[Federal Register Volume 72, Number 188 (Friday, September 28, 2007)]
[Notices]
[Pages 55262-55264]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-19163]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56495; File No. SR-Amex-2007-105]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Require That the AEMI Trading Platform Function To Assure Compliance 
With the Exchange's Priority and Parity Rules

September 21, 2007.
    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 September 18, 2007, 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 substantially by the 
Amex. The Amex has designated the proposed rule change as one 
constituting a stated policy, practice, or interpretation with respect 
to the meaning, administration, or enforcement of an existing rule 
under section 19(b)(3)(A)(i) of the Act \3\ and Rule 19b-4(f)(1) 
thereunder,\4\ which renders the proposal effective upon filing with 
the Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    In compliance with a Commission order in a recent administrative 
proceeding,\5\ the Amex proposes to adopt new Commentary .06 to Amex 
Rule 126-AEMI, ``Precedence of Bids and Offers,'' to provide that the 
Amex's new hybrid trading platform for equity products and exchange-
traded funds (``ETFs''), designated as AEMISM (``AEMI''), 
shall function at all times in a manner that assures compliance with 
the Amex's priority and parity rules. In particular, AEMI shall 
systemically prevent a Specialist attempting to execute his/her 
proprietary order from trading ahead of a customer order in the 
Specialist's possession or for which the Specialist otherwise has 
responsibility and which customer order could trade in place of some or 
all of the Specialist's side of the trade, unless the trade meets a 
specified exemption in the Exchange's rules.
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    \5\ See In the Matter of American Stock Exchange LLC, Order 
Instituting Administrative and Cease-and-Desist Proceedings, Making 
Findings, and Imposing Remedial Sanctions, a Censure, and a Cease-
and-Desist Order Pursuant to Sections 19(h)(1) and 21C of the 
Securities Exchange Act of 1934, Securities Exchange Act Release No. 
55507 (March 22, 2007) (Administrative Proceeding File No. 3-12594) 
(``Settlement Order'').
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    The proposed rule change is available at the Amex, in the 
Commission's Public Reference Room, and on the Amex's Web site at 
http://www.amex.com.

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 Amex 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 Amex 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 add to its AEMI rules a provision 
requiring that the AEMI platform function at all times in a manner that 
assures compliance with the Exchange's priority and parity rules. More 
specifically, AEMI must ensure that, when a Specialist is in the 
process of executing his/her proprietary order while a customer order 
in the Specialist's possession or for which the Specialist otherwise 
has responsibility could trade in place of some or all of the 
Specialist's side of the trade, AEMI will systemically (i) prevent the 
reporting of the execution, and (ii) allocate the appropriate portion 
of the Specialist's trade to the customer order, unless the trade meets 
a specified exemption in the Exchange's rules and has thereby been 
programmed into the AEMI system as an allowable trade. All of the 
Exchange's priority and parity rules for equity products and ETFs are 
pre-programmed into AEMI and may not be disabled or otherwise changed 
by the Specialist or any other market participant. The provision with 
the foregoing requirements is being added as new Commentary .06 to Amex 
Rule 126-AEMI.\6\
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    \6\ As noted above, the Amex is making this rule filing in 
compliance with the Settlement Order. See note 5, supra. The Amex 
has withdrawn its original filing with respect to this proposed rule 
change, SR-Amex-2007-50, which the Amex filed on May 21, 2007, and 
is replacing it with the current rule filing.
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    The Exchange believes that the new AEMI platform, as currently 
operational, does in fact meet the foregoing requirements.\7\ The 
implementation of AEMI, whose operation has been described in detail in 
previous filings, goes well beyond simply adding enhancements to the 
Amex's legacy trading systems to bring the Exchange into compliance. 
AEMI is an entirely new trading platform whose design and operation 
will, in transactions involving equity products and ETFs,\8\ prevent 
Specialists from violating the Exchange's priority and parity rules in 
ways that the Amex's legacy systems could not.
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    \7\ There are two exceptions to this statement that the Amex has 
recently become aware of and that the Amex is working to correct in 
the near future. First, there are certain circumstances immediately 
following the opening or reopening pair-off in an equity or ETF 
under which the Specialist's quotation could be routed out to 
execute against a better priced protected quotation of another 
market ahead of a marketable customer order on the AEMI Book. 
Secondly, the Exchange's rules provide for a post-opening pair-off 
of marketable orders held in the message queue during the opening 
pair-off. This post-opening pair-off is handled by the AEMI system 
in such a way that it could result in the Specialist's quote being 
executed ahead of marketable customer orders on the AEMI Book. 
Although the Amex does not believe that either of these situations 
occurs with any frequency and the Specialist has no ability to 
direct their occurrence, the Exchange is currently working to 
implement in a timely manner the software changes necessary to 
correct these system flaws and will make an additional rule filing 
at the time that the corrections become effective.
    \8\ Options are not traded on AEMI at this time.
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    Under normal circumstances, when auto-ex is enabled in AEMI, 
incoming orders are executed against resting orders on the AEMI Book in 
accordance with the Exchange's priority and parity rules that are pre-
programmed into the system. The system also permits manual trades to 
occur when auto-ex is enabled in the form of negotiated trades (between 
two crowd members), crosses in the crowd (one crowd member), and 
auctions (between multiple crowd members). When auto-ex is disabled, 
only auctions performed by the Specialists may occur (see discussion of 
auctions below).
    The following illustrates the steps involved in negotiated trades, 
which have been relatively infrequent during the first few months that 
AEMI has been in effect. Suppose two Floor Brokers negotiate the terms 
of a trade between them while standing in the crowd. They would then 
verbally request that the Specialist enter the trade into AEMI. Within 
a few seconds, the Specialist

