[Federal Register: July 21, 2006 (Volume 71, Number 140)]
[Notices]
[Page 41653-41680]
[DOCID:fr21jy06-100]

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Part IV

Securities and Exchange Commission

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Self-Regulatory Organizations; American Stock Exchange LLC; Notice of
Filing of Proposed Rule Change and Amendments No. 1, 2, 3, 4, and 5
Thereto Relating to the New Amex Hybrid Market Structure; Notice

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54145; File No. SR-Amex-2005-104]

Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing of Proposed Rule Change and Amendments No. 1, 2, 3, 4,
and 5 Thereto Relating to the New Amex Hybrid Market Structure

July 14, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 17, 2005, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. On
January 19, 2006, the Amex submitted Amendment No. 1 to the proposed
rule change.\3\ On March, 10, 2006, the Amex submitted Amendment No. 2
to the proposed rule change.\4\ On March 14, 2006, the Amex submitted
Amendment No. 3 to the proposed rule change.\5\ On July 3, 2006, the
Amex submitted Amendment No. 4 to the proposed rule change.\6\ On July
13, 2006, the Amex submitted Amendment No. 5 to the proposed rule
change.\7\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Form 19b-4 dated January 19, 2006, which replaced the
original filing in its entirety (``Amendment No. 1'').
    \4\ See Form 19b-4 dated March 10, 2006, which replaced
Amendment No. 1 in its entirety (``Amendment No. 2'').
    \5\ See Form 19b-4 dated March 14, 2006, which replaced
Amendment No. 2 in its entirety (``Amendment No. 3'').
    \6\ See Form 19b-4 dated July 3, 2006, which replaced Amendment
No. 3 in its entirety (``Amendment No. 4''). Among other things, the
amendment (1) removed the proposed Passive Price Improvement
(``PPI'') order type from AEMI until its parameters can be revised;
(2) stated the Exchange's commitment to make AEMI's depth-of-book
information broadly available; (3) added additional size and value
requirements for certain cross orders; (4) distinguished two
different quote indicators that may be disseminated in connection
with the Exchange's publishing of non-firm quotes, (5) revised its
proposed procedures with respect to an intermarket sweep order to
which no response, or only a partial fill, is received; (6) changed
the manner in which unexecuted or partially executed intermarket
sweep orders generated during an auction are handled; and (7) made a
number of other corrections and clarifications to the proposed rule
changes.
    \7\ See Partial Amendment to Form 19b-4 dated July 13, 2006
(``Amendment No. 5''). In Amendment No. 5, the Exchange made a
number of technical changes, including (1) stating the timeframe for
the availability of depth-of-book data; (2) clarifying when Exchange
Specialists may charge commissions; (3) clarifying when the Exchange
will send intermarket sweep orders to other markets; and (4)
acknowledging that its proposed trade-through treatment for late
trade reports will not obviate or invalidate an away market's rules
regarding such late trades.
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    The Exchange proposes to implement a new hybrid market structure
for equity products and Exchange Traded Funds (``ETFs'') that will
provide for a single marketplace that integrates automated execution
and floor-based auction trading. To facilitate the hybrid market, the
Exchange is undertaking a major technology upgrade and will implement a
new trading platform for equity products and ETFs. This platform,
designated as AEMISM, is aimed at providing easy and fast
access to automated order execution, as well as encompassing auction
market capabilities for those situations in which there are order
imbalances that require additional liquidity, or if price improvement
from the auction process is desired.
    The text of the proposed rule change is available on the Exchange's
Web site (http://www.amex.com), at the Exchange's principal office, on the Commission's Web site (http://www.sec.gov), and at the Commission's

Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the Exchange's proposal is to implement a new hybrid
market structure for equity products and ETFs \8\ that would provide
for a single marketplace that integrates automated execution (``auto-
ex'') and floor-based auction trading. In this hybrid market, direct
market participants would consist of off-floor members, Specialists,
Registered Traders, and Floor Brokers. Investors and off-floor members
would be able to choose from a variety of execution methods the one
that best suits their purpose at any point in time. They can access the
electronic environment directly, or take advantage of point-of-sale
representation provided by Floor Brokers in the crowd. To facilitate
the hybrid market, the Exchange is undertaking a major technology
upgrade and would implement a new trading platform for equity products
and ETFs. According to the Exchange, this platform, designated as
AEMISM--the ``Auction & Electronic Market Integration''
platform (referred to hereinafter as the ``AEMI platform'' or
``AEMI'')--is expected to provide easy and fast access to automated
order execution, as well as encompassing auction market capabilities
for those situations in which there are order imbalances that require
additional liquidity, or if price improvement from the auction process
is desired. The Exchange anticipates that auto-ex would be available
throughout the trading session. However, for those instances when
excessive volatility occurs, auto-ex would be unavailable for a limited
period of time during which the auction market would be used to dampen
volatility and gyrations in the market. This fusion of auto-ex, that is
based on both limit and market orders, with the auction process that
creates price discovery is designed to balance the premium on speed
demanded by market participants with the need to protect investors from
undue and costly volatility. The Exchange also believes that this
proposed hybrid market would promote fairness, stability, and
competitiveness in the marketplace under Regulation NMS.\9\
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    \8\ As used herein, the term ``equity products'' includes
equities and securities that trade like equities on the Exchange,
such as listed and UTP stocks, closed-end funds, and certain
structured products. The term ``ETFs'' includes Portfolio Depositary
Receipts, Index Fund Shares, Trust Issued Receipts, and Partnership
Units.
    \9\ 17 CFR 242.600 et seq.
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    Categories of Floor Participants in AEMI. In all securities traded
on AEMI, Specialists would continue to provide liquidity and
stabilization as they currently do.\10\ They would maintain their
affirmative and negative

obligations,\11\ manage auctions, and may add resident liquidity to the
AEMI Book (as described herein) at up to five price levels, including
the quote that each Specialist must provide to meet his obligation to
assist in the maintenance of a fair and orderly market and of price
continuity with reasonable depth.\12\ They would have a choice of
quoting methods, and could stream quotes into AEMI from proprietary
systems, generate quotes automatically based on parameters set by the
Specialist within AEMI, or enter quotes physically. In instances where
the Specialist's quote is depleted, AEMI would generate emergency
quotes based on parameters set by the Specialist so that the
affirmative quote obligations of the Specialist are met.
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    \10\ See infra, the discussion under ``Rule 170-AEMI''relating
to proposed changes to existing requirements for Floor Official
approval in connection with certain transactions for the
Specialist's own account that involve destabilizing ticks.
    \11\ See Amex Rule 170 and related Commentary.
    \12\ Amendment No. 5 eliminated references in this sentence and
in a related footnote to PPI orders that were included in Amendment
No. 4.
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    Market makers designated as Registered Traders would add liquidity
to the ETF marketplace through the continuous provision of competitive
quotes and must be in the crowd \13\ in order to do so. The Exchange
intends to foster quote competition between the Specialists and
Registered Traders. Unlike the existing Amex system where Registered
Traders' quotes are imbedded in the Specialist's quote, Registered
Traders would be required by Amex rules to make competitive quotes
separately from the Specialist. They would be able to stream quotes
into AEMI from proprietary systems, generate quotes automatically based
on parameters within AEMI, or enter quotes into AEMI physically from a
``front-end'' device supplied by the Exchange. They would also be
permitted to add liquidity at up to five price levels on both sides of
the market and could participate in auctions, provided that they are
actively quoting, thereby serving to provide added depth and
competition to the marketplace. Registered Traders would function under
essentially the same restrictions that are applicable to them in the
Amex's current rules.
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    \13\ In ETFs, a crowd is defined as three contiguous panels.
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    Floor Brokers would maintain their value-added services through
their point-of-sale proximity, participation in auctions, trading on
parity, and provision of liquidity to the electronic environment in the
form of crowd orders. They would receive orders from customers
electronically via the floor booth automated routing systems and would
manage their order flow using hand-held terminals. This should result
in faster responses to customers. Floor Brokers could represent
customer orders as crowd members electronically, trade on parity in the
electronic environment, and initiate and participate in auctions, using
their judgment to obtain best execution for their customers.
    Off-floor members could access the electronic environment in two
main ways. First, they could send orders directly to the AEMI Book.
Alternatively, they could direct orders to booths on the floor, which
would allow Floor Brokers to represent their orders on the floor and
use their point-of-sale privileges as members of the crowd to obtain
best execution for their customers. Orders sent to the Exchange that
must be handled manually would be directed to the order-entry firm's
broker booth to be managed by booth personnel or redirected to Floor
Brokers. For example, ``not held'' and SEC Rule 144 orders would be
handled outside the AEMI Book and would be sent to a booth. By
contrast, orders that may not be handled manually (such as odd-lot
orders) would be sent automatically to the AEMI Book.
    The Exchange is committing to making depth-of-book information
broadly available with respect to its securities that are traded in
AEMI, and the Exchange intends to implement this program with the
rollout of AEMI prior to the Trading Phase Date (as defined below under
``Implementation of the AEMI Platform'').\14\ This represents a
significant change from the Exchange's initial proposal, under which
only the Specialist would have been able to see this information. The
Exchange will make a separate rule filing with the Commission in
connection with any related fees that are proposed to be charged for
the depth of book information.
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    \14\ The Exchange intends to provide depth-of-book information
to vendors and direct subscribers simultaneously with the first day
of AEMI operation. Moreover, the Exchange commits to providing
vendors and limited direct subscribers sufficient information
including technical specifications to permit them to obtain the
depth-of-book data feed as of the first day of AEMI operation. See
Amendment No. 5.
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    This proposal seeks the approval of new rules to implement AEMI for
equity products and ETFs. Key features of the proposed new hybrid
market are summarized under the headings below.
    Automated Trading Center. By implementing AEMI, the Exchange
intends to qualify as an ``automated trading center'' under Regulation
NMS.\15\ The Exchange would publish automated quotes for all securities
on the AEMI platform. The publication of automated quotes means that
all incoming executable orders would be processed immediately and
automatically without human intervention. If Amex were not the national
best bid or best offer (``NBBO''), the incoming executable order would
be routed out immediately and automatically, in whole or in part, to
the trading center(s) with the best-priced automated quotation that is
immediately accessible (as required by Rule 611 of Regulation NMS).\16\
AEMI would contain predetermined parameters that would automatically
disable auto-ex when triggered, and Amex would publish non-firm manual
quotes until auto-ex is re-enabled.\17\
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    \15\ See 17 CFR 242.600(b)(4).
    \16\ However, an incoming intermarket sweep order (as defined
herein) or immediate-or-cancel order would not be routed out to
another trading center.
    \17\ AEMI could also disseminate a non-firm quote, using a
different indicator, when the Exchange is incapable of collecting,
processing, and/or making available quotations in one or more
securities due to the high level of trading activity or the
existence of unusual market conditions.
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    The AEMI Platform. The AEMI platform is a single electronic system
that would process quotes and orders in all equity and ETF securities
on the Exchange. The ``AEMI Book'' is the physical part of the AEMI
platform that comprises all quotes and orders that could be eligible
for auto-ex during the Exchange's regular session. These orders could
logically be represented in the automated environment by members in the
crowd interacting directly with AEMI (``crowd orders''), or represented
directly in the automated environment (``public orders''). Quotes and
orders submitted to the AEMI Book by Registered Traders and Floor
Brokers standing in the crowd would be considered crowd interest. All
other orders and quotes would constitute the Specialist Order Book
(i.e., all other off-floor orders submitted directly to AEMI; other
percentage, limit, and market orders left with the Specialist by Floor
Brokers; and the Specialist's own quotes). The Specialist Order Book
would therefore be a subset of the AEMI Book. Further, except in
certain defined circumstances, the AEMI rules would provide that the
Specialist's own proprietary interest would yield to orders on the
Specialist Order Book, thereby ensuring that customer interest is
afforded a higher priority in the electronic environment.
    AEMI would generally execute orders according to price/time
priority. However, AEMI would execute orders at a single price point
according to Amex parity, priority, and precedence rules. The
instructions and characteristics of the orders at the price point are
considered first, and then, depending on

