On October 25, 1999, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)  and Rule 19b-4 thereunder, a proposed rule change amending its rules regarding the automatic execution of options orders to increase the maximum number of contracts that may be designated for automatic execution from fifty contracts to seventy-five contracts. Notice of the proposal was published in the Federal Register on June 21, 2000. The Commission received no comments on the proposal. On November 1, 2000, the Exchange submitted Amendment No. 1 to the proposal. On November 3, 2000, the Exchange submitted Amendment No. 2 to the proposal. This order approves the proposal and grants accelerated approval of Amendment Nos. 1 and 2.
II. Description of the Proposal
The Exchange's AUTO-EX system automatically executes public customer market and marketable limit orders in options at the best bid or offer displayed at the time the order is entered into the order is entered into the Amex Order File (“AOF”). Generally, public customer market and marketable limit orders for up to fifty options contracts may be automatically executed through the Exchange's AUTO-EX system. Recently, AOF, which handles limit orders routed to the specialist's book as well as those orders routed to AUTO-EX, was increased to allow for the entry of orders of up to 250 option contracts. Because AUTO-EX is only allowed to execute equity option orders and index orders of up to fifty contracts, any market and marketable limit orders for between fifty and 250 option contracts are generally routed by the AOF to the specialist's book.
The Exchange proposes to increase the maximum AUTO-EX order size eligibility for equity and index option contracts orders from fifty contracts to seventy-five contracts. The proposed increase in permissible order size will be implemented on a case-by-case basis for an individual option class or for all option classes when two floor governors or senior floor officials deem such an increase appropriate.
The Exchange represents that it has sufficient systems capacity to accommodate implementation of the proposed increase in permissible order size and that AUTO-EX has been extremely successful in enhancing execution and operational efficiencies during emergency situations and during other non-emergency situations for certain options classes. The Exchange believes that automatic executions of orders for up to seventy-five contracts will enhance its overall operational efficiency and give the Exchange better means of competing with other options exchanges for order flow.
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 and, in particular, the requirements of section 6 of the Act. Among other provisions, section 6(b)(5) of the Act requires that the rules of an exchange be designed to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating securities transactions; remove impediments to and perfect the mechanism of a free and open market and a national securities system; and protect investors and the public interest.
While increasing the maximum order size limit from fifty contracts to seventy-five contracts for AUTO-EX eligibility by itself does not raise concerns under the Act, the Commission believes that this increase raises collateral issues that the Amex will need to monitor and address. Increasing the maximum order size for particular option classes will make a larger number of option orders eligible for the Exchange's automatic execution system. These orders may benefit from greater speed of execution, but at the same time create greater risks for market maker participants. Market makers signed onto the AUTO-EX system will be exposed to the financial risks associated with larger-sized orders being routed through the system for automatic execution at the displayed price. When the market for the underlying security changes rapidly, it may take a few moments for the related option's price to reflect that change. In the interim, customers may submit orders that try to capture the price differential between the underlying security and the option. The larger the orders accepted through AUTO-EX, the greater the risk market makers must be willing to accept. The Commission does not believe that, because Amex Start Printed Page 69080governors and senior floor officials determine to approve orders as large as seventy-five contracts as eligible for AUTO-EX, those officials or any other Amex officials or Amex committee should disengage AUTO-EX more frequently by, for example, declaring a “fast” market. Disengaging AUTO-EX can negatively affect investors by making it slower and less efficient to execute their option orders. It is the Commission's view that the Exchange, when increasing the maximum size orders that can be sent through AUTO-EX, should not disadvantage all customers—the vast majority of which enter orders for less than seventy-five contracts—by making the AUTO-EX system less reliable.
Finally, the Commission finds good cause for approving Amendment Nos. 1 and 2 prior to the 30th day after notice of the Amendment is published in the Federal Register pursuant to section 19(b)(2) of the Act. Amendment No. 1 codifies the proposed increase in the AUTO-EX parameters from fifty contracts to seventy-five option contracts. Amendment No. 2 corrects the rule language in Amex Rule 933, Commentary .02. The Commission finds that accelerated approval of Amendment Nos. 1 and 2 is appropriate in order to allow the Amex to increase its AUTO-EX eligibility limits so that it may better compete with the other option exchanges.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning Amendment Nos. 1 and 2, including whether they are consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 submissions should refer to File No. SR-Amex-99-45 and should be submitted by December 6, 2000.
For the foregoing reasons, the Commission finds that the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange, and, in particular, with section 6(b)(5).
It is Therefore Ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (SR-Amex-99-45) is approved, and Amendment Nos. 1 and 2 are approved on an accelerated basis.
For the Commission by the Division of Market Regulation, pursuant to delegated authority.Start Signature
Margaret H. McFarland,
3. See Securities Exchange Act Release No. 42931 (June 13, 2000), 65 FR 38615 (June 21, 2000).Back to Citation
4. See letter from Scott Van Hatten, Legal Counsel, Derivative Securities, Amex, to Nancy Sanow, Assistant Director, Division of Market Regulation, Commission dated October 31, 2000 (“Amendment No. 1”). In Amendment No. 1, the Amex proposes to codify its rules regarding the AUTO-EX parameters for option contracts under Amex Rule 933, Commentary .02.Back to Citation
5. See letter from Scott Van Hatten, Legal Counsel, Derivative Securities, Amex to Nancy Sanow, Assistant Director, Division of Market Regulation Commission dated November 2, 2000 (“Amendment No. 2”). In Amendment No. 2, the Amex corrects the language in Amex Rule 933, Commentary .02 to state that the eligible orders for options on the Institutional, Japan and S&P MidCap 400 Indices must be for “fewer than 100 contracts” for series subject to AUTO-EX.Back to Citation
6. See Securities Exchange Act Release No. 42094 (November 3, 1999), 64 FR 61675 (November 12, 1999). Although the maximum permissible number of cotracts in an option order executable through AUTO-EX is generally fifty contracts, there are three exceptions that allow ninety-nine contract orders; the Institutional, Japan and S&P MidCap 400 Indexes.Back to Citation
7. See Securities Exchange Act Release No. 42128 (November 10, 1999), 64 FR 63836 (November 22, 1999).Back to Citation
8. The Exchange is codifying its rules, under Amex Rule 933, Commentary .02, regarding the maximum option order size eligibility for its AUTO-EX system. See Amendment No. 1, supra note 4. Order size maximum levels for the Institutional, Japan, and S&P MidCap 400 Indexes would remain at ninety-nine contracts under this proposal. See Amendment No. 2, supra note 5.Back to Citation
9. The Commission has considered the proposed rule's impact of efficiency, competition and capital formation. 15 U.S.C. 78c(f).Back to Citation
11. The Commission notes that it is concurrently approving similar proposals filed by the Chicago Board Options Exchange, Inc. (“CBOE”), the Pacific Stock Exchange, Inc. (“PCX”) and the Philadelphia Stock Exchange, Inc. (“Phlx”). See Securities Exchange Act Release No. 43517 (November 3, 2000) (SR-CBOE-99-51); Securities Exchange Act Release No. 43518 (November 3, 2000) (SR-PCX-00-32); and Securities Exchange Act Release No. 41515 (November 3, 2000) (SR-Phlx-99-32).Back to Citation
[FR Doc. 00-29184 Filed 11-14-00; 8:45 am]
BILLING CODE 8010-01-M