[[Page 55263]]

would enter the badge identifiers of both Floor Brokers along with the 
terms of the trade (price and number of shares) into AEMI and click the 
``GO'' button, during which time the two Floor Brokers would be 
physically present. It would be very obvious to these Floor Brokers, 
and to other crowd members as well, if the Specialist were to attempt 
to delay the entry of the order into AEMI or take other action that 
would disadvantage the parties to the negotiated trade and benefit the 
Specialist (e.g., moving his quotation). AEMI would automatically 
validate that the trade meets all required parameters (e.g., the trade 
price relative to the Amex Published Quote (``APQ'')) and, if so, 
accepts the trade into AEMI for execution. If the price of the trade is 
outside the national best bid or offer (``NBBO''), then intermarket 
sweep orders are immediately generated as required to execute against 
the protected quotations of away markets, while the balance of the 
order prints on the Amex and is allocated based on the Exchange's 
priority and parity rules. In that allocation, electronic orders and 
quotations that already exist on the AEMI Book at the price of the 
verbal trade have priority over the verbal trade that has just been 
accepted by AEMI for execution. Following the allocation, AEMI will 
send a trade execution message to each Floor Broker's hand held 
terminal (``HHT'') with the number of shares allocated to the Floor 
Broker at the trade price. Each Floor Broker would then further 
allocate those shares among the customer orders in his/her HHT.
    The following example illustrates the automatic application of the 
priority and parity rules by AEMI in a situation involving a manual 
trade with auto-ex enabled. As provided in Rule 128B--AEMI, ``Auction 
Trades,'' a negotiated trade may take place only at or inside the APQ. 
A negotiated trade that takes place at the APQ automatically 
incorporates electronic orders and quotes already resident on the AEMI 
Book at the time of the print, because these orders and quotes have 
priority and standing over the verbal trade. For example, assume that 
the APQ for an ETF is 34.55 x 35.10 and the AEMI Book has 4,000 shares 
on the bid side at that price, comprised of a customer order for 3,000 
shares and the Specialist's bid for 1,000 shares. Assume that the 
customer order is a reserve order with a display size of 1,000 shares. 
Therefore, the size of the APQ on the bid side is 2,000 shares (the 
visible size of the reserve order and the Specialist's bid). Two Floor 
Brokers in the crowd wish to transact a negotiated trade for 5,000 
shares at the price of 34.55, a price that has been agreed to verbally 
and that must be entered into AEMI by the Specialist in order for the 
trade to represent a valid contract. When the Specialist prints the 
trade for the two Floor Brokers, the electronic orders at the price 
take priority and the seller will sell 3,000 shares to the customer 
reserve order (displayed and non-displayed liquidity), 1,000 shares to 
the Specialist's quote, and 1,000 shares to the contra party in the 
negotiated trade. The remaining 4,000 shares on the buy side of the 
negotiated trade expire. The 4,000 shares on the AEMI Book, including 
the Specialist's quote, take priority at the price because they 
represent passive liquidity already resident on the AEMI Book and the 
Specialist is not agent to the negotiated trade in the crowd. 
Similarly, a cross from a crowd member must interact with orders on the 
AEMI Book, with the exception of crosses that meet the size and value 
requirements outlined in Commentary .01 and .02 of Rule 126--AEMI, in 
which case they do not interact with orders already on the AEMI Book.
    Next, suppose that the negotiated trade in the crowd in the 
foregoing example is for only 1,000 shares. The priority and parity 
rules for ETFs in AEMI will automatically result in the seller 
executing all 1,000 shares against the displayed size of the customer 
reserve order, which has a higher priority than the Specialist's quote. 
On the other hand, if the negotiated trade had been for 2,000 shares, 
1,000 shares would have executed against the displayed size of the 
customer reserve order and 1,000 shares would have executed against the 
Specialist's quote, because the latter has a higher priority than the 
replenished reserve size (which is not visible liquidity). This is an 
example of a specified exemption in the Exchange's priority and parity 
rules that allows the Specialist to have a higher priority than part of 
a customer order.\9\
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    \9\ In addition to executing ahead of the replenished reserve 
size of customer reserve orders for both ETFs and equities, as 
provided by the Amex's priority and parity rules, the Specialist's 
quotation may also be executed, for both ETFs and equities under 
those rules, ahead of a percentage order that is a customer order 
and is elected by a trade event. In addition, for equities only, the 
Specialist's quotation may be executed ahead of some customer orders 
pursuant to the Amex priority and parity rules (and depending on 
whether public orders are also involved) under the following 
circumstances: (i) Parity allocation takes place among the 
Specialist's quotation in parity and the visible size of crowd 
customer orders in parity; and (ii) the Specialist's quotation and 
the visible size of certain crowd customer orders not in parity are 
executed based on time priority. See Amex Rule 126--AEMI (b) and 
(d).
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    Finally, a Specialist may conduct an auction when auto-ex is either 
enabled or disabled. In both circumstances, resting orders on the AEMI 
Book are automatically incorporated into the pair-off, and the parity 
and priority rules referred to above are systematically applied. When 
conducting a pair-off, the Specialist has agency responsibility to 
orders on the AEMI Book and may participate at the pair-off price but 
only after all other orders at the pair-off price trade first.
    In the circumstance when auto-ex is disabled, an auction pair-off 
would be conducted to resolve any imbalance and re-enable auto-ex. (If 
there were no imbalance, auto-ex could be re-enabled based simply on a 
quotation.) The only auction trade that can take place in this 
situation is one to resolve the imbalance. During the time that auto-ex 
is disabled, incoming orders, amendments, and cancellations continue to 
enter the AEMI Book and members may not trade in the open-outcry market 
except as part of the auction trade that re-enables AEMI. Any verbal 
involvement by crowd members would take place during the post-trade 
allocation process as follows. The Specialist would set the price of 
the pair-off, with the contra interest that is applied against the 
imbalance coming from marketable orders on the contra side of the AEMI 
Book (and with intermarket sweep orders being generated to away markets 
as necessary).\10\ Once the Specialist has set the auction price, he 
does not exercise any additional discretion that would influence the 
number of shares of the imbalance that he is allocated vis-[agrave]-vis 
the other members of the crowd. He must announce the price of the trade 
to the crowd before it is printed to the tape, so crowd members will 
know whether they are entitled to be part of the trade. Any remainder 
of the imbalance will be parity-allocated against the Specialist and/or 
eligible crowd participants represented electronically on the contra 
side of the AEMI Book. Each active crowd participant with a bid, offer, 
or order on the contra side of the aggressing order will receive a 
message from AEMI with the initial allocation that AEMI has 
automatically calculated for that crowd member. Following this initial 
post-trade allocation, those crowd participants who receive an initial 
allocation will verbally confirm their

