[Federal Register Volume 66, Number 227 (Monday, November 26, 2001)]
[Notices]
[Pages 59036-59038]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29357]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45071; File No. SR-Amex-2001-27]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 2 to the Proposed Rule Change Filed by the American Stock 
Exchange LLC Relating to the Prohibition on the Entry of Certain Limit 
Orders and Electronically Generated Orders Into the Exchange's Order 
Routing System

November 16, 2001.

I. Introduction

    On May 4, 2001, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``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 restrict the entry of certain limit orders and 
electronically generated orders into the Exchange's Order Routing 
System. On July 16, 2001, the Exchange submitted Amendment No. 1 to the 
proposal.\3\ The proposed rule change, including Amendment No. 1, was 
published for comment in the Federal Register on August 3, 2001.\4\ The 
Commission received one comment letter on the proposal.\5\ On August 
31, 2001 the Exchange filed Amendment No. 2 to the proposed rule 
change.\6\
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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 (``Division''), Commission, dated July 13, 2001 
(``Amendment No. 1'').
    \4\ See Securities Exchange Act Release No. 44594 (July 26, 
2001), 66 FR 40755.
    \5\ See letter from Joel Greenberg, Managing Director, 
Susquehanna International Group, Inc. to Jonathan G. Katz, 
Secretary, Commission, dated August 16, 2001 (``SIG Letter'').
    \6\ See letter from Claire McGrath, Vice President and Special 
Counsel, Amex, to Nancy Sanow, Assistant Director, Division, 
Commission, dated August 31, 2001 (``Amendment No. 2''). In 
Amendment No. 2, the Exchange amended the proposed rule text to 
clarify that the Exchange maintains separate automatic execution 
systems or Portfolio Depositary Receipts (``PDRs''), Index Fund 
Shares (``IFSs''), and Trust Issue Receipts (``TIRs'').
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II. Description of the Proposal

    The Exchange is proposing to amend Amex Rules 1000, 1000A and 1200 
to adopt restrictions on the entry of orders for the following equity 
derivative products: PDRs, such as Standard & Poors Depositary Receipts 
(``SPDRS''), DIAMONDS and Nasdaq 100 Tracking Stock (``QQQ''); IFSs, 
such as I-Shares; and TIRs such as Holding Company Depository Receipts 
(``HOLDRS''). Specifically, the proposed amendments 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 rules, members, acting as either principal or 
agent, would be prohibited from entering limit orders for PDFs, IFSs, 
or TIRs 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 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. The proposed rules provide that, in determining 
whether a member or beneficial owner effectively is operating as a 
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

[[Page 59037]]

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.\7\ 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 the proposed rules would not prohibit members 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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    \7\ See Amendment No. 1, supra note 3.
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III. Summary of Comments

    The Commission received one comment letter on the proposed rule 
change from Susquehanna International Group, Inc. (``SIG''), which 
expressed support for the proposed rule change.\8\ In its discussion of 
the Exchange's proposal to prohibit members from entering or permitting 
the entry of orders that are created and communicated electronically 
without manual input if such orders are eligible for automatic 
execution, the commenter expressed its opinion on the nature of the 
conduct that the Exchange should consider as ``manual input'' for 
purposes of the proposed rules. Specifically, SIG stated its view that 
``the manual element of the order entry process should be significant 
and not merely fleeting.'' SIG further stated that ``the mere entry of 
a term, such as price, or the clicking of a button to send a computer-
generated order'' should be insufficient to constitute manual entry. 
SIG requested that the Commission provide guidance on this issue.
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    \8\ See SIG Letter, supra note 5.
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IV. Discussion

