[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