[Federal Register Volume 67, Number 154 (Friday, August 9, 2002)]
[Notices]
[Pages 51903-51905]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20184]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46304; File No. SR-Amex-2002-56]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval to Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval to Amendment No. 1 to the Proposed Rule 
Change by American Stock Exchange LLC Relating to Odd-Lots in Nasdaq 
Securities

August 2, 2002.

I. Introduction

    On June 17, 2002, 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\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to describe odd-lot execution procedures 
applicable to trading Nasdaq National Market (``NNM'') securities. The 
proposed rule change was published for comment in the Federal Register 
on July 10, 2002.\3\ On July 26, 2002, the Exchange filed Amendment No. 
1 to the proposed rule change.\4\ This order approves the proposed rule 
change and Amendment No. 1 thereto on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 46148 (June 28, 
2002), 67 FR 45773 (July 10, 2002).
    \4\ See Letter from Claire P. McGrath, Senior Vice President and 
Deputy General Counsel, Amex, to Nancy Sanow, Assistant Director, 
Division of Market Regulation, Commission, dated July 25, 2002 
(``Amendment No. 1''). In Amendment No. 1, the Exchange: (1) Amended 
proposed Amex Rule 118(j)(i) to change the word ``adjusted'' to 
``qualified'' in the first paragraph; (2) deleted paragraph 
(j)(i)(A) for proposed Amex Rule 118, which stated that the bid or 
offer in another market center will be considered in determining the 
qualified national best bid or offer only if it is no more than 25 
cents above the bid or below the offer disseminated by the Amex; (3) 
re-numbered the provisions contained in the third paragraph of 
proposed Amex Rule 118(j)(i); and (4) changed the date of approval 
of the proposed rule change by the Exchange's Board of Governors to 
September 19, 2001.
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II. Description

A. Background

    The Exchange filed a proposed rule change to permit trading of NNM 
securities pursuant to unlisted trading privileges.\5\ The Exchange 
currently is modifying its existing system in order to provide 
automatic execution of market and executable limit orders in NNM 
securities of less than 100 shares in a

[[Page 51904]]

manner generally consistent with procedures set forth in Amex Rule 205. 
Round lot orders (e.g., 100 shares) and Part of Round Lot (``PRL'') 
orders (e.g., 175 shares) will not be subject to automatic execution. 
In this filing, the Exchange proposes to add paragraph (j) to proposed 
Rule 118 to describe procedures applicable to the execution of odd-lot 
orders. The Exchange proposes to implement these procedures on a six-
month pilot basis.
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    \5\ See Securities Exchange Act Release No. 45365 (January 30, 
2001), 67 FR 5626 (February 6, 2002)(SR-Amex-2001-106).
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B. Execution of Odd-Lots

    Market and executable odd-lot limit orders to buy (sell) will be 
executed at the price of the qualified national best offer (bid) at the 
time the order is received at the trading post or through the Amex 
Order File (AOF). Market and executable limit orders entered before the 
opening of trading in NNM securities on the Exchange will receive an 
execution at the price of the first reported round-lot or PRL on the 
Amex.
    For purposes of this provision, the qualified national best bid or 
offer is the highest bid and lowest offer disseminated by the Amex or 
by another market center that is a participant in the Joint Self-
Regulatory Organization Plan Governing the Collection, Consolidation 
and Dissemination of Quotation and Transaction Information for Nasdaq 
Listed Securities Traded on Exchanges on an Unlisted Trading Privileges 
Basis (``Plan''). The bid or offer of such other market center will be 
considered in determining the qualified national best bid or offer only 
if it meets the conditions specified in proposed Rule 118(j)(i). These 
conditions are that: (1) The quotation conforms to Amex Rule 127 
(``Minimum Price Variations''), that is, the bid or offer must be in a 
one cent increment; (2) the quotation does not result in a locked or 
crossed market; (3) the market center is not experiencing operational 
or system problems affecting quotation dissemination; and (4) members 
of the other market center disseminating the quotations are not 
relieved of their obligations with respect to their quotations pursuant 
to the ``unusual market'' exception of Rule 11Ac1-1 under the Act.
    Procedures for the execution of non-executable limit orders, stop 
orders, stop limit orders, other order types, orders filled after the 
close and non-regular way trades will be similar to existing odd-lot 
execution procedures under Amex Rule 205 A(2)-A(4), B and C. Such 
orders will be processed manually.

