[Federal Register Volume 60, Number 109 (Wednesday, June 7, 1995)]
[Notices]
[Pages 30122-30124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13892]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35786; File No. SR-Amex-94-51]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment Nos. 1 and 2 to the Proposed Rule Change by the American
Stock Exchange, Inc. Relating to the In Person Trading Volume
Requirement for Registered Option Traders
May 31, 1995.
On November 18, 1994, the American Stock Exchange, Inc. (``Amex''
or ``Exchange''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ filed
with the Securities and Exchange Commission (``Commission'') a proposal
regarding the in person\3\ trading volume requirement for Registered
Options Traders (``Traders'').\4\ Notice of the proposal appeared in
the Federal Register on December 12, 1994.\5\ No comment letters were
received on the proposed rule change. The Exchange filed Amendment No.
1 to the proposal on January 9, 1995,\6\ and Amendment No. 2 on April
6, 1995.\7\ This order approves the proposal, as amended.
\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1994).
\3\``In person'' means that options transactions are personally
executed by a Trader on the Amex floor and not through the use of
orders given to a floor broker or left on a specialist's book.
\4\Traders are considered specialists for purposes of the Act.
See Amex Rule 958, Commentary .01.
\5\See Securities Exchange Act Release No. 35050 (December 5,
1994), 59 FR 64002.
\6\As discussed herein, in Amendment No. 1 the Exchange
clarifies the obligation of Traders receiving market maker treatment
for off-floor transactions and proposes disciplinary measures for
Traders improperly accepting market maker treatment for such
transactions. See Letter from Claire McGrath, Managing Director and
Special Counsel, Derivative Securities, Amex, to Michael Walinskas,
Branch Chief, Office of Market Supervision (``OMS''), Division of
Market Regulation (``Division''), Commission, dated January 9, 1995
(``Amendment No. 1'').
\7\In Amendment No. 2, the Exchange proposes to amend Amex Rule
958, Commentary .01 and .03, to provide that Traders must have at
least 75% of their trading activity in classes in which they are
assigned. Additionally, the Exchange proposes that Traders who elect
market maker treatment for off-floor opening transactions but fail
to satisfy the requirements of Rule 958 will be referred to the
Exchange's Committee on Specialist and Registered Trader Performance
rather than the Exchange's Minor Floor Violation Disciplinary
Committee as provided in Amendment No. 1. See Letter from Claire
McGrath, Managing Director and Special Counsel, Derivative
Securities, Amex, to Michael Walinskas, Branch Chief, OMS, Division,
Commission, dated April 5, 1995 (``Amendment No. 2'').
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Specifically, the Exchange proposes to amend Rule 958 to: (1)
Require Traders to execute at least 25% of his or her individual
options transactions and total contract volume in each calendar quarter
in person and not through the use of orders;\8\ (2) require Traders to
have at least 75% of their trading activity (measured in terms of
contract volume) in the classes of options to which they are assigned,
as opposed to the 50% currently required;\9\ and (3) extend market
maker capital and margin treatment for a Trader's opening off-floor
orders provided that at least (i) 80% of their total transactions and
contract volume on the Exchange in each calendar quarter are executed
in person and not through the use of orders and (ii) the Trader
satisfies its obligations pursuant to Rule 958.\10\ In addition, the
proposal requires Traders to satisfy the market making obligations set
forth in Amex Rule 958\11\ for all off-floor orders for which a Trader
receives market maker treatment and, in general, that those orders be
effected only for purposes of hedging, reducing the risk of,
rebalancing, or liquidating open positions of the Trader.
\8\The proposal also gives the Exchange the authority to
increase the 25% in person requirement if the Exchange, in its
discretion, deems such increase to be necessary. The Exchange would
not have the authority to lower the in person requirement below 25%
without the prior approval of the Commission pursuant to a rule
filing under Section 19b of the Act.
\9\See Amendment No. 2, supra note 7.
\10\See Amendment No. 1, supra note 6. Currently, Rule 958,
Commentary .03 provides, among other things, that except for unusual
circumstances, at least 50% of a Trader's trading activity in any
calendar quarter (in terms of contract volume) must ordinarily be in
classes of options to which the Trader is assigned. In Amendment No.
2, the Exchange proposes to amend this requirement so that at least
75% of total activity (in terms of contract volume) must be in
assigned classes. See Amendment No. 2, supra note 7.
\11\These obligations include, but are not limited to, requiring
that such transactions contribute to the maintenance of fair and
orderly markets, and requiring market makers to bid and offer within
prescribed parameters.
