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The Amex Firm Quote Rule for transactions in options (Rule 958A) requires each specialist and Registered Option Trader (ROT) in a trading crowd to communicate promptly the best bid, offer, and respective sizes for each product traded in that crowd. Further, specialists and ROTs are required to execute any marketable order presented in the crowd (regardless of how the order was delivered to the crowd) at the best bid or offer, or better, in any amount up to the size of that bid or offer. The Firm Quote Rule has certain exceptions. One of these exceptions states that the specialist and ROTs are not required to honor a bid or offer if, at the time the marketable order is presented in the crowd, the specialist and/or ROT(s) who made the bid/offer are in the process of effecting a transaction and, immediately after the completion of that transaction, communicate a revised bid or offer to the Exchange. The Amex Rule originally specified that this exception applied to any transaction in process in the same options class. Last fall, the SEC advised that although it had previously approved Amex's rule text, the application of the exception to the entire class rather than just to the series in which the transaction is occurring, was a misinterpretation of the Firm Quote Rule. Therefore, at the Securities and Exchange Commission's request, the Rule has been amended (effective on April 12, 2004) to have this exception to the obligation to honor the bid/offer in a given option series apply only when a transaction is in process in the same options series.
To repeat, as a result of this amendment, the specialist and ROTs are not obligated to be "firm" for marketable orders presented, but only to the extent that the specialist and ROTs are personally involved in a transaction "in progress" in that options series, and only if, immediately after the completion of such transaction, they communicate to the Exchange a revised quotation size. After revising the bid/offer, the specialist and/or ROT(s) are only obligated to sell (buy) that option series in an amount up to their revised quotation size.
Under the amendment, a transaction in the same options class but a different options series no longer qualifies for this exception to honor a bid/offer.
If you have any questions on this requirement, please contact Jeff Jacobus at 212-306-1449 or Dave Fisch at 212-306-1450.
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