[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