[Federal Register Volume 59, Number 82 (Friday, April 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10251]


[[Page Unknown]]

[Federal Register: April 29, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33957; File No. SR-Amex-92-26]

 

Self-Regulatory Organizations; American Stock Exchange; Order 
Approving Proposed Rule Change Relating to Amendments to Rule 170 
Pertaining to Specialists' Liquidating Transactions

April 22, 1994.

I. Introduction

    On August 13, 1992, the American Stock Exchange (``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 amend Amex Rule 170 to permit 
a specialist to effect a liquidating transaction on a zero minus tick, 
in the case of a ``long'' position, or a zero plus tick, when covering 
a ``short'' position, without Floor Official approval. The Amex also 
proposes to amend this Rule to set forth the affirmative action that 
specialists would be required to take subsequent to effecting various 
types of liquidating transactions. The Amex proposes to implement the 
proposed rule change for a one-year pilot period.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1990).
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 32804 (August 25, 1993), 58 FR 45926 (August 
31, 1993). No comments were received on the proposal. This order 
approves the proposed rule change for a one year period.

II. Description of the Proposal

    Amex Rule 170, which is the primary Amex rule governing the 
functions of specialists, restricts a specialist's purchases or sales 
of his or her specialty stock to those dealings that are reasonably 
necessary to permit the specialist to maintain a fair and orderly 
market.\3\
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    \3\Amex Rule 170(c) states that a specialist shall not effect on 
the Exchange purchases or sales of any security in which such 
specialist is registered, for any account in which he or his member 
organization is directly or indirectly interested, unless such 
dealings are reasonably necessary to permit such specialist to 
maintain a fair and orderly market, or to act as an odd-lot dealer 
in such security.
    In general, specialist's activities are circumscribed by Section 
11 of the Act [15 U.S.C. 78k] and the rules thereunder, and by the 
rules of the exchange where the specialist is registered. Commission 
Rule 11b-1(a)(2), which sets forth the primary responsibilities of a 
specialist, states that a specialist's course of dealings for his or 
her own account must assist in the maintenance, so far as 
practicable, of a fair and orderly market. 17 CFR 240.11b-1(a)(2). 
Rule 11b-1(a)(2) also states, however, that a specialist should 
restrict his or her dealings so far as practicable to those 
reasonably necessary to permit him or her to maintain a fair and 
orderly market.
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    A specialist's dealer responsibilities consist of ``affirmative'' 
and ``negative'' obligations. In accordance with their affirmative 
obligations, specialists are obligated to trade for their own accounts 
to minimize order disparities and contribute to continuity and depth in 
the market.\4\ Conversely, pursuant to their negative obligations, 
specialists are precluded from trading for their own accounts unless 
such dealing is necessary for the maintenance of a fair and orderly 
market.\5\ In view of these obligations, the price trend in a security 
should be determined not by specialist trading, but by the movements of 
the incoming orders that initiate the trades. Amex Rule 170.02, which 
contains one of the specalist's ``negative'' obligations, sets forth 
distinct prohibitions against specialist trades on destablizing ticks 
(i.e., purchases on plus or zero plus ticks and sales on minus or zero 
minus ticks).\6\ Rule 170.02 also provides that, unless a specialist 
has Floor Official approval, he or she should avoid liquidation of all, 
or substantially all, of a position by selling stock at prices below 
the last different price (on a direct minus or zero minus tick) or by 
purchasing stock at prices above the last different price (on a direct 
plus or zero plus tick), unless the transaction is reasonably necessary 
in relation to the specialist's overall position in his or her 
specialty stocks.\7\
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    \4\Amex Rule 170(d) states, in part, that it is ordinarily 
expected that a specialist will engage, to a reasonable degree under 
the existing circumstances, in dealings for his own account in full 
lots when lack of price continuity or lack of depth in the full lot 
market or temporary disparity between supply and demand in either 
the full lot or the odd-lot market exists or is reasonably to be 
anticipated. in addition, Rule 170(d) states that transactions on 
the Exchange for his own account effected by a specialist in the 
securities in which he is registered are to constitute a course of 
dealings reasonably calculated to contribute to the maintenance of 
price continuity with reasonable depth, and to the minimizing of the 
effects of temporary disparity between supply and demand, immediate 
or reasonably to be anticipated, in either the full lot or the odd-
lot market.
    \5\See Amex Rule 170(c).
    \6\A plus tick is a price above the price of the last preceding 
sale. A zero plus tick is a price equal to the last sale if the last 
preceding transaction at a different price was at a lower price. 
Conversely, a minus tick is a price below the price of the last 
preceding sale. A zero minus tick is a price equal to the last sale 
if the last preceding transaction at a different price was at a 
higher price.
    \7\Rule 170.02 also provides that, unless a specialist has Floor 
Official approval, he or she should avoid: Failing to re-enter the 
market where necessary, after effecting transactions such as those 
described above; and failing to maintain a fair and orderly market 
during liquidations. The Amex proposes to delete these two 
provisions and replace them with new language described infra.
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    The Exchange proposes to amend Rule 170.02 regarding how 
specialists can ``reliquify'' a dealer position. When reliquifying, a 
specialist is reducing a large inventory position in order to be able 
to fully participate on the contra side of the market during periods of 
substantial buying or selling interest. The amended rule would permit a 
specialist, when reliquifying, to sell ``long'' inventory stock on a 
zero minus tick, or purchase stock to ``cover'' a ``short'' position on 
a zero plus tick, without Floor Official approval. In addition, the 
Amex proposes to amend Rule 170.02 to emphasize the specialist's 
affirmative role in providing stabilizing dealer participation to the 
marketplace, especially during periods of volatile or unusual market 
activity, involving significant price movement in a security, where 
reliquification may be required to facilitate the maintenance of a fair 
and orderly market. In this regard, Rule 170.02 would be amended on a 
one year pilot basis to provide that:

    Liquidations involving the principal selling of any specialty 
stock on a direct minus tick, or the purchasing of such stock on a 
direct plus tick will require Floor Official approval, and should be 
effected only in conjunction with the specialist's re-entering the 
market on the opposite side of the market from the liquidating 
transaction where the imbalance indicates that the immediate 
succeeding transactions would result in a lower price following the 
sale (or higher price following the purchase).
    During volatile or unusual market conditions involving 
significant price movement in a security, the specialist should re-
enter the market following a liquidation transaction which was 
effected by selling stock on a direct minus or zero minus tick, or 
purchasing stock on a direct plus or zero plus tick and, at a 
minimum, participate as a dealer to the extent of his or her usual 
level of dealer participation in the subject security.
    During such periods, a series of such liquidating transactions 
effected within a brief period of time should be accompanied by the 
specialist's re-entry in the market and effecting transactions which 
reflect a significant degree of dealer participation.

    The Exchange believes that its proposed amendments to Rule 170.02 
will provide specialists with the ability to respond to periods of 
extreme market volatility, particularly those characterized by high 
volume and selling pressure, by permitting him or her to liquidate 
large dealer positions acquired as a result of such selling pressure. 
In addition, the Exchange believes that the amendments would reinforce 
the specialist's affirmative obligation to maintain a fair and orderly 
market by providing stabilizing dealer participation to the 
marketplace, and would reinforce his or her negative obligations in 
that a specialist would not be able to liquidate in the absence of a 
large dealer position, but could only do so if reasonably necessary to 
maintain a fair and orderly market.
    The Exchange proposes to implement the proposed rule change as a 
one-year pilot, and will monitor compliance with the requirements of 
the Rule through existing surveillance procedures. In particular, the 
Exchange stated that liquidation transactions effected by specialists 
on direct plus or minus destabilizing ticks will initially be reviewed 
as to whether the requisite Floor Official approval was obtained, and 
will be subjected to a further review with respect to the specialist's 
dealer participation levels, re-entry into the market in terms of 
timing and support, and whether the transactions were counter to the 
market trend. The Exchange stated that it would provide the Commission 
with a report summarizing the results of its surveillance prior to the 
conclusion of the pilot period.
    The Exchange believes that the proposed rule change is consistent 
with section 6(b)(5) of the Act 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, by enabling specialists to 
facilitate orderly and continuous markets during periods of unusual 
volatility of price changes.

