[Federal Register Volume 66, Number 250 (Monday, December 31, 2001)]
[Notices]
[Pages 67582-67585]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-32082]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45176; File No. SR-Amex-2001-105]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the American Stock Exchange 
LLC, Relating to a Six-Month Extension of Automatic Execution for 
Exchange Traded Funds

December 20, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 13, 2001, the American Stock Exchange LLC (``Amex'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Amex. The proposed 
rule change has been filed by the Amex as a ``non-controversial'' rule 
change under rule 19b-4(f)(6)\3\ under the Act. 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-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex seeks a six-month extension of Amex Rule 128A to continue 
its pilot program for the automatic execution of orders for Exchange 
Traded Funds (``ETFs''). The text of the proposed rule change is 
available at the Office of the Secretary, the 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 
Statutory Basis for, the Proposed Rule Change

    On June 19, 2001, the Commission approved the Exchange's proposal, 
adopted as Amex Rule 128A, to permit the automatic execution of orders 
for Exchange Traded Funds (``ETFs'') on a six-month pilot program 
basis.\4\ The Exchange now seeks to extend the pilot program for 
another six months.
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    \4\ See Securities Exchange Act Release No. 44449 (June 19, 
2001), 66FR 33724 (June 25, 2001)(``June Release''), approving File 
No. SR-Amex-2001-29.
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    Since 1986, the Exchange has had an automatic order execution 
feature (``Auto-Ex'') for eligible orders in listed options. The 
Chicago Board Options Exchange, Philadelphia Stock Exchange, and 
Pacific Exchange established similar automatic option order execution 
features at about the same time as the Amex, and the newest options 
exchange, the International Securities Exchange, also features 
automatic order execution. Auto-Ex, accordingly, has been a standard 
feature of the options markets for a number of years.
    In 1993, the Amex commenced trading Standard and Poor's Depositary 
Receipts (``SPDRs''), the first ETF to be listed 
and traded on the Exchange. ETFs are individual securities that 
represent a fractional, undivided interest in a portfolio of 
securities. Currently, approximately 100 ETFs are listed on the Amex. 
Like an option, an ETF is a derivative security, and, according to the 
Amex, its price is a function of the value of the portfolio of 
securities underlying the ETF. Thus, as is the case with options, the 
Exchange asserts that it is not the price discovery market for ETFs, 
and that the price discovery market is the market or markets where the 
underlying securities trade.
    The Exchange is now proposing to extend its current Auto-Ex 
technology to ETFs listed under Amex Rules 1002, 1002A, and 1202 for an 
additional six months. The Amex represents that this will provide 
investors that send eligible orders to the Exchange with faster 
executions than they otherwise would receive. The Exchange believes 
that many investors desire rapid executions in trading securities that 
are priced derivative since the value of the underlying instruments may 
fluctuate during order processing. The Amex,

[[Page 67583]]

