Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Rules and Procedures Governing the Execution of Complex Orders Involving Options and Securities Futures, 18122-18125 [E6-5151]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 71, Number 68 (Monday, April 10, 2006)]
[Notices]
[Pages 18122-18125]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-5151]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53588; File No. SR-Amex-2006-28]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Adopt Rules and Procedures Governing the Execution of Complex Orders 
Involving Options and Securities Futures

April 3, 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 March 24, 2006, 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 Amex. The Exchange has 
filed the proposal as a ``non-controversial'' rule change pursuant to 
Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ 
which renders it effective upon filing with the Commission. 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks to adopt rules governing the execution of 
complex orders \5\ involving stock-option orders and security future-
option orders, and to adopt definitions of additional types of complex 
orders. Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in [brackets].
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    \5\ Complex orders include those orders which are defined in 
950--ANTE(e)(i)-(iii) and 950--ANTE(e)(vii), and proposed 950--
ANTE(e)(viii)-(xii).
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Rule 900--ANTE

Applicability, Definitions and References
    (a) Applicability--The Exchange's new trading system (known as the 
ANTE System or ANTE) will be rolled-out over a period of time 
(approximately eighteen months) on a specialist post-by-specialist post 
basis. The roll-out began on May 25, 2004 and will continue until June 
30, 2006 at which

[[Page 18123]]

time all equity and index option classes traded by the Exchange will be 
on the ANTE System. Therefore, during the roll-out period, while the 
Exchange has option classes trading on both systems, current rules (as 
they are amended from time to time) will apply to those option classes 
continuing to trade on its current system while the following ANTE 
rules will apply to those option classes trading on the new trading 
system. Once the roll-out of ANTE is complete, the amendments to the 
Exchange's options rules reflecting the implementation of ANTE set 
forth below will replace, where applicable, the corresponding 
provisions in Rules 900 through 958A. The following Trading of Option 
Contracts Rules shall apply to the trading of option contracts on the 
ANTE System: 901, 902, 903, 904, 905, 906, 907, 908, 909, 915, 916, 
917, 920, 921, 922, 923, 924, 925, 926, 927, 928, 930, 932, 940, 942, 
943, 944, 952, [953,] 954, 956, 957, 959, 960, 961, 962, 963, 964, 965, 
966, 967, 970, 971, 972, 980, 981, 982, 990, 991, and 992. In addition, 
the following Trading of Option Contract Rules, which have been amended 
to reflect usage in the ANTE System, shall apply to the trading of 
options contracts on the ANTE System. Moreover, the Rules in this 
Chapter (Trading of Options Contracts) shall be applicable to (i) the 
trading on and through the facilities of the Exchange of option 
contracts issued by the Options Clearing Corporation and the terms and 
conditions thereof; and (ii) the exercise and settlement, the handling 
of orders, and the conduct of accounts and other matters, relating to 
option contracts dealt in by any member or member organization. Except 
to the extent that specific Rules in this Chapter govern, or unless the 
context otherwise requires, the provisions of the Constitution and of 
all other Rules and policies of the Board of Governors shall be 
applicable to the trading on the Exchange of option contracts. Pursuant 
to the provisions of Article I, Section 3(i) of the Constitution, 
option contracts (as defined below) are included within the definition 
of ``security'' or ``securities'' as such terms are used in the 
Constitution and the Rules of the Exchange.
    (b)-(d) No change.
    Commentary * * *
    .01 No change.
* * * * *

