[Federal Register Volume 65, Number 185 (Friday, September 22, 2000)]
[Notices]
[Pages 57410-57412]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-24350]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-43284; File No. SR-Amex-00-07]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the American Stock Exchange LLC Relating to the Amendment of
Rule 126 on a Pilot Program Basis
September 12, 2000.
I. Introduction
On February 3, 2000, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934,\1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to implement a six month pilot program for processing
electronically transmitted orders for equities traded on the Exchange
(``eQPriority\sm\''). The proposed rule change was published for
comment in the Federal Register on June 7, 2000. \3\ No comments were
received on the
[[Page 57411]]
proposal. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 42834 (May 26,
2000), 65 FR 36183 (June 7, 2000).
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II. Description of the Proposal
The proposed rule change would add a new Commentary .03 to Amex
Rule 126, which governs the precedence of bids and offers. The Exchange
states that proposed Commentary .03 is intended to assure investors who
send electronic orders to the Exchange that their orders will be filled
at either: the Amex Published Quote (``APQ'') \4\ at the time the
specialist announces the order, up to the depth of the quote; or at an
improved price. The Exchange believes that this will encourage
investors and order flow providers to send orders to the Amex.
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\4\ The Amex states that 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.
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Proposed Commentary .03 specifically applies to the handling of
round lot, regular way orders for common stock sent to the Exchange
electronically, at all times other than openings, reopenings, or
instances where a block is sold at a ``clean up'' price. The commentary
specifies that when a specialist's order book receives the electronic
order, the specialist shall announce the order to the crowd, and the
order will establish priority with respect to all other bids and
offers. Upon that announcement, members whose bids or offers are
incorporated into the APQ may not withdraw or modify those bids and
offers except to provide price improvement to the electronic order.
Once the specialist announces the order, the specialist and members of
the crowd will have a brief opportunity to provide price improvement.
If the electronic order is filled in part at an improved price, that
sale would not remove bids and offers, and the incoming order retains
priority over other bids and offers up to the full size APO (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.
The Exchange states that it believes eQPriority\sm\ will provide
investors with the optimal combination of price improvement
possibilities with speed and certainty of execution. The Exchange also
notes that the proposed eQPriority\sm\ program is not limited to
institutional size orders. The program will only apply to the common
stock of business corporations admitted to dealings, because the
Exchange believes that it would be inappropriate to apply the program
to options and equity derivatives as the Amex is not the price
discovery market for those securities and the value of the underlying
instruments may change very-rapidly.
The Exchange also states that the program should not apply to
openings and reopenings because openings involve a balancing of supply
and demand to reach a consensus price that, by definition, is the best
execution. Moreover, the program will not apply to ``clean-up'' sales
of blocks because the Exchange believes that the current procedure for
affecting a clean-up sale at a single price outside the APQ is fairest
to all parties.
The Exchange's current auction market rules do not guarantee that
an incoming electronic order will interact against the APQ. For
example, 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. Although that
procedure gives floor brokers an opportunity to execute the electronic
order at an improved price, the procedure may also permit a floor
broker to trade against the APQ despite the presence of the electronic
order. Moreover, if an electronic order is filled in part at an
improved price, current practice potentially allows floor brokers to
interact with the APQ on parity with the unfilled remainder of the
electronic order. The Amex believes that Commentary .03 addresses the
perception that trading may occur in that manner when an electronic
order arrives on the floor of the Exchange. \5\
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\5\ 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.
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III. Discussion
The Commission finds that proposed rule change is consistent with
section 6(b)(5) of the Act. \6\ Section 6(b)(5) requires, among other
things, that the rules of an exchange be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, to remove the 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.
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\6\ 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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The Commission specifically finds that the proposed rule change
would modify the Exchange's existing auction market rules in a way that
should help assure that electronic orders sent to the Exchange from off
the Amex floor will have an improved opportunity to interact with the
published Amex quote. In particular, the Commission finds that the
proposed rule change will help prevent two scenarios under which the
Exchange's existing auction market rules may not always permit
electronic orders an ideal opportunity to interact with the Amex quote:
a scenario in which on-floor traders could trade against the Amex quote
while the specialist is attempting to obtain price improvement for the
electronic order, and a scenario in which the execution of part of an
electronic order could put floor interest on parity with the remainder
of the electronic order. The Commission finds that the proposed rule
change should provide greater assurance that electronic orders sent to
the Amex floor will have the opportunity to interact with the Amex
quote, without having to make any findings about whether either of
those practices currently occurs on the Amex floor.
The Commission further finds that the proposed rule change contains
reasonable exceptions for openings and reopenings and for blocks sold
at cleanup price, because the proposed priority rules are not needed in
those circumstances. Moreover, the Commission also finds that it is
reasonable for Amex to continue to apply its existing auction market
procedures to those portions of an electronic order that are larger
than the Amex quote.
Finally, the Commission finds that it is reasonable for the
Exchange to implement this proposal for a six month pilot period, to
permit the Exchange to assess the costs and the benefits of the
program. Continuation of this program beyond that six month period
would require the Exchange to file another proposed rule change. \7\
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\7\ The Commission expects that the Exchange will monitor the
effect of the proposed rule change on trading behavior on Amex,
paying particular attention to its effect on stocks that are traded
in a decimal environment, and convey those results to the Commission
before the pilot period ends. Among other things, the Exchange
should examine whether the rule change affects the ability of
electronic orders to interact with the APQ, and whether the rule
change affects limit order execution on Amex.
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[[Page 57412]]
It is Therefore Ordered, pursuant to section 19(b)(2) of the Act,
\8\ that the proposed rule change (SR-Amex-00-07) is hereby approved
until March 12, 2001.
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\8\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority. \9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-24350 Filed 9-21-00; 8:45 am]
BILLING CODE 8010-01-M