[Federal Register Volume 61, Number 145 (Friday, July 26, 1996)]
[Notices]
[Pages 39167-39169]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19036]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37458; File No. SR-Amex-96-13]
Self-Regulatory Organizations; American Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change and Notice of Filing
and Order Granting Accelerated Approval to Amendment No. 1 to Proposed
Rule Change Relating to Amendments to Rule 117 (Trading Halts Due to
Extraordinary Market Volatility)
July 19, 1996.
I. Introduction
On April 11, 1996, the American Stock Exchange, Inc. (``Amex'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``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 its circuit breaker
rules.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 37146 (Apr. 26, 1996), 61 FR 19650 (May 2,
1996).\3\
[[Page 39168]]
On July 10, 1996, the Exchange submitted to the Commission Amendment
No. 1 to the proposed rule change.\4\ This order approves the proposed
rule change, including Amendment No. 1 on an accelerated basis.
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\3\ The Commission has received one comment letter specifically
addressing the Amex proposal as well as the identical rule proposal
of the New York Stock Exchange (``NYSE''). See Letter from Joseph R.
Hardiman, President, National Association of Securities Dealers, to
Jonathan G. Katz, Secretary, SEC, dated May 23, 1996. The Commission
has also received three additional comment letters on the NYSE's
proposal. See Letter from William R. Rothe, Chairman, and John L.
Watson III, President, Security Traders Association, to Jonathan G.
Katz, Secretary, SEC, dated May 10, 1996; Letter from Peter W.
Jenkins, Chairman, and Holly A. Stark, Vice Chairman, Securities
Traders Association's Institutional Committee, to Jonathan G. Katz,
Secretary, SEC, dated May 17, 1996; Letter from Paul Schott Stevens,
Senior Vice President and General Counsel, Investment Company
Institute, to Jonathan G. Katz, Secretary, SEC, dated May 23, 1996.
Because the NYSE's proposal is identical to that of Amex, issues
raised in these comment letters apply equally to both rule
proposals. The comment letters are summarized in the Commission's
NYSE order and the Commission's discussion in the NYSE order is
applicable to this order. See Securities Exchange Act Release No.
37457 (July 19, 1996) (approving NYSE's proposal to shorten the
periods for halting trading when circuit breakers levels are
triggered).
\4\ See letter from Geraldine M. Brindisi, Vice President and
Corporate Secretary, Amex, to Ivette Lopez, Assistant Director,
Division of Market Regulation, SEC, dated July 9, 1996 (``Amendment
No. 1''). For a description of Amendment No. 1, see infra note 9 and
accompanying text.
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II. Description of Proposal
Currently, Amex Rule 117 provides that if the Dow Jones Industrial
Average (``DJIA'') \5\ falls 250 or more points below its previous
trading day's closing value, trading in all stocks on the Exchange will
halt for one hour. It further provides that, if on the same day the
DJIA drops 400 or more points from its previous trading day's close,
trading on the Exchange will halt for two hours.
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\5\ ``Dow Jones Industrial Average'' is a service mark of Dow
Jones & Company, Inc.
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Moreover, Commentary .03 to Amex Rule 117 provides that if the 250-
point trigger is reached during the last hour, but before the last
half-hour, of trading, or if the 400-point trigger is reached during
the last two hours, but before the last hour, of trading, the Exchange
may use abbreviated reopening procedures either to permit trading to
reopen before 4:00 p.m. or to establish closing prices. Current
Commentary .03 to Amex Rule 117 further provides that if the 250-point
trigger is reached during the last half-hour, or if the 400-point
trigger is reached during the last hour, the Exchange shall not reopen
for trading on that day.\6\
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\6\ Amex Rule 117 was approved by the Commission on a pilot
basis on October 19, 1988 and has been extended annually since then,
with the most recent extension expiring on October 31, 1996. The
Exchange proposes to adopt amendments to Amex Rule 117 to coincide
with the year-to-year pilot program. See Securities Exchange Act
Release Nos. 26198 (Oct. 19, 1988), 53 FR 41637 (Oct. 24, 1988);
36414 (Oct. 25, 1995), 60 FR 55630 (Nov. 1, 1995).
