[Federal Register Volume 59, Number 170 (Friday, September 2, 1994)]
[Notices]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-21750]


[[Page Unknown]]

[Federal Register: September 2, 1994]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34611; File No. SR-Amex-93-15]

 

Self-Regulatory Organizations; American Stock Exchange, Inc.; 
Order Approving Proposed Rule Change Relating to Specialist 
Participation in the After-Hours Trading Facility in Portfolio 
Depositary Receipts and Investment Trust Securities Based on Stock 
Indexes for a One-Year Pilot Period

August 29, 1994.

I. Introduction

    On April 21, 1993, the American Stock Exchange, Inc. (``Amex'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed change concerning its After-Hours Trading 
(``AHT'') facility (File No. SR-Amex-93-15). As originally filed, the 
proposed rule change requested permanent approval of Amex's pilot 
After-Hours Trading facility and approval on a pilot basis for 
specialists in investment trust securities based on stock indexes to 
participate in the AHT Facility. On January 4, 1994, the Amex amended 
the filing to request a three-month extension of the pilot until April 
30, 1994, which the Commission approved.\3\ On May 2, 1994, the 
Commission granted permanent approval to that portion of File No. SR-
Amex-93-15 concerning the Amex's After-Hours Trading facility, not 
including the specialist participation request.\4\

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1994).
    \3\See Securities Exchange Act Release No. 33561 (February 1, 
1994), 59 FR 5789 (February 8, 1994).
    \4\See Securities Exchange Act Release No. 33993 (May 2, 1994), 
59 FR 23902 (May 9, 1994).
    On August 3, 1993, the Exchange amended the filing to request that 
specialists in Portfolio Depository Receipts (``PDRs'') also be 
permitted to participate in the AHT facility.\5\ On July 5, 1994, the 
Exchange amended the proposed rule change to eliminate the migration of 
limit orders for PDRs and investment trust securities from the 
specialist's limit order book to the AHT facility.\6\

    \5\See letter from William Floyd-Jones, Jr., Assistant General 
Counsel, Amex, to Diana Luka-Hopson, SEC, dated August 3, 1993.
    \6\See letter from William Floyd-Jones, Jr., Assistant General 
Counsel, Amex, to Sandra Sciole, Special Counsel, SEC, dated July 1, 
1994.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 34316 (July 5, 1994), 59 FR 35547 (July 12, 
1994). No comments were received on the proposal. This order approves 
the proposed rule change as amended for a one year period.

II. Description of the Proposal

    The Exchange is amending Rules 1300 (``Applicability of 1300 
Series'') and 1302 (``After-Hours Trading Orders'') for a one year 
pilot period to permit specialists in PDRs and investment trust 
securities listed pursuant to Section 118B of the Exchange's Listing 
Guidelines\7\ to participate in the AHT facility to ``clean-up'' order 
imbalances in the AHT facility by entering an order for the 
specialist's account. For example, if there were single sided orders to 
buy 10,000 and sell 20,000 SPDRs immediately prior to the 5:00 p.m. 
close of the AHT facility, the specialist would be permitted under the 
Exchange's proposed rule amendments to enter an order for its account 
to buy up to 10,000 SPDRs in order to eliminate the sell side order 
imbalance.

    \7\The Exchange currently lists one Portfolio Depositary 
Receipt, viz., Standard and Poor's Depositary Receipts (``SPDRs''); 
and two investment trust securities pursuant to Section 118B of the 
Exchange's Listing Guidelines: LOR Index Trust SuperUnits and LOR 
Money Market SuperUnits.
---------------------------------------------------------------------------

    The Exchange is also amending Rule 1302(b) to eliminate the 
migration of limit orders for PDRs and investment trust securities from 
the specialist's limit order book to the AHT facility. Currently, Amex 
Rule 1302(b) provides that a regular way good 'til cancelled order that 
is designated as After-Hours eligible, that is on the specialist's 
limit order book, and that is executable at the closing price or 
better, shall migrate from the specialist's limit order book to the AHT 
program. Any order for an account in which the specialist member 
organization or any associated party has a direct or indirect interest 
is prohibited from migrating to the AHT program. The rule is being 
amended to provide that any order for a Portfolio Depositary Receipt or 
an investment trust security listed on the Exchange pursuant to Section 
118B of the Exchange's Listing Standards, Policies and Requirements 
will not be permitted to migrate to the AHT program.
    The Exchange is also amending Rule 1302 to permit specialists in 
PDRs and investment trust securities to participate in a coupled 
closing price order so long as the other side of the order is not for 
an account in which a member or member organization has a direct or 
indirect interest.\8\ For example, under the Exchange's amendment, the 
specialist in SPDRs would be permitted to agree prior to the 4:15 close 
of the regular trading session for such securities to take the other 
side of a customer order to buy or sell SPDRs for execution in the AHT 
facility as a closing price coupled order. The Exchange believes that 
such a capability would conform the trading of PDRs and investment 
trust securities to the practices of the ``basket'' market for equities 
where it is customary for a dealer to agree prior to the close of the 
regular trading session to take the contra side of a customer basket 
order and the closing index value.

