[Federal Register Volume 67, Number 62 (Monday, April 1, 2002)]
[Notices]
[Pages 15434-15436]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7780]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45643; File No. SR-Amex-2001-95]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1, 2, and 3 by the American Stock Exchange 
LLC Relating to Its Performance Evaluation Procedures for Option, 
Equity and ETF Specialists

March 25, 2002.
    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 February 19, 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. On December 17, 2001, the Exchange submitted Amendment No. 1 
to the proposed rule change.\3\ On February 1, 2002, the Exchange 
submitted Amendment No. 2 to the proposed rule change.\4\ On February 
19, 2002, the Exchange submitted Amendment No. 3 to the proposed rule 
change.\5\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, 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 Geraldine M. Brindisi, Vice President and 
Corporate Secretary, Amex, to Nancy J. Sanow, Esq., Assistant 
Director, Division of Market Regulation (``Division''), Commission 
(December 13, 2001) (``Amendment No. 1''). Amendment No. 1 adds 
specialist performance evaluation procedures for equity and ETF 
specialists to the proposed rule text and the purpose section of the 
proposal.
    \4\ See Letter from Geraldine M. Brindisi, Vice President and 
Corporate Secretary, Amex, to Nancy J. Sanow, Esq., Assistant 
Director, Division, Commission (January 31, 2002) (``Amendment No. 
2''). Amendment No. 2 changes the proposed rule text, including the 
proposed Commentaries, from Rule 27 (``Allocations Committee'') to 
Rule 26 (``Performance Committee''). In addition, Amendment No. 2 
clarifies that the Exchange will assign weightings to each criterion 
used to evaluate specialists, and notify specialists of any changes 
to the criteria or the weightings used by the Exchange.
    \5\ See Letter from Geraldine M. Brindisi, Vice President and 
Corporate Secretary, Amex, to Nancy J. Sanow, Esq., Assistant 
Director, Division, Commission (February 14, 2002) (``Amendment No. 
3''). Amendment No. 3 clarifies the rule text to reflect the 
criteria that the Exchange will initially use to evaluate 
specialists. In addition, Amendment No. 3 clarifies that the 
Exchange will allocate weightings to the criteria, and notify 
specialists of these relative weightings before implementation. 
Amendment No. 3 also adds to the proposed rule text that the 
Exchange may change the criteria or weightings allocated to the 
criteria in order to enhance competitiveness relative to other 
markets and/or to improve market quality. Finally, Amendment No. 3 
corrects typographical errors made in the proposed rule text.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Amex Rule 26, and adopt Commentaries 
.04, .05, .06, and .07 to Amex Rule 26 to for options, equity and 
Exchange Traded Fund (``ETF'') specialists.
    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 Exchange 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 Exchange 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's Allocations Committee is responsible for allocating 
securities to specialists that can do a quality job with respect to the 
functions of a specialist. The Committee on Floor Member Performance 
(``Performance Committee'') reviews specialist performance and may take 
remedial action up to terminating a specialist's registration as such 
or reallocating securities when it identifies inadequate performance. 
The Exchange believes that these Committees protect the interests of 
investors, issuers and ETF sponsors by ensuring that only qualified 
specialists receive and retain allocations, and the institutional 
interests of the Exchange by ensuring that the Amex is as competitive 
as possible with other markets.\6\
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    \6\ See In the Matter of the Application of Pacific Stock 
Exchange's Options Floor Post X-17, Admin. Proc. File No. 3-7285, 
Securities Exchange Act Release No. 31666 (December 29, 1992), 51 
SEC Dkt. 261. The Commission determined that performance evaluation 
processes fulfill a combination of business and regulatory interests 
at exchanges and are not disciplinary in nature. The Commission 
states in the Post X-17 case:
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    We believe that the reallocation of a market maker's (or a 
specialist's) security due to poor performance is neither an action 
responding to a violation of an exchange rule nor an action where a 
sanction is sought or intended. Instead, we believe that performance-
based security reallocations are instituted by exchanges to improve 
market maker performance and to ensure quality of markets. Accordingly, 
in approving rules for performance-based reallocations, we historically 
have taken the position that the reallocation of a specialist's or a 
market maker's security due to inadequate performance does not 
constitute a disciplinary sanction.
    We believe that an SRO's need to evaluate market maker and 
specialist performance arises from both business and regulatory 
interests in ensuring adequate market making performance by its market 
makers and specialists that are distinct from the SRO's enforcement 
interests in disciplining members who violate SRO or Commission Rules. 
An exchange has an obligation to ensure that its market makers or 
specialists are contributing to the maintenance of fair and orderly 
markets in its securities. In addition, an exchange has an interest in 
ensuring that the services provided by its members attract buyers and 
sellers to the exchange. To effectuate both purposes, an SRO needs to 
be able to evaluate the performance of its market makers or specialists 
and transfer securities from poor performing units to the better 
performing units. This type of action is very different from a 
disciplinary proceeding where a sanction is meted out to remedy a 
specific rule violation. (Footnotes omitted.)
    See also In re James Niehoff and Company, Administrative Proceeding 
File No. 3-6757, (November 30, 1986), and the other authorities cited 
in the Commission's Post X-17 decision.
    The Performance Committee may take remedial action on transactions 
that involve poor performance that are identified through Amex's 
surveillance or complaints. For equity securities, the Performance 
Committee currently reviews identified situations and ``rates'' 
transactions that involve inadequate

