Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Require Specialists To Yield Orally Agreed Upon Proprietary Trades to Later-Arriving Customer System Orders, 72421-72424 [E7-24726]

Download as PDF Federal Register / Vol. 72, No. 244 / Thursday, December 20, 2007 / Notices 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. 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–2007–134 and should be submitted on or before January 10, 2008. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.15 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–24693 Filed 12–19–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56959; File No. SR–Amex– 2007–46] Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Require Specialists To Yield Orally Agreed Upon Proprietary Trades to LaterArriving Customer System Orders sroberts on PROD1PC70 with NOTICES December 13, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 2 thereunder, notice is hereby given that on May 10, 2007, the American Stock Exchange LLC (‘‘Amex’’ or ‘‘Exchange’’) filed with the 15 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Aug<31>2005 20:08 Dec 19, 2007 Jkt 214001 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 Exchange. On December 4, 2007, Amex filed Amendment No. 1 to the proposed rule change. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons and is approving the proposal on an accelerated basis. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Amex Rule 950–ANTE to require specialists to yield proprietary transactions in options to later arriving off-Floor customer system agency orders that enter and are displayed on the specialist’s Book (‘‘Agency Orders’’) and could take the specialist’s place in the proprietary transaction. The text of the proposed rule change is available at the Amex, the Commission’s Public Reference Room, and http://www.cboe.com. 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. The text of these statements may be examined at the places specified in Item IV 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 The Amex states that ANTE Public Orders Ahead Block (‘‘Block’’) is the functionality designed to assist specialists in complying with their agency obligations, and prevents specialists from trading ahead of a public customer order in violation of the priority rules, unless the trade is marked as meeting one of the proposed specified exceptions in the Exchange’s rules. The Amex is proposing to add new Commentary .04 to Amex Rule 950– ANTE (l) to codify these exceptions to the requirement that options specialists yield proprietary transactions to later arriving Agency Orders that enter and are displayed on the options specialist’s PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 72421 Book and could take the options specialist’s place in the not yet reported proprietary transaction. Exchange rules require specialists to always yield to customer orders on the Book when trading in their specialty securities for their dealer account. When no other interest is present on the specialists’ Book, specialists may trade for their own account with interest represented on the Book or in the trading crowd.3 The Exchange proposes to add Commentary .04 to paragraph (l) of 950– ANTE to specify certain limited exceptions when options specialists are not required to yield to customers orders on the Book when trading for their own account. These exceptions are as follows: (i) If the later arriving order is an offFloor system order for the account of a broker-dealer (including, but not limited to, a foreign broker-dealer, Registered Options Trader, Supplemental Registered Options Trader, Remote Registered Options Trader, or Away Market Maker); 4 (ii) If the specialist’s trade for his or her dealer account is a trade effected pursuant to Rule 950–ANTE (d), Commentary .01 or Commentary .07(b); (iii) If the specialist’s trade for his or her dealer account is a report of principal participation on an order sent to another market center through Options Intermarket Linkage and the system order arrived after the specialist sent the Linkage order; (iv) If the specialist’s trade for his or her dealer account is in connection with a P/A order sent to another market center through the Options Intermarket Linkage; or (v) If the specialist’s trade for his or her dealer account is a correction of a bona fide specialist error. These exceptions are discussed in more detail below: Priority Over Accounts of BrokerDealers Because, pursuant to Amex Rule 950– ANTE, orders for the accounts of brokerdealers do not have priority over specialists acting as principal, the Block allows for the specialist not to yield to such orders. Complex or Combination Trade Priority Specialist participation in a transaction effected pursuant to Rule 3 See Amex Rule 150(b), Rule 155 and Rule 170 generally made applicable to options by Rule 950– ANTE (a) and (l). 4 Pursuant to 900–ANTE (b)(48), an ‘‘Away Market Maker’’ is a market maker, as defined in Section 3(a)(38) of the Act, in options registered as such on such other national securities exchange. E:\FR\FM\20DEN1.SGM 20DEN1 sroberts on PROD1PC70 with NOTICES 72422 Federal Register / Vol. 72, No. 244 / Thursday, December 20, 2007 / Notices 950–ANTE (d), Commentary .01 or Commentary .07(b) is not subject to the requirement to yield, consistent with the limited priority exceptions that already exists for certain transactions, such as those involving complex or combination orders.5 The specialist will not be required to yield to Agency Orders if the specialist’s trade for his or her dealer account is: (1) A complex trade such as a spread, straddle, ratio, or combination transaction pursuant to Commentary .01 to Rule 950–ANTE (d); or (2) if the specialist is participating in a ‘‘split price priority’’ transaction, or a pair of purchase or sale priority transactions. When a specialist participates in a trade with a broker or market maker that constitutes a complex trade (spread, straddle, etc.), the specialist must enter the execution into the trading system (ANTE). Whenever the specialist participates in a transaction in ANTE where he enters his interest and it is on the same side of a customer order at the same price level, the quantity going to the specialist is automatically swapped with that requested by the customer order. In the case where the transaction is a spread trade, the specialist can click a button labeled ‘‘spread’’ to indicate the trade is a spread trade, and the system will not automatically swap the quantity allocated to the specialist with that of the customer thereby allowing the specialist to receive the execution. For example: —A Floor Broker walks into the crowd with a spread trade request. 