[Federal Register Volume 69, Number 42 (Wednesday, March 3, 2004)]
[Notices]
[Pages 10081-10085]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4715]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49319; File No. SR-Amex-2003-39]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1, 2, 3 and 4 Thereto by the American Stock 
Exchange LLC To Adopt an Obvious Error Rule and Half-Point Error 
Guarantee for Trades on the Exchange in Nasdaq National Market 
Securities

February 25, 2004.
    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 April 30, 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, II, 
and III below, which Items have been prepared by the Exchange. The Amex 
submitted Amendment No. 1 to the proposed rule change on October 15, 
2003.\3\ The Amex submitted Amendment No. 2 to the proposed rule change 
on November 21, 2003.\4\ The Amex submitted Amendment No. 3 to the 
proposed rule change on December 10, 2003.\5\ The Amex submitted 
Amendment No. 4 to the proposed rule

[[Page 10082]]

change on February 2, 2004.\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 Bill Floyd Jones, Associate General Counsel, 
Amex, to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated October 14, 2003 
(``Amendment No. 1''). Amendment No. 1 replaced the original 
proposed rule change in its entirety.
    \4\ See Letter from Bill Floyd Jones, Associate General Counsel, 
Amex, to Nancy J. Sanow, Assistant Director, Division, Commission, 
dated November 20, 2003 (``Amendment No. 2''). Amendment No. 2 
replaced the original proposed rule change and Amendment No. 1 in 
their entirety.
    \5\ See Letter from Bill Floyd Jones, Associate General Counsel, 
Amex, to Nancy J. Sanow, Assistant Director, Division, Commission, 
dated December 9, 2003 (``Amendment No. 3''). Amendment No. 3 
replaced the original proposed rule change and Amendment Nos. 1 and 
2 in their entirety. In Amendment No. 3, Amex also represented that 
Exchange Staff plans to propose the adoption of an obvious error 
rule similar to proposed Amex Rule 118(l) for Amex listed securities 
similar to that contained in the proposed rule change, at the next 
regularly scheduled Amex board meeting.
    \6\ See Letter from Bill Floyd Jones, Associate General Counsel, 
Amex, to Nancy J. Sanow, Assistant Director, Division, Commission, 
dated January 30, 2004 (``Amendment No. 4''). In Amendment No. 4, 
Amex revised the proposed rule change to: (1) make technical 
amendments to the rule text to better reflect the proposed rule 
change, and (2) confirm that the Exchange has determined for 
business reasons not to extend the half-point error guarantee to 
other securities traded on the Exchange at this time.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to adopt an obvious error rule and half point 
error guarantee for transactions on the Exchange in Nasdaq National 
Market securities.
    The text of the proposed rule change is below. Additions are 
italicized:
* * * * *

