[Federal Register Volume 62, Number 179 (Tuesday, September 16, 1997)]
[Notices]
[Pages 48686-48688]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24544]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39035; File No. SR-Amex-97-10]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the American Stock Exchange, Inc. Relating to Amendments to
Rule 170.01 Relating to Specialists Establishing a Position in
Specialty Stocks
September 9, 1997.
I. Introduction
On February 24, 1997, 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\ the proposed rule to change to permit specialists to
engage in certain types of transactions by removing existing
restrictions that currently limit specialists approval when
establishing or increasing a position in their specialty stocks.\3\
Notice of the filing appeared in the Federal Register on May 12,
1997.\4\ No comment letters were received concerning the proposed rule
change. This order approves the Amex's proposal.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 38573 (May 5, 1997).
\4\ FR 25984 (May 12, 1997).
---------------------------------------------------------------------------
II. Description of the Proposal
The Amex, pursuant to Rule 19b-4 of the Act, proposes to amend Amex
Rule 170.01 (``Rule'') to remove certain restrictions on specialists'
ability to establish or increase their positions in their specialty
stocks.
Purpose
Amex Rule 170 governs specialists' dealings in their specialty
stocks. In particular, Amex Rule 170.01 describes certain types of
transactions to establish or increase a specialist's position which are
not to be effected unless they are ``reasonably necessary to render the
specialist's position adequate to'' the needs of the market.
Additionally, these types of transactions require floor official
approval unless they are conducted in ``less active markets'' where
such transactions are an essential part of a proper course of dealings
and where the amount of stock involved and the price change, if any,
are normal in relation to the market.\5\ Currently, such
[[Page 48687]]
restrictions apply equally to transactions that are beneficial to the
market by being against the market trend and those that are
disadvantageous to the market by being with the market trend. The
Exchange is proposing to apply these restrictions only to those
transactions that are disadvantageous to the market by being with the
market trend.
---------------------------------------------------------------------------
\5\ See Amex Rule 104.10(5)(i).
---------------------------------------------------------------------------
Specifically, Amex Rule 170 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 Amex Rule 170 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, Amex Rule 170.01(a)
prohibits a specialist from purchasing stock at a price above the last
sale in the same trading session, without Floor Official approval. Amex
Rule 170.01(b) provides that a specialist must obtain Floor Official
approval prior to effecting the purchases 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. Amex Rule 170.01(c) provides that a specialist 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.
Amex Rule 170.01(d) requires the specialist to re-offer or re-bid where
necessary after effecting the transactions described in paragraphs (a),
(b) and (c) of the Rule.
The Amex states that the restrictions contained in paragraphs (b)
and (c) of the Rule 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. Accordingly, the Exchange proposes to amend Amex
Rule 170.01 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 Amex contends that a
specialist would only be purchasing the stock offered because there is
inadequate demand for the stock.
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
the specialist's book which necessitated the transaction, and whether,
if the market subsequently ``turned around'' the specialist used a
reasonable amount of the inventory acquired in the transaction to
offset any imbalance between supply and demand.
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 the specialist to enhance the liquidity,
depth and transparency of the market as the buyer or seller of last
resort.
III. Commission Findings and Conclusions
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 Section 6(b)(5) of the Act.\6\ The Commission believes
the proposal is consistent with the Section 6(b)(5) requirements that
the rules of an exchange be designed to promote just and equitable
principals of trade, remove impediments to and perfect the mechanism of
a free and open market, and, in general, protect investors and the
public interest, promote efficiency, competition and capital
formation.\7\ The Commission also believes that the proposal is
consistent with Section 11(b) of the Act and Rule 11b-1 thereunder,\8\
which allow exchanges to promulgate rules relating to specialists in
order to maintain fair and orderly markets.
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78f.
\7\ 15 U.S.C. 78(c).
\8\ 15 U.S.C. 78k and 17 CFR 240.11b-1(a)(2).
---------------------------------------------------------------------------
Both the Act and Amex Rules reflect the crucial role played by
specialists in providing stability, liquidity and continuity in the
Exchange's auction market. Recognizing the importance of the specialist
in the auction market, the Act and Amex Rules impose stringent
obligations upon specialists.\9\ Primary among these obligations are
the requirements to maintain fair and orderly markets and to restrict
specialist dealings to those that are ``reasonably necessary'' in order
to maintain a fair and orderly market.\10\
---------------------------------------------------------------------------
\9\ Rule 11b-1 under the Act, 17 CFR 240.11b-1 and Amex Rule
170.
\10\ 17 CFR 240.11b-1(a)(2).
---------------------------------------------------------------------------
The importance of specialist performance to the quality of markets
was highlighted during the 1987 and 1989 market breaks. In The October
1987 Market Break Report (``1987 Report''), the Division examined
specialist performance on the Amex on October 19 and 20, 1987.\11\ The
Division found that, during periods of the greatest volatility in 1987,
particularly on October 19, 1987, Amex specialists had to act as the
primary, or sometimes the only, buyers for many of the specialty stocks
because of the lack of buying interest by upstairs firms.\12\ The
increased volume of order flow, coupled with the lack of participation
on the part of the upstairs firms, resulted in Amex specialists having
to take large dealer
[[Page 48688]]
positions.\13\ Although many Amex specialists appeared to perform well
under the adverse conditions, specialist performance during this period
varied widely.
