[Federal Register Volume 60, Number 25 (Tuesday, February 7, 1995)]
[Notices]
[Pages 7236-7239]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2971]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35310; File No. SR-Amex-95-01]
Self-Regulatory Organizations; Notice of Filing and Order
Granting 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
January 31, 1995.
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 January 11, 1995, 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.
\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1991).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex requests a four month extension of a pilot program which
amended Exchange Rule 109 to permit a specialist, upon request, to
grant stops in a minimum fractional change market.\3\ The text of the
proposed rule [[Page 7237]] change is available at the Office of the
Secretary, Amex and at the Commission.
\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''); 32664 (July 21, 1993), 58 FR 40171
(July 27, 1993) (File No. SR-Amex-93-22) (``July 1993 Approval
Order''); and 33791 (March 21, 1994), 59 FR 14432 (March 28, 1994)
(File No. SR-Amex-93-47) (``1994 Approval Order''). Commission
approval of these amendments to Rule 109 expires on March 21, 1995.
The Exchange seeks accelerated approval of the proposed rule change
in order to allow the pilot program to continue without
interruption. See letter from Linda Tarr, Special Counsel, Legal &
Regulatory Policy Division, Amex, to Glen Barrentine, Senior
Counsel, Division of Market Regulation, SEC, dated January 31, 1995.
---------------------------------------------------------------------------
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 March 21 1994, the Commission extended its pilot approval of
amendments to Exchange Rule 109 until March 21, 1995.\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.
\4\See 1994 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.
---------------------------------------------------------------------------
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 a four month extension of the
pilot program which amended Rule 109.
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-95-01 and should be
submitted by February 28, 1995.
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\
\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.
---------------------------------------------------------------------------
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 that received a better
price; (2) whether limit orders on the specialist's book were 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 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.
\10\See supra, note 3.
---------------------------------------------------------------------------
The Exchange has submitted to the Commission several 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
Commission must conduct further [[Page 7238]] analysis of the Amex data
and, in particular, of Rule 109's impact on limit orders on the
specialist's book, before it can consider permanent approval thereof.
To allow the Commission fairly and comprehensively to evaluate the
Amex's use of its pilot procedures, 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 July
21, 1995.
First, the Amex's latest monitoring report indicates that
approximately half of orders stopped in minimum fractional change
markets received price improvement. The Commission, therefore, believes
that the pilot procedures provide a benefit to certain investors by
offering the possibility of price improvement to customers whose orders
are granted stops in minimum fractional change markets. According to
the 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.
Second, the Amex states that the amendments to Rule 109 have not
adversely affected customer limit orders existing on the specialist's
book.\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\ In addition to
aggregated data, the Amex provided a detailed breakdown of the
disposition of each order.
\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 14-20. 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.
---------------------------------------------------------------------------
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 prior experience, the Commission
did not have sufficient grounds to conclude that this long-standing
concern had been alleviated. The Commission acknowledges, however, that
Amex's recent monitoring reports provide new information on this aspect
of the pilot program. As a result, the Commission finds that additional
time is necessary for the Commission to review such information and to
ensure that Rule 109, as amended, does not harm public customers with
limit orders on the specialist's book.
\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).
---------------------------------------------------------------------------
In terms of market depth, the Amex's 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.\14\ 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.\15\ The Amex repeatedly has stated, both to the
Commission\16\ and to its members,\17\ that specialists can only stop
stock in a minimum fractional changed 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.\18\
\14\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.
\15\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.
\16\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.
\17\See Amex Information Circular Nos. 92-74 (April 24, 1992)
and 93-333 (April 7, 1993).
\18\For further discussion of the relationship between quote
size imbalance and the likelihood of price improvement, see supra
note 14.
---------------------------------------------------------------------------
In the Commission's opinion, the Amex data generally supports its
conclusions regarding market depth. The Commission continues to believe
that the requirement of a sufficient market imbalance is a critical
aspect of the pilot program.\19\ When properly applied, such a
requirement should help the Amex 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.\20\
\19\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. 33791 (March 21, 1994), 59 FR 14437 (March 28, 1994)
(File No. SR-NYSE-94-06).
\20\See supra, text accompanying notes 11-13.
---------------------------------------------------------------------------
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 5,00 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 ongoing effort to keep
its specialists properly informed about the pilot program's
requirements. In this context, the Amex has distributed Information
Circulars,\21\ and held continuing educational sessions on the pilot
program and its requirements for stopping stock in minimum fractional
change markets. The Commission would expect the Amex to take
appropriate action in response to any instance of specialist non-
compliance with Rule 109's procedures.
\21\See supra, note 17.
---------------------------------------------------------------------------
During the pilot extension, the Commission requests that the
Exchange continue to monitor the effects of stopping stock in a minimum
fractional change market and to provide additional information where
appropriate. Moreover, if the Exchange determines to request permanent
approval of the pilot program or an extension thereof beyond July 21,
1995, the Amex should submit to the Commission a proposed rule change
by April 1, 1995. [[Page 7239]]
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.\22\
\22\No comments were received in connection with the proposed
rule change which implemented these procedures. See 1992 Approval
Order, supra, note 3.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2),\23\ that the
proposed rule change (SR-Amex-95-01) is hereby approved until July 21,
1995.
\23\15 U.S.C. 78s(b)(2) (1988).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
\24\17 CFR 200.30-3(a)(12) (1991).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-2971 Filed 2-6-95; 8:45 am]
BILLING CODE 8010-01-M