Trading in Nasdaq National Market Securities

Rule 118. (a) through (j) No change.
    (k) Reserved
    (l) Clearly Erroneous Transactions in Nasdaq National Market 
Securities--
    (i) A Floor Official shall, pursuant to the procedures set forth in 
below, have the authority to review any transaction in a Nasdaq 
National Market security that is claimed to be clearly erroneous 
arising out of the use or operation of any facility of the Exchange. In 
reviewing a trade in a Nasdaq National Market security that is claimed 
to be clearly erroneous, a Floor Official shall review the transaction 
with a view toward maintaining a fair and orderly market and the 
protection of investors and the public interest. Based upon this 
review, the Floor Official shall decline to ``break'' a disputed 
transaction if the Floor Official believes that the transaction under 
dispute is not clearly erroneous. If the Floor Official determines the 
transaction in dispute is clearly erroneous, however, he or she shall 
declare that the transaction is null and void or modify one or more 
terms of the transaction. When adjusting the terms of a transaction, 
the Floor Official shall seek to adjust the price and/ or size of the 
transaction to achieve an equitable rectification of the error that 
would place the parties to a transaction in the same position, or as 
close as possible to the same position, as they would have been in had 
the error not occurred. For the purposes of this Rule, the terms of a 
transaction are clearly erroneous when there is an obvious error in any 
term, such as price, number of shares or other unit of trading, or 
identification of the security.
    (ii) Any member who seeks to have a transaction reviewed pursuant 
to subparagraph (i) above shall submit the matter to a Floor Official 
and deliver a written complaint to Service Desk within 30 minutes of 
the transaction. Once a complaint has been received, the complainant 
shall have up to thirty 30 minutes, or such longer period as the Floor 
Official may specify, to submit any supporting written information 
concerning the complaint necessary for a review of the transaction. The 
other party to the trade shall have up to thirty minutes after being 
notified of the complaint, or such longer period as specified by the 
Floor Official, to submit any supporting written information concerning 
the complaint necessary for a review of the transaction. Either party 
to a disputed trade may request the written information provided by the 
other party pursuant to this subparagraph. Once a party to a disputed 
trade communicates that he or she does not intend to submit any further 
information concerning a complaint, the party may not thereafter 
provide additional information unless requested to do so by the Floor 
Official. If both parties to a disputed trade indicate that they have 
no further information to provide concerning the complaint before their 
respective thirty-minute information submission period has elapsed, 
then the matter may be immediately considered by a Floor Official. 
Members or persons associated with members and member organizations 
involved in the transaction shall provide the Floor Official with any 
information that he or she requests in order to resolve the matter on a 
timely basis notwithstanding the time parameters set forth above. Once 
a member has applied to a Floor Official for a ruling, the Floor 
Official shall review the transaction and make a ruling unless both 
parties to the transaction agree to withdraw the application for review 
prior to the time that the Floor Official makes the ruling. A member 
may seek review of a Floor Official's ruling pursuant to the procedures 
described in Rule 22(d) and Commentary .02 to Rule 22.
    (iii) In the event of (1) a disruption or malfunction in the use or 
operation of any facility of the Exchange, (2) a disruption or 
malfunction in the use or operation of any facility of Nasdaq that 
results in Nasdaq nullifying or modifying trades in the Nasdaq market 
pursuant to its rules, or (3) extraordinary market conditions or other 
circumstances in which the nullification or modification of 
transactions executed on the Exchange in Nasdaq National Market 
securities may be necessary for the maintenance of a fair and orderly 
market or the protection of investors and the public interest, a Floor 
Governor may review any transactions arising out of or reported through 
any facility of the Exchange; provided, however, that a Floor Governor 
may not review transactions arising out of the use or operation of any 
execution or communication system owned or operated by Nasdaq. Prior to 
the nullification or modification of transactions as a result of a 
disruption or malfunction in the use or operation of any facility of 
Nasdaq, the Exchange must receive confirmation from NASD or Nasdaq that 
there is a disruption or malfunction on Nasdaq's market that has 
resulted in the nullification or modification of trades in that market. 
A Floor Governor acting pursuant to this subsection may declare any 
Amex transaction null and void or modify the terms of any such 
transactions if the Floor Governor determines that (1) the transaction 
is clearly erroneous, or (2) such actions are necessary for the 
maintenance of a fair and orderly market or the protection of investors 
and the public interest; provided, however, that, in the absence of 
extraordinary circumstances, the Floor Governor must take action 
pursuant to this subsection within thirty (30) minutes of detection of 
the transaction, but in no event later than 3 p.m., Eastern Time, on 
the next trading day following the date of the trade at issue. A member 
may seek review of a Floor Governor's ruling from a three Governor 
Panel as described in Rule 22(d) and Commentary .02 to Rule 22 without 
first seeking review of the ruling from a Floor Official or Exchange 
Official.
    (m) Half-Point Error Guarantee. The provisions of Rule 129 shall 
not apply to orders for Nasdaq National Market securities of 1,000 
shares or less received by the specialist through the Exchange's 
electronic order routing system (``System''). As to such orders, 
erroneous execution reports sent by the specialist via the System shall 
be binding except that (i) if the erroneous report is at a price which 
is more than $.50 away from the execution price, then the price of the 
execution shall be binding, and (ii) if the member organization that 
entered the order requests a correction from the specialist prior to 
the opening on the second business day following the day of the 
transaction, the specialist shall correct