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With the proposed rule change, the Exchange proposes to revise its
circuit breaker rules so that the time periods for halting trading when
the 250-point or 400-point level is triggered would be shortened from
one hour and two hours to one-half hour and one hour, respectively.\7\
The Exchange believes the proposed amendments are an appropriate,
measured response to the significant technological progress made by the
securities markets and the broker-dealer community since 1988 in
efficiently accommodating large order imbalances that may occur under
volatile market conditions. The Exchange believes that the shortened
time periods should now provide sufficient opportunity for market
participants to evaluate market conditions and avoid unnecessary delays
in resumption of trading.
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\7\ The Exchange has represented to the Commission that it will
use the intermarket telecommunications system known as Information
Network for Futures, Options, and Equities (``INFOE'') system as
well as the Consolidated Tape to announce the precise time when the
circuit breaker thresholds are reached. Telephone conversation
between Michael Cavalier, Assistant General Counsel, Amex, and
Jennifer S. Choi, Attorney, Division of Market Regulation, SEC, on
July 9, 1996.
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With respect to Commentary .03, in its original proposal, the
Exchange proposed to replace the provision with an amendment, which
would provide that if the 250-point trigger is reached during the last
half-hour of trading, or if the 400-point trigger is reached during the
last hour of trading, the Exchange may use abbreviated reopening
procedures to establish new last sale prices.\8\ Subsequently, the
Exchange filed Amendment No. 1 to eliminate the proposed provision for
the abbreviated reopening procedures to establish new last sale prices
if trigger values are reached in the last one-half hour or hour of
trading.\9\ Therefore, the Exchange now proposes to delete the current
provision in Commentary .03 without adding new language.
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\8\ In conjunction with its proposal for abbreviated reopening
procedures, the Exchange proposed to amend Amex Rule 1 to provide
that the 9:30 a.m. to 4:00 p.m. trading session may be extended to
permit closing transactions pursuant to Rule 117. See Securities
Exchange Act Release No. 37146 (Apr. 26, 1996), 61 FR 19650 (May 2,
1996).
\9\ The Exchange also withdrew from the proposed rule change
amendments to Rule 1 because the abbreviated reopening procedures
are no longer being proposed in the rule filing. See Amendment No.
1, supra note 4.
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III. Discussion
After careful review of the Exchange's proposed amendments to the
circuit breaker rules and for the reasons discussed below, the
Commission believes 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).\10\ Specifically, the Commission
believes the proposal is consistent with the Section 6(b)(5)
requirements that the rules of an exchange be designed to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
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\10\ 15 U.S.C. 78f(b).
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In 1988, the Commission approved the Exchange's circuit breaker
proposal, along with those of the other securities exchanges and the
National Association of Securities Dealers (``NASD''), because the
Commission believed that the circuit breaker rules proposed would help
promote stability in the equity and equity-related markets by providing
for an enhanced opportunity for market participants to assess
information during times of extreme market movements.\11\ The
proposals, in part, were in response to the events of October 19, 1987,
when the DJIA declined 22.6%. The Commission believed that the circuit
breaker proposals would provide market participants with an opportunity
during a severe market decline to reestablish an equilibrium between
buying and selling interest in a more orderly fashion. The futures
exchanges also adopted analogous trading halts to provide coordinated
means to address potentially destabilizing market volatility.\12\
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\11\ See Securities Exchange Act Release No. 26198, supra note
6.
\12\ See Letter from Todd E. Petzel, Vice President, Financial
Research, Chicago Mercantile Exchange (``CME''), to Jean A. Webb,
Secretary, Commodity Futures Trading Commission (``CFTC''), dated
September 1, 1988. See also letters to Jean A. Webb, Secretary,
CFTC, from Paul J. Draths, Vice President and Secretary, Chicago
Board of Trade (``CBT''), dated July 29, 1988; Michael Braude,
President, Kansas City Board of Trade (``KCBT''), dated August 10,
1988; and Milton M. Stein, Vice President, Regulation and
surveillance, New York Futures Exchange (``NYFE''), dated September
2, 1988.
