[Federal Register Volume 63, Number 165 (Wednesday, August 26, 1998)]
[Notices]
[Pages 45541-45544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-22880]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40345; File No. SR-Amex-98-19]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 to the Proposed Rule Change by the 
American Stock Exchange, Inc. Relating to Solicitation of Options 
Transactions

August 19, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 18, 1998, the American 
Stock Exchange, Inc. (``Amex'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``SEC'') or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Amex. On July 7, 1998, the Amex filed 
Amendment No. 1 to the proposal.\2\ On

[[Page 45542]]

August 18, 1998, the Amex filed Amendment No. 2 to the proposal.\3\ 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\ See Letter from Claire P. McGrath, Vice President and 
Special Counsel, Derivative Securities, Amex, to Richard Strasser, 
Assistant Director, Division of Market Regulation (``Division''), 
Commission, dated July 6, 1998 (``Amendment No. 1''). Amendment No. 
1 revises proposed Commentary .04 to Amex Rule 950(d) to indicate 
that it may be considered conduct inconsistent with just and 
equitable principles of trade for any member or associated person 
who has knowledge of the material terms and conditions of orders 
being crossed to use that information to buy or sell the underlying 
security or related securities until either the terms of the order 
are disclosed to the trading crowd or the trade can no longer 
reasonably be considered imminent. In addition, Amendment No. 1 
revises proposed Commentary .04 to replace a reference to an 
``original'' order with a reference to an ``originating'' order and 
to replace a reference to paragraph (b) with a reference to 
Commentary .04.
    \3\ See Letter from Claire P. McGrath, Vice President and 
Special Counsel, Derivative Securities, Amex, to Richard Strasser, 
Assistant Director, Division, Commission, dated August 18, 1998 
(``Amendment No. 2''). Amendment No. 2 adds Commentary .04 to Amex 
Rule 950(c). Commentary .04 states that a Registered Option Trader 
(``ROT''), in establishing or increasing a position, may retain 
priority over or have parity with an off-floor order that is subject 
to the solicitation rule set forth in Amex Rule 950(d), Commentary 
.03. Off-floor orders that are not subject to the solicitation rule 
will retain priority and parity as set forth in Amex Rules 111 and 
950(c).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Currently, Amex Rule 950(d), Commentary .03 allows a member 
representing an order in options (the ``originating order'') to solicit 
another member, member organization, or non-member broker-dealer 
outside the trading crowd to participate in the transaction on a 
proprietary basis provided that the conditions specified in Commentary 
.03 are satisfied. The Amex proposes to amend Amex Rule 950(d), 
Commentary .03 to (1) allow a member representing an originating order 
to solicit a customer (as well as another member, member organization, 
or non-member broker-dealer) to participate in the transaction; and (2) 
provide that a ROT, when establishing or increasing a position, may 
retain priority over an off-floor order (including that of a customer) 
that is subject to Commentary .03. In addition, the Amex proposes to 
adopt Commentary .04 to Amex Rule 950(d), which will state that it may 
be considered conduct inconsistent with just and equitable principles 
of trade for any member or associated person who has knowledge of all 
material terms and conditions of (1) an originating order and a 
solicited order; (2) an order being facilitated; or (3) orders being 
crossed,\4\ the execution of which are imminent, to enter, based on 
that knowledge, an order to buy or sell an option of the same class as 
any option that is the subject of the order, an order to buy or sell 
the security underlying that class, or an order to buy or sell a 
related instrument until either (1) all the terms of the order and any 
changes in the terms and conditions of the order of which the member or 
associated person has knowledge are disclosed to the trading crowd; or 
(2) the trade can no longer reasonably be considered imminent in view 
of the passage of time since the order was received. For purposes of 
Commentary .04, a ``related instrument'' means, in reference to an 
index option, an order to buy or sell securities comprising 10% or more 
of the component securities in the index or an order to buy or sell a 
futures contract on any economically equivalent index.
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    \4\ See Amendment No. 1, supra note 2.
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    The proposed rule change is attached as Exhibit A.