product type, the capacity designation and allocation indicator for the
orders would be considered. Orders with an allocation designation of
``crowd'' would trade on parity with public orders in the AEMI Book,
and crowd orders would be restricted to crowd members. Orders with an
allocation designation of ``public'' would trade on parity with the
crowd orders and could be submitted by any on-floor or off-floor market
participant, as well as by Floor Brokers in the form of percentage,
limit, or market orders left with the Specialist. Generally, the
Specialist interest would yield to those public orders that are being
represented in the marketplace as part of the Specialist Order Book,
which is part of the AEMI Book.\18\ Every order would have a capacity
designation of ``agency'' or ``principal'' which is derived from the
account type code for the order designated by the member who enters the
order. This denotes whether the order is a customer (non-broker-dealer)
order or a broker-dealer order, which affects its priority standing
during execution.\19\ A broker-dealer order could be a principal order
entered by a member that is a broker-dealer or it could be an order
entered by a member acting as an agent for a broker-dealer. The rules
regarding priority and precedence for ETFs would differ from the
corresponding rules for equity-traded securities because ETFs are
traded more like derivative products with market makers in the crowd.
In summary, the principal/agency capacity designation serves to ensure
that investors' orders are afforded precedence in the execution
process, and the public/crowd indicator serves to distinguish off-floor
orders (which are all public) from activity that is afforded the
privileges of presence in the crowd. All off-floor orders are therefore
public, all quotes from Registered Traders are crowd, and Floor Brokers
choose between submitting public and crowd orders depending on their
physical location on the trading floor.
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    \18\ The Exchange anticipates allowing a Specialist to charge
commissions under AEMI for orders that require special handling or
for which the Specialist otherwise provides a service as agent for
the order (e.g., percentage orders). However, the Specialist would
be prohibited by Amex Rule 152(c) from charging a commission if the
Specialist were a contra-party to the trade. Amendment No. 5 further
stated that a Specialist would not be allowed to charge a commission
on any transaction in AEMI to which the Specialist's own proprietary
interests were not required to yield by AEMI rules or the
Specialist's agency responsibility. For instance, an ETF Specialist
would be allowed to trade on parity with, but not charge a
commission for, a broker-dealer order in AEMI. See Amendment No. 5.
    \19\ Proposed Rule 719-AEMI provides detailed descriptions of
available account type codes.
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    The AEMI platform would also process orders that are not intended
to receive auto-ex. Examples of such orders include on-close orders and
opening orders, all of which would have a time dependency. Similarly,
orders that require election or conversion before they could be
automatically executed (i.e., stop orders, stop limit orders, and
percentage orders) and orders that require filing and re-filing before
their terms meet conditions for automated execution (i.e., tick
sensitive orders) would be processed within the AEMI environment. These
orders would be held separate until the conditions for automatic
election, conversion, or execution are met and the orders are added to
the AEMI Book, where they then would become eligible for auto-ex.
    The Exchange is proposing to adopt a completely new rule for
handling odd-lots in AEMI that is based on the current New York Stock
Exchange (``NYSE'') rule. During the regular trading session, an odd-
lot trade would be limited to the size of the nearest round-lot trade
that elected it. For example, assume there are two odd-lot orders of 60
shares and 50 shares, respectively, and a round-lot trade of 100 shares
takes place. Odd-lots could trade up to 100 shares. However the second
odd-lot order of 50 shares would trade in its entirety to avoid
splitting an odd lot (i.e., 110 shares executes in total). If a market
odd-lot order were not filled on the basis of round-lot trades within
30 seconds of its arrival, then the odd-lot order would trade at the
price of the qualified national best bid or offer, as defined in the
rule.\20\ If the odd lot is part of a mixed lot, then the odd lot would
trade automatically against the Specialist at the same time and same
price as the first round-lot of the order.
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    \20\ Under the current NYSE odd-lot rule, a market order not
filled on the basis of a round-lot trade within 30 seconds of
arrival would trade at the price of an adjusted ITS bid or offer.
Amex's proposed AEMI odd-lot rule would instead use the qualified
national best bid or offer, as defined in the rule, due to the
Exchange's expected use of private linkages instead of ITS at the
time that Regulation NMS takes full effect.
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    Automated Execution. Amex would by default publish an automated
quotation for all securities in AEMI, and auto-ex in the AEMI platform
would operate according to two basic principles. First, interest that
is eligible to trade must be resident in the AEMI Book prior to an
incoming order arriving, with the exception of percentage orders and
emergency quotes, which are both triggered automatically. Second, Amex
would immediately and automatically ship an intermarket sweep order to
any away market which displays a better-priced quotation, provided Amex
is publishing an automated quotation.\21\ Otherwise, auto-ex of an
incoming order would occur according to whether the incoming order
would do one of the following:
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    \21\ In Amendment No. 5, the Exchange clarified that Amex would
only ship an intermarket sweep order to an away market with a better
price if the Amex were publishing an automated quotation.
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    (a) Lock the APQ: If an incoming order would lock the Amex
Published Quote (``APQ''), it would automatically execute against any
contra-side interest resident on the AEMI Book. Any unexecuted balance
would be posted simultaneously on the AEMI Book and reflected
immediately in the new APQ.
    (b) Cross the APQ: If an incoming order would cross the APQ, it
would automatically execute against orders at each price point up to
its limit price, or until it were filled or breached a tolerance. All
liquidity at each price point would be cleared before the next price
point could trade. This is known as sweeping the book, and during the
sweep the incoming order could access other points of liquidity prior
to reaching its limit price, such as a percentage order or a
Specialist's emergency quote, both of which are described later in this
document. If the range of the sweep includes better-priced protected
quotations at other markets, AEMI would send intermarket sweep orders
to clear those better prices simultaneously with performing the sweep.
Assuming no breach of a tolerance has caused auto-ex to be disabled,
any unexecuted balance would be posted simultaneously on the AEMI Book
and reflected immediately in the new APQ.
    (c) Lock the NBBO: If an incoming order would lock the NBBO, AEMI
would immediately issue an intermarket sweep order for the displayed
quantity. If the displayed quantity were less than the size of the
order, AEMI would simultaneously post any balance on the AEMI Book and
reflect this immediately in the new APQ.
    (d) Cross the NBBO: If an incoming order would cross the NBBO, AEMI
would immediately issue intermarket sweep orders for the displayed
quantities of those protected quotations. Therefore, AEMI would sweep
the protected quotations of away markets at the same time as it sweeps
in full size the same price points on the AEMI Book. As above, during
the sweep the incoming order could access other points of liquidity
prior to reaching its limit price, such as a percentage order or a
Specialist's emergency quote.

Assuming no breach of a tolerance has caused auto-ex to be disabled,
any unexecuted balance would be posted simultaneously on the AEMI Book
and reflected immediately in the new APQ.
    Auto-ex in the AEMI platform would be disabled (and re-enabled)
only in specific, published circumstances that Amex believes are
consistent with investor protection and with the maintenance of fair
and orderly markets. Such instances could occur due to the presence of
a large imbalance, during periods of high volatility, or as a result of
system malfunction.
    The conditions outlined below under which auto-ex could be disabled
during the regular trading session are designed to work together to
balance the demand for speed and immediate access to execution with the
need to provide a stable and fair marketplace. Amex recognizes that
periods of high volatility and low liquidity could cause auto-ex to be
disabled in a single security by one or more tolerances within a short
time. In compliance with Regulation NMS, Amex would continuously
monitor the frequency of disablement of auto-ex and the cause in each
instance in order to ensure that one or more tolerances is not being
breached continuously or consistently, either in individual securities
or market-wide. Should this be the case, Amex would review and, with
the appropriate regulatory approvals, make adjustments to the
conditions under which auto-ex is disabled so as to maintain both
consistency of market quality for investors and compliance as an
automated trading center under Regulation NMS.
    There are six situations under which auto-ex in AEMI would be
disabled. Four of these situations involve trading circumstances that
could otherwise result in price volatility in an individual security
and are described here. The fifth situation is the ``cash close'' for
certain ETFs and is referred to under ``Openings and Closings'' below,
and the sixth situation is when unusual market conditions (as defined
in Rule 602 of Regulation NMS) occur. Of the four trading situations,
AEMI would automatically disable auto-ex in three circumstances related
to breaching predefined tolerance levels held within the system, namely
``spread tolerance,'' ``momentum tolerance,'' and a ``gap trade
tolerance'' (i.e., exceeding a specified maximum range from the last
sale). In the fourth possible trading circumstance in which auto-ex
would be disabled (``gapping the quote''), the Specialist would
manually gap the quote to address a large order imbalance.
    With spread tolerance, auto-ex would be disabled when an inbound
order has walked the book beyond a predefined price level relative to
the price of the security at the time of the initial execution against
the order. The spread tolerance is designed to mitigate volatility
caused by the entry of a large sized order where there is no natural
contra-interest on the book (commonly known as ``pounding''). The
spread tolerance is an Exchange-set parameter per security and is
applied dynamically according to the first execution price of the
security against the incoming order, based on the table below:

------------------------------------------------------------------------
                                                              Tolerance
                        Stock price                            (cents)
------------------------------------------------------------------------
Less than $5...............................................            5
$5-$15.....................................................           15
More than $15..............................................           25
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    For example, suppose the Exchange's quote is 100 shares offered at
$3.10 and the best automated away market bid is $3.09 for 200 shares.
Assume there are additional offers at the Amex of 500 shares each at
price levels of $3.11, $3.13, $3.15, $3.16, and $3.18 and there are no
protected offers between $3.11 and $3.15. An inbound order to buy 4,000
shares at the market would therefore aggress the book five cents from
the first execution at Amex. This results in trades of 100 shares at
$3.10, 500 shares at $3.11, 500 shares at $3.13, and 500 shares at
$3.15. Auto-ex is disabled after the size offered at $3.15 is
exhausted. The APQ is consequently $3.09 \22\ bid for 2,400 shares, 500
shares offered at $3.16 and both sides are non-firm quotations.
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    \22\ The bid is set at the prevailing best automated away market
bid to insure that the Amex quote, although manual and non-firm,
does not lock or cross any away market's automated offer. See
Amendment No. 5.
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    With momentum tolerance, auto-ex would be disabled when multiple
orders have moved the price of a security in one direction beyond a
predefined trading boundary in a 30-second time period. The momentum
tolerance is designed to mitigate volatility caused by a rapid
succession of small orders in very short time frames (commonly known as
``spraying'').
    Spread and momentum tolerances would work simultaneously to prevent
excessive volatility, so while each of a series of small orders might
not individually trigger the spread tolerance, their combined effect
could trigger the momentum tolerance.
    With a gap trade, the gap between the current quotation and the
last sale has breached the parameters of the Exchange's ``1%, 2, 1, \1/
2\ point'' rule.\23\ The incoming order would execute against the quote
and auto-ex would automatically be disabled. This rule would serve to
maintain continuity and reduce volatility in the market.
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    \23\ Proposed Rule 154-AEMI.
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    In the case of a tolerance breach or a gap trade that violates the
Exchange's ``1%, 2, 1, \1/2\ point'' rule, auto-ex would be disabled
and the APQ would be designated as non-firm, being comprised of the
unexecuted balance at the price of the automated NBBO on the same side
corresponding to the aggressing order (e.g., automated national best
bid for an aggressing buy order), with the contra-side of the quote
reflecting the best bid, offer, or order in AEMI. If there is no
imbalance (e.g., the breaching order was an immediate-or-cancel order),
then the natural current Amex market is reflected in the manual APQ. If
there were no orders left on the contra-side of the AEMI Book (e.g. the
stock is illiquid), and auto-ex has been disabled, AEMI would generate
a stabilizing quote automatically so that a two-sided non-firm
quotation would be published. The stabilizing quote would be for one
round lot at one tick away from the price of the automated NBBO on the
contra-side.\24\
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    \24\ See proposed Rule 128A-AEMI(g).
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    Once auto-ex is disabled, incoming immediate-or-cancel orders would
expire on receipt. Incoming market and limit orders would be added to
the AEMI Book (but would not update the APQ) and any order could be
amended or canceled. If auto-ex were disabled due to a tolerance breach
or gap trade, the Specialist would have ten seconds to take action to
re-enable auto-ex and disseminate a new automated APQ, after which time
auto-ex would automatically attempt to resume and disseminate a new
automated APQ. If the remainder of the aggressing order that caused the
imbalance expired or were canceled or the AEMI Book were not locked or
crossed, the Specialist could re-enable auto-ex prior to the expiration
of the 10-second period through a ``front-end'' device. Otherwise, if
the order imbalance remained and the AEMI Book were locked or crossed,
the Specialist would be required to conduct an auction for the
imbalance, and the action of printing the auction trade or performing a
pair-off would automatically re-enable auto-ex and publish an automated
quote. If the Specialist had not so acted or gapped the quote by the
end of the ten-second period, then auto-ex would resume automatically,
provided the AEMI Book were not locked or crossed. If the AEMI

