Document ID: SEC-2007-0545-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2007-04-13T04:00Z

[Federal Register: April 13, 2007 (Volume 72, Number 71)]
[Notices]               
[Page 18695-18698]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13ap07-85]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55583; File No. SR-Amex-2006-107]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto 
Relating to Amex Book Clerks

April 5, 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 November 14, 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. The Exchange filed Amendment No. 1 to the proposal on March 
29, 2007. The Commission is publishing this notice to solicit comment 
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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to eliminate the agency obligations of 
Exchange options specialists and establish Amex book clerks (``ABCs''). 
The text of the proposed rule change is available at Amex, the 
Commission's Public Reference Room, and http://www.amex.com.

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

    In its filing with the Commission, Amex 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 purpose of this proposed rule change is to eliminate the 
obligation and ability of an Exchange options specialist to act as an 
agent in connection with orders in his or her assigned options classes. 
This proposal would also permit the Exchange to designate Exchange 
employees or independent contractors to serve as ABCs, responsible for 
maintaining and operating the ANTE Central Book (i.e., the specialist's 
customer limit order book) and the ANTE Display Book.\3\ The Exchange 
also seeks to amend certain Exchange rules relating to the operation of 
the Plan for the Purpose of Creating and Operating an Intermarket 
Option Linkage (``Linkage Plan'') to accommodate the implementation of 
pertinent ABC rules and other proposed rule changes described 
herein.\4\ Finally, this proposed rule change also would implement 
several other amendments to conform other Exchange rules to the 
proposal. The Exchange notes that the proposal substantially mirrors 
changes recently adopted by the Chicago Board

[[Page 18696]]

