

[Federal Register: November 15, 2005 (Volume 70, Number 219)]
[Notices]               
[Page 69369-69372]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15no05-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52741; File No. SR-Amex-2005-115]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change Regarding Options Quote Size Mitigation

November 4, 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 November 4, 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 and 
II below, which Items have been substantially prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons 
and to approve 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 adopt an options market data size 
mitigation policy (``Options Size Mitigation'') on a four (4) month 
pilot basis. The text of the proposed rule change is available on the 

[[Page 69370]]

http://www.amex.com, the Office of the Secretary, the Amex, and at the 

Commission's Public Reference Room.

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

    In its filing with the Commission, the Amex included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The purpose of the proposal is to adopt an Options Size Mitigation 
policy for the benefit of the Exchange and the marketplace, by helping 
to enhance the Exchange's ability to process an increasing volume of 
incoming options quotes.\3\ The Exchange believes that Options Size 
Mitigation will help to prevent potential data delays and enhance our 
existing ability to manage market data traffic.
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    \3\ In January 2000, OPRA capacity was 3,000 messages per second 
(``MPS'') with an expectation during the year to increase to 8,000 
and 12,000 MPS, respectively. As an example, one-minute and five-
minute peak output rates in March 2000 were 3,515 and 3393 MPS, 
respectively. OPRA in 2001 increased system capacity to 24,000 MPS. 
Moving forward to October 2005, the current system capacity is 
125,000 MPS with one-minute and five-minute peak output rates of 
86,342 MPS (9/27/05) and 70,783 MPS (10/05/05), respectively.
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    The recent growth in options quote message traffic is largely the 
result of the increase in the multiple trading of equity options, 
conversion to decimal pricing, technological advancements in options 
quoting systems, the dissemination of quotes with size and changes in 
market structure through the greater use of electronic quoting systems 
by market participants and the options exchanges. In the past, the 
options exchanges together with the Options Price Reporting Authority 
(``OPRA'') discussed plans to develop strategies to mitigate options 
message traffic.\4\ In addition, the ``Report of the Advisory Committee 
on Market Information: A Blueprint for Responsible Change'' (the 
``Seligman Report'') issued in 2001 identified system capacity concerns 
as a problem for the options industry.\5\ The Seligman Report also 
cited industry quote mitigation efforts.\6\ However, to date, the 
options exchanges have not agreed to a quote mitigation strategy at the 
OPRA level.
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    \4\ In December 1999, the Securities Industry Automation 
Corporation (``SIAC'') and SRI Consulting issued a report entitled 
``Mitigating Options Message Traffic'' (the ``SRI Study'') 
recommending short-term and long-term solutions to the growth in 
options message traffic at that time. The recommendations focused on 
a reduction in the number of products quoted and traded. The options 
exchanges collectively have not agreed to the recommendations of the 
SRI Study.
    \5\ The Seligman Report maintained that capacity concerns exist 
at every level in the distribution chain of options market date: The 
options exchanges, the consolidator (SIAC), vendors and broker-
dealers. In addition, due to the nature of the options business, a 
far larger volume of options information is disseminated than occurs 
in the equity markets. As reported in the Seligman Report, options 
data accounts for approximately 70-80% of U.S. market data traffic. 
This percentage may have actually increased since 2001 due to the 
exponential growth during the last few years in options quoting.
    \6\ The Seligman Report noted that the options exchange have 
been working on appropriate quote mitigation strategies as follows: 
(1) A ``request-for-quote'' system for less actively-traded options 
series; (2) more stringent listing standards and more aggressive 
delisting policies; (3) desensitization of auto-quote systems; and 
(4) modification of the ``firm quote rule'' to reduce the need to 
auto-quote ``out-of-the-money'' and away from the market quotes.
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Proposed Options Size Mitigation