Book were still locked or crossed after the initial ten-second period
and the Specialist had still taken no action, AEMI would attempt to re-
enable auto-ex every subsequent ten seconds. The APQ would not be
updated until auto-ex were re-enabled and an automated quotation were
disseminated. Amex's Regulatory Division could bring enforcement action
against Specialists that have a pattern of failing to take action
within the initial ten seconds under the circumstances described above.
    The Exchange is proposing to adopt rules for gapping the quote
similar to those of the NYSE in order to maintain uniformity in the
marketplace. A Specialist would gap the quote when either: (i) A large
order has been represented in the crowd; or (ii) an incoming order has
swept the book, disabled auto-ex, and left a large order imbalance in
the security. If the Specialist gaps the quote, auto-ex would be
disabled and a gapped quote would be disseminated, reflecting the order
imbalance. If auto-ex had already been disabled due to the tolerance
breach, then it would remain disabled and the existing non-firm quote
would be updated with a non-firm gapped quote. This quote would be
published in order to attract electronic contra-side interest and would
be displayed until incoming order flow offsets the imbalance to such an
extent that the Specialist could pair off the imbalance, which would
automatically re-enable auto-ex. The quote could be gapped for a
maximum of two minutes, by which time the Specialist would be required
to perform an auction, or he would have to request a trading halt with
Senior Floor Official or Exchange Official approval. The gapped quote
disseminated by the Specialist would be comprised of the order
imbalance at a bid or offer equal to the price of the automated NBBO on
the side of the imbalance,\25\ and a round-lot on the contra-side at
the price at which the Specialist judges the stock would next print if
there were no additional interest or cancellations. If the gapped quote
were the result of an order represented in the crowd, the Floor Broker
whose order imbalance has caused the quote to be gapped would be
required to enter his order into AEMI immediately so that it
participates in the pair-off. When the quote is gapped, incoming orders
would be added to the AEMI Book and any order not participating in the
pair-off could be amended or canceled, including the imbalance, but no
auto-ex would occur until the Specialist performed a pair-off, and the
APQ is updated. Note that orders that are participating in the pair-off
could not be canceled or amended during the pair-off duration itself,
which would last no more than three seconds.
---------------------------------------------------------------------------

    \25\ The NYSE rule provides that the side of the gapped quote
reflecting the order imbalance be at the price of the last sale.
---------------------------------------------------------------------------

    Gap quote situations involve clearly large imbalances compared with
the typical trading volume in a security. For example, assume the
Exchange quote is $5.09 bid for 100 shares, 300 shares offered at
$5.11, and the automated national best bid is $5.10. Further assume
that a Floor Broker walks into the Crowd looking to purchase 50,000
shares. The Specialist determines that gapping the quote is in the
interest of the marketplace, and enters the side and size of the
imbalance and the price at which the contra-side would print. Auto-ex
would be disabled and the gapped quote would be published as a non-firm
quotation at $5.10 bid for 50,000 shares and a contra-side of 100
shares (a round lot) offered at $5.20. The Floor Broker would submit
his imbalance from his hand-held terminal so that it is electronically
captured in AEMI and could participate in the pair-off performed by the
Specialist. If incoming contra-side order flow of 45,000 shares entered
the book electronically, the Specialist would auction the outstanding
5,000 shares in the crowd and perform the pair-off, which would cause
the trade to be printed and auto-ex to be re-enabled. The pair-off
itself is described later in this document under ``Performing a Pair
Off.''
    The Auction Process. Vital to the AEMI platform is the preservation
of the auction market, represented by members in the crowd trading on
parity. Specialists, Floor Brokers, and Registered Traders would
continue to add depth to the price discovery process by their
interaction and presence in the crowd at the point of sale. The AEMI
platform would support auctions and negotiated trades \26\ taking place
in the trading crowd and interacting with orders in the AEMI Book. If
the Specialist were to conduct an auction in the new hybrid market, he
would print the auction trades to the tape via AEMI. Both electronic
imbalances that disable auto-ex due to a tolerance breach and oversized
orders arriving via a Floor Broker in the crowd would be able to take
advantage of the auction market and liquidity offered in the crowd.
When the Specialist conducts an auction and prints the resulting trade,
relevant orders in the electronic environment would be included and the
AEMI platform would automatically satisfy better displayed automated
quotations (protected quotations) \27\ at away markets as part of the
auction print. Since verbal bids and offers would not have standing in
the AEMI Book, it would be the electronic print that finalized the
trade and recorded the aggressing and contra-participants. To ensure
the price discovery process is fairly leveraged, negotiated trades and
auction trades could not take place outside the APQ when auto-ex is
enabled.
---------------------------------------------------------------------------

    \26\ Negotiated trades are one-to-one trades between two crowd
members (possibly including the Specialist) and would be allowed
only while auto-ex is enabled. An auction trade is between a single
crowd participant and multiple counterparties in the crowd. They are
differentiated by the need to allocate on a post-trade basis to
crowd participants. However, this difference does not affect
priority and parity rules, the standing of orders on the AEMI Book,
or the issuance of intermarket sweep orders. An auction trade could
take place either while auto-ex is enabled or in order to re-enable
auto-ex.
    \27\ See 17 CFR 242.600(b)(57) and (58).
---------------------------------------------------------------------------

    The Specialist would conduct an auction based on information from
both the crowd and AEMI relating to the imbalance, minimum Specialist
and crowd exposure, and away market obligations. The Specialist and
crowd exposure would represent the minimum commitment of the crowd,
once the imbalance had been offset by away market obligations and the
contra-side interest already on AEMI that would participate in the
trade. Should the market change between the time of the verbal auction
and the auction trade being printed, then the exposure of the crowd
could change, up to the maximum exposure of the imbalance itself. After
conducting the auction, the Specialist would print the trade and
subsequently manage the post-trade allocation to the crowd, after which
AEMI would send notification of individual trades to active crowd
participants. To be considered an active crowd participant, at the time
of the auction trade, a Registered Trader in the crowd would have to
have a bid or offer on the AEMI Book, and a Floor Broker would have to
be represented by a crowd order on the opposite side of the imbalance.
    If a Floor Broker were to walk into a crowd with an order, he could
participate in a verbally transacted trade with one or more individual
crowd participants, including the Specialist. If the Specialist printed
a trade inside the automated NBBO, there would be no electronic orders
(including orders at the Amex) and no away exposure to be satisfied.
However, if he printed a trade outside the automated NBBO, orders on
the AEMI Book could participate and intermarket sweep orders would be

automatically generated to satisfy better-priced automated quotations
at away markets. If one or more intermarket sweep orders \28\ had been
generated by an auction trade and were unexecuted in whole or in part
by away markets, the remaining portion of the aggressing order that was
suspended in AEMI at the time intermarket sweep orders were generated
would be reincorporated into AEMI without losing order time priority
and would re-aggress the AEMI Book (including the generation of
intermarket sweep orders to away markets, if necessary), except for
negotiated trades where any unexecuted intermarket sweep orders expire.
---------------------------------------------------------------------------

    \28\ Amex proposes to define an intermarket sweep order as a
limit order for an NMS stock (as defined in Regulation NMS): (1)
Received on the Exchange by AEMI from a member or another market
center which is to be executed (i) immediately at the time such
order is received in the AEMI Book, (ii) without regard for better-
priced protected quotations displayed at one or more other market
centers, and (iii) at prices equal to or better than the limit
price, with any portion not so executed to be treated as canceled;
provided, however, that an order that is received through the
communications network operated pursuant to the Intermarket Trading
System (ITS) Plan or any successor to the ITS Plan would trade only
at a single price; or (2) generated by AEMI in connection with the
execution of an order by AEMI and routed to one or more away market
centers to execute against all better-priced protected quotations
displayed by the other market centers up to their displayed size. An
intermarket sweep order would have to be marked as such to inform
the receiving market center that it could be immediately executed
without regard to protected quotations in other markets. Amex
believes that this definition is consistent with the Regulation NMS
definition of the same term.
---------------------------------------------------------------------------

    The following are examples of the different types of trades
discussed above:
    (i) Negotiated Trade. Assume that two Floor Brokers negotiate a
trade while standing in the crowd. They request that the Specialist
print the trade, which he could do at or inside the APQ. The Specialist
enters both Floor Broker badge identifiers into AEMI and the trade is
printed. If the price is outside the APQ, it is rejected. If the price
is outside the automated NBBO, then an intermarket sweep order is
generated for the aggressing Floor Broker. Suppose that the APQ is
1,000 shares offered at $5.80 and Floor Broker A negotiates to buy
5,000 shares from Floor Broker B at $5.80. As the Specialist enters the
trade, the automated national best offer changes from 1,500 shares
offered at $5.80 to 500 shares offered at $5.79. AEMI would generate an
intermarket sweep order for 500 shares for Floor Broker A and print
4,500 shares at $5.80. Floor Broker A has purchased the 1,000 shares
offered on the AEMI Book and 3,500 shares from Floor Broker B. Should
the intermarket sweep order be rejected or only partly executed by the
away market, the unexecuted portion would expire and the two Floor
Brokers would have no further obligations with respect to such order.
In this trade, the Specialist played no part other than to print the
trade.
    (ii) Auction Trade with auto-ex enabled. Suppose the APQ for an ETF
is 1,000 shares offered at $5.80 and the automated national best offer
is 1,000 shares offered at $5.79. A Floor Broker walks into the crowd
with an order to buy 5,000 shares. The Floor Broker announces a bid of
$5.80 and the crowd, made up of four Registered Traders and two Floor
Brokers, verbally confirms its offsetting interest. All of the crowd
participants are represented electronically on the contra-side of the
AEMI Book at the time of the trade with the exception of one Floor
Broker, who is therefore not eligible to participate in the trade.
Since AEMI does not permit a print outside the APQ while auto-ex is
enabled, the Specialist could print the trade only at $5.80 or better.
The Specialist enters into AEMI a trade of 5,000 shares at $5.80 with
the Floor Broker's badge identifier as the aggressor. AEMI
automatically generates an intermarket sweep order of 1,000 shares at
$5.79 and prints 4,000 shares at $5.80 at the Amex. The print includes
the 1,000 shares offered at $5.80 on the AEMI Book with 3,000 shares
trading against the Specialist/crowd. If the away market rejects or
only partly executes the intermarket sweep order for 1,000 shares, the
balance of the suspended order would be released on the AEMI Book
without losing order time priority.
    (iii) Auction Trade with auto-ex disabled. If auto-ex has been
disabled due to a spread or momentum tolerance breach or a gap trade
has occurred, the Specialist could print the auction at a price outside
of the automated NBBO and outside the APQ. For example, assume that a
large order has walked the book and breached the spread tolerance,
causing auto-ex to be disabled and a non-firm quote to be published.
Also assume that a buy imbalance of 8,000 shares is on the AEMI Book
and the manual APQ is $5.78 bid for 8,000 shares, 1,000 shares offered
at $5.79. The automated national best offer is 500 shares offered at
$5.80. The crowd, all of whom are represented electronically on the
contra-side of the AEMI Book, verbally confirm their interest at a
price of $5.83. There are no other orders on the AEMI Book and no other
protected quotes at away markets between $5.80 and $5.83. The
Specialist prints the auction trade at $5.83, and AEMI automatically
generates an intermarket sweep order of 500 shares at $5.80 and prints
7,500 shares at $5.83 at the Amex. The offer for 1,000 shares on the
AEMI book is included in the trade and receives price improvement of
$0.04. The balance of the printed trade of 6,500 shares is the
Specialist/crowd exposure. If the away market rejects the intermarket
sweep order for 500 shares, the balance of the suspended order would be
released on the AEMI Book without losing order time priority.
    In both of the above auction trade examples, the Specialist would
oversee the electronic capture of the crowd allocation, based on the
AEMI priority and parity rules and involving an allocation table for
the security as determined by the ETF Trading Committee (if the
security is an ETF). For a listed stock, UTP stock, or closed-end fund,
the allocation of crowd exposure is among eligible crowd participants
and the Specialist Order Book and is based on equal splits among all
crowd participants, with the whole of the Specialist Order Book deemed
as one crowd participant for these purposes.\29\ This allocation
pertains to each member of the crowd participating on the contra-side
at the time of the trade (e.g., four Registered Traders and one Floor
Broker in the first auction trade example). Each Floor Broker
participating in an auction trade, whether as an aggressor or as a
crowd participant on the trade, would conduct additional allocations to
existing orders on their hand held terminals. These allocations, once
completed, would be electronically communicated to AEMI, and Floor
Brokers would have 20 seconds to complete their respective trade
allocations. If an allocation were reported to AEMI more than 20
seconds later, the trade allocation would be deemed late but would
still be permitted. Post-trade allocation would not occur for
negotiated trades, since the Specialist would capture the two
counterparties at the time of the trade.
---------------------------------------------------------------------------