1. Buy 10 Intel Jan 25 calls at $5 (Amex quote = 4.90 x 5). 2. Sell 10 Intel Jan 25 puts at $1 (Amex quote = 0.95 x 1.05). —There is a customer order to sell 10 contracts at $5, which could be an existing order or one that comes in after the Floor Broker enters the crowd. The specialist executes the spread trade buying 10 Jan 25 puts @ 1 and selling 10 Jan. 25 calls @ 5. The specialist enters the transaction into the trading system and indicates the trade is a spread trade by clicking the spread button. In the foregoing, when entering the transaction into the system, if the specialist does not click the ‘‘spread’’ button, the 10 contracts allocated to him at $5 will be swapped with the customer order. However, in the above example, because the specialist indicates the spread transaction by clicking ‘‘spread’’, 5 The priority exception requires the specialist to improve the market on one ‘‘leg’’ of the complex trade, which must be marked as a ‘‘spread’’ transaction. VerDate Aug<31>2005 20:08 Dec 19, 2007 Jkt 214001 the quantity is allocated to the specialist and not to the customer. The processing for split price priority is the same as that for complex trades.6 If the specialist indicates both executions are split price executions by clicking the ‘‘spread’’ button, the trading system will allow the transaction to process ahead of any customer orders on the book.7 For example: —Floor Broker walks into the crowd with an order to buy 100 @ $5 or, an order comes into the system to buy 100 @ $5. 1. Amex quote = 4.80 × 5. 2. There is a customer order to sell 10 at $5. —The specialist executes the buy order 50 @ $4.90 (this price is better than the ABBO and customer orders price) and 50 @ $5, against the specialist account or he enters a trade for the specialist account to match against the Brokers order—50 @ $4.90 and 50 @ $5. When the specialist enters the transaction into the trading system, he or she can indicate the split price trade by clicking the ‘‘spread’’ button just as he or she does for the execution of complex trades. By doing so, the system allows the quantity allocated to the specialist to remain with the specialist. As noted above, if the specialist does not click on the ‘‘spread’’ button, then 10 of the 50 contracts allocated to the specialist will be allocated to the customer instead. Certain Linkage Transactions The Block will not be triggered if: (1) The specialist’s trade for his or her dealer account is a report of principal participation on an order sent to another market center through Options Intermarket Linkage prior to the time the Agency Order was displayed on the Book; 8 or (2) The transaction is in connection with a P/A order sent to another market center through the Options Intermarket Linkage. A specialist who participates as principal on an order sent to another 6 Pursuant to Commentary .07(b) to Amex Rule 950–ANTE (d), this exception applies to orders of 100 contracts or more. 7 The Exchange states that when a specialist marks a trade as ‘‘spread’’, it is reported to the tape as a spread transaction although the trade may not necessarily be a spread trade. FINRA conducts surveillance to monitor whether specialists are inappropriately marking trades as spread, when the trade does not qualify for such treatment pursuant to Amex Rule 950–ANTE (d), Commentaries .01 or .07(b). 8 The Block will be triggered if an eligible Agency Order is displayed on the Book at the time the specialist attempts to send a principal order to another market. PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 market center through Options Intermarket Linkage is not required to yield to an Agency Order that arrives subsequent to the time the specialist sent a principal linkage commitment, but prior to receiving a report of execution back. In this case, the specialist has time priority to the Agency Order since the proprietary trade has already taken place. Furthermore, a specialist is not required to yield to an Agency Order where a specialist is obligated to trade with an order on the book on the basis of receiving an execution report of a ‘‘P/A’’ order (as defined in Amex Rule 940(b)(10)(i)), sent to another market center through Options Intermarket Linkage. Under applicable linkage rules, this trade was done expressly on behalf of a customer order, and the specialist must relinquish the position to the customer upon receiving the execution report.9 The exception ensures that the specialist maintains this obligation. Correction of a Bona Fide Error Specialist options errors are processed outside of the ANTE trading system by Exchange staff through Exchange error corrections facilities. In circumstances in which a specialist must correct a bona fide error, if the correction involves principal participation and an Agency Order is present on the Book at the time of the correction, there is no requirement that the specialist yield to later arriving customer Agency Orders. All errors are appropriately documented and reported to the Exchange, by the Service Desk, in a manner designated by the Exchange. Although ANTE has systematized the functionality required by the proposed exceptions codified in proposed Commentary .04 to Amex 950–ANTE (l), the Exchange wishes to advise that there is an inherent limitation in fully systematizing this functionality. The ANTE trading system combines the electronic routing, quoting, and execution of options orders with on floor auction market trading in options. In this regard, specialists can and will be involved in orally consummated orders. Often these ‘‘crowd trades’’ involve a number of registered options traders as contra-parties to the transaction together with the specialist. To enable timely trade reporting, the specialist may report a crowd transaction without all of the names of the contra-parties reflected, and shortly thereafter submit an Action without an Order (known as an ‘‘AWO’’) to provide the names of all counter-parties to the trade. If the specialist is a party to the 9 See E:\FR\FM\20DEN1.SGM Amex Rule 941(b). 