[Federal Register Volume 64, Number 182 (Tuesday, September 21, 1999)]
[Notices]
[Pages 51155-51156]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24498]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41866; File No. SR-Amex-99-23]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the American Stock Exchange LLC 
Relating to the Amendment of Commentary .05 to Rule 155

September 13, 1999.
    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 July 9, 1999, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change. The Exchange submitted 
Amendment No. 1 to its proposal on August 2, 1999.\3\ The proposed rule 
change, as amended, is 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.
    \3\ In Amendment No. 1, the Exchange clarified that Amex Rule 
155 applies to all securities transactions on the Amex, revised and 
expanded its discussion of the rules of the other exchanges, and 
provided an example of what constitutes good cause for rescinding a 
trade. Letter from William Floyd-Jones, Assistant General Counsel, 
Legal & Regulatory Policy, Amex, to Terri Evans, Attorney, Division 
of Market Regulation, Commission, dated July 29, 1999 (``Amendment 
No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Under the proposal, a member seeking to break an equity or option 
trade \4\ must first obtain written Floor Official approval. The member 
seeking the rejection must show good cause for the Floor Official to 
form the belief that the execution was inconsistent with the 
specialist's responsibility to maintain a fair and orderly market. The 
text of the proposed rule change is as follows. New text is italicized 
and deleted text is bracketed.
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    \4\ Amex Rule 155 generally applies to securities transactions 
on the Exchange. Amex Rule 950(a) specifically extends Rule 155 to 
options trading. The proposed rule change, accordingly, will apply 
to all securities trades effected on the Amex, including options. 
See Amendment No. 1, supra note 3.
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Exchange Rule 155
* * * * *
    .05(i) If a specialist elects to take or supply for his own account 
the securities named in an order entrusted to him by another member or 
member organization, such member or organization shall be so notified 
as follows:
    (a) If such securities were named in an order received by the 
specialist through the Post Execution Reporting (``PER'') System or the 
Amex Options Switch (``AMOS'') System, the Exchange shall furnish a 
report of the transaction; or
    (b) If such securities were named in an order received by the 
specialist in any other manner, the specialist shall indicate on the 
copy of the order ticket to be returned to the member or member 
organization that he executed the order as principal.
    (ii) A member or member organization that seeks to [may] reject a 
transaction for which notice is required to be furnished pursuant to 
paragraph (i) above shall request Floor Official review of the 
transaction in writing promptly after receiving such notice and shall 
advise [by so advising] the relevant specialist in writing 
contemporaneously with the request for review [promptly after receiving 
such notice]. Any such written request for review [rejection] shall be 
given to the Floor Official and specialist by a member, not by a clerk. 
The transaction may only be rejected upon written Floor Official 
approval for good cause shown in relation to the specialist's 
responsibility to maintain a fair and orderly market. Any transaction 
not rejected in this manner shall be deemed accepted.
* * * * *
    (b) Not applicable.
    (c) Not applicable.

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 Exchange 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 Exchange 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Since at least 1926, the Amex has had rules that allow specialists 
to act as both agent and principal on trades, but permit the brokers 
that placed the orders to reject the resulting contracts.\5\ Such rules 
always have required (i) a report advising the member that gave-out the 
order that the specialist acted as principal on the trade, and (ii) an 
opportunity for the member that gave-out the order to reject the 
contract. The genesis of the Amex and similar New York Stock Exchange 
(``NYSE'') rules \6\ goes back to the turn of the century and 
traditional concepts of agency law that an agent cannot deal for its 
account against its principal absent the principal's consent.
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    \5\ Section 1 of Chapter XI of the Rules of the New York Curb 
Exchange (a predecessor of the Amex) in the July 1926 ``Constitution 
of New York Curb Exchange and Rules Adopted by the Board of 
Governors Pursuant Thereto'' provides in part:
    No regular member, while acting as a broker, whether as a 
specialist or otherwise, shall buy or sell, directly or indirectly, 
for his own account or for that of a partner, or for any account in 
which either he or a partner has a direct or indirect interest, 
securities, the order for the sale or purchase of which has been 
accepted for execution by him, or by his firm, or by a partner, 
except as follows: . . .
    [Exception (b)]. A regular member may only take the securities 
named in the order, provided that he shall have offered the same in 
the open market, if bonds at \1/8\ of 1%, and if stocks at the 
minimum fraction of trading, above his bid, and provided that the 
price is justified by the conditions of the market, and that the 
member who gave the order shall directly, or through a broker 
authorized to act for him, after prompt notification, accept the 
trade and report it.
    [Exception (c)]. A regular member may only supply the securities 
named in the order, provided that he shall have bid for the same in 
the open market, if bonds at \1/8\ of 1%, and if stocks at the 
minimum fraction of trading, below his offer, and provided that the 
price if justified by the conditions of the market, and that the 
member who gave the order shall directly, or through a broker 
authorized to act for him, after prompt notification, accept the 
trade and report it.
    \6\ The NYSE has a rule similar to Amex rule 155. See Amendment 
No. 1, supra note 3 (interpreting rules of other exchanges).
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    There have been many changes in the securities market since the 
early part of this century. Of particular importance, the dissemination 
of information regarding trades and quotes is now nearly instantaneous 
and permits both market professionals and public investors to monitor 
the market and the quality of their executions. Brokers have developed 
sophisticated systems for reviewing execution quality in response to 
the Commission's statements on ``best execution'' of customer orders. 
The Exchange also has developed

