

[Federal Register: November 8, 2005 (Volume 70, Number 215)]
[Notices]               
[Page 67765-67772]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08no05-68]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52718; File No. SR-Amex-2005-060]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change and Amendments Nos. 1, 2, and 
3 Thereto Relating to Amendments to the Obvious Error Rules

November 2, 2005.
    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 May 31, 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 
September 21, 2005, the Amex submitted Amendment No. 1 to the proposed 
rule change.\3\ On October 4, 2005, the Amex submitted Amendment No. 2 
to the proposed rule change.\4\ On October 27, 2005, the Amex submitted 
Amendment No. 3 to the proposed rule change.\5\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Form 19b-4 dated September 21, 2005, which replaced the 
original filing in its entirety (``Amendment No. 1'').
    \4\ Amendment No. 2 corrected technical errors in the proposed 
rule text.
    \5\ Amendment No. 3 incorporated certain proposed revisions to 
Amex Rules 936 and 936--ANTE contained in Amendment No. 1 to Amex 
Rules 936C and 936C--ANTE and corrected an error in the proposed 
rule text of Amex Rules 936C and 936C--ANTE.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to: (i) Amend the equity and index options 
obvious error rules to revise the manner in which an obvious price 
error is determined for both equity and index options; (ii)

[[Page 67766]]

clarify the determination of ``Fair Market Value'' in connection with 
the index option obvious error rule; (iii) amend the equity and index 
options obvious error rules relating to an erroneous quote in the 
underlying security; (iv) amend the equity and index options obvious 
error rules to permit transactions executed outside of trading hours to 
be cancelled; (v) amend how obvious errors based on ``verifiable 
disruptions or malfunctions of Exchange systems'' as set forth in both 
the equity and index obvious error rules are adjusted or cancelled; and 
(vi) revise the equity and index options obvious error rules to amend 
the terms that relate to the cancellation of ``no bid series.''
    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in [brackets].
* * * * *
Rule 936. Cancellation and Adjustment of Equity Options Transactions
    This Rule governs the cancellation and adjustment of transactions 
involving equity options. Rules 936C and 936C--ANTE govern the 
cancellation and adjustment of transactions involving options on 
indexes, exchange-traded funds (``ETFs'') and trust issued receipts 
(``TIRs''). Paragraphs (a)(1) and (2) of this Rule have no 
applicability to trades executed in open outcry.
    (a) Trades Subject to Review. A member or person associated with a 
member may have a trade cancelled or adjusted if, in addition to 
satisfying the procedural requirements of paragraph (b) below, one of 
the following conditions is satisfied:
    (1) Obvious Price Error. An obvious pricing error occurs when the 
execution price of an electronic transaction is above or below the 
Theoretical Price for the series by an amount equal to at least the 
amount shown below:

------------------------------------------------------------------------
                                                                Minimum
                      Theoretical price                          amount
------------------------------------------------------------------------
Below $2.....................................................      $0.25
$2 to $5.....................................................       0.40
Above $5 to $10..............................................       0.50
Above $10 to $20.............................................       0.80
Above $20....................................................       1.00
------------------------------------------------------------------------

    Definition of Theoretical Price. For purposes of this Rule only, 
the Theoretical Price of an option series is, for series traded on at 
least one other options exchange, the last bid price with respect to an 
erroneous sell transaction and the last offer price with respect to an 
erroneous buy transaction, just prior to the trade, disseminated by the 
competing options exchange that has the most liquidity in that option 
class in the previous two calendar months. The Theoretical Price will 
not include the last bid price (erroneous sell transaction) or last 
offer price (erroneous buy transaction) of the competing options 
exchange that has the most liquidity in that options class in the 
previous two calendar quarters if such competing options exchange 
widens its quote to incorporate the prior erroneous quote of the 
