[Federal Register Volume 68, Number 227 (Tuesday, November 25, 2003)]
[Notices]
[Pages 66144-66147]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29414]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48800; File No. SR-Amex-2002-116]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment Nos. 1, 2, 3, and 4 Thereto by the American 
Stock Exchange LLC Relating to Specialist Stabilization Requirements 
for Derivative Products

November 17, 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 December 27, 2002, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in

[[Page 66145]]

Items I, II, and III below, which Items have been prepared by the 
Exchange. On April 23, 2003, the Exchange submitted Amendment No. 1 to 
the proposed rule change.\3\ On June 3, 2003, the Exchange submitted 
Amendment No. 2 to the proposed rule change.\4\ On October 3, 2003, the 
Exchange submitted Amendment No. 3 to the proposed rule change.\5\ On 
October 22, 2003, the Exchange submitted Amendment No. 4 to the 
proposed rule change.\6\ 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 William Floyd-Jones, Associate General 
Counsel, Amex, to Nancy Sanow, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated April 22, 2003 
(``Amendment No. 1''). Amendment No. 1 removed proposed language 
that would have allowed approved persons to trade the same 
derivatives as an affiliated specialist and replaced the proposed 
rule change in its entirety.
    \4\ See letter from William Floyd-Jones, Associate General 
Counsel, Amex, to Nancy Sanow, Assistant Director, Division, 
Commission, dated June 2, 2003 (``Amendment No. 2''). Amendment No. 
2 provided further details on the description of the proposed 
exemption of derivative products from the requirements of 
Commentaries .05, .06 and .07 to Amex Rule 170 and also replaced the 
proposed rule change in its entirety.
    \5\ See letter from William Floyd-Jones, Associate General 
Counsel, Amex, to Nancy Sanow, Assistant Director, Division, 
Commission, dated October 2, 2003 (``Amendment No. 3''). Amendment 
No. 3 made technical corrections to the proposed rule text and 
replaced the proposed rule change in its entirety.
    \6\ See letter from William Floyd-Jones, Associate General 
Counsel, Amex, to Nancy Sanow, Assistant Director, Division, 
Commission, dated October 21, 2003 (``Amendment No. 4''). Amendment 
No. 4 explained why the Exchange believes that the maximum quote 
spread rules for options should not be applicable to transactions in 
derivative products. In addition, Amendment No. 4 proposes to 
continue to apply Commentary .05 to Rule 170 to specialist 
transactions in derivative products. Amendment No. 4 also replaced 
the proposed rule change, as amended, in its entirety.
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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 Rules 170, 1000(a), and 1000 
A(a) to: (1) Eliminate specialist stabilization requirements and other 
technical requirements for ``derivative products;'' and (2) correct 
erroneous cross references in the Exchange's rules to the definition of 
the term ``derivative product.'' Below is the text of the proposed rule 
change. Proposed deleted language is bracketed. Proposed new language 
is italicized.
* * * * *

Registration and Functions of Specialists

    Rule 170. (a) through (e). No change.

Commentary

    .01 through .11 No change.
    .12 The following provisions of this Rule shall not apply to the 
trading of derivative products (as defined in Article I, Section 3(d) 
of the Exchange Constitution): Commentary .01, .02, .06 (to the extent 
that the SEC has granted ``no action'' relief or otherwise exempted the 
security from the ``Short Sale Rule''), and .07.

Portfolio Depositary Receipts

    Rule 1000 (a) Applicability. The Rules in this Chapter (Trading of 
Certain Equity Derivatives) are applicable only to Portfolio Depositary 
Receipts. Except to the extent that specific Rules in this Chapter 
govern, or unless the context otherwise requires, the provisions of the 
Constitution and all other rules and policies of the Board of Governors 
shall be applicable to the trading on the Exchange of such securities. 
Pursuant to the provisions of Article 1, Section 3([i]j) of the 
Constitution, Portfolio Depositary Receipts are included within the 
definition of ``security'' or ``securities'' as such terms are used in 
the Constitution and Rules of the Exchange. In addition, pursuant to 
the provisions of Article I, Section 3(d) [Article IV, Section 1(b)(4)] 
of the Constitution, Portfolio Depositary Receipts are included within 
the definition of ``derivative products'' as that term is used in the 
Constitution and Rules of the Exchange.