20DEN1 sroberts on PROD1PC70 with NOTICES Federal Register / Vol. 72, No. 244 / Thursday, December 20, 2007 / Notices trade, his participation must be reported on either the trade report or the AWO. The trading ahead block will replace his participation if a later arriving off-floor customer agency order is entitled to participate in the specialist’s place. However, it is theoretically possible that if there was a customer agency order on the specialist book at the time of the trade report that was cancelled prior to the AWO, the trading ahead block would not be able to replace the specialist’s participation with the customer. Similarly though, a customer order could be entered subsequent to the trade report but prior to the AWO, and in such a situation the specialist’s participation will be replaced. Because the specialist has the ability to delay reporting his participation in a transaction there is of course the potential that a specialist may inappropriately use this ability to avoid being replaced by a customer order. While the Exchange acknowledges that this type of inappropriate action could happen, a specialist delaying the reporting of his participation to avoid being replaced by a customer order runs the risk that the customer order does not cancel or otherwise get executed, or the risk that additional customer orders arrive that could also replace the specialist’s participation. However, FINRA conducts routine surveillance to identify situations in which a specialist traded ahead of an order by the use of an AWO to report his participation after the reporting of a transaction. The Exchange states that to date, this surveillance indicates that specialists generally report their proprietary participation at the time of the trade report, rather than through a later AWO. Moreover, even when a later AWO is used, FINRA has only identified two possibly valid trading ahead alerts, which are currently under review. To the extent violative conduct is found to have occurred, the Amex will take appropriate disciplinary action against the specialist in question. The Exchange notes that the foregoing amendment to Commentary .04 to 950– ANTE(l) shall remain applicable until the Amex Book Clerk (‘‘ABC’’) program has been fully implemented.10 The ABC program eliminates the obligation and ability of Exchange options specialists to execute orders as agent in his or her assigned options classes. Rather, an Exchange employee or independent contractor, the ABC shall be responsible for maintaining and operating the customer limit order book and display 10 See Securities Exchange Act Release No. 56804 (November 16, 2007), 72 FR 66002 (November 26, 2007) (SR–Amex–2006–107). VerDate Aug<31>2005 20:08 Dec 19, 2007 Jkt 214001 book. The Amex anticipates a six month rollout period of ABC program. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with section 6(b) of the Act 11 in general and furthers the objectives of section 6(b)(5) of the Act 12 in particular in that it is 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; and is designed to prohibit unfair discrimination between customers, issuers, brokers and dealers. Specifically, the Exchange believes that conforming the Exchange’s rule text to the ANTE Public Orders Ahead Block functionality is consistent with the protection of investors and the public interest, and would sooner afford market participants the benefits that should flow from the proposal. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will 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 The Exchange states that 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 (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–Amex–2007–46 on the subject line. 11 15 12 15 PO 00000 U.S.C. 78f(b). U.S.C. 78f(b)(5). Frm 00083 Fmt 4703 Sfmt 4703 72423 Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–Amex–2007–46. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of 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 Number SR–Amex–2007–46 and should be submitted on or before January 10, 2008. IV. Commission Findings and Accelerated Approval After careful consideration, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange 13 and, in particular, the requirements of section 6 of the Act.14 Specifically, the Commission finds that the proposed rule change is consistent with section 6(b)(5) of the Act,15 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and 13 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 14 15 U.S.C. 78f. 15 15 U.S.C. 78f(b)(5). E:\FR\FM\20DEN1.SGM 20DEN1 72424 Federal Register / Vol. 72, No. 244 / Thursday, December 20, 2007 / Notices 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, because the proposed rule change modifies the Exchange’s ANTE system to systematically prevent a specialist from trading ahead of public customer orders except in those limited circumstances that are enumerated in the proposed rule. The Commission finds good cause, pursuant to section 19(b)(2) of the Act,16 for approving the proposed rule change prior to the thirtieth day after the date of publication of the notice of filing thereof in the Federal Register as the proposal does not significantly affect the protection of investors or the public interest, and does not impose any significant burden on competition. The Commission notes that the proposed rule change codifies the system changes made in response to certain undertakings made by the Amex.17 Moreover, the Commission believes that granting accelerated approval to this proposed rule change will allow these changes to be effective without delay and to remain in effect during the transition to the ABC program.18 V. Conclusion It is therefore ordered, pursuant to section 19(b)(2) of the Act,19 that the proposed rule change (SR–Amex–2007– 46), as amended, be, and is hereby approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.20 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–24726 Filed 12–19–07; 8:45 am] sroberts on PROD1PC70 with NOTICES BILLING CODE 8011–01–P 16 15 U.S.C. 78s(b)(2). Securities Exchange Release No. 55507 (March 22, 2007). 