[[Page 51156]]

sophisticated surveillance systems backed by extensive staff resources 
for reviewing trading by its members. These facilities were unavailable 
and inconceivable at the beginning of the century. At that time, the 
coarse approach of allowing one party to a trade to renege if the 
executing specialist acted both as agent and principal may have created 
an appropriate ``in terrorem'' effect. Today, however, a discretionary 
and unchecked unilateral right of rescission is excessive.
    The Philadelphia Stock Exchange (``Phlx'') amended its rules in 
1993 to permit rescission of options trades only when the cancellation 
is approved in writing by a floor official, ``for good cause shown.'' 
\7\ The Exchange's proposed rule change is based upon the Phlx's 1993 
amendment to its rules.
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    \7\ See Securities Exchange Act Release No. 32922 (September 17, 
1993), 58 FR 50062 (September 24, 1993) (amending Phlx Rule 1019, 
Commentary .05) and Amendment No. 1, supra note 3 (interpreting the 
rules of the other exchanges).
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    The Amex rule that permits a party to an Exchange contract to break 
it, even though the execution may have been consistent with the market 
at the time of trade, interjects an element of financial risk into the 
market. This risk is magnified in the context of options due to the 
leverage of these securities. In the Exchange's view, the risk of 
financial instability created by giving persons an unfettered right to 
cancel trades merely because the executing specialist acted both as 
principal and agent outweighs whatever residual benefits the Rule may 
have. The Exchange, moreover, is not proposing to eliminate a member's 
ability to rescind a trade where the specialist may have acted 
inappropriately. The proposed rule change simply aims at eliminating 
the unchecked right to break trades due to the capacity in which the 
specialist acted.
    Under the proposal, a member seeking to break an equity or option 
trade \8\ must first obtain written Floor Official approval. The member 
seeking the rejection must show good cause for the Floor Official to 
form the belief that the execution was inconsistent with the 
specialist's responsibility to maintain a fair and orderly market. For 
example, assume the market is 9 to 9\1/4\, 1,000 by 1,000, and the 
specialist holds a sell stop order for 800 shares with an electing 
price of 9. Assume that the specialist sells 1,000 shares for its 
principal account at 9, and then executes the sell stop order at 8\3/
4\, buying 800 shares for its account. In this circumstance, it would 
be appropriate to break the trade at 8\3/4\ since, when a specialist's 
trade elects a stop, the specialist is required to fill the stop order 
at the price of the electing transaction (in this case at 9).\9\ The 
Exchange believes that the proposal appropriately limits the financial 
risk of specialists that provide liquidity to investors by acting as 
principal while maintaining the ability of members to break trades 
where the specialist acts inconsistently with his or her obligations.
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    \8\ See Amendment No. 1, supra note 3.
    \9\ Id.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\10\ in general and furthers the objectives of Section 6(b)(5) \11\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in general 
to protect investor and the public interest. Moreover, the Exchange 
contends that the proposal is not designed to permit unfair 
discrimination between customers, issuers, brokers and dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will impose no burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.

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:
    (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, 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, NW, Washington, DC 20549-0609. 
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, DC. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-Amex-99-23 and should be submitted by October 12, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-24498 Filed 9-20-99; 8:45 am]
BILLING CODE 8010-01-M