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Currently, under Amex Rule 958 there is no in person trading volume
or transaction requirement for Traders. The Exchange believes, however,
that establishing an in person requirement for Traders of at least 25%
of a Trader's individual transactions and total contract volume during
each calendar quarter will result in better, more liquid markets
because Traders will be available in trading crowds to contribute to
the maintenance of fair and orderly markets, and will encourage Traders
to make more competitive bids and offers and trade for their own
account when there exists a lack of price continuity, a temporary
disparity between the supply of and demand for options contracts, or a
temporary distortion of the price relationships between options.
With regard to market maker treatment for off-floor options
transactions, Amex Rule 958(g) currently provides that only option
transactions initiated on the Amex's floor count as market maker
transactions. Thus, only on-floor market maker transactions qualify for
favorable capital and margin treatment under the Amex's rules, even if
such orders are entered to adjust or hedge the risk of positions of the
Trader that result from the Trader's on-floor market making
activity.\12\
\12\Questions of margin and capital treatment do not arise in
connection with closing transactions initiated from off the floor,
because they only reduce or eliminate existing positions.
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The Amex states that because a Trader currently cannot effectively
adjust his or her positions or engage in hedging or other risk limiting
opening transactions from off the Exchange floor without incurring a
significant economic penalty, Amex Traders must either be physically
present on the floor at all times while the market is open, or face
significant risks of adverse market movements during those times when
they must necessarily be absent from the trading floor. The Amex argues
that by imposing costs on certain hedging or risk-adjusting
transactions of Traders, the Amex's current rules may prevent Traders
from effectively discharging their market making obligations and expose
them to unacceptable levels of risk. The Amex believes that the amended
proposal addresses these concerns by offering Traders the opportunity
to obtain market maker treatment for up to 20% of their off-floor
opening transactions.
Traders who elect market maker treatment for off-floor opening
transactions but fail to satisfy the proposal's requirements, including
the 80% in person requirement, will be referred to the Amex's Committee
on Specialist and Registered Trader Performance and subject to the
disciplinary measures provided in Article V of the Exchange's
Constitution.\13\ Under Article V of the Exchange's Constitution, the
Exchange [[Page 30123]] may impose appropriate discipline for
violations of the Act and the Exchange's rules, including expulsion,
suspension, limitation of activities, fines, censure, or any other
suitable sanction.\14\
\13\See Amendment No. 2, supra note 7.
\14\Id.
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The Amex believes that the amended proposal presents a more
appropriate and realistic treatment of Trade transactions initiated
from both off the trading floor and in person than what is provided for
under existing Exchange Rule 958. The Amex believes that requiring
Traders to execute at least 25% of their transactions and total
contract volume in each calendar quarter in person and, further,
extending favorable margin and capital treatment for off-floor
transactions only to those Traders who satisfy the 80% in person
transaction and trading volume requirement, should have the effect of
increasing the extent to which Trader transactions contribute to
liquidity and to the maintenance of fair and orderly markets on the
Amex by providing for a greater degree of in person trading by Traders
and by enabling Traders to better manage the risk of their market
making activities. Thus, the Amex believes that the proposal is
consistent with and in furtherance of the objectives of Section 6(b)(5)
and Section 11(a) of the Act in that it will promote the maintenance of
fair and orderly markets on the Amex and will contribute to the
protection of investors and the public interest.
The Commission finds that the proposal 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)(5) in that the
proposal is designed to promote just and equitable principles of trade
and to protect investors and the public interest.\15\ In addition, the
Commission finds that the proposal is consistent with the requirement
under Section 11(b) of the Act and the rules thereunder that require
market maker transactions to be consistent with the maintenance of fair
and orderly markets.\16\
\15\15 U.S.C. 78f(b)(5)(1988).
\16\15 U.S.C. 78k (1982) and 17 CFR 240.11b-1.
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The Commission believes that the proposal is a reasonable effort by
the Amex to accommodate the needs of Traders to effect off-floor
opening transactions while reinforcing the requirement under Amex Rule
958 that Traders' transactions constitute a course of dealings
reasonably calculated to contribute to the maintenance of a fair and
orderly market. The Commission believes that the proposed 25% minimum
in person trading requirement, the 75% minimum assigned class
requirement, and the 80% in person requirement for market maker
treatment for off-floor trades, taken together, will help to ensure
that Traders' transactions continue to contribute to the maintenance of
fair and orderly markets while, at the same time, enabling Traders to
better manage the risk of their market making activities.
As the Amex has noted, under the current requirements, Traders who
adjust existing positions for hedging purposes while not physically
present on the Exchange floor cannot receive market maker margin
treatment for such orders under any circumstances and must decide
whether to close out their positions or place their orders in a
customer margin account requiring 50% margin. While this may not be an
unreasonable result in many cases, the Commission believes that the
Amex has set forth a reasonable proposal that permits market maker
treatment for certain off-floor orders under very limited circumstances
that ensure that such orders must contribute to the maintenance of fair
and orderly markets and that require Traders to comply with a
heightened 80% in person trading requirement.