[[Page 15435]]

performance. At the end of each quarter, the Amex staff calculates a 
quarterly performance rating for each unit based upon the unit's rated 
situations. According to the Exchange, a poor rating may result in a 
preclusion on new allocations. The Performance Committee also conducts 
random reviews of option and ETF specialist order tickets and assigns 
performance ratings based upon these reviews.
    The Allocations Committee thus receives ``Performance Ratings,'' 
which Allocations Committee members use in making allocations 
decisions. The performance ratings consist of (1) a rating (from ``1'' 
to ``5,'' with ``1'' being the best score) for each unit based upon a 
questionnaire distributed to Floor brokers on a routine basis (the 
Committee also receives the overall average score for each unit from 
the Floor Broker Questionnaire); and (2) a Performance Committee rating 
(from ``1'' to ``5'') based upon rated situations (for equities) and 
order ticket reviews (for options and ETFs).
    In view of the importance of allocations and reallocation decisions 
to investors, issuers, ETF sponsors, and the Exchange, the Amex 
proposes to revise the current system for evaluating option, equity, 
and ETF specialists by adding a number of objective criteria to the 
rating scheme and implementing defined consequences for poor 
performance. The Exchange also proposes to codify its existing market 
share methodology for evaluating options specialist performance. The 
Exchange notes that upon implementation of the new evaluation system 
for equity specialists, the Performance Committee will no longer assign 
performance ratings for specific transactions, but may take such other 
action as is available to the Performance Committee and appropriate in 
the circumstances. The Exchange will continue order ticket reviews for 
options and ETFs for regulatory purposes. The Exchange may incorporate 
the results of these reviews into the performance evaluation rating 
system with the criteria that measure the number of Minor Floor 
Violation Disciplinary actions.
    Under the proposed specialist evaluation systems, specialists would 
be evaluated quarterly based upon data from the prior quarter with 
respect to various criteria. The Exchange proposes that it may change 
the criteria used to evaluate specialists and the weightings of these 
criteria from time to time as warranted by market conditions in order 
to enhance the Exchange's competitiveness relative to other markets 
and/or market quality. The Exchange would notify specialists of any 
changes to the criteria, and the weightings thereof, prior to 
implementation. The Exchange proposes to use the following performance 
criteria at the commencement of the specialist evaluation systems:

Option Specialist Evaluation Criteria

     Percentage of trades executed at or better than the 
National Best Bid and Offer (``NBBO'')
     Percentage of orders that receive price improvement
     Percentage of time at NBBO
     Average bid/offer spread
     Liquidity enhanced trades \7\
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    \7\ The Exchange notes that liquidity enhancement is a measure 
of the depth of a market. The percentage of trades that receive 
liquidity enhancement equals the percentage of trades where an order 
for more than 20 contracts was executed at one price, at or between 
the NBBO.
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     Average execution time
     Size of orders eligible for Auto-Ex
     Timeliness of openings relative to the underlying security
     Floor Broker Questionnaire rankings
     Average number of Performance Committee actions per 
option, and
     Average number of Minor Floor Violation Disciplinary 
Committee actions \8\ per option.
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    \8\ The Exchange represents that the term ``action'' would be 
defined to include any time the Committees did something other than 
``no action'' the matter. For example, an admonitory letter from the 
Performance or Minor Floor Violation Disciplinary Committee would be 
considered ``action'' for the purposes of calculating specialist 
performance ratings.
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Equity Specialist Evaluation Criteria

     Percentage of volume executed better than the NBBO
     Percentage of volume at the NBBO
     Percentage of time at the NBBO
     Percentage of market orders executed within sixty seconds
     Percentage of manual display of better limit orders
     Number of issues opened after 9:45
     Floor Broker Questionnaire rankings
     Average response time to ITS \9\ commitments
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    \9\ The term ``ITS'' means Intermarket Trading System.
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ETF Specialist Evaluation Criteria

