[Federal Register Volume 64, Number 92 (Thursday, May 13, 1999)]
[Notices]
[Pages 25928-25929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12061]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41362; File No. 10-100]


Exempted Exchanges; AZX, Inc.; Order Amendment Exemption Order 
Under Section 5 of the Securities Exchange Act of 1934; Final Order

May 3, 1999.

I. Introduction

    AZX, Inc. has requested that the Securities and Exchange Commission 
(``Commission'') amend the Exemption Order pursuant to which AZX, Inc. 
operates the Arizona Stock Exchange (``AZX'') without registration as a 
national securities exchange.\1\ The amended Exemption Order would 
permit AZX to trade exchange-listed securities during regular trading 
hours, conduct two additional regular hours auctions, and consolidate 
its evening auctions. The proposal was published for comment in the 
Federal Register on February 1, 1999.\2\ No comment letters were 
received. After evaluating the proposal, the Commission concludes that 
AZX will continue to meet the statutory standard for an exchange 
operating pursuant to the limited volume exemption from registration 
under Section 5 of the Securities Exchange Act of 1934 (``Act'').\3\ 
Accordingly, the Commission hereby amends AZX's Exemption Order as 
requested by AZX, Inc., subject to the terms and conditions described 
below.
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    \1\ Securities Exchange Act Release No. 28899 (February 20, 
1991), 56 FR 8377 (February 28, 1991), amended by Securities 
Exchange Act Release No. 37272 (June 3, 1996), 61 FR 29145 (June 7, 
1996) (collectively ``Exemption Order''). AZX also operates without 
registering as a broker-dealer, clearing agency, transfer agent, or 
exclusive securities information processor pursuant to a staff no-
action letter. Letter from Richard G. Ketchum, Director, Commission, 
to Daniel T. Brooks, Esq., Cadwalader, Wickersham & Taft, regarding 
Wunsch Auction Systems, Inc., dated February 28, 1991.
    \2\ Securities Exchange Act Release No. 40961 (January 22, 
1999), 64 FR 4908.
    \3\15 U.S.C. 78e.
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II. AZX

    AZX, Inc. operates AZX, a computerized, single-price auction system 
that facilitates trading of registered equity securities by broker-
dealers and institutions. AZX operates three off-hours auctions in 
Nasdaq National Market (``NNM'') and exchange-listed securities, at 
9:15 a.m., 4:20 p.m., and 5:00 p.m. (ET), each trading day. AZX also 
operates one auction during regular trading hours,\4\ at 10:30 a.m. 
(ET). As described in its Exemption Order, AZX trades only NNM 
securities during the 10:30 a.m. auction.
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    \4\ ``Regular trading hours'' refers to the time period in which 
the New York Stock Exchange, Inc. permits trading, which is 9:30 
a.m. to 4:00 p.m. (ET) each trading day.
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III. The Proposal

    On July 30, 1998, AZX, Inc. filed with the Commission pursuant to 
Rule 6a-1 under the Act,\5\ an amendment to its application for 
exemption from registration as a national securities exchange. In its 
amendment, AZX proposes to operate two additional auctions during 
regular trading hours, at 12:30 p.m. and 2:30 p.m. (ET) each trading 
day. AZX also proposes to trade exchange-listed and NNM securities 
during all three regular hours auctions. In addition. AZX proposes to 
consolidate its two evening after-hours actions into one after-hours 
auction ending at 4:30 p.m. (ET). Under the proposal, there would be 
five AZX auctions--two off-hours and three regulator hours. All five 
auctions would be permitted to trade both exchange-listed and NNM 
securities, and will be subject to real-time transaction reporting 
under National Association of Securities Dealers, Inc. (``NASD'') 
rules.
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    \5\ 17 CFR 240.6a-1.
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IV. Discussion

A. Volume Level

    The Commission believes that the changes proposed by AZX should not 
change AZX's status as an exempted exchange. The limited volume 
exemption continues to be premised on AZX's average daily volume 
(including both regular and after-hours auctions) remaining below the 
average daily volume of the lowest volume national securities 
exchange.\6\ AZX's current average daily volume is well below that of 
the lowest volume national securities exchange.\7\ Moreover, given the 
wide range of alternatives available to investors during regular 
trading hours, AZX's proposal to trade listed securities during its 
regular hours auctions (including two additional auctions) does not 
seem likely to result in AZX's volume exceeding the volume of any 
national securities exchange. Should AZX's volume exceed the limited 
volume threshold, however, the Commission may rescind the exemption.\8\
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    \6\ The Exemption Order states that the Commission would be 
concerned if the volume of an exempted exchange ``exceeded that of 
any of the fully regulated national securities exchanges.'' 
Securities Exchange Act Release No. 28899, supra note 1 at 8380.
    \7\ The Philadelphia Stock Exchange (``Phlx'') is currently the 
lowest volume national securities exchange. For calendar year 1998, 
the average daily volume of the Phlx was approximately 6,262,127 
shares. For calendar year 1998, the average daily volume of AZX was 
approximately 95,168 shares--less than 2% of the volume of the Phlx.
    \8\ The Exemption Order states that ``[s]hould the Commission 
learn that any of the conditions set forth in this Order or 
otherwise imposed upon the granting of this exemption have been 
breached * * * the Commission will commence a review to determine 
whether to rescind the exemption.'' Securities Exchange Act Release 
No. 28899, supra note 1 at 8383. In the event the Commission 
rescinds the exemption because AZX's volume exceeds the limited 
volume threshold, AZX would have the option to continue operating by 
registering as a national securities exchange, or registering as a 
broker-dealer and complying with Regulation ATS. See Securities 
Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844 
(December 22, 1998).

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[[Page 25929]]

B. Other Conditions

    All of the original and conditions of the Exemption Order remain in 
effect. In addition, this Order imposes an additional conditions--that 
AZX conduct surveillance of trading of listed securities during regular 
trading hours to detect, among other things, potential insider trading 
and market manipulation. As a condition of the original Exemption Order 
in 1991, AZX undertook to conduct surveillance of its after-hours 
trading. When it began trading NNM securities during regular trading 
hours in 1996, AZX implemented additional surveillance procedures 
tailored to regular hours trading in NNM stocks. AZX has now agreed to 
adapt those procedures to trading in listed securities. Specifically, 
AZX will compare AZX auction prices and bids and offers entered into 
AZX with trading activity on the registered exchanges, and will monitor 
the effects of an order cancellation or order revision on the price of 
the stock on the primary exchange.

V. Conclusion

    The Commission has determined that AZX will continue to qualify for 
a limited volume exemption from exchange registration under the Act 
even if it implements the changes described in this order. Subject to 
the conditions described above, the Commission finds that, by reason of 
the limited volume of transactions effected on AZX, it is not 
practicable and not necessary or appropriate in the public interest or 
for the protection of investors to require AZX's registration as a 
national securities exchange. The Commission reserves the right to 
apply further conditions or rescind the exemption if circumstances 
change or if AZX does not operate as represented.
    It is therefore ordered that AZX's Exemption Order be amended to 
grant AZX's amended application for exemption from registration as a 
national securities exchange, subject to the terms and conditions 
described above.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-12061 Filed 5-12-99; 8:45 am]
BILLING CODE 8010-01-M