18 See supra note 10 and accompanying text. 20 15 U.S.C. 78s(b)(2). 20 17 CFR 200.30–3(a)(12). 17 See VerDate Aug<31>2005 20:08 Dec 19, 2007 Jkt 214001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56969; File No. SR–Amex– 2007–53] Self-Regulatory Organizations; American Stock Exchange LLC; Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 2, and 3 Thereto, and Notice of Amendment No. 3 to the Proposed Rule Change Relating to the Listing and Trading of the GreenHaven Continuous Commodity Index Fund December 14, 2007. On May 29, 2007, the American Stock Exchange LLC (‘‘Amex’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder 2 list and trade shares (‘‘Shares’’) of the GreenHaven Continuous Commodity Index Fund (‘‘Fund’’) pursuant to Commentary .07 to Amex Rule 1202. On July 31, 2007, Amex filed Amendment No. 1 to the proposed rule change, and on November 16, 2007, Amex filed Amendment No. 2 to the proposed rule change. The proposed rule change, as amended, was published for comment in the Federal Register on November 26, 2007 for a 15day comment period.3 The Commission did not receive any comments regarding the proposal. On December 13, 2007, Amex filed Amendment No. 3 to the proposed rule change.4 This order approves the proposed rule change, as modified by Amendment Nos. 1, 2, and 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 56802 (November 16, 2007), 72 FR 65994 (‘‘Notice’’). 4 Amendment No. 3 would amend the proposed rule change by: (a) Clarifying that only Reuters determines the composition of the Index (defined infra), and stating that Reuters: (i) considers information about changes to the Index and related matters to be potentially market-moving, material, and confidential; and (ii) has policies and procedures in place to ensure to prevent the use and dissemination of such information; (b) stating that the Web sites for the Fund and/or the Exchange will disseminate information the information discussed infra (including the composition of the portfolio of the Fund) to everyone at the same time; (c) adding information concerning halting of trading in the Shares; (d) adding information about applicable existing rules that would govern specialists’ potential conflicts of interest; and (e) stating that the Information Circular (described infra) would discuss the regulatory jurisdiction over the physical trading of commodities or the futures contracts on which the value of the Shares is based, and that there is no regulated source of last sale information regarding physical commodities. The text of Amendment No. 3 to the proposed rule change is available at the Commission’s Public Reference Room, at the Exchange, and at http:// www.amex.com. 2 17 PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 3 thereto, on an accelerated basis. Simultaneously, the Commission is providing notice of and soliciting comments from interested persons regarding Amendment No. 3. I. Description As described in the Exchange’s proposal,5 the Fund’s primary investment objective is to reflect the performance of the Continuous Commodity Total Return Index (the ‘‘Index’’ or ‘‘CCI–TR’’), over time, less the expenses of the operations of the Fund and the Master Fund. The Master Fund will invest in a portfolio of exchange-traded futures (‘‘Commodity Futures Contracts’’) on the commodities comprising the Index.6 GreenHaven Commodity Services LLC, a Delaware limited liability company, will serve as Managing Owner of the Fund and the Master Fund. The Managing Owner will serve as the commodity pool operator and commodity trading advisor of the Fund and the Master Fund. The Managing Owner is registered as a commodity pool operator and commodity trading advisor with the Commodity Futures Trading Commission (‘‘CFTC’’) and with the National Futures Association (‘‘NFA’’).7 II. Commission Findings and Accelerated Approval After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.8 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,9 which requires that the rules of an exchange be designed, among other things, to promote just and 5 Substantially all of the assets of the Fund will be invested in the Master Fund. For a more detailed description of the Fund and Master Fund, including their structure, holdings, applicable exchange listing and trading rules, disclosure of pricing information, surveillance, and other regulation, see Notice at 65997–66001. Terms not otherwise defined herein have the same meaning as the meaning given in the Notice. 6 For information regarding the Commodity Futures Contracts, see Notice at 65996–65997. 7 As a registered commodity pool operator and commodity trading advisor with respect to both the Fund and the Master Fund, the Managing Owner is required to comply with various regulatory requirements under the Commodity Exchange Act and the rules and regulations of the CFTC and the NFA, including investor protection requirements, antifraud prohibitions, disclosure requirements, and reporting and recordkeeping requirements. 8 In approving this proposed rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 9 15 U.S.C. 78f(b)(5). E:\FR\FM\20DEN1.SGM 20DEN1