    During the last few months, the Exchange has made several upgrades 
to its systems to increase the ability of the Amex to handle increases 
in market data. The Exchange is continuing in these efforts to 
implement further enhancements to its system capacity so that the 
Exchange is able to handle expected increases in market data in the 
future.\7\
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    \7\ The Exchange notes that system capacity at the OPRA level is 
125,000 MPS. This level is expected to increase to 149,000 MPS on 
January 1, 2006.
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    The continuing increases in options industry quote traffic rates 
have challenged the Exchange's ability (as well as the industry on a 
whole) to process market data in a timely manner. The Exchange believes 
that the proposed Options Size Mitigation policy is beneficial and will 
enhance our ability to process inbound quote traffic and help prevent 
market data delays. As detailed below, the Exchange submits that when 
Options Size Mitigation is in effect, specialists will nonetheless be 
able to comply with their trade-through and best execution obligations.
    Under Options Size Mitigation, during high quote volume periods and 
peaks, incoming market data will be filtered prior to being forwarded 
to floor trading systems. When in effect, Options Size Mitigation will 
filter market data by not processing incoming quotes (i.e. away market 
quotes) with size changes below a variable percent. However, Amex 
systems will always maintain and display Amex quotations with accurate 
size regardless of whether Options Size Mitigation is in effect.
    For example, if the filtering is set at 10%, away market quotations 
that change (i.e., increase or decrease) the existing size of the 
quotation by 10% or less would not be forwarded to floor trading 
systems or displayed to specialists. The filtering level would be set 
on an exchange-wide basis, based on either the number of MPS exceeding 
a predefined amount or when a delay of a predetermined length has 
occurred in the processing of market data.
    The Exchange submits that the initial Options Size Mitigation 
filtering level will be set at 10% with the ability to increase the 
filtering level in 10% level increments as warranted. The head of the 
Exchange's Floor Operations (or his designee), in conjunction with two 
(2) Senior Floor Officials, will determine the appropriate filtering 
level. The Exchange will ensure that all options market data (including 
filtered quotes) is available for regulatory and surveillance purposes.
    When Options Size Mitigation is in effect, an announcement will be 
made on the trading floor, advising members regarding the level of 
filtering. As a result, specialists will be able to assess (when the 
Amex is not the NBBO) the potential that the size of an away market 
NBBO quotation may be inaccurate. Thus, if a 10% filtering is in 
effect, for any potentially affected orders, the specialist would be 
required to view a third-party quotation vendor in order to verify 
whether the displayed size is accurate. Based on a 10% filtering level, 
only those orders that are greater than 10% below the NBBO size would 
potentially be affected. For example, if the displayed NBBO size from 
an away market is 1,000 contracts, any order size between 900 and 1,100 
contracts would potentially be affected under Options Size Mitigation. 
Therefore, reliance on third-party quotation vendors by specialists is 
especially important for away market quotes when Options Size 
Mitigation is in effect.
    To the extent that the NBBO quotation size (when the Amex is not 
the NBBO) is inaccurate and/or the specialist does not have time to 
view a third-party vendor, he or she will need to determine whether it 
is necessary to send the full order size to the away market. If the 
specialist does not send the full order to the away market, he or she 
will need to wait for a response from the away market prior to taking 
any action with respect to the balance of the order.
    Certain Linkage Plan and related Amex Rule obligations are premised 
on

[[Page 69371]]

