[Federal Register Volume 59, Number 59 (Monday, March 28, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7214]


[Federal Register: March 28, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33791; File No. SR-Amex-93-47]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Partial Temporary Accelerated Approval to Proposed Rule Change 
by American Stock Exchange, Inc. Relating to an Extension of Its Pilot 
Program Which Permits Specialists To Grant Stops in a Minimum 
Fractional Change Market

March 21, 1994.
    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 December 29, 1993, the American Stock Exchange, Inc. (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the self-
regulatory organization.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange requests permanent approval of the pilot program which 
amended Amex Rule 109 to permit a specialist, upon request, to grant 
stops in a minimum fractional change market.\3\ In the alternative, the 
Exchange proposes a one-year extension of the pilot program. The 
complete text of the proposed rule change is available at the Office of 
the Secretary, Amex, and at the Commission.
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    \3\The Amex received approval to amend Rule 109, on a pilot 
basis, in Securities Exchange Act Release No. 30603 (April 17, 
1992), 57 FR 15340 (April 27, 1992) (File No. SR-Amex-91-05) (``1992 
Approval Order''). The Commission subsequently extended the Amex's 
pilot program in Securities Exchange Act Release Nos. 32185 (April 
21, 1993), 58 FR 25681 (April 27, 1993) (File No. SR-Amex-93-10) 
(``April 1993 Approval Order''); and 32664 (July 21, 1993), 58 FR 
40171 (July 27, 1993) (File No. SR-Amex-93-22) (``July 1993 Approval 
Order''). Commission approval of these amendments to Rule 109 
expires on March 21, 1994. The Exchange seeks accelerated approval 
of the proposed rule change in order to allow the pilot program to 
continue without interruption. See letter from Claudia Crowley, 
Special Counsel, Legal & Regulatory Policy Division, Amex, to Beth 
Stekler, Attorney, Division of Market Regulation, SEC, dated March 
4, 1994.
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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 self-regulatory organization 
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 III below. The self-regulatory 
organization 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
    On July 21, 1993, the Commission extended its pilot approval of 
amendments to Exchange Rule 109 until March 21, 1994.\4\ The amendments 
permit a specialist, upon request, to grant a stop\5\ in a minimum 
fractional change market\6\ for any order of 2,000 shares or less, up 
to a total of 5,000 shares for all stopped orders, provided there is an 
order imbalance, without obtaining prior Floor Official approval. A 
Floor Official, however, must authorize a greater order size or 
aggregate share threshold.
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    \4\See July 1993 Approval Order, supra, note 3.
    \5\When a specialist agrees to a floor broker's request to 
``stop'' an order, the specialist is obligated to execute the order 
at the best bid or offer, or better if obtainable. See Amex Rule 
109(a).
    \6\Amex Rule 127 sets forth the minimum fractional changes for 
securities traded on the Exchange.
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    During the course of the pilot program, the Exchange has closely 
monitored compliance with the rule's requirements; analyzed the impact 
on orders on the specialist's book resulting from the execution of 
stopped orders at a price that is better than the stop price; and 
reviewed market depth in a stock when a stop is granted in a minimum 
fractional change market. The Exchange believes that the amendments to 
Rule 109 have provided a benefit to investors by providing an 
opportunity for price improvement, while increasing market depth and 
continuity without adversely affecting orders on the specialist's book. 
The Exchange's findings in this regard have been forwarded to the 
Commission under separate cover.
    The Exchange is therefore proposing permanent approval of the 
amendments to Rule 109. In the alternative, the Exchange is requesting 
an extension of the pilot program for an additional one-year period, if 
the Commission feels that further study and monitoring of the effects 
of the pilot program are necessary.
2. Statutory Basis
    The proposed rule change is consistent with section 6(b) of the Act 
in general and furthers the objectives of section 6(b)(5) in particular 
in that it is designed 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. The Exchange believes that the proposed amendments to Rule 
109 are consistent with these objectives in that they are designed to 
allow stops, in minimum fractional change markets, under limited 
circumstances that provide for the possibility of price improvement to 
customers whose orders are granted stops.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will impose no burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. 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 at the 
Commission's Public Reference Section, 450 Fifth Street NW., 
Washington, DC 20549. 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-93-47 and should be 
submitted by April 18, 1994.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange and, in 
particular, with section 6(b)(5)\7\ and section 11(b)\8\ of the Act. 
