[Federal Register Volume 65, Number 249 (Wednesday, December 27, 2000)]
[Notices]
[Pages 81940-81942]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-32892]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43736; File No. SR-Amex-99-16]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the American Stock Exchange LLC Relating to Amex Rule 108, 
Priority and Parity at Openings

December 18, 2000.
    On April 28, 1999, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ relating to Amex Rule 108, Priority and Parity at 
Openings. On July 13, 1999, the Amex filed an amendment to the

[[Page 81941]]

proposed rule change.\3\ Notice of the proposed rule change, as 
amended, was published for comment in the Federal Register on February 
28, 2000.\4\ The Commission received one comment letter regarding the 
proposal.\5\ This order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from William Floyd-Jones, Assistant General 
Counsel, Amex, to Michael Walinskas, Associate Director, Division of 
Market Regulation (``Division''), Commission (July 8, 1999) 
(``Amendment No. 1''). Amendment No 1 replaces and supercedes the 
original filing.
    \4\ Securities Exchange Act Release No. 42441 (February 18, 
2000), 65 FR 10571 (February 28, 2000) (SR-Amex-99-16).
    \5\ See Letter from Peter G. Armstrong, Vice President, San 
Francisco Equity Operations, Pacific Exchange, Inc. (``PCX'') to 
Jonathan G. Katz, Secretary, Commission, (April 7, 2000).
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I. Introduction and Background

    The proposed rule change would amend Amex Rule 108, Priority and 
Parity at Openings, by adding Commentary .02 to modify procedures 
applicable to proprietary orders sent by market makers in other 
Intermarket Trading System (``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.
    Presently, the Amex pre-opening procedures 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 then to receive an 
execution in full at the opening price (or the re-opening price 
following a halt or suspension in trading).

II. Description of the Proposal

    Proposed Commentary .02 to Amex Rule 108, 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 re-opening, 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 re-opening 
would be canceled. Paragraph (b) would provide that, if such orders 
would offset the imbalance, the Amex 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. Paragraph (c) would note 
that Paragraphs (a) and (b) of Commentary .02 would only apply if the 
Amex specialist issues an ITS pre-opening notification or indication 
through the Consolidated Tape. Paragraph (d) would provide that 
proprietary orders from market makers in other ITS participant markets 
shall be marked and identified as such.

III. Summary of Comments

    The Commission received one comment letter on the proposed rule 
change.\6\ In general, the Commenter stated that the proposed rule 
change would place an unnecessary burden on competition, hinder, rather 
than facilitate, transactions in securities, create an obstacle to 
price discovery at the opening, and serve to restrict rather than to 
promote a free and open market.\7\
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    \6\ See note 5, supra.
    \7\ See note 5, supra, p. 1.
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    Specifically, the Commenter stated that under the Amex's current 
practice, the Amex specialist is able to allow the full supply and 
demand for the security to determine the opening price because all 
trading interests are aggregated at the opening, including proprietary 
orders of other market makers. However, the Commenter opined that 
allowing the Amex specialist to reject orders of regional specialists 
is contrary to the concept of a national market system because it 
singles out a particular form of trading interest for exclusion from 
the opening.\8\
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    \8\ See note 5, supra, p. 2.
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    In addition, the Commenter stated that the proposal, if approved, 
would allow Amex specialists, upon issuance of a pre-opening 
indication, to exclude proprietary trading interest if it increases an 
imbalance, even if such interest was entered before an indication was 
published. As a result, the proposal would hinder price discovery, and 
by discriminating against regional exchange specialists, might further 
fragment the National Market System (``NMS'') \9\
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    \9\ See note 5, supra, p. 2.
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    The Commenter stated that the proposal would impose an unnecessary 
burden on regional specialists, who, believing that they have taken 
appropriate steps to minimize risk exposure in given issues prior to 
the opening by entering orders on the Amex for execution at the 
opening, would find it necessary to monitor the Amex market for the 
possibility of a pre-opening indication. The specialist would then have 
to cancel orders out of the Amex system and re-enter trading interest 
through ITS to ensure participation in the opening. The Commenter 
further opined creating additional differences between the pre-opening 
procedures on the Amex and the NYSE would be overly burdensome.\10\
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    \10\ See note 5, supra, p. 2.
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    The Commenter recommended that the Commission not approve the 
Amex's proposed rule change, in order to avoid unfair discrimination, 
obstacles to price discovery and transactions of regional specialists, 
and further fragmentation of the NMS.\11\
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    \11\ See note 5, supra, p. 3.
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    The Amex responded by stating that (1) the proposal would benefit 
investors; and (2) the proposed procedures have already been reviewed 
and approved by the Commission in the context of interest of market 
makers on other ITS participant markets that is sent to the Amex after 
an indication or pre-opening notification.\12\
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    \11\ See Letter from Bill Floyd-Jones, Assistant General 
Counsel, Amex, to Katherine England, Assistant Director, Division, 
Commission (July 28, 2000).
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    In response to the Commenter's issues regarding price discovery, 
discrimination, and unnecessary burden on competition, the Amex stated 
that the proposed procedures are comparable to those already in effect 
at the Amex and other markets for pre-opening interest sent by ITS 
Participants after a pre-opening notification or indication has been 
sent by the Exchange.\13\ The Amex stated that applying the proposed 
procedures to the orders of the market makers before, rather than 
after, an indication or pre-opening notification does not place any 
burden on transactions in securities that the Commission has not 
already reviewed and approved.\14\ The Amex believes it is therefore 
reasonable and consistent with the Act to conform the procedures for 
handling orders that are received before a notification or indication 
to the procedures that would apply to interest

