[Federal Register Volume 60, Number 175 (Monday, September 11, 1995)]
[Notices]
[Pages 47194-47196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22392]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36181; File No. SR-Amex-95-24]


Self-Regulatory Organizations; American Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to the 
Execution of Odd-Lot Market Orders

September 1, 1995.
    On June 16, 1995, the American Stock Exchange, Inc. (``Amex'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Amex Rule 205\3\ to provide for the 
execution of odd-lot market orders\4\ at a price based upon the 
Intermarket Trading System (``ITS'') best bid or offer, subject to 
certain conditions as described more fully below.

    \1\15 U.S.C. 78s(b)(1).
    \2\17 CFR 240.19b-4.
    \3\Amex Rule 205 pertains to the manner of executing odd-lot 
orders.
    \4\An odd-lot market order is an order of less than a unit of 
trading to buy, sell, or sell short, that carries no further 
qualifying notations. The normal trading unit, or round-lot, is 100 
shares.
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    The proposed rule change was published for comment in the Federal 
Register on July 19, 1995.\5\ No comments were received on the 
proposal.

    \5\Securities Exchange Act Release No. 35963 (July 12, 1995), 60 
FR 37112.
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    The Exchange proposes to amend Amex Rule 205 in order to establish 
new odd-lot pricing procedures. The Commission initially approved the 
Exchange's current odd-lot pricing procedures as a pilot program in 
January 1989\6\ and extended it eleven times since then.\7\ Under the 
pilot procedures, odd-lot market orders with no qualifying notations 
are executed at the Amex quotation at the time the order is 

[[Page 47195]]
represented in the market either by being received at the trading post 
or through the Exchange's Post Execution Reporting (``PER'') system.\8\ 
Also, for the purposes of the pilot program, limit orders that are 
immediately executable based on the Amex quote at the time the order is 
received at the trading post or through PER are executed in the same 
manner as market orders. Neither order type is charged an odd-lot 
differential.\9\ Prior to the 1989 pilot program, odd-lot market orders 
were routed to a specialist and held in accumulation in the PER system 
or by the specialist until a round-lot execution in that security took 
place on the Exchange. Subsequent to the round-lot execution, the odd-
lot order received the same price as the last Exchange round-lot 
transaction, plus or minus an odd-lot dealer differential.

    \6\Securities Exchange Act Release No. 26445 (Jan. 10, 1989), 54 
FR 2248 (approving File No. SR-Amex-88-23).
    \7\See Securities Exchange Act Release Nos. 35344 (Feb. 8, 
1995), 60 FR 8430 (approving File No. SR-Amex-95-03); 34949 (Nov. 8, 
1994), 59 FR 58863 (approving File No. SR-Amex-94-47); 34496 (Aug. 
8, 1994), 59 FR 41807 (approving File No. SR-Amex-94-28); 33584 
(Feb. 7, 1994), 59 FR 6983 (approving File No. SR-Amex-93-45); 32726 
(Aug. 9, 1993), 58 FR 43394 (approving File No. SR-Amex-93-24); 
31828 (Feb. 5, 1993), 58 FR 8434 (approving File No. SR-Amex-93-06); 
30305 (Jan. 20, 1992), 57 FR 4653 (approving File No. SR-Amex-92-
04); 29922 (Nov. 8, 1991), 56 FR 58409 (approving File No. SR-Amex-
91-30); 29186 (May 19, 1991), 56 FR 22488 (approving File No. SR-
Amex-91-09); 28758 (Jan. 10, 1991), 56 FR 1656 (approving File No. 
SR-Amex-90-39); 27590 (Jan. 5, 1990), 55 FR 1123 (approving File No. 
SR-Amex-89-31).
    \8\Securities Exchange Act Release No. 26445 (Jan. 10, 1989), 54 
FR 2248. The PER system provides member firms with the means to 
electronically transmit equity orders, up to volume limits specified 
by the Exchange, directly to the specialist's post on the trading 
floor of the Exchange. Securities Exchange Act Release No. 34869 
(Oct. 20, 1994), 59 FR 54016.
    \9\A differential is a charge paid by the customer to the 
specialist odd-lot dealer for executing the order.
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    In its previous orders, the Commission encouraged the Exchange to 
evaluate the feasibility of implementing an odd-lot pricing system 
based on the ITS best bid or offer.\10\ The Commission was not 
satisfied that all customers were receiving the best execution, in 
terms of price and time, under the pilot procedures. In response, the 
Exchange, in its most recent request for an extension of the pilot 
program, stated that it has decided to proceed with systems 
modifications to provide for the execution of odd-lot market orders at 
the ITS best bid or offer, subject to certain conditions as hereinafter 
described, and that such system modifications should be completed by 
February 8, 1996.\11\

