[Federal Register Volume 65, Number 39 (Monday, February 28, 2000)]
[Notices]
[Pages 10571-10573]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-4558]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42441]; File No. SR-Amex-99-16]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange LLC Relating to Exchange Rule 108

February 18, 2000

    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act'') \1\ and rule 19b-4 thereunder,\2\ notice 
is hereby given that on April 28, 1999, the American Stock Exchange LLC 
(``Amex'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the self-regulatory organization. Amex filed an amendment to the 
proposed rule change on July 13, 1999.\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\ 17 CFR 240.19b-4.
    \3\ See Letter to Michael Walinskas, Associate Director, 
Division of Market Regulation, Commission, from William Floyd-Jones, 
Assistant General Counsel, Amex, dated July 8, 1999 (``Amendment No. 
1''). Amendment No. 1 replaces and supersedes the original filing.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The text of the proposed rule change is available at the Office of 
the Secretary, the Amex and at the Commission.

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 self-regulatory organization 
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 self-regulatory organization 
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

1.  Purpose
    The Amex proposes to amend rule 108 (``Priority and Parit at 
Openings'' by adding Commentary .02 to modify procedures applicable to 
proprietary orders sent by market makers in other ITS participant 
markets to the Amex by means of the Common Message Switch (``CMS'') and 
Amex Order File (``AOF'') or through a floor broker before an ITS pre-
opening notification or indication of an anticipated opening price 
range is issued by the Exchange specialist.
    The proposed procedures are comparable to those in effect for pre-
opening orders sent by ITS participants to another market that has 
issued a pre-opening notification or indication. The ITS Plan provides 
that, after a specialist issues an ITS pre-opening notification or an 
indication through the consolidated tape of an opening price range for 
a security, market makers on other ITS Participants must route orders 
for execution at the opening prices only through ITS and not by other 
means (paragraph (c)(4) of Exhibit A relating to the ``Pre-Opening 
Application Rule'').\4\

[[Page 10572]]

