[Federal Register Volume 59, Number 50 (Tuesday, March 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5921]


[[Page Unknown]]

[Federal Register: March 15, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33735; File No. SR-Amex-87-33]

 

Self-Regulatory Organizations; American Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to Telephone 
Access to the Floor

March 8, 1994.

I. Introduction

    On December 30, 1987, the American Stock Exchange, Inc. (``Amex'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and rule 19b-4 
thereunder,\2\ a proposed rule change to allow members to establish 
direct telephone communications between the floor of the Exchange and 
non-members located off of floor. The proposal will formalize the 
Amex's existing telephone policy. The proposed rule change also 
prohibits Amex members from using a portable telephone on the Exchange 
floor.\3\
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
    \3\This prohibition is the substance of Amendment No. 1, 
submitted on November 16, 1988.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 25287 (January 22, 1988), 53 FR 2555 (January 
28, 1988). No comments were received on the proposal. Notice of 
Amendment No. 1 was published in Securities Exchange Act Release No. 
26604 (March 7, 1989) 54 FR 10599 (March 14, 1989). The Commission did 
not receive any comments to the amendment.

II. Description

    The proposed rule change amends Amex rules 220, 221, and 222 
concerning communication to the Floor and Floor wire privileges. Amex 
rule 220 will be amended to provide that no member may establish or 
maintain any telephonic or electronic communication between the Floor 
and any other location without the prior written approval of the 
Exchange. In addition, the proposed rule change adds three commentaries 
to rule 220 (.01, .02, and .03).
    Commentary .01 permits, with the approval of the Exchange, a 
telephone line to be established by a member or member organization on 
the Floor to communicate with a non-member located off the Floor. 
Commentary .01 also prohibits the use of portable telephones or other 
portable communication devices on the Floor which would facilitate 
direct voice communication between members and non-members.
    Commentary .02 permits a specialist unit, with the approval of the 
Exchange, to maintain a telephone line at its trading post location to 
the off-floor offices of the specialist unit; the unit's clearing firm; 
the floor of another securities, commodities, or options exchange; or 
the upstairs offices of a member organization. With respect to entering 
orders, the commentary prohibits the use of such telephones for 
transmitting to the Floor orders for the purchase or sale of 
securities, but permits the specialist to enter orders in options, 
futures, or underlying securities for execution in such other markets, 
or with a member firm's off-floor offices.\4\ Finally, the commentary 
also permits the specialist to obtain market information through use of 
the post phone.
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    \4\Amex rule 175(b) permits a specialist to purchase or sell 
options on its specialty stock only when such transaction is 
appropriate to permit the specialist to offset the risk of making a 
market in the underlying stock. Any such options transaction must be 
made in accordance with Amex's ``Guidelines for Specialists' Stock 
Options Transactions''.
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    Commentary .03 places responsibility upon any member or member 
organization, which has been granted approval of any means of 
communication under rule 220, for assuring compliance with all Exchange 
rules and requirements in connection with any business conducted by 
means of such electronic or telephonic communication.
    The proposed amendments to rule 221 will delete paragraphs (a)(1) 
and (a)(2) concerning wire connections between a regular members's 
floor booth and a member not represented on the floor of the Exchange.
    The proposed amendment to rule 222 concerning revocation of floor 
wire privileges deletes the current text of the rule and substitutes 
language which provides that the Exchange, to the extent not 
inconsistent with the Act, may deny, limit or revoke approval of any 
electronic or telephonic communication between the Floor and any other 
location when it determines\5\ that such Communication is inconsistent 
with the public interest, the protection of investors, or just and 
equitable principles of trade, or such communication has been or is 
being used to facilitate any violations of the Act, the rules 
thereunder, or the Exchange Constitution or rules.
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    \5\Such action by the Exchange must be in accordance with the 
procedures set forth in Amex rule 40 (``Denial of Membership'') 
which provides due process procedures on actions by the Exchange 
which may prohibit or limit a person with respect to access to 
services offered by the Exchange.
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III. Discussion