[[Page 10083]]

the execution report to the price of the execution and that price shall 
be binding. If the erroneous execution report sent by the specialist is 
at a price which is more than $.50 away from the execution price and if 
a transaction has appeared on the tape at the price of the erroneous 
report and in a quantity equal to or exceeding the amount reported, the 
specialist must render a corrected report no later than noon on the 
business day following the day of the transaction. If not so corrected, 
the specialist will be responsible for any resulting loss. However, as 
to limit orders, erroneous execution reports sent by the specialist 
shall also not be binding where the subject security did not trade at 
or below (or above, as the case may be) the limit price specified on 
the order on that trading day.
    (n) Rule 390 shall not preclude a member, member organization, 
allied member, registered representative, or officer from sharing or 
agreeing to share in any losses in any customer's account with respect 
to Nasdaq National Market securities after the member organization has 
established that the loss was caused in whole or in part by the action 
or inaction of such member, member organization, allied member, 
registered representative or officer, provided, however, that this 
provision shall not permit a member, member organization, allied 
member, registered representative or officer to guarantee any customer 
against loss in his account. Commentary: No Change.
* * * * *

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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Trades in Nasdaq securities may occur at clearly erroneous prices 
due to human or system errors. The Exchange, accordingly, is proposing 
to adopt an obvious error rule for use on the Exchange in connection 
with unlisted trading privileges (``UTP'') transactions on the Exchange 
in Nasdaq securities. New Amex Rule 118(l) would be similar to Rule 
11890 (Clearly Erroneous Transactions) of the National Association of 
Securities Dealers, Inc. (``NASD'') for the Nasdaq Stock Market.
    Like the NASD's rule, the proposed Amex obvious error rule would 
allow the Exchange to break or revise single or multiple trades that 
are obviously erroneous. Under the proposed rule, a member may request 
an Amex Floor Official \7\ to review a transaction that is claimed to 
be clearly erroneous. Once a ruling is requested, a Floor Official must 
review the trade unless both parties agree to withdraw the application 
before the Floor Official makes a ruling.
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    \7\ Floor Officials are deemed to be Officers of the Exchange. 
See Amex Rule 22(c). Floor Officials are generally responsible for 
the supervision of operations the Exchange Floor. There are four 
classifications of Floor Official. In ascending order of 
responsibility, these classifications are: (1) Floor Official, (2) 
Exchange Official, (3) Senior Floor Official, and (4) Senior 
Supervisory Officer. The Vice Chairman of the Exchange is a Floor 
Governor and serves as the Senior Supervisory Officer. Governors of 
the Exchange that spend a significant amount of time on the Floor 
are Senior Floor Officials. Numerous provisions of the Exchange's 
rules specifically call for Floor Official involvement in the 
Exchange's operations.
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    The proposed rule requires a Floor Official to review a transaction 
or series of transactions with a view toward maintaining a fair and 
orderly market and the protection of investors and the public interest. 
Based upon this review, a Floor Official would decline to ``break'' a 
disputed transaction if the Floor Official believes that the 
transaction under dispute is not clearly erroneous. If the Floor 
Official determines the transaction in dispute is clearly erroneous, 
however, the Floor Official may declare the transaction null and void 
or modify one or more terms of the transaction. When adjusting the 
terms of a transaction, the Floor Official would seek to adjust the 
price and/or size of the transaction to achieve an equitable 
rectification of the error that would place the parties to a 
transaction in the same position, or as close as possible to the same 
position, as they would have been in had the error not occurred.
    Subparagraph (ii) of proposed Amex Rule 118(l) establishes 
deadlines and procedures for Floor Official review of a disputed 
transaction. Any member who seeks to have a transaction or series of 
transactions reviewed must submit the matter to a Floor Official and 
deliver a written complaint to Service Desk within 30 minutes of the 
transaction. Once a complaint has been received, the complainant would 
have up to thirty 30 minutes, or such longer period as the Floor 
Official may specify, to submit any supporting written information 
concerning the complaint necessary for a review of the transaction. The 
other party to the trade would have up to thirty minutes after being 
notified of the complaint, or such longer period as specified by the 
Floor Official, to submit any supporting written information concerning 
the complaint necessary for a review of the transaction. Either party 
to a disputed trade may request the written information provided by the 
other party. Once a party to a disputed trade communicates that he or 
she does not intend to submit any further information concerning a 
complaint, the party may not thereafter provide additional information 
unless requested to do so by the Floor Official. If both parties to a 
disputed trade indicate that they have no further information to 
provide concerning the complaint before their respective thirty-minute 
information submission period has elapsed, then the matter may be 
immediately considered by a Floor Official. Members or persons 
associated with members and member organizations involved in the 
transaction would be required to provide the Floor Official with any 
information that he or she requests in order to resolve the matter on a 
timely basis.
    Subparagraph (iii) of proposed Amex Rule 118(l) provides that, in 
the event of (1) a disruption or malfunction in the use or operation of 
any facility of the Exchange, (2) a disruption or malfunction in the 
use or operation of any facility of Nasdaq that results in the 
nullification or modification of trades in that market,\8\ or (3) 
extraordinary market conditions or other circumstances in which the 
nullification or modification of transactions in Nasdaq National Market 
securities may be necessary for the maintenance of a fair and orderly 
market or the protection of investors and the public interest, a Floor 
Governor may review any transactions arising out of or reported through 
any facility of the Exchange. A Floor Governor acting pursuant to this 
subsection may declare any Amex transaction null and void or modify the 
terms of any such transactions if the Floor Governor determines that 
(1) the transaction is clearly erroneous, or (2)

