[Federal Register Volume 61, Number 192 (Wednesday, October 2, 1996)]
[Notices]
[Pages 51476-51478]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25225]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37728; File No. SR-AMEX-96-10]
Self-Regulatory Organizations; American Stock Exchange, Inc.;
Order Granting Approval To Proposed Rule Change Relating to the
Implementation of a Wireless Data Communications Infrastructure
September 26, 1996.
I. Introduction
On March 27, 1996, the American Stock Exchange, Inc. (``Amex'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder, \2\ a proposed rule change to amend Exchange Rules 60 and
220 and to adopt a policy regarding the use of wireless data
communications devices at the Exchange (``Wireless Communications
Policy'').\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Exchange also submitted a letter discussing the impact
of the Infrastructure on the Exchange's surveillance program. See
Letter from Bill Floyd-Jones, Jr., Assistant General Counsel, Amex,
to Jon E. Kroeper, SEC, dated April 4, 1996.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 37161 (May 2, 1996), 61 FR 20871 (May 8,
1996). Two comment letters, from the same commenter, were received on
the proposal.\4\ The Amex submitted one letter supporting its proposal
and responding to Comment Letter No. 1.\5\ For the reasons discussed
below, the Commission has decided to approve the Amex proposal.
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\4\ See Letter from Bradford L. Jacobowitz, General Counsel,
Interactive Brokers LLC, to Jonathan G. Katz, Secretary, SEC, dated
May 29, 1996 (``Comment Letter No. 1''), and Letter from Bradford L.
Jacobowitz, General Counsel, Interactive Brokers LLC, to Elisa
Metzger, SEC, dated August 12, 1996 (``Comment Letter No. 2'').
\5\ See Letter from Bill Floyd-Jones, Jr., Assistant General
Counsel, Amex, to Elisa Metzger, SEC, dated July 11, 1996 (``Amex
Letter'').
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II. Description of the Proposal
The Exchange has undertaken the development of an infrastructure
(``Infrastructure'') to accommodate the use of hand-held wireless data
communications devices on the Trading Floor. In connection with the
implementation of the Infrastructure, the Exchange seeks to amend Rule
220 to explicitly provide that the Exchange may regulate communications
between points on the Floor. The Exchange also seeks to adopt a
Wireless Communications Policy regarding the use of wireless data
communications devices at the Exchange. The Wireless Communications
Policy will address the following issues:
1. The ability of the Exchange to administer wireless data
communications on a real time basis (e.g., the implementation of a
protocol for prioritizing and/or managing message traffic during
periods of extraordinary use);
2. Surveillance of wireless data communications;
3. Member, member firm and Exchange preservation of records of
orders and trades;
4. Security with respect to confidential wireless transmissions
and access to the Infrastructure;
5. Review and approval of member and member firm applications to
use wireless data communications devices;
6. The fair allocation of a finite resource (i.e., radio
frequency bandwidth);
7. Exchange fees and allocation of expenses associated with the
implementation, operation of, and enhancements to, the
Infrastructure;
8. Sanctions for violations of the Exchange's Wireless
Communications Policy;
9. Inspection and oversight of wireless data communications
technology; and
10. The design and implementation of the Infrastructure.
In addition, the Exchange proposes to adopt new Commentary .03 to
Rule 60 which will provide that, in connection with member or member
organization use of any electronic system, service, or facility
provided by the Exchange to members for the conduct of their business
on the Exchange: (i) The Exchange may expressly provide in the contract
with any vendor providing all or part of such electronic system,
service, or facility to the Exchange, that such vendor and its
subcontractors shall not be liable to members or member organizations
for any damages sustained by a member or member organization growing
out of the use or enjoyment of such electronic system, service, or
facility by the member or member organization; and (ii) members and
member organizations shall indemnify the Exchange and any vendor and
subcontractor covered by subsection (i) above with regard to any third
party claims relating to the member or member organization's use of
such electronic system, service, or facility.
III. Summary of Comments
The Commission received two comment letters regarding the Wireless
Communications Policy.\6\ The commenter discussed the following aspects
of the Wireless Communications Policy: (1) The requirement that all
wireless communications that leave, enter or travel between points on
the Floor must first pass through a Gateway Subsystem, (2) the fair
allocation of
[[Page 51477]]
radio frequencies, (3) the availability of wireless communications for
Exchange members who have not acquired or developed their own system,
and (4) the fee imposed for the use of this system.
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\6\ See supra note 4.
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The commenter raised several concerns regarding the required use of
the Gateway Subsystem. The commenter believes that the Gateway
Subsystem will slow the transmission of orders to the floor broker, and
that this delay will ``retard price efficiencies, and make competitive
efforts to enhance the speed of order routing useless * * *.'' \7\ In
addition, the commenter believes that the delay in transmitting orders
caused by the Gateway Subsystem is not necessary for surveillance and
recordkeeping purposes.
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\7\ See Comment Letter No. 1 at 2.
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The commenter further stated that it is anti-competitive for the
Exchange to require that all users of hand held terminals use the
Gateway Subsystem. Specifically, the commenter believes that those
members who spend the money to develop their own technology will be
subject to the same disadvantages of the Gateway Subsystem as those
members who do not develop their own system. Further, those members who
develop their own system will not be able to fully benefit from their
technological developments.
