[Federal Register Volume 63, Number 214 (Thursday, November 5, 1998)]
[Notices]
[Pages 59817-59819]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29622]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40613; File No. SR-Amex-98-20]
Self-Regulatory Organizations; American Stock Exchange, Inc.;
Order Granting Permanent Approval of the Exchange's Pilot Program for
Specialists in Portfolio Depositary Receipts, Investment Trust
Securities, and Index Fund Shares To Participate in the After-Hours
Trading Facility
October 28, 1998.
I. Introduction
On June 9, 1998, the American Stock Exchange, Inc. (``Amex'' or
``the Exchange''), filed with the Securities and Exchange Commission
(``SEC'' or ``the Commission'') a proposed rule change pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\
and Rule 19b-4 \2\ thereunder seeking permanent approval of the pilot
program permitting specialists in Portfolio Depositary Receipts \3\
(``PDRs''), investment trust securities, and Index Fund Shares to
participate in the after-hours trading (``AHT'') facility to ``clean-
up'' order imbalances and to effect closing price coupled orders.\4\
The proposed rule change was published for comment in the Federal
Register on July 23, 1998.\5\ No comments were received on the Amex's
proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Exchange currently lists three Portfolio Depositary
Receipts, viz., Depositary Receipts on the Standard and Poor's
500 and MidCap Indexes, and Depositary Receipts
on the Dow Jones Industrial Average TM. The Exchange also
lists 17 Index Fund Shares which are commonly referred to as WEBS
sm. WEBS are shares issued by an open-end management
investment company that seek to provide investment results that
correspond generally to the price and yield performance of a
specified foreign or domestic equity market index. The Exchange
currently lists WEBS based on the following Morgan Stanley Capital
International (``MSCI'') indices: MSCI Australia Index, MSCI Austria
Index, MSCI Belgium Index, MSCI Canada Index, MSCI France Index,
MSCI Germany Index, MSCI Hong Kong Index, MSCI Italy Index, MSCI
Japan Index, MSCI Malaysia Index, MSCI Mexico Index, MSCI
Netherlands Index, MSCI Singapore (Free) Index, MSCI Spain Index,
MSCI Sweden Index, MSCI Switzerland Index, and MSCI United Kingdom
Index. The Commission notes that due to certain restrictions imposed
by the Malaysian government WEBS based on the MSCI Malaysia Index
currently trade differently than the other WEBS trading on Amex.
\4\ Pursuant to the pilot program, the specialist in PDRs,
investment trust securities, and Index Fund Shares may participate
in a coupled price closing order so long as the other side of the
order is not for an account in which a member or member organization
has a direct or indirect interest.
\5\ Securities Exchange Act Release No. 40201 (July 15, 1998),
63 FR 39608.
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II. Description of the Proposal
The Commission originally approved the pilot program on August 29,
1994 (``Original Pilot Approval'').\6\ The pilot was scheduled to
expire on August 29, 1995, but was extended for three successive one-
year periods, and a thirty-day period.\7\ With this proposed rule
change, the Amex seeks permanent approval of the pilot program, which
otherwise will expire on October 31, 1998.
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\6\ See Securities Exchange Act Release No. 34611 (Aug. 29,
1994), 59 FR 45739 (Sept. 2, 1994).
\7\ See Securities Exchange Act Release Nos. 36123 (Aug. 18,
1995), 60 FR 44519 (Aug. 28, 1995); 37529 (Aug. 6, 1996), 61 FR
41814 (Aug. 12, 1996); 38986 (Aug. 27, 1997), 62 FR 46785 (Sept. 4,
1997); and 40533 (October 8, 1998), 63 FR 55660 (October 16, 1998).
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In the Original Pilot Approval and in each one-year extension, the
Commission requested that the
[[Page 59818]]
Exchange submit a report and analysis regarding the operation of the
pilot program. The Exchange did not submit a report until 1997,
however, as specialists made little or no use of the pilot program
until the period September 3, 1996 to May 30, 1997. The 1997 report
stated that during that period, there were two trades for a total of
600 shares of PDRs in the AHT session for PDRs, investment trust
securities, and Index Fund Shares.\8\ The 1998 report stated that
during the period June 1, 1997 to April 30, 1998, there were 12 trades
for a total of 56,320 shares of PDRs in the AHT session.\9\ No single-
sided orders remained unexecuted at the end of the AHT session during
the review period and there were no problems with any of these
trades.\10\
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\8\ See letter dated August 5, 1997, from William Floyd-Jones,
Jr., Assistant General Counsel, Amex, to Michael Walinskas, Senior
Special Counsel, Division of Market Regulation (``Division''),
Commission.
\9\ See letter dated June 8, 1998, from William Floyd-Jones,
Jr., Assistant General Counsel, Amex, to Michael Walinskas, Senior
Special Counsel, Division, Commission.
\10\ Id.
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The Exchange believes that permanent approval of the Exchange's
pilot program to permit specialists in PDRs, investment trust
securities, and Index Fund Shares to participate in the AHT facility in
order to ``clean-up'' order imbalances and effect closing price coupled
orders will benefit investors by providing additional liquidity to the
listed cash market for derivative securities based upon market indexes.