Agencies

[Federal Register Volume 72, Number 244 (Thursday, December 20, 2007)]
[Notices]
[Pages 72421-72424]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-24726]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56959; File No. SR-Amex-2007-46]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change, as Modified by Amendment No. 1 Thereto, To Require 
Specialists To Yield Orally Agreed Upon Proprietary Trades to Later-
Arriving Customer System Orders

December 13, 2007.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on May 10, 2007, 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 Exchange. 
On December 4, 2007, Amex filed Amendment No. 1 to the proposed rule 
change. The Commission is publishing this notice to solicit comments on 
the proposed rule change, as amended, from interested persons and is 
approving the proposal on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Amex Rule 950-ANTE to require 
specialists to yield proprietary transactions in options to later 
arriving off-Floor customer system agency orders that enter and are 
displayed on the specialist's Book (``Agency Orders'') and could take 
the specialist's place in the proprietary transaction.
    The text of the proposed rule change is available at the Amex, the 
Commission's Public Reference Room, and http://www.cboe.com.

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. The 
text of these statements may be examined at the places specified in 
Item IV 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
    The Amex states that ANTE Public Orders Ahead Block (``Block'') is 
the functionality designed to assist specialists in complying with 
their agency obligations, and prevents specialists from trading ahead 
of a public customer order in violation of the priority rules, unless 
the trade is marked as meeting one of the proposed specified exceptions 
in the Exchange's rules.
    The Amex is proposing to add new Commentary .04 to Amex Rule 950-
ANTE (l) to codify these exceptions to the requirement that options 
specialists yield proprietary transactions to later arriving Agency 
Orders that enter and are displayed on the options specialist's Book 
and could take the options specialist's place in the not yet reported 
proprietary transaction.
    Exchange rules require specialists to always yield to customer 
orders on the Book when trading in their specialty securities for their 
dealer account. When no other interest is present on the specialists' 
Book, specialists may trade for their own account with interest 
represented on the Book or in the trading crowd.\3\
---------------------------------------------------------------------------

    \3\ See Amex Rule 150(b), Rule 155 and Rule 170 generally made 
applicable to options by Rule 950-ANTE (a) and (l).
---------------------------------------------------------------------------