[[Page 81942]]

received after a pre-opening notification or indication.\15\
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    \13\ Id. at p.1.
    \14\ See ITS Plan, Exhibit A, Paragraph (b)(i)(B).
    \15\ See note 12, supra, p. 1.
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    In response to the issue of further fragmentation of the NMS, the 
Amex provided an illustration in which a riskless principal transaction 
by a market maker on other ITS participant markets may result in a 
double printing of trades and a misleading appearance of activity in a 
stock.\16\ The Amex states that the practice, along with the generation 
of tape revenue for the regional exchange, which is used to subsidize 
cash payments for order flow arrangements, may lead to further 
fragmentation in the market. However, the Amex opined the proposal 
would reduce fragmentation and enhance price discovery at openings and 
re-openings because the proposal is designed to help provide moire 
accurate pricing at the opening.\17\
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    \16\ See note 12, supra, pp. 2-3.
    \17\ See note 12, supra, p. 2.
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    Finally, the Amex noted that the proposal made no changes in the 
procedures for handling specific customer orders or net imbalances or 
agency interest.\18\ If a specialist on a regional market is unable to 
execute the agency orders, he or she may send the orders via an ITS 
commitment to the Amex at no charge to the regional specialist and 
those orders will be treated as any other customer orders at the Amex. 
The Amex believes that the proposal will neither impede price discovery 
nor increase market fragmentation so long as the regional specialist 
continues to send orders that the regional specialist is either unable 
or unwilling to execute, to the Exchange via ITS.\19\ The Amex also 
noted that the proposal would only affect the occasional regional 
specialist proprietary order.\20\
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    \18\ See note 12, supra, p. 2. These are two of the three types 
of orders that PCX sends to the Amex.
    \19\ See note 12, supra, p. 2.
    \20\ See note 12, supra, p. 2.
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IV. Discussion

    After careful review, the Commission finds that the proposal is 
consistent with the requirements of Section 6(b) of the Act in 
general,\21\ and furthers the objectives of Section 6(b)(5) of the 
Act,\22\ 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 
respect to 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.\23\
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ In approving the proposal, the Commission has considered 
the rule's impact on efficiency, competition, and capital formation. 
15 U.S.C. 78c(f).
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    The Commission also finds that the changes are consistent with 
Section 11A(a)(1)(D) of the Act,\24\ in that the linking of markets for 
qualified securities though communication and data processing 
facilities should help to foster efficiency, enhance competition, 
increase the information available to brokers, dealers, and investors, 
facilitate the offsetting of investors' orders, and contribute to the 
best execution of such orders.
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    \24\ 15 U.S.C. 78k-1(a)(1)(D).
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    In determining that the proposed procedures that apply to orders 
entered on the Exchange before the Amex specialist issues an ITS pre-
opening notification or indication through the Consolidated Tape are 
reasonable and consistent with Section 6(b)(5) \25\ and 11A(a)(1)(D) 
\26\ of the Act, the Commission has considered carefully the 
Commenter's concerns that the proposed procedure place an unnecessary 
burden on competition, hinder transactions in securities, create 
obstacles to price discovery and restrict rather than promote a free 
and open market. The Commission is not persuaded by these arguments. 
The proposed procedures should reduce the imbalances of buy or sell 
orders at openings or re-openings, and decrease the market risk on the 
Amex specialist, thus helping to facilitate orderly openings and re-
openings. In addition, the orders of market makers in other ITS 
participant markets entered before an indication or pre-opening 
notification has been sent will be treated 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.
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    \25\ 15 U.S.C. 78f(b)(5).
    \26\ 15 U.S.C. 78k-1(a)(1)(D).
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    The Commission also has considered carefully the Commenter's 
concern of further market fragmentation because of discrimination 
against regional exchange specialists. The Commission believes that the 
proposed procedures will help to contribute to enhance execution of 
orders and foster cooperation and coordination with other ITS 
participant markets because the proposal is designed to promote 
accurate pricing at the opening; orders of market makers in other ITS 
participant markets would be executed in accordance with the current 
procedures if the Amex specialist does not issue a notice or indication 
before the opening or re-opening. The proposal does not make any 
changes to the Amex's current procedures of handling specific customer 
orders or net imbalances of agency interest.

V. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\27\ that the proposal, as amended (SR-Amex-99-16), be and hereby 
is approved.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-32892 Filed 12-26-00; 8:45 am]
BILLING CODE 8010-01-M