[Federal Register Volume 63, Number 32 (Wednesday, February 18, 1998)]
[Notices]
[Pages 8229-8232]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3996]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39631; File No. SR-AMEX-97-37]


Self-Regulatory Organizations; American Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval of Amendment No. 1 to the Proposed Rule 
Change Relating to Expansion of Designated Options Areas

February 9, 1998.

I. Introduction

    On October 14, 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\ a proposed rule change to expand the locations where 
options on Amex-listed stocks may trade at the Exchange. The proposed 
rule change was published for comment in the Federal Register.\3\ No 
comments were received on the proposal. On January 14, 1998, the Amex 
filed an amendment to the proposed rule change (``Amendment No. 
1''),\4\ The Commission hereby approves the proposal. In addition, the 
Commission is publishing this notice to solicit comments from 
interested persons on Amendment No. 1 to the proposal and hereby 
approves that amendment on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 39306 (November 6, 
1997), 62 FR 61154 (November 14, 1997).
    \4\ Letter from Scott G. VanHatten, Legal Counsel, Derivative 
Securities, Amex, to Michael Walinskas, Senior Special Counsel, 
Division of Market Regulation, Commission, dated January 13, 1998.
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II. Description of the Proposal

    In 1988, the Commission approved an Amex proposal to permit options 
trading on Amex-listed stocks (``1988 Approval Order'').\5\ In that 
order, the Commission noted that: ``[W]ith the expansion of its trading 
facility, specifically the addition of a separate trading room, the 
Amex is in a position to trade stocks and options thereon in physically 
separated locations. The proposed rule change specifies that such 
trading shall take place at different trading locations and provides 
the safeguards necessary to prevent abuses which could result from the 
trading of stocks and related options in physical proximity to each 
other.'' \6\
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    \5\ Securities Exchange Act Release No. 26147 (October 3, 1988), 
53 FR 39556 (October 7, 1988) (File No. SR-AMEX-88-16).
    \6\ Id.
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    More recently, in 1994, the Commission approved an Amex proposal to 
provide greater flexibility in the design and development of new stock 
index option products which can be listed and traded on Amex.\7\ In 
that approval order, the Commission based its approval in part on the 
fact that Amex imposed a number of restrictions on trading in options 
on indexes. For instance, where Amex-listed stocks comprise more than 
10% of the value of a particular index, options on that index must be 
traded in a room physically separated from the Equity Floor.\8\
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    \7\ Securities Exchange Act Release No. 34359 (July 12, 1994), 
59 FR 36799 (July 19, 1994).
    \8\ Id. (emphasis added).
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    Now, Amex, as a result of increases in trading volume in options on 
the Exchange,\9\ has proposed to relax the requirement that Amex-listed 
stocks and options on Amex-listed stocks be traded in a room physically 
separated from the Main Trading Floor
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    \9\ The Amex noted in its filing that the number of options on 
Amex-listed stocks has increased slowly, to 45 classes since 1988, 
while the overall number of options classes traded on the Exchange 
has increased over 350% since that time.
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Background

    Amex currently has three trading locations: (1) the Main Trading 
Floor; (2) the mezzanine trading level, which is located above the 
Exchange's main trading floor (``Mezzanine''),\10\ and (3) a separate 
room connected by a hallway to the Main Trading Floor (the ``Red Room'' 
or ``Designated Options Area'').

[[Page 8230]]