    For the reasons discussed below, the Commission finds that the 
proposed rule change is consistent with section 6(b) of the Act,\9\ and 
in particular with section 6(b)(5).\10\ Section 6(b)(5) requires, among 
other things, that the rules of an exchange be designed to prevent 
fraudulent and manipulative acts and practices and to protect investors 
and the public interest.\11\ The Commission believes that the proposed 
rule change meets these requirements.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 15 U.S.C. 78f(b)(5).
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    As discussed above, the Exchange has proposed to prohibit members, 
acting as either principal or agent, from entering limit orders for 
PDFs, IFSs or TIRs into the Exchange's 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 beneficial owner effectively is operating as a 
market maker by holding itself out as willing to buy and sell such 
securities on a regular and continuous basis. The Commission has 
approved similar proposals filed by the Amex,\12\ the International 
Securities Exchange (``ISE''),\13\ the Chicago Board Options Exchange 
(``CBOE''),\14\ and the Philadelphia Stock Exchange, Inc. (``Phlx'') 
with respect to options orders.\15\ In considering these proposals, the 
Commission found that such a prohibition is a reasonable approach to 
prevent members (other than market makers) or customers from reaping 
the benefits of market making without the concomitant obligations. The 
Commission noted that if non-market maker members or customers were 
permitted to enter multiple customer limit orders to the extent that 
they were acting as market makers, and, at the same time, jump ahead of 
all other orders on the book, they would have an inordinate advantage 
over other market participants.\16\
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    \12\ See Securities Exchange Act Release No. 43938 (February 7, 
2001), 66 FR 10539 (February 15, 2001) (noticing immediate 
effectiveness of SR-Amex-2001-03).
    \13\ 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 (``ISE Order'')).
    \14\ See Securities Exchange Act Release No. 44258 (May 4, 
2001), 66 FR 26889 (May 16, 2001) (noticing immediate effectiveness 
of SR-CBOE-2001-20).
    \15\ See Securities Exchange Act Release No. 43939 (February 7, 
2001), 66 FR 10547 (February 15, 2001) (noticing immediate 
effectiveness of SR-Phlx-01-05).
    \16\ See ISE Order, supra note 13.
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    The Commission finds that the Exchange's proposed rule, which 
prohibits the entry of certain limit orders, is adequately designed to 
prevent certain market participants from obtaining an unfair advantage 
by acting as market makers, while having priority over registered 
market makers by virtue of their customer status, and thus finds that 
the proposed rule is consistent with section 6(b)(5) of the Act.\17\
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    \17\ 15 U.S.C. 78f(b)(5).
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    With respect to the portion of Amex's proposed rules that prohibit 
members from entering orders that are created and communicated 
electronically without manual input, if such orders are eligible for 
automatic execution, the Commission notes that it has approved similar 
proposals by the Amex,\18\ the ISE,\19\ the CBOE,\20\ the Pacific 
Exchange, Inc. (``PCX''),\21\ and the Phlx \22\ with respect to options 
orders. In approving those proposals, the Commission noted that while 
in the equity markets limit orders from active customers have been a 
valuable source of quote competition, the options exchanges' business 
models depend on market makers for competition and liquidity. The 
Commission recognized that allowing electronic order entry could give 
automated customers a significant advantage over market makers, which 
could undercut the exchanges' business models. The Commission found 
that it was not inconsistent with the purposes of the Act for the 
options exchanges to address the risk to their market makers posed by 
rapid entry of electronically generated orders that are designed to 
take advantage of temporary anomalies between current options prices 
and the value of the underlying stock or index.
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    \18\ See supra note 12.
    \19\ See supra note 13.
    \20\ See Securities Exchange Act Release No. 43285 (September 
12, 2000), 65 FR 56972 (September 20, 2000) (approving SR-CBOE-00-
01).
    \21\ See Securities Exchange Act Release No. 43328 (September 
22, 2000), 65 FR 58834 (October 2, 2000) (approving SR-PCX-00-13).
    \22\ See Securities Exchange Act Release No. 43376 (September 
28, 2000), 65 FR 59488 (October 5, 2000) (notice immediate 
effectiveness of SR-Phlx-00-79).
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    The Commission believes that the same analysis is appropriate for 
the instant filing, and therefore finds that the proposed rule change 
seeking to prohibit members from entering orders that are created and 
communicated electronically without manual input, if such orders are 
eligible for automatic execution is not inconsistent with the purposes 
of sections 6(b)(5) \23\ and 6(b)(8) \24\ of the Act.
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    \23\ 15 U.S.C. 78f(b)(5).
    \24\ 15 U.S.C. 78f(b)(8). Section 6(b)(8) requires that the 
rules of the exchange do not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.
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    In approving this proposal, the Commission notes it does not agree 
with the sole commenter's view on the rules' scope. In the Commission's 
view, the rules as written are clear--they prohibit the entry of orders 
that are created and communicated electronically without manual input. 
The Commission believes that, under the language of the rules, the 
entry of an order term, such as price, is sufficient to constitute 
manual input as this involves deliberate action on the part of the 
sender of the order. Under a plain reading of the rules, if manual 
input is involved in the creating or

[[Page 59038]]

communicating of an order, its entry does not violate Exchange rules.

V. Amendment No. 2

    The Commission finds good cause for approving Amendment No. 2 prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register. In Amendment No. 2, the Exchange added text to 
the proposed commentaries to Annex Rules 1000, 1000A, and 1200 that 
clarifies that the proposed commentaries relate to atomatic executions 
systems for PDRs, IFSs and TIRs, as distinguished from the Exchange's 
automatic execution system for options. The Commission believes that 
these are technical, non-substantive changes to the proposal, which 
further strengthen and clarify the proposed rule change and raise no 
new regulatory issues. The Commission believes that Amendment No. 2 
does not alter the original proposal, which was subject to a full 
notice and comment period. Therefore, the Commission finds that 
granting accelerated approval to Amendment No. 2 is appropriate and 
consistent with section 19(b)(2) of the Act.\25\
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    \25\ 15 U.S.C. 78s(b)(2).
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VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2, 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 December 17, 2001.

VII. Conclusion

    For all of the aforementioned reasons, the Commission finds that 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.\26\
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    \26\ In approving this rule change, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation, consistent with section 3(f) of the Act. 15 
U.S.C. 78c(f).
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    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-AMEX-00-27) 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\
Margaret H. McFarland,
Deputy Secretary
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    \28\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 01-29357 Filed 11-23-01; 8:45 am]
BILLING CODE 8010-01-M