III. Discussion

    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 sections 6(b) (5) and 11 of the Act.\8\ The Commission 
believes the proposal is consistent with the section 6(b)(5) 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, remove impediments to and perfect 
the mechanism of a free and open market, and, in general, protect 
investors and the public interest. The Commission also believes that 
the proposal is consistent with section 11(b) of the Act and Rule 11b-1 
thereunder,\9\ which allow exchanges to promulgate rules relating to 
specialists in order to maintain fair and orderly markets.
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    \8\15 U.S.C. 78f and 78k (1988).
    \9\17 CFR 240.11b-1 (1991).
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    Both the Act and Exchange rules reflect the crucial role played by 
specialists in providing stability, liquidity, and continuity in the 
Exhange's auction market. Recognizing the importance of the specialist 
in the auction market, the Act, as well as Exchange rules, impose 
stringent obligations upon specialist.\10\ Primary among the 
obligations are the requirements to maintain fair and olderly markets 
and to restrict specialist dealings to those that are ``reasonably 
necessary'' in order to maintain a fair and orderly market.\11\
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    \10\See Rule 11b-1 under the Act, 17 CFR 240.11b-1 (1993); Amex 
Rule 170.
    \11\17 CFR 240.11b-1(A)(2) (1993).
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    The importance of specialist performance to the quality of Exchange 
markets was highlighted during the 1987 and 1989 market breaks. In the 
Division of Market Regulation's (``Division'') report on the October 
1987 market break (``1987 Market Break Report''), the Division examined 
specialist performance on the Amex on October 19 and 20, 1987.\12\ The 
Division found that, although some Amex specialists appeared to perform 
well under adverse conditions, others did not.\13\
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    \12\See Division of Market Regulation, The October 1987 Market 
Break, February 1988, at 4-29 to 4-41.
    \13\See 1987 Market Break Report at 4-41.
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    The Division also examined Amex specialist performance during the 
volatile conditions of October 13 and 16, 1989 (``October 1989 
Report''), and found that specialist performance during the time was 
similar in many respects to the pattern of specialist performance 
during the October 1987 Market Break.\14\ Specifically, the Division 
found that, during these two periods of adverse market conditions, 
specialists were confronted with extreme volume and volatility.\15\
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    \14\See Division of Market Regulation, Market Analysis of 
October 13 and 16, 1989, at 33.
    \15\1987 Market Break Report at 4-30; October 1989 Report, at 
27.
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    Both the 1987 Market Break Report and the October 1998 Report 
reaffirmed the importance of specialist participation in countering 
market trends during periods of market volatility. At the same time, 
the reports emphasized the importance the Commission placed on the 
Amex's ability to ensure that all specialists comply with their 
affirmative and negative market making obligations during such periods.
    One area of specialist performance specifically reviewed by the 
October 1989 Report involved specialist's compliance with their 
obligation to maintain and orderly market by buying and selling stocks 
for their own accounts to relieve imbalances between supply and demand. 
In the October 1989 Report, the Division requested that the Amex 
examine the language of Rule 170.02.\16\ Amex Rule 170.02 states that, 
unless a specialist has the prior approval of a Floor Official, he or 
she should avoid liquidation of all or substantially all of position by 
selling stock at prices below the last different price or by purchasing 
stock at prices above the last different price unless such transactions 
are reasonably necessary in relation to the specialist's overall 
position in the stocks in which he or she is registered. The Division 
indicated that Rule 170.02 appeared to provide specialists with 
unnecessarily broad latitude for effecting transactions on 
destabilizing tricks.\17\
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    \16\See October 1989 Report at 29. The Division also requested 
that the New York Stock Exchange (``NYSE'') examine the language of 
NYSE Rule 104.10, which contains similar language to Amex Rule 
170.02. Specifically, the Division stated that the suggestion 
regarding NYSE Rule 104.10's treatment of estabilizing transactions 
is equally applicable to Amex Rule 170.02. See October 1989 Report 
at 29-30, note 56.
    \17\See October 1989 Report at 19, note 31.
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    The proposed rule change is responsive to the request regarding 
Rule 170.02 as well as the conclusions of the two market break reports. 
The Amex, recognizing that market conditions may necessitate that a 
specialist participate heavily in a rapidly declining market, has 
proposed amendments to Rule 170.02 to provide specialists with 
flexibility in liquidating specialty stock positions in order to 
facilitate their ability to maintain fair and orderly markets, 
particularly during unusual market conditions. At the same time, the 
amendments also would strengthen the specialist's concomitant 
obligation to participate as dealer on the opposite side of the market 
after a liquidating transaction.
    Under the amended Rule, a specialist may liquidate a position by 
selling stock on a direct minus tick or by purchasing stock on a direct 
plus tick only if such transactions are reasonably necessary for the 