C. Locked and Crossed Market Conditions

    The Exchange also proposed procedures for automatically executing 
market and executable limit odd-lot orders entered after the opening of 
Amex trading in NNM securities when the national best bid and offer is 
locked or crossed. Specifically, if a locked market exists, market 
orders and executable buy and sell limit orders will be executed at the 
same price as the locked price. If a crossed market exists, and the bid 
is higher than the offer by $.05 or less, market and executable limit 
orders will be executed at the mean of the crossed bid and offer. If 
the mean does not fall on a one-cent increment, the execution will be 
rounded up to the nearest $.01. If a crossed market exists and the bid 
is higher than the offer by more than $.05, then an odd-lot order will 
not be automatically executed, but will be executed manually in 
accordance with proposed Rule 118(j)(i) (i.e., filled at the price of 
the next unlocked and uncrossed qualified national bid or offer).
    The Exchange also proposes to add new Commentary .05 to Rule 205 to 
reference Rule 118(j) odd-lot procedures.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with section 6(b) of the Act \6\ in general and 
furthers the objectives of Section 6(b)(5).\7\ The Commission believes 
that the proposal is designed to remove impediments to and to perfect 
the mechanism of a free and open market, to facilitate transactions in 
odd-lot orders, to help ensure the economically efficient execution of 
these transactions, and in general to protect investors and the public 
interest.\8\
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(6).
    \8\ In approving this rule, the Commission notes that it has 
considered the proposal's impact on efficiency, competition, and 
capital formation, consistent with Section 3 of the Act. 15 U.S.C. 
78c(f).
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    The Commission believes that the Exchange's proposed pricing 
procedure for odd-lot orders in NNM securities will facilitate the 
execution of such orders. Because the orders will be priced off a 
current market quote, investors should receive a timely execution of 
their orders. Moreover, the Commission believes that pricing standard 
odd-lot market orders at the qualified national best bid or offer will 
result in orders receiving execution prices that accurately reflect 
market conditions, and will ensure that customers receive the best 
execution, both in terms of price and time.
    The Commission also believes that it is reasonable for the Exchange 
to establish certain requirements to trigger use of the qualified 
national best bid or offer in the odd-lot pricing system. The limited 
prerequisites for use of quotes disseminated by other participants in 
the Plan are appropriate to protect the automatic execution feature of 
the odd-lot pricing system against the inclusion of aberrant 
quotations. The Commission believes that, in the instances enumerated 
by the Exchange, it is appropriate to use the Amex best bid or offer in 
lieu of quotes disseminated by other participants in the Plan that do 
not satisfy the conditions of proposed Amex Rule 118(j)(1).
    Moreover, the proposed rule will ensure that a differential is not 
charged for standard odd-lot market orders in NNM securities. This 
prohibition furthers the Commission's objective of ensuring that 
customers receive the best execution of such orders, and that the price 
charged for the execution of standard odd-lot market orders will 
reflect the market price without additional transaction costs.
    Finally, the Commission believes that the manner in which the 
Exchange proposes to handle locked and crossed markets is consistent 
with the Act because it is designed to reduce the frequency of locked 
and crossed markets, which should help to provide reliable quotation 
information, facilitate price discovery, and contribute to the 
maintenance of a fair and orderly market. The proposal seeks to 
eliminate locked markets by matching marketable orders against one 
another, and to eliminate crossed markets by executing the orders at 
the mean of the crossed bid and offer, if the bid is higher than the 
offer by $.05 or less.\9\ The Commission believes this approach is 
reasonable. As the Commission has concluded previously, continued 
locking and crossing of the market can negatively affect market 
quality.\10\ By helping to reduce the negative impact of locked and 
crossed markets by dealing with them in a timely manner, the Commission 
believes that the proposal should improve market quality and enhance 
the production of fair and orderly quotations.
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    \9\ If the bid is higher than the offer by more than $.05, an 
odd-lot order will be executed manually.
    \10\ See Securities Exchange Act Release No. 40455 (September 
22, 1998), 63 FR 51978 (September 29, 1998) (order approving File 
No. SR-NASD-98-01).
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    The Commission finds good cause for approving the proposed rule 
change

[[Page 51905]]

prior to the thirtieth day after the date of publication of notice in 
the Federal Register. The Commission notes that granting accelerated 
approval to the proposal will allow the Amex to commence trading of NNM 
securities on a UTP basis in a timely fashion. Therefore, the 
Commission finds that granting accelerated approval to the proposed 
rule change is appropriate and consistent with section 19(b)(2) of the 
Act.\11\
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    \11\ 15 U.S.C. 78s(b)(2).
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IV. Amendment No. 1

    The Commission finds good cause for approving Amendment No. 1 prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register. In Amendment No. 1, in addition to making 
technical, non-substantive changes to the rule text to correct minor 
errors contained therein, the Exchange deleted paragraph (j)(i)(A) for 
proposed Amex Rule 118. This provision stated that the bid or offer in 
another market center will be considered in determining the qualified 
national best bid or offer only if it is no more than 25 cents above 
the bid or below the offer disseminated by the Amex.
    The Commission believes that this change to the proposal was 
necessary so that bids and offers from other market centers in NNM 
securities that better the quote disseminated by the Amex would be 
considered in determining the qualified NBBO for odd-lots. The 
Commission believes that it would be inconsistent with the Act to allow 
broker-dealers to ignore quotes from other markets simply because they 
are better than the Amex quote by a designated amount.
    In sum, the Commission finds that this change is consistent with 
section 6(b)(5) of the Act \12\ in that it will facilitate transactions 
in odd-lot orders, help ensure the economically efficient execution of 
these transactions, and in general protect investors and the public 
interest. The Commission also finds that the Amex's proposed changes in 
Amendment No. 1 further strengthen and clarify the proposed rule change 
and eliminate a potential regulatory issue. Therefore, the Commission 
finds that granting accelerated approval to Amendment No. 1 is 
appropriate and consistent with section 19(b)(2) of the Act.\13\
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1, including whether the proposed 
amendment 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-2002-56 and should be submitted by August 30, 2002.

VI. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder. Moreover, the Commission 
finds that there is good cause to grant accelerated approval to the 
proposed rule change and Amendment No. 1 on a pilot basis, to expire 
six months from the date of this order.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed rule change and Amendment No. 1 thereto (SR-
Amex-2002-56) are approved on an accelerated basis.
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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. 02-20184 Filed 8-8-02; 8:45 am]
BILLING CODE 8010-01-P