    \29\ The Exchange revised the language in this sentence in
Amendment No. 5 to make clear that the Specialist Order Book would
be deemed as one crowd participant for purposes of the trade
allocation.
---------------------------------------------------------------------------

    Trading in the Crowd. A Floor Broker could trade in any crowd on
the floor under the hybrid market rules, but would have to be
physically present in the crowd to represent a crowd order in the AEMI
Book. On leaving a crowd or logging out of his system, a Floor Broker
would be required: (i) To cancel all crowd orders in the AEMI Book for
securities in the crowd he is leaving; (ii) to electronically submit
the orders in the form of percentage or limit orders to the Specialist
for handling; or (iii) to electronically route the crowd orders to
another Floor Broker in the crowd, via

his hand-held terminal. If the Floor Broker did not take one of the
actions above, he would be responsible for any executions against his
crowd orders on the AEMI Book, and Amex could bring regulatory action
against the Floor Broker.
    Floor Brokers would have a new electronic order type--a ``reserve
order''--which would consist of both a visible size and an undisplayed
(reserve) size that would not be included in the APQ. Reserve orders
would enable Floor Brokers to represent their customer interest at
multiple price points at or outside the APQ and to participate in the
electronic environment on parity, while shielding their orders from
market impact. The aggregate amount of all undisplayed reserve orders
(but not the individual orders) at each price point would be visible
only to the Specialist, who would include any reserve orders in an
auction. As a reserve order receives executions, the displayed size
would be replenished up to the maximum of the defined display size or
the remainder of the order. The price point could not be traded through
until all the reserve size has been exhausted.
    For example, assume the APQ is $5.10 bid for 500 shares. Further
assume that a Floor Broker in the crowd enters a reserve order to buy
5,000 shares for $5.09, display 1,000, and a second Floor Broker enters
a reserve order to buy 4,000 shares for $5.09, display 500. The
Specialist would see the aggregated reserve size of 7,500 shares for
$5.09 in addition to the individual displayed interests. If an incoming
sell order subsequently exhausts the 500 shares bid at $5.10, the new
APQ is $5.09 bid for 1,500 shares, reflecting the displayed portions of
the Floor Brokers' orders.
    If a Floor Broker were trading multiple orders for different
clients simultaneously during the day, he could enter a single crowd
order into the AEMI Book that represented all or a piece of each order.
Prior to submission of such an order to AEMI, the Floor Broker would
designate the allocation method of the trade (i.e., whether the
returning trade against the order is allocated to the oldest customer
order represented, evenly across all the orders, or pro-rata based on
size).
    Floor Brokers could also leave percentage orders with the
Specialist as public orders, permitting their customers' orders to
participate throughout the day in the electronic environment through
manual conversion, automatic conversion, and/or election. A Floor
Broker could route a percentage order to the Specialist Order Book and
then monitor the execution of this order from his hand-held terminal
while away from the crowd. The AEMI platform could convert a percentage
order automatically, based on instructions the Floor Broker submitted
with the percentage order. Alternatively, the Specialist could also
convert a percentage order manually, depending on market conditions and
Floor Broker instructions with respect to the percentage order. Because
the proposed processing of percentage orders is expected to primarily
be automated, the Exchange is seeking to remove some size restrictions
associated with the Specialist's conversion on destabilizing ticks.
    In ETF securities, Registered Traders would also participate in
crowd activity, individually adding liquidity to the AEMI Book and to
the auction process. Although Registered Traders would not have the
same quote obligations as Specialists, they would be required to
maintain competitive two-sided quotes when physically in the crowd.
This active quote would designate them as crowd members for that
individual security and thus make them eligible to participate in crowd
activity.
    A ``parity joining time'' is applied in AEMI to public and crowd
orders and Registered Traders' quotes that are entered within a
prescribed time following certain events. A new order entered would be
considered on parity if it were the only order at a price or it were
entered within a two-second ``parity joining time,'' which would permit
parity to be established when a new highest bid (lowest offer) is
established in AEMI, following a trade, or when all bids (offers) at
the APQ are canceled. If such an order or quote established the new
price, then only subsequent orders entered within the parity joining
time would trade on parity. If an order or quote were submitted outside
the parity joining time at a price point at which there were already an
order or quote present, it would be on parity at the price after a
trade at any price has occurred. This principle would be applied to
public and crowd orders and to quotes entered by Registered Traders
when a new APQ is established.
    For example, assume that three Registered Traders are using a
variety of Exchange-supplied and proprietary technology to submit
quotes in a crowd, and each is bidding $6.00 for 2,000 shares. Further
assume that an incoming sell order for 6,000 shares exhausts the bid,
and the three Registered Traders submit fresh bids immediately. If a
fourth Registered Trader joins the bid eight seconds later, the first
three Registered Traders' bids would be on parity, and the fourth would
not be on parity. Once a trade occurs not involving any of these bids,
such as a midpoint cross or a negotiated trade at or inside the APQ,
all four bids would be on parity. The establishment of parity at the
price would have no effect on the execution speed or behavior of
incoming order flow, but would ensure that a Registered Trader's
ability to compete electronically is comparable to his ability to
compete in the current crowds, irrespective of the technology used to
provide liquidity to the electronic environment. Since the purpose of
this principle is to mitigate the minute differences in processing time
or latency between competing technologies, the concept is also applied
to public orders when there is a mix of public and crowd orders at a
single price point. If there are multiple public orders at a price
point, they would trade in price/time priority relative to each other
but on parity with crowd orders at the same price.
    New Electronic Order Types. To provide more trading opportunities
to off-floor participants in particular, the Exchange is proposing to
introduce new electronic cross order types. In addition to current
crosses negotiated in the crowd by Floor Brokers, which would continue
to be available under AEMI and applicable to all equity-traded
securities on the Amex unless stated otherwise in the Exchange's rules,
five electronic order types are being introduced as well as one
electronic ``auction cross'' order type.\30\ All six of these
electronic order types are limited to ETFs and Nasdaq UTP securities.
The

electronic cross order type selected at order entry by the market
participant would dictate whether the cross order could be broken up by
interacting with orders on the AEMI Book, whether price improvement is
being sought for the cross order, and how the residual of the cross
order would be handled after it had been broken up. Two examples of
electronic cross order types are ``cross'' and ``cross only'', which
are differentiated by their interaction with the book--a ``cross''
order would interact with orders in the AEMI Book at the cross price
whereas a ``cross only'' order would not. For example, if the APQ were
$5.10 bid for 100 shares, 200 shares offered at $5.11, the sell side of
a ``cross'' order for 500 shares at $5.10 would trade 100 shares
against the $5.10 bid, since the existing electronic bid would take
priority, and the remaining 400 shares would be crossed against the
contra-side of the cross order. After both transactions, the 100 shares
to buy from the ``cross'' order would expire. Under the same scenario,
a ``cross only'' order at $5.10 would be rejected, since its
instructions would prevent interaction with the AEMI Book when there is
an existing bid on the AEMI Book for $5.10 (i.e., equal to the cross
price).
---------------------------------------------------------------------------

    \30\ Following discussion with the staff of the Commission, the
Exchange is adding to the proposed AEMI rules additional minimum
size (greater than the largest customer order on the Specialist
Order Book at the cross price) and value ($100,000 or more)
requirements for certain cross orders that are priced at the APQ and
allowed to trade ahead of a previously displayed public customer
order. While Amex believes that these requirements would not be
triggered by the operation of its proposed new electronic cross
orders, they may be applicable to crosses negotiated in the crowd by
Floor Brokers. See proposed Rule 126-AEMI, Commentaries .01 and .02.
Because the initial version of AEMI has not been programmed to
automatically check for these additional parameters, the Exchange
will need to develop and implement a surveillance and enforcement
program with respect to member compliance with these additional rule
requirements that would be in effect during the short period that it
will take to develop these new parameters into a future version of
AEMI. Amex regulatory officials will communicate the details of the
interim surveillance and enforcement program to the staff of the
Commission by letter. The Exchange expects that this proposed
interim program will, due to limitations on its ability to manually
surveil compliance with the additional requirements on a real-time
basis, be more punitive and after-the-fact in nature, as opposed to
an immediate rehabilitative approach.
---------------------------------------------------------------------------

    Another cross order type, designated as an electronic ``auction
cross,'' would actively seek price improvement, and the sender of the
order would designate which side or sides of the cross are eligible for
price improvement. For example, assume that the APQ is $5.10 bid for
100 shares, 200 shares offered at $5.14, and an ``auction cross'' is
submitted for 500 shares at $5.12, with the buy side designated for
price improvement. The buy side of the cross would be put on the AEMI
Book and reflected in the APQ at one tick worse than the designated
cross price. The APQ would therefore become $5.11 bid for 500 shares,
200 shares offered at $5.14. If the bid for $5.11 did not receive price
improvement within three seconds, it would be canceled and the cross
would take places at $5.12, provided this is still feasible given
market conditions and there is no trade-through. If, however, the
auction price were outside the automated NBBO at the time of the trade,
the auction cross would expire. To ensure consistency with rules
relating to short sales, the sell side of an auction cross that is
exposed for price improvement could be re-priced by AEMI. For example,
assume that the APQ is $5.10 bid for 100 shares, 200 shares offered at
$5.15, and the last trade on Amex is $5.13, which is a minus tick. An
``auction cross'' is submitted for 500 shares at $5.12, with the sell
side marked as a short sale and designated for price improvement. Since
this is a tick sensitive order, AEMI would take into account the tick
of the last trade when generating the filing price. Since the last
trade was $5.13, a minus tick, AEMI would re-price the order by one
tick to $5.14 so that a plus tick would result if this order traded
during the auction cross duration. In this example, the auction cross
would expire at the end of the price improvement duration, since the
cross could not occur at $5.12 under the short sale rule. By contrast,
if two trades had occurred during the price improvement duration (at
$5.10 and $5.11) to create a plus tick, the auction cross would take
place at the designated cross price of $5.12.
    Quoting. Specialists would be expected to maintain a two-sided
quote during the regular trading session to comply with their
obligations under the Exchange's rules to assist in the maintenance of
a fair and orderly market and of price continuity with reasonable
depth. A Registered Trader in ETF securities would be required to
maintain a two-sided quote to be eligible to participate electronically
and in crowd trades. Specialists and Registered Traders could submit
quotes in the following three ways:
    (1) Specialists and Registered Traders could optionally stream in
multiple two-sided quotes (one quote per price point) to add liquidity
to up to a total of five price points on each side of the AEMI Book.
The Exchange is introducing a new interface to facilitate streaming in
quotes from a proprietary application.
    (2) Quotes could be generated automatically (``auto-quotes'')
within AEMI. Auto-quotes are defined as quotes automatically generated
within AEMI on behalf of a Specialist or Registered Trader, based on
user-specified parameters relating to size, ticks, and underlying
market data. A Specialist could peg either his best bid or his best
offer to the automated NBBO. Registered Traders could peg their best
bid or offer to one side of the APQ (excluding their own quote if that
quote represented the only interest on that side of the APQ) or the
automated NBBO. Both Specialists and Registered Traders could also peg
their best bid or offer in ETFs to the Intra-day Optimized Portfolio
Value. The contra-side (unpegged) of the quote would be automatically
generated based on a quote spread designated by the user for that
security. If the price to which the quote is pegged changed, a fresh
auto-quote would be generated based on the pegged price and the
Specialist's or Registered Trader's size.
    (3) Single, two-way quotes could also be entered physically into
the AEMI platform (``solo quotes''). A Specialist or Registered Trader
could enter solo quotes at any time. If the user were auto-quoting or
streaming in quotes, a solo quote would override the best existing
quote, auto-quote, or streamed quote. The next auto-quote or streamed
quote would override the previous solo quote. These solo quotes would
be represented to the market place as automated quotations while auto-
ex is enabled.
    At the Amex, as discussed above, Specialists are expected to
maintain continuous two-sided quotes in support of their affirmative
market making obligations to ensure price continuity and stability in
the market. The AEMI platform would ensure that a Specialist is able to
meet these obligations by generating a single two-sided, firm,
automated emergency quote when the Specialist's quote is decremented
below a configured size that is based on parameters set by the
Specialist. This feature is available only when the Specialist is not
streaming in his quotations. If the Specialist's quote in a given stock
were decremented to below a specified size or were exhausted, and no
price change in the marketplace had automatically generated a new
quote, then an emergency quote would be generated by AEMI, based on the
programmed parameters. For example, assume that a Specialist has set
parameters that would generate a fresh quote of 500 shares if his quote
size is decremented to below 200 shares, and this quote would be
generated at two ticks away from his previous quote. Further assume
that (1) the Specialist's quote is pegged to the automated national
best bid, (2) his current quote is 1,000 bid at $5.08 and represents
the automated national best bid, and (3) the next best bid in the
marketplace is at $5.07. An incoming sell order for 900 shares depletes
his quote to below the size specified and therefore an emergency quote
is generated for 500 shares at $5.06 (assuming that a tick is $0.01 for
this security), which is now the Specialist's best bid.
    Intermarket Sweep Orders. Amex believes that the AEMI platform has
been designed to be fully compliant with the newly adopted Order
Protection Rule of Regulation NMS, which requires that the visible size
of all best automated quotes of all away markets be cleared in order to
execute or print a trade at a worse price. To this end, incoming orders
at the Exchange would be routed out automatically if an away market
with an automated

