[Federal Register Volume 65, Number 249 (Wednesday, December 27, 2000)]
[Notices]
[Pages 81940-81942]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-32892]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-43736; File No. SR-Amex-99-16]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change by the American Stock Exchange LLC Relating to Amex Rule 108,
Priority and Parity at Openings
December 18, 2000.
On April 28, 1999, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') a proposed rule change pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule
19b-4 thereunder,\2\ relating to Amex Rule 108, Priority and Parity at
Openings. On July 13, 1999, the Amex filed an amendment to the
[[Page 81941]]
proposed rule change.\3\ Notice of the proposed rule change, as
amended, was published for comment in the Federal Register on February
28, 2000.\4\ The Commission received one comment letter regarding the
proposal.\5\ This order approves the proposed rule change, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from William Floyd-Jones, Assistant General
Counsel, Amex, to Michael Walinskas, Associate Director, Division of
Market Regulation (``Division''), Commission (July 8, 1999)
(``Amendment No. 1''). Amendment No 1 replaces and supercedes the
original filing.
\4\ Securities Exchange Act Release No. 42441 (February 18,
2000), 65 FR 10571 (February 28, 2000) (SR-Amex-99-16).
\5\ See Letter from Peter G. Armstrong, Vice President, San
Francisco Equity Operations, Pacific Exchange, Inc. (``PCX'') to
Jonathan G. Katz, Secretary, Commission, (April 7, 2000).
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I. Introduction and Background
The proposed rule change would amend Amex Rule 108, Priority and
Parity at Openings, by adding Commentary .02 to modify procedures
applicable to proprietary orders sent by market makers in other
Intermarket Trading System (``ITS'') participant markets to the Amex by
means of the Common Message Switch (``CMS'') and Amex Order File
(``AOF'') or through a floor broker before an ITS pre-opening
notification or indication of an anticipated opening price range is
issued by the Exchange specialist.
Presently, the Amex pre-opening procedures allow market makers on
other ITS participant markets to enter orders into CMS and AOF or
through a floor broker for their own account before an indication or
ITS pre-opening notification is issued, and then to receive an
execution in full at the opening price (or the re-opening price
following a halt or suspension in trading).
II. Description of the Proposal
Proposed Commentary .02 to Amex Rule 108, would set forth
procedures that apply to an order for the account of market makers on
another ITS participating market center entered on the Exchange before
the Amex specialist issues an ITS pre-opening notification or an
indication through the Consolidated Tape. Paragraph (a) would provide
that the Amex specialist would not be required to execute such orders
if they would add to the imbalance at the opening or re-opening, but
the specialist could execute all or part of such orders in his or her
discretion, and any portion not executed at the opening or re-opening
would be canceled. Paragraph (b) would provide that, if such orders
would offset the imbalance, the Amex specialist may take or supply as
principal 50 percent of the imbalance at the opening price, rounded up
or down to avoid allocation of odd-lots. Where orders have been
received from more than one market maker, the Amex specialist would
allocate the remaining imbalance among them in proportion to the amount
that each obligated itself to take or supply. For purposes of paragraph
(b), multiple market makers, in the same security in the same market
would be deemed to be a single market maker. Paragraph (c) would note
that Paragraphs (a) and (b) of Commentary .02 would only apply if the
Amex specialist issues an ITS pre-opening notification or indication
through the Consolidated Tape. Paragraph (d) would provide that
proprietary orders from market makers in other ITS participant markets
shall be marked and identified as such.
III. Summary of Comments
The Commission received one comment letter on the proposed rule
change.\6\ In general, the Commenter stated that the proposed rule
change would place an unnecessary burden on competition, hinder, rather
than facilitate, transactions in securities, create an obstacle to
price discovery at the opening, and serve to restrict rather than to
promote a free and open market.\7\
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\6\ See note 5, supra.
\7\ See note 5, supra, p. 1.
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Specifically, the Commenter stated that under the Amex's current
practice, the Amex specialist is able to allow the full supply and
demand for the security to determine the opening price because all
trading interests are aggregated at the opening, including proprietary
orders of other market makers. However, the Commenter opined that
allowing the Amex specialist to reject orders of regional specialists
is contrary to the concept of a national market system because it
singles out a particular form of trading interest for exclusion from
the opening.\8\
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\8\ See note 5, supra, p. 2.
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In addition, the Commenter stated that the proposal, if approved,
would allow Amex specialists, upon issuance of a pre-opening
indication, to exclude proprietary trading interest if it increases an
imbalance, even if such interest was entered before an indication was
published. As a result, the proposal would hinder price discovery, and
by discriminating against regional exchange specialists, might further
fragment the National Market System (``NMS'') \9\
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\9\ See note 5, supra, p. 2.
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The Commenter stated that the proposal would impose an unnecessary
burden on regional specialists, who, believing that they have taken
appropriate steps to minimize risk exposure in given issues prior to
the opening by entering orders on the Amex for execution at the
opening, would find it necessary to monitor the Amex market for the
possibility of a pre-opening indication. The specialist would then have
to cancel orders out of the Amex system and re-enter trading interest
through ITS to ensure participation in the opening. The Commenter
further opined creating additional differences between the pre-opening
procedures on the Amex and the NYSE would be overly burdensome.\10\
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\10\ See note 5, supra, p. 2.
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The Commenter recommended that the Commission not approve the
Amex's proposed rule change, in order to avoid unfair discrimination,
obstacles to price discovery and transactions of regional specialists,
and further fragmentation of the NMS.\11\
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\11\ See note 5, supra, p. 3.