Index Fund Shares

    Rule 1000A. (a) Applicability. The Rules in this Section are 
applicable only to Index Fund Shares. Except to the extent specific 
Rules in this Section govern or unless the context otherwise requires, 
the provisions of the Constitution and all other rules and policies of 
the Board of Governors shall be applicable to the trading on the 
Exchange of such securities. Pursuant to the provisions of Article I, 
Section 3([i]j) of the Constitution, Index Fund Shares are included 
within the definition of ``security'' or ``securities'' as such terms 
are used in the Constitution and Rules of the Exchange. In addition, 
pursuant to the provisions of Article I, Section 3(d) [Article IV, 
Section 1(b)(4)] of the Constitution, Index Fund Shares are included 
within the definition of ``derivative products'' as that term is used 
in the Constitution and Rules of the Exchange.
* * * * *

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
    Since the 1930s,\7\ specialists on the Amex and New York Stock 
Exchange, Inc. (``NYSE'') have been subject to requirements that 
generally prohibit them from buying on plus ticks or selling on minus 
ticks except with the permission of a Floor Official. The Exchange 
believes that while these rules may have made sense in the 1930s or in 
the 1960s (when they were formally enacted by the Amex and NYSE), 
changes in market structure and technology in the succeeding decades, 
such as the shift to trading in penny increments, dispersion of order 
flow to multiple competing market centers, consolidation and 
availability of market data, and enhancements in trading, 
communications, and surveillance technology, have made these 
stabilization rules anticompetitive anachronisms. In addition, the 
Exchange believes that the policy considerations behind the 
implementation of stabilization rules for common stocks do not apply in 
the context of derivatively priced securities.\8\ In this regard, the 
Commission previously approved an Amex rule change that eliminated 
stabilization rules and other technical requirements of Rule 170 
related to stabilization requirements as applied to

[[Page 66146]]