Exchange. In such a case, the Theoretical Price shall be the last bid 
price (erroneous sell transaction) and the last offer price (erroneous 
buy transaction) just prior to the trade, disseminated by the competing 
options exchange with the next best liquidity. If there are no 
competing options exchanges left without an erroneous quote, the 
Theoretical Price shall be the first quote of the competing options 
exchange, that has the most liquidity in that options class in the 
previous two calendar quarters, after the transaction(s) in question 
that does not reflect the erroneous quote. If there are no quotes for 
comparison, designated Trading Officials will determine the Theoretical 
Price. For transactions occurring as part of an opening, the 
Theoretical Price shall be the first quote after the transaction(s) in 
question that does not reflect the erroneous transaction(s).
    (i) Cancellation or Price Adjustment. Obvious Pricing Errors will 
be cancelled or adjusted as follows.
     Transactions Between Amex specialists/registered options 
traders (ROTs): Where both parties to the transaction are Amex 
specialists/ROTs, the execution price of the transaction will be 
adjusted by Trading Officials to the prices provided in Paragraphs (A) 
and (B) below, minus (plus) an adjustment penalty (``adjustment 
penalty''), unless both parties agree to adjust the transaction to a 
different price or agree to cancel the trade within fifteen (15) 
minutes of being notified by Trading Officials of the Obvious Error.
    (A) Erroneous buy transactions will be adjusted to their 
Theoretical Price plus an adjustment penalty of either $.15 if the 
Theoretical Price is under $3 or $.30 if the Theoretical Price is at or 
above $3.
    (B) Erroneous sell transactions will be adjusted to their 
Theoretical Price minus an adjustment penalty of either $.15 if the 
Theoretical Price is under $3 or $.30 if the Theoretical Price is at or 
above $3.
     Transactions Involving at least one non-Amex specialist/
ROT: Where one of the parties to the transaction is not an Amex 
specialist/ROT, the transactions will be cancelled by Trading Officials 
unless both parties agree to an adjustment price for the transaction 
within thirty (30) minutes of being notified by Trading Officials of 
the Obvious Error.
    (2) No Bid Series. Electronic transactions in series quoted no bid 
[at a nickel (i.e., $0.05 offer)] will be cancelled provided at least 
one strike price below (for calls) or above (for puts) in the same 
options class was quoted no bid [at a nickel] at the time of execution.
    (3) Verifiable Disruptions or Malfunctions of Exchange Systems: 
Electronic or open outcry transactions arising out of a ``verifiable 
disruption or malfunction'' in the use or operation of any Exchange (a) 
automated quotation, dissemination, execution, or communication system 
that caused a quote/order to trade in excess of its disseminated size 
(e.g., a quote/order that is frozen because of an Exchange system error 
and is repeatedly traded) in which case trades in excess of the 
disseminated size may be nullified; or (b) automated quotation, 
dissemination or communication system that prevented a member from 
updating or canceling a quote/order for which the member is 
responsible, provided there is Exchange documentation reflecting that 
the member sought to update or cancel the quote/order. With respect to 
verifiable disruptions or malfunctions of the Exchange's automated 
quotation system, documentation of the existence of the disruption or 
malfunction will be sufficient provided the automated quotation system 
was programmed to update or cancel a quote based upon specific changes 
in the underlying, those changes occurred and due to the disruption or 
malfunction the quote was not updated or cancelled. Unless the parties 
agree to a price adjustment, the transaction will be cancelled. 
[Transactions that qualify for price adjustment will be adjusted to the 
Theoretical Price, as defined in paragraph (a)(1) above.]
    (4) No Change
    (5) Erroneous Quote in Underlying. (i) Electronic trades (this 
provision does not apply to trades executed in open outcry) resulting 
from an erroneous quote in the underlying security may be adjusted or 
canceled as set forth in paragraph (a)(1) above. An erroneous quote 
occurs when the underlying security has a width of at least $1.00 and 
has a width at least five times greater than the average quote width 
for such underlying security on the primary market (as defined in Rule 
900 (b)(26)) during the time period encompassing two minutes before and 
after the dissemination of such quote. For purposes of this Rule, the 
average quote width shall be determined by adding the

