[Federal Register Volume 67, Number 154 (Friday, August 9, 2002)]
[Notices]
[Pages 51903-51905]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20184]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46304; File No. SR-Amex-2002-56]
Self-Regulatory Organizations; Order Granting Accelerated
Approval to Proposed Rule Change and Notice of Filing and Order
Granting Accelerated Approval to Amendment No. 1 to the Proposed Rule
Change by American Stock Exchange LLC Relating to Odd-Lots in Nasdaq
Securities
August 2, 2002.
I. Introduction
On June 17, 2002, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to describe odd-lot execution procedures
applicable to trading Nasdaq National Market (``NNM'') securities. The
proposed rule change was published for comment in the Federal Register
on July 10, 2002.\3\ On July 26, 2002, the Exchange filed Amendment No.
1 to the proposed rule change.\4\ This order approves the proposed rule
change and Amendment No. 1 thereto on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 46148 (June 28,
2002), 67 FR 45773 (July 10, 2002).
\4\ See Letter from Claire P. McGrath, Senior Vice President and
Deputy General Counsel, Amex, to Nancy Sanow, Assistant Director,
Division of Market Regulation, Commission, dated July 25, 2002
(``Amendment No. 1''). In Amendment No. 1, the Exchange: (1) Amended
proposed Amex Rule 118(j)(i) to change the word ``adjusted'' to
``qualified'' in the first paragraph; (2) deleted paragraph
(j)(i)(A) for proposed Amex Rule 118, which stated that the bid or
offer in another market center will be considered in determining the
qualified national best bid or offer only if it is no more than 25
cents above the bid or below the offer disseminated by the Amex; (3)
re-numbered the provisions contained in the third paragraph of
proposed Amex Rule 118(j)(i); and (4) changed the date of approval
of the proposed rule change by the Exchange's Board of Governors to
September 19, 2001.
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II. Description
A. Background
The Exchange filed a proposed rule change to permit trading of NNM
securities pursuant to unlisted trading privileges.\5\ The Exchange
currently is modifying its existing system in order to provide
automatic execution of market and executable limit orders in NNM
securities of less than 100 shares in a
[[Page 51904]]
manner generally consistent with procedures set forth in Amex Rule 205.
Round lot orders (e.g., 100 shares) and Part of Round Lot (``PRL'')
orders (e.g., 175 shares) will not be subject to automatic execution.
In this filing, the Exchange proposes to add paragraph (j) to proposed
Rule 118 to describe procedures applicable to the execution of odd-lot
orders. The Exchange proposes to implement these procedures on a six-
month pilot basis.
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\5\ See Securities Exchange Act Release No. 45365 (January 30,
2001), 67 FR 5626 (February 6, 2002)(SR-Amex-2001-106).
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B. Execution of Odd-Lots
Market and executable odd-lot limit orders to buy (sell) will be
executed at the price of the qualified national best offer (bid) at the
time the order is received at the trading post or through the Amex
Order File (AOF). Market and executable limit orders entered before the
opening of trading in NNM securities on the Exchange will receive an
execution at the price of the first reported round-lot or PRL on the
Amex.
For purposes of this provision, the qualified national best bid or
offer is the highest bid and lowest offer disseminated by the Amex or
by another market center that is a participant in the Joint Self-
Regulatory Organization Plan Governing the Collection, Consolidation
and Dissemination of Quotation and Transaction Information for Nasdaq
Listed Securities Traded on Exchanges on an Unlisted Trading Privileges
Basis (``Plan''). The bid or offer of such other market center will be
considered in determining the qualified national best bid or offer only
if it meets the conditions specified in proposed Rule 118(j)(i). These
conditions are that: (1) The quotation conforms to Amex Rule 127
(``Minimum Price Variations''), that is, the bid or offer must be in a
one cent increment; (2) the quotation does not result in a locked or
crossed market; (3) the market center is not experiencing operational
or system problems affecting quotation dissemination; and (4) members
of the other market center disseminating the quotations are not
relieved of their obligations with respect to their quotations pursuant
to the ``unusual market'' exception of Rule 11Ac1-1 under the Act.
Procedures for the execution of non-executable limit orders, stop
orders, stop limit orders, other order types, orders filled after the
close and non-regular way trades will be similar to existing odd-lot
execution procedures under Amex Rule 205 A(2)-A(4), B and C. Such
orders will be processed manually.
C. Locked and Crossed Market Conditions
The Exchange also proposed procedures for automatically executing
market and executable limit odd-lot orders entered after the opening of
Amex trading in NNM securities when the national best bid and offer is
locked or crossed. Specifically, if a locked market exists, market
orders and executable buy and sell limit orders will be executed at the
same price as the locked price. If a crossed market exists, and the bid
is higher than the offer by $.05 or less, market and executable limit
orders will be executed at the mean of the crossed bid and offer. If
the mean does not fall on a one-cent increment, the execution will be
rounded up to the nearest $.01. If a crossed market exists and the bid
is higher than the offer by more than $.05, then an odd-lot order will
not be automatically executed, but will be executed manually in
accordance with proposed Rule 118(j)(i) (i.e., filled at the price of
the next unlocked and uncrossed qualified national bid or offer).
The Exchange also proposes to add new Commentary .05 to Rule 205 to
reference Rule 118(j) odd-lot procedures.