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

(a) Purpose
    In 1989, the Amex adopted the ``solicitation rule'' (Amex Rule 
950(d). Commentary .03) to govern the manner in which members may 
solicit other members and non-member broker-dealers to participate in 
options transactions. According to the Amex, members generally solicit 
participation in large size orders and/or orders with more complex 
terms and conditions, including orders involving both stock and 
options. Amex Rule 950(d), Commentary .03 permits the solicitation of 
on-floor and off-floor members and non-member broker-dealers outside of 
a trading crowd to participate as the contra side of an order only if 
the trading crowd is given (1) the same information about the options 
order as is given to the solicited party; and (2) a reasonable 
opportunity to accept the bid or offer before the solicited party 
participates in the transaction. The Amex recently has become aware of 
a growing practice among member firms to solicit not only other members 
and broker-dealers, but also customers to participate in these large 
options orders.
    Amex Rule 950(d), Commentary .02 describes facilitation orders, in 
which a member or member organization executes a crossing transaction 
with an order for a public customer. According to the Amex, the purpose 
of the facilitation rule is to provide procedures that allow a 
customer's order to be executed completely. The Amex notes that while 
the facilitation rule is similar in many ways to the solicitation rule, 
i.e., it requires disclosure to the trading floor crowd and allows the 
crowd to supplant the facilitating member, it does not allow the 
trading floor crowd to supplant the customer. In addition, floor 
members may also facilitate customer orders using the Amex's crossing 
rule (Amex Rule 151, `` `On Order' Transactions''). However, Amex Rule 
151 does not protect a customer order from being supplanted by the 
trading crowd, nor would the current proposed change to the Amex's 
solicitation rule.
    The Exchange policy regarding the use of non-public market 
information that applies to solicited orders currently does not apply 
to facilitation orders. Since the adoption of the solicitation rule, 
the Amex has prohibited the use of non-public information by the 
solicited party for its own benefit by trading in the underlying stock 
or in related options. Use of such non-public information by the 
solicited party or by the trading crowd (regardless of whether that 
party ultimately completes the options transaction) generally is 
considered conduct inconsistent with just and equitable principles of 
trade. The Amex also proposes to codify in Amex Rule 950(d), Commentary 
.04 the policy regarding the use of non-public information and to apply 
that newly codified policy to non-public information obtained by a 
member facilitating a customer order or information obtained by a 
member crossing customer orders.
    The Amex proposes to amend the solicitation rule (Amex rule 950(d), 
Commentary .03) to apply the rule to the solicitation of customers and 
to indicate that a ROT, when establishing or increasing a position, may 
retain priority over an off-floor order that is subject to the 
solicitation rule. The Amex states that its rules are designed to 
promote the interaction of orders in options in an open-outcry auction. 
Such rules impose order exposure requirements on floor brokers seeking 
to cross buy orders and sell orders. Applying the solicitation rule to 
customers will preserve the right of members to solicit customer 
participation in orders in advance of submitting a proposed trade to 
the trading floor crowd, while at the same time assuring that orders 
that are the subject of a solicitation are exposed to the auction 
market in a meaningful way.
    Moreover, the proposal seeks to reconcile the practice of 
soliciting

[[Page 45543]]