On the Main Trading Floor, Amex currently permits trading in:
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    \10\ The Mezzanine abuts and overlooks the Exchange's equity 
trading floor. See Release No. 34-34359 at n. 8.
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    (1) Amex-listed stocks,
    (2) Options on non-Amex-listed stocks, and
    (3) Options on indexes (excluding options on indexes where Amex-
listed stocks comprise more than 10% of the index value, by 
weight).\11\
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    \11\ An index can be valued using a number of different methods. 
For example, an index can be valued by determining: the price of the 
components of the index (price-weighting); the number of shares of 
each component that could be purchased by spending equal dollar 
amounts (equal dollar-weighting); and the market capitalizations of 
the components of the index (capitalization-weighting). Cf. Release 
No. 34-34359 at n. 7 and accompanying text.
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    In the Red Room, Amex currently permits trading in:
    (1) Options on Amex-listed stocks,
    (2) Options on non-Amex-listed stocks, and
    (3) Options on indexes where Amex-listed stocks comprise more than 
10% of the index value, by weight.
    On the Mezzanine, Amex currently permits trading in:
    (1) Options on indexes where Amex-listed stocks comprise more than 
10% of the index value by weight, and
    (2) Options on non-Amex-listed stocks.
    Consistent with the 1988 Approval Order, as described above, 
trading of Amex-listed stocks occurs on the Main Trading Floor, while 
trading of options on Amex-listed stocks is permitted only in the Red 
Room. The Exchange states that the capacity of the Red Room is no 
longer sufficient to accommodate all trading in options on Amex-listed 
stocks. The Exchange represented in its filing that while the number of 
options on Amex-listed stocks has increased slowly, to approximately 45 
classes since 1988, the overall number of option classes traded on the 
Exchange has increased over 350% since that time. As a result of this 
increase in classes of options traded at the Amex, the Exchange states 
that it currently lacks flexibility in moving trading units around its 
trading floors. Those specialist units currently trading options on 
Amex-listed stocks are forced to remain in the Red Room, even though 
they have outgrown their space, or face giving up those classes to move 
to larger quarters. Moreover, the Exchange represented that specialist 
units that currently do not trade any options on Amex-listed stocks are 
unable to do so because there is no room left in the Red Room. The 
increase in classes of options traded on the Exchange and the 
Exchange's need for flexibility in moving the various trading units 
around the Exchange's trading floors has made it necessary for the 
Exchange to find additional physically separate locations for trading 
options on Amex-listed stocks.
    Accordingly, the Exchange has proposed to permit options trading on 
Amex-listed stocks in two locations of the Exchange in addition to the 
Red Room: (1) The Mezzanine and (2) the back row of the west side of 
the Exchange's Main Trading Floor, also referred to as the west side of 
Exchange Posts 12, 13 and 15 (``Back Row'').
    The Exchange represented in its filing that the two locations 
selected would keep options and equity trading sufficiently separate 
such that there can be no time and place advantage derived from the 
proximity of the equity and options trading areas.\12\ The Exchange 
contends that permitting the trading of options on Amex-listed stocks 
on the Mezzanine is consistent with the Commission's approval of the 
Mezzanine as a physically separate trading location with respect to 
trading in stock index options. For options on Amex-listed stocks 
traded on the Mezzanine, the Exchange represents that: (1) Options on 
Amex-listed stocks shall not be traded in the portion of the Mezzanine 
that is visible from the Main Trading Floor; (2) members will be 
prohibited from using hand signals or other like means of communication 
to communicate between the Mezzanine and the Main Trading Floor; and 
(3) members will be notified in writing by the Exchange of the new 
prohibitions on the use of hand signals or other like means of 
communication.
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    \12\ Securities Exchange Act Release No. 39306 (November 6, 
1997), 62 FR 61154 (November 14, 1997).
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    With respect to the Back Row trading location, the Exchange 
contends that it will be able to keep options and equity trading 
sufficiently separate to avoid the time and place advantage that could 
result from the proximity of the equity and options trading area. 
Specifically, the Exchange represents that no option on an Amex-listed 
equity will trade at any post on the Exchange's Main Trading Floor 
where there exists a direct line of sight between the posts of the 
option and its corresponding underlying equity. In addition, for 
options on Amex-listed stocks traded at the Back Row of the Main 
Trading Floor: (1) Those options shall remain separate from their 
corresponding underlying equities by no less than one row of posts on 
the Main Trading Floor; (2) members will be prohibited from using hand 
signals or other like means of communication to communicate between the 
Back Row and the Main Trading Floor; and (3) members will be notified 
in writing by the Exchange of the new prohibitions on the use of hand 
signals or other like means of communications.
    The Exchange believes that the proposed rule change will not 
increase the potential for trading abuse and manipulation as there is 
no line of sight between the Mezzanine and the Back Row and the 
Designated Stock Area, which will now constitute those areas of the 
Main Trading Floor other than the Back Row. Thus, no time or place 
advantage should result from the proposed rule change.
    In addition to the above representations, the Exchange states that 
it has in place various safeguards to detect and prevent any such abuse 
or manipulation. For instance, the Exchange notes that options on Amex-
listed stocks and the underlying Amex-listed stocks will continue to be 
deemed ``paired securities,'' (as that term is used in the Exchange's 
Series 900 rules).\13\ This designation invokes additional safeguards 
designed to prevent the misuse of market information and market 
manipulation by Amex members. These safeguards include Amex Rule 175, 
which generally prohibits someone from acting as a specialist in an 
equity and in the option on the equity.
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    \13\ The term paired security means a security which is the 
subject of securities trading on the Exchange and Exchange option 
trading. Amex Rule 900(b)(38).
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    In addition, Amex Rule 958(e) prohibits any equity specialist, odd-
lot dealer or Nasdaq market maker from acting as a registered trader in 
a class of stock options on a stock in which he is registered in the 
primary market place. Moreover, Rule 958(f) prohibits any member, while 
acting as a Registered Options Trader (``ROT''), who is also registered 
as a Registered Equity Trader or Registered Equity Marketmaker, from 
executing a proprietary Exchange option transaction on a paired 
security if he has been in the Designated Stock Area (i.e., the Main 
Trading Floor) where the related security is traded during the 
preceding 60 minutes.
    To ensure compliance with the above safeguards, the Exchange states 
that it has in place various surveillance procedures. The Exchange's 
surveillance procedures, which are set forth at Section XI, C of the 
Amex Trading Analysis Options Surveillance Manual concerning Paired 
Security Review, include, among other items, the preparation of daily 
activity reports on ROTs' trading activity in Amex-listed stocks and 
options. These reports are

