Document ID: SEC-2007-1734-0001
Agency: sec
Document Type: Notice
Title: \9\ See Amex Rule 941(b). ---------------------------------------------------------------------------
Posted Date: 2007-12-20T05:00Z

[Federal Register: December 20, 2007 (Volume 72, Number 244)]
[Notices]               
[Page 72421-72424]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20de07-102]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56959; File No. SR-Amex-2007-46]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change, as Modified by Amendment No. 1 Thereto, To Require 
Specialists To Yield Orally Agreed Upon Proprietary Trades to Later-
Arriving Customer System Orders

December 13, 2007.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on May 10, 2007, 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 and 
II below, which Items have been substantially prepared by the Exchange. 
On December 4, 2007, Amex filed Amendment No. 1 to the proposed rule 
change. The Commission is publishing this notice to solicit comments on 
the proposed rule change, as amended, from interested persons and is 
approving the proposal on an accelerated basis.
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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 amend Amex Rule 950-ANTE to require 
specialists to yield proprietary transactions in options to later 
arriving off-Floor customer system agency orders that enter and are 
displayed on the specialist's Book (``Agency Orders'') and could take 
the specialist's place in the proprietary transaction.
    The text of the proposed rule change is available at the Amex, the 
Commission's Public Reference Room, and http://www.cboe.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, the Amex included statements 
concerning the purpose of and basis for 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 Amex states that ANTE Public Orders Ahead Block (``Block'') is 
the functionality designed to assist specialists in complying with 
their agency obligations, and prevents specialists from trading ahead 
of a public customer order in violation of the priority rules, unless 
the trade is marked as meeting one of the proposed specified exceptions 
in the Exchange's rules.
    The Amex is proposing to add new Commentary .04 to Amex Rule 950-
ANTE (l) to codify these exceptions to the requirement that options 
specialists yield proprietary transactions to later arriving Agency 
Orders that enter and are displayed on the options specialist's Book 
and could take the options specialist's place in the not yet reported 
proprietary transaction.
    Exchange rules require specialists to always yield to customer 
orders on the Book when trading in their specialty securities for their 
dealer account. When no other interest is present on the specialists' 
Book, specialists may trade for their own account with interest 
represented on the Book or in the trading crowd.\3\
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    \3\ See Amex Rule 150(b), Rule 155 and Rule 170 generally made 
applicable to options by Rule 950-ANTE (a) and (l).
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    The Exchange proposes to add Commentary .04 to paragraph (l) of 
950-ANTE to specify certain limited exceptions when options specialists 
are not required to yield to customers orders on the Book when trading 
for their own account. These exceptions are as follows:
    (i) If the later arriving order is an off-Floor system order for 
the account of a broker-dealer (including, but not limited to, a 
foreign broker-dealer, Registered Options Trader, Supplemental 
Registered Options Trader, Remote Registered Options Trader, or Away 
Market Maker); \4\
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    \4\ Pursuant to 900-ANTE (b)(48), an ``Away Market Maker'' is a 
market maker, as defined in Section 3(a)(38) of the Act, in options 
registered as such on such other national securities exchange.
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    (ii) If the specialist's trade for his or her dealer account is a 
trade effected pursuant to Rule 950-ANTE (d), Commentary .01 or 
Commentary .07(b);
    (iii) If the specialist's trade for his or her dealer account is a 
report of principal participation on an order sent to another market 
center through Options Intermarket Linkage and the system order arrived 
after the specialist sent the Linkage order;
    (iv) If the specialist's trade for his or her dealer account is in 
connection with a P/A order sent to another market center through the 
Options Intermarket Linkage; or
    (v) If the specialist's trade for his or her dealer account is a 
correction of a bona fide specialist error.
    These exceptions are discussed in more detail below:
Priority Over Accounts of Broker-Dealers
    Because, pursuant to Amex Rule 950-ANTE, orders for the accounts of 
broker-dealers do not have priority over specialists acting as 
principal, the Block allows for the specialist not to yield to such 
orders.
Complex or Combination Trade Priority
    Specialist participation in a transaction effected pursuant to Rule

[[Page 72422]]

950-ANTE (d), Commentary .01 or Commentary .07(b) is not subject to the 
requirement to yield, consistent with the limited priority exceptions 
that already exists for certain transactions, such as those involving 
complex or combination orders.\5\
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    \5\ The priority exception requires the specialist to improve 
the market on one ``leg'' of the complex trade, which must be marked 
as a ``spread'' transaction.
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    The specialist will not be required to yield to Agency Orders if 
the specialist's trade for his or her dealer account is: (1) A complex 
trade such as a spread, straddle, ratio, or combination transaction 
pursuant to Commentary .01 to Rule 950-ANTE (d); or (2) if the 
specialist is participating in a ``split price priority'' transaction, 
or a pair of purchase or sale priority transactions.
    When a specialist participates in a trade with a broker or market 
maker that constitutes a complex trade (spread, straddle, etc.), the 
specialist must enter the execution into the trading system (ANTE). 
Whenever the specialist participates in a transaction in ANTE where he 
enters his interest and it is on the same side of a customer order at 
the same price level, the quantity going to the specialist is 
automatically swapped with that requested by the customer order. In the 
case where the transaction is a spread trade, the specialist can click 
a button labeled ``spread'' to indicate the trade is a spread trade, 
and the system will not automatically swap the quantity allocated to 
the specialist with that of the customer thereby allowing the 
specialist to receive the execution. For example:

--A Floor Broker walks into the crowd with a spread trade request.
    1. Buy 10 Intel Jan 25 calls at $5 (Amex quote = 4.90 x 5).
    2. Sell 10 Intel Jan 25 puts at $1 (Amex quote = 0.95 x 1.05).
--There is a customer order to sell 10 contracts at $5, which could be 
an existing order or one that comes in after the Floor Broker enters 
the crowd. The specialist executes the spread trade buying 10 Jan 25 
transaction into the trading system and indicates the trade is a spread 
trade by clicking the spread button.

    In the foregoing, when entering the transaction into the system, if 
the specialist does not click the ``spread'' button, the 10 contracts 
allocated to him at $5 will be swapped with the customer order. 
However, in the above example, because the specialist indicates the 
spread transaction by clicking ``spread'', the quantity is allocated to 
the specialist and not to the customer.
    The processing for split price priority is the same as that for 
complex trades.\6\ If the specialist indicates both executions are 
split price executions by clicking the ``spread'' button, the trading 
system will allow the transaction to process ahead of any customer 
orders on the book.\7\ For example:
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    \6\ Pursuant to Commentary .07(b) to Amex Rule 950-ANTE (d), 
this exception applies to orders of 100 contracts or more.
    \7\ The Exchange states that when a specialist marks a trade as 
``spread'', it is reported to the tape as a spread transaction 
although the trade may not necessarily be a spread trade. FINRA 
conducts surveillance to monitor whether specialists are 
inappropriately marking trades as spread, when the trade does not 
qualify for such treatment pursuant to Amex Rule 950-ANTE (d), 
Commentaries .01 or .07(b).

    1. Amex quote = 4.80 x 5.
    2. There is a customer order to sell 10 at $5.
the specialist account or he enters a trade for the specialist account 

    When the specialist enters the transaction into the trading system, 
he or she can indicate the split price trade by clicking the ``spread'' 
button just as he or she does for the execution of complex trades. By 
doing so, the system allows the quantity allocated to the specialist to 
remain with the specialist. As noted above, if the specialist does not 
click on the ``spread'' button, then 10 of the 50 contracts allocated 
to the specialist will be allocated to the customer instead.
Certain Linkage Transactions
    The Block will not be triggered if:
    (1) The specialist's trade for his or her dealer account is a 
report of principal participation on an order sent to another market 
center through Options Intermarket Linkage prior to the time the Agency 
Order was displayed on the Book; \8\ or
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    \8\ The Block will be triggered if an eligible Agency Order is 
displayed on the Book at the time the specialist attempts to send a 
principal order to another market.
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    (2) The transaction is in connection with a P/A order sent to 
another market center through the Options Intermarket Linkage.
    A specialist who participates as principal on an order sent to 
another market center through Options Intermarket Linkage is not 
required to yield to an Agency Order that arrives subsequent to the 
time the specialist sent a principal linkage commitment, but prior to 
receiving a report of execution back. In this case, the specialist has 
time priority to the Agency Order since the proprietary trade has 
already taken place. Furthermore, a specialist is not required to yield 
to an Agency Order where a specialist is obligated to trade with an 
order on the book on the basis of receiving an execution report of a 
``P/A'' order (as defined in Amex Rule 940(b)(10)(i)), sent to another 
market center through Options Intermarket Linkage. Under applicable 
linkage rules, this trade was done expressly on behalf of a customer 
order, and the specialist must relinquish the position to the customer 
upon receiving the execution report.\9\ The exception ensures that the 
specialist maintains this obligation.
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    \9\ See Amex Rule 941(b).
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Correction of a Bona Fide Error
    Specialist options errors are processed outside of the ANTE trading 
system by Exchange staff through Exchange error corrections facilities. 
In circumstances in which a specialist must correct a bona fide error, 
if the correction involves principal participation and an Agency Order 
is present on the Book at the time of the correction, there is no 
requirement that the specialist yield to later arriving customer Agency 
Orders. All errors are appropriately documented and reported to the 
Exchange, by the Service Desk, in a manner designated by the Exchange.
    Although ANTE has systematized the functionality required by the 
proposed exceptions codified in proposed Commentary .04 to Amex 950-
ANTE (l), the Exchange wishes to advise that there is an inherent 
limitation in fully systematizing this functionality. The ANTE trading 
system combines the electronic routing, quoting, and execution of 
options orders with on floor auction market trading in options. In this 
regard, specialists can and will be involved in orally consummated 
orders. Often these ``crowd trades'' involve a number of registered 
options traders as contra-parties to the transaction together with the 
specialist. To enable timely trade reporting, the specialist may report 
a crowd transaction without all of the names of the contra-parties 
reflected, and shortly thereafter submit an Action without an Order 
(known as an ``AWO'') to provide the names of all counter-parties to 
the trade. If the specialist is a party to the

