[Federal Register Volume 63, Number 32 (Wednesday, February 18, 1998)]
[Notices]
[Pages 8229-8232]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3996]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39631; File No. SR-AMEX-97-37]
Self-Regulatory Organizations; American Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Notice of Filing and Order
Granting Accelerated Approval of Amendment No. 1 to the Proposed Rule
Change Relating to Expansion of Designated Options Areas
February 9, 1998.
I. Introduction
On October 14, 1997, the American Stock Exchange, Inc. (``Amex'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), 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 expand the locations where
options on Amex-listed stocks may trade at the Exchange. The proposed
rule change was published for comment in the Federal Register.\3\ No
comments were received on the proposal. On January 14, 1998, the Amex
filed an amendment to the proposed rule change (``Amendment No.
1''),\4\ The Commission hereby approves the proposal. In addition, the
Commission is publishing this notice to solicit comments from
interested persons on Amendment No. 1 to the proposal and hereby
approves that amendment on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 39306 (November 6,
1997), 62 FR 61154 (November 14, 1997).
\4\ Letter from Scott G. VanHatten, Legal Counsel, Derivative
Securities, Amex, to Michael Walinskas, Senior Special Counsel,
Division of Market Regulation, Commission, dated January 13, 1998.
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II. Description of the Proposal
In 1988, the Commission approved an Amex proposal to permit options
trading on Amex-listed stocks (``1988 Approval Order'').\5\ In that
order, the Commission noted that: ``[W]ith the expansion of its trading
facility, specifically the addition of a separate trading room, the
Amex is in a position to trade stocks and options thereon in physically
separated locations. The proposed rule change specifies that such
trading shall take place at different trading locations and provides
the safeguards necessary to prevent abuses which could result from the
trading of stocks and related options in physical proximity to each
other.'' \6\
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\5\ Securities Exchange Act Release No. 26147 (October 3, 1988),
53 FR 39556 (October 7, 1988) (File No. SR-AMEX-88-16).
\6\ Id.
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More recently, in 1994, the Commission approved an Amex proposal to
provide greater flexibility in the design and development of new stock
index option products which can be listed and traded on Amex.\7\ In
that approval order, the Commission based its approval in part on the
fact that Amex imposed a number of restrictions on trading in options
on indexes. For instance, where Amex-listed stocks comprise more than
10% of the value of a particular index, options on that index must be
traded in a room physically separated from the Equity Floor.\8\
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\7\ Securities Exchange Act Release No. 34359 (July 12, 1994),
59 FR 36799 (July 19, 1994).
\8\ Id. (emphasis added).
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Now, Amex, as a result of increases in trading volume in options on
the Exchange,\9\ has proposed to relax the requirement that Amex-listed
stocks and options on Amex-listed stocks be traded in a room physically
separated from the Main Trading Floor
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\9\ The Amex noted in its filing that the number of options on
Amex-listed stocks has increased slowly, to 45 classes since 1988,
while the overall number of options classes traded on the Exchange
has increased over 350% since that time.
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Background
Amex currently has three trading locations: (1) the Main Trading
Floor; (2) the mezzanine trading level, which is located above the
Exchange's main trading floor (``Mezzanine''),\10\ and (3) a separate
room connected by a hallway to the Main Trading Floor (the ``Red Room''
or ``Designated Options Area'').
[[Page 8230]]
On the Main Trading Floor, Amex currently permits trading in:
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\10\ The Mezzanine abuts and overlooks the Exchange's equity
trading floor. See Release No. 34-34359 at n. 8.
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(1) Amex-listed stocks,
(2) Options on non-Amex-listed stocks, and
(3) Options on indexes (excluding options on indexes where Amex-
listed stocks comprise more than 10% of the index value, by
weight).\11\
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\11\ An index can be valued using a number of different methods.
For example, an index can be valued by determining: the price of the
components of the index (price-weighting); the number of shares of
each component that could be purchased by spending equal dollar
amounts (equal dollar-weighting); and the market capitalizations of
the components of the index (capitalization-weighting). Cf. Release
No. 34-34359 at n. 7 and accompanying text.
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In the Red Room, Amex currently permits trading in:
(1) Options on Amex-listed stocks,
(2) Options on non-Amex-listed stocks, and
(3) Options on indexes where Amex-listed stocks comprise more than
10% of the index value, by weight.
On the Mezzanine, Amex currently permits trading in:
(1) Options on indexes where Amex-listed stocks comprise more than
10% of the index value by weight, and
(2) Options on non-Amex-listed stocks.
Consistent with the 1988 Approval Order, as described above,
trading of Amex-listed stocks occurs on the Main Trading Floor, while
trading of options on Amex-listed stocks is permitted only in the Red
Room. The Exchange states that the capacity of the Red Room is no
longer sufficient to accommodate all trading in options on Amex-listed
stocks. The Exchange represented in its filing that while the number of
options on Amex-listed stocks has increased slowly, to approximately 45
classes since 1988, the overall number of option classes traded on the
Exchange has increased over 350% since that time. As a result of this
increase in classes of options traded at the Amex, the Exchange states
that it currently lacks flexibility in moving trading units around its
trading floors. Those specialist units currently trading options on
Amex-listed stocks are forced to remain in the Red Room, even though
they have outgrown their space, or face giving up those classes to move
to larger quarters. Moreover, the Exchange represented that specialist
units that currently do not trade any options on Amex-listed stocks are
unable to do so because there is no room left in the Red Room. The
increase in classes of options traded on the Exchange and the
Exchange's need for flexibility in moving the various trading units
around the Exchange's trading floors has made it necessary for the
Exchange to find additional physically separate locations for trading
options on Amex-listed stocks.