The execution of such orders is subject to the provisions of Exhibit A 
of the ITS Plan. Current pre-opening procedures on the Amex, however, 
allow market makers on other ITS participant markets to enter orders 
into CMS and AOF or through a floor broker for their own account before 
an indication or ITS pre-opening notification is issued, and to then 
received an execution in full at the opening price (or the re-opening 
price following a halt or suspension in trading). This contrasts with 
ITS Plan procedures that would apply if the order were entered after 
the indication or pre-opening notification.
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    \4\ The ITS Plan's Pre-Opening Application rule (paragraph 
(b)(i)(B)) provides that, if the Consolidated Tape Association Plan 
or the Exchange's rules require or permit that an ``indication of 
interest'' be furnished to the consolidated tape before an opening, 
then the furnishing of an indication of interest in such situations 
shall, without any other additional action required of the 
specialists, initiate the ITS Pre-Opening process, and, if 
applicable, substitute for and satisfy specified pre-opening 
notification requirements in the Pre-Opening application Rule. These 
provisions are also included in Amex Rule 232(b)(i)(B).
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    Proposed Rule 108, Commentary .02 would set forth procedures that 
apply to an order for the account of market makers on another ITS 
participating market center entered on the Exchange before the Amex 
specialist issues an ITS pre-opening notification or an indication 
through the consolidated tape. Paragraph (a) would provide that the 
Amex specialist would not be required to execute such orders if they 
would add to the imbalance at the opening or reopening, but the 
specialist could execute all or part of such orders in his or her 
discretion, and any portion not executed at the opening or reopening 
would be canceled. Paragraph (b) would provide that, if such orders 
would offset the imbalance, the specialist may take or supply as 
principal 50 percent of the imbalance at the opening price, rounded up 
or down to avoid allocation of odd-lots. Where orders have been 
received from more than one market maker, the Amex specialist would 
allocate the remaining imbalance among them in proportion to the amount 
that each obligated itself to take or supply. For purposes of paragraph 
(b), multiple market makers, in the same security in the same market 
would be deemed to be a single market maker. \5\ Paragraph (d) provides 
that proprietary orders from market makers in other ITS participant 
markets shall be marked and identified as such.
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    \5\ These provisions are comparable to those in the ITS Plan, 
Exhibit A, Paragraph (b)(ii)(c)-(E). See also Amex Rules 
232(b)(ii)(c)-(E), NASD Rule 5240(f)-(h), NYSE Rule 15(c)(ii)(C)-
(E), CHX Chapter XXXI Section 3(a)(II)(C)-(E), CSE Rule 14.3(f), (h) 
& (i), PCX Rule 5.20(b)(8)(ii)(C)-(E), and Phlx Rule 2000(c)(ii)(C)-
(E). The ITS Plan establishes the following protocol for the 
execution of ITS commitments received after a pre-opening 
notification or indication:
    (C) Allocation of Imbalances--Whenever pre-opening responses 
from one or more responding market makers include obligations to 
take or supply as principal more than 50 percent of the opening 
imbalance, the Exchange specialist may take or supply as principal 
50 percent of the imbalance at the opening price, rounded up or down 
as may be necessary to avoid the allocation of odd lots. In any such 
case, where the pre-opening response is from more than one 
responding market maker, the specialist shall allocate the remaining 
imbalance (which may be greater than 50 percent if the specialist 
elects to take or supply less than 50 percent of the imbalance) 
among them in proportion to the amount each obligated himself to 
take or supply as principal at the opening price in his pre-opening 
response, rounded up or down as may be necessary to avoid the 
allocation of odd lots. For the purpose of this paragraph (b), 
multiple responding market makers in the same Eligible Listed 
Security in the same Participant market shall be deemed to be a 
single responding market maker.
    (D) Treatment of Obligations to Trade--In receiving a pre-
opening response, an Exchange specialist shall accord to any 
obligation to trade as agent included in the response the same 
treatment as he would to an order entrusted to him as agent on the 
Exchange at the same time such obligation is received.
    (E) Responses Increasing the Imbalance--An Exchange specialist 
shall not reject a pre-opening response that has the effect of 
further increasing the existing imbalance for that reason alone.
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    Orders originating from a market maker on another ITS Participant 
can add to the imbalance of buy or sell orders at openings or 
reopenings, and satisfying such orders in full can significantly 
increase the burden and market risk of the Amex specialist. (Openings 
and reopenings in Amex securities are virtually always conducted by the 
Amex specialist, rather than regional exchange specialists or over-the-
counter market makers.) Even when orders of market makers in the other 
ITS participant markets offset the imbalance, the Amex specialist is 
subject to additional market risk if such specialist is foreclosed from 
participating in the opening by the need to accommodate the orders.
    In order to facilitate orderly openings and reopenings in a manner 
similar to procedures for openings and reopenings in the ITS Plan, the 
Exchange proposed to treat the orders of market makers in other ITS 
participant markets entered prior to an indication or pre-opening 
notification in a manner comparable to the manner such orders would be 
handled pursuant to the ITS Plan if they were entered after an 
indication or pre-opening notification. Orders of market makers in 
other ITS participant markets would be executed in accordance with 
current procedures if the Amex specialists fails to issue a notice or 
indication before the opening or reopening.
    The following examples illustrate the operation of the proposed 
rule and its benefits. Assume under the current procedures that prior 
to the opening, the Amex specialist is long 50,000 shares and receives 
customer orders to sell 25,000 shares at the market. The Amex 
specialist in this example opens the stock down a quarter point and 
takes the 25,000 shares into inventory. Now assume that market maker in 
another ITS participant market sends an order to the Amex to sell 
10,000 shares for its principal account. The Amex specialist now has 
orders to sell 35,000 shares at the market and, due to the increased 
selling pressure, opens the stock down half a point and takes all 
35,000 shares into inventory. As a result of the increased size of the 
sell side order imbalance, the customer orders on the Amex receive an 
inferior fill to what they would have received if the specialist did 
not have to execute the principal order of the market maker.
    Under the Exchange's proposed procedures, if the Amex specialist 
sends an ITS pre-opening notification or indication, the specialist 
would not be required to execute the 10,000 share principal order from 
the market maker that added to the 25,000 share sell side imbalance. As 
a result, the customer orders on the Amex would receive a better 
execution than under the current procedures where the specialist is 
required to accommodate the interest of the market maker. Under the 
proposed procedures, the customer sell orders on the Amex in the 
example would be executed down a quarter point from the prior close 
rather than down a half a point as they would be under the current 
procedure. The Amex specialist, moreover, would not acquire the 
additional 10,000 shares of inventory, leaving him or her better able 
to accommodate additional sell side interest.
    Similar benefits would accrue to investors in situations where the 
orders of market makers in other ITS participant markets offset the 
imbalance. Assume in this hypothetical that the specialist is short 
50,000 shares and receives customer orders to sell 25,000 shares at the 
market prior to the open. In this example, the specialists normally 
would be willing to buy 25,000 shares down an \1/8\ from the prior 
close to partially cover the short position. Now assume that a market 
maker in another ITS participant market sends a principal order to the 
Amex to buy 20,000 shares. Under the present procedures, the market 
maker order would be executed in full, and the specialist would be 
entitled to only 5,000 shares, reducing his or her ability to 
accommodate subsequent buy side interest since the specialist already 
has a substantial short position in the stock. Under the Exchange's 
proposal, however, if the specialist sent an ITS pre-opening notice or 
an indication, the specialist and market maker would be entitled to buy 
12,500 shares. The Exchange does not believe that its proposed rule 
change will create any disincentive for specialists to send ITS

[[Page 10573]]

pre-opening notifications because these would continue to be sent in 
accordance with the terms of the ITS Plan which is not being altered.
2. Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) \6\ of the Act, in general, and Section 6(b)(5) \7\ 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, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and in general, to protect investors and the 
public interest, and is not designed to permit unfair discrimination 
between customer, issuers, brokers or dealers.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is 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

    Written comments on the proposed rule change were neither solicited 
nor received.

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, N.W., Washington, D.C. 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, located at the above address. 
Copies of such filing will also be available for inspection and copying 
at the principal office of the self-regulatory organization. All 
submissions should refer to File No. SR-Amex-99-16 and should be 
submitted by March 20, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \8\
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    \8\ 17 CFR 200.30-3(a)(12).


Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-4558 Filed 2-25-00; 8:45 am]
BILLING CODE 8010-01-M