[[Page 10084]]

such actions are necessary for the maintenance of a fair and orderly 
market or the protection of investors and the public interest; 
provided, however, that, in the absence of extraordinary circumstances, 
the Floor Governor must take action pursuant to proposed Amex Rule 
118(l)(iii) within thirty minutes of detection of the transaction, but 
in no event later than 3 p.m., Eastern Time, on the next trading day 
following the date of the trade at issue.
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    \8\ Prior to the nullification or modification of transactions 
as a result of a disruption or malfunction in the use or operation 
of any facility of Nasdaq, the Exchange must receive confirmation 
from NASD or Nasdaq that there is a disruption or malfunction on 
Nasdaq's market that has resulted in the nullification or 
modification of trades in that market.
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    A member seeking a prompt, i.e., prior to settlement, review of a 
Floor Official's ruling under proposed Amex Rule 118(l) would follow 
the procedures outlined in Amex Rule 22(d). These procedures provide 
possible appeals first to an Exchange Official, next to a Floor 
Governor, and finally to a three governor panel. Proposed Amex Rule 118 
also provides that a member aggrieved by a Floor Governor's ruling 
under subsection (iii) of the proposed rule may appeal the ruling 
directly to a three Governor panel pursuant to Amex Rule 22(d) and 
Commentary .02. Commentary .02 to Amex Rule 22 requires Floor Officials 
to prepare and submit a written record of their decisions as soon as 
practical after making a ruling.\9\ Floor Officials, consequently, 
would have to prepare and submit written decisions regarding rulings on 
trades that may be clearly erroneous. The Commission recently reviewed 
and approved amendments to the Exchange's procedures for appealing 
Floor Official rulings.\10\
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    \9\ Floor Governors would also have to comply with similar 
procedures under this rule. Telephone Conversation between Bill 
Floyd Jones, Associate General Counsel, Amex, and Ian K. Patel, 
Attorney, Division, Commission, dated January 16, 2004.
    \10\ See, Securities Exchange Act Release No. 47078 (December 
30, 2002), 67 FR 79668 (December 20, 2002) (SR-Amex-2001-07).
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    In conjunction with the adoption of an obvious error rule, the 
Exchange also proposes the adoption of a Half-Point Error Guarantee for 
transactions in Nasdaq stocks (proposed Amex Rule 118(m)). The proposed 
Amex error guarantee would allow small investors to rely upon reports 
of executions of system orders of sizes that may be designated by the 
Exchange from time to time where the report is within $.50 of the 
execution price. System orders of 1,000 shares or less would be 
eligible for the Half-Point Error Guarantee.
    As to such others, erroneous execution reports sent by the 
specialist via the Exchange's electronic order routing system would be 
binding except that if the erroneous report is at a price which is more 
than $.50 away from the execution price, then the execution price would 
be binding. In addition, if the member organization that entered the 
order requests a correction from the specialist prior to the opening on 
the second business day following the day of the transaction, the 
specialist would correct the execution report to the price of the 
execution and that price would be binding. If the erroneous execution 