    In its filing with the Commission, the Amex stated that the 
proposed rule change will codify current Exchange policies relating to 
communications to and from the Floor. These policies, states the Amex, 
have developed in keeping with the general premise that since 
transacting business on the floor of an exchange is an essential 
privilege of exchange membership, communications to and from the Floor 
should be restricted.
    The Commission has reviewed closely the provisions of the proposed 
Amex rule change. The Commission notes that the substantive provisions 
of the proposed Amex rule change are very similar to the New York Stock 
Exchange (``NYSE'') telephone access rules previously approved by the 
Commission.\6\ In its June 23 order approving the proposed NYSE rule, 
the Commission carefully considered the provisions of the proposed rule 
and the comments and arguments raised in favor of and in opposition to 
the NYSE rule change. In particular, the Commission carefully 
considered the issues and arguments concerning the proposal to limit 
the installation of such telephone links to a member's booth on the 
floor and the proposed prohibition on the use by members of portable 
telephones. In the more recent NYSE order, the Commission carefully 
reviewed the possible effects from permitting specialists to 
communicate with, and enter orders directly to, a member on the floor 
of an option or futures exchange. For the same reasons as set forth in 
the NYSE orders with respect to the aforementioned issues, we now 
believe the Amex's proposal should be approved.
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    \6\See Securities Exchange Act Release Nos. 25842 (June 23, 
1988), 53 FR 24539 (June 29, 1988); and 33686 (February 25, 1994).
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    First, the Commission believes that permitting members to 
communicate from their floor booths to non-members located off-floor is 
reasonable and consistent with the Act, and, in particular, with 
sections 6(b)(5), 6(b)(8), and 11A(a)(1)(C)(ii) of the Act.\7\ The 
Commission believes that this may permit smaller floor broker firms to 
compete more effectively for order flow and can result in benefits to 
investors by improving execution of orders.
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    \7\15 U.S.C. 78f(b)(5), 78f(b)(8), and 78k-1(a)(1)(C)(ii) 
(1988). Section 6(b)(5) of the Act requires that the rules of an 
exchange be designed to ``prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, * 
* * to remove impediments to and perfect the mechanism of a free and 
open market * * * and, in general to protect investors and the 
public interest * * *.'' Section 6(b)(8) requires that the rules of 
an exchange ``not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of [the Act].'' Section 
11A(a)(1)(C)(ii) states the Congressional finding that ``it is in 
the public interest and appropriate for the protection of investors 
and the maintenance of fair and orderly markets to assure * * * fair 
competition among brokers and dealers * * *.''
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    Second, the Commission continues to believe that prohibiting 
members' use of portable telephones is reasonable and consistent with 
the Act. In its proposal the Amex states that portable telephones will 
enable a non-member to communicate directly with a member in the 
trading crowd. The Amex is concerned that this could lead to loss of 
investor confidence because generally larger, more active customers 
would be granted the privilege of communicating with the crowd. The 
Commission believes these concerns are valid because the ability of a 
customer to communicate directly with a broker in a trading crowd could 
provide time and place advantages to the customer which are unavailable 
to others. Moreover, the Commission does not believe that a prohibition 
against the use of portable telephones violates section 6(b)(8) of the 
Act by imposing a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. In summary, although it is a 
close question, the Commission believes there are valid regulatory 
reasons for prohibiting the use of portable telephones. Thus, in the 
Commission's view, the proposed Amex prohibition on the use of portable 
telephones on the Exchange floor constitutes a reasonable response by 
the Amex to its regulatory concerns, and therefore is consistent with 
sections 6(b)(5) and 6(b)(8) of the Act.
    Third, the Commission continues to believe it is reasonable to 
permit specialist units to communicate from the Amex floor with their 
off-floor office or clearing firm. By allowing such necessary 
communication links, the Exchange is enabling the specialist units to 
function more effectively on the Amex floor. This is consistent with 
section 6(b)(5), in that it will facilitate transactions in securities. 
Similarly, the Commission believes that the Amex's proposed prohibition 
against the use of such communication links to transmit to the Amex 
floor orders for the purchase or sale of securities is reasonable and 
consistent with the requirements of the Act in view of the specialist 
unit's integral role in maintaining stability in the market. In 
particular, the Commission would be concerned that, without this 
restriction, large customers could be provided with time and place 
informational advantages that are not available to other public 
customers. The Commission also notes that such a restriction does not 