The Exchange responded to these comments stating that it
anticipates a delay of only two seconds as a result of routing messages
through the Gateway Subsystem. Further, any such delay will be imposed
equally on all users of wireless technology. The Exchange also
addressed the issue of audit trail information and stated that orders
transmitted by wireless communication devices would be subject to the
same audit trail requirements as all other orders.
The commenter also raised concerns regarding the exclusive use of
the 2.4 GHz radio frequency. The commenter stated that the exclusive
use of this frequency would limit the number of persons that could use
the wireless system. As an alternative, the commenter suggested that
the Exchange also permit the use of the 902 Mhz frequency and the use
of infrared technology.
The Exchange explained that it rejected the use of the 902 Mhz
frequency because the 902 Mhz frequency could only carry ten percent of
the message traffic that the 2.4 Ghz frequency could transmit. In
addition, the Exchange believes that it did not make economic sense to
build two separate Wireless Infrastructures to accommodate two
different frequencies, one of which is a more antiquated frequency. The
Exchange also explained that infrared technology was not an option
because infrared technology requires unobstructed sight lines, which is
not easily accommodated on the Exchange's two trading floors.
The commenter raised issues regarding the anti-competitive
implications of the Exchange providing wireless communications devices
for Exchange members who have not acquired or developed their own
systems. The commenter is concerned that those members who develop
their own systems will be subject to the same time delays as those
members who have not made such an investment. In addition, the
commenter asserts that the fee that the Exchange plans to charge for
the use of the Gateway Subsystem is ``tantamount to a double
`technology tax' and is a disincentive to the development of
proprietary systems.'' \8\ The commenter believes that this fee will
require developers of technology to pay for their own system and the
Gateway Subsystem.
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\8\ See Comment Letter No. 1 at 3.
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The Exchange responded to these comments stating that there will be
a separate fee for those members who use the Exchange's communications
devices. In addition, members will be free to develop their own
communications device that may be better and more efficient than the
Exchange's communications devices. Further, the Exchange states that
its wireless initiative will benefit the public by providing for
appropriate management and surveillance of this new technology.\9\
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\9\ Prior to submitting the proposed rule changes, the Exchange
received three written responses to an Amex letter dated February
29, 1996, addressed to all members and member firms regarding the
implementation of the Infrastructure and anticipated user fees for
wireless data communications devices on the Floor. The three
responses to the Exchange's letter concerned objections to the
proposed fee structure. The Exchange decided that the specifics of
the per device fee would not be determined until the fall of 1997,
giving the Exchange a period of time to observe the Infrastructure
in operation. A per device fee will not be imposed prior to that
time. In addition, once imposed, the monthly fee will be capped at
$250 per device.
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IV. Discussion
After careful consideration of the comments and the Amex response
thereto, the Commission has determined to approve the proposed rule
change. For the reasons discussed below, 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, and, in particular, with the requirements of
Section 6(b).\10\ In particular, the Commission believes the proposal
is consistent with the Section 6(b)(5) requirements that the rules of
an exchange be designed to promote just and equitable principles of
trade, to prevent fraudulent and manipulative acts, remove impediments
to and perfect the mechanism of a free and open market, and, in
general, to protect investors and the public interest.
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\10\ 15 U.S.C. 78f(b).
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The Commission believes that the Wireless Communication Policy
should remove impediments to and perfect the mechanism of a free and
open market, and protect investors and the public interest by
expediting and making more efficient the process by which members
receive and execute orders on the floor of the Exchange. While the
commenter raised concerns regarding the time delay caused by the
requirement that all communications go through the Gateway Subsystem,
it is anticipated that the time delay will consist of two seconds.
Further, the requirement that all orders pass through the Gateway
Subsystem and the proposed amendment to Rule 220 will permit the
Exchange to continue regulating and monitoring communications between
points on the Floor.
In addition, all users of wireless communications devices will be
required to capture electronically, all information regarding their
transactions on the Floor that is required by the Commission's rules
and the Exchange's rules.\11\ Accordingly, audit trail information
should be more accurate than current information which is recorded
manually on order tickets or trading cards.
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\11\ The Commission notes that members, brokers, and dealers are
subject to the Commission's recordkeeping and record retention
rules, Rules 17a-3 and 17a-4 under the Act (17 CFR 240.17a-3 and
240.17a-4), and may retain required records in any medium acceptable
under Rule 17a-4, including optical storage technology.
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The Commission believes that the Wireless Communications Policy, is
consistent with the policy in Article IV, Section 1(e) of the Exchange
Constitution which currently provides that the Exchange shall not be
liable for any damages sustained by a member or member organization
growing out of the use or enjoyment by such member or member
organization of the facilities afforded by the Exchange to members for
the conduct of their business. This provision, as well as similar
provisions at other exchanges, reflect the common understanding that
exchanges should not bear the risk of liability associated with member
firm use of their systems.
[[Page 51478]]
The Commission believes that the proposed commentary to Rule 60
regarding the disclaimer for vendor liability will provide needed
protection for both the Exchange and vendors that may be retained by
the Exchange to provide various services for use by member firms. If
the Exchange does not have the ability to negotiate such liability
protection, it would become increasingly difficult to find vendors
willing to provide the Exchange with the essential services that it
needs.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-Amex-96-10) is approved.
\12\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-25225 Filed 10-1-96; 8:45 am]
BILLING CODE 8010-01-M
