[Federal Register Volume 68, Number 84 (Thursday, May 1, 2003)]
[Notices]
[Pages 23348-23351]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10791]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47728; File No. SR-Amex-2003-16]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by American Stock 
Exchange LLC Relating to Automatic-Execution for Nasdaq National Market 
Securities

April 23, 2003.
    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 March 13, 2003, 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 and 
II below, which Items have been prepared by the Exchange. On April 3, 
2003, the Exchange filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons and to grant 
accelerated approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Amex provided anticipated 
implementation dates, stating that the Amex proposes to implement 
the proposed rule change before the end of May 2003 on a temporary 
basis until it implements its enhanced Auto-Ex technology in the 
fourth quarter of 2003. See April 2, 2003, letter from William 
Floyd-Jones, Associate General Counsel, Amex, to Nancy Sanow, 
Assistant Director, Division of Market Regulation, Commission.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks to extend its existing Automatic Execution 
System (``Auto-Ex'') to Nasdaq National Market System stocks (``Nasdaq 
stocks'') admitted to trading pursuant to 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 Privilege 
Basis (the ``OTC/UTP Plan'').\4\ The text of the proposed rule change 
is set forth below. Proposed new language is in italics.
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    \4\ The OTC/UTP Plan was initially approved in 1990. See 
Securities Exchange Act Release No. 28146 (June 26, 1990), 55 FR 
27917 (July 6, 1990). It has subsequently been amended. See also 
Securities Exchange Act Release Nos. 34371 (July 13, 1994), 59 FR 
37103 (July 20, 1994); 35221 (January 11, 1995), 60 FR 3886 (January 
19, 1995); 36102 (August 14, 1995), 60 FR 43626 (August 22, 1995); 
36226 (September 13, 1995), 60 FR 49029 (September 21, 1995); 36368 
(October 13, 1995), 60 FR 54091 (October 19, 1995); 36481 (November 
13, 1995), 60 FR 58119 (November 24, 1995); 36589 (December 13, 
1995), 60 FR 65696 (December 20, 1995); 36650 (December 28, 1995), 
61 FR 358 (January 4, 1996); 36934 (March 6, 1996), 61 FR 10408 
(March 13, 1996); 36985 (March 18, 1996), 61 FR 12122 (March 25, 
1996); 37689 (September 16, 1996), 61 FR 50058 (September 24, 1996); 
37772 (October 1, 1996), 61 FR 52980 (October 9, 1996); 38457 (March 
31, 1997), 62 FR 16880 (April 8, 1997); 38794 (June 30, 1997), 62 FR 
36586 (July 8, 1997); 39505 (December 31, 1997), 63 FR 1515 (January 
9, 1998); 40151 (July 1, 1998), 63 FR 36979 (July 8, 1998); 40896 
(December 31, 1998), 64 FR 1834 (January 12, 1999); 41392 (May 12, 
1999), 64 FR 27839 (May 21, 1999); 42268 (December 23, 1999), 65 FR 
1202 (January 6, 2000); 43005 (June 30, 2000), 65 FR 42411 (July 10, 
2000); 44099 (March 23, 2001), 66 FR 17457 (March 30, 2001); 44348 
(May 24, 2001), 66 FR 29610 (May 31, 2001); 44552 (July 13, 2001), 
66 FR 37712 (July 19, 2001); 44694 (August 14, 2001), 66 FR 43598 
(August 20, 2001); 44804 (September 17, 2001), 66 FR 48299 
(September 19, 2001); 45081 (November 19, 2001), 66 FR 59273 
(November 27, 2001); 46381 (August 19, 2002), 67 FR 164 (August 23, 
2002); 46729 (October 25, 2002), 67 FR 212 (November 1, 2002).
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* * * * *

Automatic Execution For Nasdaq National Market Securities (Temporary)

