Document ID: SEC-2006-0508-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2006-04-19T04:00Z

[Federal Register: April 19, 2006 (Volume 71, Number 75)]
[Notices]               
[Page 20144-20145]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19ap06-144]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53635; File No. SR-Amex-2005-075]

 
Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Approving Proposed Rule Change and Amendments No. 2 and 3 Thereto 
Relating to the Establishment of a New Class of Registered Options 
Trader Called a Supplemental Registered Options Trader (``SROT'')

April 12, 2006.

I. Introduction

    On July 14, 2005, 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 establish a new class of Registered Options 
Trader called a Supplemental Registered Options Trader (``SROT''). On 
November 4, 2005, the Amex filed Amendment No. 1 to the proposed rule 
change.\3\ On December 7, 2005, the Amex filed Amendment No. 2 to the 
proposed rule change.\4\ On January 13, 2006, the Amex filed Amendment 
No. 3 to the proposed rule change.\5\ The proposed rule change, as 
amended, was published for comment in the Federal Register on January 
26, 2006.\6\ The Commission received no comments from the public in 
response to the proposed rule change. This order approves the proposed 
rule, as amended by Amendments No. 2 and 3.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
    \4\ Amendment No. 2 replaced and superseded Amendment No. 1.
    \5\ Amendment No. 3 made clarifying changes to the Purpose 
section, as well as changes to the proposed rule text relating to 
allocation of executed contracts and affiliation limitations.
    \6\ See Securities Exchange Act Release No. 53161 (January 20, 
2005), 71 FR 4388.
---------------------------------------------------------------------------

II. Description

    Amex proposes to adopt Amex Rule 993--ANTE to establish a new 
category of registered options trader called an SROT. Amex also 
proposes to adopt amendments to existing Amex Rules 900--ANTE, 918--
ANTE, 935--ANTE, 936--ANTE, 936C--ANTE, 950--ANTE, 951--ANTE, 958--ANTE 
and 958A--ANTE to incorporate this new category of trader into relevant 
existing rules.
    The Amex proposes to define an SROT as a ROT that is a member 
organization so designated by the Exchange and would be granted remote 
quoting rights to enter bids and offers electronically only from off 
the Exchange's physical trading floor,\7\ in at least 300 option 
classes. A member organization requesting approval to act as an SROT 
would file an application with the Exchange, and the Exchange would 
initially choose a maximum of six (6) SROTs, based upon criteria 
including adequacy of resources, operational history, market making 
and/or specialist experience in a broad array of securities, and the 
ability to interact with order flow in all types of markets. The 
Exchange proposes to designate a committee (``Committee'') to make SROT 
approval decisions, including granting, withdrawing, denying, and 
deferring approval.\8\ The proposed rule also includes provisions that 
govern SROT applicant withdrawal, as well as suspension and/or 
termination of SROT appointments.
---------------------------------------------------------------------------

    \7\ See proposed Amex Rule 900--ANTE (50).
    \8\ Pursuant to paragraph (a)(vi) to proposed Amex Rule 993--
ANTE, the Committee may not defer a determination of the approval of 
the application of an SROT applicant unless the basis for such 
deferral has been objectively determined by the Committee, subject 
to Securities and Exchange Commission approval or effectiveness 
pursuant to a proposed rule change filed under Section 19(b) of the 
Act. The Committee would be required to provide written notification 
to any SROT applicant whose application is the subject of such 
deferral, describing the objective basis for such deferral.
---------------------------------------------------------------------------

    The Exchange would determine the number and type of option classes 
assigned to an SROT, with a minimum of 300 option classes per SROT. 
SROTs would be required to purchase or lease one seat for every thirty 
(30) option classes quoted and would be required to provide continuous 
two-sided quotations in at least 60% of the series of their assigned 
classes. The proposed rule would require that SROTs maintain 
information barriers and that no SROT be assigned to an options class 
where the SROT has a direct or indirect affiliate who is a specialist, 
ROT or SROT in such option class. Commentary to proposed Amex Rule 
993--ANTE also provides that quoting rights and the designation as an 
SROT are non-transferable and that SROTs may trade in a market-making 
capacity only in the classes of options to which he/she is assigned.
    Amex proposes to modify Amex Rule 935--ANTE, which governs the 
allocation of unexecuted contracts to include SROTs. As proposed, when 
more than one market participant is quoting at the Amex Best Bid or 
Offer (``ABBO''), and an SROT is not interacting with its own firm's 
orders, the allocations in Amex Rule 935--ANTE (a)(1)-(4) would apply. 
However, when more than one market participant is quoting at the ABBO, 
and an SROT is interacting with its own firm's orders, the ANTE System 
will allocate the remaining contracts after non-broker dealer customer 
orders as follows: (i) 20% to an SROT interacting with its own firm's 
orders; (ii) 20% to the specialist; and (iii) the balance to registered 
options traders.
    Amex also proposes to modify Amex Rule 958--ANTE, which governs 
ANTE options transactions of registered options traders and imposes 
certain obligations, including engaging in transactions that are 
reasonably calculated to contribute to the maintenance of a fair and 
orderly market, making competitive bids and offers necessary, in a 
market making capacity, to contribute to the maintenance of a fair and 
orderly market, to include SROTs. Furthermore, Amex proposes to modify 
Amex Rule 958A--ANTE, which is the Exchange's Firm Quote Rule, to apply 
to SROTs.

