[Federal Register Volume 59, Number 150 (Friday, August 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19106]
[[Page Unknown]]
[Federal Register: August 5, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34471; File No. SR-Amex-94-22]
Self-Regulatory Organizations; Filing and Order Granting
Accelerated Approval to Proposed Rule Change by American Stock
Exchange, Inc. Relating to Amendments To Exchange Rule 103
August 1, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on June 15,
1994, 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. On
July 11, 1994, the Exchange submitted to the Commission Amendment No. 1
to the proposed rule change in order to clarify which Exchange members
would be affected by the proposal.\1\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\See letter from Claudia Crowley, Special Counsel, Legal &
Regulatory Policy Division, Amex, to Beth Stekler, Attorney,
Division of Market Regulation, SEC, dated July 1, 1994 (``Amendment
No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to amend Amex Rule 103 to permit a
member, while on the trading floor, to initiate a proprietary stock
transaction while he has a position in a listed option overlying the
stock. The text of the proposed rule change is available at the Office
of the Secretary, Amex, and at the Commission.
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
Amex Rule 103 prohibits a member, while on the trading floor, from
initiating a proprietary stock transaction while he has a position in
an option overlying the stock, or while he has knowledge that any
account in which his member organization or any other member, allied
member or approved person in such organization is directly or
indirectly interested has such an option position.
Rule 103 was adopted in 1935 in response to a Commission request to
each national securities exchange, and was intended to control various
abuses in the use of options connected to the operations of
manipulative ``pools'' during the late 1920s and early 1930s.
In 1977, shortly after the start of trading in listed options, the
Commission reviewed the issue of whether the restriction should be
eased with respect to listed options, and agreed to lift the
restriction for regional exchange members, citing the small percentage
of total orders in the underlying equity flowing to any one regional
exchange.\2\ Indicating a desire to progress very cautiously in this
area, however, the Commission declined to permit a change in the rule
at the primary markets, the New York Stock Exchange (``NYSE'') and the
Amex. The Commission did indicate a willingness to study whether
specialists should be allowed to hedge in options on their specialty
stocks, and a rule to that effect with specific hedging guidelines was
ultimately adopted.\3\ Such hedging by specialists is specifically
permitted by Rule 103.
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\2\See Report of the Special Study of the Options Markets to the
SEC, p. 870 et seq. (1978).
\3\See Amex Rule 175 and the Guidelines for Specialists'
Specialty Stock Options Transactions.
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Accordingly, the impact of Rule 103(a) is now limited to the
Registered Equity Traders\4\ and Registered Equity Market Makers
(``REMMs''),\5\ who are the remaining classes of members who initiate
proprietary transactions on the floor in equities while restricted by
Rule 103(a) from doing so if they hold a position in the overlying
options. The Amex is proposing to lift the Rule 103 restriction with
respect to listed options. The NYSE recently received Commission
approval for similar amendments to its comparable rule.\6\
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\4\See Amendment No. 1, supra, note 1. A Registered Equity
Trader is an Amex member who is authorized to initiate proprietary
transactions on the floor of the Exchange but who is not registered
as a specialist or odd-lot dealer. See Amex Rules 110 and 111(f).
Registered Equity Traders exist pursuant to, and must comply with
the requirements of, Section 11(a)(1)(G) of the Act. See also SEC
Rule 11a1-1(T). In addition, the Amex requires that 75% of a
Registered Equity Trader's monthly transactions must be stabilizing
transactions under the tick-test. See Amex Rule 111(e).
\5\A REMM is a Registered Trader who is a designated to act as a
market maker in certain securities. REMMs are authorized to initiate
proprietary transactions on the floor of the Exchange and have an
affirmative obligation to maintain a fair and orderly market. See
Amex Rule 114(b). In addition, REMMs must comply with a complex
series of rules about the price at which they can trade and the size
of those trades. See Amex Rule 114, Commentary .02(c).
\6\See Securities Exchange Act Release No. 34135 (May 31, 1994),
59 FR 29463 (June 7, 1994) (File No. SR-NYSE-93-17) (approving
amendments to NYSE Rule 96 that permit an NYSE Floor professional
who has a listed option position in a stock to initiate an on-Floor
proprietary trade in that stock) (``NYSE approval order'').
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As the Commission noted in its order approving the NYSE rule
change, this proposal may reduce the current disincentive for options
market participants to act as stock traders, thereby increasing the
capital committed to such market making activities and improving the
depth and liquidity of such markets, particularly in times of market
stress.
Further, the Exchange believes that, similar to the NYSE, the
Amex's surveillance and compliance programs would enable the Exchange
to identify and investigate stock and/or options transactions which
raise manipulative concerns, and to detect and deter intermarket
manipulation and other fraudulent or abusive practices.
Finally, the Amex also proposes to correct a cross reference in
Rule 103(b) to Rule 175, which was not done when Rule 175 was last
amended.
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 facilitate securities transactions and
perfect the mechanism of a free and open market.
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, D.C. 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 inspections and copying at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 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-94-22 and should be
submitted by August 26, 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 the requirements of Section 6(b).\7\ In particular,
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, to prevent fraudulent
and manipulative acts, and, in general, to protect investors and the
public interest.
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\7\15 U.S.C. 78f(b) (1988).