[[Page 67767]]

quote widths of each separate quote during the four minute time period 
referenced above (excluding the quote in question) and dividing the 
number of quotes during such time period (excluding the quote in 
question).
    (ii) Electronic trades resulting from an erroneous quote in the 
underlying security may also be adjusted or cancelled as set forth in 
paragraph (a)(1)(i) above when (i) a national securities exchange or 
the Nasdaq Stock Market, Inc.'s quotes are not firm based upon direct 
communication from that market or dissemination of a message indicating 
the quotes are not firm or (ii) a national securities exchange or the 
Nasdaq Stock Market, Inc. has directly communicated or otherwise 
confirmed that it is experiencing systems or other problems affecting 
the reliability of its disseminated quotes.
    (6) Transactions Executed Outside of Trading Hours. All equity 
options transactions that occur outside of the trading hours of the 
Exchange will be cancelled if it is determined by the Trading Officials 
that the transaction occurred outside of the Exchange's trading hours, 
except as set forth in Commentary .02 to Amex Rule 1.
    (b) through (e). No Change
Commentary
    .01 through .03 No Change
* * * * *

Rule 936C. Cancellation and Adjustment of Index Option Transactions

    This Rule only governs the cancellation and adjustment of 
transactions involving options on indexes, exchange-traded funds (ETFs) 
and trust issued receipts (TIRs). Rule 936 governs the cancellation and 
adjustment of transactions involving equity options. Paragraphs (a)(1), 
(2), (6) and (7) of this Rule have no applicability to trades executed 
in open outcry.
(a) Trades Subject to Review
    A member or person associated with a member may have a trade 
cancelled or adjusted if, in addition to satisfying the procedural 
requirements of paragraph (b) below, one of the following conditions is 
satisfied:
    (1) Obvious Price Error. An obvious pricing error will be deemed to 
have occurred when the execution price of a transaction is above or 
below the fair market value of the option by at least a prescribed 
amount. For series trading with normal bid-ask differentials as 
established in Rule 958(c), the prescribed amount shall be: (a) the 
greater of $0.10 or 10% for options trading under $2.50; (b) 10% for 
options trading at or above $2.50 and under $5; or (c) $0.50 for 
options trading at $5 or higher. For series trading with bid-ask 
differentials that are greater than the widths established in Rule 
958(c), the prescribed error amount shall be: (a) the greater of $0.20 
or 20% for options trading under $2.50; (b) 20% for options trading at 
or above $2.50 and under $5; or (c) $1.00 for options trading at $5 or 
higher.
    (i) Definition of Fair Market Value: For purposes of this Rule 
only, the [f]Fair [m]Market [v]Value of an option is the midpoint of 
the national best bid and national best offer for the series (across 
all exchanges trading the option). Fair Market Value will not include 
the national best bid price (erroneous sell transaction) or national 
best offer price (erroneous buy transaction) of competing options 
exchanges if such competing options exchange(s) widen their quote(s) to 
incorporate the prior erroneous quote of the Exchange. In such a case, 
the Fair Market Value shall be the midpoint of the first quote after 
the transaction(s) in question that does not reflect the erroneous 
quote. In multiply listed issues, if there are no quotes for comparison 
purposes, [f]Fair [m]Market [v]Value shall be determined by Trading 
Officials. For singly listed issues, [f]Fair [m]Market [v]Value shall 
be the midpoint of the first quote after the transaction(s) in question 
that does not reflect the erroneous quote [erroneous transaction(s)]. 
For transactions occurring as part of an opening, the Fair Market Value 
shall also be the midpoint of the first quote after the transaction(s) 
in question that does not reflect the erroneous quote [erroneous 
transaction(s)].
    (2) No Change.
    (3) Verifiable Disruptions or Malfunctions of Exchange Systems. 
Trades arising out of a ``verifiable disruption or malfunction'' in the 
use or operation of any Exchange (a) automated quotation, 
dissemination, execution, or communication system that caused a quote/
order to trade in excess of its disseminated size (e.g., a quote/order 
that is frozen because of an Exchange system error and is repeatedly 
traded) in which case trades in excess of the disseminated size may be 
nullified; or (b) automated quotation, dissemination or communication 
system that prevented a member from updating or canceling a quote/order 
for which the member is responsible, provided there is Exchange 
documentation reflecting that the member sought to update or cancel the 
quote/order. With respect to verifiable disruptions or malfunctions of 
the Exchange's automated quotation system, documentation of the 
existence of the disruption or malfunction will be sufficient provided 
the automated quotation system was programmed to update or cancel a 
quote based upon specific changes in the underlying, those changes 
occurred and due to the disruption or malfunction the quote was not 
updated or cancelled. Unless the parties agree to a price adjustment, 
the transaction will be cancelled. [Transactions that qualify for price 
adjustment will be adjusted to the Fair Market Value, as defined in 
paragraph (a)(1)(i) above.]
    (4) No Change.
    (5) Erroneous Quote in Underlying. (i) A trade resulting from an 
erroneous quote in the underlying security may be cancelled or 
adjusted. An erroneous quote occurs when the underlying security has a 
width of at least $1.00 and has a width at least five times greater 
than the average quote width for such underlying security on the 
primary market (as defined in Rule 900(b)(26)) during the time period 
encompassing two minutes before and after the dissemination of such 
quote.
    (ii) Electronic trades resulting from an erroneous quote in the 
underlying security may also be adjusted or cancelled as set forth in 
paragraph (a)(1)(i) above when (i) a national securities exchange or 
the Nasdaq Stock Market, Inc.'s quotes are not firm based upon direct 
communication from that market or dissemination of a message indicating 
the quotes are not firm or (ii) a national securities exchange or the 
Nasdaq Stock Market, Inc. has directly communicated or otherwise 
confirmed that it is experiencing systems or other problems affecting 
the reliability of its disseminated quotes.
    (6) No Change.
    (7) No Bid Series. Electronic transactions in series quoted no bid 
[at a nickel (i.e., $0.05 offer)] will be cancelled provided at least 
one strike price below (for calls) or above (for puts) in the same 
options class was quoted no bid [at a nickel] at the time of execution.
    (8) Transactions Executed Outside of Trading Hours. All index 
options transactions that occur outside of the trading hours of the 
Exchange will be cancelled if it is determined by the Trading Officials 
that the transaction occurred outside of the Exchange's trading hours, 
except as set forth in Commentary .02 to Amex Rule 1.
    (b) through (e). No Change.
Commentary
    .01 through .02. No Change.
* * * * *

[[Page 67768]]

Rule 936--ANTE. Cancellation and Adjustment of Equity Options 
Transactions
    This Rule governs the nullification and adjustment of transactions 
involving equity options. Rule 936C and 936C--ANTE governs the 
nullification and adjustment of transactions involving options on 
indexes, exchange-traded funds (``ETFs'') and trust issued receipts 
(``TIRs''). Paragraphs (a)(1) and (2) of this Rule have no 
applicability to trades executed in open outcry. (a) Trades Subject to 
Review. A member or person associated with a member may have a trade 
cancelled or adjusted if, in addition to satisfying the procedural 
requirements of paragraph (b) below, one of the following conditions is 
satisfied:
    (1) Obvious Price Error. An obvious pricing error occurs when the 
execution price of an electronic transaction is above or below the 
Theoretical Price for the series by an amount equal to at least the 
amount shown below:

------------------------------------------------------------------------
                                                                Minimum
                      Theoretical price                          amount
------------------------------------------------------------------------
Below $2.....................................................      $0.25
$2 to $5.....................................................       0.40
Above $5 to $10..............................................       0.50
Above $10 to $20.............................................       0.80
Above $20....................................................       1.00
------------------------------------------------------------------------

