[Federal Register Volume 65, Number 113 (Monday, June 12, 2000)]
[Notices]
[Pages 36855-36856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14724]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42888; File No. SR-Amex-00-05]


Self-Regulatory Organizations; American Stock Exchange LLC.; 
Order Approving Proposed Rule Change to Rescind Rules 5 and 6, the 
Exchange's Off-Board Trading Rules, and to Make Conforming Changes to 
Rules 25, 317, 900 and 959

June 1, 2000.

I. Introduction

    On February 1, 2000, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to rescind Rules 5 and 6, the 
Exchange's off-board trading rules, and to make conforming changes to 
Rules 25, 317, 900 and 959. The proposed rule change was published for 
comment in the Federal Register on March 3, 2000.\3\ Proposed rule 
changes filed by thee Chicago Stock Exchange and the Philadelphia Stock 
Exchange to rescind their off-board trading rules were published on the 
same date as the Amex proposing release.\4\ Shortly thereafter, the 
Boston Stock Exchange and the Pacific Exchange filed similar proposed 
rule changes.\5\ The Commission received no comments on any of these 
proposals. Today, in separate orders, the Commission is approving the 
proposed rule changes to rescind off-board trading

[[Page 36856]]

rules filed by the exchanges noted above.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 42460 (February 25, 
2000), 65 FR 11618.
    \4\ Securities Exchange Act Release No. 42459 (February 25, 
2000). 65 FR 11619 (March 3, 2000) (File No. SR-CHX-99-28); 
Securities Exchange Act Release No. 42458 (February 25, 2000), 65 FR 
11628 (March 3, 2000) (File NO. SR-Phlx-00-12).
    \5\ Securities Exchange Act Release No. 42661 (April 10, 2000), 
65 FR 20497 (April 17, 2000) (File No. SR-BSE-00-02); Securities 
Exchange Act Release NO. 42660 (April 10, 2000), 65 FR 21052 (April 
19, 2000) (File No. SR-PCX-00-11).
    \6\ The New York Stock Exchange was first to submit a proposed 
rule change rescinding its off-board trading rule, Rule 390. 
Securities Exchange Act Release No. 42450 (February 23, 2000), 65 FR 
10577 (February 28, 2000) (``NYSE Release'').
    On May 5, 2000 the Commission approved the New York Stock 
Exchange's proposed rule change to rescind Rule 390. Securities 
Exchange Act Release 34-42758 (May 5, 2000), 65 FR 30175 (May 10, 
2000) (``NYSE Approval Order'').
    In the NYSE Release, the Commission also solicited the public's 
views on a broad range of issues related to market fragmentation--
the trading of orders in multiple locations without interaction of 
those orders. The period for public comment on market fragmentation 
expired on May 12, 2000. The Commission currently is reviewing the 
comments submitted in response to the NYSE Release.
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II. Description of the Proposal

    Exchange Rules 5 and 6 restrict a member's ability to effect 
transactions in Exchange-listed securities (Rule 5) and bonds (Rule 6) 
off a national securities exchange. In the proposing release, the 
Exchange explained that these rules were originally intended to 
``centralize buying and selling interest in listed securities to ensure 
the execution of orders at the best possible prices. Over time, 
however, these off-board trading restrictions came to be viewed by many 
as anticompetitive.'' The Exchange also noted that Chairman Levitt had 
recently called for the elimination of off-board trading rules.
    The Exchange proposed to eliminate Exchange Rule 5 because the rule 
is ``largely irrelevant'' to the trading of Amex-listed equity 
securities, given the applicability of Commission Rule 19c-3 \7\ and 
the fact that most Amex-listed stocks were listed for trading after 
April 26, 1979. The Exchange also noted that Exchange Rule 5 only 
applies to Amex members, and that non-member firms do in fact trade 
Amex-listed equities off an exchange. With respect to Exchange Rule 6, 
the Exchange stated that the rule was of ``little practical 
consequence'' due to the exceptions in the rule that permit ``the great 
bulk of listed bond transactions to occur over-the counter.'' 
Therefore, in light of the ``limited practical impact of the Exchange's 
off-board trading rules and the changing view on their propriety.'' the 
Exchange proposed to eliminate its off-board trading restrictions for 
Amex-listed equities and bonds.
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    \7\ Commission Rule 19c-3 prohibits a national securities 
exchange from imposing off-board trading restrictions to equity 
securities listed after April 26, 1979. 17 CFR 240.19c(3).
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange. In particular, 
the Commission finds the proposed rule change is consistent with 
Section 6(b)(5) of the Act \8\ which requires, among other things, that 
the rules of an exchange be designed 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 Section 6(b)(8), 
which requires that the rules of an exchange not impose any burden on 
competition not necessary or appropriate in furtherance of the Act. The 
rescission of the Exchange's off-board trading restrictions is also 
consistent with Section 11A of the Act \9\ which sets forth the 
findings and objectives that are to guide the Commission in its 
oversight of the national market system. Specifically, rescinding the 
off-board trading restrictions will help further the national market 
system objective in Section 11(A)(a)(1)(C)(i) to assure the 
economically efficient execution of securities transactions, and in 
Section 11A(a)(1)(C)(ii) to assure fair competition between exchange 
markets and markets other than exchange markets.\10\
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    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78k-1.
    \10\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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    As discussed more fully in the NYSE Approval Order, the existence 
of off-board trading restricting can no longer be justified in an age 
when advancing technology and expanding trading volume are introducing 
new competitive challenges for the U.S. securities markets, both at 
home and abroad. Off-board trading rules such as Exchange Rules 5 and 6 
directly restrict a certain type of market center competition--
competition between exchange markets and markets other than exchange 
markets. Their rescission today eliminates an inappropriate regulatory 
burden on competition that runs contrary to the objectives set forth in 
the Act.
    Off-board trading restrictions have been justified on the basis 
that they promote the interaction of investors' orders without 
participation by a dealer--indeed an objective set forth in the 
Act.\11\ The Commission believes, however, that whatever beneficial 
effect off-board trading restrictions such as Exchange Rules 5 and 6 
may have in enhancing the interaction of investor orders can no longer 
justify their anticompetitive nature. To the extent off-board trading 
rules enhance order interaction, they do so in an undesirable way--by 
attempting a direct restriction on competition. Such attempts are never 
wholly successful and typically only distort, rather than eliminate, 
competition and introduce unnecessary costs ultimately borne by 
investors.
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    \11\ Section 11A(a)(1)(C)(v) of the Act.
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    The outcome of competition between market centers should depend on 
which market centers are most able to serve investor interests by 
providing the highest quality trading services at the lowest possible 
prices; the Commission's regulatory task is removing unwarranted 
regulatory barriers to competition between market centers. As stated in 
the NYSE Approval Order, the rescission of off-board trading rules is 
``intended solely to free the forces of competition and allow investor 
interests to control the success or failure of individual market 
centers.'' \12\ The same rationale and motivation support the 
Commission's action today.
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    \12\ NYSE Approval Order at 30179.
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IV. Conclusion

    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-Amex-00-05) is approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
Margaret H. McFarland,
Deputy Secretary.
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    \14\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 00-14724 Filed 6-09-00; 8:45 am]
BILLING CODE 8010-01-M