    Rule 118A-T. (a) An Auto-Ex eligible order in a Nasdaq National 
Market System security will be executed automatically at the Amex 
Published Quote (``APQ'') for such security in accordance with the 
provisions of this rule.
    (b) An Auto-Ex eligible order for a Tier 1 Nasdaq National Market 
security must be a round lot, or partial round lot (``PRL''), market or 
marketable limit order for 1,000 shares or less received by the 
Exchange electronically. An Auto-Ex eligible order for a Tier 2 Nasdaq 
National Market security must be a round lot, or PRL, market or 
marketable limit order for 500 shares or less received by the Exchange 
electronically. For purposes of this Rule, a ``Tier 1'' Nasdaq National 
Market security is a stock with an average daily consolidated trading 
volume of over 10 million shares during the preceding calendar quarter, 
and a ``Tier 2'' Nasdaq National Market security is a stock with an 
average daily consolidated trading volume of 10 million shares or less 
during the preceding calendar quarter.
    (c) The specialist will be the contra side to each Auto-Ex 
execution. In the event that the specialist trades as a result of an 
automatic execution at a price at which the specialist could have 
executed one or more limit orders on the book, the specialist shall 
immediately execute any such limit orders at the price of the Auto-Ex 
trade to the extent such booked orders would have been executed had the 
incoming order not been executed automatically.
    (d) An Auto-Ex eligible order will be routed to the specialist and 
will not be

[[Page 23349]]

automatically executed in the following situations:
    (i) Auto-Ex will be turned-off for one or more securities when the 
specialist in conjunction with a Floor Governor or two Floor Officials 
determine that quotes are not reliable and the Exchange or the Nasdaq 
Stock Market is experiencing communications or systems problems, ``fast 
markets,'' or delays in the dissemination of quotes.
    (ii) Auto-Ex will not occur if it would cause the election of a 
stop or stop limit order on the book, or it would cause a trade to 
occur through the price of an all or none order on the book.
    (iii) Auto-Ex will not occur in a stock for 10 seconds after there 
has been an Auto-Ex trade in that security.
    (iv) Auto-Ex will not occur in a stock when the spread in the APQ 
in that security is equal to or greater than thirty cents.
    (v) Auto-Ex will not occur in a stock when the APQ on the opposite 
side of an incoming order is not at the NBBO for that security.
    (vi) Auto-Ex will not occur when the size displayed in the APQ on 
the opposite side of an incoming order is less than the size of the 
incoming order.
    (vii) Auto-Ex will not occur when an incoming order is larger than 
the applicable Tier 1 or Tier 2 size parameter for that stock.
    (e) The Auto-Ex Enhancements Committee (``Committee'') will review 
a request from a specialist with respect to one or more securities to:
    (i) Increase the size of Auto-Ex eligible orders above 1,000 share 
Tier 1 or 500 share Tier 2 parameters,
    (ii) Reduce the duration of the 10-second pause between Auto-Ex 
executions, and/or
    (iii) Increase the number of trades before the implementation of 
the 10-second pause in Auto-Ex described in paragraph (d)(iii) above.
    The Committee may approve, disapprove or conditionally approve such 
requests. The Committee will balance the interests of investors, the 
specialist, and the Exchange in determining whether to grant a 
specialist's request to modify the Auto-Ex parameters specified in (i) 
through (iii) of paragraph (e) of this Rule. The Committee also will 
consider a request from a specialist to reduce Auto-Ex parameters that 
previously had been increased, provided, however, that the Committee 
may not reduce the Auto-Ex parameters below the floors stated in 
paragraphs (b) and (d) of this Rule. The Committee may delegate its 
authority to one or more Floor Governors. The Committee will meet 
promptly to review a Governor's decision to modify Auto-Ex parameters 
in the event that a Governor acts pursuant to delegated authority.
* * * * *