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Since the implementation of the circuit breakers, the DJIA has
risen significantly. The 250 point and 400 point triggers, which
represented 12% and 19% of the DJIA when implemented, now represent
4.5% and 7% of the DJIA. The Exchange and members of the industry have
continued to study the circuit breaker rules and to consider the
possible effects of triggering the current circuit breakers in light of
the rise in the DJIA since their implementation.
While the Exchange evaluates the need to change the circuit breaker
trigger levels, the Commission believes, in the near term, it is
reasonable for the Exchange to shorten the length of the trading halts.
The Exchange believes and the Commission agrees that, with advances in
technology and increases in
[[Page 39169]]
the operational capacity of the markets, the current length of the
trading halts may not be necessary for market participants to become
aware of and respond to significant price movements. The shorter time
periods proposed by the Exchange for halting all trades should be
sufficient to allow market participants to evaluate and act on changing
market conditions without unduly constraining market activities.\13\
Nevertheless, the Commission encourages the Exchange and members of the
industry to continue to evaluate the trigger levels for the trading
halts in light of the changing circumstances of the markets since
1988.\14\
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\13\ The Commission also believes that shortening the length of
the trading halts does not need to be delayed pending the resolution
of any other circuit breaker issues. While an examination of the
broader issue of raising the circuit breaker triggers may be
warranted, the trading halt periods should be shortend irrespective
of the level of the trigger points. See Securities Exchange Act
Release No. 37457, supra note 3 (some comment letters discuss other
circuit breaker issues that are not directly involved in the
specific proposal before the Commission).
\14\ To coordinate trading halts across all securities and
futures markets, the regional and futures exchanges have submitted
amendments to their circuit breaker rules. For more detail on the
specifics of these proposals, see Securities Exchange Act Release
No. 37459 (July 19, 1996); Letter from Norman E. Mains, Senior Vice
President, Chief Economist, and Director of Research, CME, to Jean
A. Webb, Secretary, Commodity Futures Trading Commission, dated July
5, 1996. The NASD's Policy Statement on Market Closings state that
the NASD will, upon the request of the Commission, act to halt
domestic trading in all securities quoted on the Nasdaq system and
domestic trading in equity or equity-related securities in the over-
the-counter market. The Commission notes that it has a standing
request with the NASD to halt trading as quickly as practicable
whenever the NYSE and other equity markets have suspended trading.
The Amex's and NYSE's proposed rule change does not affect the
Commission's standing request. See Letter from Richard Ketchum,
Chief Operating Officer and Executive Vice President, NASD, to
Howard, to Howard Kramer, Associate Director, SEC, dated July 18,
1996.
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The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof. The Exchange's original
proposal was published in the Federal Register for the full statutory
period \15\ and Amendment No. 1, which deletes the provision in the
proposal that provides for an abbreviated reopening session, was
submitted in response to the comments received.\16\ Moreover, the
Commission believes that deleting this provision is appropriate where
the details of such a session were not fully developed and might have
created confusion on the Exchange or among the various equities and
futures markets during times of extreme volatility. Based on the above,
the Commission finds that there is good cause, consistent with Section
6(b)(5) of the Act, to accelerate approval of the amended proposed rule
change.
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\15\ See Securities Exchange Act Release No. 37146, supra note
8.
\16\ For a detailed discussion about the comments received, see
Securities Exchange Act Release No. 37457, supra note 3.
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The Commission also believes that the circuit breaker mechanisms
must be coordinated across the U.S. equity, futures and options markets
to be effective in times of extreme proposal will become effective on
July 22, 1996, which will also be the effective date of the amended
rules of the other markets, so that the circuit breaker trading halts
will continue to be coordinated among the different markets.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1. 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. Sec. 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 Exchange. All
submissions should refer to File No. SR-Amex-96-13 and should be
submitted by August 16, 1996.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-Amex-96-13) is approved and
effective on July 22, 1996.
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\17\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19036 Filed 7-25-96; 8:45 am]
BILLING CODE 8010-01-M