---------------------------------------------------------------------------
\11\ See 1987 Report, February 1988 at xvii, 4-1.
\12\ See 1987 Report 4-23 to 4-24 and 4-26, to 4-27. Generally,
``upstairs firms,'' or block trading desks of large broker dealers
(as opposed to specialists and other traders on the Amex Floor),
can, at times, provide an additional source of liquidity for Amex-
listed issues through their trading activities. During the 1987
market break, however, particularly on October 19, 1987, very little
buying was effected by upstairs firms, forcing specialists to be the
contra-side to large blocks of stock.
\13\ See 1987 Report at 4-48.
---------------------------------------------------------------------------
The Division also examined Amex specialist performance during the
volatile conditions of October 13 and 16, 1989. The Division found that
specialist performance during that time was similar in many respects to
specialist performance during the 1987 market break.\14\ Specifically,
the Division found that, during these two periods of extreme market
volatility, specialists were confronted with extraordinary order
imbalances that required unprecedented capital commitments.\15\ As in
October 1987, specialists as a whole on October 13, 1989 were
substantial buyers in the face of heavy selling pressure, although
performance varied among specialists.
---------------------------------------------------------------------------
\14\ See Market Analysis of October 13 and 16, 1989 (``1989
Analysis'') at 3-4 and 33-44.
\15\ See 1987 Report at 4-8 and 1989 Report at 23-26.
---------------------------------------------------------------------------
Both the 1987 Report and the 1989 Analysis reaffirmed the
importance of specialist participation in countering market trends
during periods of market volatility. At the same time, the reports
emphasized the importance the Commission placed on the Amex's ability
to ensure that all specialists comply with their affirmative and
negative market making obligations during such periods.\16\
---------------------------------------------------------------------------
\16\ A specialist's dealer responsibilities consist of
``affirmative'' and ``negative'' obligations. In accordance with
their affirmative obligations, specialists are obligated to trade
for their own accounts to minimize order disparities and contribute
to continuity and depth in the market. Conversely, pursuant to their
negative obligations, specialists are precluded from trading for
their own accounts unless such dealing is necessary for the
maintenance of a fair and orderly market. In view of these
obligations, the price trend in a security should be determined not
by specialist trading but by the movements of the incoming orders
that initiate these trades.
---------------------------------------------------------------------------
The Commission recognizes that market conditions may exist at times
where it is necessary or desirable to provide specialists with
additional flexibility in establishing or increasing a position in
order to facilitate their ability to maintain fair and orderly markets,
particularly during unusual market conditions. Accordingly, the
Commission believes that it is appropriate for the Amex to remove those
provisions of Rule 170.01 that require floor official approval for
certain specialist purchases on zero-minus ticks and specialist sales
on zero-plus ticks.\17\ The proposed changes may allow specialists,
during periods of market volatility, to keep any general price
movements orderly, thereby furthering the maintenance of fair and
orderly markets consistent with Sections 6 and 11 of the Act. The
Commission emphasizes, however, that the expanded flexibility afforded
to specialists by the proposal merely obviates the current required
floor official approval for the affected transactions and does not
reflect that all specialist purchases on zero-minus ticks and sales on
zero-plus ticks are appropriate. Notably, specialists remain subject to
their ``negative obligations,'' specifically, the requirement that
specialists are precluded from trading for their own account unless
such dealing is necessary for the maintenance of a fair and orderly
market.\18\
---------------------------------------------------------------------------
\17\ The Commission notes that Rule 170.01 currently only
requires floor official approval for purchases or sales at a price
equal to the last sale price when all or substantially all the stock
offered/bid on the limit order book represents all or substantially
all the stock offered/bid in the market. Moreover, the rule
currently does not require floor official approval of such
transactions if they are effected in ``less active markets'' where
they are an essential part of a proper course of dealings and where
the amount of stock involved and the price change, if any, are
normal in relation to the market.
\18\ In addition, Amex Rule 170.01 clearly requires that covered
transactions must be reasonably necessary to render the specialist's
position adequate to such needs.
---------------------------------------------------------------------------
Finally, the Commission believes that the Amex's established
surveillance procedures and criteria, including the automated computer
program which identifies each instance in which a specialist crosses
the market, should allow the Exchange to monitor specialist compliance
with Amex Rule 170.01. In addition, the Commission expects the Amex to
monitor carefully compliance with the procedures of Amex Rule 170 as
required under Section 19(g) of the Act.\19\
---------------------------------------------------------------------------
\19\ Section 19(g) of the Act requires every self-regulatory
organization to comply with, and enforce compliance with, the Act,
the rules thereunder and its own rules.
---------------------------------------------------------------------------
For the foregoing reasons, the Commission finds that the Amex's
proposal to permit specialists to engage in certain types of
transactions by removing existing restrictions that currently limit
specialists when establishing or increasing a position in their
specialty stocks is consistent with the requirements of the Act and the
rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-Amex-97-10), as amended, is approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
---------------------------------------------------------------------------
\20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-24544 Filed 9-15-97; 8:45 am]
BILLING CODE 8010-01-M