[Federal Register Volume 67, Number 81 (Friday, April 26, 2002)]
[Notices]
[Pages 20849-20851]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-10312]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45794; File No. SR-Amex-00-60]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change and Amendment Nos. 1 and 2 Thereto by the American 
Stock Exchange LLC Relating to the Use of Handheld Terminals by Floor 
Brokers and Registered Options Traders and to the Exchange's Audit 
Trail Rules

April 22, 2002.

I. Introduction

    On December 11, 2000, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a 
proposal relating to the use of handheld terminals (``HHTs'') by the 
Exchange's floor brokers and registered options traders (``ROTs'') and 
to the Exchange's audit trail rules. On May 15, 2001, Amex submitted 
Amendment No. 1 to the proposal,\3\ and on July 27, 2001, Amex 
submitted Amendment No. 2 to the proposal.\4\ The Commission published 
the proposed rule change, as amended, in the Federal Register on August 
8, 2001.\5\ The Commission received no comments on the proposal. This 
order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from William Floyd-Jones, Assistant General 
Counsel, Legal & Regulatory Policy Division, Amex, to Nancy Sanow, 
Assistant Director, Division of Market Regulation, Commission, dated 
May 15, 2001 (``Amendment No. 1''). In Amendment No. 1, Amex revised 
the proposal to clarify that its new Hand Held Terminal Policy would 
apply to both wired as well as wireless terminals, and to make 
technical corrections to the proposed rule text.
    \4\ See letter from William Floyd-Jones, Assistant General 
Counsel, Legal & Regulatory Policy Division, Amex, to Nancy Sanow, 
Assistant Director, Divison of Market Regulation, Commission, dated 
July 26, 2001 (``Amendment No. 2''). In Amendment No. 2, Amex 
revised and resubmitted its statement of the purpose of, and the 
statutory basis for, the proposed rule change. However, Amex did not 
make any revisions to the proposed rule text.
    \5\ See Securities Exchange Act Release No. 44647 (August 8, 
2001), 66 FR 41632.
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II. Description of the Proposal

A. Mandatory Use of HHTs by Brokers and ROTs and Codification of 
Handheld Terminal Policy

    In the mid-1990s, the Exchange's ROTs began to make extensive use 
of proprietary HHTs that were linked to their home offices by wireless 
data transmission technologies. Amex has stated that the rapid 
proliferation of these devices raised concerns with broadcast 
interference, systems disruption, antenna location, exhaustion of 
system capacity, and appropriate regulatory oversight of data 
communications. As a result of these considerations and in light of 
similar developments on other exchanges, Amex built a Wireless Data 
Communications Infrastructure (``Infrastructure'') and adopted a 
Wireless Communications Policy to regulate the use of these devices.\6\
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    \6\ See Securities Exchange Act Release Nos. 37728 (September 
26, 1996), 61 FR 51476 (October 2, 1996) (approving Amex's original 
Wireless Communications Policy); and 40019 (May 21, 1998), 63 29272 
(May 28, 1998) (amending Amex's Wireless Communications Policy).
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    Since the inception of the Wireless Communications Policy, Amex has 
allowed members to develop their own HHT applications, subject to 
review by the Exchange to ensure compliance with its rules and 
compatibility with its systems. Amex also required members to use the 
Infrastructure (i.e., Amex antennas, base stations, network, etc.) to 
transmit communications to and from HHTs and to conform their 
proprietary technologies, at their cost, to the requirements of the 
Infrastructure.
    Amex introduced a Booth Automated Routing System (``BARS'') in late 
2000. BARS is an order routing system with no order execution 
capabilities. Brokers can program different algorithms for each Amex 
security into BARS to cause certain orders to be routed to the 
specialist for execution or ``booking,'' and others to be routed to the 
broker's booth on the Amex floor. Booth clerks also can enter orders 
into BARS that are telephoned to the floor (i.e., orders that are not 
systematized when they arrive on the Exchange). In August 2001, Amex 
enhanced the functionality of BARS by introducing a wireless retail 
application system (``BARS/HHT'') that provides communications between 
member firm booth personnel and floor brokers with HHTs using the 
Infrastructure. As of April 1, 2002, all Amex floor brokers had BARS 
terminals in their booths. Currently, there are approximately 50 floor 
brokers representing 12 firms with assigned HHTs. This is approximately 
40 percent of the total number of HHTs that Amex ultimately will 
assign. As a member firm is added to BARS, Amex would provide that firm 
with the appropriate number of HHTs to utilize the new system.\7\ Amex 
has proposed to require