[[Page 8231]]

used to analyze ROT trading activity to ensure compliance with Amex 
Rule 958.
    Lastly, the Exchange states that it will continue to follow the 
restrictions the Exchange imposed in its proposal regarding trade in 
index options as discussed in Securities Exchange Act Release No. 
34359,\14\ which addresses, among other items, the locations where it 
is permissible to trade options on indexes where Amex-listed stocks 
comprise more than 10% of the index value by weight.\15\
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    \14\ Id.
    \15\ Id. Among other items, the Exchange represented that: 
First, index options trading shall not be located on the Exchange's 
Main Trading Floor; and second, for index options traded on the 
Mezzanine where Amex-listed stocks comprise more than 10% of the 
value of the index, by weight: (1) Those options shall not be traded 
in the portion of the Mezzanine that is visible from the Main 
Trading Floor, and (2) members will be prohibited from using hand 
signals or other forms of communication to communicate between the 
Mezzanine and the Main Trading Floor. Securities Exchange Act 
Release No. 34359 (July 12, 1994), 59 FR 36799 (July 19, 1994).
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III. Discussion

    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 with the 
requirements of Section 6 of the Act.\16\ In particular, the Commission 
believes the proposal is consistent with Section 6(b)(5) of the Act in 
that it should remove impediments to and perfect the mechanism of a 
free and open market, promote just and equitable principles of trade, 
and protect investors and the public.\17\ The Commission believes that 
the Amex has provided adequate safeguards to protect against market 
manipulation and abuse of market information in this context. The 
Commission also believes that the proposal will allow the Exchange 
flexibility in moving trading posts while minimizing the potential for 
abuse by ensuring that Amex traders will not be able to obtain unfair 
informational advantages.
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    \16\ 15 U.S.C. 78f(b).
    \17\ In approving this rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    In considering this filing, the Commission notes that floor traders 
and market makers, by virtue of their close proximity to the trading 
crowds and access to market information, may have a time and place 
advantage over other market participants. For example, floor traders in 
the crowd may be able to gain an insight into the future direction of 
the market on the basis of, among other things, the other traders in 
the crowd and their bidding/offering patterns. Likewise, market makers 
have an informational advantage about order flow and quote changes. For 
the reasons stated below, however, the Commission believes that the 
restrictions contained in the Amex proposal adequately minimize any 
potential for misuse of information or market manipulation. The 
Commission concurs with the Exchange's view that the trading locations 
for equities and options on equities are sufficiently separated in a 
manner that will minimize the time and place advantage that can be 
derived from the proximity of the equity and options trading areas. 
Specifically, for options on Amex-listed stocks traded on the 
Mezzanine, the Exchange has represented that: (1) Those options shall 
not be traded in the portion of the Mezzanine that is visible from the 
Main Trading Floor, and (2) members will be prohibited from using hand 
signals or other like means of communication to communicate between the 
Mezzanine and the Main Trading Floor. For options on Amex-listed stocks 
traded at the Back Row of the Main Trading Floor: (1) Those options 
shall remain separate from their corresponding underlying equities by 
no less than one row of posts on the Main Trading Floor, and (2) 
members will be prohibited from using hand signals or other like means 
of communication to communicate between the Back Row and the Main 
Trading Floor. Members will be notified in writing by the Exchange of 
the new prohibitions on the use of hand signals or other like means of 
communications.
    By restricting the trading of options to areas outside the 
visibility of trading of the underlying securities, the Commission 
believes the proposal adequately limits the ability of Amex members to 
unfairly use any material, nonpublic information they might possess. 
Moreover, the Commission believes that current surveillance procedures 
are adequate to identify and deter potential manipulations and other 
trading abuses. Finally, by prohibiting hand signals and other forms of 
communication between options and equity trading posts on the Main 
Trading Floor, the Mezzanine, and the Back Row, the Exchange should be 
able to significantly restrict abuses.
    The Commission's approval of the proposed rule change is premised 
on the belief that the Amex's proposed trading locations for equities 
and options are sufficiently separated such that there is no time and 
place advantage derived from the physical proximity of the two trading 
locations which could be exploited by Amex members. Accordingly, any 
decision by the Amex to change the location of the designated options 
area relative to the designated stock area, or to modify the means of 
access between them, would require submission of a proposed rule change 
under Section 19(b) of the Act.
    Based on the foregoing, the Commission believes that the proposal 
will allow the Exchange to expand the trading locations for options on 
Amex-listed stocks while providing adequate protections against market 
participants that might attempt to manipulate the market or misuse any 
market information, which results from the trading of options and the 
stocks underlying those options in physical proximity to each other.
    The Commission finds good cause consistent with the Act 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 
in the Federal Register. Specifically, Amendment No. 1 simply provides 
additional details regarding, among other things, where options and 
stocks are currently traded at the Amex and does not substantively 
change the proposal as originally filed. Accordingly, the Commission 
approves Amendment No. 1 on an accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments, including whether the submission is consistent with the Act, 
concerning Amendment No. 1. 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. 
Sec. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. 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-97-37 and should 
be submitted by March 11, 1998.

[[Page 8232]]

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act.\18\ that the proposed rule change (SR-AMEX-97-37), as amended, 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\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-3996 Filed 2-17-98; 8:45 am]
BILLING CODE 8010-01-M