Moreover, by requiring that a percentage of Traders' transactions
be effected in person and by strengthening the requirement that a
substantial percentage of Traders' transactions be effected in their
appointed classes, the proposal will improve Amex market maker
capabilities. The Commission believes these requirements will help to
ensure that Traders will be physically present in their appointed
classes to respond to public orders and to improve the price and size
of the markets made on the Amex floor. In addition, the proposal will
have the effect of reducing the extent to which Amex Traders can
effectively function as privileged investors by entering the Amex floor
only long enough to drop off orders with a floor broker, without ever
actually making competitive quotations or otherwise affirmatively
functioning as market makers. Thus, the Commission believes the Amex
proposal will serve to maintain fair and orderly markets and generally
promote the protection of investors and the public interest.\17\
\17\See Securities Exchange Act Release No. 21008 (June 1,
1984), 49 FR 23721 (June 7, 1984), (order approving proposed rule
change by the Chicago Board Options Exchange (``CBOE'') establishing
minimum in person and assigned class trading requirements for market
makers).
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In summary, the Commission believes that the introduction of an in
person trading requirement, an increase in the required percentage of
trades in assigned classes, and the availability of market maker
treatment for a limited number of off-floor transactions, as described
above, should help to ensure the stability and orderliness of the
Amex's markets.
The Commission expects the Amex to closely monitor those Traders
electing to receive market maker treatment for off-floor orders as
provided under the proposal to ensure that they are meeting the in
person trading requirements in addition to their other market making
obligations required under Rule 958, as amended. The Amex has
represented that market makers who choose to receive favorable margin
and capital treatment under the proposal but fail to satisfy the
proposal's requirements will be referred to the Exchange's Committee on
Specialist and Registered Trader Performance and subject to the
sections available under Article V of the Exchange's Constitution.\18\
The Commission expects the Exchange to impose strict sanctions for
violations of the rule, particularly in cases of egregious or repeated
failures to comply with the rule's requiremets.\19\
\18\See Amendment No. 2, supra note 7.
\19\The Amex plans to issue a circular to its membership
describing the rule change and emphasizing the importance of
monitoring off-floor trading activity. Telephone conversation
between Claire McGrath, Managing Director and Special Counsel,
Derivative Securities, Amex, and Brad Ritter, Senior Counsel, OMS,
Division, Commission, on January 10, 1995.
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Finally, the Commission notes that the staff of the Board of
Governors of the Federal Reserve System (``Board'') has previously
issued a letter raising no objection to the Commission's approval of a
substantively similar proposal by the CBOE based on the Commission's
belief that the off-floor transactions of market makers for which they
can receive market maker treatment will be designed to contribute to
the maintenance of a fair and orderly market and would be consistent
with the obligations of a specialist under Section 11 of the Act.\20\
\20\See Securities Exchange Act Release No. 34104 (May 25,
1994), 59 FR 28438 (June 1, 1994), note 13 (citing letter from Scott
Holz, Senior Attorney, Board, to Howard Kramer, Associate Director,
Division, Commission, dated March 9, 1994) (``Exchange Act Release
No. 34104'').
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The Commission finds good cause for approving Amendment Nos. 1 and
2 to the proposed rule change prior to the thirtieth day after the date
of publication of notice of filing thereof in the Federal Register.
Specifically, the Commission notes that Amendment [[Page 30124]] Nos. 1
and 2 are more restrictive than the original proposal, which was
published for the full 21-day comment period without any comments being
received by the Commission.\21\ Additionally, the Commission notes that
Amendment Nos. 1 and 2 conform the Amex proposal, in most respects, to
the CBOE proposal previously approved by the Commission.\22\
Accordingly, the Commission believes it is consistent with Sections
6(b)(5) and 19(b)(2) of the Act to approve Amendment Nos. 1 and 2 to
the proposed rule change on an accelerated basis.
\21\The Commission believes the amended proposal is more
restrictive in that it clarifies the obligations that Traders must
satisfy in order to obtain market maker treatment for off-floor
opening transactions and obligates the Exchange to initiate
disciplinary proceedings against members who improperly accept
market maker treatment for such transactions.
\22\See Exchange Act Release No. 34104, supra note 20.
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Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment Nos. 1 and 2 to the proposed rule
change. 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 in the Commission's Public
Reference Section, 450 Fifth Street, NW., Washington, DC. 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-94-51 and should be submitted by June 28, 1995.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change (File No. SR-Amex-94-51), as
amended, is approved.
\23\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.\24\
\24\17 CFR 200.30-3 (a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-13892 Filed 6-6-95; 8:45 am]
BILLING CODE 8010-01-M