Exchange traded options.\9\ Thus, the only ``derivative products''\10\ 
currently subject to stabilization requirements on the Amex are 
Portfolio Depository Receipts, Index Fund Shares and Trust Issued 
Receipts (collectively ``Exchange Traded Funds'' or ``ETFs''). The 
Exchange, accordingly, is proposing to eliminate stabilization rules 
and other technical requirements of Rule 170 related to stabilization 
requirements with respect to ETFs.
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    \7\ See Saperstein Interpretation, Securities Exchange Act 
Release No. 1117 (March 30, 1937).
    \8\ The Exchange notes that stabilization rules, which limit the 
ability of Amex and NYSE specialists to buy on plus ticks or sell on 
minus ticks, are an objective expression of a specialist's 
``negative'' obligation to refrain from trading except in connection 
with transactions that assist in maintaining a fair and orderly 
market. According to the Exchange, these rules were intended to 
prevent Amex and NYSE specialists from ``leading the market'' in 
their specialty stocks.
    \9\ See Securities Exchange Act Release No. 27235 (September 11, 
1989), 54 FR 38580 (September 19, 1989).
    \10\ Article 1, Section 3(d) of the Exchange Constitution 
defines ``derivative products'' as follows:
    The term ``derivative products'' includes, in addition to 
standardized options, other securities which are issued by The 
Options Clearing Corporation or another limited purpose entity or 
trust, and which are based solely on the performance of an index or 
portfolio of other publicly traded securities. Notwithstanding the 
foregoing, the term ``derivative products'' shall not include 
warrants of any type or closed-end management investment companies.
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    The Exchange believes that eliminating stabilization rules with 
respect to ETFs is appropriate in view of the fact that ETFs, like 
options, are priced derivatively, based upon the value of an underlying 
basket of securities. Thus, the Exchange believes that there should be 
no concern that specialist ETF transactions would ``lead the market'' 
with respect to the price of an ETF if he or she effected purchases of 
plus or zero-plus ticks, or effected sales on minus or zero-minus 
ticks.
    In this regard, the Exchange notes that the Commission has, in many 
instances, granted ``no action'' relief for short sales of ETFs with 
respect to the Commission's ``Short Sale Rule'' (Rule 10a-1 under the 
Act) in large part due to the derivative pricing of ETFs.\11\ The 
Exchange also notes that the Commission recently approved an Amex rule 
change that allowed side-by-side trading of broad based ETFs and the 
related options as a result of the derivative pricing of ETFs.\12\ In 
both situations, according to the Exchange, the Commission discounted 
the possibility of inappropriate activity by ETF specialists due to the 
derivative pricing of these securities. The Exchange also believes that 
requiring a Floor Official to review a proposed transaction on a 
destabilizing ``tick'' prior to execution is contrary to the interests 
of investors in the context of derivately priced ETFs since the delay 
caused by Floor Official review may cause customers to receive an 
inferior execution or miss the market.
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    \11\ See e.g. Letter from James A. Brigagliano, Assistant 
Director, Division of Market Regulation, to James F. Duffy, 
Executive Vice President and General Counsel, American Stock 
Exchange, dated March 3, 1999 (regarding Nasdaq-100 Trust, Series 
1). This letter states in part:
    On the basis of your representations and the facts presented, in 
particular the composite and derivative nature of the Nasdaq-100 
Shares, trading would not appear to be susceptible to the practices 
that Rule 10a-1 is designed to prevent. In particular, the Amex 
anticipates that the market value of the Nasdaq-100 Shares will rise 
or fall based on changes in the net asset value of the Trust. 
Moreover, the short sale rule does not apply to analogous derivative 
products such as index options and index futures contracts. 
Accordingly, the Commission hereby grants an exemption to Rule 10a-1 
to permit sales of Nasdaq-100 Shares without regard to the `tick' 
requirements of Rule 10a-1.
    \12\ See Securities Exchange Act Release No. 46213 (July 16, 
2002), 67 FR 48232 (July 23, 2002).
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    The Exchange believes that ETFs should not be subject to the 
maximum quote spread rules applicable to options.\13\ These rules were 
adopted on the Amex in 1974 and originally applied to registered option 
traders. In 1989, the option quote spread rules were formally extended 
to Amex specialists.\14\ During the period between 1974 and 1989, the 
Commission restricted the trading of listed options on more than one 
exchange, and the Commission did not completely eliminate these 
restrictions until December 31, 1994.\15\ Currently, all option 
exchanges have similar maximum quote spread rules.\16\
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    \13\ See Commentary .01 to Amex Rule 950(n) and Amex Rule 
958(c).
    \14\ The Exchange adopted the maximum quote spread rules 
applicable to registered options traders in 1975 and formally 
extended them to options specialists in 1989. See Securities 
Exchange Act Release No. 27235 (September 11, 1989), 54 FR 38580 
(September 19, 1989).
    \15\ See Discussion on the history of restrictions on the 
multiple listing of options in In Re: Stock Exchanges Options 
Trading Antitrust Litigation, 171 F.Supp. 2d 1974 (April 24, 2001).
    \16\ See Chicago Board Options Exchange, Inc. Rule 8.7, Pacific 
Stock Exchange, Inc. Rule 6.37, Philadelphia Stock Exchange, Inc. 
Rule 1014, and International Stock Exchange Rule 803.
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    The Exchange believes that extending maximum quote spread rules to 
ETFs may have an anti-competitive impact by establishing a regulatory 
requirement on the Amex that does not exist in the other market centers 
that trade ETFs. Unlike the situation with listed options where all 
option exchanges have similar rules regulating bid/ask differentials, 
the Exchange believes that none of the registered exchanges, ATSs, 
third market dealers, or Nasdaq that currently trade ETFs establish, or 
are subject to, maximum quote spread differentials. The Exchange also 
believes that extending maximum quote spreads rules to ETFs would serve 
no investor protection purpose since trading in ETFs is characterized 
by vigorous competition among market centers. If investors are 
unsatisfied with the quote for an ETF displayed in a particular market 
center, the Exchange believes that they can trade the security in 
another market. Competition among market centers, not quote spread 
regulation, maintains ETF bid/ask differentials at appropriate levels.
    The Exchange is proposing to exempt ETFs from the other technical 
requirements of Rule 170 from which options were exempted in 1989.\17\ 
These sections deal with transactions which: (1) May be subject to the 
Commission's short sale rule (Commentary .06); and (2) are assigned to 
investment accounts (Commentary .07). The Exchange believes that 
eliminating Commentary .06 with respect to ETFs is appropriate because 
this Commentary simply reminds specialists that they are subject to the 
Commission's short sale rule. Since the short sale rule frequently does 
not apply to ETFs due to the Commission's provision of ``no action'' 
relief, the Commentary creates an ambiguity regarding the applicability 
of the short sale rule to specialist transactions in ETFs. The 
Exchange, accordingly, is proposing to eliminate Commentary .06 with 
respect to ETFs to the extent that the Commission has granted no action 
relief or has otherwise exempted the securities from the short sale 
rule. Commentary .07 restricts the ability of specialists to assign 
securities to an investment account unless the securities were acquired 
in transactions that meet certain rigorous stabilization tests. Since 
the prices of ETF trades are determined derivatively, it is impossible 
for specialists to satisfy the stabilization tests of Commentary .07 
and they cannot, consequently, establish investment accounts for these 
securities. The Exchange, accordingly, is proposing to eliminate 
Commentary .07 with respect to ETFs.
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    \17\ See supra note 9.
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    The Exchange also is proposing to correct erroneous cross 
references in Rules 1000(a) and 1000A(a) to the definitions of the 
terms ``derivative products'' and ``security or securities'' in the 
Exchange Constitution.
2. Statutory Basis
    As described above, the proposed rule change is consistent with 
Section 6(b) of the Act \18\ in general and furthers the objectives of 
Section 6(b) of the Act \19\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in

[[Page 66147]]

general, to protect investors and the public interest; and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers and dealers.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 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 and, in fact, may enhance competition among 
markets and market makers to the benefit of investors. Modifying the 
Exchange's stabilization rules will eliminate regulatory restrictions 
on Amex specialists that are not imposed upon their market maker 
competitors. Thus, the Exchange believes that the proposed rule change 
actually will reduce competitive burdens rather than imposing them. The 
Exchange also believes that the revisions also will facilitate the 
ability of Amex specialists to provide prompt execution of customer 
orders. The Exchange notes that these enhancements at the Amex may 
create new incentives for market makers in other market centers to 
compete more aggressively with Amex specialists to provide better 
service, thus benefiting investors generally.

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 date of 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 self-regulatory organization 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 Amex. All submissions should refer to File No. 
SR-Amex-2002-116 and should be submitted by December 16, 2003.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-29414 Filed 11-24-03; 8:45 am]
BILLING CODE 8010-01-P