The Commission believes that the amendments to Rule 109 should further 
the objectives of section 6(b)(5) and section 11(b) through pilot 
program procedures designed to allow stops, in minimum fractional 
change markets, under limited circumstances that provide the 
possibility of price improvement to customers whose orders are granted 
stops.\9\
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    \7\15 U.S.C. 78f (1988).
    \8\15 U.S.C. 78k (1988).
    \9\For a description of Amex procedures for stopping stock in 
minimum fractional change markets, and of the Commission's rationale 
for approving those procedures on a pilot basis, see 1992 Approval 
Order, supra, note 3. The discussion in the aforementioned order is 
incorporated by reference into this order.
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    In its orders approving the pilot procedures,\10\ the Commission 
asked the Amex to study the effects of stopping stock in a minimum 
fractional change market. Specifically, the Commission requested 
information on: (1) The percentage of stopped orders executed at the 
stop price, versus the percentage of such orders receiving a better 
price; (2) whether limit orders on the specialist's book were being 
bypassed due to the execution of stopped orders at a better price (and, 
to this end, the Commission requested that the Amex conduct a one-day 
review of all book orders in the ten stocks receiving the greatest 
number of stops); (3) market depth, including a comparison of the size 
of stopped orders to the size of the opposite side of the quote and to 
any quote size imbalance, and including an analysis of the ratio of the 
size of the bid to the size of the offer; and (4) specialist compliance 
with the pilot program's procedures.
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    \10\See supra, note 3.
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    On March 12, 1993, June 28 and July 1, 1993, and October 15, 1993 
and January 5, 1994, the Exchange submitted to the Commission 
monitoring reports regarding the amendments to Rule 109. The Commission 
believes that, although these monitoring reports provide certain useful 
information concerning the operation of the pilot program, the Amex 
must provide further data, particularly about Rule 109's impact on 
limit orders on the specialist's book, before the commission can fairly 
and comprehensively evaluate the Amex's use of the pilot procedures. To 
allow such additional information to be gathered and reviewed, without 
compromising the benefit that investors might receive under Rule 109, 
as amended, the Commission believes that it is reasonable to extend the 
pilot program until March 21, 1995. During this extension, the 
Commission expects the Amex to respond fully to the concerns set forth 
below.
    First, the January monitoring report indicates that approximately 
three-quarters of orders stopped in minimum fractional change markets 
received price improvement. The Commission, therefore, believes that 
the pilot procedures provide a benefit to investors by offering the 
possibility of price improvement to customers whose orders are granted 
stops in minimum fractional change markets. According to the latest 
Amex report, moreover, nearly all stopped orders were for 2,000 shares 
or less. In this respect, the amendments to Rule 109 should mainly 
affect small public customer orders, which the Commission envisioned 
could most benefit from professional handling by the specialist. During 
the pilot extension, the commission requests that the Amex continue to 
monitor the percentage of stopped orders that are for 2,000 shares or 
less.
    Second, the Amex preliminarily believes that, with respect to a 
significant majority of stops granted under these amendments to Rule 
109, customer limit orders existing on the specialist's book were not 
disadvantaged.\11\ This conclusion is based on the Exchange's review of 
limit orders on the opposite side of the market at the time a stop was 
granted pursuant to this pilot program. As part of its one-day review 
of the ten stocks receiving the greatest number of stops, the Amex 
determined how often book orders which might have been entitled to an 
execution had the order not been stopped, in fact, were executed at 
their limit price by the close of the day's trading.\12\ The Commission 
does not consider that data to be conclusive given the narrow scope of 
the Exchange's analysis of the pilot program's impact.
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    \11\When stock is stopped, book orders on the opposite side of 
the market that are entitled to immediate execution lose their 
priority. If the stopped order then receives an improved price, 
limit orders at the stop price are bypassed and, if the market turns 
away from that limit, may never be executed.
    As for book orders on the same side of the market as the stopped 
stock, the Commission believes that Rule 109's requirements make it 
unlikely that these limit orders would not be executed. Under the 
Amex's pilot program, an order can be stopped only if a substantial 
imbalance exists on the opposite side of the market. See infra, text 
accompanying notes 19-25. In those circumstances, the stock would 
probably trade away from the large imbalance, resulting in execution 
of orders on the book.