report sent by the specialist is at a price which is more than $.50 
away from the execution price and if a transaction has appeared on the 
tape at the price of the erroneous report and in a quantity equal to or 
exceeding the amount reported, the specialist would be required to 
render a corrected report no later than noon on the business day 
following the day of the transaction. If not so corrected, the 
specialist would be responsible for any resulting loss. However, as the 
limit orders, erroneous execution reports sent by the specialist would 
also not be binding where the subject security did not trade at or 
below (or above, as the case may be) the limit price specified on the 
order on that trading day.\11\ The Exchange believes that the Half-
Point Error Guarantee would encourage investors to use the Exchange's 
electronic order routing facilities.\12\
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    \11\ Thus, if the subject security did not trade at or below 
(above) the limit price specified on the order on that trading day, 
then the provisions of Amex Rule 129 would apply. If the subject 
security did trade at or below (above) the limit price specified on 
the order on that trading day, then the Half-Point Error Guarantee 
would apply. Telephone conversation between Bill Floyd Jones, 
Associate General Counsel, Amex, David Fisch, Managing Director, 
Amex, Susie Cho, Special Counsel, Division, Commission, and Ian 
Kiran Patel, Attorney, Division, Commission, on January 29, 2004.
    \12\ Proposed Amex Rule 118(m) is similar to New York Stock 
Exchange, Inc. Rule 123B(b)(2).
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    To implement the Half-Point Error Guarantee, the Exchange also is 
proposing to adopt a rule (Rule 118(n)) that would codify current 
practice with respect to the resolution of errors in Nasdaq securities 
traded on the Exchange. The proposed rule change would state that 
members and member organizations may share in losses in a customer's 
account when the member or member organizations determine that the 
member or firm was responsible for the loss.\13\
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    \13\ Proposed Amex Rule 118(n) is based upon Supplementary 
Material .20 to NYSE Rule 352. The Exchange has represented that it 
plans to propose an obvious error rule for listed securities. See 
supra n. 5. However, for business reasons, the Exchange does not 
plan to propose a Half-Point Error Guarantee for listed securities. 
See Amendment No. 4, supra note 6.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \14\ in general and furthers the 
objectives of Section 6(b) \15\ 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.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 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 not necessary or appropriate in furtherance of 
the purposes of the Act.

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 Exchange 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. Comments may also be submitted electronically at the 
following e-mail address: [email protected]. All comment letters 
should refer to File No. SR-Amex-2003-39. This file number

[[Page 10085]]

should be included on the subject line if e-mail is used. To help the 
Commission process and review your comments more efficiently, comments 
should be sent in hardcopy or by e-mail but not by both methods. 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 2003-39 and 
should be submitted by March 24, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-4715 Filed 3-2-04; 8:45 am]
BILLING CODE 8010-01-P