    The Exchange proposes to add Commentary .04 to paragraph (l) of 
950-ANTE to specify certain limited exceptions when options specialists 
are not required to yield to customers orders on the Book when trading 
for their own account. These exceptions are as follows:
    (i) If the later arriving order is an off-Floor system order for 
the account of a broker-dealer (including, but not limited to, a 
foreign broker-dealer, Registered Options Trader, Supplemental 
Registered Options Trader, Remote Registered Options Trader, or Away 
Market Maker); \4\
---------------------------------------------------------------------------

    \4\ Pursuant to 900-ANTE (b)(48), an ``Away Market Maker'' is a 
market maker, as defined in Section 3(a)(38) of the Act, in options 
registered as such on such other national securities exchange.
---------------------------------------------------------------------------

    (ii) If the specialist's trade for his or her dealer account is a 
trade effected pursuant to Rule 950-ANTE (d), Commentary .01 or 
Commentary .07(b);
    (iii) If the specialist's trade for his or her dealer account is a 
report of principal participation on an order sent to another market 
center through Options Intermarket Linkage and the system order arrived 
after the specialist sent the Linkage order;
    (iv) If the specialist's trade for his or her dealer account is in 
connection with a P/A order sent to another market center through the 
Options Intermarket Linkage; or
    (v) If the specialist's trade for his or her dealer account is a 
correction of a bona fide specialist error.
    These exceptions are discussed in more detail below:
Priority Over Accounts of Broker-Dealers
    Because, pursuant to Amex Rule 950-ANTE, orders for the accounts of 
broker-dealers do not have priority over specialists acting as 
principal, the Block allows for the specialist not to yield to such 
orders.
Complex or Combination Trade Priority
    Specialist participation in a transaction effected pursuant to Rule

[[Page 72422]]

950-ANTE (d), Commentary .01 or Commentary .07(b) is not subject to the 
requirement to yield, consistent with the limited priority exceptions 
that already exists for certain transactions, such as those involving 
complex or combination orders.\5\
---------------------------------------------------------------------------

    \5\ The priority exception requires the specialist to improve 
the market on one ``leg'' of the complex trade, which must be marked 
as a ``spread'' transaction.
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    The specialist will not be required to yield to Agency Orders if 
the specialist's trade for his or her dealer account is: (1) A complex 
trade such as a spread, straddle, ratio, or combination transaction 
pursuant to Commentary .01 to Rule 950-ANTE (d); or (2) if the 
specialist is participating in a ``split price priority'' transaction, 
or a pair of purchase or sale priority transactions.
    When a specialist participates in a trade with a broker or market 
maker that constitutes a complex trade (spread, straddle, etc.), the 
specialist must enter the execution into the trading system (ANTE). 
Whenever the specialist participates in a transaction in ANTE where he 
enters his interest and it is on the same side of a customer order at 
the same price level, the quantity going to the specialist is 
automatically swapped with that requested by the customer order. In the 
case where the transaction is a spread trade, the specialist can click 
a button labeled ``spread'' to indicate the trade is a spread trade, 
and the system will not automatically swap the quantity allocated to 
the specialist with that of the customer thereby allowing the 
specialist to receive the execution. For example:

--A Floor Broker walks into the crowd with a spread trade request.
    1. Buy 10 Intel Jan 25 calls at $5 (Amex quote = 4.90 x 5).
    2. Sell 10 Intel Jan 25 puts at $1 (Amex quote = 0.95 x 1.05).
--There is a customer order to sell 10 contracts at $5, which could be 
an existing order or one that comes in after the Floor Broker enters 
the crowd. The specialist executes the spread trade buying 10 Jan 25 
puts @ 1 and selling 10 Jan. 25 calls @ 5. The specialist enters the 
transaction into the trading system and indicates the trade is a spread 
trade by clicking the spread button.