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In light of the changes in market structure that have taken place
since Rule 103 was adopted, the Commission believes that the benefits
of the Amex proposal outweigh an burdens it may impose. Specifically,
the Commission has concluded that the proposed rule change should
enhance the quality of the Amex market. The Amex established the
membership categories of Registered Equity Trader and REMM to provide a
means by which Amex members could, under certain conditions, add depth
and liquidity to the market by initiating proprietary transactions on
the floor of the Exchange.\8\ The Commission, however, notes that Rule
103 may frustrate that purpose,\9\ to the extent it may be
unnecessarily restrictive given the risks posed by Registered Equity
Traders' and REMMs' dealings in stocks in which they (or their member
organization) have an option position.\10\
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\8\For further discussion of the conditions for Registered
Equity Trader and REMM participation, see supra, notes 4-5.
\9\The Amex argues that there is a disincentive for any Amex
member who participates in the options market (or who is associated
with a member organization that participates in the options market)
to be active as a Registered Equity Trader or REMM.
\10\For further discussion of the risks of such activity and the
safeguards contained in the Amex proposal, see infra, notes 12-16
and accompanying text.
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After careful review, the Commission believes that the Amex
proposal may reduce the current disincentive for members, especially
options market participants and their associated persons, to act as a
Registered Equity Trader or REMM given Rule 103's restrictions.\11\ For
instance, Amex members currently serving as Registered Equity Traders
and REMMs could initiate proprietary floor trades in situations where
they presently cannot do so; moreover, other members might be
encouraged to service in that capacity. In the Commission's view, an
increase in the capital committed to such supplemental market making
activities could improve the depth and liquidity of the Amex market,
particularly in times of market stress.
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\11\See supra, note 9 and accompanying text.
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Furthermore, the Commission is satisfied that the Amex proposal
contains adequate safeguards to protect investors in the securities
markets. In this respect, the Commission notes that a comprehensive
regulatory framework has been developed for the trading of listed
securities, including listed options.\12\ For example, in 1983, an
Intermarket Surveillance Group (``ISG'') was formed to coordinate more
effectively surveillance and information sharing arrangements between
the stock and options markets.\13\ Using procedures developed in that
forum, among other things, the national securities exchanges identify
and investigate stock and/or options transactions that, based on
certain parameters, raise manipulative concerns. The Commission
believes that this regulatory scheme, including Amex monitoring and
surveillance of amended Rule 103, should be sufficient to detect and
deter intermarket manipulation and other fraudulent or abusive
practices.
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\12\Listed options are standardized contracts traded in an open
auction market environment. Exchange-traded options are subject,
among other things, to real-time quotation and last-sale reporting;
anti-fraud provisions; and minimum criteria for initial and
continued listing. Transactions in listed options become part of the
integrated audit trail.
In contrast, over-the-counter options are individualized
contracts that are negotiated between the counterparties. There is
minimal, if any, public disclosure and a relatively illiquid
secondary trading market.
\13\The full members of the ISG are the Amex; the Boston Stock
Exchange; the Chicago Board Options Exchange; the Chicago Stock
Exchange; the National Association of Securities Dealers; the NYSE;
the Pacific Stock Exchange; and the Philadelphia Stock Exchange.
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Specifically, the Amex has informed the Commission that the
Exchange will increase the frequency and scope of its examination of
the trading activity of Registered Equity Traders and REMMs. The
Commission expects that Amex staff will utilize such information as
part of its on-going efforts to ensure compliance with the Act, the
rules and regulations thereunder and Exchange rules. In this respect,
the Exchange has assured the Commission that, if a transaction raises
concerns about intermarket manipulation, Amex staff, with the
cooperation of the options exchanges where appropriate, will conduct a
thorough examination of all the relevant facts. Accordingly, the
Commission believes that the Amex's monitoring and surveillance of Rule
103, as amended, will aid the Exchange in detecting any trading abuses.
More generally, the Commission believes that, independent of Rule
103, other Amex rules, which the Amex will continue to monitor for
compliance, should help to keep floor professionals from being in a
position where they can engage in trading abuses. These include, among
other things, the yielding requirement imposed on certain on-floor
orders for a member's account,\14\ and the conditions placed on when a
Registered Equity Trader or REMM can initiate a proprietary floor
trade.\15\ Further, Registered Equity Traders and REMM, like other Amex
members, are subject to the prohibition on frontrunning of block
transactions.\16\
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\14\See, e.g., Rule 111(d).
\15\See supra, notes 4-5.
\16\See, e.g., Information Circular Nos. 90-147 (September 14,
1990); 82-37 (July 6, 1982); and 79-12 (February 27, 1979). See also
Article V, Section 4(h) of the Amex Constitution.
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Finally, the Commission notes that, Registered Equity Traders and
REMMs currently are not prohibited from trading in stocks in which they
have an existing option position. Such transactions, however, must be
initiated off-floor. To the extent that the amended rule will permit
such transactions to be initiated on-floor, Amex surveillance should
detect and deter any trading abuses derived from informational
advantages. In sum, the Commission believes that the proposed rule
change should not materially affect the Amex's ability to address the
regulatory concerns raised by floor professionals' intermarket trading
activity.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice of filing thereof. This will permit the benefits of the proposed
rule change to be realized as soon as possible. In addition, the
Exchange's proposal is identical to an NYSE proposal that was published
in the Federal Register for the full comment period and was approved by
the Commission.\17\
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\17\No comments were received in connection with the proposed
rule change that amended the comparable NYSE rule. See NYSE approval
order, supra, note 6.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-Amex-94-22), including
Amendment No. 1, is approved.
\18\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.\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. 94-19106 Filed 8-4-94; 8:45 am]
BILLING CODE 8010-01-M