

[Federal Register: January 26, 2006 (Volume 71, Number 17)]
[Notices]               
[Page 4386-4387]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26ja06-81]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53148; File No. SR-Amex-2005-131]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval to a Proposed 
Rule Change and Amendment No. 1 Thereto Relating to the Implementation 
of a Quote Risk Manager

January 19, 2006.
    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 December 27, 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 prepared by the Exchange. On January 
13, 2006, the Amex filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons. In 
addition, the Commission is granting accelerated approval of the 
proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1, which replaced and superseded the original 
filing in its entirety, made certain additions to the purpose 
section and minor changes to the text of the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to amend Exchange Rule 958--ANTE to codify a 
change to the Exchange's ANTE System to allow specialists and 
registered options traders (``ROTs'') to establish an options ``Quote 
Risk Manager.'' The text of the proposed rule change, as amended, is 
below. Proposed new language is in italics.

Rule 958--ANTE Options Transactions of Registered Options Traders

    (a)-(h) No Change.

. . . Commentary

    .01-.09 No Change.

.10 ANTE Participant Quotations

    Automated Quotation Adjustments--An ANTE Participant may establish 
parameters by which ANTE will automatically restate the prices of ANTE 
Participant quotations in all series of an options class, at prices 
specified by the ANTE Participant, if within an Exchange-specified time 
period such ANTE Participant, in the aggregate, executes a number of 
trades, specified by the ANTE Participant, for that options class. The 
threshold number of trades shall be pre-established by the ANTE 
Participant for each options class.
* * * * *

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 had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The Amex has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    Exchange rules require option specialists to continuously provide 
and maintain a two-sided market of at least ten contracts for every 
series of every option class they are allocated.\4\ Although not 
required, ROTs often continuously provide and maintain two-sided 
markets in every series of every option class they are assigned.\5\ 
This continuous quoting obligation can, at times, subject specialists 
and ROTs to unintended and often unacceptable levels of risk. Each 
option class has at least twelve (12) series and many option classes 
have significantly more series.\6\
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    \4\ See Exchange Rule 950--ANTE (1).
    \5\ See Exchange Rule 958--ANTE (h)(iii)(A).
    \6\ For a typical equity option class, the Exchange lists both 
puts and calls in four expiration months with three strike prices 
within each expiration month. Many option classes also have puts and 
calls with numerous strike prices in two long-term expiration 
series. As the underlying stock price moves, additional strike 
prices are added for each expiration. Options on volatile stocks can 
have well over 100 different series trading at any given time. For 
example, there are over 400 different series traded in Google 
(GOOG).
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    The Exchange's ANTE System, which provides for the nearly 
simultaneous execution of orders in these numerous series, subjects 
specialists and ROTs to executions at their quoted market with little 
or no ability to adjust the quote in response to the number of 
contracts traded at a given price, particularly if orders arrive in 
quick succession from multiple sources in various related option 
series. Accordingly, specialists and ROTs are vulnerable to the risk 
that, through an error in their pricing decisions or because of market 
developments, they will receive multiple executions at disadvantageous 
prices across all of the related option series in an option class--all 
before they are able to react and adjust their quotes. As a result, the 
quality of the markets available to customers may suffer because, under 
such circumstances, specialists and ROTs are likely to quote less 
aggressively and limit the size of their quotes to avoid the attendant 
risks and costs.
    In order to protect specialists and ROTs from this unreasonable 
level of risk of multiple and nearly simultaneous executions in related 
options series, the Exchange has developed an enhancement to the ANTE 
System which is referred to as the ``Quote Risk Manager.'' The ``Quote 
Risk Manager'' would provide the ability for specialists and ROTs to 
automatically restate their quote to an inferior price (i.e., the 
widening of quotes).\7\ The result of this ``widened quote'' would be 
to prevent further executions, since in the ANTE System trades are 
subject to execution at a price no worse than the national best bid or 
offer.\8\
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    \7\ Specialists and ROTs may not exceed the legal width 
requirements as set forth in Exchange Rule 958--ANTE(c).
    \8\ The Exchange established time period shall initially be five 
(5) seconds. If the Exchange were to change this time period it 
would provide notice to the specialists and ROTs.

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[[Page 4387]]

    The Exchange's proposed rule requires that a certain number of 
trades occur in an options class before the automatic widening of 
quotes takes place. Proposed Commentary .10 to Rule 958--ANTE provides 
that a specialist or ROT may establish specific parameters by which 
their quotations in all series of an options class are automatically 
repriced. ANTE would widen the quotes at the specialist's or ROT's 
predetermined price, if the specialist or ROT executes a set number of 
trades, to be specified by the specialist or ROT, within an Exchange 
established time frame, in that class.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\9\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\10\ 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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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change would 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. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-2005-131 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.

All submissions should refer to File Number SR-Amex-2005-131. 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 Section, 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 Amex. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make publicly available. All 
submissions should refer to File Number SR-Amex-2005-131 and should be 
submitted on or before February 16, 2006.

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

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder, applicable to a national 
securities exchange.\11\ In particular, the Commission believes that 
the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\12\ which requires among other things, that the rules of the 
Exchange are designed to promote just and equitable principles of 
trade, 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. The Commission notes that the 
proposal does not alter the obligations of specialists and ROTs. The 
Commission believes that the proposed rule change should provide 
specialists and ROTs assistance in effectively managing their 
quotations.
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    \11\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Amex has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of notice thereof in the Federal Register. The Commission 
notes that similar proposals to provide protection from risk for market 
makers have been approved for other options exchanges.\13\ The 
Commission believes that granting accelerated approval of the proposal 
should provide specialists and ROTs with similar protections from the 
risk associated with an excessive number of near simultaneous 
executions in a single options class. Accordingly, the Commission finds 
good cause, pursuant to Section 19(b)(2) of the Act,\14\ for approving 
the proposed rule change, as amended, prior to the thirtieth day after 
the date of publication of notice thereof in the Federal Register.
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    \13\ See Securities Exchange Act Release Nos. 51049 (January 18, 
2005), 70 FR 3756 (January 26, 2005) (SR-BSE-2004-52); 51050 
(January 18, 2005), 70 FR 3758 (January 26, 2005) (SR-ISE-2004-31); 
and 51740 (May 25, 2005), 70 FR 32686 (June 3, 2005) (SR-PCX-2005-
64).
    \14\ 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,\15\ that the proposed rule change (SR-Amex-2005-131) and Amendment 
No. 1 thereto be, and hereby are, approved on an accelerated basis.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-942 Filed 1-25-06; 8:45 am]

BILLING CODE 8010-01-P
