I. Introduction

On January 28, 2005, January 31, 2005, January 26, 2005, January 27, 2005, January 28, 2005, and January 28, 2005, the American Stock Exchange LLC (“Amex”), the Boston Stock Exchange, Inc. (“BSE”), the Chicago Board Options Exchange, Inc. (“CBOE”), the International Securities Exchange, Inc. (“ISE”), the Pacific Exchange, Inc. (“PCX”), and the Philadelphia Stock Exchange, Inc. (“Phlx”) (collectively, “Participants”), respectively, filed with the Securities and Exchange Commission (“Commission”) pursuant to Section 11A of the Securities Exchange Act of 1934 (“Act”) ^[1] and Rule 11Aa3-2 thereunder,^[2] an amendment (“Joint Amendment No. 14”) to the Plan for the Purpose of Creating and Operating an Intermarket Option Linkage (“Linkage Plan”).^[3] On January 31, 2005, the Commission summarily put into effect Joint Amendment No. 14, on a temporary basis not to exceed 120 days, and solicited comment on Joint Amendment No. 14 from interested persons.^[4] The Commission received no comments on Joint Amendment No. 14. This order approves Joint Amendment No. 14.

II. Description of the Proposed Amendment

In Joint Amendment No 14, the Participants propose to extend the pilot contained in Section 8(c)(ii)(B)(2)(b) of the Linkage Plan, which limits Trade-Through ^[5] liability at the end of the trading day for an additional year, until January 31, 2006, and to increase the limitation on liability from 25 contracts to 50 contracts, per Satisfaction Order ^[6] for the period between five minutes prior to the close of trading in the underlying security and the close of trading in the option class.

III. Discussion and Commission Findings

When the Participants initially proposed the limitation on Trade-Through liability at the end of the trading day in Joint Amendment No. 4 to the Linkage Plan,^[7] the Participants represented to the Commission that the Participants' members had expressed concerns regarding their obligations to fill Satisfaction Orders (which may be sent by a Participant's member that is traded through) at the close of trading in the underlying security. Specifically, the Participants represented that their members were concerned that they may not have sufficient time to hedge the positions they acquire.^[8] The Participants stated that they believed that their proposal to limit liability at the end of the options trading day to the filling of 10 contracts per exchange, per transaction, would protect small customer orders, but still establish a reasonable limit for their members' liability. The Participants further represented that the proposal should not affect a member's potential liability under an exchange disciplinary rule for engaging in a pattern or practice of trading through other markets under Section 8(c)(i)(C) of the Linkage Plan.

The Commission approved Joint Amendment No. 4 for a one-year pilot ^[9] ( printed page 30499) to give the Participants and the Commission an opportunity to evaluate: (1) The need for the limitation on liability for Trade-Throughs near the end of the trading day; (2) whether 10 contracts per Satisfaction Order is the appropriate limitation; and (3) whether the opportunity to limit liability for Trade-Throughs near the end of the trading day leads to an increase in the number of Trade-Throughs.

In the order approving Joint Amendment No. 4, the Commission stated that in the event the Participants chose to seek permanent approval of this limitation, the Participants must provide the Commission with a report regarding data on the use of the exemption no later than 60 days before seeking permanent approval (“Report”).^[10] The Commission specified that the Report should include information about the number and size of Trade-Throughs that occur during the last seven minutes of the equity options trading day and during the remainder of the trading day, the number and size of Satisfaction Orders that Participants might be required to fill without the limitation on liability and how those amounts are affected by the limitation on liability, and the extent to which the Participants use the underlying market to hedge their options positions.^[11] In a subsequent amendment to the Linkage Plan for the purpose of extending the pilot, Joint Amendment No. 8, the Participants represented that if they were to seek to make the limitation on Trade-Through liability permanent, they would submit the Report to the Commission no later than March 31, 2004.^[12]

Following the extension of the pilot program pursuant to Joint Amendment No. 8, certain Participants provided the Commission with portions of the data required in the Report, but were unable to provide sufficient information to enable the Commission to evaluate whether permanent approval would be appropriate. The Commission extended the pilot program until January 31, 2005, to allow the limitation to continue in effect, with an increase in liability to 25 contracts per Satisfaction Order, to enable the Participants to continue to gather and the Commission to evaluate the data relating to the effect of the operation of the pilot program.^[13]

Since the extension of the pilot program pursuant to Joint Amendment No. 12, the Participants have provided no additional data to the Commission to justify permanent approval of the limitation on liability. The Participants have represented that they are currently considering amendments to the Linkage Plan that, if proposed and approved, could obviate the need for the limitation on liability for Trade-Throughs at the end of the trading day. Specifically, the amendments the Participants are considering are intended to minimize the incidence of Trade-Throughs, and subsequently decrease the incidence of Satisfaction Orders. The Participants have represented that these amendments could be in effect within a year, and at that time, Participants would either allow the pilot program to lapse, or, if they believed that a continuation of the limitation was appropriate, would discuss that matter with the Commission staff. In this regard, the Commission notes that the Participants must submit sufficient information to enable the Commission to evaluate whether permanent approval of the pilot program would be appropriate no later than 60 days prior to seeking permanent approval before the Commission will consider such permanent approval.

The Commission previously determined, pursuant to Rule 11Aa3-2(c)(4) under the Act,^[14] to put into effect summarily on a temporary basis not to exceed 120 days, the amendments detailed above in Joint Amendment No. 14. After careful consideration of Joint Amendment No. 14, the Commission finds that approving Joint Amendment No. 14 is consistent with the requirements of the Act and the rules and regulations thereunder. Specifically, the Commission finds that Joint Amendment No. 14 is consistent with Section 11A of the Act ^[15] and Rule 11Aa3-2 thereunder,^[16] in that it is appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets. Specifically, the Commission believes that extending the pilot program and raising the limitation on liability to 50 contracts per Satisfaction Order will afford the Participants the opportunity to either gather sufficient information to justify the need for the pilot program or determine that the limitation on Trade-Through liability is no longer necessary. The Commission believes that raising the limitation on liability to 50 contracts per Satisfaction Order will increase the average size of Satisfaction Order fills during the end of the options trading day, thereby enhancing customer order protection.

IV. Conclusion

It is therefore ordered, pursuant to Section 11A of the Act ^[17] and Rule 11Aa3-2 thereunder,^[18] that Joint Amendment No. 14, which extends the pilot program until January 31, 2006, is approved.