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Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by American Stock Exchange LLC Relating to the Auto-Ex By-Pass Provisions

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Start Preamble December 18, 2000.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934,[1] and Rule 19b-4 thereunder,[2] notice is hereby given that on August 9, 2000, 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, II, and III below, which Items have been prepared by Amex. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

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

The American Stock Exchange LLC proposes to allow options orders to by-pass Auto-Ex when the best bid or offer is represented by either a registered trader or a floor broker.

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

In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for Start Printed Page 81943the 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 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 the Statutory Basis for, the Proposed Rule Change

1. Purpose

The automatic execution system at the Exchange (known as “Auto-Ex”) provides the options investor with an important and useful tool in today's trading environment. since the system's implementation in 1985—for a limited number of option classes and for small orders of 10 contracts or less—the Commission has approved the system's expansion to all option classes traded and recently has approved an increase of the maximum permissible order size to 75 contracts.[3] Auto-Ex provides the investor with an efficient means of getting a rapid, guaranteed execution of a market or marketable limit order. In the often fast-moving and volatile environment of options trading, a guaranteed and rapid execution clearly has value to an investor. In fact, an assured execution in a rapidly changing market and the avoidance of the potential downside risk of missing the market has benefited investors during the last 15 years. In addition, automatic executions have reduced the costs of trades generally and have enabled traders, specialists and the Exchange itself to better manage the tremendous volume of transactions that our markets now regularly experience.

To operate efficiently, Auto-Ex provides that all customer market and marketable limit orders within the appropriate size parameters be executed at the prevailing best bid or offer with either the specialist or a registered options trader as the contra-party to the transaction. The specialist in each option class must sign on and remain on Auto-Ex every trading day; registered trades, on the other hand, are not obligated either to sign on or remain on Auto-Ex in the option classes they trade. When registered traders have signed on to Auto-Ex in a particular option class, however, orders automatically executed through the system are distributed to the specialist and registered traders on a random rotating basis. Thus, a registered trader who improves the market is not assured of being the contra-party on an Auto-Ex execution at that better bid or offer because it may not be that registered traders' turn to receive the Auto-Ex transaction.

The Exchange is proposing to expand its auto-Ex by-pass feature to encourage further registered trades to improve the quotation. Currently, the by-pass feature provides that whenever the bid or offer in a specific series represents a customer limit order on the specialists' book, or a better bid or offer is being disseminated by another options exchange, market and marketable limit orders eligible for an Auto-Ex execution by-pass the system and are routed instead to the specialist for handling. Expanding this by-pass feature to include situations where a registered options trader improves the quotation would ensure that registered options traders are the conta-party to any market or marketable limit order that, without the by-pass feature, would have been executed by the Auto-Ex system. Registered traders will now be assured that when they improve the quotation in a given option series they can be the conta-party to transactions at the improved bid or offer for Auto-Ex eligible market and marketable limit orders in addition to the larger size non-Auto-Ex eligible orders for which they currently compete. If the registered trader chooses to use this feature, the size of their bid or offer will have to be at least the guaranteed Auto-Ex size (i.e., currently 10 to 75 contracts, depending on the options class).

The Exchange also proposes that this feature be expanded to floor brokers representing customer orders in the trading crowd. When Auto-Ex was first developed in 1985, floor brokers and their customers objected to transactions occurring on Auto-Ex while orders they represented in the trading crowd went unexecuted. Floor brokers withdrew these objections when they recognized the benefits of Auto-Ex executions of small market and marketable limit orders. However, if registered traders can cause orders to by-pass Auto-Ex, floor brokers may believe that their customers' interests are not being served and, therefore, brokers also need the capability of having orders by-pass Auto-Ex. Thus, floor brokers can improve either the bid or the offer and be assured that their customers will be the contra-party to any market or marketable limit orders that would otherwise have been automatically executed through Auto-Ex. Floor brokers choosing to use this feature will have to bid or offer for at least the guaranteed Auto-Ex size (i.e., currently 10 to 75 contracts, depending on the options class).

2. Statutory Basis

The Exchange represents that the proposed rule change is consistent with Section 6(b) of the Act[4] and Section 6(b)(5),[5] 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 facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and a national market system.

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

The Exchange does not believe that the proposed rule change will impose any inappropriate burden on competition.

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.

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

Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:

(A) by order approve such proposed rule change, or

(B) institute proceedings to determine whether the proposed rule change should be disapproved.

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. 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 Start Printed Page 81944with 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-00-42 and should be submitted by January 17, 2001.

Start Signature

For the Commission by the Division of Market Regulation, pursuant to delegated authority.[6]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


3.  The maximum Auto-Ex size for eligible orders was recently increased from 50 to 75 contracts. See Securities Exchange Act Release No. 43516 (November 3, 2000), 65 FR 69079.

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6.  17 CFR.200.30-3(a)(12).

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[FR Doc. 00-32894 Filed 12-26-00; 8:45 am]