[Federal Register Volume 65, Number 110 (Wednesday, June 7, 2000)]
[Notices]
[Pages 36183-36185]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14259]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42834; File No. SR-Amex-00-07]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange LLC Relating to the Amendment of 
Rule 126 on a Pilot Program Basis

May 26, 2000.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on 
February 3, 2000, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission the 
proposed rule change as 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.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Amex Rule 126 on a six month pilot 
program basis by adding a new Commentary .03 to implement a program for 
processing electronically transmitted orders for the common stock of 
business corporations admitted to dealings on the Exchange 
(``eQPrioritysm''). Below is the text of the proposed rule 
change, which is entirely new.
* * * * *
    .03. Orders Delivered Electronically to the Specialist. At all 
times other than an opening or a reopening (Rule 108) or a block sold 
at a ``clean-up'' price (Rule 155), a round lot, regular way order for 
the common stock of a business corporation admitted to dealings on the 
Exchange that is sent to the specialist electronically and is 
executable according to its terms in whole or in part shall be handled 
in the following manner. Upon receipt of the electronic order by the 
specialist's order book, the specialist shall announce the order to the 
crowd and the order shall establish priority with respect to all other 
bids and offers. Once the specialist has announced the order, members 
who have bids or offers incorporated in the Amex Published quote 
(``APQ'' shall not be permitted to withdraw or modify their interest 
except to provide price improvement (i.e., an execution between the 
APQ) to the incoming order.

[[Page 36184]]

Following the announcement of the order, the specialist and members in 
the crowd shall have a brief opportunity to provide price improvement 
to the incoming order. In the event that the incoming order is price 
improved but not entirely filled at the improved price, the sale shall 
not remove all bids and offers, and the incoming order shall retain 
priority over other bids and offers up to the full size of the APQ that 
was displayed at the time of the announcement of the order less any 
interest that provided price improvement to the order. In the event 
that the incoming order is larger than the size displayed in the APQ, 
the order shall be executed according to these procedures and any 
unfilled balance of the order shall be handled according to the 
Exchange's customary auction market processes.
    This Commentary .03 will expire six months from the date the SEC 
approval. The SEC approved this rule change on (insert date of Approval 
Order when known).
* * * * *