quotation were displaying a better price, provided Amex is publishing
an automated quotation.\31\ Intermarket sweep orders could be sent and
received through either ITS or private linkages with those other
markets or market participants. Away markets could also would need to
be cleared by a Specialist's or Registered Trader's quote moving
through an automated away market (where regulations so permit).
---------------------------------------------------------------------------

    \31\ In Amendment No. 5, the Exchange clarified that Amex would
ship an intermarket sweep order to an away market with a better
price only if the Amex were publishing an automated quotation.
---------------------------------------------------------------------------

    If one or more away market best prices are required to be cleared
in order to conform to the Order Protection Rule, an outbound
intermarket sweep order would be generated to each away market
displaying a better price, in the displayed amount. The ``sweep''
qualifier on the order indicates to the receiving trading center that
the order could be executed even though it is at an inferior price to
the automated NBBO.
    Only protected quotes of away markets from 9:30 a.m. to 4 p.m.
Eastern Time would be considered by AEMI in the calculation of how many
orders to send and where to send them. Where an outbound obligation
represents an order received by the Exchange, that order would be
suspended on the AEMI Book and unavailable for execution on the Amex
unless it were released. If a rejection (i.e., a no-fill or partial
fill cancellation) were received in response to the obligation sent to
away markets and no better automated quotations existed, the balance of
the suspended order would be released on the AEMI Book without losing
order time priority. If a rejection were received and there were better
automated quotations at other markets, the released order would be
resent to those markets.\32\ If, following a rejection, another away
market published a better quote before the balance could be released
(i.e., the automated NBBO has changed), the order would also be resent.
Incoming intermarket sweep orders to satisfy the Order Protection Rule
could also be received by the Exchange from members and away markets.
Such incoming orders could trade at multiple prices up to their limit
at Amex, irrespective of the prevailing automated NBBO, with the
exception of intermarket sweep orders received through ITS, which would
receive only the best price available at Amex. Any unexecuted balance
would expire.
---------------------------------------------------------------------------

    \32\ In the situation where there were equal-priced automated
quotations at other markets, the released order would also be resent
to those markets if the order exhausted all size on the AEMI Book at
the price and were not completely filled. See Amendment No. 5.
---------------------------------------------------------------------------

    Amex would monitor connections at all times to ensure that systems
were functioning properly. All intermarket sweep orders sent by AEMI to
away markets would be immediate-or-cancel orders, and Amex therefore
expects an immediate response from the away market when accessing a
protected quote. To manage the issuance of immediate-or-cancel
intermarket sweep orders to access manual quotes at the NBBO, each
intermarket sweep order would have an expiration delay timer. This
timer would control how long AEMI would wait before cancelling the
intermarket sweep order and trading through the quotation. If an
intermarket sweep order were sent to an away market and no response
were received by the time the delay timer had expired, and assuming
that no system errors had been detected, AEMI would issue a further
request to cancel the order and would immediately trade through the
quotation. This would occur through the release of the order that had
been suspended on the AEMI Book pending the response to the intermarket
sweep order, and the released order would re-aggress the AEMI Book
(including the generation of intermarket sweep orders to other away
markets, if necessary). Such trade-throughs by Amex would occur on a
per-order basis.\33\
---------------------------------------------------------------------------

    \33\ Amex expects that a late trade report from an away market
following such a trade-through, while possible, would be an
infrequent event. In such case, however, the Exchange acknowledges
that its proposed trade-through treatment would not obviate or
invalidate the away market's rules regarding such late trades. See
Amendment No. 5.
---------------------------------------------------------------------------

    If an away market sends a rejection in response to an outbound
intermarket sweep order and the quotation at the away market were not
updated, Amex would trade through the quote, but would still continue
to route other intermarket sweep orders to that market's protected
quotation in the same security.
    Performing a Pair-Off. At openings and closings and at the
conclusion of auctions, the Specialist would be required to perform a
pair-off of orders in the AEMI Book in an orderly manner. With the
exception of closings, auto-ex would be automatically enabled (or re-
enabled) after the pair-off. The pair-off would have to be completed
within three seconds of the Specialist commencing it, and during this
pair-off any new orders would queue unseen by the Specialist and would
not be considered in the pair-off. This brief queuing would ensure that
the pair-off is orderly, and that an incoming order that arrives at the
same instant that the pair-off commences would not alter the pair-off
to such an extent that it would disadvantage investors whose orders
might now not be included for execution. During the pair-off itself,
orders that were being processed as part of the pair-off could not be
altered or canceled, while all other orders would be queued in the AEMI
platform (but would not be permitted to enter the AEMI Book). These
queued orders could be amended or canceled at any time. If, however,
the Specialist failed to complete the pair-off within three seconds,
the pair-off session would be automatically canceled, and the queue of
new orders that had accumulated would be added into the AEMI Book,
where they would be eligible to participate in the new pair-off that
the Specialist must perform.
    Openings and Closings. The Exchange is proposing to automate
certain aspects of its opening session in AEMI. The Specialist would
manually start the opening pair-off session at or as close to 9:30 a.m.
as possible. The Specialist would perform the opening pair-off to open
trading in a security. The Specialist could also open ETFs and Nasdaq
UTP securities on a quote if there were no marketable orders in the
AEMI Book. As described above, the pair-off would have to be completed
within three seconds of the Specialist commencing it. All marketable
crowd orders would be considered on parity for the opening pair-off.
Any imbalance of marketable orders would be fully or partially filled
against the Specialist and Registered Trader orders at the pair-off
price on the contra-side of the imbalance. Market and marketable limit
odd-lot orders would be automatically executed against the Specialist
at the opening price. At the end of the opening pair-off session, any
queue that was formed during the pair-off would then be processed, with
marketable orders relative to the pair-off trade price being
automatically paired off and the imbalance being added to the AEMI Book
with the original time stamp priority, and intermarket sweep orders
being sent to away markets as necessary.\34\ At the open, if the
imbalance were too large for the Specialist and the crowd to offset,
the Specialist could delay the opening, with appropriate approvals
pursuant to proposed Rule 22-AEMI. At the close, if the imbalance were
too large for the Specialist and the crowd to offset, the Exchange
would declare a trading halt

and there would be no closing rotation in that security.
---------------------------------------------------------------------------

    \34\ The Exchange modified this sentence in Amendment No. 5 to
state that AEMI would ship intermarket sweep orders to away markets
as necessary.
---------------------------------------------------------------------------

    The Exchange is also proposing to automate certain aspects of its
closing process. The Specialist would conduct the closing pair-off
session in his specialty security. In both UTP and listed securities,
an on-close imbalance of 25,000 shares or more would be automatically
published to the tape at 20 and then ten minutes before the market
close at 4:00 p.m.\35\ In all securities, the closing pair-off session
would commence automatically at the official closing time and auto-ex
would be disabled at this time. The Specialist, who would perform a
pair-off of orders in the AEMI Book, would manually close each
security, and all orders would have to have been entered electronically
in order to participate in the close.
---------------------------------------------------------------------------

    \35\ The imbalances would be published to Consolidated Tape
Association (CTA) Tape B for Amex-listed securities. Amex is working
with the Nasdaq SIP to publish the imbalances in Nasdaq UTP
securities to Tape C. Note that the Exchange is proposing to make
the publication of order imbalances optional in Nasdaq UTP
securities.
---------------------------------------------------------------------------

    At the close, the Specialist would execute any imbalance at an
auction price determined in a manner consistent with auction market
procedures and would then pair off and execute the remaining executable
orders at that closing price. Percentage orders and stop orders that
would be elected by the closing price determined by the Specialist
could be included in pricing the close. For example, assume that the
market is in the closing pair-off session, auto-ex is disabled, and
Amex is publishing a manual non-firm auction quote. Also assume that
there is a resting limit order, or the Specialist's own bid, on the
AEMI Book to buy 10,000 shares at $10; that there is a single market-
on-close order to sell 1,000 shares; and that there is a stop order to
sell 50,000 shares with a stop price of $10. The Specialist could price
the close to take into account the execution of the stop order so that
all trades executed at the close would receive the same price. So if
the Specialist priced the close at $9.60, the market-on-close order
would receive $9.60, the buy order on the AEMI Book would be filled at
$9.60 (thereby receiving price improvement of $0.40), and the balance
of the stop order would be filled against the Specialist at $9.60 also.
Amex believes that this process would ensure price stability at the
close and result in a robust close with the maximum volume being traded
at a single auction price.\36\
---------------------------------------------------------------------------

    \36\ Because a market-on-close order is a contingent order, in
that it is seeking to receive the closing price that is determined
by the closing pair-off, it would not necessarily be entitled to
execution (or partial execution) at the price of a quote or order on
the opposite side of the market if auction market principles would
result in a closing price inferior to the latter quote or order.
---------------------------------------------------------------------------

    The Specialist would conduct a post trade allocation with respect
to the shares necessary to offset the imbalance, as with a regular
auction. Until this post-trade allocation process were completed, the
Specialist would be responsible for the contra-side of the imbalance
traded. If there were no on-close orders, the closing price would be
the last sale in the security.
    In the case of certain ETFs that trade up to 4:15 p.m., the
Specialist could perform a ``cash close'' pair-off during the regular
trading session at 4:00 p.m., which would occur prior to the official
closing session on the Exchange and would be an added service for those
investors who wish to mark positions to the cash close. In the event
that there are ``market at 4:00 p.m. cash close'' orders for an ETF in
the AEMI Book, auto-ex would be disabled automatically in that security
at the 4:00 p.m. cash close time. Once the pair-off is concluded, auto-
ex would resume until disabled for the official closing pair-off to be
conducted at 4:15 p.m.
    Implementation of the AEMI Platform. Amex believes that AEMI will
be rolled out over a period of time anticipated to begin early in the
fourth quarter of 2006 for equities and ETFs, prior to the final date
set by the Commission for full operation of all automated trading
centers that intend to qualify their quotations for trade-through
protection under Rule 611 of Regulation NMS (``Trading Phase Date'').
By the Trading Phase Date, all Exchange-traded ETF shares, equity
shares, and securities that trade like equities would be on the AEMI
platform. The Exchange intends to file separate rules with the
Commission for a modified version of the AEMI platform to be in effect
during the rollout and prior to the Trading Phase Date. The Exchange
intends to refer to this pre-Rule 611 version of AEMI as AEMI-One.
    Proposed Rule 1A-AEMI, a transitional rule filed as part of this
proposal, describes the plan for the phase-in of the AEMI platform and
the applicability of various Exchange rules during and after the
rollout period. Once the rollout of AEMI is complete for all securities
that had been subject to a particular Exchange legacy rule, the
Exchange will submit a ``house-keeping'' filing pursuant to Rule 19b-4
under the Exchange Act, which will delete each such rule that is not
applicable to the Exchange's then current trading environment.\37\ The
following is a brief discussion of each proposed new AEMI rule.
---------------------------------------------------------------------------

