[Federal Register Volume 72, Number 53 (Tuesday, March 20, 2007)]
[Notices]
[Pages 13146-13147]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-5005]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55464; File No. SR-Amex-2007-08]
Self-Regulatory Organizations; American Stock Exchange LLC; Order
Granting Approval of a Proposed Rule Change to Establish a Passive
Price Improvement Order for Specialists and Registered Traders
March 13, 2007.
I. Introduction
On January 19, 2007, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder.\2\ The proposed rule change was published for comment in
the Federal Register on February 2, 2007.\3\ The Commission received
one comment letter.\4\ On March 12, 2007, Amex submitted a response to
the comment letter.\5\ This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Release Act 55179 (January 26,
2007), 72 FR 05091 (February 2, 2007).
\4\ See Letter from Christopher Cornette, Member, Amex, to
Florence E. Harmon, Deputy Secretary, Commission, received February
14, 2007.
\5\ See Letter from Claire P. McGrath, Senior Vice President &
General Counsel, Amex, to Nancy M. Morris, Secretary, Commission,
dated March 12, 2007 (``Amex Response Letter'').
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II. Description of the Proposal
Amex proposes to amend the rules for its AEMI trading platform \6\
to add a Passive Price Improvement (``PPI'') order type. PPI orders are
undisplayed orders that, to execute, would have to be inside the
automated best bid and offer of the Exchange (also referred to as the
``Amex Published Quote'' or ``APQ'') by at least a tick. They would be
the only method for Specialists and Registered Traders to offer price
improvement electronically. A Specialist or Registered Trader would
have to have at least one active quote on a particular side of a
security on the AEMI book to enter and maintain a PPI order in the same
security on the same side. A Specialist or Registered Trader that meets
this quoting requirement could enter only one PPI order on each side
for a security. A PPI order could not form part of the APQ and would be
visible only to the entering Specialist or Registered Trader (or his
firm).
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\6\ See Securities Exchange Act Release No. 54552 (September 29,
2006), 71 FR 59546 (October 10, 2006).
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AEMI would make a PPI order eligible for execution if at least one
of the following conditions were met:
1. The Specialist's or Registered Trader's displayed quote is at
the APQ on the side of the PPI order that would be executed. In this
case, the PPI order would be executed up to (a) the size of the
Specialist's or Registered Trader's displayed quote on that side or (b)
the size of the incoming order, whichever is smaller.
2. The Specialist's or Registered Trader's displayed quote is one
tick away from the APQ on the side of the PPI order that would be
executed. In this case, the PPI order would be executed up to (a) half
of the size of the Specialist's or Registered Trader's displayed quote
on that side or (b) the size of the incoming order, whichever is
smaller.
The AEMI system would ignore (i.e., make ineligible for execution
against an otherwise marketable aggressing order, without canceling)
the remaining size of a PPI order beyond the thresholds described
above.\7\ The AEMI system would also ignore a PPI order in the
following circumstances:
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\7\ For example, assume that a Specialist's bid for 1,000 shares
is part of the Amex best bid and there are no better-priced
protected quotations at other trading centers. The Specialist has a
PPI order to buy 3,000 shares priced one tick better than the Amex
best bid. Assume that an incoming market order to sell 3,000 shares
is received by AEMI. The system would execute 1,000 shares against
the Specialist's PPI order, and the remainder would execute one tick
down at the Amex best bid (based on the Exchange's rules of priority
and parity). The remaining size of the PPI order (2,000 shares) is
ignored because the PPI order may execute only up to the size of the
Specialist's displayed bid at the APQ.
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The PPI order locks or crosses the automated NBBO or APQ
as a result of a change in the automated NBBO or APQ;
The PPI order equals the APQ on the same side of the
market;
[[Page 13147]]
There is a negotiated trade; or
AEMI's auto-execution functionality is disabled.
In addition, the AEMI system would cancel a PPI order in three
circumstances: (1) if the Specialist's or Registered Trader's best
quote is withdrawn; (2) at the end of the day; or (3) there is a
trading halt in the security.