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 20145]]

and regulations thereunder applicable to a national securities 
exchange.\9\ In particular, the Commission finds that the proposal, as 
amended, is consistent with the provisions of Section 6(b)(5) of the 
Act,\10\ which require, among other things, that a national securities 
exchange's rules be designed to promote just and equitable principles 
of trade, to remove impediments to and to perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \9\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Currently, the Exchange permits ROTs to submit quotes only from the 
physical trading floor. Under the proposal, a new class of market 
participant, SROTs, would be permitted to quote electronically from off 
the Exchange's physical trading floor. Introducing a new class of 
market participant able to enter quotes from off the physical trading 
floor should attract new market makers to the Exchange, which should 
increase the liquidity available in those classes to which SROTs are 
assigned.
    The Commission notes that the Committee will determine, based on 
specified criteria, which member organizations should be chosen to act 
as SROTs. The existence of order flow commitments between an SROT 
applicant and order flow providers is one factor the Committee will 
evaluate in making its decisions. The Exchange represents, and the 
Commission emphasizes, that a future change to, or termination of, any 
such commitments would not be used by the Exchange at any point in the 
future to terminate or take remedial action against an SROT and that 
the Committee would not take remedial action solely because orders 
subject to any such commitments were not subsequently routed to the 
Exchange. Similarly, the Exchange has included the ``willingness to 
promote the Exchange'' as a factor that the Committee may consider when 
making its application decisions. The Exchange represents, and the 
Commission emphasizes, that the Committee would not apply this factor 
to in any way restrict, either directly or indirectly, an SROT's 
activities as a market maker or specialist on other exchanges, or to 
restrict how SROTs handle orders held by them in a fiduciary capacity 
to which they owe a duty of best execution.
    The Exchange also represents that should the Committee decide not 
to approve an SROT applicant, or should an SROT's appointment be 
suspended or terminated in one or more classes, an SROT applicant or an 
SROT, respectively, would be entitled to a hearing under Article IV, 
Section 1(g) of the Amex Constitution and Amex Rule 40. Additionally, 
should the Committee decide to defer an SROT application, the Committee 
must provide written notification to any SROT applicant whose 
application is the subject of such deferral, describing the objective 
basis for such deferral. Proposed Amex Rule 993(a)(vi)--ANTE prohibits 
the Committee from deferring a determination of the approval of the 
application of an SROT applicant unless the basis for such deferral has 
been objectively determined by the Committee, subject to Securities and 
Exchange Commission approval or effectiveness pursuant to a proposed 
rule change filed under Section 19(b) of the Act.
    Proposed Amex Rule 993(c)--ANTE sets forth the obligations that an 
SROT would be required to fulfill. Specifically, an SROT would be 
required to generate continuous, two-sided quotations in not less than 
60% of the series of their assigned classes. The Commission believes 
that these obligations for SROTs are consistent with the Act. In 
particular, the Commission believes that SROT's affirmative obligations 
are sufficient to justify the benefits they receive as market makers.
    The Exchange also represents that information barriers would be in 
place to prevent the misuse of material, non-public information with 
any affiliates that may conduct a brokerage business in option classes 
assigned to an SROT, or that may act as a market maker in any security 
underlying options assigned to an SROT. SROTs would also be required to 
comply with Amex Rule 193 regarding the misuse of material non-public 
information between the affiliate and the specialist organization.
    The Commission believes that the trade allocation algorithm that 
would apply to SROTs is consistent with the Act and should encourage 
SROTs to quote competitively.
    Finally, the Commission notes that an SROT would be permitted to 
trade in a market making capacity only in the classes of options in 
which the SROT is assigned and, furthermore, that quoting rights and 
designation of an SROT would be non-transferable.
    As such, the Commission believes that Amex's proposal to adopt Amex 
Rule 993--ANTE to establish a new category of registered options trader 
called an SROT and the corresponding amendments to existing Amex Rules 
900--ANTE, 918--ANTE, 935--ANTE, 936--ANTE, 936C--ANTE, 950--ANTE, 
951--ANTE, 958--ANTE and 958A--ANTE, are consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-Amex-2005-075), as amended 
by Amendments No. 2 and 3, be, and it hereby is, approved.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
[FR Doc. E6-5800 Filed 4-18-06; 8:45 am]

BILLING CODE 8010-01-P