impose an unnecessary or inappropriate competitive burden on specialist 
units in conflict with the requirements of section 6(b)(8) of the Act.
    Finally, the Commission believes that the portion of the proposal 
allowing a specialist unit to use a telephone linkage at the specialist 
post to enter orders in operations, futures, or underlying securities 
through a member on the floor of an options, futures, or other 
securities exchange is consistent with section 6(b)(5) of the Act. In 
this regard, the Commission believes that this will facilitate 
transactions in securities by providing specialists with the ability to 
hedge their positions more rapidly by enabling them to communicate 
directly with a member on the floor of the exchange where the order is 
being placed. Further, it is the Commission's belief that the execution 
of the hedging order will be more cumbersome and less timely if the 
specialist is limited to routing such an order through an off-floor 
office or clearing firm. Moreover, by expanding the available processes 
by which specialists can transfer the risk of their market making 
responsibilities, specialists will be better able to fulfill their 
responsibilities.
    Nevertheless, the Commission has always been concerned that 
transactions from a specialist post ensure a course of fair dealing and 
not allow abuses such as frontrunning and tape racing due to the 
specialist's position. In this context, the Commission, in originally 
approving the use of options by specialists for hedging their 
speciality stocks, was sensitive to concerns over the potential for 
specialist frontrunning, tape racing, or other abuses arising from the 
specialist's informational advantage.\8\ The Commission notes that the 
Amex rule permitting a specialist to enter into options transactions is 
limited to hedging (i.e., offsetting the risk of making a market in the 
underlying specialty stock) purposes in that it places restrictions on 
the size, timing, and purpose of such transactions.\9\ In addition, the 
Commission emphasizes that the proposal being approved does not affect 
the restrictions currently in place for placing options orders. The 
proposal only provides a more efficient means for specialists to relay 
their hedging orders to options exchanges.\10\
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    \8\See Securities Exchange Act Release No. 21710 (February 4, 
1985), 50 FR 5708.
    \9\See Amex Rule 175 and note 4, supra.
    \10\We also note that the rules of the Chicago Board Options 
Exchange and those of the NYSE prohibit market makers and 
specialists, respectively, from accepting orders over the telephone 
at the trading post.
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    With respect to the entry of futures orders, the Amex is able to 
conduct surveillance of specialists' futures transactions through 
information sharing agreements with the futures exchanges.\11\ In 
addition, the Amex has agreed to establish procedures to surveil 
certain futures activity.\12\ The Commission also notes and the Amex 
has stated, as a practical matter, that the entry of futures orders by 
specialists, in addition to orders by options specialists in the 
underlying securities, is generally done for hedging purposes and the 
Commission believes that any such activity would have to be consistent 
with the specialist's obligation to maintain a fair and orderly market.
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    \11\We also that surveillance information is also shared through 
the Intermarket Surveillance Group (``ISG''). ISG was formed on July 
14, 1983 to, among other things, coordinate more effectively 
surveillance and investigative information sharing arrangements in 
the stock and options markets. See Intermarket Surveillance Group 
Agreement, July 14, 1983. Because of potential opportunities for 
trading abuses involving stock index futures, stock options and the 
underlying stock and the need for greater sharing of surveillance 
information for these potential intermarket trading abuses, the 
major stock index futures exchanges (e.g., CME & CBT) joined the ISG 
as affiliate members in 1990.
    \12\Conversation between Tom Brown, Managing Director, Trading 
Analysis & Inquiries/Derivatives, Amex, Julio Mojica, Assistant 
Director, Market Operations and Surveillance, Division of Market 
Regulation, Commission, and Joe McDonald, Branch Chief, Options 
Inspections, Division of Market Regulation, Commission on March 2, 
1994.
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    Based on the above, the Commission believes that any increased 
potential for frontrunning, tape racing, or other abuses by specialists 
that would be created by the proposed rule change is minimal, due to 
the restrictions placed on the specialists' options activity and the 
special surveillance procedures to monitor equity specialists' use of 
options, options specialists' activity in underlying securities, and 
the use of futures by both equity and options specialists.
    In view of the above, the Commission concludes that the proposed 
Amex rule change is reasonable and consistent with the Act, 
particularly sections 6(b)(5), 6(b)(8) and 11A(1)(C)(ii).
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-Amex-87-33) is approved.

    \13\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\17 CFR 200.30-3(a)(12) (1991).
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[FR Doc. 94-5921 Filed 3-14-94; 8:45 am]
BILLING CODE 8010-01-M