Options Exchange to eliminate DPM agency responsibilities and establish 
PAR Officials.\5\ The following summarizes the effects this proposed 
rule change would have on existing Exchange rules.
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    \3\ The Exchange submits that all incoming customer orders are 
represented in the ANTE Central Book, and if marketable, will be 
automatically executed subject to a number of limited exceptions. 
Orders that are otherwise eligible for automatic execution may not 
receive an automatic execution: (i) Whenever the Amex Best Bid or 
Offer (ABBO) crosses the National Best Bid or Offer (NBBO) and 
causes an inversion in the quote; or (ii) whenever a better bid or 
offer is being disseminated by another options exchange and the 
order is not eligible for automatic price matching. In addition, if 
quotes are deemed unreliable or the Exchange is experiencing 
communications or systems problems, non-firm markets or delays in 
the dissemination of quotes by the Options Price Reporting 
Authority, orders will not be automatically executed. In these 
limited cases, incoming customer orders will be routed to the ANTE 
Display Book for manual handling.
    \4\ Exchange rules governing the operation of the Linkage Plan 
are set forth under Amex Rules 940 through 945 and Amex Rule 941-
ANTE.
    \5\ See Securities Exchange Act Release No. 52798 (November 18, 
2005), 70 FR 71344 (November 28, 2005).
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    a. Agency Responsibilities
    Generally, Amex Rule 170 (applicable to options transactions by 
Amex Rule 950-ANTE(l)) governs options specialists on the Exchange and 
describes the obligations imposed on an options specialist. These 
obligations include the general obligation, with respect to each of a 
specialist's assigned options classes, to fulfill market-making 
obligations and provide functions of a floor broker (to the extent that 
the options specialist acts as a floor broker). Rule 170(b), in 
particular, describes the floor broker and agency functions that an 
options specialist is required to perform. As a condition of being 
registered as a specialist by the Exchange, options specialists are 
required to execute options orders on an agency basis for those classes 
of options assigned to them.\6\ Accordingly, all options specialists on 
the Amex presently act as both agent and principal for orders in their 
respective assigned options classes. The Exchange has now determined 
that it is in the best interest of the Exchange, its members, and 
investors to eliminate the agency obligation of options specialists.
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    \6\ See Amex Rule 950-ANTE(l), incorporating Amex Rule 170 to 
options transactions.
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    This rule change proposes to eliminate those provisions providing 
for the options specialist's broker and agency functions and would 
provide that an options specialist ``shall not execute orders as an 
agent or floor broker.'' \7\ Instead, the Exchange proposes to create a 
new category of market participant, the ABC, who will be responsible 
for maintaining and operating the customer limit order book. This 
responsibility would include handling and executing orders that are 
routed to the customer limit order book. The proposal would clarify 
that the specialists' accounts shall continue to be used by the ABC to 
execute P/A and Satisfaction Orders routed to the Exchange and that the 
specialists shall continue to be liable for any charges incurred in 
relation to executing such orders. This change would afford options 
specialists the ability to concentrate their efforts exclusively on 
their market-making functions and would eliminate the potential 
conflicts associated with options specialists acting as both principal 
and agent with respect to orders they handle and trades they make as 
options specialists.
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    \7\ Proposed Amex Rule 950-ANTE(l), Commentary .01.
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    The ABC would be an Exchange employee or independent contractor 
designated by the Exchange to be responsible for: (i) Maintaining and 
operating the customer limit order book for the assigned options 
classes; and (ii) effecting proper executions of orders placed in the 
customer order limit book. The ABC would be prohibited from having an 
affiliation with any member that is approved to act as a specialist, 
registered options trader (``ROT''), remote registered options trader 
(``RROT'') and supplemental registered options trader (``SROT'') on the 
Exchange. The Exchange believes that the responsibility for executing 
agency orders at trading posts should belong to the ABC, who has no 
interest that might conflict with the duties owed to the customer. 
Additionally, given that the increased reliance on electronic order 
execution has resulted in the virtual elimination of manual order 
handling, a vast majority of orders are currently never handled or seen 
by specialists. This trend effectively eliminates the need for 
specialists to act in an agency capacity and perform functions related 
thereto.
    b. Other Affected Rules
    The Exchange is proposing amendments to other Exchange rules to 
allow the Exchange to reassign agency responsibilities and obligations 
from the options specialist to the ABC, as detailed below.
    Display Obligation. Currently, under Amex Rule 958A-ANTE, an 
options specialist is required to immediately display the full price 
and size of any eligible customer limit orders when such orders 
represent buying or selling interest that is at a better price or size 
than the best disseminated Amex quote.\8\ Because the options 
specialist no longer would be operating the customer limit order book 
or executing orders as agent and since the vast majority of orders are 
currently either executed, displayed or booked immediately and without 
any input from a specialist, the Exchange proposes to shift the display 
obligation in its entirety from the options specialist to the ABC.\9\ 
Accordingly, the ABC would be required to maintain and keep active the 
Exchange's automated customer limit order display facility in ANTE.
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    \8\ See Amex Rule 958A-ANTE(e). See also Securities Exchange Act 
Release No. 51062 (January 21, 2005), 70 FR 4163 (January 28, 2005) 
(File No. SR-Amex-00-27).
    \9\ The display obligation set forth in Amex Rule 958A-ANTE(e), 
along with the exceptions set forth therein, would be moved to 
proposed Amex Rule 995-ANTE.
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    Due Diligence Responsibility. Under the proposed rule, the ABC 
would be required to use due diligence to execute customer orders at 
the best prices available to him or her under the rules of the 
Exchange.
    Public Order Book Responsibilities. In addition to his or her 
responsibility for maintaining orders in the electronic customer order 
limit order book in ANTE, the ABC also would be prohibited from 
removing a booked public customer order unless the order is cancelled, 
expires, is transmitted in accordance with Intermarket Option Linkage 
(``Linkage'') obligations, or is executed.
    Linkage Obligations. As the options specialist would no longer be 
executing agency orders, this responsibility, and any associated 
Linkage obligations that previously were handled by the options 
specialist, would now fall upon the Exchange. As an employee (or 
independent contractor) of the Exchange, the ABC would be responsible 
for handling Linkage orders in the option classes appointed to him or 
her. Specifically, an ABC would have the means to: (1) Utilize an 
options specialist's account to route Principal Acting as Agent (``P/
A'') Orders \10\ and Satisfaction Orders to away markets based on prior 
instructions that must be provided by the options specialist to the 
ABC, and (2) handle all Linkage orders or portions of Linkage orders 
received by the Exchange that are not automatically executed. The ABC 
also would have the means to utilize the options specialist's account 
to fill Satisfaction Orders that result from a Trade Through \11\ that 
the Exchange effects. Because the Linkage Plan requires that P/A Orders 
be submitted for the account of an eligible market maker,\12\ the ABC 
must be able to utilize the options specialist's account to fulfill the 
Linkage obligations imposed by Amex rules.
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    \10\ A ``Principal Acting as Agent (``P/A'') Order'' is an order 
for the principal account of a specialist (or equivalent entity on 
another Participant Exchange under the Linkage Plan that is 
authorized to represent public customer orders), reflecting the 
terms of a related unexecuted public customer order for which the 
specialist is acting as agent. See Linkage Plan Section 2(16)(a).
    \11\ See Amex Rule 940(b)(19).
    \12\ See Linkage Plan Section 2(16)(a); see also Amex Rule 
940(10)(i).
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    Amex Linkage Rules would be amended to require an options 
specialist to make available its account to the ABC for the purpose of 
enabling the ABC to satisfy certain Linkage-related obligations. Amex 
Linkage Rules also would be amended to obligate the

