02-12115. Self-Regulatory Organizations; Order Granting Accelerated Approval of Proposed Rule Change by the American Stock Exchange LLC to Amend Commentary .02(c) of Amex Rule 901C to Include Volume Weighted Average Pricing as a Permissible Index ...

May 8, 2002.

I. Introduction

On March 5, 2002, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) ^[1] and Rule 19b-4 thereunder,^[2] a proposed rule change to amend Commentary .02(c) of Amex Rule 901C to add volume weighted average pricing (“VWAP”) as a permissible index option settlement value calculation methodology for National Association of Securities Dealers Automated Quotation System (“NASDAQ”) National Market System (“NMS”) listed components. Notice of the proposed rule change was published for comment in the Federal Register on April 10, 2002.^[3] This order approves the proposed rule change on an accelerated basis.

II. Description of the Proposal

The Exchange proposes to amend Commentary .02(c) to Amex Rule 901C to add VWAP as a permissible index option settlement value calculation methodology for NASDAQ/NMS listed components. Currently, Commentary .02(c) of Amex Rule 901C provides that index settlement values are determined by using the regular way opening sale price for each of an index's component stocks in its primary market on the last trading day prior to expiration.^[4] Unlike exchange-listed securities where there is a market opening price at which all investors entering a market-on-open order can participate, investors in NASDAQ/NMS securities cannot be sure of transactions at a price equal to the first reported print. In some instances, this price may be significantly different than the first price at which most investors can conduct transactions. As a result, investors, market-makers and the specialist cannot be sure that any hedges into which they may have entered will converge to the settlement value for the index; and, in some cases, the value of the hedge may differ significantly from the index settlement value. This uncertainty adds to the cost of trading the options and makes them less desirable to trade.

While it may still be difficult to get complete convergence, the Exchange believes that using the VWAP would provide more opportunity for investors to transact at a price near the settlement price, making it much less likely that there will be any significant difference between the hedge and the settlement value. For this reason, the Exchange proposes to permit, in addition to “regular way” opening price settlement, the VWAP settlement calculation methodology for NASDAQ/NMS listed components.

III. Discussion

The Commission has reviewed carefully the proposed rule change and finds that it is consistent with the Act and the rules and regulations promulgated thereunder applicable to a national securities exchange and, in particular, with the requirements of Section 6(b).^[5] Specifically, the Commission finds that approval of the proposed rule change is consistent with Section 6(b)(5) ^[6] in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and a national market system, and in general, to protect investors and the public interest. The Commission believes that permitting the VWAP settlement calculation methodology for NASDAQ/NMS component securities of an index option may provide more opportunity for investors to transact at a price near the settlement price, and should result in a settlement value more reflective of the markets in NASDAQ/NMS securities.^[7]

The Commission finds good cause for approving the proposed rule change before the thirtieth day after the date of publication of notice of filing thereof in the Federal Register. In the notice,^[8] the Commission indicated that it would consider granting accelerated approval of the proposal after a 15-day comment period. The Commission received no comments on the proposal during the 15-day comment period. The Commission believes it is reasonable to implement the proposal on an accelerated basis, in view of the anticipated benefits of the proposal. For these reasons, the Commission finds good cause for accelerating approval of the proposed rule change.

IV. Conclusion

For the above reasons, the Commission finds that the proposed rule change is consistent with the provisions of the Act, in general, and with Section 6(b)(5) ^[9] in particular.

It is therefore ordered, pursuant to section 19(b)(2) of the Act,^[10] that the proposed rule change (SR-AMEX-2002-15) be and hereby is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[11]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  Securities Exchange Act Release No. 45692 (April 4, 2002), 67 FR 17475. In the notice, the Commission stated it would consider granting accelerated approval of the proposed rule change after a 15-day comment period.

4.  See, e.g., Securities Exchange Act Release No. 36283 (September 26, 1995), 60 FR 51825 (October 3, 1995) (SR-Amex-95-26) (order approving the listing and trading of options on the Morgan Stanley High Technology 35 Index).

5.  15 U.S.C. 78f(b). In approving this proposal, the Commission has considered the proposed rule's impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f).

6.  15 U.S.C. 78f(b)(5).

7.  This approval order limits use of the VWAP as a permissible index option settlement value calculation methodology for NASDAQ/NMS listed components. Should the Amex wish to use the VWAP as the methodology for securities other than NASDAQ/NMS component securities, the Commission expects the Exchange to file a proposed rule change for Commission consideration.

8.  See footnote 3, supra.

9.  15 U.S.C. 78f(b)(5).

10.  15 U.S.C. 78s(b)(2).

11.  17 CFR 200.30-3(a)(12).