    \12\Beyond the one-day review, the Amex could make this 
determination only for those stocks in which the electronic display 
book had been implemented. For other stocks, the Amex determined how 
often an equivalent volume (i.e., the same number of shares as the 
stopped order) was executed at the opposite side's limit price by 
the close of the day's trading.
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    The Commission historically has been concerned that book orders may 
get bypassed when stock is stopped, especially in a minimum fractional 
change market.\13\ Based on the Amex's experience to date, the 
Commission believes that additional data is necessary before the 
Commission can determine whether there are sufficient grounds to 
conclude that this long-standing concern has been alleviated. Thus to 
ensure that Rule 109, as amended, will not potentially harm public 
customers with limit orders on the specialist's book, the Amex should 
provide detailed facts supporting its arguments about the impact of its 
pilot procedures. The Commission therefore requests that the Amex 
conduct another review of this issue. At a minimum, the Amex should 
determine how often limit orders against which stock is stopped in a 
minimum fractional change market are executed by the close of the day's 
trading.\14\ Further, the Amex should conduct, on a date to be selected 
by the Commission, another one-day review of all book orders in the ten 
stocks receiving the greatest number of stops, and should submit to the 
Commission both raw trade data for,\15\ and a description of the final 
disposition of,\16\ each such order.
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    \13\See, e.g., SEC, Report of the Special Study of the 
Securities Markets of the Securities and Exchange Commission, H.R. 
Doc. No. 95, 88th Cong., 1st Sess. Pt. 2 (1963).
    \14\Specifically, the Amex would first calculate the total 
number of shares of limit orders against which stock is stopped in 
minimum fractional change markets. The Amex would then determine how 
many of those shares actually are executed by the close of the day's 
trading. As noted above, see supra note 12, electronic display book 
technology is necessary to determine the final disposition of limit 
orders. The Amex expects the electronic book to be implemented 
Floor-wide by mid-1994. Telephone conversation between Claudia 
Crowley, Special Counsel, Legal & Regulatory Policy Division, Amex, 
and Beth Stekler, Attorney, Division of Market Regulation, on March 
11, 1994. As the phase-in of the electronic book continues, the Amex 
should provide the Commission with complete information for all 
stocks in which it has the capability to monitor the final 
disposition of limit orders, even if it has not yet completed Floor-
wide implementation of the electronic book.
    \15\In this regard, the Commission requests that the Amex submit 
the documentation the Amex is relying upon to support its 
conclusions about the final disposition of these limit book orders. 
See infra, note 16.
    \16\See supra, note 14.
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    In terms of market depth, the Amex's January monitoring report 
suggests that stock tends to be stopped in minimum fractional change 
markets where there is a significant disparity (in both absolute and 
relative terms) between the number of shares bid for and the number of 
shares offered.\17\ That report also suggests that, given the depth of 
the opposite side of the market, orders affected by the Rule 109 pilot 
tend to be relatively small.\18\ The Amex repeatedly has stated, both 
to the Commission\19\ and to its members,\20\ that specialists can only 
stop stock in a minimum fractional change market when (1) an imbalance 
exists on the opposite side of the market and (2) such imbalance is of 
sufficient size to suggest the likelihood of price improvement.\21\
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    \17\There is a direct relationship between such a quote size 
imbalance and the likelihood of price improvement. A large imbalance 
on one side of the market suggests that subsequent transactions will 
take place on the other side. In those circumstances, it could be 
appropriate to grant a stop, since the delay might allow the 
specialist to execute the order at a better price for the customer.
    \18\A relatively large order might begin to counteract the 
pressure the imbalance on the opposite side of the market is putting 
on the stock's price. Accordingly, it might not be as appropriate to 
stop such an order.
    \19\See letter from Claire P. McGrath, Senior Counsel, Legal & 
Regulatory Policy Division, Amex, to Mary Revell, Branch Chief, 
Division of Market Regulation, SEC, dated January 6, 1992 (Amendment 
No. 1 to File No. SR-Amex-91-05). Amendment No. 1 formally 
incorporated the requirement that the indicia of market depth 
discussed below must, without exception, be satisfied before a 
specialist is permitted to stop stock in a minimum fractional change 
market.
    \20\See Amex Information Circular Nos. 92-74 (April 24, 1992) 
and 93-333 (April 7, 1993).
    \21\For further discussion of the relationship between quote 
size imbalance and the likelihood of price improvement, see supra 
note 17.