Rule 950--ANTE

Rules of General Applicability
    (a)-(c) No change.
    (d) The provisions of Rule 126, with the exception of subparagraphs 
(a) and (b) thereof, shall apply to Exchange option transactions and 
the following additional commentary shall also apply:
    Commentary * * *
    .01 When a member holding a spread order, a straddle order, ratio 
order, [or] a combination order, a stock-option order, or a security 
future-option order and bidding or offering on the basis of a total 
credit or debit for the order has determined that the order may not be 
executed by a combination of transactions with or within the bids and 
offers established in the marketplace, then the order may be executed 
as a spread, straddle, ratio, [or] combination, stock-option, or 
security future-option order at the total credit or debit with one 
other member without giving priority to either bids or offers 
established in the marketplace that are not better than the bids or 
offers comprising such total credit or debit, provided that, (i) in 
executing a spread order, the member does not buy at the established 
bid for the option contract to be bought and sell at the established 
offer for the option contract to be sold or, (ii) in executing a 
straddle or combination order, the member does not either buy both 
sides of the order at the established bids or sell both sides of the 
order at the established offers. Stock-option orders and security 
future-option orders have priority over bids or offers of the trading 
crowd but not over bids or offers of public customers in the limit 
order book.
    .02-.07 No change.
    (e) The types of orders specified in Rule 131 and the following 
additional types of orders shall be applicable to Exchange option 
transactions:
    (i)-(vii) No change.
    (viii) Combination Orders with Non-Equity Options Legs--One or more 
legs of an order may be to purchase or sell a stated number of units of 
another security.
    (1) Stock-Option Order--A stock-option order is an order to buy or 
sell a stated number of units of an underlying or related security 
coupled with either (a) the purchase or sale of option contract(s) on 
the opposite side of the market representing either the same number of 
units of the underlying or related security or the number of units of 
the underlying security necessary to create a delta neutral position; 
or (b) the purchase or sale of an equal number of put and call option 
contracts, each having the same exercise price, expiration date, and 
each representing the same number of units of stock, as and on the 
opposite side of the market from, the underlying or related security 
portion of the order.
    (2) Security Future-Option Order--A security future-option order is 
an order to buy or sell a stated number of units of a single stock 
future or a security convertible into a security future (``convertible 
security future'') coupled with either (a) the purchase or sale of 
option contract(s) on the opposite side of the market representing 
either the same number of the underlying for the security future or 
convertible security future, or the number of units of the underlying 
for the security future or convertible security future necessary to 
create a delta neutral position; or (b) the purchase or sale of an 
equal number of put and call option contracts, each having the same 
exercise price, expiration date, and each representing the same number 
of underlying for the security future or the convertible security 
future, as and on the opposite side of the market from, the stock 
underlying for the security future or convertible security future 
portion of the order.
    (ix) Strangle Order--A strangle order is an order to buy (sell) a 
number of call option contracts and the same number of put option 
contracts in the same underlying security, which contracts have the 
same expiration date (e.g., an order to buy two XYZ June 35 calls and 
to buy two XYZ June 40 puts).
    (x) Butterfly Spread Order--A butterfly spread order is an order 
involving three series of either put or call options all having the 
same underlying security and time of expiration and, based on the same 
current underlying value, where the interval between the exercise price 
of each series is equal, which orders are structured as either (i) a 
``long butterfly spread'' in which two short options in the same series 
offset by one long option with a higher exercise price and one long 
option with a lower exercise price or (ii) a ``short butterfly spread'' 
in which two long options in the same series are offset by one short 
option with a higher exercise price and one short option with a lower 
exercise price.
    (xi) Box/Roll Spread Order: Box spread means an aggregation of 
positions in a long call option and short put option with the same 
exercise price (``buy side'') coupled with a long put option and short 
call option with the same exercise price (``sell side'') all of which 
have the same aggregate current underlying value, and are structured as 
either: A) a ``long box spread'' in which the sell side exercise price 
exceeds the buy side exercise price or B) a ``short box spread'' in 
which the buy side exercise price exceeds the sell side exercise price.

[[Page 18124]]

    (xii) Collar and Risk Reversal Orders--A collar order (risk 
reversal) is an order involving the sale (purchase) of a call (put) 
option coupled with the purchase (sale) of a put (call) option in 
equivalent units of the same underlying security having a lower 
(higher) exercise price than, and same expiration date as, the sold 
(purchased) call (put) option.
    (f)-(n) No change.
* * * * *

