[Federal Register Volume 66, Number 32 (Thursday, February 15, 2001)]
[Notices]
[Pages 10539-10540]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-3802]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43938; File No. SR-Amex-01-03]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the American Stock Exchange 
LLC Relating to the Prohibition Against Members Functioning as Market 
Makers and the Entry of Electronically Generated Orders Into the 
Exchange's Order Routing System

February 7, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
\1\ (the ``Act'') and Rule 19b-4 thereunder \2\, notice is hereby given 
that on February 1, 2001, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'') or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Exchange has designated the proposed rule change as 
constituting a ``non-controversial'' rule change under paragraph (f)(6) 
of Rule 19b-4 under the Act,\3\ which renders the proposal effective 
upon receipt of this filing by the Commission. 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
    \3\ 17 CFR 240.19b(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes to adopt new Rule 934, which restricts the entry 
of certain option limit orders and prohibits the entry of orders that 
are created and communicated electronically without manual input into 
the Exchange's order routing and execution systems. The text of the 
proposed rule change is available at the Office of the Secretary, Amex 
and at the Commission.

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 Amex 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 Amex 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
     The Exchange proposes to adopt new Rule 934 restricting the entry 
of certain option limit orders and of orders that are created and 
communicated electronically without manual input into the Exchange's 
electronic order routing and delivery system (Amex Order File--AOF), 
which routes orders of up to 250 option contracts to the Exchange's 
electronic order execution and processing systems (i.e., Auto-Ex and 
the Amex Options Display Book or AODB).
    The proposed new rule provides that members, acting as either 
principal or agent, may not permit the entry of orders into the 
electronic order routing system if the orders are limit orders for the 
account or accounts of the same or related beneficial owners and the 
limit orders are entered in such a manner that the member of the 
beneficial owner(s) effectively is operating as a market maker by 
holding itself out as willing to buy and sell such securities on a 
regular or continuous basis. In determining whether a member or 
beneficial owner effectively is operating as a market maker, the 
Exchange will consider, among other things, the simultaneous or near-
simultaneous entry of limit orders to buy and sell the same security; 
the multiple acquisition and liquidation of positions in the security 
during the same day; and the entry of multiple limit orders at 
different prices in the same security.\4\
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    \4\ Since the proposal rule change was filed with the 
Commission, the Exchange made a technical change to the text of 
proposed Amex Rule 934(a) to insert the word ``and.'' The change 
does not affect the substance of the rule. Telephone conversation 
between Claire McGrath, Vice President and Special Counsel, Amex, 
and Jennifer Colihan, Special Counsel, Division of Market 
Regulation, Commission, on February 6, 2001.
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    The proposed rule would also prohibit members from entering orders 
that are created and communicated electronically without manual input 
and if such orders are eligible for execution through the Exchange's 
Automatic Execution System (``Auto-Ex'').\5\ Orders entered by 
customers or associated persons of members will be deemed to involve 
manual input if the terms of the order are entered into an order-entry 
screen or there is a manual selection of a displayed order against 
which an off-setting order should be sent. It should be noted that 
members shall not be prohibited from electronically communicating to 
the Exchange orders entered by customers into front-end communication 
systems (e.g., Internet gateways, online networks, etc.).
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    \5\ Currently, only market and marketable limit orders up to 
specifically established sizes are eligible for execution through 
Auto-Ex; however, the Exchange has a proposal pending before the 
Commission that would allow the automatic execution of non-
marketable limit orders that improve the best price available on the 
Exchange by automatically executing such limit order if the current 
best bid/offer quote on another market is better than the Amex quote 
by a predefined number of ticks. (See SR-Amex 00-29.)
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    The Exchange states that its business model depends upon 
specialists and registered options traders for competition and 
liquidity. To encourage participation by these market makers, the 
Exchange needs to limit the ability of non-specialists/registered 
traders to compete on preferential terms within its automated systems. 
In addition, customer orders are provided with certain benefits such as 
automatic execution, priority of bids and offers and firm quote 
guarantees, and thus should not be allowed to act as market makers. The 
proposed rule will prevent non-specialist/registered trader members and 
their customers from reaping the benefits of market making activities 
without any of the concomitant obligations such as providing continuous 
quotations during