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 III 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to extend its existing Auto-Ex technology 
to Nasdaq stocks trading pursuant to the OTC/UTP Plan to permit 
automatic execution of small orders to accommodate the needs of some 
investors who desire such executions.\5\ The Amex proposes to implement 
the proposed rule change prior to the end of May 2003 on a temporary 
basis until it can implement the enhanced Auto-Ex technology that it 
currently is developing. The Exchange anticipates that it will 
implement its enhanced Auto-Ex technology in the fourth quarter of 
2003.
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    \5\ The Commission previously has approved the extension of the 
Exchange's Auto-Ex technology to exchange traded funds (``ETFs''). 
See, Securities Exchange Act Release No. 47105 (December 30, 2002), 
68 FR 592 (January 6, 2003).
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    Under the proposed rule change, the Amex would automatically 
execute a market or marketable limit order received by the Exchange 
electronically when (1) the order is equal to or less than the size 
displayed in the Amex Published Quote (``APQ''),\6\ (2) the APQ is at 
the National Best Bid or Offer (``NBBO'') for the security, and (3) the 
order is for 1,000 shares or less for a ``Tier 1'' Nasdaq stock, or 500 
shares or less for a ``Tier 2'' Nasdaq stock.\7\ For example, assume 
that the NBBO for a stock is .03 to .05, and the APQ is .03 to .06. In 
this case, the Amex would automatically execute an eligible market sell 
order but would not automatically execute an eligible market buy order 
because the Amex is not at the NBBO for the stock on the offer side of 
the market. The Amex would automatically execute eligible orders when 
it is on the NBBO even where the NBBO is locked or crossed. Orders that 
are ineligible for Auto-Ex will be routed automatically to the book for 
execution by the specialist. The enhancements that the Exchange intends 
to implement to Auto-Ex in the fourth quarter of 2003 will allow Auto-
Ex eligible orders to trade directly with orders on the book. This 
enhancement, accordingly, will eliminate the need for specialists to 
separately execute orders on the book that would have been executed by 
incoming Auto-Ex eligible orders by allowing incoming orders to 
automatically trade with orders on the book.
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    \6\ The APQ is the quote that the Amex, pursuant to the OTC/UTP 
Plan, disseminates to investors by means of the plan securities 
information processor for last sale and quotation information.
    \7\ A ``Tier 1'' Nasdaq stock is a Nasdaq stock that has an 
average daily consolidated trading volume of more than 10 million 
shares during the preceding calendar quarter. A Tier 2 Nasdaq stock 
is a Nasdaq stock that has an average daily consolidated trading 
volume of 10 million shares or less during the preceding calendar 
quarter. At the end of each calendar quarter, the Amex would 
determine whether a particular Nasdaq stock admitted to trading 
pursuant to the OTC/UTP Plan would be considered a Tier 1 or Tier 2 
Nasdaq stock for the following quarter.
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    The specialist would be the contra side to every Auto-Ex trade. To 
protect limit orders on the book, in the event that an automatic 
execution results in the specialist buying or selling stock at a price 
at which the specialist could have executed an order on the book in 
whole or part, the specialist would be required to immediately execute 
the limit order at the price of the Auto-Ex trade to the extent that 
the limit order would have been executed had the incoming order not 
been automatically executed against the specialist.
    Auto-Ex would be unavailable in one or more securities where the 
specialist in conjunction with a Floor Governor or two Floor Officials 
determines that quotes are not reliable and the Exchange or the Nasdaq 
National Market System is experiencing communications or systems 
problems, ``fast markets,'' \8\ or delays in the dissemination of 
quotes. The Exchange believes that any quote disseminated in these 
circumstances may be unreliable and, hence, should not be available for 
automatic execution. This is consistent with disengagement of Auto-Ex 
for EFTs when quotes are

[[Page 23350]]