    Definition of Theoretical Price. For purposes of this Rule only, 
the Theoretical Price of an option series is, for series traded on at 
least one other options exchange, the last bid price with respect to an 
erroneous sell transaction and the last offer price with respect to an 
erroneous buy transaction, just prior to the trade, disseminated by the 
competing options exchange that has the most liquidity in that option 
class in the previous two calendar months. The Theoretical Price will 
not include the last bid price (erroneous sell transaction) or last 
offer price (erroneous buy transaction) of the competing options 
exchange that has the most liquidity in that options class in the 
previous two calendar quarters if such competing options exchange 
widens its quote to incorporate the prior erroneous quote of the 
Exchange. In such a case, the Theoretical Price shall be the last bid 
price (erroneous sell transaction) and the last offer price (erroneous 
buy transaction) just prior to the trade, disseminated by the competing 
options exchange with the next best liquidity. If there are no 
competing options exchanges left without an erroneous quote, the 
Theoretical Price shall be the first quote of the competing options 
exchange, that has the most liquidity in that options class in the 
previous two calendar quarters, after the transaction(s) in question 
that does not reflect the erroneous quote. If there are no quotes for 
comparison, designated Trading Officials will determine the Theoretical 
Price. For transactions occurring as part of an opening, the 
Theoretical Price shall be the first quote after the transaction(s) in 
question that does not reflect the erroneous transaction(s).
    (i) Cancellation or Price Adjustment. Obvious Pricing Errors will 
be cancelled or adjusted as follows.
     Transactions Between Amex specialists/registered options 
traders (ROTs): Where both parties to the transaction are Amex 
specialists/ROTs, the execution price of the transaction will be 
adjusted by Trading Officials to the prices provided in Paragraphs (A) 
and (B) below, minus (plus) an adjustment penalty (``adjustment 
penalty''), unless both parties agree to adjust the transaction to a 
different price or agree to cancel the trade within fifteen (15) 
minutes of being notified by Trading Officials of the Obvious Error.
    (A) Erroneous buy transactions will be adjusted to their 
Theoretical Price plus an adjustment penalty of either $.15 if the 
Theoretical Price is under $3 or $.30 if the Theoretical Price is at or 
above $3.
    (B) Erroneous sell transactions will be adjusted to their 
Theoretical Price minus an adjustment penalty of either $.15 if the 
Theoretical Price is under $3 or $.30 if the Theoretical Price is at or 
above $3.
     Transactions Involving at least one non-Amex specialist/
ROT: Where one of the parties to the transaction is not an Amex 
specialist/ROT, the transactions will be cancelled by Trading Officials 
unless both parties agree to an adjustment price for the transaction 
within thirty (30) minutes of being notified by Trading Officials of 
the Obvious Error.
    (2) No Bid Series. Electronic transactions in series quoted no bid 
[at a nickel (i.e., $0.05 offer)] will be cancelled provided at least 
one strike price below (for calls) or above (for puts) in the same 
options class was quoted no bid [at a nickel] at the time of execution.
    (3) Verifiable Disruptions or Malfunctions of Exchange Systems: 
Electronic or open outcry transactions arising out of a ``verifiable 
disruption or malfunction'' in the use or operation of any Exchange (a) 
automated quotation, dissemination, execution, or communication system 
that caused a quote/order to trade in excess of its disseminated size 
(e.g., a quote/order that is frozen because of an Exchange system error 
and is repeatedly traded) in which case trades in excess of the 
disseminated size may be nullified; or (b) automated quotation, 
dissemination or communication system that prevented a member from 
updating or canceling a quote/order for which the member is 
responsible, provided there is Exchange documentation reflecting that 
the member sought to update or cancel the quote/order. With respect to 
verifiable disruptions or malfunctions of the Exchange's automated 
quotation system, documentation of the existence of the disruption or 
malfunction will be sufficient provided the automated quotation system 
was programmed to update or cancel a quote based upon specific changes 
in the underlying, those changes occurred and due to the disruption or 
malfunction the quote was not updated or cancelled. Unless the parties 
agree to a price adjustment, the transaction will be cancelled. 
[Transactions that qualify for price adjustment will be adjusted to the 
Theoretical Price, as defined in paragraph (a)(1) above.]
    (4) No Change.
    (5) Erroneous Quote in Underlying. (i) Electronic trades (this 
provision does not apply to trades executed in open outcry) resulting 
from an erroneous quote in the underlying security may be adjusted or 
canceled as set forth in paragraph (a)(1) above. An erroneous quote 
occurs when the underlying security has a width of at least $1.00 and 
has a width at least five times greater than the average quote width 
for such underlying security on the primary market (as defined in Rule 
900 (b)(26)) during the time period encompassing two minutes before and 
after the dissemination of such quote. For purposes of this Rule, the 
average quote width shall be determined by adding the quote widths of 
each separate quote during the four minute time period referenced above 
(excluding the quote in question) and dividing the number of quotes 
during such time period (excluding the quote in question).
    (ii) Electronic trades resulting from an erroneous quote in the 
underlying security may also be adjusted or canceled as set forth in 
paragraph (a)(1)(i) above when (i) a national securities exchange or 
the Nasdaq Stock Market, Inc.'s quotes are not firm based upon direct 
communication from that market or dissemination of a message indicating 
the quotes are not firm or (ii) a national securities exchange or the 
Nasdaq Stock Market, Inc. has directly communicated or otherwise 
confirmed that it is experiencing systems or other problems affecting 
the reliability of its disseminated quotes.

[[Page 67769]]

    (6) Transactions Executed Outside of Trading Hours. All equity 
options transactions that occur outside of the trading hours of the 
Exchange will be canceled if it is determined by the Trading Officials 
that the transaction occurred outside of the Exchange's trading hours, 
except as set forth in Commentary .02 to Amex Rule 1.
    (b) through (e). No Change.
Commentary
    .01 through .03. No Change.
* * * * *