III. Discussion
After careful review, the Commission finds that the proposed rule
change is consistent with section 6(b) of the Act \6\ in general and
furthers the objectives of Section 6(b)(5).\7\ The Commission believes
that the proposal is designed to remove impediments to and to perfect
the mechanism of a free and open market, to facilitate transactions in
odd-lot orders, to help ensure the economically efficient execution of
these transactions, and in general to protect investors and the public
interest.\8\
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(6).
\8\ In approving this rule, the Commission notes that it has
considered the proposal's impact on efficiency, competition, and
capital formation, consistent with Section 3 of the Act. 15 U.S.C.
78c(f).
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The Commission believes that the Exchange's proposed pricing
procedure for odd-lot orders in NNM securities will facilitate the
execution of such orders. Because the orders will be priced off a
current market quote, investors should receive a timely execution of
their orders. Moreover, the Commission believes that pricing standard
odd-lot market orders at the qualified national best bid or offer will
result in orders receiving execution prices that accurately reflect
market conditions, and will ensure that customers receive the best
execution, both in terms of price and time.
The Commission also believes that it is reasonable for the Exchange
to establish certain requirements to trigger use of the qualified
national best bid or offer in the odd-lot pricing system. The limited
prerequisites for use of quotes disseminated by other participants in
the Plan are appropriate to protect the automatic execution feature of
the odd-lot pricing system against the inclusion of aberrant
quotations. The Commission believes that, in the instances enumerated
by the Exchange, it is appropriate to use the Amex best bid or offer in
lieu of quotes disseminated by other participants in the Plan that do
not satisfy the conditions of proposed Amex Rule 118(j)(1).
Moreover, the proposed rule will ensure that a differential is not
charged for standard odd-lot market orders in NNM securities. This
prohibition furthers the Commission's objective of ensuring that
customers receive the best execution of such orders, and that the price
charged for the execution of standard odd-lot market orders will
reflect the market price without additional transaction costs.
Finally, the Commission believes that the manner in which the
Exchange proposes to handle locked and crossed markets is consistent
with the Act because it is designed to reduce the frequency of locked
and crossed markets, which should help to provide reliable quotation
information, facilitate price discovery, and contribute to the
maintenance of a fair and orderly market. The proposal seeks to
eliminate locked markets by matching marketable orders against one
another, and to eliminate crossed markets by executing the orders at
the mean of the crossed bid and offer, if the bid is higher than the
offer by $.05 or less.\9\ The Commission believes this approach is
reasonable. As the Commission has concluded previously, continued
locking and crossing of the market can negatively affect market
quality.\10\ By helping to reduce the negative impact of locked and
crossed markets by dealing with them in a timely manner, the Commission
believes that the proposal should improve market quality and enhance
the production of fair and orderly quotations.
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\9\ If the bid is higher than the offer by more than $.05, an
odd-lot order will be executed manually.
\10\ See Securities Exchange Act Release No. 40455 (September
22, 1998), 63 FR 51978 (September 29, 1998) (order approving File
No. SR-NASD-98-01).
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The Commission finds good cause for approving the proposed rule
change
[[Page 51905]]
prior to the thirtieth day after the date of publication of notice in
the Federal Register. The Commission notes that granting accelerated
approval to the proposal will allow the Amex to commence trading of NNM
securities on a UTP basis in a timely fashion. Therefore, the
Commission finds that granting accelerated approval to the proposed
rule change is appropriate and consistent with section 19(b)(2) of the
Act.\11\
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\11\ 15 U.S.C. 78s(b)(2).
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IV. Amendment No. 1
The Commission finds good cause for approving Amendment No. 1 prior
to the thirtieth day after the date of publication of notice thereof in
the Federal Register. In Amendment No. 1, in addition to making
technical, non-substantive changes to the rule text to correct minor
errors contained therein, the Exchange deleted paragraph (j)(i)(A) for
proposed Amex Rule 118. This provision stated that the bid or offer in
another market center will be considered in determining the qualified
national best bid or offer only if it is no more than 25 cents above
the bid or below the offer disseminated by the Amex.
The Commission believes that this change to the proposal was
necessary so that bids and offers from other market centers in NNM
securities that better the quote disseminated by the Amex would be
considered in determining the qualified NBBO for odd-lots. The
Commission believes that it would be inconsistent with the Act to allow
broker-dealers to ignore quotes from other markets simply because they
are better than the Amex quote by a designated amount.
In sum, the Commission finds that this change is consistent with
section 6(b)(5) of the Act \12\ in that it will facilitate transactions
in odd-lot orders, help ensure the economically efficient execution of
these transactions, and in general protect investors and the public
interest. The Commission also finds that the Amex's proposed changes in
Amendment No. 1 further strengthen and clarify the proposed rule change
and eliminate a potential regulatory issue. Therefore, the Commission
finds that granting accelerated approval to Amendment No. 1 is
appropriate and consistent with section 19(b)(2) of the Act.\13\
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1, including whether the proposed
amendment is consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the Amex. All submissions should refer to File No.
SR-Amex-2002-56 and should be submitted by August 30, 2002.
VI. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of the Act
and the rules and regulations thereunder. Moreover, the Commission
finds that there is good cause to grant accelerated approval to the
proposed rule change and Amendment No. 1 on a pilot basis, to expire
six months from the date of this order.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\14\ that the proposed rule change and Amendment No. 1 thereto (SR-
Amex-2002-56) are approved on an accelerated basis.
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\14\ 15 U.S.C. 78s(b)(2).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-20184 Filed 8-8-02; 8:45 am]
BILLING CODE 8010-01-P