Document ID: SEC-2006-0955-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2006-07-27T04:00Z

[Federal Register: July 27, 2006 (Volume 71, Number 144)]
[Notices]               
[Page 42687-42689]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jy06-85]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54181; File No. SR-Amex-2006-61]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
and Amendment No. 1 Thereto Relating to the Handling of Immediate or 
Cancel Orders in Options

July 20, 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 June 26, 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 
Exchange. On July 18, 2006, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ The Exchange has designated this proposal as 
constituting a stated policy, practice, or interpretation with respect 
to the meaning, administration, or enforcement of an existing rule of 
the Exchange pursuant to Section 19(b)(3)(A)(i) of the Act \4\ and Rule 
19b-4(f)(1) thereunder,\5\ which renders the proposal effective upon 
filing with the Commission.\6\ 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\ In Amendment No. 1, the Exchange proposes to revise the 
proposed rule text to make it more clear.
    \4\ 15 U.S.C. 78s(b)(3)(A)(i).
    \5\ 17 CFR 240.19b-4(f)(1).
    \6\ For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change the 
Commission considers the period to commence on July 18, 2006, the 
date on which the Exchange filed Amendment No. 1. See 15 U.S.C. 
78s(b)(3)(C).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to clarify the appropriate handling of 
immediate or cancel (``IOC'') orders in options.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.amex.com, at the Office of the Secretary of the 

Exchange, 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 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. 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
    The Exchange proposes to provide an interpretation in connection 
with the appropriate handling of IOC orders in options for the benefit 
of its members and the marketplace.
    An IOC order in options, as set forth in Amex Rule 950--ANTE(e)(v), 
is defined as a market or limited price order which is to be executed 
in whole or in part as soon as such order is represented in the ANTE 
System. Any portion of an IOC order that is not so executed is treated 
as cancelled.
    Consistent with Amex Rule 958A-ANTE (``Firm Quote Rule''), IOC 
orders must be executed as soon as they are represented in ANTE. Amex 
Rule 958A--ANTE(c) provides that the responsible broker or dealer \7\ 
must execute customer orders in an amount up to their published 
quotation size. In connection with broker dealer orders, the 
responsible broker or dealer is obligated to execute broker-dealer 
orders up to the quotation size established by the Exchange, which 
quotation size must be at least one (1) contract.
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    \7\ Amex Rule 958A--ANTE(a)(ii) includes specialists and 
registered options traders in the definition of a responsible broker 
or dealer. Remote registered options traders and supplemental 
registered options traders are also included in the definition of 
responsible broker or dealer, subject to certain conditions.
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    The appropriate handling of IOC orders in a linked environment has 
become increasingly complex. Section 8(c) of the intermarket options 
linkage plan \8\ (``Linkage Plan'' or ``Linkage'')

[[Page 42688]]