[[Page 20850]]

brokers to use the BARS/HHT system when it becomes fully operational. 
In addition, Amex has proposed to require all ROTs to use HHTs with the 
following minimum capabilities at such times as may be determined by 
Amex:
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    \7\ Users of these systems are subject to an Exchange fee. See 
Securities Exchange Act Release No. 44286 (May 9, 2001), 66 FR 27187 
(May 16, 2001) (R-Amex-2001-22--).
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     HHTs used by ROTs must be able to receive execution 
reports during a trading session with respect to trades executed 
against their accounts automatically (e.g., Auto-Ex and Book trades).
     ROTs must be able to report their trades to their clearing 
agents for comparison and clearance within time limits prescribed by 
the Exchange by means of their HHTs.
     HHTs used by ROTs must be able to make a record of text 
transmissions to or from other persons. This record must include the 
date and time of the transmission, the name of the person initiating 
the transmission, all persons receiving the transmission, and the text 
of the message.
     ROTs must be able to capture the following audit trail 
data on their HHTs with respect to all trades they execute on the 
Exchange: (1) Time of trade (the clocking mechanism must be in 
seconds), (2) executing broker badge number, (3) contra broker badge 
number, (4) open or closing transaction, (5) clearing member, and (6) 
contra clearing member. ROTs must be able to report this audit trail 
information to their clearing agents during a trading session within 
time limits prescribed by the Exchange.
     HHTs used by ROTs must be able to make a record of the 
following information with respect to orders or quotes initiated by 
ROTs for securities or futures traded in other markets: (1) Date; (2) 
the time the order or quote is sent to the other market (the clocking 
mechanism must be in tenths of a second); (3) the identity of the 
person initiating the order or quote; (4) security symbol; (5) buy, 
sell, sell short, or short exempt; (6) order type (e.g., market, 
limit); (7) order or quote size; (8) order or quote price; (9) 
execution quantity; (10) execution price; and (11) market where the 
order or quote is routed (e.g., New York Stock Exchange, Nasdaq, CBOE, 
or Instinet).\8\
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    \8\ Amex has stated that the rationale for requiring ROT HHTs to 
be able to produce an audit trail with respect to orders and quotes 
initiated on Amex but sent to another market is to facilitate 
surveillance of intermarket trading violations such as front 
running.
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     All clocking must be done electronically. All clocking 
mechanisms must be synchronized at least once per business day to the 
National Time Service or as specified by the Exchange from time to 
time.\9\
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    \9\ Every Exchange order passes through the Amex Order File 
(``AOF''), the host system of order processing, prior to a BARS 
booth terminal routing the order to an HHT. Any messsage affecting 
an order is logged and time stamped in AOF. All orders are assigned 
a unique turnaround number that is referenced on any subsequent 
cancellations, executions, or administrative messages. AOF includes 
a respository of all orders, execution information, processing of 
orders, reports, cancels, and administrative messages. Amex has 
represented that its order processing systems have been designed so 
that the clocking mechanisms do not deviate by more than three 
seconds from the Naval Observatory atomic clock in Washington, DC.
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     All required records must be maintained for at least three 
years and available to the staff of the Exchange upon request in no 
more than three business days.
    The Wireless Communications Policy does not currently appear in the 
Exchange's rules. The Exchange proposes to codify the Policy in Amex 
Rule 220, Commentary .04, and--in light of the fact that many members 
have begun using wired, as opposed to wireless, HHTs--to rename it the 
``Hand Held Terminal Policy'' (``HHT Policy''). In addition, Amex 
proposes to revise the HHT Policy: (1) To eliminate language that 
discussed the implementation of the Infrastructure, (2) to remove other 
features of the HHT Policy that are no longer used, and (3) to remove 
text that is found elsewhere in the Exchange's rules or that Amex 
believes is inappropriate in a rule. The requirements for ROTs' usage 
of HHTs, noted above, also would be incorporated into the HHT Policy.