The market price of these exchange-traded funds is based upon
transactions largely effected in markets other than the Amex. (In the
case of Index Fund Shares, the market price of these securities is
based exclusively on transactions occurring outside the Amex.) The
Exchange represents that the specialist in the Amex-listed securities
has no unique access to market sensitive information regarding the
market for the underlying securities or closing index values. Further,
to prevent the potential for manipulation or misuse, the pilot program
eliminates the migration of limit orders for PDRs, investment trust
securities, and Index Fund Shares from the specialists limit order book
to the AHT facility. The Exchange, therefore, believes that permanent
approval of specialist participation in the AHT facility in PDRs,
investment trust securities and Index Fund Shares in the manner
previously approved by the Commission on a pilot basis does not raise
any market integrity issues. In addition, should a customer not care
for an execution at the closing price, the rules of the Exchange's AHT
facility permit cancellation of an order up to the close of the AHT
session at 5:00 p.m. (Orders in the AHT facility are not executed until
the 5:00 p.m. close of the AHT session.) Amex represents, therefore,
that a customer has approximately 40 minutes to determine if an
execution at the closing price suits his needs and may cancel the order
if he believes that the closing price does not suit his objectives.
III. Discussion
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, Sections 6(b)(5) and 11 of the Act.\11\ The Commission
believes that the rule change is consistent with the Section 6(b)(5)
requirements that the rules of an exchange be designed to prevent
fraudulent and manipulative acts and practices, promote just and
equitable principles of trade, remove impediments to and perfect the
mechanism of a free and open market, and in general, protect investors
and the public interest.\12\ The Commission also believes that the
proposal is consistent with Section 11(b) of the Act and Rule 11b-1
thereunder,\13\ which allow exchanges to promulgate rules relating to
specialists in order to maintain fair and orderly markets.
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\11\ 15 U.S.C. 78f(b)(5) and 78k.
\12\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\13\ 17 CFR 240.11b-1.
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Under the pilot program, specialists in PDRs, investment trust
securities and Index Fund Shares may participate in the AHT facility to
clean up order imbalances by entering an order for their own account.
The pilot program also allows specialists in PDRs, investment trust
securities and Index Fund Shares to participate in a coupled closing
price order as long as the other side of the order is not for an
account in which a member or member organization has a direct or
indirect interest. Moreover, the pilot program eliminates the migration
of limit orders for PDRs, investment trust securities, and Index Fund
Shares from the specialists limit order book to the AHT facility to
prevent the potential for manipulation or misuse of specialists'
information regarding which limit orders are eligible for execution in
the AHT facility.
The Commission continues to believe, as it did when the pilot
program was initially approved, that permitting specialists in PDRs,
investment trust securities, and Index Fund Shares \14\ to participate
in the AHT facility by entering an order for the specialist's account
to eliminate order imbalances should assist specialists in their
obligation to minimize temporary disparity between supply and
demand.\15\ Moreover, the Commission agrees with the Amex that
permitting specialists in PDRs, investment trust securities, and Index
Fund Shares to participate in the AHT facility to effect closing price
coupled orders should benefit investors by providing additional
liquidity to the listed cash market for derivative securities based
upon market indexes.
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\14\ The Commission notes that when the original pilot program
was approved, it applied only to PDRs and investment trust
securities. The pilot program was modified to include Index Fund
Shares with the extension of the pilot program in August 1996. See
Securities Exchange Act Release No. 37529 (August 6, 1996), 61 FR
41814 (August 12, 1996).
\15\ See Original Pilot Approval, supra note 6.
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The Commission also continues to believe that the Amex's rule
change strikes a reasonable balance between the Exchange's need to
accommodate the needs of investors by increasing the liquidity in the
listed cash market for derivative securities based on market indexes
and the need to prevent the potential for manipulation or misuses of
information. With regard to the latter concern, although Amex
specialists will be aware of limit orders remaining on the specialist's
limit order book, they generally will not be able to use this
information to their advantage because, under the terms of the pilot
program, as permanently approved, Amex Rule 1302(b) has been amended to
eliminate the migration of limit orders for PDRs, investment trust
securities, and Index Fund Shares from the specialist's limit order
book to the AHT facility.\16\ Further, the Commission notes that all
orders entered by the specialist in the AHT facility receive the
closing price in the Amex market on that same trading day, rather than
a negotiated price. This should reduce the likelihood that any
additional information the specialist has as a result of making a
market in the speciality security could be misused in the AHT facility.
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\16\ The Commission notes that the permanent approval of the
pilot program includes permanent approval of the changes to Rule
1302(b) restricting the migration of limit orders.
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In addition, while the trading activity for PDRs, investment trust
securities, and Index Fund Shares in the AHT facility has been modest,
the Exchange
[[Page 59819]]
has reported no problems with any of these trades. Moreover, as
evidenced by the reports filed by the Exchange, the pilot program has
been used increasingly over the past two years.
Finally, the Commission expects the Amex, through use of its
surveillance procedures, to monitor closely the trading of PDRs,
investment trust securities, and Index Fund Shares in the AHT facility
to ensure that trading in these issues is not subject to any patterns
of manipulation, trading abuses or unusual trading activity.
IV. Conclusion
For the reasons discussed above, the Commission believes that
permanent approval of specialist participation in the AHT facility in
PDRs, investment trust securities and Index Fund Shares in the manner
previously approved by the Commission is appropriate and consistent
with the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-Amex-98-20) is approved.
\17\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-29622 Filed 11-4-98; 8:45 am]
BILLING CODE 8010-01-M