    \37\ In Amendment No. 5, the Exchange changed the phrase ``all
Exchange-traded products'' to ``all securities.''
---------------------------------------------------------------------------

Rule 1-AEMI. Hours of Business
    The Exchange proposes to adopt this new AEMI rule, which tracks the
language of its current Rule 1 with the exception of a reference to
``After Hours Trading'' in the current rule. This facility, which has
rarely been utilized, would not be supported by the AEMI platform.
Rule 3-AEMI. General Prohibitions and Duty To Report
    The Exchange proposes to adopt this new AEMI Rule, which tracks the
language of its current Rule 3 with the primary exception of references
in the Commentary to three specific kinds of trading activity that
members and member organizations should avoid. The reason for the
change is that these particular restrictions would not be compatible
with the operation of AEMI, including the use of intermarket sweep
orders and the ability of incoming orders to ``walk the book.'' The
Exchange is instead proposing to add new language that would emphasize
the prohibition of certain ``gaming'' behavior that could occur under
the AEMI platform.
Rule 22-AEMI. Authority of Floor Officials
    The Exchange proposes to adopt this new AEMI rule, which tracks the
language of its current Rule 22 with a few exceptions as follows.
First, the Exchange is proposing to add language to paragraph (b) of
this rule, regarding reallocation of a security, to assure that the
rule is compatible with the provisions of Amex Rule 27 on reallocation.
In addition, the Exchange is not including the language in Section
(c)(5) of the current rule, which requires a crowd announcement by a
member if he is bidding or offering pursuant to an off-floor order for
an account in which a member or member organization has an interest.
That provision is primarily applicable to ``G'' orders, which would not
be accepted under AEMI due to the fact that they are infrequently used
on the Amex and would require complex programming for AEMI to be able
to execute them properly. Other than in connection with ``G'' orders,
there are no other situations that would compel a need to announce in
this manner, so this section of the current rule would no longer be
necessary. The Exchange is

also proposing to exclude some related language that is in the last
paragraph of paragraph (c) of current Amex Rule 22, along with some
outdated language involving hand signals. In addition, a provision in
the current rule providing for the prohibition of entry of stop or stop
limit orders is not being included in the proposed Rule 22-AEMI due to
the fact that the election and execution of such orders would be fully
automated in AEMI.
    The Exchange is also proposing to add language in Commentary .02 to
the proposed new rule to recognize the fact that records of rulings and
decisions of Floor Officials could be created electronically under AEMI
and not just by filling out paper forms. A related revision would
provide that the need for Floor Official approval of a particular
action with respect to a security could be indicated to the Specialist
electronically on a system maintained by the Exchange. It would further
provide for the proper response by a Specialist to an electronic
message regarding required Floor Official approval.
Rule 60-AEMI. Vendor Liability Disclaimer
    The provisions of this proposed new rule track the language of a
paragraph in current Amex Rule 60 relating to liability arising out of
the use of any electronic system, service, or facility provided by the
Exchange to members for the conduct of their business on the Exchange.
However, most of the language in the current rule is not being retained
in the proposed new rule because it relates to systems and personnel
(i.e., ``System Clerks'') that are no longer utilized at the Exchange
or would no longer be utilized after AEMI is implemented. These systems
include the Post Execution Reporting (``PER'') and Amex Options Switch
(``AMOS'') systems, the On-Line Comparison System (``OCS'') system, and
the NYSE electronic display book licensed by the Exchange.
Rule 1A-AEMI. Applicability, Definitions, References and Phase-In
    Proposed Rule 1A-AEMI is a transitional rule that outlines the plan
for the phase-in of AEMI and the applicability of various Exchange
rules during and after this period of time. The proposed rule also sets
out requirements for members and member organizations and their
associated persons with respect to AEMI training and the use of AEMI
technology.
    During the roll-out period for the AEMI platform, while the
Exchange has securities trading on both the legacy and the AEMI
platforms, the Exchange's current rules (as amended from time to time)
would apply to those securities that continue to trade on the legacy
system, while the corresponding AEMI rules would apply to those
securities trading on AEMI. When AEMI is fully implemented and there
are no more securities trading on the legacy system, the Exchange will
file a proposed rule change with the Commission to propose that each
AEMI rule completely replace its corresponding counterpart (e.g.,
proposed Rule 108-AEMI would replace Amex Rule 108) and that certain
other rules that are not applicable to transactions in AEMI be
rescinded.
    The Exchange anticipates that the start of the roll-out would occur
prior to the final date set by the Commission for full operation of all
automated trading centers that intend to qualify their quotations for
trade-through protection under Rule 611 of Regulation NMS (``Trading
Phase Date''). Consequently, a somewhat modified early version of the
AEMI platform (referred to as ``AEMI-One'') would be in operation
starting with the initial roll-out and continuing through the day prior
to the Trading Phase Date. The Exchange intends to file a separate set
of rules in the near future that would cover the operation of AEMI-One.
    When the AEMI platform is fully implemented, transitional Rule 1A-
AEMI would be rescinded except for the definitions contained therein,
which would migrate to the ``Definitions'' section at the beginning of
the Amex's ``General and Floor Rules.'' \38\ Key definitions include:
---------------------------------------------------------------------------

    \38\ The Exchange would have to file a proposed rule change with
the Commission for this purpose.
---------------------------------------------------------------------------

     ``AEMI Book''--the part of the AEMI platform that would
hold and automatically match orders, bids, and offers submitted to it
electronically by the Specialists, Registered Traders, Floor Brokers,
and off-floor members.
     ``Crowd Order''--an order in the AEMI Book that would be
represented by a broker standing in the crowd or a bid or offer in the
AEMI Book entered by a Registered Trader standing in the crowd.
     ``Customer''--any person who is not a broker/dealer.
     ``Public order''--an order, initiated either on the Floor
by a Floor Broker (e.g., a percentage order or a limit order) or off-
floor by a member, that would be entered directly into the Specialist
Order Book.
     ``Registered Trader''--a member who would be authorized by
the rules of the Exchange to initiate trades while on the Floor for his
or her account. Registered Trader transactions in securities traded in
AEMI could be effected only in accordance with the provisions of
proposed Rule 110-AEMI.
     ``Specialist Order Book''--the accumulation of orders on
the AEMI Book that would not be represented by a broker standing in the
crowd or other party. It would be a subset of the AEMI Book. The
Specialist Order Book would not include the bids and offers of
Registered Traders in the crowd.
     ``Automated National Best Bid and Offer'' (``automated
NBBO'')--the highest automated bid and lowest automated offer
calculated and disseminated on a current and continuing basis by a plan
processor pursuant to an effective national market system plan.
     ``Automatic conversion''--automatic conversion (``auto
conversion'') of percentage orders by AEMI. Auto conversions would be
governed by certain conditions in the AEMI Book which would qualify a
percentage order to be converted. The parameters that would trigger an
auto conversion would be configurable. An auto conversion could also
take place during an opening, a re-opening, and the closing pair-off.
     ``Manual conversion''--The Specialist could manually
convert percentage orders depending on the instruction on the
percentage order. The AEMI platform would permit both active and
passive manual conversions.
     ``Active manual conversion''--a manually converted
percentage order that becomes an immediate-or-cancel (``IOC'') order
and immediately aggresses the AEMI Book.
     ``Passive manual conversion''--a manually converted
percentage order that becomes a limit order at the APQ. It could set a
new APQ or join the existing APQ.
     ``Trade event''--Every execution due to an aggressing
order would be considered a ``trade event'' by the AEMI platform. The
election of a percentage order, stop order, or stop limit order would
be based on a trade event.
     ``Specialist emergency quote''--a firm, automated quote
automatically generated by AEMI when the Specialist's mandatory quote
is reduced to or below a configured size in order to ensure continuity
of price and assist the specialist in meting his quoting obligations
under proposed Rule 170-AEMI. Such a quote would be generated according
to parameters set by the Specialist, and would be obligatory if the
Specialist were utilizing an AEMI ``front-end'' device to generate
quotes. This feature would be disabled if quotes

were streamed in from a proprietary system.\39\
---------------------------------------------------------------------------

    \39\ See supra, under ``Quoting'' for a discussion and related
example of such an emergency quote.
---------------------------------------------------------------------------

     ``Stabilizing quote''--a non-firm quote that would
automatically be generated by AEMI when auto-ex were disengaged
following a tolerance breach or gap trade (see proposed Rule 128A-
AEMI(g)) and no orders existed on the contra-side of the AEMI Book.
Under those circumstances, AEMI would automatically publish a quote for
one round lot at one tick away from the price of the automated NBBO on
the contra-side.
Rule 108-AEMI. Priority and Parity at Openings and Reopenings
    Proposed Rule 108-AEMI is an amended version of current Amex Rule
108 and provides that orders, bids, and offers must be received by AEMI
prior to the commencement of the opening pair-off in order to
participate in that pair-off. Orders that were not represented
electronically in the AEMI Book would not participate in the opening.
The proposed new rule, which would also apply to reopenings, provides
the priority and parity rules (which replace the current priority and
parity rules) that the AEMI platform would apply to the opening pair-
off and also would provide requirements for the execution of market and
limited price orders and for tick sensitive purchases and short sales.
The rule identifies ``Must Trade Orders'' (market orders and certain
limited price orders treated as market orders) that would have to be
executed on the opening or reopening and ``May Trade Orders'' that are
eligible, but are not required, to be executed on the opening or
reopening. Orders within each of the two foregoing groupings would be
deemed to be on parity, except that orders on the Specialist Order Book
(a subset of the AEMI Book) would be executed in the order in which
they were received. Further, in the case of ETFs, all customer orders
to buy or sell would be executed before any broker-dealer orders, bids,
or offers on the same side of the market.
    The opening pair-off session for a security, once initiated by the
Specialist, would have to be completed with the Specialist's selection
of the single opening pair-off price within three seconds. During the
opening pair-off session, incoming orders, bids, offers, cancellations,
amendments, and other messages would be held in a message queue and
would not be included in the opening pair-off. The rule provides that,
if the Specialist did not complete the pair-off within three seconds,
the pair-off session would terminate, all messages in the message queue
would enter the AEMI Book and would be on parity with the orders that
were part of the unsuccessful pair-off effort, and the Specialist would
have to reinitiate the opening pair-off session to open the security.
The Specialist would open the security on a quote if there were no
bids, offers, or orders in the AEMI Book that were eligible for
execution on the open.
    Once any orders that were in a message queue during the opening
pair-off session were entered into the AEMI Book after the opening
pair-off had been completed, AEMI would attempt to automatically pair
off any marketable orders from the queue at the opening price unless
this would cause a trade through of a protected quotation in another
market center. In the latter case, AEMI would attempt to effect the
pair-off at whichever price would result in the largest trade and would
not result in a trade-through of a protected quotation. If such a post-
opening pair-off could not be effected or there were orders from the
message queue that did not participate in the pair-off, the remaining
orders from the message queue that entered the AEMI Book would be
treated in the same manner as incoming orders during the regular
session, including the generation of intermarket sweep orders as
required.
    The Exchange is also replacing the Specialist book enhanced splits
during parity allocation, with an equal split between the book and each
crowd participant.\40\
---------------------------------------------------------------------------

