options Trader may send electronic orders pursuant 
to this Commentary. An extension of the three (3) month time period is 
not permitted. Upon the expiration of the three (3) month period, 
Registered Options Traders will no longer be permitted to 
electronically send orders from the floor of the Exchange for the 
purpose of bona fide hedging and/or liquidating positions in the 
formerly assigned options class.

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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change, as 
amended. The text of these statements may be examined at the places 
specified in Item IV below. The Exchange 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
    According to the Amex, the purpose of the proposed rule change is 
to provide ROTs who are no longer physically present in the trading 
crowd of his or her formerly assigned option class \4\ with the ability 
to send electronic

[[Page 20427]]

orders in such option class or classes that have been relocated. The 
proprietary electronic orders of such ROT would be required to be part 
of a bona fide hedge \5\ position or the liquidation of positions. The 
Exchange believes that providing ROTs with this limited ability to send 
orders for the purpose of creating a bona fide hedge or liquidating 
positions in an option class that has been relocated would provide an 
effective and efficient means for ROTs to reduce position risk.
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    \4\ The Exchange states that a ROT would no longer be considered 
assigned to an option class once an assigned option class has been 
relocated to a different floor location and the ROT has not 
communicated his intention to relocate with such assigned options 
class. A ROT must communicate his intention to relocate if he wants 
to keep the assigned option class. This proposed rule change 
proposes a three (3) month grace period in which the ROT may 
electronically send orders to close-out or hedge those assigned 
options class positions. Therefore, for purposes of this rule 
filing, such relocated assigned option class shall be referred to as 
a ROT's ``formerly assigned option class.''
    \5\ Although the Act does not specifically define a ``bona fide 
hedge,'' the Exchange notes that the Commission has stated that it 
implies an appreciable offset of risk, for all or part of the 
position being hedged. A bona fide hedge may be established either 
by contemporaneous transactions in two securities where each 
position acquired reduces the risk of the other, or by a single 
transaction in which a position acquired in one security reduces the 
risk of a previously established position in another security. Any 
portion of a position that does more than offset the risk of the 
position or positions on the other side is not considered part of a 
bona fide hedge. See Commentary .13 to Amex Rule 111. An example of 
a bona fide hedge position would be owning the short sell position 
and then ``fully hedging'' (delta neutral) it with a long call 
position in the underlying securities.
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    The Exchange pursuant to Amex Rule 110 (applicable to options 
through Amex Rule 950-ANTE(a)) and Amex Rule 958-ANTE(a) require that 
each ROT be qualified and registered with the Exchange as a ROT and 
assigned by the Exchange in one or more classes of options. In 
addition, Amex Rule 958-ANTE(a) further provides that Exchange options 
transactions initiated by a ROT on the floor of the Exchange for any 
account in which such ROT has an interest must be in his or her 
assigned classes.
    In those cases where an option class is relocated on the trading 
floor, a ROT has two alternatives: (i) Stay in his or her present 
location and no longer keep that assigned options class, in which case, 
the ROT may only hedge and/or liquidate positions by sending orders to 
another options exchange; \6\ or (ii) keep the assigned options class 
and relocate with the option to the new location which may be 
difficult, and near impossible, depending on the ROTs other assigned 
classes. Accordingly, the Exchange submits that permitting ROTs, 
although not physically present in the trading crowd, to apply to the 
Exchange to send proprietary electronic orders constituting bona fide 
hedging and/or position liquidations in a formerly assigned option 
class or classes that have been relocated to different locations on the 
floor for up to a three (3) month period from the date the application 
is granted, would be reasonable and should help to reduce position risk 
and efficiently relocate options classes on the trading floor. The 
Exchange determined that three (3) months is a reasonable amount of 
time considering that that is the time period within which an 
expiration normally occurs. The Exchange also considered whether 
advance notice of an option class relocation is more suitable than a 
three (3) month extension; however, advance notice may be difficult, if 
not impossible, for such occurrences as market maker consolidations and 
mergers which is often the cause for the relocation. Therefore, the 
Exchange believes that the three (3) month extension is the best 
alternative to option class relocations.
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    \6\ See Amex Rule 958-ANTE(a). In addition, Amex Rule 958-
ANTE(h) provides, ``(i) Registered options traders may choose to 
either use an Exchange provided or proprietary automated quote 
calculation system to calculate and submit quotes in all or some of 
their assigned classes; join the specialist's disseminated quotation 
with the ability to manually change that quotation on a series-by-
series basis in those classes the registered options trader has 
chosen not to use an automated quote calculation system; or enter 
orders into the ANTE System from their hand-held device. Whenever a 
registered options trader is either using an automated quote 
calculation system (pursuant to (i) above); joining the specialist's 
quote in a given option class (pursuant to (ii) above); or sending 
an order into the ANTE System, the registered options trader must be 
physically present at the specialist's post on the floor of the 
Exchange where that option class is traded.''
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    Proposed Commentary .10 to Amex Rule 958-ANTE provides that a ROT 
would be required to apply to the Exchange and be granted approval in 
order to take advantage of the ability to send electronic orders under 
this proposal. Application in writing would have to be submitted to the 
Exchange's Division of Regulation and Compliance (``R&C''). The R&C 
would take into consideration several factors in determining whether to 
grant the ROT approval, including, but not limited to, if the ROT is in 
good standing with the Exchange, whether the ROT has had any recent 
regulatory issues and whether advance notice of the relocation was 
provided. The R&C would generally approve a ROT application to take 
advantage of the ability to send electronic orders under this proposal 
consistent with the absence of regulatory issues and sufficient advance 
notice of relocation. Once approved by R&C, a ROT would be able to send 
proprietary electronic orders, representing a bona fide hedge or 
position liquidation, in a formerly assigned option class, when such 
ROT is no longer physically present in the trading crowd, for a period 
of up to three (3) months without extension.
    In connection with this proposal, the Exchange submits that rules 
governing ROTs relating to their assigned options classes would 
continue to apply to the use of electronic bona fide hedging and/or 
liquidating orders and that ROTs must continue to adhere to these 
rules. For example, ROTs would be required to adhere to their in-person 
trading requirements. Specifically, Amex Rule 958-NTE(g) provides that, 
except as otherwise determined by the Exchange, a minimum of 25% of a 
ROT's option contract volume, and a minimum of 25% of a ROT's total 
number of options transactions in any calendar quarter would have to be 
executed in person and not through the use of orders represented by 
another member or member organization. However, in any calendar quarter 
in which a ROT receives ROT treatment for off-floor orders in 
accordance with Commentary .01 of Amex Rule 958-ANTE, in addition to 
satisfying the requirements of Commentary .03 of Amex Rule 958-ANTE, 
the ROT would have to execute in person, and not through the use of 
orders represented by another member or member organization, at least 
80% of his total transactions and option contract volume. Commentary 
.03 to Amex Rule 958-ANTE generally provides that at least 50% of a 
ROT's trading activity in any quarter be in his or her assigned 
classes. The Exchange notes that, if ROTs take advantage of this 
proposal, then they would become subject to the higher 75% requirement 
contained in Commentary .03 to Amex Rule 958-ANTE, whereby at least 75% 
of a ROT's trading activity in any quarter must be in his or her 
assigned classes.\7\
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    \7\ According to the Exchange, the reason that a ROT would be 
subject to the higher 75% requirement is because the 50% requirement 
set forth in Commentary .03 to Amex Rule 958-ANTE applies to option 
transactions initiated by a ROT on the floor. Since the 75% 
requirement applies to ROTs receiving ROT treatment for off-floor 
orders, this higher 75% requirement would apply to ROTs who have 
been approved to take advantage of the ability to send electronic 
orders under this proposal due to the fact that electronic orders 
are considered off-floor orders.
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    Amex Rule 935-ANTE(a) provides that non-broker-dealer customer 
orders are afforded priority over all other market participants. In 
addition, the orders for the accounts of all ``non-public customers,'' 
(i.e., broker-dealers and members) are treated equally and may only 
retain priority over or be on parity with other orders of broker-
dealers. Orders for the account of a ROT in connection with this 
proposal will not have priority over orders of