B. Audit Trail Enhancements

    The Exchange has proposed the following changes to Amex Rules 153 
and 180 regarding records of orders:
     Paragraph (a) of Amex Rule 153 would be amended to 
explicitly require members and member organizations located off the 
floor to maintain a record of order modifications and cancellations.
     Paragraph (b) of Amex Rule 153 would be amended to require 
all members and member organizations to maintain a record of all 
orders, modifications, and cancellations received by them on the floor. 
Members and member organizations would be required to systematize any 
order, modification, or cancellation that CMS-eligible immediately upon 
receipt on the floor, if it were not already systematized.\10\ Amex 
would provide members and member organizations with a paper record of 
all of their systematized orders that they would retain to satisfy 
their recordkeeping obligations.
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    \10\ The Common Message Switch (``CMS'') is the means by which 
member firms may send electronic orders to both Amex and the NYSE. 
Currently, percentage and combination orders (e.g., spread orders) 
are not CMS-eligible. Amex has stated that it intends to develop 
systems that would make these orders CMS-eligible.
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     Paragraph (c) of Amex Rule 153 would be rescinded because 
it concerns orders ``carried'' to the Exchange floor, and the substance 
of the rule would be covered by Paragraph (b) of Amex Rule 153.
     Paragraph (d) of Amex Rule 153, concerning records of ITS 
commitments, would be amended to extend the rule's recordkeeping 
obligations to member organizations, to clarify that these 
recordkeeping obligations apply to order cancellations, and to extend 
the recordkeeping obligations from 12 months to three years.
     Paragraph (e) of Amex Rule 153, concerning records of 
orders in the Exchange's After Hours Trading (``AHT'') Facility, would 
be amended to consolidate AHT facility recordkeeping obligations in one 
place and would conform this provision to the other paragraphs of Amex 
Rule 153.
     Paragraph (f) of Amex Rule 153 concerns cancellations and 
reports. Recordkeeping responsibilities with respect to order 
cancellations would be transferred to the other sections of Amex Rule 
153. Paragraph (f) also would be modified to require members and member 
organizations to keep records of reports for three years instead of 12 
months.
     Amex Rule 180, concerning the recordkeeping obligations of 
specialists, would be deleted, as the revisions to Amex Rule 153 would 
include recordkeeping by specialists as well as other members.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the Act and the rules and regulations thereunder applicable to a 
national securities exchange.\11\ In particular, the Commission finds 
that the proposal is consistent with section 6(b)(5) of the Act \12\ 
which requires, among other things, that the rules of an exchange be 
designed to promote just and equitable principles of trade; to 
facilitate transactions in securities; to remove impediments to and 
perfect the mechanisms of a free and open market and a national market 
system; and, in general, to protect investors and the

[[Page 20851]]

public interest. The Commission also finds that that the proposed rule 
change is also consistent with the National Market System goals set 
forth in section 11A(a)(1)(C) of the Act \13\ in that it will enhance 
economically efficient execution of securities transactions.
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    \11\ In approving the proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78k-1(a)(1)(C).
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    The Commission believes that requiring Amex brokers and ROTs to 
employ BARS/HHT in the manner described above should improve 
efficiency, minimize risk, and help create more liquid markets on the 
Exchange. BARS allows member firms to manage their order flow more 
efficiently by giving them a choice of sending orders electronically to 
their booths for further action or sending orders directly to the 
specialist post. BARS/HHT furthers the automation of the order delivery 
process by allowing floor brokers to communicate with their booths via 
HHTs. The Commission believes that BARS/HHT will improve the ability of 
brokers to represent equity and option orders and of ROTs to make 
markets.
    The Commission also believes that the proposed amendments to Amex 
Rules 153 and 180 are consistent with the Act because they will clarify 
members' responsibilities under the Exchange's audit trail rules. 
Furthermore, these amendments will require the systematization of any 
order that has not already been systematized, which should make order 
processing more efficient and increase the ability of the Exchange and 
its members to construct an audit trail.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-Amex-00-60) and Amendment 
Nos. 1 and 2 thereto are approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-10312 Filed 4-25-02; 8:45 am]
BILLING CODE 8010-01-P