moreover, will continue under the pilot extension to incorporate a 
price improvement algorithm into Auto-Ex for ETFs, and thus to provide 
investors with better execution prices on their orders. The price 
improvement algorithm works in the following manner:
    When the Amex establishes the National Best Bid or Offer 
(``NBBO''),\5\ Auto-Ex is programmed to execute eligible incoming ETF 
orders at the Amex Published Quote (``APQ'') plus a programmable number 
of trading increments with respect to the Amex bid, and less a 
programmable number of trading increments in the case of the Amex 
offer. For example, if the APQ were 90.10 to 90.20, and the APQ 
constituted the NBBO, incoming sell orders might be automatically 
executed at 90.12 (the Amex bid plus two ticks) and incoming buy orders 
might be executed at 90.18 (the Amex offer less two ticks).
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    \5\ The term ``establish'' as used in this context of Amex Rule 
128A means that the APQ is currently at the NBBO, regardless of 
whether or not the Amex was the first exchange to be at that price. 
See June Release.
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    If the Amex does not establish the NBBO, Auto-Ex is programmed to 
execute eligible incoming ETF orders at or better than the NBBO up to a 
specified number of trading increments relative to the APQ.\6\ Auto-Ex 
executes an eligible order at the improved price relative to the APQ 
unless such execution would result in a trade-through with respect to 
the price of an away market that is a participant in the Intermarket 
Trading System (``ITS''). If a trade-through would result, the order is 
routed to the specialist for electronic processing through the Amex 
Point of Sale (``POS'') Book.\7\
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    \6\ The number of trading increments designated for price 
improvement when the Amex establishes the NBBO may be different than 
the number of increments designated for price improvement when the 
Amex does not establish the NBBO. Id.
    \7\ Once an order that is Auto-Ex eligible is sent to the 
Exchange, the person that initiated the order has no control over 
its execution. This is the case regardless of whether the order is 
executed by Auto-Ex or is executed by the specialist because Auto-Ex 
is unavailable. If the order is routed to the specialist for 
handling because Auto-Ex is unavailable, the specialist does not 
know if the order is for the account of a broker-dealer or for the 
account of a customer. This information is in the Exchange's order 
processing system and is unavailable to the specialist.
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    For example, assume that Auto-Ex is programmed to execute the order 
at the Amex bid plus two ticks. If the Amex bid were 90, and an away 
ITS market were bidding 90.01, an incoming sell order would be 
automatically executed on the Amex at 90.02. Continuing with this 
example, if the away market were bidding 90.02, an incoming sell order 
would be automatically executed on the Amex at 90.02 (matching the away 
market). If the away market were bidding 90.03, the incoming sell order 
would not be automatically executed. Instead, it would be routed to the 
specialist for electronic processing through the Amex POS Book.
    The amount of price improvement that the system provides--both when 
the Amex establishes the NBBO and when it does not--is determined by 
the Auto-Ex Enhancements Committee (``Committee'') upon the request of 
a specialist, and may differ among ETFs. The Committee consists of the 
Exchange's four Floor Governors and the Chairmen (or their designees) 
of the Specialists Association, Options Market Makers Association and 
the Floor Brokers Association, respectively. The Exchange anticipates 
that the amount of price improvement will vary among securities based 
upon such factors as the width of the spread, the volatility of the 
basket of securities underlying the ETF, and liquidity of available 
hedging vehicles. The amount of price improvements may be adjusted 
intra-day by the Committee.
    As detailed in Amex Rule 128A, Auto-Ex for ETFs with price 
improvement is unavailable when the spread is at a specified minimum 
and maximum variation, which may be adjusted security to security. The 
Committee will determine, upon the request of a specialist, the minimum 
and maximum spreads at which Auto-Ex is unavailable. As further 
provided in the rule, Auto-Ex is also unavailable with respect to 
incoming sell orders when the Amex bid is for 100 shares, and similarly 
unavailable with respect to incoming buy orders when the Amex offer is 
for 100 shares.
    Orders that are otherwise Auto-Ex eligible orders are also routed 
to the specialist, and not automatically executed, in situations where 
the specialist in conjunction with a Floor Governor or two Floor 
Officials determine that quotes are not reliable and the Exchange is 
experiencing communications or systems problems, ``fast markets,'' or 
delays in the dissemination of quotes. Members and member organizations 
are notified when the Exchange has determined that quotes are not 
reliable prior to disengaging Auto-Ex.
    Specialists and Registered Options Traders (``ROTS'') that sign 
onto the system are automatically allocated the contra side of Auto-Ex 
trades for ETFs. Due to the automatic price improvement feature, the 
specialist and ROTs that sign onto Auto-Ex for ETFs are deemed to be on 
parity for purposes of allocating the contra side of ETF Auto-Ex 
trades. Amex Rule 128A incorporates the following methodology for the 
allocation of the contra side to Auto-Ex ETF trades:

------------------------------------------------------------------------
                                                             Approximate
                                                Approximate   number of
                                                 number of      trades
                                                   trades     allocated
                                                 allocated     to ROTs
                                                   to the     signed on
Number of ROTs signed on to Auto-Ex in a crowd   specialist   to Auto-Ex
                                                 throughout   throughout
                                                  the day      the day
                                                 (``target    (``target
                                                  ratio'')     ratio'')
                                                 (percent)    (percent)
------------------------------------------------------------------------
1.............................................           60           40
2-4...........................................           40           60
5-7...........................................           30           70
8-15..........................................           25           75
16 or more....................................           20           80
------------------------------------------------------------------------

    At the start of each trading day, the sequence in which trades are 
to be allocated to the specialist and ROTs signed onto Auto-Ex is 
randomly determined. Auto-Ex trades then are automatically allocated in 
sequence on a rotating basis to the specialist and to the ROTs that 
have signed onto the system so that the specialist and the crowd 
achieve their ``target ratios'' over the course of a trading session. 
If an Auto-Ex eligible order is greater than 100 shares, Auto-Ex 
divides the trade into lots of 100 shares each. Each lot is considered 
a separate trade for purposes of determining target ratios and 
allocating trades within Auto-Ex.
    Round lot orders delivered to the post electronically for 2,000 
shares or less are eligible for Auto-Ex for ETFs. Orders for an account 
in which a market maker in ETFs registered as such on another market 
has an interest are ineligible for Auto-Ex for ETFs. If orders for such 
market makers were eligible for Auto-Ex with price improvements, the 
Exchange represents, Amex specialists and ROTs would be unable to make 
markets with the proposed liquidity for other investors. (Orders fro 
Amex Registered Trade are ineligible for Auto-Ex for ETFs pursuant to 
Commentaries .04 and .05 to Rule 111 and Amex Rule 950(c).)
    Amex Rule 128A also stipulates that Auto-Ex eligible orders for any 
account in which the same person is directly or indirectly interested 
may be entered only at intervals of 30 seconds or more between the 
entry of each such order in an ETF. The Exchange indicates that Amex 
specialists and ROTs are willing to provide Auto-Ex with price 
improvement for orders of a certain size. If persons were allowed to 
enter more than one Auto-Ex eligible order for an account in which they 
had a direct or indirect interest at intervals of less than