and Amex Rule 942(a)(1) both provide that, absent reasonable 
justification and during normal market conditions, members should not 
effect trade-throughs. A recent change to the Linkage Plan and Amex 
Rule 940 provides a limited exception to trade-through liability under 
``trade and ship.'' \9\ Under ``trade and ship,'' an Amex member may 
trade an order at a price that is one-tick inferior to the national 
best bid or offer (``NBBO'') if the member contemporaneously transmits 
to the market(s) disseminating the NBBO, Linkage Order(s) \10\ to 
satisfy all interest at the NBBO price. Any execution the member 
receives from the NBBO market must then (pursuant to agency 
obligations) be reassigned to any customer order underlying the Linkage 
Order that was transmitted to trade against the market disseminating 
the NBBO. As a result, if an executable order is received when the Amex 
is not the NBBO, the specialist is required to either ``step-up'' and 
execute at the NBBO, use the ``trade or ship'' option or route the 
order away, via the Linkage, to the options exchange(s) disseminating 
the NBBO. The ``trade or ship'' option may be of limited use because 
the member may be unwilling to trade at a price one-tick inferior to 
the NBBO and ``take out'' the NBBO market. In addition, because of the 
IOC condition, the Exchange believes routing the order to another 
options exchange quoting at the NBBO would not be consistent with the 
obligation to provide an immediate execution, while executing the order 
at the Amex best bid or offer would result in a trade-through.\11\
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    \8\ See Plan for the Purpose of Creating and Operating an 
Intermarket Options Linkage, Securities Exchange Act Release Nos. 
43086 (July 28, 2000), 65 FR 48023 (August 4, 2000) (Amex, CBOE and 
ISE); 43573 (November 14, 2000), 65 FR 70851 (November 28, 2000) 
(Phlx); 43574 (November 16, 2000), 65 FR 70850 (November 28, 2000) 
(PCX n/k/a NYSEArca) and 49198 (February 5, 2004) 69 FR 7029 
(February 12, 2004) (BSE).
    \9\ See Securities Exchange Act Release No. 52414 (September 13, 
2005), 70 FR 55186 (September 20, 2005).
    \10\ A ``Linkage Order'' is defined in Amex Rule 940(b)(10) to 
mean an immediate or cancel order routed through the Linkage as 
permitted under the Linkage Plan.
    \11\ A trade through is defined in Amex Rule 940(b)(19) as a 
transaction in an options series at a price that is inferior to the 
NBBO, but shall not include a transaction that occurs at a price one 
minimum quoting increment inferior to the NBBO provided a Linkage 
Order is contemporaneously sent to each Participant Exchange 
disseminating the NBBO for the full size of the Participant 
Exchange's bid (offer) that represents the NBBO.
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    Both the Linkage Plan and related Amex Rule 942 provide that, 
absent reasonable justification and during normal market conditions, 
Exchange members should not effect trade-throughs. Therefore, a pattern 
or practice of trading through bids and offers will subject a member to 
disciplinary action pursuant to Amex Rule 942(d).
    Currently, when an IOC order is routed to the specialist, ANTE will 
cancel the order if it is not marketable.\12\ However, if the order is 
marketable on the Amex but would result in a trade-through because the 
Amex is not at the NBBO when the order is represented, such order will 
be routed to the ANTE display book for manual handling by the 
specialist. At this point, if the specialist is not willing to ``step 
up'' and match the NBBO or employ ``trade and ship,'' the specialist is 
faced with the choice of either trading-through the away market or not 
executing the order, in violation of the Commission's Quote Rule. 
Consistent with the ``immediate'' condition of an IOC order, the 
Exchange believes that the specialist should have the ability to cancel 
such orders if the responsible broker or dealer is not willing to match 
the NBBO or ``trade and ship.'' The Exchange believes that this 
interpretation is consistent with the definition and expected operation 
of IOC order types. Accordingly, the proposed interpretation of the 
definition of an options IOC order would clarify that such a 
cancellation is permissible. Because of the dual obligations to honor 
disseminated quotes and to avoid a pattern or practice of effecting 
trade-throughs of superior bids and offers, the Exchange believes this 
interpretation is warranted.
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    \12\ The ANTE system immediately executes marketable IOC orders 
that are routed to the specialist book. If an IOC order is not 
marketable, ANTE will cancel the order.
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    The amendment to paragraph (v) of Amex Rule 950--ANTE(e) would 
provide legal and regulatory certainty for IOC orders to be cancelled 
when they are represented in the ANTE system, if the Amex were not 
quoting at the NBBO.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\13\ in general and furthers the objectives of Section 6(b)(5) \14\ in 
particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, to protect investors and the public interest 
and is not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change 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 with respect to the 
proposed rule change.

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

    Because the foregoing proposed rule change relates to a stated 
policy, practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule of the Exchange, the 
proposed rule change has become effective pursuant to Section 
19(b)(3)(A)(i) of the Act \15\ and Rule 19b-4(f)(1) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A)(i).
    \16\ 17 CFR 240.19b-4(f)(1).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.\17\
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    \17\ See supra at note 6.
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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-2006-61 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-2006-61. This file 
number should be included on the subject line if e-mail is used. To 
help the

[[Page 42689]]

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 such 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-2006-61 and should be submitted on or before August 17, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E6-11986 Filed 7-26-06; 8:45 am]

BILLING CODE 8010-01-P