Rule 936C--ANTE. Cancellation and Adjustment of Index Option 
Transactions

    This Rule only governs the cancellation and adjustment of 
transactions involving options on indexes, exchange-traded funds (ETFs) 
and trust issued receipts (TIRs). Rule 936 and 936--ANTE governs the 
cancellation and adjustment of transactions involving equity options. 
Paragraphs (a)(1), (2), (6) and (7) of this Rule have no applicability 
to trades executed in open outcry.
(a) Trades Subject to Review
    A member or person associated with a member may have a trade 
cancelled or adjusted if, in addition to satisfying the procedural 
requirements of paragraph (b) below, one of the following conditions is 
satisfied:
    (1) Obvious Price Error. An obvious pricing error will be deemed to 
have occurred when the execution price of a transaction is above or 
below the fair market value of the option by at least a prescribed 
amount. For series trading with normal bid-ask differentials as 
established in Rule 958(c), the prescribed amount shall be: (a) the 
greater of $0.10 or 10% for options trading under $2.50; (b) 10% for 
options trading at or above $2.50 and under $5; or (c) $0.50 for 
options trading at $5 or higher. For series trading with bid-ask 
differentials that are greater than the widths established in Rule 
958(c), the prescribed error amount shall be: (a) the greater of $0.20 
or 20% for options trading under $2.50; (b) 20% for options trading at 
or above $2.50 and under $5; or (c) $1.00 for options trading at $5 or 
higher.
    (i) Definition of Fair Market Value: For purposes of this Rule 
only, the [f]Fair [m]Market [v]Value of an option is the midpoint of 
the national best bid and national best offer for the series (across 
all exchanges trading the option). Fair Market Value will not include 
the national best bid price (erroneous sell transaction) or national 
best offer price (erroneous buy transaction) of competing options 
exchange(s) if such competing options exchanges widen their quote(s) to 
incorporate the prior erroneous quote of the Exchange. In such a case, 
the Fair Market Value shall be the midpoint of the first quote after 
the transaction(s) in question that does not reflect the erroneous 
quote. In multiple listed issues, if there are no quotes for comparison 
purposes, [f]Fair [m]Market [v]Value shall be determined by Trading 
Officials. For singly-listed issues, [f]Fair [m]Market [v]Value shall 
be the midpoint of the first quote after the transaction(s) in question 
that does not reflect the erroneous quote [erroneous transaction(s)]. 
For transactions occurring as part of an opening, the Fair Market Value 
shall also be the midpoint of the first quote after the transaction(s) 
in question that does not reflect the erroneous quote [erroneous 
transaction(s)].
    (2) No Change.
    (3) Verifiable Disruptions or Malfunctions of Exchange Systems. 
Trades arising out of a ``verifiable disruption or malfunction'' in the 
use or operation of any Exchange (a) automated quotation, 
dissemination, execution, or communication system that caused a quote/
order to trade in excess of its disseminated size (e.g., a quote/order 
that is frozen because of an Exchange system error and is repeatedly 
traded) in which case trades in excess of the disseminated size may be 
nullified; or (b) automated quotation, dissemination or communication 
system that prevented a member from updating or canceling a quote/order 
for which the member is responsible, provided there is Exchange 
documentation reflecting that the member sought to update or cancel the 
quote/order. With respect to verifiable disruptions or malfunctions of 
the Exchange's automated quotation system, documentation of the 
existence of the disruption or malfunction will be sufficient provided 
the automated quotation system was programmed to update or cancel a 
quote based upon specific changes in the underlying, those changes 
occurred and due to the disruption or malfunction the quote was not 
updated or canceled. Unless the parties agree to a price adjustment, 
the transaction will be canceled. [Transactions that qualify for price 
adjustment will be adjusted to the Fair Market Value, as defined in 
paragraph (a)(1)(i) above.]
    (4) No Change.
    (5) Erroneous Quote in Underlying. (i) A trade resulting from an 
erroneous quote in the underlying security may be canceled or adjusted. 
An erroneous quote occurs when the underlying security has a width of 
at least $1.00 and has a width at least five times greater than the 
average quote width for such underlying security on the primary market 
(as defined in Rule 900(b)(26)) during the time period encompassing two 
minutes before and after the dissemination of such quote.
    (ii) Electronic trades resulting from an erroneous quote in the 
underlying security may also be adjusted or canceled as set forth in 
paragraph (a)(1)(i) above when (i) a national securities exchange or 
the Nasdaq Stock Market, Inc.'s quotes are not firm based upon direct 
communication from that market or dissemination of a message indicating 
the quotes are not firm or (ii) a national securities exchange or the 
Nasdaq Stock Market, Inc. has directly communicated or otherwise 
confirmed that it is experiencing systems or other problems affecting 
the reliability of its disseminated quotes.
    (6) No Change.
    (7) No Bid Series. Electronic transactions in series quoted no bid 
[at a nickel (i.e., $0.05 offer)] will be cancelled provided at least 
one strike price below (for calls) or above (for puts) in the same 
options class was quoted no bid [at a nickel] at the time of execution.
    (8) Transactions Executed Outside of Trading Hours. All index 
options transactions that occur outside of the trading hours of the 
Exchange will be cancelled if it is determined by the Trading Officials 
that the transaction occurred outside of the Exchange's trading hours, 
except as set forth in Commentary .02 to Amex Rule 1.
    (b) through (e). No Change
Commentary
    .01 through .02. No Change.
* * * * *

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.