If there were multiple PPI orders at the same price, the
Specialist's PPI order would have priority, and any remaining size of
an aggressing order would be executed against Registered Trader PPI
orders in time priority. Intermarket sweep orders would be generated as
necessary to clear any better-priced protected quotations at other
trading centers before executing any PPI orders on the AEMI system.
To reflect the proposed rule change as described above, changes are
proposed to the following AEMI rules: Rule 123-AEMI (Manner of Bidding
and Offering), Rule 131-AEMI (Types of Orders), Rule 157-AEMI (Orders
with More than One Broker), and Rule 170-AEMI (Registration and
Functions of Specialists).
III. Summary of Comments and Amex Response
The Commission received one comment letter opposing the proposed
rule change. The commenter argued that limiting the use of PPI Orders
to Specialists and Registered Traders gives them ``an unfair
advantage'' and thus is not consistent with Section 6(b) of the Act.
The commenter noted that the Specialist would have access to
aggressing orders that could be price-improved but Floor Brokers would
not. The commenter suggested that there would be many instances where
Floor Brokers would be willing to provide price improvement but would
not publicly display such interest in order to minimize any potential
market impact. The commenter also suggested that PPI Orders could be
misused to trade ahead of a Floor Broker's marketable orders instead of
providing price improvement.
In its response to comments, Amex asserted that Floor Brokers are
able to operate effectively and compete with Specialists and Registered
Traders. For example, Amex pointed out that Floor Brokers have the
exclusive use of certain order types on AEMI (e.g., percentage orders
and reserve orders). Amex also emphasized that the use of PPI Orders
would be monitored and policed electronically. Amex stated that its
regulatory program would be able to detect possible unfair trading
practices. Finally, Amex represented that it ``is in the process of
developing the means by which other market participants, including
floor brokers, would have the ability to systematically provide such
price improvement.'' \8\
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\8\ Amex Response Letter at 1.
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IV. Discussion and Commission's Findings
After careful consideration, 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.\9\ In particular, the Commission finds that the proposal is
consistent with the requirements of Section 6(b)(5) of the Act,\10\
which requires, among other things, that the Exchange's rules be
designed 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 general to protect investors and the
public interest.
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\9\ In approving this proposed rule change, the Commission notes
that it has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\10\ 15 U.S.C. 78f(b)(5).
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The Commission previously has found similar exchange rules to be
consistent with the Act.\11\ The Commission does not believe that the
comment raises any issue that would preclude approval of the current
proposal. As the Commission noted in the NYSE Hybrid Approval Order,
Specialists today are permitted to offer price improvement to incoming
orders in the auction market.\12\ In this proposal, Amex seeks to
provide its Specialists and Registered Traders with the ability to
continue to offer price improvement in an electronic environment, but
only if certain conditions are met. A Specialist's or Registered
Trader's PPI order is eligible for execution only if its quote on the
same side of the market is at or one tick away from the APQ. If the
Specialist's or Registered Trader's quotation is at the APQ, a PPI
order is eligible to execute up to the same size as its quotation; if
it is one tick away from the APQ, the PPI order is eligible to execute
up to one half the size of its quotation. A PPI order will be ignored
if the Specialist's or Registered Trader's quotation is more than one
tick away from the APQ. Thus, a Specialist's ability to benefit from
the PPI order is directly correlated with the extent to which it quotes
competitive markets in size. The Commission notes, moreover, that Amex
has represented that it ``is in the process of developing the means by
which other market participants, including floor brokers, would have
the ability to systematically provide such price improvement.'' \13\
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\11\ See Securities Exchange Act Release Nos. 53539 (March 22,
2006), 71 FR 16353, 16381-82 (March 31, 2006) (``NYSE Hybrid
Approval Order'') and 54511 (September 25, 2006), 71 FR 58460
(October 3, 2006).
\12\ See 71 FR at 16382.
\13\ Amex Response Letter at 1.
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The Commission further notes that a PPI order could execute only
against a marketable incoming limit order. An incoming order that is
not marketable against a PPI order (or a protected quotation) and that
improves the APQ would be quoted as part of the new APQ.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (SR-Amex-2007-08), be, and it
hereby is, approved.
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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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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-5005 Filed 3-19-07; 8:45 am]
BILLING CODE 8010-01-P