[[Page 55264]]

participation or non-participation to the Specialist.\11\ The 
Specialist enters the necessary adjustments into AEMI, and AEMI will 
compute the revised individual allocations for each crowd member. AEMI 
will then immediately send a message to each of these crowd 
participants with their respective individual final trade allocations, 
with Floor Brokers completing an additional allocation of their 
individual trades to existing orders in their HHTs.
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    \10\ The Specialist may not be part of the pair-off at that 
price; he participates only in the absorption of the imbalance.
    \11\ If the Specialist were to ignore a particular crowd 
member's confirmation of participation (arguably so that the 
Specialist could execute more of the imbalance himself), this would 
be very obvious to the disadvantaged crowd member (because his 
allocation would go to zero from the number that he initially was 
assigned by AEMI), who could challenge the result. The Amex 
believes, in other words, that it is highly unlikely that the 
Specialist could get away with such a blatant act.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Regulation NMS, as well as Section 6(b) of the Act,\12\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act,\13\ 
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 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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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Amex believes that the proposed rule change does not impose any 
burden on competition that is 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 either solicited or received with respect 
to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change constitutes a stated 
policy, practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule, it has become 
effective pursuant to section 19(b)(3)(A)(i) of the Act \14\ and Rule 
19b-4(f)(1) thereunder.\15\ At any time within 60 days of the filing of 
the proposed rule change, the Commission may summarily abrogate such 
rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.
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    \14\ 15 U.S.C. 78s(b)(3)(A)(i).
    \15\ 17 CFR 240.19b-4(f)(1).
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IV. 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. Comments may be submitted by any of 
the following methods:

Electronic comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-Amex-2007-105 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Amex-2007-105. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Amex. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Amex-2007-105 and should be 
submitted on or before October 19, 2007.

    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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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-19163 Filed 9-27-07; 8:45 am]
BILLING CODE 8010-01-P