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    The Commission believes that the requirement of a sufficient market 
imbalance is a critical aspect of the pilot program.\22\ Such a 
requirement is necessary to ensure that stops are only granted, in a 
minimum fractional change market, when the benefit (i.e., price 
improvement) to orders being stopped far exceeds the potential of harm 
to orders on the specialist's book.\23\ To evaluate how this standard 
is being applied in practice, the Commission requests that the Amex 
conduct another comprehensive quantitative analysis of market depth. In 
its next monitoring report, the Amex should provide, in chart form, a 
comparison of the size of the stopped order to any quote size 
imbalance.\24\ The chart also should include the ratio of the size of 
the bid to the size of the offer.\25\ The Amex should concentrate an 
orders for 2,000 shares or less, and should provide the requested 
information in the form of an average for all buy orders stopped, and 
the for all sell orders stopped, in that size range.
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    \22\In extending a comparable pilot program on the New York 
Stock Exchange, the Commission placed similar emphasis on the 
critical nature of the sufficient size standard when stopping stock 
in minimum fractional change markets. See Securities Exchange Act 
Release No. 32031 (March 22, 1993), 58 FR 16563 (March 29, 1993) 
(File No. SR-NYSE-93-18).
    \23\See supra, text accompanying notes 11-16.
    \24\Every time a specialist stops an order to buy, the Amex 
should calculate the size of that stopped order as a percentage of 
the quote size imbalance, i.e., the difference between the size of 
the offer and the size of the bid.
    Every time a specialist stops an order to sell, the Amex should 
calculate the size of that stopped order as a percentage of the 
quote size imbalance, i.e., the difference between the size of the 
bid and the size of the offer.
    \25\Every time a specialist stops an order to buy, the Amex 
should calculate the size of the bid as a percentage of the size of 
the offer.
    Every time a specialist stops an order to sell, the Amex should 
calculate the size of the offer as a percentage of the size of the 
bid.
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    Finally, the Amex report describes its efforts regarding compliance 
with the pilot procedures. To alleviate confusion about how to evidence 
Floor Official approval (which, as noted above, a specialist must 
obtain to stop any order for more than 2,000 shares, or a total of more 
than 5,000 shares for all stopped orders), the Exchange has developed 
new manual and automated reports, which serve as a written audit trail 
for surveillance purposes. As a result, the Commission believes that 
the Amex has sufficient means to determine whether a specialist 
complied with the amendments' order size and aggregate share thresholds 
and, if not, whether Floor Official approval was obtained for larger 
parameters. The Commission also notes the Amex's on-going effort to 
keep its specialists properly informed about the pilot program's 
requirements. In this context, the Amex has distributed Information 
Circulars.\26\ and held continuing educational sessions on the pilot 
program and its requirements for stopping stock in minimum fractional 
change markets.
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    \26\See supra, note 20.
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    During the pilot extension, the Commission requests that the Amex 
continue to monitor closely specialist compliance with Rule 109's 
procedures. As before, the Amex should determine how often orders 
requiring Floor Official approval to be stopped do not receive such 
approval. In so doing, the Amex should distinguish between instances 
where the specialist did not ask for permission and those where it was 
denied (and, if so, on what grounds). The Amex should gather and report 
information about the market conditions prevailing at the time of each 
instance of specialist non-compliance with these procedures and the 
action taken by the Exchange in response thereto.
    The Commission requests that the Amex submit a report describing 
its findings on these matters, specifically: (1) The effect of Rule 
109, as amended, on limit book orders and (2) specialist compliance 
with the pilot procedures, by December 31, 1994. In addition, if the 
Exchange determines to request an extension of the pilot program beyond 
March 21, 1995, the Commission requests that the Amex also submit a 
proposed rule change by December 31, 1994.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of the 
notice of filing thereof. This will permit the pilot program to 
continue on an uninterrupted basis. In addition, the procedures the 
Exchange proposes to continue using are the identical procedures that 
were published in the Federal Register for the full comment period and 
were approved by the Commission.\27\
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    \27\No comments were received in connection with the proposed 
rule change which implemented these procedures. See 1992 Approval 
Order, supra, note 3.
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    It is therefore ordered, pursuant to section 19(b)(2)\28\ that the 
proposed rule change (SR-Amex-93-47) is hereby approved until March 21, 
1995.
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    \28\15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-7214 Filed 3-25-94; 8:45 am]
BILLING CODE 8010-01-M