    In the foregoing, when entering the transaction into the system, if 
the specialist does not click the ``spread'' button, the 10 contracts 
allocated to him at $5 will be swapped with the customer order. 
However, in the above example, because the specialist indicates the 
spread transaction by clicking ``spread'', the quantity is allocated to 
the specialist and not to the customer.
    The processing for split price priority is the same as that for 
complex trades.\6\ If the specialist indicates both executions are 
split price executions by clicking the ``spread'' button, the trading 
system will allow the transaction to process ahead of any customer 
orders on the book.\7\ For example:
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    \6\ Pursuant to Commentary .07(b) to Amex Rule 950-ANTE (d), 
this exception applies to orders of 100 contracts or more.
    \7\ The Exchange states that when a specialist marks a trade as 
``spread'', it is reported to the tape as a spread transaction 
although the trade may not necessarily be a spread trade. FINRA 
conducts surveillance to monitor whether specialists are 
inappropriately marking trades as spread, when the trade does not 
qualify for such treatment pursuant to Amex Rule 950-ANTE (d), 
Commentaries .01 or .07(b).

--Floor Broker walks into the crowd with an order to buy 100 @ $5 or, 
an order comes into the system to buy 100 @ $5.
    1. Amex quote = 4.80 x 5.
    2. There is a customer order to sell 10 at $5.
--The specialist executes the buy order 50 @ $4.90 (this price is 
better than the ABBO and customer orders price) and 50 @ $5, against 
the specialist account or he enters a trade for the specialist account 
to match against the Brokers order--50 @ $4.90 and 50 @ $5.

    When the specialist enters the transaction into the trading system, 
he or she can indicate the split price trade by clicking the ``spread'' 
button just as he or she does for the execution of complex trades. By 
doing so, the system allows the quantity allocated to the specialist to 
remain with the specialist. As noted above, if the specialist does not 
click on the ``spread'' button, then 10 of the 50 contracts allocated 
to the specialist will be allocated to the customer instead.
Certain Linkage Transactions
    The Block will not be triggered if:
    (1) The specialist's trade for his or her dealer account is a 
report of principal participation on an order sent to another market 
center through Options Intermarket Linkage prior to the time the Agency 
Order was displayed on the Book; \8\ or
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    \8\ The Block will be triggered if an eligible Agency Order is 
displayed on the Book at the time the specialist attempts to send a 
principal order to another market.
---------------------------------------------------------------------------

    (2) The transaction is in connection with a P/A order sent to 
another market center through the Options Intermarket Linkage.
    A specialist who participates as principal on an order sent to 
another market center through Options Intermarket Linkage is not 
required to yield to an Agency Order that arrives subsequent to the 
time the specialist sent a principal linkage commitment, but prior to 
receiving a report of execution back. In this case, the specialist has 
time priority to the Agency Order since the proprietary trade has 
already taken place. Furthermore, a specialist is not required to yield 
to an Agency Order where a specialist is obligated to trade with an 
order on the book on the basis of receiving an execution report of a 
``P/A'' order (as defined in Amex Rule 940(b)(10)(i)), sent to another 
market center through Options Intermarket Linkage. Under applicable 
linkage rules, this trade was done expressly on behalf of a customer 
order, and the specialist must relinquish the position to the customer 
upon receiving the execution report.\9\ The exception ensures that the 
specialist maintains this obligation.
---------------------------------------------------------------------------

    \9\ See Amex Rule 941(b).
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Correction of a Bona Fide Error
    Specialist options errors are processed outside of the ANTE trading 
system by Exchange staff through Exchange error corrections facilities. 
In circumstances in which a specialist must correct a bona fide error, 
if the correction involves principal participation and an Agency Order 
is present on the Book at the time of the correction, there is no 
requirement that the specialist yield to later arriving customer Agency 
Orders. All errors are appropriately documented and reported to the 
Exchange, by the Service Desk, in a manner designated by the Exchange.
    Although ANTE has systematized the functionality required by the 
proposed exceptions codified in proposed Commentary .04 to Amex 950-
ANTE (l), the Exchange wishes to advise that there is an inherent 
limitation in fully systematizing this functionality. The ANTE trading 
system combines the electronic routing, quoting, and execution of 
options orders with on floor auction market trading in options. In this 
regard, specialists can and will be involved in orally consummated 
orders. Often these ``crowd trades'' involve a number of registered 
options traders as contra-parties to the transaction together with the 
specialist. To enable timely trade reporting, the specialist may report 
a crowd transaction without all of the names of the contra-parties 
reflected, and shortly thereafter submit an Action without an Order 
(known as an ``AWO'') to provide the names of all counter-parties to 
the trade. If the specialist is a party to the