     Percentage of orders that receive price improvement
     Percentage of time at the NBBO
     Average bid/offer spread
     Average execution time for market and marketable limit 
orders
     Floor Broker Questionnaire rankings
     Average response time to ITS commitments
     Average number of Performance or Minor Floor Violation 
Disciplinary Committee actions per ETF
    The Exchange would rate all specialists from ``1'' to ``5'' on a 
curve based upon their scores with respect to the criteria. ETFs would 
be ``tiered'' and evaluated for rating purposes in separate groups 
based upon trading volume to ensure that comparisons between 
specialists are based upon securities with similar trading 
characteristics. The Exchange would notify specialists of their ratings 
following calculation. A rating of ``1'' would represent the best 
possible score. Ratings of ``4'' and ``5'' would have defined remedial 
consequences.
    A specialist unit that received a ``4'' or a ``5'' rating in any 
quarter would be referred to the Performance Committee for 
consideration of a preclusion on new allocations, or other appropriate 
remedial action. A specialist unit that received a ``5'' rating in any 
two of four consecutive quarters would be referred to the Performance 
Committee for consideration of possible reallocation of one or more 
securities, or other appropriate remedial action. A specialist unit 
that received ratings of ``4'' or ``5'' in any three of six consecutive 
quarters would be referred to the Performance Committee for 
consideration of possible reallocation of one or more securities, or 
other appropriate remedial action. The Exchange notes that the 
Performance Committee may consider any relevant information, including 
the Specialist Floor Broker Questionnaire, trading data, a member's 
regulatory history, market share, order flow statistics, level and 
adequacy of staffing, and other pertinent information in reviewing a 
specialist or unit.
    In addition to the performance ratings system described above, the 
Exchange also proposes to codify the current program for evaluating 
options specialists based upon market share. Under this program, 
options specialists are regularly evaluated with respect to non-market 
maker contract volume in options that are actively traded in the United 
States. There may be different minimum market share criteria for (1) 
options that have always been multiply listed, and (2) options that 
were at one time exclusively awarded to only one exchange under the old 
``lottery'' system.
    According to the Exchange, options specialists are not evaluated on 
their market share in a newly listed option for the six months 
following listing on the Exchange. Under the program, a specialist that 
falls below the minimum market share criteria in one or more

[[Page 15436]]

options is referred to the Performance Committee for consideration of 
reallocation or other remedial action based upon poor market share in 
one or more options. The Exchange may change the minimum market share 
criteria used to evaluate specialists from time to time as warranted by 
market conditions. The Exchange would notify specialists of any changes 
to the market share criteria prior to implementation. The Exchange also 
would notify specialists of their market share.
    The market share evaluation program for options specialists would 
be separate from the performance ratings system. Thus, for example, an 
option specialist with performance ratings that would not trigger 
remedial action could be referred to the Performance Committee for 
consideration of reallocation or other action based upon sub-standard 
market share in one or more options.
    The Performance Committee reviews proposed transfers of specialist 
registrations between specialists to ensure that the institutional 
interests of the Exchange are protected. The Performance Committee, 
accordingly, will consider the performance ratings and market share of 
both the acquiring and transferring specialists in determining whether 
to approve a proposed transfer.
    Under the proposed specialist evaluation procedures, performance 
reviews can result from (1) complaints or surveillance reviews, (2) low 
scores under the specialist performance ratings systems, or (3) low 
market share in one or more options classes. A performance review can 
result in a variety of possible actions, including recommendations for 
performance improvement, a determination not to permit a firm to seek 
new allocations, or a reallocation of one or more options classes from 
a specialist unit. The Performance Committee is not precluded from 
reallocating options based on a single instance of deficient 
performance or a single quarter or poor ratings or low market share. 
Conversely, the Performance Committee is not required to take such 
actions. Rather, the Exchange believes that the purpose of the rules 
and processes is to identify circumstances that warrant review by the 
Performance Committee. The nature of the appropriate remedial actions 
is necessarily a subjective matter, dependent on such matters as the 
options being traded, competition on other exchanges, personnel and 
systems changes, and other factors. Accordingly, such determinations 
are left to the expertise, discretion and judgment of the Performance 
Committee.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b)(5) of the Act \10\ in general, and furthers the 
objectives of section 6(b) of the Act \11\ in particular, in that the 
proposal is designed to promote just and equitable principles of trade 
and protect investors and the public interest by encouraging good 
performance and competition among specialists.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will impose no 
burden on competition; rather, it will enhance and encourage 
competition both within the Exchange, and, more significantly, between 
and among the Exchange and other exchanges and markets by establishing 
incentives for superior performance and thereby ensuring the 
maintenance of quality markets at the Exchange. In this respect, the 
Exchange believes that it is critical to recognize that the most 
important level of competition occurs not among specialists of the same 
exchange to obtain a particular listing, but rather among specialists 
of different exchanges trading in the same security and actively 
competing for the business of the investing public. The Exchange notes 
that the Commission has expressly recognized that the procedures set 
forth in the proposed rule change for reviewing the performance of 
specialists and taking remedial action where appropriate are necessary 
to ensure quality markets and thereby attract buyers and sellers to the 
Exchange.\12\
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    \12\ See note 6, supra.
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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 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, as amended, 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 Exchange.
    All submissions should refer to File No. SR-Amex-2001-95 and should 
be submitted by April 22, 2002.

Margaret H. McFarland,
Deputy Secretary.
    For the Commission, by the Division of Market Regulation, pursuant 
to the delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 02-7780 Filed 3-29-02; 8:45 am]
BILLING CODE 8010-01-P