SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-49885; File No. 4-429)
June 17, 2004
Joint Industry Plan; Order Approving Joint Amendment No. 10 to the Plan for the Purpose of Creating and Operating an Intermarket Options Linkage Relating to the Handling of Principal Acting as Agent Orders
On February 18, 2004, March 1, 2004, March 23, 2004, April 20, 2004, April 23, 2004, and April 27, 2004, the International Securities Exchange, Inc. ("ISE"), American Stock Exchange, LLC ("Amex"), Chicago Board Options Exchange, Inc. ("CBOE"), Pacific Exchange, Inc. ("PCX"), Philadelphia Stock Exchange, Inc. ("Phlx"), and Boston Stock Exchange, Inc. ("BSE") (collectively the "Participants") respectively submitted to the Securities and Exchange Commission ("SEC" or "Commission") Amendment No. 10 to the Plan for the Purpose of Creating and Operating an Intermarket Options Linkage (the "Linkage Plan").1 The amendment proposes to modify the manner in which a member of a Participant may send Principal Acting as Agent Orders ("P/A Orders") that are larger than the Firm Customer Quote Size ("FCQS").
The proposed amendment to the Plan was published in the Federal Register on May 19, 2004.2 No comments were received on the proposed amendment. This order approves the proposed amendment to the Plan.
II. Description of the Proposed Amendment
In Joint Amendment No. 10, the Participants explain that currently, the Linkage Plan provides a market maker with two ways to handle principal acting as agent ("P/A") Orders3 that are larger than the Firm Customer Quote Size ("FCQS").4 First, the market maker may send a P/A Order larger than the FCQS representing the entire customer order for manual processing at the receiving Participant. Second, the market maker may send an initial P/A Order for up to the FCQS. If the market maker then seeks to send another P/A Order, it must send an order for the lesser of the entire remaining size of the underlying customer order or 100 contracts.
Proposed Joint Amendment No. 10 addresses the handling of P/A orders if the market maker chooses the second alternative, the sending of multiple P/A Orders. As currently drafted, the Linkage Plan does not recognize the possibility that a Participant's disseminated quotation may be for less than either the remaining size of the customer order or 100 contracts. Thus, the proposed Amendment specifies that a market maker sending a second P/A Order may limit such order to the lesser of: the remaining size of the customer order; 100 contracts; or the size of the receiving Participant's disseminated quotation.
In addition, the Participants believe that there is a practical issue if multiple exchanges are displaying the same bid or offer. In that case, the Linkage Plan is unclear as to whether a market maker must send the entire order to one Participant or can send orders to multiple Participants, as long as they are for the size of the entire order, or 100 contracts, in the aggregate. The Amendment clarifies the Linkage Plan to specify that a market maker may send P/A Orders to multiple exchanges, as long as all such orders, in the aggregate, are for the lesser of the entire remaining size of the customer order or 100 contracts. However, a market maker may limit the size of any single additional order to the size of the receiving market's disseminated quotation.
Finally, the proposed Amendment modifies the provisions of the Linkage Plan relating to the time period within which a receiving Participant must inform the sending Participant of the amount of the order executed and the amount, if any, that was canceled, and the time period for which a sending Participant must wait while the receiving Participant continues to disseminate the same price at the national best bid or offer before sending a second P/A Order. Currently, the applicable time period for each such circumstance is 15 seconds. The proposed Amendment would permit the Options Linkage Authority to determine different applicable time periods for both circumstances, subject to approval by the Commission.
After careful consideration, the Commission finds that the proposed amendment to the Plan seeking to extend the current pilot is consistent with the requirements of the Act and the rules and regulations thereunder. Specifically, the Commission finds that the proposed amendment to the Plan is consistent with Section 11A of the Act5 and Rule 11Aa3-2 thereunder,6 in that it should help to clarify the Participant's obligations in handling P/A Orders, which should facilitate the efficient and active trading of P/A Orders through the Linkage in furtherance of the goals of a national market system.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.9
Margaret H. McFarland
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