[[Page 67584]]

30 seconds, according to the Exchange, Amex specialists and ROTs would 
be unable to make markets with the proposed liquidity for all 
investors. Under Rule 128A, members and member organizations are 
responsible for establishing procedures to prevent orders for any 
account in which the same person is directly or indirectly interested 
from being entered at intervals of less than 30 seconds with respect to 
an ETF.
    The specialist may request the Exchange to increase the maximum 
size of Auto-Ex eligible orders. Under Amex Rule 128A, such requests 
are reviewed by the Committee, which approves, disapproves, or 
conditionally approves such requests. The rule directs the Committee to 
balance the interests of investors, the specialist, ROTs in the crowd, 
and the Exchange in determining whether to grant a request to increase 
the size of Auto-Ex eligible orders.
    The Committee also may consider requests from the specialist or 
ROTs to reduce the size of Auto-Ex eligible orders, balancing the same 
interests that it would consider in reviewing a request to increase the 
size of Auto-Ex eligible orders. The Committee is not permitted, 
however, to reduce the size of Auto-Ex eligible orders below 2,000 
shares.
    In addition, under Rule 128A the Committee may delegate its 
authority to one or more Floor Governors. The rule provides, however, 
that the Committee must meet promptly to review a Floor Governor's 
decision in the event that a Floor Governor acts pursuant to delegated 
authority.
    Amex Rule 128A further provides that in the event of system 
problems or unusual market conditions, a Floor Governor is permitted to 
reduce the size of Auto-Ex eligible orders below 2,000 shares or 
increase the size of Auto-Ex eligible orders up to 5,000 shares. Any 
such change is temporary and lasts only until the end of the unusual 
market condition or the correction of the system problem. Members and 
member organizations will be notified when the size of Auto-Ex eligible 
orders is adjusted due to the system problems or unusual market 
conditions.
    Rule 128A also provides that the Chairman and Vice Chairman of the 
Exchange, acting jointly, determine which ETFs are eligible for Auto-
Ex.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of section 6(b) of the Act in general and furthers 
the objectives of section 6(b)(5) of the Act 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 engage in regulating, 
clearing, settling, processing information with respect to and 
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; 
and is not designed to permit unfair discrimination between customers, 
issuers, brokers and dealers.
    The proposed rule change will allow the Auto-Ex for ETFs pilot 
program to continue for an additional six months. The proposal also 
facilitates the comparison and settlement of trades since Auto-Ex 
transactions result in ``locked-in'' trades. Auto-Ex for ETFs, 
moreover, automatically provides investors with price improvement on 
their orders.

B. Self-Regulatory Organization's Statement on Burden on Competition

    That Exchange believes that the proposed rule change will impose no 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes the 
proposal, if fact, will enhance competition among markets and market 
makers and thereby benefit investors by allowing the Exchange to 
continue to provide Auto-Ex for ETFs with price improvement.

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

    The foregoing proposed rule change (1) does not significantly 
affect the protection of investors or the public interest; (2) does not 
impose any significant burden on competition; and (3) by its terms does 
not become operative until 30 days from the date on which it was filed, 
or such shorter time as the Commission may designate. In addition, the 
Amex provided the Commission with notice of its intent to file the 
proposed rule change within a time designated by the Commission.\8\ The 
proposed rule change has therefore become effective pursuant to section 
19(b)(3)(A) of the Act \9\ and rule 19b-4(f)(6) thereunder. \10\
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    \8\ The Commission has granted Amex's request to designate a 
time period shorter than five days prior to filing for notice of its 
intent to file.
    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    The Amex has requested that the Commission waive the usual pre-
operative waiting period. The Commission believes the pilot program 
provides beneficial services to investors, and finds it consistent with 
the protection of investors and the public interest to accelerate the 
operative date so that the pilot can continue uninterrupted and those 
benefits do not lapse. Thus, the Commission designates December 20, 
2001, as the operative date of the proposed rule change. \11\ The pilot 
extension will expire June 19, 2002.
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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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    At any time within 60 days of the filing of this proposal rule 
change, the Commission may summarily abrogate the rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protecton of investors, or otherwise in 
furtherance of the purposes of the Act. \12\
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    \12\ 17 CFR 240.19b-4(f)(6).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether it 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 Room. 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-2001-105, and should be 
submitted by January 22, 2002.

[[Page 67585]]

    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-32082 Filed 12-28-01; 8:45 am]
BILLING CODE 8010-01-M