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Joint Industry Plan; Notice of Filing of Amendment to the Options Intermarket Linkage Plan To Conform the Options Intermarket Linkage Plan to the Requirements of Securities Exchange Act Rule 11Ac1-7

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Pursuant to section 11A(a)(3) of the Securities Exchange Act of 1934 (“Act”) [1] and Rule 11Aa3-2, thereunder,[2] notice is hereby given that on March 13, 2001, the American Stock Exchange LLC (“Amex”), Chicago Board Options Exchange, Inc. (“CBOE”), International Securities Exchange LLC (“ISE”), Pacific Exchange, Inc. (“PCX”), and Philadelphia Stock Exchange, Inc. (“Phlx”) (collectively the “Participants”) submitted to the Securities and Exchange Commission (“SEC” or “Commission”) an amendment to the Options Intermarket Linkage Plan.[3] The amendment proposes to conform the Linkage Plan to the requirements of the recently-adopted Exchange Act Rule 11Ac1-7, the Trade-Through Disclosure Rule.[4] The Commission is publishing this notice to solicit comments from interested persons on the proposed Linkage Plan amendment.

I. Description and Purpose of the Amendment

On November 17, 2000, the Commission adopted Rule 11Ac1-7 to require a broker-dealer to disclose to its customer when the customer's order for listed options is executed at a price inferior to a better published quote (“intermarket trade-through”), and to disclose the better published quote available at that time. However, a broker-dealer is not required to disclose to its customer an intermarket trade-through if the broker-dealer effects the transaction on an exchange that participates in an approved linkage plan that includes provisions reasonably designed to limit customers' orders from being executed at prices that trade through a better published quote. The purpose of the proposed amendment to the Linkage Plan is to add provisions to the Linkage Plan that are reasonably designed to limit intermarket trade-throughs.

The proposed amendment would change the definitions of “National Best Bid or Offer” (“NBBO”) and “Trade-Throughs” so that the terms would apply to unlinked, as well as linked, exchanges. The Participants represent that the proposed changes would extend the requirement in the Linkage Plan that, absent reasonable justification and during normal market conditions, members should not effect trade-throughs, to unlinked markets, as well as linked markets.

Next, the proposed amendment would require that Participants establish procedures for conducting surveillance for trade-throughs, both with respect to trading through linked and unlinked markets. It also would require that Participants adopt uniform rules that Start Printed Page 17978would make it a violation of a Participant's rules for a member to engage in a pattern or practice of trading through bids and offers in other linked markets,[5] unless one of the enumerated exceptions to the Linkage Plan's Trade-Through provisions applies and, in the case of a Block Trade, where the initiating member has satisfied aggrieved parties at the block price.

Lastly, the proposed amendment would add a provision to the Linkage Plan that states that a failure to lodge a Trade-Through complaint will not signify that a Trade-Through has not occurred, but instead, would affect only liability.

The Participants believe that, upon Commission approval of the amendment, coupled with the adoption and approval of the conforming rules by the Participants, the Linkage Plan would meet the requirements of the Trade-Through Disclosure Rule, and therefore, broker-dealers who effect transactions on one of the linked markets would be exempt from making the required disclosures under the Trade-Through Disclosure Rule.

II. Implementation of the Plan Amendment

The Participants intend to make the proposed amendment to the Linkage Plan reflected in this filing effective when the Commission approves the amendment.

III. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed Linkage Plan amendment is consistent with the Act. Persons making written submission 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 Linkage Plan amendment that are filed with the Commission, and all written communications relating to the proposed Linkage Plan amendment 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 at the Commission's Public Reference Room. Copies of such filings will also be available for inspection and copying at the principal offices of the Amex, CBOE, ISE, Phlx, and PCX. All submissions should refer to File No. 4-429 and should be submitted by April 25, 2001.

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

Margaret H. McFarland,

Deputy Secretary.

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3.  On July 28, 2000, the Commission approved a national market system plan for the purpose of creating and operating an intermarket options market linkage (“Linkage Plan”) proposed by the Amex, CBOE, and ISE. See Securities Exchange Act Release No. 43086 (July 28, 2000), 65 FR 48023 (August 4, 2000). Subsequently, upon request by the Phlx and PCX, the Commission issued orders to permit these exchanges to participate in the Linkage Plan. See Securities Exchange Act Release Nos. 43573 (November 16, 2000), 65 FR 70850 (November 28, 2000) and 43574 (November 16, 2000), 65 FR 70851 (November 28, 2000).

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4.  17 CFR 240.11Ac1-7. See Securities Exchange Act Release No. 43591 (November 17, 2000), 65 FR 75439 (December 1, 2000) (“Adopting Release”). Specifically, in the Adopting Release, the Commission noted that to conform to the regulations of the Trade Through Disclosure Rule, a linkage plan must, at a minimum: (1) Limit participants from trading through, not only the quotes of other linkage plan participants, but also, the quotes of exchanges that are not participants in an approved linkage plan; (2) require plan participants to actively surveil their markets for trades executed at prices inferior to those publicly quoted on other exchanges; and (3) make clear that the failure of a market with a better quote to complain within a specified period of time that its quote was traded-through may affect potential liability, but does not signify that a trade-through has not occurred.

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5.  In the Adopting Release, the Commission noted that in addition to the minimal provisions that must be included in an intermarket linkage plan to allow broker-dealers effecting transactions on exchanges participating in the plan to be excepted from the disclosure requirements of the Trade-Through Disclosure Rule, each exchange participating in a linkage plan would have to adopt certain rules. Specifically, the Commission stated that each exchange,

would have to adopt rules to allow the exchange to sanction specialists or market makers that trade through better prices of other exchanges, maintain policies and procedures that would limit the occurrence of intermarket trade-throughs, and maintain records that would identify intermarket trade-throughs and any review or remedial action taken by the exchange in response to such intermarket trade-throughs.

See Adopting Release, supra note 5 at n.62. Notwithstanding the more limited language in the proposed amendment to the Linkage Plan, each exchange's rules must address trade-throughs of better quotes displayed by both linked and unlinked markets.

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[FR Doc. 01-8208 Filed 4-3-01; 8:45 am]