maintenance of a fair and orderly market and only if the specialist has 
obtained the prior approval of a Floor Official. Liquidations on a zero 
minus or a zero plus tick, which previously required Floor Official 
approval, can be effected under the pilot procedures without a Floor 
Official's approval, but continue to be subject to the restriction that 
they be effected only when reasonably necessary to maintain a fair and 
orderly market. In addition, the specialist must maintain a fair and 
orderly market during the liquidation.
    Both the Act and Exchange rules reflect the crucial role played by 
specialists in providing stability, liquidity, and continuity in the 
Exchange's auction market. Recognizing the importance of the specialist 
in the auction market, the Act, as well as Exchange rules, impose 
stringent obligations upon
    After the liquidation, a specialist is required to re-enter the 
market on the opposite side of the market from the liquidating 
transaction to offset any imbalances between supply and demand. During 
any period of volatile or unusual market conditions resulting in a 
significant price movement in a specialist's specialty stock, the 
specialist's re-entry into the market must reflect, at a minimum, his 
or her usual level of dealer participation in the specialty stock. In 
addition, during such periods of volatile market conditions or unusual 
price movements, re-entry into the market following a series of 
transactions must reflect a significant level of dealer participation.
    Thus, the amendments to Rule 170.02 would reinforce the 
specialist's affirmative obligation to maintain a fair and orderly 
market by providing stabilizing dealer participation to the 
marketplace, especially during periods of volatile or unusual market 
activity. For example, during periods of high market volatility, not 
only would specialists continue to be obligated to temper disparities 
between supply and demand, but would specifically have to reenter the 
market after a liquidating transaction. Similarly, the amendments to 
Rule 170.02 would reinforce the negative market making obligations of 
specialists. For example, a specialist would not be permitted to 
reliquify in the absence of a large dealer position; rather he or she 
would only be able to do so if reasonably necessary to enable him or 
her to maintain fair and orderly market. Thus, the new amendments to 
Rule 170.02 would not allow the specialist to use the rule as a vehicle 
for trading.
    During future periods of market volatility, accompanied by 
increasing volume and selling pressure, specialists may be under 
extreme pressure to keep the markets orderly and continuous by entering 
the market as buyers. In these instances, the Commission believes that 
the amendments to Rule 170.02 should assist specialists in tempering 
sudden price movements and keeping any general price movements orderly, 
thereby furthering the maintenance of fair and orderly markets 
consistent with Sections 6 and 11 under the Act.
    The Commission emphasizes that reliquifications are not precluded 
during periods of significant price movements, but they should be 
accompanied by the necessary dealer participation against the trend of 
the market, even in situations where continuity and depth reflect 
variations that may normally be experienced in the stock.
    In addition, the Commission believes that approval of the Amex 
proposal for a one year pilot period will provide the Commission and 
Exchange an opportunity to monitor the operation of the rule during 
periods of unusual or volatile market conditions. This one year period 
also will allow the Commission and the Exchange the opportunity to 
monitor specialist compliance with the new rule to ensure that 
specialists are properly assuming their responsibilities of re-entering 
the market following liquifying transactions.
    Finally, in its rule filing, the Amex indicated that, during the 
one year pilot period, the Exchange would monitor compliance with the 
requirements of the Rule. Specifically, the Amex stated that 
liquidation transactions effected by specialists on direct plus or 
minus destabilizing ticks will initially be reviewed as to whether the 
requisite Floor Official approval was obtained, and will be subjected 
to a further review with respect to the specialist's dealer 
participation levels, re-entry into the market in terms of timing and 
support, and whether to transactions were counter to the market trend. 
The Exchange also stated that it would provide the Commission with a 
report summarizing the results of its surveillance prior to the 
conclusion of the pilot period. In this regard, the Commission requests 
that the Exchange submit a report, by January 22, 1995, setting forth 
the criteria developed by the Exchange to determine whether any 
reliquifications by specialists were necessary and appropriate in 
connection with fair and orderly markets and providing information 
gathered regarding the Exchange's monitoring of liquidation 
transactions effected by specialists on any destabilizing tick. In 
addition, the Commission requests that the Amex provide, among other 
things, the following information in its report:
    (1) A review of all liquidation transactions effected by 
specialists on any destabilizing ticks;
    (2) A review of liquidating transactions by specialists to 
determine that the required Floor Official approval was obtained where 
necessary;
    (3) And a review of liquidating transactions in light of dealer 
participation levels and re-entry into the market in terms of timing 
and support (e.g., whether the specialist's transactions were counter 
to the market trend).
    It therefore is ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the proposed rule change is approved for a one year pilot 
period ending on April 22, 1995.

    \18\18 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-10251 Filed 4-28-94; 8:45 am]
BILLING CODE 8010-01-M