Rule 953--ANTE

Acceptance of Bid or Offer

    (a) All bids or offers for option contracts dealt in on the 
Exchange made and accepted in accordance with these Rules shall 
constitute binding contracts between the parties thereto but shall be 
subject to the exercise by the Board of Governors of the powers in 
respect thereto vested in said Board by the Constitution, and to the 
Rules of the Exchange, and said contracts shall also be subject to the 
rules of The Options Clearing Corporation and to the exercise by The 
Options Clearing Corporation of the powers reserved to it in the rules 
of The Options Clearing Corporation. 
    (b) Stock-option orders and security future-option orders. 
    (i) A bid or offer that is identified to the Exchange trading crowd 
as part of a stock-option order, as defined in Rule 950--ANTE 
(e)(viii)(1) or, or a security future-option order, as defined in Rule 
950--ANTE (e)(viii)(2), is made and accepted subject to the following 
conditions:
    (A) at the time the stock-option order or security future-option 
order is announced, the member initiating the order must disclose to 
the crowd all legs of the order and must identify the specific 
market(s) on which and the price(s) at which the non-option leg(s) of 
the order is to be filled, and
    (B) concurrent with execution of the options leg of the order, the 
initiating member and each member that agrees to be a contra-party on 
the non-option leg(s) of the order must take steps immediately to 
transmit the non-option leg(s) to the identified market(s) for 
execution.
    (ii) A trade representing the execution of the options leg of a 
stock-option order or a security future-option order may be cancelled 
at the request of any member that is a party to that trade only if 
market conditions in any of the non-Exchange market(s) prevent the 
execution of the non-option leg(s) at the price(s) agreed upon.
    (c) Failure to observe the requirements set forth in paragraph 
(b)(i)(A) and (B) above shall be considered conduct inconsistent with 
just and equitable principles of trade.
* * * * *

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 IV 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Commodity Futures Modernization Act of 2000 lifted the ban on 
the trading of single stock futures and futures on narrow based 
security indices (together, ``security futures'') in the United States. 
The Amex is proposing to (i) adopt a new definition for stock-option 
orders and security futures option orders (``security future-option 
order''), (ii) grant certain execution priorities to stock-option 
orders and security future-option orders, (iii) authorize the execution 
of stock-option orders and security future-option orders, and (iv) add 
additional language to the Amex rules regarding different types of 
complex orders.
    The Exchange proposes to adopt language to allow for the execution 
of stock-option orders and security future-option orders. The Exchange 
believes that complex orders involving orders consisting of stock or 
securities futures and option legs are effective hedging strategies 
that would permit members to initially offset the risk of price 
movements in an option position with a corresponding purchase or sale 
of stock underlying the option position or securities futures. 
Therefore, complex orders consisting of stock or security futures and 
options legs that fall within their proposed definition would be 
entitled to the same priorities that spreads, straddles, ratio, and 
combination orders are afforded.
    The Exchange proposes to amend Commentary .01 to Amex Rule 950-
ANTE(d), to permit members to execute stock-option orders and security 
future-option orders, the options legs of which will have priority over 
bids or offers of the trading crowd but not over bids or offers of 
public customers in the limit order book. The proposed rules also 
provide that members holding stock-option orders or security future-
option orders and bidding or offering on a net debit or credit basis 
may execute the order with another member without giving priority to 
equivalent bids or offers in the trading crowd or the book, provided 
that at least one leg of the order betters the corresponding bid or 
offer in the book.
    The Exchange further proposes to adopt new Amex Rule 953--ANTE to 
provide execution procedures for stock-option orders and security 
future-option orders. The proposed rule text provides that the 
initiating member and the contra-parties with respect to the non-option 
leg(s) must take steps to transmit the non-option leg(s) to the 
appropriate market concurrently with the execution of the options 
leg(s) of the order. Because security futures products may not be 
fungible between markets, the member initiating the security future-
option order must identify the specific market of execution. If the 
security or security futures leg of the order cannot be executed at the 
price(s) agreed upon due to market conditions, a trade representing the 
execution of the options leg of the transaction may be cancelled at the 
request of any member that is a party to that trade.
    Furthermore, the Exchange proposes to amend Amex Rule 950--ANTE(e) 
to include the definitions of additional types of complex orders. 
Specifically, a strangle order, a butterfly spread order, a box/roll 
spread order, and a collar and risk reversal order. The proposed rule 
defines a strangle order as an order to buy or sell a certain number of 
call option contracts and the same number of put option contracts in 
the same underlying security, which have the same expiration date. A 
butterfly spread order is defined as an order involving three series of 
either put or call options all having the same underlying security and 
time of expiration and, based on the same current underlying value, 
where the interval between the exercise price of each series is equal. 
These orders are structured as either (i) a ``long butterfly spread'' 
in which two short options in the same series offset by one long option 
with a higher exercise price and one long option with a lower exercise 
price or (ii) a ``short butterfly spread'' in which two long options in 
the same series are offset by one short option with a higher exercise 
price and one short option with a lower exercise price. A box/roll 
spread order is defined as an aggregation of positions in a long call 
option and short put option with the same exercise price (``buy side'')