[[Page 72423]]

trade, his participation must be reported on either the trade report or 
the AWO. The trading ahead block will replace his participation if a 
later arriving off-floor customer agency order is entitled to 
participate in the specialist's place. However, it is theoretically 
possible that if there was a customer agency order on the specialist 
book at the time of the trade report that was cancelled prior to the 
AWO, the trading ahead block would not be able to replace the 
specialist's participation with the customer. Similarly though, a 
customer order could be entered subsequent to the trade report but 
prior to the AWO, and in such a situation the specialist's 
participation will be replaced.
    Because the specialist has the ability to delay reporting his 
participation in a transaction there is of course the potential that a 
specialist may inappropriately use this ability to avoid being replaced 
by a customer order. While the Exchange acknowledges that this type of 
inappropriate action could happen, a specialist delaying the reporting 
of his participation to avoid being replaced by a customer order runs 
the risk that the customer order does not cancel or otherwise get 
executed, or the risk that additional customer orders arrive that could 
also replace the specialist's participation. However, FINRA conducts 
routine surveillance to identify situations in which a specialist 
traded ahead of an order by the use of an AWO to report his 
participation after the reporting of a transaction. The Exchange states 
that to date, this surveillance indicates that specialists generally 
report their proprietary participation at the time of the trade report, 
rather than through a later AWO. Moreover, even when a later AWO is 
used, FINRA has only identified two possibly valid trading ahead 
alerts, which are currently under review. To the extent violative 
conduct is found to have occurred, the Amex will take appropriate 
disciplinary action against the specialist in question.
    The Exchange notes that the foregoing amendment to Commentary .04 
to 950-ANTE(l) shall remain applicable until the Amex Book Clerk 
(``ABC'') program has been fully implemented.\10\ The ABC program 
eliminates the obligation and ability of Exchange options specialists 
to execute orders as agent in his or her assigned options classes. 
Rather, an Exchange employee or independent contractor, the ABC shall 
be responsible for maintaining and operating the customer limit order 
book and display book. The Amex anticipates a six month rollout period 
of ABC program.
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    \10\ See Securities Exchange Act Release No. 56804 (November 16, 
2007), 72 FR 66002 (November 26, 2007) (SR-Amex-2006-107).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \11\ in general and furthers the 
objectives of section 6(b)(5) of the Act \12\ in particular in that it 
is 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; 
and is designed to prohibit unfair discrimination between customers, 
issuers, brokers and dealers. Specifically, the Exchange believes that 
conforming the Exchange's rule text to the ANTE Public Orders Ahead 
Block functionality is consistent with the protection of investors and 
the public interest, and would sooner afford market participants the 
benefits that should flow from the proposal.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange does not believe that the proposed rule change will 
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

    The Exchange states that 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 (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-Amex-2007-46 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 20549-1090.

All submissions should refer to File Number SR-Amex-2007-46. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of 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 Number SR-Amex-2007-46 and should be 
submitted on or before January 10, 2008.

IV. Commission Findings and Accelerated Approval

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange \13\ and, in particular, the requirements of section 6 of the 
Act.\14\ Specifically, the Commission finds that the proposed rule 
change is consistent with section 6(b)(5) of the Act,\15\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and

[[Page 72424]]

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, because the proposed rule 
change modifies the Exchange's ANTE system to systematically prevent a 
specialist from trading ahead of public customer orders except in those 
limited circumstances that are enumerated in the proposed rule.
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    \13\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission finds good cause, pursuant to section 19(b)(2) of 
the Act,\16\ for approving the proposed rule change prior to the 
thirtieth day after the date of publication of the notice of filing 
thereof in the Federal Register as the proposal does not significantly 
affect the protection of investors or the public interest, and does not 
impose any significant burden on competition. The Commission notes that 
the proposed rule change codifies the system changes made in response 
to certain undertakings made by the Amex.\17\ Moreover, the Commission 
believes that granting accelerated approval to this proposed rule 
change will allow these changes to be effective without delay and to 
remain in effect during the transition to the ABC program.\18\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(2).
    \17\ See Securities Exchange Release No. 55507 (March 22, 2007).
    \18\ See supra note 10 and accompanying text.
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-Amex-2007-46), as amended, 
be, and is hereby approved on an accelerated basis.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
---------------------------------------------------------------------------

    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-24726 Filed 12-19-07; 8:45 am]
BILLING CODE 8011-01-P