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The American Stock Exchange ("Amex" or "Exchange") has received approval from the Securities and Exchange Commission ("SEC") to adopt Commentary .01 to Rule 950-ANTE(e) and Rule 953-ANTE(c) 1 relating to the execution of option combination orders in NDX and RUT. As further described below, these option orders contain multiple legs and may be executed and printed as long as specified conditions are met.
The purpose of this rule change is to facilitate the execution of certain types of complex orders in NDX and RUT during times of market volatility. It may be difficult in a volatile market to complete trades on options tied to an NDX Combination or an RUT Combination (see definitions below), because the originally quoted price for a component leg may be outside the quoted market by the time market participants are prepared to complete the transaction.
Regulatory training on the operation of these approved rules will be conducted on Tuesday, March 4, 2008, and the rule will be implemented on the following day, Wednesday, March 5.
Definitions
An "NDX Combination" is a long (or short) NDX call option together with a short (or long) NDX put option having the same expiration date and strike price. An "NDX Combination Order" is an order to purchase or sell NDX options and the offsetting number of NDX Combinations to establish a market neutral (delta neutral) hedge. The terms "RUT Combination" and "RUT Combination Order" are defined in an analogous way, except that RUT options are used.
Execution Procedure
When a member holds an NDX or RUT Combination Order and is bidding or offering on the basis of a total debit or credit for the order, 2 the member may immediately execute the order if the prices of the quoted markets for all the legs line up to satisfy the net debit or credit of the order. That is, the member holding the order may sell to the bid(s) and buy the offer(s), as appropriate, for each leg of the order. If, however, the net debit or credit of the order is between the bid and offer quoted by the trading crowd as a net price, then the order may only be executed if both of the following conditions are met:
If, after obtaining a quote, an NDX or RUT Combination Order is not executed immediately, then an order may be executed and printed at the prices originally quoted for each of the component legs within two hours after the original quote if both of the following conditions are met:
Other Conditions for Using the Two-Hour Window
The two-hour window described above is intended to provide liquidity to larger-sized orders which might otherwise be unable to obtain an execution during times of market volatility, for the benefit of the marketplace and investors.
A member seeking to execute an NDX or RUT Combination Order outside of the quoted market must first obtain Floor Official approval, with the advice and participation of regulatory staff. 3 Once the execution is approved the trade must be printed immediately, and it will be printed as a "sold sale". Until the actual printing of the trade has occurred, a contract has not been established, and a trade has not taken place. Because it will generally take some period of time for regulatory staff to confirm that the requisite conditions (as described above) have been met, members seeking to use this two-hour window to print outside the quoted markets must initiate a Floor Official review of the NDX or RUT Combination order early enough to enable such confirmation. While Floor Officials and regulatory staff will use their best efforts to conduct a timely review of such orders, there is no guarantee that a request received after the original quote can be approved.
Members seeking approval as described above will be required to attest that the trade in question is delta neutral. This will include documenting the delta value that will be used to determine the number of NDX or RUT Combinations to be included in the Combination Order.
Although members may print outside the quoted markets if conditions specified in the rule are met, members are reminded that this rule does not minimize the obligation to obtain best execution for their customers.
NDX and RUT Combination Orders must be executed only in open outcry outside the ANTE system when relying on the two-hour window to print outside a quoted market.
Finally, the two-hour window to print outside a quoted market is not available in any other products.
1 Approved Amex rules can be found on the web at http://wallstreet.cch.com/AMEX/Rules/.
2 The total debit or credit for the order must be at a multiple of the minimum price variation (MPV) for that option class. The MPV can be 1¢, 5¢ or 10¢, depending on the prices of the option legs and whether the option class is included in the Penny Pilot Program. Currently, neither NDX nor RUT is included in the Penny Pilot Program, so the MPV for those products would be either 5¢ or 10¢. See Rule 952.
3 Regulatory staff can be reached on the trading floor at x1208.