    \40\ The allocation split between the in-parity visible size of
(i) public orders on the Specialist Order Book (including the
Specialist's quote) and (ii) Crowd Orders is illustrated in the
following example. Suppose there are three visible in-parity public
bids for a common stock in the Specialist Order Book for a total of
400 shares at $13.00, which price is at the APQ and the NBB. Also
assume an in-parity bid by the specialist for 1,000 shares at the
same price, as well as in-parity Crowd Order bids of 1,000 shares
each by Floor Broker A and Floor Broker B. If there is an aggressing
sell order at the market for 1,000 shares, the total allocation for
the in-parity public orders and the specialist bid (which are
aggregated and treated as a single participant for computational
purposes) is \1/3\ of the 1,000 shares based on two crowd
participants plus the aggregated public/specialist bids treated as a
third participant. The public/specialist bids therefore receive a
total of 400 shares because the system will round up to the nearest
round-lot when computing the allocation to the public orders. Within
the public/specialist band, the Specialist is at the back of the
line and must yield to all of the public orders. In this example,
the three public bids for 400 shares will consume the entire public
allocation, leaving none for the Specialist. The remaining 600
shares are allocated to the two Crowd Orders in the amount of 300
shares to each.
---------------------------------------------------------------------------

    The foregoing proposed opening procedures would replace any
conflicting procedures in current Amex Rule 108.
Rule 109-AEMI. ``Stopping'' Stock
    The current ability of a Specialist or other member of the Exchange
to agree to ``stop'' stock at a specified price (i.e., to guarantee
that the order of the member who accepts the stop would be executed at
the stop price or better) would not exist under AEMI. Consequently, the
current language in Amex Rule 109 governing such agreements is not
included in proposed Rule 109-AEMI, which contains a simple prohibition
on such arrangements with respect to any security traded in AEMI. The
Exchange is including in proposed Rules 131A-AEMI(b) and 118-AEMI(j)
(see below) language that is in current Amex Rule 109(d) relating to
the manner of printing the close.
Rule 110-AEMI. Registered Traders and Floor Trading
    The Exchange is proposing Rule 110-AEMI to establish the standards
for floor trading by Registered Traders under AEMI, where a Registered
Trader is defined as a member who is authorized by the rules of the
Exchange to initiate trades while on the floor for his or her account.
Under the proposed rule, Registered Traders would be limited to
transactions in index warrants, currency warrants, securities listed
pursuant to Section 107 of the Amex Company Guide (``Other
Securities''), Trust Issued Receipts, Partnership Units, and derivative
products (including ETFs).
    The proposed new rule incorporates current requirements (see Amex
Rule 958, Commentary .10) that transactions by Registered Traders in
AEMI in index warrants, currency warrants, Other Securities, Trust
Issued Receipts, and Partnership Units could be effected only by
Registered Traders who were regular members, while transactions by
Registered Traders in AEMI in derivative products could be effected by
Registered Traders who were regular members, Options Principal Members,
or limited trading permit holders.
    Most of the provisions in proposed Rule 110-AEMI and its associated
commentary are currently in the Exchange's trading rules (primarily
current Amex Rules 111, 950 and 958 and their commentaries), so
Registered Traders would function under essentially the same
requirements that are currently applicable to them. These provisions
are being adapted to the AEMI platform and placed in proposed Rule 110-
AEMI for convenience of reference and to minimize the burden of
multiple cross-references. Consequently,

the Exchange will propose that current Amex Rule 111 be rescinded upon
the full implementation of the AEMI platform.
    Each Registered Trader electing to engage in transactions in AEMI
would be assigned by the Exchange one or more securities in the
aforementioned categories, and transactions in AEMI initiated by such
Registered Trader for any account in which he or she has an interest
shall, to the extent prescribed by the Exchange, be in such assigned
securities. Registered Trader transactions should constitute a course
of dealings reasonably calculated to contribute to the maintenance of a
fair and orderly market, including the making of competitive bids and
offers as reasonably necessary and engaging in dealings for his or her
own account in situations where there is a lack of price continuity, a
temporary disparity between supply and demand, or a temporary
distortion of price relationships for the products in which he or she
is trading and any underlying securities.
    The proposed rule would establish minimum percentages of share
volume and number of transactions that a Registered Trader would have
to execute in person and not through the use of orders entrusted to a
broker or Specialist, and it further would require that Registered
Traders and Specialists compete with each other to improve the quoted
markets in all securities that they trade. The proposed rule would
recognize, however, that there are circumstances in which some
communication between the Specialist and Registered Traders could be
necessary and appropriate, such as making a collective response to a
request for a market, provided that the member representing such order
requested such response and the size of the order were larger than the
size disseminated in AEMI. Such a collective response would happen only
in the crowd verbally. For instance, suppose the APQ for an ETF is
$3.50 bid for 3,000 shares and 5,000 shares offered at $3.55. If a
Floor Broker walks into the crowd with an order to buy 20,000 shares of
the ETF at the market, he could request a collective quote from the
specialist/crowd. This verbal process would be similar to the auction
process when auto-ex is enabled, and the crowd would be required to
collectively confirm their verbal interest.
    A Registered Trader electing to engage in transactions in AEMI
under the proposed rule would be designated as a Specialist on the
Exchange for purposes of the Act and the rules and regulations
thereunder with respect to transactions initiated and effected in AEMI
in the capacity of a Registered Trader. This could include transactions
initiated from off the floor in the capacity of a Registered Trader if
certain ``in-person'' share volume percentage requirements are met. A
Registered Trader who establishes or increases a position for an
account in which he or she has an interest while on the floor of the
Exchange would not retain priority over an off-floor customer order.
Rule 112-AEMI. Suspension of Registration of Registered Trader
    Proposed Rule 112-AEMI replicates the language of current Amex Rule
112 but with cross-references to other AEMI rules which would contain
the appropriate provisions being referenced.
Rule 115-AEMI. Exchange Procedures for Use of Unusual Market Exception
    The Exchange is proposing Rule 115-AEMI which would extend to
Registered Traders the provisions of current Amex Rule 115 that are
applicable to Specialists with respect to procedures in the event of an
inability to update quotes on a timely basis due to a high level of
trading activity or the existence of an unusual market condition. Under
the proposed new rule, in the event that the Exchange were unable to
accurately collect, process, and/or disseminate quotation data in one
or more securities owing to the high level of trading activity or the
existence of unusual market conditions, AEMI would be required to
immediately disable auto-ex and disseminate the indicator ``N'' to
indicate that Amex's quotation, if a trading halt has not been declared
and quotations are being published for such security or securities, was
not firm.
    A Specialist or Registered Trader unable to update his quotation on
a timely basis due to the high level of trading activity or the
existence of an unusual market condition would have to promptly notify
a Floor Official. The Floor Official, with the involvement of a member
of the Amex regulatory staff, would then consult with the Market
Operations Division of Amex to determine whether to declare a non-
regulatory halt in such security or securities if the ability of the
Specialist to promptly communicate quotation data were adversely
affected. In the absence of such a non-regulatory halt, incoming orders
would continue to execute against orders for the security or securities
in the AEMI Book.
    A Registered Trader unable to publish a quotation in a security
could withdraw or cancel his quotation and inform the Market Operations
Division afterward, since he would not have the same quoting
obligations of a Specialist as specified in proposed Rule 170-AEMI(d).
In addition, the absence of a quotation from a Registered Trader would
not be a basis for a non-regulatory halt in the related security.
Rule 118-AEMI. Trading in Nasdaq Securities
    Proposed Rule 118-AEMI does not contain the provision in current
Amex Rule 118 that allows telephone access to the Exchange Specialists
by Nasdaq System market makers and other exchanges trading Nasdaq
securities pursuant to Unlisted Trading Privileges (``UTP'') because
this is incompatible with the way orders would be processed by AEMI.
Certain outdated requirements in current Amex Rule 118 with respect to
Specialist registration for trading Nasdaq securities are also not in
the language of proposed Rule 118-AEMI. In addition, the proposed rule
has been modified to reflect recent changes to current Amex Rule 118
which provide that all Nasdaq listed securities are eligible
securities, instead of just the ``National Market'' securities.
    Under the proposed rule, odd-lot orders in Nasdaq securities would
be executed pursuant to the procedures in proposed Rule 205-AEMI, which
is based on the text of NYSE's odd-lot rule, with some modifications.
The language of current Amex Rule 118 regarding odd-lot orders would
not be a part of the proposed rule. Some change from the NYSE rule text
is necessary with respect to Nasdaq securities in connection with
provisions that utilize an adjusted ITS bid or offer as an execution
price. In those instances, due to its expected use of private linkages
instead of ITS at the time that Regulation NMS takes full effect, Amex
would instead use the ``qualified national best bid'' or the
``qualified national best offer'', defined as the highest bid and
lowest offer, respectively, disseminated by the Exchange or another
market center; provided, however, that (i) the bid and offer in another
such market center must conform to Exchange requirements for minimum
price variations, (ii) the quotation does not result in a locked or
crossed market, (iii) the other market center is not having quotation
dissemination problems, (iv) the bid or offer is firm, and (v) the
quotation disseminated by the other market center is automated.
    The Exchange proposes to standardize its closing procedures under
AEMI so that the procedures for Nasdaq UTP securities would be
substantially the same as for listed stocks. All market-on-close
(``MOC'') and limit-on-close

(``LOC'') orders would have to be entered into AEMI by the applicable
deadlines in the proposed rule to participate in the closing. Orders
not represented electronically would not participate. The Exchange
proposes to accept tick-sensitive MOC and LOC orders for Nasdaq UTP
securities to offset imbalances, although tick-sensitive MOC and LOC
orders whose execution would violate customer restrictions or the
Commission's short sale rules at the time of publication would not be
reflected in the closing imbalances.\41\ The AEMI platform would
automatically publish all imbalances to the tape; however, the Exchange
proposes in this rule to make publication of imbalances optional for
all Nasdaq UTP securities since the Exchange is not the primary market.
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    \41\ Commentary .02 to current Amex Rule 7, the Exchange's rule
on short sales, provides that Rule 7 does not apply to transactions
on the Exchange in Nasdaq securities pursuant to unlisted trading
privileges under Amex Rule 118.
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    The closing procedures for Nasdaq UTP securities would change, as
follows. Currently, the imbalance of MOC and marketable LOC orders is
printed against the bid or offer, as the case may be. Under AEMI, if
there were an imbalance at the close between the buy and sell MOC and
marketable LOC orders, the Specialist would, at the close or as soon
after the close of trading in the security as practicable, execute the
imbalance at an auction price under prevailing market conditions that
is consistent with auction market procedures. The Specialist would
conduct the post-trade allocation with respect to the shares necessary
to offset the imbalance of buy/sell interest at the closing price, and
AEMI would then send notification of individual trades to active crowd
participants (consisting of Registered Traders in the crowd with a bid
or offer on the AEMI Book on the contra-side of the imbalance and Floor
Brokers with a crowd order on the contra-side of the imbalance, in each
case at the time of the trade), as with a regular auction and the
associated priority and parity rules.
    Following the printing of the closing imbalance, AEMI would print
at the same price any paired quantity of MOC and LOC orders. The pair-
off transaction would be reported to the tape with an appropriate
indicator.\42\ Subsequently, AEMI would execute at that same price stop
orders and percentage orders on the AEMI Book elected by the execution
of the MOC and marketable LOC imbalance at the price of the imbalance
trade, if those orders were executable based on the order of execution
of orders, bids, and offers on the close, as provided in proposed Rule
118-AEMI.
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    \42\ The indicator is intended to alert other market
participants that (i) there is trading ahead of limit orders, bids,
or offers in AEMI; and (ii) such market participants with orders,
bids, or offers limited to the price of the transaction being
reported are not eligible to participate in the print.
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    The proposed rule provides 11 categories that determine the order
of execution by AEMI at the close, ranging from market orders
(including MOC orders), which have the highest priority, to buy
percentage orders and sell percentage orders with a limit price equal
to the closing price, which have the lowest priority. Certain lower
priority stop and percentage orders that are elected would be executed
by AEMI only if there were sufficient interest in AEMI to execute them,
and AEMI would execute all customer orders in ETFs in these lower
priority categories before it executed any broker-dealer orders in
these categories.
    References to ``G'' orders and certain other order types that are
currently acceptable are not included in proposed Rule 118-AEMI and
several other proposed rules because these order types would not be
available under AEMI. In addition, certain current notification
requirements involving paper forms are not being included in proposed
Rule 118-AEMI and other proposed rules because the information would be
available electronically in AEMI.
Rule 119-AEMI. Indications, Openings and Reopenings
    Proposed Rule 119--AEMI tracks the provisions of current Amex Rule
119 with several additional provisions, including the requirement of
mandatory dissemination of an indication to the tape prior to an
opening, if such opening would result in a price change of 10% or more
from (1) the last sale reported on the Amex, (2) the offering price of
the security in the case of an initial public offering, or (3) the last
reported sale on a securities market from which the security is being
transferred.
Rule 123--AEMI. Manner of Bidding and Offering
    Proposed Rule 123-AEMI describes in detail how the AEMI platform
would process bids, offers, and orders. The AEMI platform would accept
electronic bids and offers from both the Specialist and Registered
Traders and include them in the AEMI Book. The AEMI platform would also
accept orders from Floor Brokers standing in the crowd (``Crowd
Orders'') and other off-floor orders transmitted to AEMI
electronically, and would file all such orders in the AEMI Book. On the
basis of this input of bids, offers, and orders, AEMI would disseminate
the Amex best quote, together with the associated visible size, to the
tape. AEMI would also disseminate an indicator to the tape whenever the
Amex quote is not firm.
    A Registered Trader who is not in the crowd for a security would
not be allowed to submit a bid or offer to AEMI for that security but
could give an order to a Floor Broker as a Crowd Order or place an
order on the Specialist Order Book for the Registered Trader's account.
A Floor Broker who is not in the crowd for a security would not be
allowed to submit a Crowd Order to AEMI for that security.
    Members could make verbal bids and offers in the trading crowd,
provided that these bids/offers are deemed withdrawn if not immediately
executed. Accordingly, verbal bids and offers would not be reflected in
the published quotation. Because AEMI would not recognize a verbal bid
or offer in the crowd, trades executed in AEMI could trade through a
verbal bid/offer without satisfying it.
    The Exchange is also proposing in Rule 123-AEMI that Specialists
and Registered Traders be allowed to stream bids and offers into AEMI
at up to five price points, as well as manually updating their bids and
offers in AEMI. In addition, both Specialists and Registered Traders
would be allowed to automatically generate proprietary bids and offers
in AEMI (``Auto-Quote''), and the proposed rule specifies the
acceptable bases for those Auto-Quotes (for example, the automated away
market best bid or offer, with or without a price adjustment).
Registered Traders could also Auto-Quote based on the best bid or offer
published by the Amex.\43\
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    \43\ Auto-quoting is a separate function from streaming in
quotes and also from the generation of an emergency quote. See
supra, the discussion of these functions and their relationship
under ``Quoting.'' See also infra, a similar discussion under ``Rule
170-AEMI.''
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    Except when auto-ex is disabled, the AEMI platform would
immediately display any regular-way limit order, bid, or offer that
would improve or add to the size of the APQ that is not executed upon
receipt in the AEMI Book except for immediate-or-cancel, fill-or-kill,
on-close, 4 p.m. cash close, or odd-lot orders. AEMI would not display
the reserve size of a Crowd Order until it is eligible for display.\44\
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    \44\ In Amendment No. 5, the Exchange eliminated an extraneous
reference to passive price improvement orders because that order
type has been eliminated from the proposed rule change.
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    If AEMI ships an order, bid, or offer to an away market to comply
with Rule 611 or Rule 610 of Regulation NMS,