unreliable.\9\ Auto-Ex also would not occur if the execution would 
elect a stop or stop limit order on the book, or would trade through an 
all or none order on the book. The Exchange believes that the 
specialist should review situations where an incoming order may elect 
one or more stop orders or trade through an all or none order on the 
book to ensure that the orders are executed consistent with the 
maintenance of a fair and orderly market. Auto-Ex also would be 
unavailable for 10 seconds after an automatic execution to give the 
specialist an opportunity to update the market.
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    \8\ The Exchange represents that ``fast markets'' means the 
unusual market conditions that give rise to the unusual market 
exception pursuant to Amex Rule 115. Telephone conversation among 
William Floyd-Jones, Associate General Counsel, Amex; Christopher B. 
Stone, Special Counsel, Division of Market Regulation, Commission; 
and Ann E. Leddy, Attorney, Division of Market Regulation, 
Commission (April 23, 2003).
    \9\ See Commentary .03 to Amex Rule 128A, ``Contract Made on 
Acceptance of Bid or Offer.'' The Exchange has assured the 
Commission that the circumstances in which Auto-Ex is not available 
will be identical to the circumstances in which Auto-Ex is not 
available for ETFs and that the disengagement of Auto-Ex for Nasdaq 
securities will work in the same fashion as the disengagement of 
Auto-Ex for ETFs. Telephone conference among William Floyd-Jones, 
Associate General Counsel, Amex; Christopher B. Stone, Special 
Counsel, Division of Market Regulation, Commission; and Ann E. 
Leddy, Attorney, Division of Market Regulation, Commission (April 
16, 2003).
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    The Exchange believes that the 1,000 and 500 share size limits and 
the 10-second pause in Auto-Ex following an automatic execution are 
minimum standards that a specialist should have flexibility to increase 
on a security-by-security basis. The Exchange, consequently, is 
proposing to allow specialists to request an increase in the size of 
orders eligible for Auto-Ex, an increase in the number of trades 
between automatic executions before there is a pause in Auto-Ex, and a 
reduction in the 10-second pause. The Auto-Ex Enhancements Committee 
would review such requests to enhance these Auto-Ex parameters. The 
Auto-Ex Enhancements Committee also would review requests to reduce 
these parameters (if they had been previously increased) to no less 
than the base levels found in the rule.\10\ The Auto-Ex Enhancements 
Committee could delegate its authority under the rule to one or more 
Floor Governors. If a Governor acts pursuant to delegated authority, 
the Committee would have to meet promptly to review the Governor's 
decision.
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    \10\ The Auto-Ex Enhancements Committee is an existing committee 
of the Exchange consisting 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.
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    Auto-Ex would be unavailable when the spread in the Amex Published 
Quote is 30 cents or more. The Exchange represents that this is 
intended to prevent automatic executions at disadvantageous prices to 
the incoming electronic order.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b) of the Act,\11\ in general, and 
Section 6(b)(5) of the Act,\12\ 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 engaged 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 Exchange believes that the proposed rule change will speed 
the execution of small orders for Nasdaq stocks on the Amex. The 
Exchange also believes that the proposal will facilitate the comparison 
and settlement of trades, since Auto-Ex transactions result in 
``locked-in'' trades.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes that the 
proposal, in fact, will enhance competition among markets and thereby 
benefit investors by allowing the Exchange to provide Auto-Ex for 
Nasdaq stocks.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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-2003-16 and 
should be submitted by May 22, 2003.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Exchange has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of notice thereof in the Federal Register to permit 
application of the Auto-Ex technology to Nasdaq stocks at the earliest 
time possible. The Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\13\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \14\ because 
it helps remove impediments to, and perfects the mechanisms of, a free 
and open market and a national market system. Specifically, the 
Commission believes that the proposed rule change does not raise any 
significant regulatory issues in view of the fact that the Exchange 
already provides Auto-Ex for options and ETFs, and the instant proposal 
seeks to extend existing Auto-Ex technology to another type of security 
traded on the Exchange. As a result, there are no unique regulatory 
issues that the Commission has not previously considered. In addition, 
the Exchange is proposing to implement Auto-Ex on a temporary basis 
until its enhanced Auto-Ex technology is available.
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    \13\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    Furthermore, upon commencement of the Amex trading Nasdaq 
securities, the Commission received a substantial number of complaints 
that the Amex's trading of Nasdaq securities without Auto-Ex 
functionality was disrupting the Nasdaq marketplace generally. To

[[Page 23351]]

the extent such concerns had merit, the Commission believes the Amex's 
development of Auto-Ex functionality for Nasdaq securities should help 
address the concerns raised by other market participants.
    For the reasons discussed above, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\15\ for approving the proposed 
rule change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register.
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    \15\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-Amex-2003-16) is hereby 
approved on an accelerated basis.
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    \16\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-10791 Filed 4-30-03; 8:45 am]
BILLING CODE 8010-01-P