[Federal Register Volume 62, Number 91 (Monday, May 12, 1997)]
[Notices]
[Pages 25982-25984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12283]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38573; File No. SR-Amex-97-10]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the American Stock Exchange, Inc. Relating to Amendments to
Rule 170.01 Pertaining to Specialists Establishing a Position
May 5, 1997.
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 February 24, 1997, the American Stock Exchange, Inc. (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1)
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex, pursuant to Rule 19b-4 of the Act, proposes to amend
Commentary .01 to Exchange Rule 170 to permit a specialist to provide
liquidity to orders on the book in stabilizing transactions without the
necessity of first obtaining Floor Official approval.
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 Amex 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 IV below. The Amex 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
Rule 170 (``Rule''), the primary rule governing a specialist's
functions, restricts a specialist's transactions in his or her
specialty stock to those that are reasonably necessary to the
maintenance of a fair and orderly market. Specifically, paragraph (d)
of the Rule provides that a specialist is affirmatively required to
engage in a course of dealings for his own account to minimize order
disparities and contribute to continuity and depth in the market, and
is precluded from trading for his own account unless such dealing is
necessary for the maintenance of a fair and orderly market. The price
trend of a security should thus be determined by incoming orders rather
than the specialist's proprietary dealings.
Commentary .01 to the Rule sets forth specific requirements which
are applicable when a specialist is establishing or increasing a
position, and provides that a specialist should effect such
transactions in a reasonable and orderly manner in relation to the
condition of the general market, the market in the particular stock and
the adequacy of his position to meet the immediate and reasonably
anticipated needs of the market. In particular, paragraph (b) of the
Rule provides that a specialist must obtain Floor Official approval
prior to effecting the purchase of all or substantially all the stock
offered on the book at a price equal to the last sale, when such offer
represents all or substantially all the stock offered in the market.
Paragraph (c) provides that he similarly must obtain Floor Official
approval prior to supplying all or substantially all the stock bid for
on the book at a price equal to the last sale. In addition, paragraph
(a) prohibits a specialist from purchasing stock at a price above the
last sale in the same
[[Page 25983]]
trading session, without Floor Official approval. Paragraph (d)
requires him to re-offer or re-bid where necessary after effecting the
transactions described in paragraphs (a), (b), and (c).
The Amex states that the restrictions contained in paragraphs (b)
and (c) were intended to strike a balance between protecting the
auction market from unnecessary specialist trading and providing
immediate liquidity to orders that come to the Floor. The Floor
Official's function, at the time Rule 170 was adopted, was to operate
as a control mechanism to ensure that the specialist did not trade
unnecessarily.
The Amex contends that although the need to obtain Floor Official
approval was reasonable in the past, before technology enabled markets
to move quickly within seconds, it now has the effect, under certain
circumstances, of reducing liquidity and disadvantaging orders entered
with the specialist. If an order is brought to the specialist, he is
free to execute it immediately without displaying it first. Under such
circumstances, the specialist may purchase or sell all or substantially
all the stock offered or bid for, at a price equal to the last sale,
without obtaining Floor Official approval. However, if the specialist
initially decides instead to display the order, providing transparency,
in the hopes of either narrowing the market or generating interest on
the opposite side, but thereafter determines to take the offer or hit
the bid, he must obtain Floor Official approval.
Accordingly, it is proposed that Commentary .01 be amended to
provide that a specialist is not required to obtain Floor Official
approval with respect to the purchase, on a zero minus tick, of stock
offered on the book, or the sale, on a zero plus tick, of stock bid for
on the book. A specialist is the buyer and seller of last resort, and
is expected to step in when there is a disparity between supply and
demand. In this situation, the specialist would only be purchasing the
stock offered because there is inadequate demand for the stock. The
transaction in question would be stabilizing, in that he is buying on a
zero minus tick, against the direction of the market, rather than
directing the course of the market.
In addition, the Amex contends that with the advent of improved
technology, the Exchange's surveillance systems can now provide an
adequate substitute for Floor Official Approval in such circumstances.
In the last few years, the Exchange has developed an automated computer
program which identifies each instance in which a specialist crosses
the market (i.e., buys on the offer and sells on the bid). Each of
these situations can then be individually reviewed by the Exchange
Trading Analysis staff to determine whether the specialist was acting
appropriately. With respect to the proposed rule change, the Exchange
staff would look at how large the specialist's position was prior to
the transaction, whether there were imbalances in the limit orders on
his book which necessitated the transaction, and whether, if the market
subsequently ``turned around'' he used a reasonable amount of the
inventory acquired in the transaction to offset any imbalance between
supply and demand.
For example, assume that a customer enters an order to sell XYZ
stock at 10\1/8\ (the last sale and a minus tick) when the market is
quoted 10-10\1/4\. And assume that instead of executing the order
immediately, which the specialist is entitled to do, he displays it,
changing the quote to 10-10\1/8\. Because no buy side interest develops
at 10\1/8\, several minutes later the specialist determines that it is
appropriate to take the offer. He must now locate and explain the
circumstances to a Floor Official, and during this time the market may
move lower, either on the Amex or on another market, so that the
specialist would no longer pay 10\1/8\ for the stock. Had the
specialist been free to take the offer without seeking Floor Official
approval, the customer would have received an execution and the
Exchange staff would have reviewed the circumstances surrounding the
transaction to determine whether it appeared to be consistent with the
specialist's affirmative and negative obligations. In appropriate
cases, the specialist's actions could, of course, be referred to the
Exchange's Enforcement Division for possible disciplinary action.
The Amex believes that the proposed change carves out an exception
to the existing provisions, but would provide a distinct benefit to the
market by permitting the specialist to satisfy a customer's order more
expeditiously, while enabling him to enhance the liquidity, depth and
transparency of the market as the buyer or seller of last resort.
2. Basis
The Amex believes that the proposed rule change is consistent with
Section 6(b) of the Act in general and furthers the objectives of
Section 6(b)(5) \3\ in particular in that it is designed to promote
just and equitable principles of trade, to prevent fraudulent and
manipulative acts and practices, and to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, as well as to protect investors and the public interest.
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\3\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Amex does not believe that the proposed rule change will impose
any inappropriate 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. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) As the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Amex consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. 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, N.W., Washington, D.C. 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 Room in Washington, D.C. Copies of such
filing will also be available for inspection and copying at the
principal office of the Amex. All submissions should refer to the file
number in the caption above and should be submitted by June 2, 1997.
[[Page 25984]]
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-12283 Filed 5-9-97; 8:45 am]
BILLING CODE 8010-01-M