[[Page 72423]]

trade, his participation must be reported on either the trade report or 
the AWO. The trading ahead block will replace his participation if a 
later arriving off-floor customer agency order is entitled to 
participate in the specialist's place. However, it is theoretically 
possible that if there was a customer agency order on the specialist 
book at the time of the trade report that was cancelled prior to the 
AWO, the trading ahead block would not be able to replace the 
specialist's participation with the customer. Similarly though, a 
customer order could be entered subsequent to the trade report but 
prior to the AWO, and in such a situation the specialist's 
participation will be replaced.
    Because the specialist has the ability to delay reporting his 
participation in a transaction there is of course the potential that a 
specialist may inappropriately use this ability to avoid being replaced 
by a customer order. While the Exchange acknowledges that this type of 
inappropriate action could happen, a specialist delaying the reporting 
of his participation to avoid being replaced by a customer order runs 
the risk that the customer order does not cancel or otherwise get 
executed, or the risk that additional customer orders arrive that could 
also replace the specialist's participation. However, FINRA conducts 
routine surveillance to identify situations in which a specialist 
traded ahead of an order by the use of an AWO to report his 
participation after the reporting of a transaction. The Exchange states 
that to date, this surveillance indicates that specialists generally 
report their proprietary participation at the time of the trade report, 
rather than through a later AWO. Moreover, even when a later AWO is 
used, FINRA has only identified two possibly valid trading ahead 
alerts, which are currently under review. To the extent violative 
conduct is found to have occurred, the Amex will take appropriate 
disciplinary action against the specialist in question.
    The Exchange notes that the foregoing amendment to Commentary .04 
to 950-ANTE(l) shall remain applicable until the Amex Book Clerk 
(``ABC'') program has been fully implemented.\10\ The ABC program 
eliminates the obligation and ability of Exchange options specialists 
to execute orders as agent in his or her assigned options classes. 
Rather, an Exchange employee or independent contractor, the ABC shall 
be responsible for maintaining and operating the customer limit order 
book and display book. The Amex anticipates a six month rollout period 
of ABC program.
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    \10\ See Securities Exchange Act Release No. 56804 (November 16, 
2007), 72 FR 66002 (November 26, 2007) (SR-Amex-2006-107).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \11\ in general and furthers the 
objectives of section 6(b)(5) of the Act \12\ 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 designed to prohibit unfair discrimination between customers, 
issuers, brokers and dealers. Specifically, the Exchange believes that 
conforming the Exchange's rule text to the ANTE Public Orders Ahead 
Block functionality is consistent with the protection of investors and 
the public interest, and would sooner afford market participants the 
benefits that should flow from the proposal.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
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

    The Exchange states that no written comments were solicited or 
received with respect to the proposed rule change.

III. 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-2007-46 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-2007-46. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of Amex. 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-2007-46 and should be 
submitted on or before January 10, 2008.

IV. Commission Findings and Accelerated Approval

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange \13\ and, in particular, the requirements of section 6 of the 
Act.\14\ Specifically, the Commission finds that the proposed rule 
change is consistent with section 6(b)(5) of the Act,\15\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and

[[Page 72424]]

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, because the proposed rule 
change modifies the Exchange's ANTE system to systematically prevent a 
specialist from trading ahead of public customer orders except in those 
limited circumstances that are enumerated in the proposed rule.
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    \13\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission finds good cause, pursuant to section 19(b)(2) of 
the Act,\16\ for approving the proposed rule change prior to the 
thirtieth day after the date of publication of the notice of filing 
thereof in the Federal Register as the proposal does not significantly 
affect the protection of investors or the public interest, and does not 
impose any significant burden on competition. The Commission notes that 
the proposed rule change codifies the system changes made in response 
to certain undertakings made by the Amex.\17\ Moreover, the Commission 
believes that granting accelerated approval to this proposed rule 
change will allow these changes to be effective without delay and to 
remain in effect during the transition to the ABC program.\18\
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    \16\ 15 U.S.C. 78s(b)(2).
    \17\ See Securities Exchange Release No. 55507 (March 22, 2007).
    \18\ See supra note 10 and accompanying text.
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-Amex-2007-46), as amended, 
be, and is hereby approved on an accelerated basis.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
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. E7-24726 Filed 12-19-07; 8:45 am]

BILLING CODE 8011-01-P