[[Page 10540]]

all market conditions. The proposed rule is designed to prevent certain 
members and customers from obtaining an unfair advantage by acting as 
unregistered specialists and traders while having priority over the 
specialists and registered traders by virtue of their customer status. 
Permitting members or customers to enter multiple limit orders to such 
an extent that they are effectively acting as market makers in an 
option, while at the same time giving them priority over all other 
orders on the book, would give such members and customers an inordinate 
advantage over the market participants. In addition, allowing 
electronically generated and communicated orders to be routed directly 
through the Exchange systems and to Auto-Ex would give customers with 
such electronic systems a significant advantage over specialists and 
registered traders. In the Exchange's view, these circumstances reduce 
the incentive to engage in market making on the Exchange, which could 
reduce liquidity and competition and could undercut the Exchange's 
business model.\6\ Lastly, the Exchange notes that computer generated 
orders can still be sent to the Exchange for execution, however, they 
may not be sent for execution through the Exchange's order routing 
system. Instead, such orders will be routed to the trading crowd and 
represented in open outcry.
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    \6\ In approving a similar proposal currently in place at the 
Chicago Board Options Exchange (``CBOE''), the Commission noted that 
allowing electronic order entry into ORS (the counterpart to Amex's 
AOF) could give automated customers a significant advantage over 
market makers. See Securities Exchange ACt Release No. 43285 
(September 12, 2000), 65 FR 56972 (September 20, 2000).
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\7\ in general and furthers the objectives of Section 6(b)(5) \8\ in 
particular in that it is disigned to prevent fradulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, and to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received with respect 
to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The proposed rule change has been filed by the Exchange as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A) of the Act 
\9\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\10\ Because the 
foregoing proposed rule change: (i) Does not significantly affect the 
protection of investors or the public interest; (ii) does not impose 
any significant burden on competition; and (iii) by its terms, does not 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest; provided that the 
Exchange has given the Commission written notice of its intent to file 
the proposed rule change at least five business days prior to the 
filing date of the proposed rule change, it has become effective 
pursuant to Section (19(b)(3)(A) of the Act and Rule 19b-4(f)(6).
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission accelerate the 
operative date of the proposal. In addition, the Exchange provided the 
Commission with written notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed rule 
change, more than five business days prior to the date of the filing of 
the proposed rule change. The Commission finds that it is appropriate 
to accelerate the operative date of the proposal and designate the 
proposal to become operative today.\11\
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    \11\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    The Commission finds good cause for accelerating the operative date 
of the proposed rule change. The Commission notes that it has approved 
similar proposals filed by the ISE,\12\ the CBOE,\13\ the Pacific 
Exchange, Inc. (``PCX''),\14\ and the Philadelphia Stock Exchange, Inc. 
(``Phlx'').\15\ Approval of this proposal on an accelerated basis will 
enable the Amex to compete on an equal basis with these other exchanges 
and thus is consistent with Section 6(b)(8) of the Act.\16\
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    \12\ See Securities Exchange Act Release No. 42455 (February 24, 
2000), 65 FR 11388 (March 2, 2000) (approving application of ISE for 
registration as a national securities exchange).
    \13\ See Securities Exchange Act Release No. 43285 (September 
12, 2000), 65 FR 56972 (September 20, 2000) (approving SR-CBOE-00-
01).
    \14\ See Securities Exchange Act Release No. 43328 (September 
22, 2000), 65 FR 58834 (October 2, 2000) (approving SR-PCX-00-13).
    \15\ See Securities Exchange Act Release No. 43376 (September 
28, 2000), 65 FR 58834 (October 5, 2000) (approving SR-Phlx-00-79).
    \16\ 15 U.S.C. 78f(b)(8).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
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 Section. 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 number SR-Amex-01-03 and should be 
submitted by March 8, 2001.
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    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-3802 Filed 2-14-01; 8:45 am]
BILLING CODE 8010-01-M