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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Order execution has become increasingly automated and competitive. 
To encourage investors and order flow providers to send orders to the 
Exchange, the Amex is proposing to add a new Commentary .03 to Amex 
Rule 126. Commentary .03 would be effective for a six months pilot 
period. The commentary is intended to assure investors who send equity 
orders to the Exchange that their orders will be filled either (i) at 
the Amex Published Quote (``APO'') \3\ at the time the specialist 
announces the order up to the depth of the quote, or (ii) at an 
improved price.\4\ Specifically, the proposed rule change would require 
that members may not withdraw or modify their bids and offers 
incorporated into the APQ during the processing of electronically 
delivered orders except to provide price improvement. The proposed rule 
change also provides that an incoming electronic order retains priority 
over other bids and offers on the Floor until the exhaustion of the APQ 
displayed at the time the specialist announces the electronic order. 
\5\
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    \3\ The APQ is the best bid or offer that Amex conveys to the 
Consolidated Quotation System. Conversation between Bill Floyd-
Jones, Assistant General Counsel, Arne Michelson, Senior Vice 
President, Laurence McDonald, Managing Director, Lauren Brophy, Vice 
President, Amex, and Joshua Kans, Special Counsel, Madge Hamilton, 
Special Counsel, Division of Market Regulation (``Division''), 
Commission, April 5, 2000.
    \4\ Current practices do not guarantee that an incoming 
electronic order will interact against the APQ. When an electronic 
order arrives on the Exchange, the specialist in the security will 
announce a crossing market in an attempt to provide price 
improvement to the order. For example, if an electronic market order 
to buy arrives on the Exchange, the specialist will announce a bid 
at a minimal fractional variation away from the APQ ask price, and 
the specialist will announce an offer at the APQ ask price. This 
gives floor brokers an opportunity to price improve the order by 
selling to the bid. This method of crossing, however, may also 
permit a floor broker to take the offer despite the presence of the 
electronic order. If an electronic market order to sell arrives, a 
floor broker similarly has the opportunity to sell to the bid first.
    Also, if an electronic order is filled in part at an improved 
price, current practice allows floor brokers to interact with the 
APQ on parity with the remainder of the electronic order. This is 
because Amex Rules 126(e)(3) and 126(f) provide that each sale 
cancels all bids and offers. In that case, Amex Rules 126(e)(2) and 
126(f) require the bids or offers on parity to be filled as equally 
as practicable. Conversations between Bill Floyd-Jones, Assistant 
General Counsel, Arne Michelson, Senior Vice President, Laurence 
McDonald, Managing Director, Lauren Brophy, Vice President, Amex and 
Joshua Kans, Special Counsel Madge Hamilton, Special Counsel, 
Division, Commission, March 31, 2000 and April 5, 2000.
    \5\ The proposed rule change further provides that once the 
specialist announces the order, the specialist and members of the 
crowd will have a brief opportunity to provide price improvement. If 
part of the order is filled at an improved price, the sale would not 
remove bids and offers, and the incoming order retains priority over 
other bids and offers up to the full size of the APQ less any 
interest that provided price improvement. If the incoming order is 
larger than the size displayed in the APQ, the unfilled portion will 
be handled according to the customary auction market procedures.
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    An example best illustrates how the program will work. Assume the 
APQ is 20 to 20\1/8\, 3,000 by 3,000 and that the bid consists of a 
broker in the crowd working a buy order (3,000 shares reflected in the 
APQ). Assume that the offer consists of a customer limit order (1,000 
shares) and the specialist as principal (2,000 shares). (There is also 
a broker in the crowd working a sell order who has chosen not to 
reflect any of his interest in the APQ.) Assume that the specialist 
receives an electronic order to buy 3,000 shares at the market. Once 
the specialist announces the order, no one would be permitted to 
withdraw his or her interest from the APQ except to provide price 
improvement to the incoming electronic order. In this example, the 
specialist would announce to the crowd that there are 3,000 shares to 
buy. Both the specialist and the broker working the sell order each 
could sell, 1,500 shares to the incoming electronic order at an 
improved price of 20\1/6\.\6\ If, however, the broker in the crowd were 
unwilling to price improve the order, and the specialist were willing 
to sell, 3,000 at 20\1/16\, then the electronic order would buy 3,000 
at 20\1/16\ from the specialist. If neither the specialist nor the 
broker in the crowd were willing to price improve the order, it would 
be filled at 20\1/8\ against the customer limit order and the 
specialist's offer. The electronic order would have priority over all 
other purchasers at the Amex until the APQ displayed at the time it is 
announced is exhausted.
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    \6\ This example presumes that the floor broker and the 
specialist simultaneously sell to the bid. In that situation, Amex 
Rules 126(e)(2) and 126(f) provide that all such bids and offers are 
on parity and any securities to be sold in execution of bush bids or 
offers are divided as equally as practicable between the specialist 
and the brokers, except when the specialist has an accumulation of 
orders on his book representing a substantial amount of the security 
at the same price. Conversation between Bill Floyd-Jones, Assistant 
General Counsel, Arne Michelson, Senior Vice President, Laurence 
McDonald Managing Director, Amex, and Joshua Kans, Special Counsel, 
Madge Hamilton, Special Counsel, Division, Commission, March 31, 
2000.
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    The Exchange's proposed eQPriority program is not limited to 
institutional size orders. In addition, the Exchange's program is 
available with respect to all interest displayed in the APQ at the time 
the order is announced. The Exchange believes that eQPriority will 
provide investors with the optimal combination of price improvement 
possibilities together with speed and certainty of execution.
    The eQPriority program only will apply to the common stock of 
business corporations admitted to dealings. The Exchange believes that 
it would be inappropriate to apply eQPriority to options and equity 
derivatives because the Amex is not the price discovery market for 
these securities and the value of the underlying instruments may change 
very rapidly. The Exchange also believes that the program should not 
apply to openings and reopenings. Openings involve a balancing of 
supply and demand to reach a consensus price that, by definition, is 
the best execution. The program also will not apply to ``clean-up'' 
sales of blocks. The Exchange believes that the current

[[Page 36185]]

procedure for affecting a clean-up sale at a single price outside the 
APQ is fairest to all parties and, accordingly, does not propose to 
amend this process.
    The Exchange is proposing to adopt eQPriority on a six-month pilot 
program basis to assess its benefits and costs.
2. Statutory Basis
    The proposed rule change is consistent with section 6(b) of the Act 
in general and furthers the objectives of section 6(b)(5) 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 investors and the 
public interest; and is not designed to permit unfair discrimination 
between customers, issuers, brokers and dealers.

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, D.C. 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-00-07 and should be submitted June 28, 2000.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-14259 Filed 6-6-00; 8:45 am]
BILLING CODE 8010-01-M