[Federal Register Volume 67, Number 128 (Wednesday, July 3, 2002)]
[Notices]
[Pages 44652-44654]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16689]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46122; File No. SR-Amex-2001-95]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change and Amendment Nos. 1, 2, 3, and 4 to the Proposed Rule Change by 
the American Stock Exchange LLC Relating to Its Performance Evaluation 
Procedures for Option, Equity and ETF Specialists

June 26, 2002.
    On February 19, 2001, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to codify the Exchange's 
performance evaluation procedures for options, equity and Exchange 
Traded Fund (``ETF'') specialists. The Amex filed Amendment Nos. 1,\3\ 
2,\4\ and 3 \5\ to the proposed rule change, respectively. The proposed 
rule change, as amended, was published for public comment in the 
Federal Register on April 1, 2002.\6\ The Commission received no 
comments on the proposal. On May 28, 2002, the Amex filed Amendment No. 
4 to the proposed rule change.\7\ 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 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'').
    \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'').
    \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'').
    \6\ See Securities Exchange Act Release No. 45643 (March 25, 
2002), 67 FR 15434 (proposing SR-Amex-2001-95).
    \7\ See Letter from Geraldine M. Brindisi, Vice President and 
Corporate Secretary, Amex, to Nancy J. Sanow, Esq., Assistant 
Director, Division, Commission (May 24, 2002) (``Amendment No. 4''). 
Amendment No. 4 clarifies that the Exchange may change the 
performance rating criteria and their weightings from time to time 
as warranted by market conditions without filing such changes 
pursuant to Section 19(b) of the Act, 15 U.S.C. 78s(b), provided 
that the Exchange follows the procedures in the proposed rule for 
changing the criteria and their weightings. This was a technical 
amendment and is not subject to notice and comment.
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I. Description 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 revise the current system for 
evaluating option, equity and ETF specialists by adding and codifying a 
number of objective criteria in 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.\8\
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    \8\ 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 that would be appropriate in the circumstances. The 
Exchange will continue to 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.
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    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 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, in advance of the calendar 
quarter in which the change would be implemented.
    The Exchange proposes to use the following performance criteria for 
specialist evaluation until further notice:

Option Specialist Evaluation Criteria

     Percentage of trades executed at or better than the 
National Best Bid and Offer (``NBBO'').

[[Page 44653]]

     Percentage of orders that receive price improvement.
     Percentage of time at NBBO.
     Average bid/offer spread.
     Liquidity enhanced trades.\9\
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    \9\ The Amex states 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.
     Average number of Minor Floor Violation Disciplinary 
Committee actions \10\ per option.
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    \10\ The Amex states 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 \11\ commitments.
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    \11\ 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.\12\ 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.
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    \12\ A rating of ``1'' would represent the best possible score. 
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.
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    In addition to the performance ratings system described above, the 
Exchange also proposes to codify its 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.\13\ 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 in advance of the calendar quarter in which the 
change will be implemented. The Exchange also would notify specialists 
of their market share.
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    \13\ The Exchange represents that options specialists are not 
evaluated on their market share in a newly listed option for the six 
months following listing on the Exchange. In addition, under the 
program, a specialist that falls below the minimum market share 
criteria in one or more 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.
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    The market share evaluation program for options specialists would 
be separate from the performance ratings system. Thus, for example, an 
options 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.

II. Discussion

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\14\ In particular, the Commission finds that the proposal, as 
amended, is consistent with Section 6(b)(5) of the Act, which requires, 
among other things, that the Exchange's procedures be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest.\15\
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    \14\ In approving this proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that codifying the Exchange's performance 
evaluation procedures for options, equity and ETF specialists should 
help to protect investors, issuers and ETF sponsors by ensuring that 
the better qualified specialists receive and retain allocations, thus 
potentially making this marketplace more competitive. The Commission 
also believes that the proposal helps the Exchange maintain market 
quality and integrity by providing the Exchange's Performance Committee 
with a means to identify the specialists that fail to satisfy market 
responsibilities. Further, the Commission believes that the proposal 
provides specialists more guidance regarding how the Exchange evaluates 
market performance.
    The Commission notes that 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 will 
notify specialists of their ratings.\16\ The Commission notes that the 
Exchange 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 will notify 
specialists of any changes to the criteria, and/or weightings thereof, 
in advance of the calendar quarter in which the change will be 
implemented, which should provide specialists with reasonable notice of 
the measures being used to judge their market performance.
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    \16\ The Commission notes Amex Rule 26(e), amongst other things, 
provides that the Performance Committee may meet with specialists 
who fail to satisfy minimum performance standards. In such an event, 
specialists would be notified in writing of the grounds to be 
considered by the Performance Committee and given access to all 
written materials to be reviewed by the Performance Committee.

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[[Page 44654]]

III. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-Amex-2001-95), as amended, 
is approved.
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    \17\ 15 U.S.C 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to the delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-16689 Filed 7-2-02; 8:45 am]
BILLING CODE 8010-01-P