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The Amex responded by stating that (1) the proposal would benefit
investors; and (2) the proposed procedures have already been reviewed
and approved by the Commission in the context of interest of market
makers on other ITS participant markets that is sent to the Amex after
an indication or pre-opening notification.\12\
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\11\ See Letter from Bill Floyd-Jones, Assistant General
Counsel, Amex, to Katherine England, Assistant Director, Division,
Commission (July 28, 2000).
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In response to the Commenter's issues regarding price discovery,
discrimination, and unnecessary burden on competition, the Amex stated
that the proposed procedures are comparable to those already in effect
at the Amex and other markets for pre-opening interest sent by ITS
Participants after a pre-opening notification or indication has been
sent by the Exchange.\13\ The Amex stated that applying the proposed
procedures to the orders of the market makers before, rather than
after, an indication or pre-opening notification does not place any
burden on transactions in securities that the Commission has not
already reviewed and approved.\14\ The Amex believes it is therefore
reasonable and consistent with the Act to conform the procedures for
handling orders that are received before a notification or indication
to the procedures that would apply to interest
[[Page 81942]]
received after a pre-opening notification or indication.\15\
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\13\ Id. at p.1.
\14\ See ITS Plan, Exhibit A, Paragraph (b)(i)(B).
\15\ See note 12, supra, p. 1.
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In response to the issue of further fragmentation of the NMS, the
Amex provided an illustration in which a riskless principal transaction
by a market maker on other ITS participant markets may result in a
double printing of trades and a misleading appearance of activity in a
stock.\16\ The Amex states that the practice, along with the generation
of tape revenue for the regional exchange, which is used to subsidize
cash payments for order flow arrangements, may lead to further
fragmentation in the market. However, the Amex opined the proposal
would reduce fragmentation and enhance price discovery at openings and
re-openings because the proposal is designed to help provide moire
accurate pricing at the opening.\17\
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\16\ See note 12, supra, pp. 2-3.
\17\ See note 12, supra, p. 2.
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Finally, the Amex noted that the proposal made no changes in the
procedures for handling specific customer orders or net imbalances or
agency interest.\18\ If a specialist on a regional market is unable to
execute the agency orders, he or she may send the orders via an ITS
commitment to the Amex at no charge to the regional specialist and
those orders will be treated as any other customer orders at the Amex.
The Amex believes that the proposal will neither impede price discovery
nor increase market fragmentation so long as the regional specialist
continues to send orders that the regional specialist is either unable
or unwilling to execute, to the Exchange via ITS.\19\ The Amex also
noted that the proposal would only affect the occasional regional
specialist proprietary order.\20\
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\18\ See note 12, supra, p. 2. These are two of the three types
of orders that PCX sends to the Amex.
\19\ See note 12, supra, p. 2.
\20\ See note 12, supra, p. 2.
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IV. Discussion
After careful review, the Commission finds that the proposal is
consistent with the requirements of Section 6(b) of the Act in
general,\21\ and furthers the objectives of Section 6(b)(5) of the
Act,\22\ in particular, in that it is designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
respect to facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and in general, to protect investors and the
public interest.\23\
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\21\ 15 U.S.C. 78f(b).
\22\ 15 U.S.C. 78f(b)(5).
\23\ In approving the proposal, the Commission has considered
the rule's impact on efficiency, competition, and capital formation.
15 U.S.C. 78c(f).
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The Commission also finds that the changes are consistent with
Section 11A(a)(1)(D) of the Act,\24\ in that the linking of markets for
qualified securities though communication and data processing
facilities should help to foster efficiency, enhance competition,
increase the information available to brokers, dealers, and investors,
facilitate the offsetting of investors' orders, and contribute to the
best execution of such orders.
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\24\ 15 U.S.C. 78k-1(a)(1)(D).
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In determining that the proposed procedures that apply to orders
entered on the Exchange before the Amex specialist issues an ITS pre-
opening notification or indication through the Consolidated Tape are
reasonable and consistent with Section 6(b)(5) \25\ and 11A(a)(1)(D)
\26\ of the Act, the Commission has considered carefully the
Commenter's concerns that the proposed procedure place an unnecessary
burden on competition, hinder transactions in securities, create
obstacles to price discovery and restrict rather than promote a free
and open market. The Commission is not persuaded by these arguments.
The proposed procedures should reduce the imbalances of buy or sell
orders at openings or re-openings, and decrease the market risk on the
Amex specialist, thus helping to facilitate orderly openings and re-
openings. In addition, the orders of market makers in other ITS
participant markets entered before an indication or pre-opening
notification has been sent will be treated in a manner comparable to
the manner such orders would be handled pursuant to the ITS Plan if
they were entered after an indication or pre-opening notification.
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\25\ 15 U.S.C. 78f(b)(5).
\26\ 15 U.S.C. 78k-1(a)(1)(D).
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The Commission also has considered carefully the Commenter's
concern of further market fragmentation because of discrimination
against regional exchange specialists. The Commission believes that the
proposed procedures will help to contribute to enhance execution of
orders and foster cooperation and coordination with other ITS
participant markets because the proposal is designed to promote
accurate pricing at the opening; orders of market makers in other ITS
participant markets would be executed in accordance with the current
procedures if the Amex specialist does not issue a notice or indication
before the opening or re-opening. The proposal does not make any
changes to the Amex's current procedures of handling specific customer
orders or net imbalances of agency interest.
V. Conclusion
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\27\ that the proposal, as amended (SR-Amex-99-16), be and hereby
is approved.
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\27\ 15 U.S.C. 78s(b)(2).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-32892 Filed 12-26-00; 8:45 am]
BILLING CODE 8010-01-M