[[Page 67770]]

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

1. Purpose
    The Exchange's equity option obvious error rules, Amex Rules 936 
and 936--ANTE, and index option obvious error rules, Amex Rules 936C 
and 936C--ANTE (the ``Obvious Error Rules'') establish guidelines for 
the adjustment and cancellation of transactions in equity and index 
options. The purpose of this proposed rule change is to (i) amend the 
definition of ``Theoretical Price'' \6\ and ``Fair Market Value'' \7\ 
in connection with determining whether an equity or index option 
obvious price error has occurred as established in Amex Rules 936(a)(1) 
and 936(a)(1)--ANTE (equity), and Amex Rules 936C(a)(1) and 
936C(a)(1)--ANTE (index), respectively; (ii) amend Amex Rules 
936C(a)(1)(i) and 936C(a)(1)(i)--ANTE to clarify how Fair Market Value 
is determined in connection with single-listed index options and 
opening transactions; (iii) amend the Obvious Error Rules relating to 
erroneous quote(s) in the underlying security to permit the 
cancellation/adjustment of an option transaction when an exchange 
declares its quotes non-firm or otherwise communicates to the Amex that 
its quotes are unreliable; (iv) add an additional type of qualifying 
transaction entitled ``Transactions Executed Outside of Trading 
Hours''; (v) amend how obvious price errors based on ``verifiable 
disruptions or malfunctions of Exchange systems'' are adjusted or 
cancelled; and (vi) revise the Obvious Error Rules to amend the terms 
of cancellations for ``no bid series.''
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    \6\ ``Theoretical Price'' of an option series is, for series 
traded on at least one other options exchange, the last bid price 
with respect to an erroneous sell transaction and the last offer 
price with respect to an erroneous buy transaction, just prior to 
the trade, disseminated by the competing options exchange that has 
the most liquidity in that option class in the previous two calendar 
months. If there are no quotes for comparison, designated Trading 
Officials will determine the Theoretical Price. For transactions 
occurring as part of an opening, the Theoretical Price shall be the 
first quote after the transaction(s) in question that does not 
reflect the erroneous transaction(s).
    \7\ ``Fair Market Value'' of an option is the midpoint of the 
national best bid and national best offer for the series (across all 
exchanges trading the option). In multiply listed issues, if there 
are no quotes for comparison purposes, Fair Market Value shall be 
determined by Trading Officials. For singly-listed issues, Fair 
Market Value shall be the first quote after the transaction(s) in 
question that does not reflect the erroneous transaction(s). For 
transactions occurring as part of an opening, the Fair Market Value 
shall also be the first quote after the transaction(s) in question 
that does not reflect the erroneous transaction(s).
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Obvious Price Error

    Under the Obvious Error Rules, an obvious price error is one of 
several enumerated types of transactions that qualify as an obvious 
error and are accordingly subject to adjustment or cancellation.

Equity Options

    Amex Rules 936(a)(1) and 936(a)(1)--ANTE provide that an obvious 
pricing error will be deemed to have occurred when the execution price 
of an electronic transaction (not open outcry) varies from the 
Theoretical Price by a requisite amount.\8\ For multiply-traded 
options, the Theoretical Price is the last bid (offer) price with 
respect to an erroneous sell (buy) transaction just prior to the trade 
that is disseminated by the competing options exchange with the most 
liquidity in that class over the preceding two (2) calendar months. If 
there are no quotes for comparison purposes, then trading officials 
will determine the Theoretical Price. For transactions occurring as 
part of an opening, the Theoretical Price is the first quote after the 
transaction(s) in question that does not reflect the erroneous 
transaction(s). When an obvious price error occurs, the Amex either 
will adjust or cancel the transaction pursuant to Amex Rules 
936(a)(1)(i) and 936(a)(1)(i)--ANTE.
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    \8\ The requisite amount is: $0.25 for options below $2; $0.40 
for options priced from $2 to $5; $0.50 for options priced above $5 
to $10; $0.80 for options priced above $10 to $20; and $1.00 for 
options priced above $20.
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Index Options

    Amex Rules 936C(a)(1) and 936C(a)(1)--ANTE provide that an obvious 
pricing error will be deemed to have occurred when the execution price 
of an electronic transaction (not open outcry) varies from the Fair 
Market Value by a prescribed amount.\9\ For multiply-traded options, 
the Fair Market Value is the midpoint of the national best bid for 
erroneous sell transactions or national best offer for erroneous buy 
transactions. If there are no quotes for comparison purposes, then 
trading officials will determine the Fair Market Value. For both 
single-listed options and transactions occurring as part of an opening, 
Fair Market Value is the midpoint of the first quote after the 
transaction(s) in question that does not reflect the erroneous 
transaction(s). The Exchange proposes to revise the rule text 
accordingly to clarify that the Fair Market Value is the midpoint of 
the first non-erroneous quote. When an obvious price error occurs, the 
Amex either will adjust or cancel the transaction pursuant to Amex 
Rules 936C(c) and 936C(c)--ANTE.
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    \9\ For index options series trading with normal bid-ask 
differentials as established in Rule 958(c), the prescribed amount 
shall be: (a) The greater of $0.10 or 10% for index options trading 
under $2.50; (b) 10% for index options trading at or above $2.50 and 
under $5; or (c) $0.50 for index options trading at $5 or higher. 
For index options series trading with bid-ask differentials that are 
greater than the widths established in Rule 958(c), the prescribed 
error amount shall be: (a) The greater of $0.20 or 20% for index 
options trading under $2.50; (b) 20% for index options trading at or 
above $2.50 and under $5; or (c) $1.00 for index options trading at 
$5 or higher.
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    Since the implementation of the Obvious Error Rules, there have 
occasionally been options transactions effected on the Exchange that 
were executed at prices that appeared to be ``obvious price errors'' 
but could not be cancelled or adjusted under existing rules. For 
example, in connection with an equity option, following dissemination 
of an erroneous quotation by the Amex, the competing options exchange 
with the most liquidity in the option class in question during the 
previous two (2) calendar months widened its quote to incorporate the 
Amex quote. As a result, although the price of the Amex transaction was 
``erroneous'' (i.e. based on an erroneous quote), it was not 
``erroneous'' pursuant to Amex Rules 936 and 936--ANTE in that the 
Theoretical Price was based on the ``widened quotes'' disseminated by 
the competing options exchanges. As a result, the Exchange believes 
that an amendment to the definition of Theoretical Price (and Fair 
Market Value for index options) is appropriate so that the bids and 
offers of an options exchange experiencing obvious price errors or 
erroneous quotes are not indirectly used as the basis for the 
Theoretical Price (and Fair Market Value). The Exchange believes that 
the use of quotes that are deemed to be ``erroneous'' as a basis for 
the Theoretical Price (equity) and Fair Market Value (indexes) is not 
proper and is inconsistent with the role and purpose of the Obvious 
Error Rules.