[[Page 18697]]

options specialist to provide the ABC with prior written instructions 
for routing P/A Orders, and Satisfaction Orders to other markets.\13\ 
Since orders routed pursuant to the Linkage can be configured in 
numerous ways, these written instructions would, with some degree of 
specificity (i.e., state whether the order should be routed 
automatically, the means through which the order should be routed, 
etc.), direct how the ABC should handle responses to Linkage Orders, as 
provided under proposed Amex Rule 995-ANTE, as well as detail the 
procedures the ABCs would be required to follow when utilizing the 
options specialists' accounts.
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    \13\ The Exchange intends to file with the Commission a request 
for an exemption from the requirements set forth in Rule 608(c) of 
Regulation NMS under the Act requiring the Exchange to comply with 
and enforce compliance by its members with certain provisions of the 
Linkage Plan that require eligible market makers (such as 
specialists and ROTs) through whom the P/A Order is routed to be 
functioning as the agent with respect to that order. This exemption 
would facilitate the establishment of ABCs and their handling of 
Linkage Orders.
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    Finally, when handling outbound P/A Orders and Satisfaction Orders, 
the ABC shall use due diligence to execute the orders entrusted to him/
her, act in accordance with the prior written instructions provided by 
the options specialist for P/A Orders and Satisfaction Orders that the 
ABC represents, and act in accordance with Amex rules regarding P/A and 
Satisfaction Orders received through the Linkage.
    Compensation of ABCs. As an Exchange employee or independent 
contractor, the ABC's compensation would be determined and paid solely 
by the Amex. No options specialist, ROT, RROT or SROT would be 
permitted to directly or indirectly compensate or provide any other 
form of consideration to an ABC.
    Liability of the Exchange for Actions of ABCs. The Exchange's 
liability for the actions of ABCs would be limited in the same manner 
as currently provided under existing Exchange rules, including (but not 
limited to) Article IV, Section 1(e) of the Amex Constitution (Exchange 
Liability) and Amex Rule 61 (Exchange's Costs of Defending Legal 
Proceedings).
    Firm Disseminated Market Quotes. Amex Rule 958A-ANTE currently 
provides that, in the case of an order received by the options 
specialist, the options specialist's firm quote obligation attaches at 
the time the order is received by such specialist, regardless of 
whether the options specialist is actually aware of the order at that 
time. This provision is a direct consequence of the fact that the 
options specialists currently represent orders on the customer limit 
order book in an agency capacity from the moment such orders are 
received on the book. However, because the options specialist no longer 
would be operating the customer limit order book if the proposed rule 
change were approved, Amex Rule 958A-ANTE would be modified such that 
the firm quote obligation would attach, when an options specialist is 
the responsible broker or dealer, at the same time those obligations 
attach with respect to each other responsible broker or dealer--that 
is, when the order is announced to the trading crowd either via 
electronic display or by the ABC.
    Rules Relating to ANTE's Automatic Execution Feature. Under 
established procedures set forth in Amex Rule 933-ANTE (ANTE Automatic 
Matching and Execution of Options Orders), an order eligible for 
automatic matching and execution will not be automatically executed if 
the Amex disseminated quote is inferior to the NBBO by more than the 
price matching amount and instead is routed to the specialist for 
manual handling. On the assumption that the specialist would always be 
responsible for representing such orders as an agent, Commentary .01(b) 
provides for automatic price matching series that ``[i]f the Exchange's 
best bid or offer is inferior to the NBBO displayed by another options 
exchange by more than the price matching amount, the order will be 
routed to the specialist and not automatically executed.'' In addition, 
this Commentary also provides that if a customer order exceeds the 
established order size parameter, it will be routed to the specialist 
and not automatically executed. However, because the Exchange has set 
the order size parameter to 25,001 contracts, orders should rarely 
exceed the established order size parameter, and therefore, would not 
be routed to the specialist for manual handling. Similarly, for 
automatic price improvement series, Commentary .01(c) provides that a 
``customer order that exceeds the established order size parameter will 
be either automatically executed at the Exchange's best bid or offer if 
it is within the automatic matching and execution order size parameters 
* * *, or it will be routed to the specialist and not automatically 
executed.''
    Commentary .01(e) to Amex Rule 933-ANTE further provides instances 
in which an order is re-routed to the specialist and not automatically 
executed. These situations are as follows: (i) Where the current best 
bid or offer for a series is crossed (e.g., 4.20 bid, 4 asked) or 
locked (e.g., 4 bid, 4 asked); \14\ (ii) the specialist in conjunction 
with a Floor Governor or two Floor Officials determined quotes in such 
options or options exchange(s) are not reliable; or (iii) the Exchange 
is experiencing communications or systems problems, non-firm markets or 
delays in the dissemination of quotes by the Options Price Reporting 
Authority.
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    \14\ See Amex Rule 951-ANTE, Commentary .01.
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    In order to make Amex Rule 933-ANTE consistent with the proposal, 
Commentary .01(b), (c) and (e) to Amex Rule 933-ANTE would be revised 
to provide that an order that is not automatically executed will be 
routed to the ABC rather than the specialist.
    Duty To Report Unusual Activity. Amex Rule 958A-ANTE also will 
require the ABC, as well as the specialist, to report to a Floor 
Official any unusual activity, transactions, or price changes or other 
unusual market conditions or circumstances with respect to the ABCs 
appointed option classes that may be detrimental to the maintenance of 
a fair and orderly market.
    General Options Specialist Rules. There are also other Exchange 
rules relating to options specialists that must be amended to reflect 
the fact that options specialists will not be operating the customer 
limit order book or executing orders as agent with respect to their 
allocated option classes. For example, Amex Rule 154 states, ``[n]o 
member or member organization shall place with a specialist, acting as 
broker, any order to effect on the Exchange any transaction except at 
the market or at a limited price.'' The proposal would amend Amex Rule 
950-ANTE(f) (incorporating Amex Rule 154 to options transactions) to 
state that Exchange specialists are prohibited from acting as a floor 
broker or in an agency capacity in connection with orders in his or her 
assigned options classes. Therefore, the proposal will require members 
to use an independent floor broker or book orders with the ABC when 
warranted. Rule 950-ANTE(f) would also be amended to make clear that 
ABCs, not options specialists, would accept stop, stop limit, spread or 
straddle orders. Additionally, Amex Rule 155 discusses the precedence 
specialists are to assign to orders entrusted to them as agents. The 
proposal would amend Amex Rule 950-ANTE(a) (incorporating Amex Rule 155 
to options transactions) to impose the precedence requirement on ABCs 
in the case of options transactions. Finally, Amex Rule 177 requires 
all specialists to report certain activities or

