

[Federal Register: November 26, 2007 (Volume 72, Number 226)]
[Notices]               
[Page 66002-66004]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26no07-77]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56804; File No. SR-Amex-2006-107]

 
Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 1, to 
Eliminate Options Specialists' Agency Responsibilities and Establish 
Amex Book Clerks

November 16, 2007.

I. Introduction

    On November 14, 2006, American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal to eliminate the agency obligations of 
Exchange options specialists and establish Amex book clerks (``ABCs''). 
The Exchange filed Amendment No. 1 to the proposed rule change on March 
29, 2007. The proposal as amended was published for comment in the 
Federal Register on April 13, 2007.\3\ The Commission received no 
comments on the proposal. This order approves the proposed rule change, 
as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 55583 (April 5, 
2007), 72 FR 18695 (``Notice'').
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II. Description of the Proposal

    The Exchange has proposed to eliminate the obligation and ability 
of an Exchange options specialist to act as an agent in connection with 
orders in his or her assigned options classes. This proposal would 
permit the Exchange to designate Exchange employees or independent 
contractors to serve as ABCs, responsible for maintaining and operating 
the ANTE Central Book (i.e., the specialist's customer limit order 
book) and the ANTE Display Book.\4\ The Exchange also seeks to amend 
certain Exchange rules relating to the operation of the Plan for the 
Purpose of Creating and Operating an Intermarket Option Linkage 
(``Linkage Plan'') to accommodate the implementation of pertinent ABC 
rules and other proposed rule changes described herein.\5\ Finally, the 
proposed rule change would implement several other amendments to 
conform other Exchange rules to the proposal. The Exchange has noted 
that its proposal substantially mirrors changes recently adopted by the 
Chicago Board Options Exchange to eliminate DPM agency responsibilities 
and establish PAR Officials.\6\ The following description summarizes 
certain significant effects this proposed rule change would have on 
existing Exchange rules.\7\
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    \4\ The Exchange submits that all incoming customer orders are 
represented in the ANTE Central Book, and if marketable, will be 
automatically executed subject to a number of limited exceptions. 
Orders that are otherwise eligible for automatic execution may not 
receive an automatic execution: (i) Whenever the Amex Best Bid or 
Offer (ABBO) crosses the National Best Bid or Offer (NBBO) and 
causes an inversion in the quote; or (ii) whenever a better bid or 
offer is being disseminated by another options exchange and the 
order is not eligible for automatic price matching. In addition, if 
quotes are deemed unreliable or the Exchange is experiencing 
communications or systems problems, non-firm markets or delays in 
the dissemination of quotes by the Options Price Reporting 
Authority, orders will not be automatically executed. In these 
limited cases, incoming customer orders will be routed to the ANTE 
Display Book for manual handling.
    \5\ Exchange rules governing the operation of the Linkage Plan 
are set forth under Amex Rules 940 through 945 and Amex Rule 941-
ANTE.
    \6\ See Securities Exchange Act Release No. 52798 (November 18, 
2005), 70 FR 71344 (November 28, 2005) (SR-CBOE-2005-46).
    \7\ For a complete description of the proposed rule change, see 
the Notice, supra note 3.
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    Under the current rules of the Exchange, options specialists are 
required to execute options orders on an agency basis for those classes 
of options assigned to them.\8\ Accordingly, all options specialists on 
the Amex presently act as both agent and principal for orders in their 
respective assigned options classes.
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    \8\ See Amex Rule 950-ANTE(l), incorporating Amex Rule 170 to 
options transactions.
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    The Exchange has now determined that it is in the best interest of 
the Exchange, its members, and investors to eliminate the agency 
obligation of options specialists. The Exchange has proposed to amend 
its rules to remove an options specialist's obligation to act as an 
agent in its allocated securities on the Exchange.\9\ The Exchange has 
further proposed to designate ABCs who would be responsible for 
handling certain orders in the same manner as they are currently 
handled by the options specialists.\10\ The ABCs will maintain and 
operate the customer limit order book,\11\ effect proper executions of 
orders that are routed to the customer limit order book,\12\ display 
eligible limit