Widened Quotes

    The proposal is intended to correct circumstances in the Obvious 
Error Rules where the Amex posts an erroneous quote and subsequently a 
competing options exchange, in direct response to the erroneous quote, 
widens its quote to incorporate the prior erroneous quote of the Amex. 
For example, the current market for an option is established by the 
Chicago Board Options Exchange, Inc. (``CBOE'') to be 1.65 bid/1.90 
offer. The Amex then quotes 0 bid/.25 offer for the option. The CBOE 
immediately posts a market to incorporate the Amex quote such as .20

[[Page 67771]]

bid/1.90 offer. An order to buy is then executed on the Amex at the 
offer price of $0.25. The Amex then corrects the quote to 1.65 bid/1.90 
offer with the CBOE following suit at 1.65 bid/1.90 offer. The Exchange 
believes for purposes of determining Theoretical Price in connection 
with the equity options (Amex Rules 936(a)(1) and 936(a)(1)--ANTE) and 
Fair Market Value in connection with index options (Amex Rules 
936C(a)(1) and 936C(a)(1)--ANTE) that erroneous quotes of a competing 
options exchange that incorporated an erroneous Amex quote (in this 
example, .20 bid/1.90 offer) should not be used.
    The Exchange proposes a revision to its equity option obvious price 
error rules, Amex Rules 936(a)(1) and 936(a)(1)--ANTE, providing that 
in determining the Theoretical Price of an option the last bid 
(erroneous sell transaction) or last offer (erroneous buy transaction) 
of the competing options exchange with the most liquidity in that 
option class over the previous two calendar quarters will be excluded 
if such competing options exchange widens its quote to incorporate the 
prior erroneous quote of the Amex. As a result, the Exchange proposes 
that the Theoretical Price, under these circumstances, would be the 
last bid price (erroneous sell transaction) and the last offer price 
(erroneous buy transaction) just prior to the trade, disseminated by 
the competing options exchange with the next best liquidity. If there 
are no competing options exchanges left without an erroneous quote, the 
Theoretical Price would be the first quote of the competing options 
exchange that has the most liquidity in such option class over the 
previous two (2) calendar quarters after the transaction(s) in question 
that does not reflect the erroneous quote.
    In connection with the index option obvious price error rules, the 
Exchange proposes that Fair Market Value will not include the national 
best bid price (erroneous sell transaction) or national best offer 
price (erroneous buy transaction) of a competing options exchange if 
such exchange widens its quotes to incorporate the prior erroneous 
quote of the Exchange. Accordingly, the Fair Market Value will be the 
midpoint of the first quote after the transaction(s) in question that 
does not reflect the erroneous quote.

Erroneous Quote in Underlying Security

    As set forth in the Obvious Error Rules, a trade resulting from an 
erroneous quote in the underlying security may be adjusted or 
cancelled. However, pursuant to these Rules, a quote from an exchange 
in an underlying security that is declared ``erroneous'' by that 
exchange may not qualify for cancellation or adjustment.\10\ Therefore, 
the Exchange proposes to amend Amex Rules 936(a)(5), 936(a)(5)--ANTE, 
936C(a)(5) and 936C(a)(5)--ANTE so that when an exchange for an 
underlying security or Nasdaq if the underlying security trades on 
Nasdaq declares its quote(s) ``non-firm'' or when an exchange or Nasdaq 
communicates to the Amex that it is experiencing systems or other 
problems affecting the reliability of its disseminated quotes, a trade 
resulting from such ``erroneous'' underlying quote could be cancelled 
or adjusted. In order for a trade to be cancelled or adjusted, the 
Exchange would have to have proper documentation of that market's non-
firm declaration or notification of unreliable quotes, as applicable.
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    \10\ The Obvious Error Rules define an erroneous quote as a 
quote that occurs when the underlying security has a width of at 
least $1.00 and a width at least five times greater than the average 
quote width for such underlying security on the primary market (as 
defined in Amex Rule 900(b)(26) and Rule 900(b)(26)--ANTE) during 
the time period encompassing two minutes before and after the 
dissemination of such quote. The average quote width is determined 
by adding the quote widths of each separate quote during the four 
minute time period referenced above (excluding the quote in 
question) and dividing the number of quotes during such time period 
(excluding the quote in question).
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Transactions Executed Outside of Trading Hours