AEMI would: (1) Suspend the shipped order, bid, or offer; and (2)
remove (or not incorporate) the suspended order, bid, or offer from the
Amex quote to the extent that it has been shipped. An order that has
been shipped to another market is deemed to have been removed from the
AEMI Book and, consequently, could not be traded against and could be
traded through. If a shipped order were returned unexecuted, in whole
or part, by the away market, the unexecuted portion of the suspended
order, bid, or offer shall be incorporated or reinserted into AEMI and
quoted or requoted with the same time stamp priority as it would have
had if it had not been shipped; provided, however, that additional
intermarket sweep orders shall be generated as required under Rule 611
of Regulation NMS in connection with the reaggressing of the AEMI Book
by the unexecuted portion of the suspended order.
    A floor member whose order, bid, or offer is incorporated into the
APQ would be deemed by the Exchange to be the responsible broker or
dealer for such quote under the Commission's Firm Quote Rule. A Floor
Broker would be responsible for any Crowd Order that he entered into
AEMI, even if he leaves the crowd without withdrawing the Crowd Order.
    Automated bids and offers disseminated through the AEMI platform
would be firm until revised or withdrawn. Other bids and offers
disseminated through AEMI, such as when the Exchange is conducting an
auction or is unable to accurately collect, process, and/or make
available quotations under certain circumstances, would be non-firm,
and AEMI would disseminate a specified indicator whenever the APQ is
not firm. The circumstances under which such a non-firm indicator would
be disseminated are: (1) The Exchange is incapable of collecting,
processing, and/or making available quotations in one or more
securities due to the high level of trading activity or the existence
of unusual market conditions; (2) auto-ex has been disabled due to the
breach of a tolerance (as defined in proposed Rule 128A-AEMI(g)), and
auto-ex and the dissemination of an automated quotation have not yet
resumed (see conditions for auto-ex resumption described in proposed
Rule 128A-AEMI(g)); or (3) a gap quote situation exists due to an order
imbalance (as described in proposed Rule 170-AEMI(f)).\45\ In
conjunction with publishing a non-firm quote, AEMI would disable auto-
ex.
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    \45\ The indicator ``N'' would be used in connection with the
first of these three circumstances, and the indicator ``U'' would be
used in connection with the latter two circumstances (breach of a
tolerance of a gapped quote). These quote indicators should not be
confused with the indicators A, B, and H, which are for firm quotes
and denote that a market center is not meeting the Regulation NMS
definition of an automated market even though auto-ex is on.
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Rule 124-AEMI. Types of Bids and Offers
    Proposed Rule 124-AEMI contains provisions that differ from some of
the provisions of current Amex Rule 124 regarding acceptable types of
bids and offers under AEMI. The term ``regular way'' has been redefined
in the proposed new rule to recognize that the normal settlement cycle
for a security in AEMI can be either cash, next-day, or the third
business day after the day of the contract.
Rule 126-AEMI. Precedence of Bids and Offers
    Proposed Rule 126-AEMI sets out the rules of precedence of bids and
offers in AEMI for equities and ETFs and other equity-traded
securities. The priority and precedence rules are different between
ETFs and other equity-traded securities (listed equities, Nasdaq
stocks, closed-end funds, etc.) because ETFs are traded more like
derivative products with market makers in the crowd.
    Proposed Rule 126-AEMI would provide that bids (offers)
communicated to AEMI within two seconds (the ``parity joining time'')
of (i) the establishment of a new highest bid (lowest offer) in AEMI,
(ii) a trade in AEMI, or (iii) cancellation of all bids (offers) that
are at the APQ, would be considered in parity, for purposes of the next
trade, with bids or offers at the same price point remaining in the
AEMI Book following any of these three events. In the case of the
cancellation of all bids (offers), the participant joining time would
apply only to the side of the quote on which the cancellation took
place. A related provision in proposed Rule 128A-AEMI specifies that
bids (offers) in the AEMI Book would remain firm following any of the
three events described above. Bids (offers) at the same price point
remaining in the AEMI Book following such event would be considered on
parity at that price point unless such bids (offers) were revised or
withdrawn. A bid (offer) that is revised would lose its priority and
parity status and would be treated as a newly submitted bid (offer). A
reduction in order/quote size would not result in a loss of parity
status.
    The proposed new rule also specifies a number of exceptions to
parity for certain types of orders. For a listed stock, UTP stock, or
closed-end fund:
     An in-parity specialist bid (offer) would yield to a
public bid (offer).
     A specialist bid (offer) would not participate in parity
with a crowd bid (offer) if AEMI received a public bid (offer) outside
the parity joining time.
     If a specialist bid (offer) was or would have participated
in parity but for the submission of one or more public bids (offers)
pursuant to the two prior bullet points, and all such public bids
(offers) are subsequently canceled before the next trade in that
security, the specialist bid (offer) would, for the next trade, regain
the priority and parity status it held or would have held.
    Similarly, for an ETF or other equity-traded product that is not a
listed stock, UTP stock, or closed-end fund:
     An in-parity broker-dealer bid (offer) (including that of
a specialist) would yield to a public customer bid (offer) or a crowd
customer bid (offer).
     If a specialist bid (offer) was or would have participated
in parity but for the submission of one or more public customer bids
(offers) or crowd customer bids (offers) pursuant to the prior bullet
point, and all such public customer bids (offers) and crowd customer
bids (offers) are subsequently canceled before the next trade in that
security, the specialist bid (offer) would, for the next trade, regain
the priority and parity status it held or would have held.
    A new provision on parity of refreshed size of reserve orders would
provide that, if an aggressing order exhausts all visible size at a
price and there are two or more reserve orders at that price at a
priority level, the reserve orders would refresh and the refreshed
sizes of those reserve orders would be in parity with each other. In
this situation, AEMI would continue to execute the aggressing order
until all size resulting from the first refreshment were exhausted. If
the aggressing order had not yet been completely filled, the reserve
orders would refresh again and the refreshed sizes would again be in
parity with each other. (Orders having ``reserve size'' are more fully
discussed in subparagraph(s) of proposed Rule 131-AEMI.) Once visible
size and reserve size at a price were executed by an aggressing contra-
order, AEMI would execute, to the extent possible, portions of
percentage orders elected by the foregoing trade events. Finally,
marketable stop and stop limit orders would not receive a parity
allocation but would be deemed elected by the foregoing trade events
only after the aggressing order had completed the final

round of the parity allocation process with respect to the foregoing
categories.
    Proposed Rule 126-AEMI lists the order of priority for various
combinations of public and crowd orders. For example, in the case of a
listed stock where there were public orders that are in parity (and no
public orders outside the in-parity time window), the highest execution
priority would belong to visible size of public orders (including
passive manual conversion percentage orders), visible size of crowd
orders, and the Specialist quote, in parity. The proposed rule
describes the parity allocation process under a number of scenarios. In
the foregoing example, any securities sold in execution of an
aggressing order would be divided equally (with rounding as specified
in the rule) among the Specialist Order Book (which includes all public
orders and the Specialist quote) and each of the individual Floor
Brokers representing the crowd orders. From the quantity allocated to
the Specialist Order Book, the individual public orders in parity would
be allocated shares in order time priority, and the Specialist quote
would not receive an allocation until all of the in-parity public
orders had been filled. The allocation of the individual crowd orders
among the Floor Brokers in parity would be accomplished pursuant to an
``allocation wheel'' based on order time priority, until the allocation
is exhausted.\46\ The existing enhanced split for orders on the
Specialist's book with respect to securities sold in the execution of
simultaneous bids (offers) would be eliminated under the proposed rule.
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    \46\ An allocation wheel based on time priority operates in the
following manner. For the first aggressing order on a given day for
which none of the orders at the price point have participated in
such an allocation wheel, the first order to be allocated the lost
size would be the visible in-parity Crowd Order with the highest
order time priority in the AEMI Book. AEMI would then work its way
through the individual Crowd Orders in order time priority,
allocating the lot size to each until the total in-parity crowd
allocation were exhausted. If this allocation had not been exhausted
after all of the Crowd Orders had been allocated one lot, the system
would move back to the partially unfilled visible inparity Crowd
Order with the highest order time priority at the price point and
repeat the process.
    If, during the same day, another allocation wheel were required
and there were two or more orders in parity at the price point that
had participated in a prior allocation wheel on that day, the first
order that would be allocated the lot size would be the in-parity
Crowd Order have the highest order time priority in the prior
allocation wheel not to receive an allocation in the final round of
that allocation wheel. See Commentary .04 to this rule for an
example of the operation of an allocation wheel.
---------------------------------------------------------------------------

    With respect to ETFs and other equity-traded securities which are
not stocks or closed-end funds, proposed Rule 126-AEMI would list the
order of priority for various combinations of public and crowd customer
orders and public and crowd non-customer (i.e., broker-dealer) orders.
Once visible customer size at a price is exhausted, AEMI would then
allocate any remaining shares to in-parity bids (offers) for the
account of non-customers. If the Specialist's quote is in parity with
other non-customer bids (offers), AEMI would calculate the allocation
to the Specialist using the appropriate percentage from the Specialist
allocation table below, based on the number of crowd participants (and
counting all of the public non-customer orders on the AEMI Book as a