participation in orders from customers with the rules and practices of 
the auction market. The Amex believes that the proposal will help in 
giving fair and equal access to information regarding solicited 
transactions to participants in trading crowds. In addition, the Amex 
believes that providing trading crowds with an opportunity to 
participate in transactions from which they had been excluded will 
result in more competitive markets and executions for customers at the 
best available prices.
    In addition, the Amex's proposal codifies the policy that it is 
inconsistent with just and equitable principles of trade for any member 
or associated person who has knowledge of all material terms and 
conditions of (1) an originating order and a solicited order; (2) an 
order being facilitated; or (3) orders being crossed, the execution of 
which are imminent, to enter, based on such knowledge, an order to buy 
or sell an option of the same class as any option that is the subject 
of the order, or an order to buy or sell the security underlying such 
class, or an order to buy or sell any related instrument prior to the 
time the order's terms and any changes in those terms are disclosed to 
the trading floor crowd or the trade can no longer reasonably be 
considered imminent in view of the passage of time since the order was 
received. The purpose of this policy is to prevent members and 
associated persons from using undisclosed information about imminent 
solicited option transactions to trade the relevant option or any 
closely-related instrument in advance of persons represented in the 
trading crowd. Without this prohibition, such trading can threaten the 
integrity of the auction market or disadvantage other market 
participants. The Amex believes that applying the same prohibitions on 
the use of non-public information obtained when facilitating a customer 
order is necessary and appropriate to prevent similar misuse of such 
information.
(b) Statutory Basis
    The Amex believes that the proposed rule change is consistent with 
Section 6(b) of the Act, in general, and further the objectives of 
Section 6(b)(5) of the Act, in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Amex believes that the proposed rule change will impose no 
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 self-regulatory organization consents, the Commission will by 
order approve such proposed rule change, or 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, including whether the proposed rule 
change is consistent with the Act. 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. 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-98-19 and should 
be submitted by September 16, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
Exhibit A
    Additions are italicized; deletions are bracketed.

Rule 950  Rules of General Applicability

    (a)-(c) No change.

* * * Commentary

    .01-.03  No change.
    .04  A Registered Options Trader, in establishing or increasing a 
position, may retain priority over or have parity with an off-floor 
order that is subject to the solicitation rule set forth in Rule 
950(d), Commentary .03.
    (d) The provisions of Rule 126, with the exception of subparagraphs 
(a) and (b) thereof, shall apply to Exchange option transactions and 
the following additional commentary shall also apply:

* * * Commentary

    .01-.02 No change.
    .03  A member or member organization representing an order in 
options (``originating order'') may solicit another member, member 
organization, [or] non-member broker dealer or customer outside the 
trading crowd (``solicited party'') to participate in the transaction 
on a proprietary basis provided the member or member organization, upon 
entering the trading crowd to execute the transaction announces to the 
trading crowd the same terms and conditions about the originating order 
as disclosed to the solicited party and bids at the price he is 
prepared to buy from the solicited party or offers at the price he is 
prepared to sell to the solicited party.
    After all other market participants are given a reasonable 
opportunity to accept the bid or offer, the solicited party may accept 
all or any remaining part of such order or the member may cross all or 
any remaining part of the originating order with the solicited party at 
such bid or offer by announcing that the member is crossing the orders 
stating the quantity and price. Non-solicited market participants and 
floor brokers holding non-solicited discretionary orders in the trading 
crowd will have priority over the solicited party or the solicited 
order to trade with the original order at the best bid or offer price 
subject to the precedence rules set forth in Rule 155.
    A Registered Options Trader, when establishing or increasing a 
position, may retain priority over an off-floor order that is subject 
to this solicitation rule.
    All orders subject to solicitation pursuant to this Commentary, and 
all

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tickets reflecting orders solicited pursuant to this Commentary, must 
be marked as specified by the Exchange.
    .04  With respect to Commentaries .02 and .03 above, it may be 
considered conduct inconsistent with just and equitable principles of 
trade for any member or person associated with a member, who has 
knowledge of all material terms and conditions of an original order and 
a solicited order, including a facilitation order, the execution of 
which are imminent, to enter, based on such knowledge, an order to buy 
or sell an option of the same class as any option that is the subject 
of the order, or an order to buy or sell the security underlying such 
class, or an order to buy or sell any related instrument until either 
(i) all the terms of the order and any changes in the terms and 
conditions of the order of which that member or associated person has 
knowledge are disclosed to the trading crowd or (ii) the solicited 
trade can no longer reasonably be considered imminent in view of the 
passage of time since the solicitation. For purposes of this paragraph 
(b), an order to buy or sell a ``related instrument,'' means, in 
reference to an index option, an order to buy or sell securities 
comprising ten percent or more of the component securities in the index 
or an order to buy or sell a futures contract on any economically 
equivalent index.
    (e)-(o) No change.

[FR Doc. 98-22880 Filed 8-25-98; 8:45 am]
BILLING CODE 8010-01-M