    The Exchange further proposes that any equity options or index 
options transaction that occurs outside normal trading hours 
(currently, 9:30 a.m. until 4:02 p.m. Eastern time (``ET'') for equity 
options and 9:30 a.m. until 4:15 p.m. ET for broad-based index options 
and options on select Exchange-Traded Fund Shares) would be cancelled 
if the Trading Officials determine that the transaction took place 
outside of Amex trading hours, except as set forth in Commentary .02 to 
Amex Rule 1.
    Amex Rule 1 sets forth the hours of business at the Exchange. 
Commentary .02 to Rule 1 provides that no option series may freely 
trade after 4:02 p.m. ET except that broad stock index group options 
and options on select Exchange-Traded Fund Shares shall freely trade 
until 4:15 p.m. ET each business day. Three (3) exceptions to the 
general rule are provided in Commentary .02 so that a trading rotation 
in any class of options may be effected even though the transaction 
will occur after 4:02 p.m. as follows: (i) Trading in the underlying 
security opens or re-opens after 3:30 p.m. ET; (ii) such rotation was 
initiated due to unusual market conditions pursuant to Rule 918 and 
notice of such rotation is publicly disseminated no later than the 
commencement of the rotation or 4:00 p.m. whichever is earlier or 
notice of such rotation is publicly disseminated after 4:00 p.m. and 
the rotation does not commence until five (5) minutes after news of 
such rotation is publicly disseminated; or (iii) for option classes 
trading on ANTE, an automated trading rotation is held at the close of 
trading as soon as practicable after 4:02 p.m. ET. Accordingly, equity 
options and index options transactions would be cancelled if the 
Trading Officials determine that the transaction occurred outside of 
the Amex trading hours.

Verifiable Disruptions or Malfunctions of Exchange Systems

    In connection with transactions arising out of ``verifiable 
disruptions or malfunctions of Exchange systems,'' the Obvious Error 
Rules provide that those transactions that qualify for price adjustment 
will be adjusted to the Theoretical Price for equity options or Fair 
Market Value for index options. The Exchange submits that unintended 
results may occur due to the manner in which price adjustments are 
handled during these circumstances. Accordingly, the Exchange proposes 
that unless the parties agree to a price adjustment, the transaction 
would be cancelled. This new standard would replace the current price 
adjustment to the Theoretical Price for equity options or Fair Market 
Value for index options and clarify that the transaction will be 
cancelled if a price adjustment is not agreed to.
    An example of such unintended consequences is set forth below. The 
current market for a particular equity call option is established by 
the Amex at 1.15 bid/1.30 offer. The underlying security subsequently 
increases in price. The other options exchanges (excluding the Amex) 
change their quote so that the market is now 1.20 bid/1.35 offer. The 
Amex due to a systems problem does not change its quote and remains at 
1.15 bid/1.30 offer. The underlying security continues to increase in 
price. The other options exchanges now post a market of 1.25 bid/1.40 
offer. The Amex remains at 1.15 bid/1.30 offer. An order to buy is 
executed on the Amex at 1.30. As defined by the current Rule, the 
Theoretical Price for this option is 1.25 so that in adjusting the 
price the specialist would be disadvantaged by the adjustment to 1.25 
compared to the selling price of 1.30 (when the market was actually 
1.40). Under the proposal,

[[Page 67772]]

unless the parties agreed to an adjustment, the transaction would be 
cancelled.

No Bid Series

    Under the current Obvious Error Rules ``no bid provisions,'' 
electronic transactions in option series quoted no bid at a nickel 
(i.e. $0.05 offer) will be cancelled provided at least one strike price 
below (for calls) or above (for puts) in the same options class was 
quoted no bid at a nickel at the time of execution. A ``no bid'' option 
refers to an option where the bid price is $0.00.\11\ Series of options 
quoted no bid are typically deep out-of-the-money series that are 
perceived as having little if any chance of expiring in-the-money. For 
this reason, relatively few transactions occur in these series and 
those that do are usually the result of a momentary pricing error. In 
some cases, the pricing error is substantial enough such that the other 
provisions in the equity and index options obvious error rules become 
applicable. However, in many cases, the no bid provisions are the only 
provisions that would apply to the pricing error.
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    \11\ When the bid price is $0.00, the offer price is typically 
$0.05. In this instance, the option typically is referred to as ``no 
bid at a nickel.''
---------------------------------------------------------------------------

    The proposal seeks to revise the no bid provision in the Obvious 
Error Rules that provide that the option series must be quoted no bid 
at a nickel and instead only require that the option series be quoted 
no bid. The reason for this change is that options that are priced at 
no bid, regardless of the offer, are typically deep out-of-the-money 
series that are perceived as having little if any chance of expiring 
in-the-money. This is especially the case when the series below (for 
calls) or above (for puts) in the same option class similar is quoted 
no bid. In this regard, the offer price is irrelevant. Therefore, 
transactions in series that are quoted no bid at a dime, for example, 
are just as likely to be the result of an obvious error as are 
transactions in series that are quoted no bid at a nickel when the 
series below (for calls) or above (for puts) in the same option class 
similarly is quoted no bid.
2. Statutory Basis
    The Amex represents that the filing provides objective guidelines 
for the nullification or adjustment of transactions executed at clearly 
erroneous prices. Moreover, the proposed rule provides uniformity 
regarding obvious pricing errors, which will serve to benefit 
customers. For these reasons, the Exchange believes the proposal is 
consistent with Section 6(b) of the Act \12\, in general, and furthers 
the objectives of Section 6(b)(5) of the Act,\13\ in particular, in 
that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and, in 
general, to protect investors and the public interest.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change will impose no 
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.

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-2005-060 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-Amex-2005-060. 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-2005-060 and should be submitted on or before 
November 29, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 05-22164 Filed 11-7-05; 8:45 am]

BILLING CODE 8010-01-P