[[Page 66003]]

orders,\13\ undertake the obligations related to handling certain 
Linkage orders,\14\ and act as agent for orders that, for various 
reasons, cannot be automatically executed and so are routed to the ANTE 
Display Book for manual handling.\15\
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    \9\ See Proposed Amex Rules 950-ANTE(f) cmt. .01 and 950-ANTE(l) 
cmt. .01.
    \10\ See Proposed Amex Rule 995-ANTE.
    \11\ See Proposed Amex Rule 995-ANTE(a)(i).
    \12\ See Proposed Amex Rule 995-ANTE(a)(ii). The requirement 
that options specialists effect proper executions would require an 
options specialist to use due diligence to execute customer orders 
at the best prices available under the rules of the Exchange. See 
Proposed Amex Rule 995-ANTE(b)(ii).
    \13\ See Proposed Amex Rule 995-ANTE(b)(i).
    \14\ See Proposed Amex Rule 995-ANTE(e).
    \15\ See Proposed Amex Rule 995-ANTE(b)(iv); see also supra note 
4.
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    The Exchange has proposed to amend its rules to provide that the 
Exchange, via the ABCs, and not the options specialists, would be 
responsible for handling Linkage orders. Under the proposal, ABCs 
would: (i) Use an options specialist's account to route Principal 
Acting as Agent (``P/A'') Orders and Satisfaction Orders to away 
markets based on prior instructions that must be provided by the 
options specialist to the ABC,\16\ and (ii) handle all Linkage orders 
or portions of Linkage orders received by the Exchange that are not 
automatically executed.\17\ The ABC also would use the specialist's 
account to fill incoming Satisfaction Orders that result from a Trade 
Through \18\ that the Exchange effects.\19\
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    \16\ See Proposed Amex Rule 950-ANTE(l) cmt. .05.
    \17\ See Proposed Amex Rule 995-ANTE(e).
    \18\ See Amex Rule 940(b)(19).
    \19\ See Proposed Amex Rule 950-ANTE(l) cmt. .05.
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    The Exchange has proposed measures designed to ensure the 
independence of ABCs from Exchange members. An ABC would be required to 
be an Exchange employee or independent contractor, and his or her 
compensation would be determined and paid solely by the Exchange. In 
addition, the ABC would be prohibited from having an affiliation with 
any member that is approved to act as a specialist, registered options 
trader (``ROT''), remote registered options trader (``RROT'') or 
supplemental registered options trader (``SROT'') on the Exchange.
    Because the options specialists would no longer be operating the 
customer limit order book, the Exchange proposes to amend Rule 958A--
ANTE, which defines when an options specialist's firm quote obligation 
attaches. Amex Rule 958A--ANTE currently provides that, in the case of 
an order received by the options specialist, the options specialist's 
firm quote obligation attaches at the time the order is received by 
such specialist, regardless of whether the options specialist is 
actually aware of the order at that time. This rule would be modified 
to provide that the firm quote obligation would attach, when an options 
specialist is the responsible broker or dealer, at the same time those 
obligations attach with respect to each other responsible broker or 
dealer--that is, when the order is announced to the trading crowd 
either via electronic display or by the ABC. The Exchange has proposed 
this clarification in light of the fact that options specialists will 
no longer represent orders on the customer limit order book in an 
agency capacity from the moment such orders are received on the book.
    Finally, to ensure a smooth and orderly transition of the 
responsibility for operating the customer limit order book and 
executing agency orders from options specialists to ABCs, the Exchange 
proposes to implement this rule change to all applicable trading posts 
over a 180-day period from the effective date of this rule change. 
During this 180-day transition period, any options specialist who 
continues to operate the customer limit order book would continue to be 
subject to the same agency obligations as currently provided under Amex 
Rules 950-ANTE(l) and 958A-ANTE(e), except that, upon the approval of 
this proposal, these obligations instead would be reflected in a 
Regulatory Circular.