quotation sizes being disseminated by the exchanges. For example, the 
definition of Firm Customer Quote Size (``FCQS'') in Section 2 of the 
Linkage Plan refers to disseminated quotation sizes. In addition, the 
obligation to provide an automatic execution is premised on the size of 
a Linkage Order being no larger than the FCQS.\8\ In all cases, the 
Exchange pursuant to the Linkage Plan and related rules is required to 
provide an execution for at least the FCQS.
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    \8\ See Amex Rule 941(e).
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    The Commission recently approved Linkage Plan Amendment No. 16 and 
related Exchange Rules defining FCQS as the number of option contracts 
that the Participant Exchange \9\ receiving a Principal Acting as Agent 
(``P/A'') \10\ Order guarantees it will automatically execute at its 
disseminated quotation in a series of an eligible option class for 
public customer orders entered directly for execution in that 
market.\11\ The Exchange recently incorporated a change into its 
systems to accommodate the change to FCQS. As result, inbound P/A 
Orders are executed up to the size of the disseminated quotation for 
that series of an eligible options class rendering unnecessary the size 
of the sending Participant Exchange's quotation. In this manner, the 
Exchange is fully compliant with the current definition of FCQS.
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    \9\ ``Participant Exchange'' is defined in Amex Rule 940(b)(14) 
to mean a registered national securities exchange that is a party to 
the Linkage Plan.
    \10\ A P/A Order is defined in Amex Rule 940(b)(10)(i) to mean 
an order for the principal account of a specialist (or equivalent 
entity on another Participant Exchange that is authorized to 
represent customer orders), reflecting the terms of a related 
unexecuted public customer order for which the specialist is acting 
as agent.
    \11\ See Securities Exchange Act Release Nos. 52656 (October 24, 
2005), 70 FR 66477 (November 2, 2005) (approval of Joint Amendment 
No. 16 to the Intermarket Option Linkage Plan Relating to the 
Definition of Firm Customer Quote Size and Restrictions on Sending 
Certain Principal Acting as Agent Orders; File No. 4-429) and 52657 
(October 24, 2005), 70 FR 65941 (November 1, 2005) (approving the 
rules of the options exchanges).
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    The Exchange submits that the vast majority of its options orders 
will be largely unaffected by the Options Size Mitigation policy. The 
typical order size that the Exchange receives is approximately twenty 
(20) contracts. As set forth above, the significance of displayed 
options quotations sizes concerns the Exchange's obligation to provide 
an execution through the Options Linkage in an amount equal to the 
FCQS. In connection with the Exchange's ANTE system, FCQS is largely 
determined by the maximum order size eligible for automatic execution 
(the ``auto-match'' size). The '>Options Trading Committee has 
determined that the auto-match size for any option class in ANTE is the 
disseminated quotation size. Because under Options Size Mitigation, all 
Amex quotations will be displayed, specialists will be able to fully 
comply with their regulatory obligations without additional changes or 
adjustments. Furthermore, the actual size of the disseminated quotation 
of another options exchange does not also impact a specialist's 
obligations under the Options Linkage due to the definition of FCQS, 
and therefore, specialists will be able to rely on the Amex displayed 
quotation without using a thirty-party market data vendor. Similarly, 
Firm Principal Quotation Size or ``FPQS'' will not be affected by 
Options Size Mitigation because FPQS is defined as the number of option 
contracts that a Participant Exchange guarantees it will execute at its 
disseminated quotation for incoming principal orders in an eligible 
option class.\12\ As a result, since the Exchange will always display 
its quotes with size, specialists will be able to properly execute 
principal orders received through the Linkage.
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    \12\ The definition of FPQS further provides a minimum size of 
10 contracts, however if the Participant Exchange is disseminating a 
quotation size of less than 10 contracts, then the FPQS may equal 
such quotation size.
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    Linkage Plan Amendment No. 15 (Trade and Ship and Book and Ship) 
\13\ and related Exchange rules \14\ were also recently approved by the 
Commission providing that (i) an exchange may trade an order at a price 
that is one-tick inferior to the NBBO if a Linkage Order is transmitted 
to the NBBO market(s) to satisfy all interest at the NBBO price (this 
is the ``trade and ship'' concept); and (ii) an exchange may book an 
order that would lock another exchange if a Linkage Order is sent to 
such other exchange to satisfy all interest at the lock price (this is 
the ``book and ship'' concept). At a 10% filtering level for Options 
Size Mitigation, specialists would need to know the size of away market 
quotations in order to take full advantage of the ``trade and ship'' 
and ``book and ship'' concepts for orders greater than the 10% filter 
(i.e., increases or decreases). For smaller orders (those less than the 
10% filter), Options Size Mitigation would have a limited effect, if 
any, so that specialists would be able to process orders in the normal 
fashion. When Options Size Mitigation is in effect, specialists to 
fully know and understand the depth of size of away markets would need 
to use a third-party market data vendor.
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    \13\ See Securities Exchange Act Release No. 52413 (September 
13, 2005), 70 FR 55185 (September 20, 2005) (Order Approving 
Amendment No. 15 to the Plan for the Purpose of Creating and 
Operating an Intermarket Option Linkage Relating to a ``Trade and 
Ship'' Exception to the Definition of ``Trade-Through'' and a ``Book 
and Ship'' Exception to the Locked Markets Provision).
    \14\ See Securities Exchange Act Release No. 52414 (September 
13, 2005), 70 FR 55186 (September 20, 2005) (SR-Amex-2005-046).
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    The Exchange submits that Options Size Mitigation will offer 
greater ability and flexibility to manage inbound quote traffic. Given 
the exponential increase in options quote traffic rates in recent 
years, the Exchange believes that Options Size Mitigation is a 
necessary tool in connection with the processing of quote traffic.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\15\ in general and furthers the objectives of Section 6(b)(5) \16\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, remove impediments to and perfect the mechanisms of a free 
and open market and a national market system, and, in general, protect 
investors and the public interest.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. 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 at http://www.sec.gov/rules/sro.shtml.
; or     Send an e-mail to rule-comments@sec.gov. Please include 

File No. SR-Amex-2005-115 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary,

[[Page 69372]]

Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-9303.
    All submissions should refer to File No. SR-Amex-2005-115. 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 at 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. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-Amex-2005-115 and should be 
submitted on or before December 6, 2005.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Section 6 of the 
Act \17\and the rules and regulations thereunder applicable to a 
national securities exchange.\18\ In particular, the Commission 
believes that the proposed rule change is consistent with Section 
6(b)(5) of the Act, which requires, among other things, that the rules 
of a national securities exchange be 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.\19\
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    \17\ 15 U.S.C. 78f.
    \18\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed rule change should 
enhance the Amex's ability to process an increasing volume of incoming 
options quotes during high option quote volume periods and peaks. The 
Commission also believes that the Options Size Mitigation program 
should help to limit potential data delays of incoming data without 
limiting the dissemination of Exchange participants' quotes and orders.
    The Amex has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of the notice thereof in the Federal Register. The 
Commission believes that granting accelerated approval of the proposal 
will allow the Amex to immediately implement the Options Size 
Mitigation program and thus, should facilitate the processing of an 
increasing volume of incoming options quotes and should avoid potential 
data transmission delays. Furthermore, the Commission notes that the 
current pilot program was approved on a temporary four-month basis to 
allow the Commission an opportunity to solicit comments on the proposed 
rule change and to evaluate the impact of the proposal on the options 
market. Accordingly, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\20\ for approving the proposed rule change 
prior to the thirtieth day after publication of the notice thereof in 
the Federal Register.
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    \20\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change, as amended (SR-2005-115), is 
hereby approved on an accelerated basis for a four-month pilot period 
to expire on March 5, 2006.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-6263 Filed 11-14-05; 8:45 am]

BILLING CODE 8010-01-P