    \8\As amended, Amex Rule 1300 (e)(i) defines ``closing price'' 
as the price established by the last regular way sale on the 
Exchange prior to the official closing of the 9:30 a.m. to 4:15 p.m. 
trading session, as determined by the Exchange.
---------------------------------------------------------------------------

    The Exchange believes that permitting specialists in PDRs and 
investment trust securities to participate in the AHT facility in order 
to ``clean-up'' order imbalances and effect closing price coupled 
orders would benefit investors by providing additional liquidity to the 
listed cash market for derivative securities based upon well known 
market indexes, such as those described above. The market price of 
these securities is based upon transactions largely effected in markets 
other than the Amex. The Exchange states that the specialist in such 
securities has no unique access to market sensitive information 
regarding the market for the underlying securities or closing index 
values. The Exchange, therefore, believes that specialist participation 
in the AHT facility in PDRs and investment trust securities in the 
manner described above does not raise any market integrity issues. In 
addition, should a customer not care for an execution at the closing 
price, the rules of the Exchange's AHT facility permit cancellation of 
an order up to the close of the AHT session at 5:00 p.m. (orders in the 
AHT facility are not executed until the 5:00 p.m. close of the after-
hours session.) A customer, therefore, will have approximately 40 
minutes to determine if an execution at the closing price suits its 
needs, and may cancel its order if it believes that the closing price 
does not suit its objectives.
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.\9\ The Commission 
believes that the rule change 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,\10\ which allow exchanges to promulgate rules relating to 
specialists in order to maintain fair and orderly markets.

    \9\15 U.S.C. Sec. 78f and 78k (1988).
    \10\17 CFR 240.11b-1 (1994).
---------------------------------------------------------------------------

    Both the Act and Exchange rules reflect the crucial role played by 
specialists in providing stability, liquidity, and continuity in the 
Exchange's market. Recognizing the importance of the specialist in the 
market, the Act, as well as Exchange rules, impose stringent 
obligations upon specialists.\11\ Primary among these obligations is 
the requirement to maintain fair and orderly markets by engaging in, 
among other things, dealings for their own account to minimize the 
effects of temporary disparity between supply and demand.\12\

    \11\See Rule 11b-1 under the Act, 17 CFR 240.11b-1 (1994); Amex 
Rule 170.
    \12\See Amex Rule 170(d).
---------------------------------------------------------------------------

    The Commission believes that the rule change permitting specialists 
in PDRs and investment trust securities listed pursuant to Section 118B 
to participate in the AHT facility by entering an order for the 
specialist's account only to eliminate order imbalances should assist 
specialists in their obligation to minimize temporary disparity between 
supply and demand. In addition, the Commission agrees with the Exchange 
that permitting specialists in PDRs and investment trust securities to 
participate in the AHT facility in order to ``clean-up'' order 
imbalances and effect closing price coupled orders would benefit 
investors by providing additional liquidity to the listed cash market 
for derivative securities based upon well known market indexes.
    The Commission also believes that the Amex's rule change strikes a 
reasonable balance between the Exchange's need to accommodate the needs 
of investors by increasing liquidity in the listed cash market for 
derivative securities based on market indexes, and the need to prevent 
the potential for manipulation or misuse of information. For example, 
although Amex specialists will know which limit order are eligible for 
execution in the AHT facility, they will not be able to use this 
information to their own advantage because Rule 1302(b) is being 
amended to eliminate the migration of limit orders for PDRs and 
investment trust securities from the specialist's limit order book to 
the AHT facility.
    In addition, the Commission believes that approval of the Amex rule 
change for a one year pilot period will provide the Commission and 
Exchange an opportunity to monitor the operation of the amendments to 
Rules 1300 and 1302. This one year period also will allow the 
Commission and the Exchange the opportunity to monitor specialist 
compliance with the amended rules to ensure that specialists are 
properly executing their responsibilities.
    Finally, in its rule filing, the Amex indicated that, during the 
one year pilot period, the Exchange would study the operation of the 
facility to determine if there are any additional issues that need to 
be addressed. In this regard, the Commission requests that the Exchange 
submit a report and analysis, by May 1, 1995, of the following 
information (broken down by month): (1) trading volume (trades and 
number of shares of PDRs and investment trust securities) in the after-
hours session; (2) the number of trades, if any, of (a) single-sided 
orders, and (b) coupled buy and sell orders which specialists executed 
in the after-hours session; (3) the number of shares, if any, of (a) 
single-sided orders, and (b) coupled buy and sell orders which 
specialists executed in the after-hours session; and (4) the number, if 
any, of single-sided orders that remained unexecuted at the end of the 
after-hours session. In addition, the Commission expects the Amex, 
through use of its surveillance procedures, to monitor closely the 
trading of PDRs and investment trust securities in the AHT facility to 
ensure that trading in these issues is not subject to any patterns of 
manipulation or trading abuses or unusual trading activity. Finally, 
the Commission requests that the Amex keep the Commission apprised of 
any technical problems which may arise regarding the operation of the 
pilot program.
    It is therefore ordered, Pursuant to Section 19(b)(2) of the 
Act\13\ that the proposed rule change (SR-Amex-93-15) is hereby 
approved for a one year period until August 29, 1995.

    \13\15 U.S.C. 78s(b)(2) (1988).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\

    \14\17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-21750 Filed 9-1-94; 8:45 am]
BILLING CODE 8010-01-M