III. Discussion

    After careful consideration, 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.\20\ In particular, the Commission finds that the 
proposal is consistent with section 6(b)(5) of the Act,\21\ 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 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.
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    \20\ 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).
    \21\ 15 U.S.C. 78f(b)(5).
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    With this proposal, Amex seeks to eliminate potential conflicts of 
interest that may currently arise for its options specialists in the 
handling of customer orders. Currently, Amex options specialists trade 
for their own accounts in order to assist in the maintenance of a fair 
and orderly market on the Exchange, and also act as agents for certain 
orders in their allocated options. Amex has proposed to eliminate an 
options specialist's obligation and permission to act as agent for 
customer orders in his or her allocated securities.\22\
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    \22\ The Commission notes that Amex Rule 950-ANTE, as amended, 
will no longer permit an options specialist to act as an agent for 
customer orders. However, to the extent that an options specialist 
nevertheless undertakes to represent a customer's order in violation 
of Amex Rule 950-ANTE, the options specialist will assume all the 
duties and liabilities of an agent to a principal during the course 
of such representation.
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    Instead, Amex has proposed that orders that currently are 
represented by options specialists as agent be handled by Exchange 
employees known as Amex Book Clerks, or ABCs. ABCs would be independent 
from options specialists, as Amex has proposed to prohibit affiliations 
between ABCs and specialists, ROTs, RROTs, and SROTs in order to ensure 
the ABCs are independent from Exchange members' interests. Further, the 
compensation of ABCs would be determined and paid exclusively by the 
Exchange. The Commission believes that the Amex's proposal adequately 
assures the independence of the ABC in a manner designed to mitigate 
potential conflicts of interest with the options specialist. Further, 
the Commission believes that eliminating an options specialist's 
obligation to act as agent for certain orders in its assigned classes 
will promote just and equitable principles of trade and protect 
investors and the public interest, because it will greatly reduce any 
potential conflicts of interest that may have previously arisen when a 
specialist traded for its own account while acting as agent for certain 
customer orders.\23\
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    \23\ In addition, the Commission notes that Amex Rule 193, 
Affiliated Persons of Specialists, will have the effect of 
mitigating conflicts of interest that might arise when an affiliate 
of the options specialist acts as agent for a customer order in one 
of the specialist's assigned options classes. Amex Rule 193 provides 
that any approved person or member organization which is affiliated 
with a specialist must either: (a) Be subject to Amex Rule 170(e), 
which provides that ``[n]o member . . . officer, employee, or 
approved person who is affiliated with a specialist or specialist 
member organization, shall, during the period of such affiliation, 
purchase or sell any security in which such specialist is registered 
for any account in which such person or party has a direct or 
indirect interest''; or (b) ``establish[] and obtain[] Exchange 
approval of procedures restricting the flow of material, non-public 
corporate or market information between itself and the specialist 
member organization, and any member, officer, or employee associated 
therewith.'' The Exchange represented that Rule 193 will have the 
effect of restricting the sharing of material, nonpublic information 
between the options specialist and any affiliate of the options 
specialist who acts as agent for a customer order. Telephone 
conversation between Jeffrey P. Burns, Vice President and Associate 
General Counsel, Amex, and Nathan Saunders, Special Counsel, 
Division, Commission, on November 14, 2007.

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[[Page 66004]]

    Pursuant to the proposed rule change, ABCs will undertake 
responsibilities comparable to those currently held by options 
specialists with respect to customer orders. For example, an ABC must 
use due diligence to execute the orders placed in his or her custody at 
the best prices available to him or her under Exchange rules. In 
addition, ABCs will assume the obligations related to displaying public 
customer orders that improve Amex's disseminated quote by maintaining 
the ANTE Central Book, the Exchange's automated limit order display 
facility, and keeping it active. Accordingly, the Commission believes 
that the Exchange's proposal should ensure that customers' orders 
continue to be represented and handled in a timely fashion on the 
Exchange. The Commission therefore believes that the proposal will 
continue to protect customer orders while preventing fraudulent and 
manipulative acts and practices.
    The ABCs also would assume responsibilities related to Linkage 
orders. An ABC would use an options specialist's account to route P/A 
Orders and Satisfaction Orders to other participants in the Linkage 
Plan based on prior written instructions provided by the options 
specialist to the ABC.\24\ The written instructions provided by the 
options specialist will also include direction as to how the ABC should 
handle responses to Linkage orders routed to other Linkage Participants 
that are not responded to in a timely manner.\25\ The ABC will also use 
the options specialist's account to fill any Satisfaction Order that 
results from a Trade Through that is effected on the Exchange by ABCs. 
Finally, the ABC will handle all Linkage orders or portions of Linkage 
orders received by the Exchange that are not automatically executed.
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    \24\ The Commission today is also granting the Exchange a 
conditional exemption from the requirement in Rule 608(c) of 
Regulation NMS promulgated under the Act that the Exchange comply 
with and enforce compliance by its members with certain provisions 
of the Linkage Plan to facilitate the establishment of ABCs and 
their handling of Linkage Orders. See Letter from Elizabeth K. King, 
Associate Director, Division of Trading and Markets, Commission, to 
Jeffrey P. Burns, Vice President and Associate General Counsel, 
Amex, dated November 16, 2007.
    \25\ Amex Rule 942(d)(3) specifically addresses the situations 
in which an Amex member (or, as proposed to be amended, an ABC 
acting as employee of the Exchange) does not receive a response to a 
Linkage order within 20 seconds of sending the order.
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    The Commission believes that the proposed rules governing the 
handling of Linkage orders by the ABC and the use of the options 
specialist's accounts for routing Linkage orders is consistent with the 
promotion of a national market system because, among other things, it 
will allow P/A Orders that reflect the terms of Amex customer orders to 
be generated by Amex and routed to other Linkage Participant markets, 
which will allow a Amex customer order to receive possible execution at 
a price better than the price disseminated by Amex.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\26\ that the proposed rule change (File No. SR-Amex-2006-107), as 
modified by Amendment No. 1, be, and it hereby is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).
    \27\ 27 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-22911 Filed 11-23-07; 8:45 am]

BILLING CODE 8011-01-P