[[Page 18698]]

information to a Floor Official. The proposal would amend Amex Rule 
950-ANTE(a) (incorporating Rule 177 to options) obligating the ABC, as 
well as an options specialist, to report to a Floor Official those 
activities and such information as delineated in Amex Rule 177.
    c. Implementation
    Finally, to ensure a smooth and orderly transition of the 
responsibility for operating customer limit order book and executing 
agency orders from options specialists to ABCs, the Exchange proposes 
to implement this rule change to all applicable trading posts over a 
180-day period from the effective date of this rule change. During this 
180-day transition period, any options specialist who continues to 
operate the customer limit order book would continue to be subject to 
the same agency obligations as currently provided under Amex Rules 950-
ANTE(l) and 958A-ANTE(e), except that, upon the approval of this 
proposal, these prior obligations instead would be reflected in a 
Regulatory Circular during the 180-day transition period.
2. Statutory Basis
    Amex believes the proposed rule change is consistent with Section 
6(b) of the Act \15\ in general and furthers the objectives of Section 
6(b)(5) of the Act \16\ 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 regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, 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; and is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers, or to regulate by virtue of any authority conferred by the Act 
matters not related to the purpose of the Act or the administration of 
the Exchange.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that this proposed rule change would 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

    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, 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 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-2006-107 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-2006-107. 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-2006-107 and should be submitted on or before May 4, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-6960 Filed 4-12-07; 8:45 am]

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