[Federal Register Volume 66, Number 150 (Friday, August 3, 2001)]
[Notices]
[Pages 40755-40756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19377]



[[Page 40755]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44594; File No. SR-Amex-2001-27]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange LLC Relating to the Prohibition 
of the Entry of Certain Limit Orders and Electronically Generated 
Orders Into the Exchange's Order Routing System

July 26, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
\1\ and Rule 19b-4 thereunder, \2\ notice is hereby given that on May 
4, 2001, the American Stock Exchange LLC (the ``Amex'' or the 
``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. On July 16, 2001, the Exchange submitted Amendment No. 1 to 
the proposal.\3\ 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\ See letter from Claire McGrath, Vice President and Special 
Counsel, Amex, to Nancy Sanow, Assistant Director, Division of 
Market Regulation, Commission, dated July 13, 2001 (``Amendment No. 
1''). In Amendment No. 1, the Exchange corrected technical errors in 
the proposed prohibition on orders that are created and communicated 
electronically without manual input to state that such orders may 
not be entered into the Exchange's order routing system if they are 
eligible for automatic execution.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes to amend Rules 1000, 1000A and 1200 to restrict 
the entry of certain limit orders and 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 an 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
    In February 2001, the Commission issued a notice of filing and 
immediate effectiveness of a proposed rule change submitted by the 
Exchange that restricted the entry of certain option limit orders and 
option orders created and communicated electronically without manual 
input into the Exchange's electronic order routing and delivery 
systems.\4\ The Exchange is not proposing to adopt the same 
restrictions for some of the other equity derivative products it 
currently trades. Specifically, the Exchange proposes that the new 
rules would apply to the following equity derivative products: Exchange 
Traded Funds (``ETFs'') such as Standard & Poors Depositary Receipts 
(``SPDRS''), DIAMONDS and Nasdaq 100 Tracking Stock (``QQQ''), and 
Trust Issued Receipts (``TIRs'' such as Holding Company Depositor 
Receipts (``HOLDRS'').
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    \4\ See Securities Exchange Act Release No. 43938 (February 7, 
2001), 66 FR 10539 (February 15, 2001).
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    The proposed amendments to Amex Rules 1000, 1000A and 1200 would 
restrict the entry of certain limit orders and 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 99,900 shares of each 
equity derivative to the Exchange's electronic order execution and 
processing systems (i.e., Point of Sale Specialist's Book), under 
certain circumstances as described below.
    a. Limit Orders
    Under the proposed rule, members, acting as either principal or 
agent, would be prohibited from entering limit orders into the 
electronic order routing system if such orders are 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 or the beneficial owner(s) 
effectively is operating as a market make by holding itself out as 
willing to buy and sell such securities on a regular or continuous 
basis. The proposed rules provide that in determining whether a member 
or beneficial owner effectively is operating as market maker, the 
Exchange would 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.
    b. Electronically Created and Communicated Orders
    The Exchange also proposes to adopt rules that prohibit members 
from entering orders that are created and communicated electronically 
without manual input, if such orders are eligible for execution through 
the Exchange's automatic execution system.\5\ The Exchange would 
consider orders entered by customers or associated persons of members 
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. The Exchange notes 
that under the proposed rules, members would not be prohibited from 
electronically communicating to the Exchange orders entered by 
customers into front-end communication systems (e.g., Internent 
gateways, online networks, etc.).
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    \5\ See Amendment No. 1, supra note 3.
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    The Exchange states that its business model depends upon 
specialists and registered options traders (``ROTs'') who act as market 
makers, for competition and liquidity. The Exchange believes that to 
encourage participation by these market makers, it needs to ensure that 
other members, and their customers, cannot use benefits granted to 
them, such as automatic execution, priority of bids and offers and firm 
quote guarantees for customer orders, to compete on preferential terms 
within the Exchange's automated systems. The Exchange represents that 
the proposed rule would prevent members who are not specialists or ROTs 
from reaping the benefits of market making activities without any of 
the concomitant obligations, such as providing continuous quotations 
during all market conditions. The Exchange represents that the proposed 
rule is designed to prevent certain members and customers from 
obtaining an unfair advantage by acting as unregistered specialists 
and/or ROTs while having priority over the specialists and/or ROTs by 
virtue of their customer status.
    The Exchange believes that 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

[[Page 40756]]

orders on the book, gives such members and customers an inordinate 
advantage over other market participants. In addition, the Exchange 
believes that 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. The Exchange represents that 
these circumstances reduce the incentive to engage in market making on 
the Exchange reducing liquidity and competition and could under cut the 
Exchange's business model.
    Lastly, the Exchange notes that computer generated orders can still 
be sent to the Exchange for execution; however, they may not be sent 
for automatic execution through the Exchange's order routing system.\6\ 
Instead, such orders will be routed to the trading crowd and 
represented in open outcry.
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    \6\ See Amendment No. 1, supra note 3.
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2. 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 designed to prevent fraudulent 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 No. SR-Amex-2001-27 and 
should be submitted by August 24, 2001.

    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. 01-19377 Filed 8-2-01; 8:45 am]
BILLING CODE 8010-01-M