[[Page 18125]]

coupled with a long put option and short call option with the same 
exercise price (``sell side'') all of which have the same aggregate 
current underlying value, and are structured as either: (A) A ``long 
box spread'' in which the sell side exercise price exceeds the buy side 
exercise price or (B) a ``short box spread'' in which the buy side 
exercise price exceeds the sell side exercise price. A collar and risk 
reversal order is defined as an order involving the sale or purchase of 
a call or put option, coupled with the purchase or sale of a put or 
call option in equivalent units of the same underlying security having 
a lower or higher exercise price than, and same expiration date as, the 
sold or purchased call or put option.
    Finally, the Exchange seeks to make housekeeping changes to the 
rules: (1) To add an additional reference to ``ratio order'' into 
Commentary .01 of Amex Rule 950--ANTE(d), that was inadvertently 
omitted when the Exchange originally sought immediate effectiveness to 
trade ratio orders \6\ and (2) to remove the reference to Amex Rule 953 
in Amex Rule 900--ANTE, as an option rule that will be applicable to 
the trading of options contracts on the ANTE System because the Amex 
has proposed to adopt new Amex Rule 953--ANTE.
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    \6\ See Securities Exchange Act Release No. 50525 (October 13, 
2004), 69 FR 61875 (October 21, 2004) (Notice of Filing and 
Immediate Effectiveness of SR-Amex-2004-77).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \7\ in general and furthers the objective 
of Section 6(b)(5) of the Act \8\ in particular in that it is designed 
to perfect the mechanisms of a free and open market and the national 
market system, protect investors and the public interest, and promote 
just and equitable principles of trade.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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 with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the forgoing rule change does not: (1) Significantly affect 
the protection of investors or the public interest; (2) impose any 
significant burden on competition; and (3) become operative for 30 days 
after the date of this filing, or such shorter time as the Commission 
may designate, it has become effective pursuant to Section 19(b)(3)(A) 
of the Act \9\ and Rule 19b-4(f)(6) thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\11\ 
However, Rule 19b-4(f)(6)(iii) \12\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange provided the Commission 
with written notice of its intent to file this proposed rule change at 
least five business days prior to the date of filing the proposed rule 
change. In addition, the Exchange has requested that the Commission 
waive the 30-day pre-operative delay. The Commission believes that 
waiving the 30-day pre-operative delay is consistent with the 
protection of investors and in the public interest because it will 
allow the Amex to immediately implement rules and procedures governing 
the execution of complex orders involving options and securities 
futures that are substantially similar to the rules of other 
exchanges.\13\
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    \11\ 17 CFR 240.19b-(f)(6)(iii).
    \12\ Id.
    \13\ See Securities Exchange Act Release Nos. 46390 (August 21, 
2002), 67 FR 55290 (August 28, 2002) (Order approving File No. SR-
ISE-2002-18); and 49367 (March 5, 2004), 69 FR 11678 (March 11, 
2004) (Notice of Filing and Immediate Effectiveness of SR-CBOE-2002-
14). For the purposes only of waiving the pre-operative delay, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the Act.

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 (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File No. SR-Amex-2006-28 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File No. SR-Amex-2006-28. 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 (https://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 such 
filing will also 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 available publicly. All submissions should refer to 
File No. SR-Amex-2006-28 and should be submitted on or before May 1, 
2006.

    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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Nancy M. Morris,
Secretary.
 [FR Doc. E6-5151 Filed 4-7-06; 8:45 am]
BILLING CODE 8010-01-P