    \10\Securities Exchange Act Release No. 26445 (Jan. 10, 1989), 
54 FR 2248 (approving File No. SR-Amex-88-23).
    \11\Securities Exchange Act Release No. 35344 (Feb. 8, 1995), 60 
FR 8430 (approving File No. SR-Amex-95-03). The Commission notes 
that the current odd-lot pilot program is scheduled to expire on 
February 8, 1996.
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    The Exchange now proposes to amend Amex Rule 205, which it intends 
to implement after the required systems modifications are completed. 
The proposed amendment provides generally for the execution of odd-lot 
market orders at the highest bid and lowest offer disseminated by the 
Amex or by another ITS participant market. In order to protect against 
the inclusion of incorrect or stale quotations when determining the 
highest bid and lowest offer, a quotation in a stock from another ITS 
market center will be considered only if: (1) The stock is included in 
ITS in that market center, (2) the size of the quotation is greater 
than 100 shares, (3) the bid or offer is no more than one-quarter 
dollar away from the bid or offer, respectively, disseminated by the 
Exchange, (4) the quotation conforms to the Exchange's requirements 
concerning minimum fractional changes,\12\ (5) the quotation does not 
result in a ``locked market,''\13\ (6) the market center is not 
experiencing operational or system problems with respect to the 
dissemination of quotation information, and (7) the bid or offer is 
``firm'' pursuant to the Commission's and the market's rules.\14\ If an 
ITS quotation from another market is not used because it fails to meet 
one of the above criteria, the best bid and offer disseminated by the 
Exchange will be used.

    \12\Amex Rule 127 governs the Exchange's policy concerning 
minimum fractional changes for securities.
    \13\According to Amex Rule 236(a)(4), a ``locked market'' occurs 
whenever the Exchange disseminates a bid for an ITS security at a 
price that equals or exceeds the price of the offer for the security 
then being displayed from another ITS participating market center or 
whenever the Exchange disseminates an offer for an ITS security at a 
price that is less than the price of the bid for the security then 
being displayed from another ITS participating market center.
    \14\The Exchange considers a bid or offer as ``firm'' when the 
members of the market center disseminating the bid or offer are not 
relieved of their obligations with respect to such bid or offer 
under paragraph (c)(2) of Rule 11Ac1-1 pursuant to the ``unusual 
market'' exception of paragraph (b)(3) of Rule 11Ac1-1. See 17 CFR 
240.11Ac1-1(b)(3); 17 CFR 240.11Ac1-1(c)(2).
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    Where quotation information is not available (e.q., when quotation 
collection or dissemination facilities are inoperable) odd-lot market 
orders would be executed at the prevailing Amex bid or offer or at a 
price deemed appropriate under prevailing market conditions. All odd-
lot market orders entered prior to the opening of trading will continue 
to automatically receive the opening price, unless the Rule provides 
otherwise.\15\ The pricing procedures will apply to market orders to 
buy on the offer and orders to sell on the bid marked ``long.'' The 
proposal will continue to prohibit odd-lot differentials for these 
transactions. Finally, these procedures also will apply to odd-lot 
executable limit orders.

    \15\See Amex Rule 205 (c) (1) (``Orders Filled After the 
Close'') and Amex Rule 205 (c) (2) (``Non-Regular Way Trades'').
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    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).\16\ Specifically, 
the Commission believes the proposal is consistent with Section 6(b) 
(5) of the Act\17\ because the Exchange's proposed pricing procedures 
for standard odd-lot market orders are designed to facilitate the 
execution and reporting of odd-lot transactions, assist in the prompt 
and accurate clearance and settlement of such transactions, perfect the 
mechanism of a free and open market and a national market system, and, 
in general, protect investors and the public interest. The Commission 
anticipates this proposal will ensure that customers receive the best 
execution, both in terms of price and time, for standard odd-lot market 
orders because such orders will be priced off a current market quote 
instead of a subsequent transaction. This should result in investors 
receiving more timely executions at the best prices then prevailing 
under current market conditions.

    \16\15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f (b) (5).
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    The Commission also believes it is reasonable for the Exchange to 
set certain requirements to trigger the use of the ITS best bid or 
offer in the odd-lot pricing system. The limited prerequisites for the 
use of the ITS quote are appropriate to protect the automatic execution 
feature of the odd-lot pricing system against the inclusion of aberrant 
quotations. Although the ITS quote remains the Commission's preferred 
method of pricing standard odd-lot orders, the Commission recognizes 
that the use of the ITS quote may not always be practicable for the 
Exchange. Therefore, the Commission believes, in the instances 
enumerated by the Exchange, it is appropriate to use the Amex best bid 
or offer. Moreover, even those few orders receiving only the Amex quote 
will be executed more cheaply than under the pre-1989 system because 
the Exchange's proposal continues to ensure that a differential is not 
charged for odd-lot market orders.
    When the ITS best bid or offer is unavailable, the Commission 
believes it is acceptable for the Amex to price standard odd-lot market 
orders at the price of the last Exchange round-lot sale or at a price 
deemed appropriate under prevailing market conditions by the odd-lot 
dealer. In this way, the Exchange continue to provide procedures that 
facilitate the execution of odd-lot orders.
    Finally, the Commission expects, based on the Exchange's 
representations, the required systems modifications will be completed 
by 

[[Page 47196]]
February 8, 1996. The Commission also expects the Exchange to notify 
the Commission staff of such completion and the implementation of this 
proposal.
    It Therefore Is Ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-Amex-95-24) is approved.

    \18\ 15 U.S.C. 78s (b) (2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\

    \19\ 17 CFR 200.30-3 (a) (12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-22392 Filed 9-8-95; 8:45 am]
BILLING CODE 8010-01-M