[[Page 20428]]

customers and other broker-dealers, including specialists, other ROTs, 
away market makers and firms. Consistent with the Exchange's current 
rules on priority, parity, and precedence, the electronic hedging and/
or liquidating orders of ROTs, as provided in this proposal, would be 
on parity with the orders of other broker-dealers, specialists, ROTs, 
and away market makers. The electronic hedging and/or liquidating 
orders of ROTs will continue to receive market maker treatment because 
the orders would be executed to reduce the risk of the positions put on 
by the ROT in connection with his market maker responsibilities in the 
formerly assigned option class.
2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, is 
consistent with section 6(b) of the Act,\8\ in general, and furthers 
the objectives of section 6(b)(5) of the Act,\9\ in particular, in that 
it is designed to prevent fraudulent and manipulative acts and 
practices, promote just and equitable principles of trade, 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. The Exchange believes that providing ROTs with this 
limited ability to send orders in connection with a bona fide hedge or 
liquidating position in an option class that has been relocated would 
provide an effective and efficient means for ROTs to reduce position 
risk, and thereby, promote a free and open national market system.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change, as amended, does 
not impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

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

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

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 the proposed rule change, as amended, 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-2005-096 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-2005-096. 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-2005-096 and should be submitted on or before May 
11, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E6-5920 Filed 4-19-06; 8:45 am]

BILLING CODE 8010-01-P