Accordingly, the Exchange has proposed to permit options trading on
Amex-listed stocks in two locations of the Exchange in addition to the
Red Room: (1) The Mezzanine and (2) the back row of the west side of
the Exchange's Main Trading Floor, also referred to as the west side of
Exchange Posts 12, 13 and 15 (``Back Row'').
The Exchange represented in its filing that the two locations
selected would keep options and equity trading sufficiently separate
such that there can be no time and place advantage derived from the
proximity of the equity and options trading areas.\12\ The Exchange
contends that permitting the trading of options on Amex-listed stocks
on the Mezzanine is consistent with the Commission's approval of the
Mezzanine as a physically separate trading location with respect to
trading in stock index options. For options on Amex-listed stocks
traded on the Mezzanine, the Exchange represents that: (1) Options on
Amex-listed stocks shall not be traded in the portion of the Mezzanine
that is visible from the Main Trading Floor; (2) members will be
prohibited from using hand signals or other like means of communication
to communicate between the Mezzanine and the Main Trading Floor; and
(3) members will be notified in writing by the Exchange of the new
prohibitions on the use of hand signals or other like means of
communication.
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\12\ Securities Exchange Act Release No. 39306 (November 6,
1997), 62 FR 61154 (November 14, 1997).
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With respect to the Back Row trading location, the Exchange
contends that it will be able to keep options and equity trading
sufficiently separate to avoid the time and place advantage that could
result from the proximity of the equity and options trading area.
Specifically, the Exchange represents that no option on an Amex-listed
equity will trade at any post on the Exchange's Main Trading Floor
where there exists a direct line of sight between the posts of the
option and its corresponding underlying equity. In addition, for
options on Amex-listed stocks traded at the Back Row of the Main
Trading Floor: (1) Those options shall remain separate from their
corresponding underlying equities by no less than one row of posts on
the Main Trading Floor; (2) members will be prohibited from using hand
signals or other like means of communication to communicate between the
Back Row and the Main Trading Floor; and (3) members will be notified
in writing by the Exchange of the new prohibitions on the use of hand
signals or other like means of communications.
The Exchange believes that the proposed rule change will not
increase the potential for trading abuse and manipulation as there is
no line of sight between the Mezzanine and the Back Row and the
Designated Stock Area, which will now constitute those areas of the
Main Trading Floor other than the Back Row. Thus, no time or place
advantage should result from the proposed rule change.
In addition to the above representations, the Exchange states that
it has in place various safeguards to detect and prevent any such abuse
or manipulation. For instance, the Exchange notes that options on Amex-
listed stocks and the underlying Amex-listed stocks will continue to be
deemed ``paired securities,'' (as that term is used in the Exchange's
Series 900 rules).\13\ This designation invokes additional safeguards
designed to prevent the misuse of market information and market
manipulation by Amex members. These safeguards include Amex Rule 175,
which generally prohibits someone from acting as a specialist in an
equity and in the option on the equity.
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\13\ The term paired security means a security which is the
subject of securities trading on the Exchange and Exchange option
trading. Amex Rule 900(b)(38).
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In addition, Amex Rule 958(e) prohibits any equity specialist, odd-
lot dealer or Nasdaq market maker from acting as a registered trader in
a class of stock options on a stock in which he is registered in the
primary market place. Moreover, Rule 958(f) prohibits any member, while
acting as a Registered Options Trader (``ROT''), who is also registered
as a Registered Equity Trader or Registered Equity Marketmaker, from
executing a proprietary Exchange option transaction on a paired
security if he has been in the Designated Stock Area (i.e., the Main
Trading Floor) where the related security is traded during the
preceding 60 minutes.
To ensure compliance with the above safeguards, the Exchange states
that it has in place various surveillance procedures. The Exchange's
surveillance procedures, which are set forth at Section XI, C of the
Amex Trading Analysis Options Surveillance Manual concerning Paired
Security Review, include, among other items, the preparation of daily
activity reports on ROTs' trading activity in Amex-listed stocks and
options. These reports are
[[Page 8231]]
used to analyze ROT trading activity to ensure compliance with Amex
Rule 958.
Lastly, the Exchange states that it will continue to follow the
restrictions the Exchange imposed in its proposal regarding trade in
index options as discussed in Securities Exchange Act Release No.
34359,\14\ which addresses, among other items, the locations where it
is permissible to trade options on indexes where Amex-listed stocks
comprise more than 10% of the index value by weight.\15\
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\14\ Id.
\15\ Id. Among other items, the Exchange represented that:
First, index options trading shall not be located on the Exchange's
Main Trading Floor; and second, for index options traded on the
Mezzanine where Amex-listed stocks comprise more than 10% of the
value of the index, by weight: (1) Those options shall not be traded
in the portion of the Mezzanine that is visible from the Main
Trading Floor, and (2) members will be prohibited from using hand
signals or other forms of communication to communicate between the
Mezzanine and the Main Trading Floor. Securities Exchange Act
Release No. 34359 (July 12, 1994), 59 FR 36799 (July 19, 1994).
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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 with the
requirements of Section 6 of the Act.\16\ In particular, the Commission
believes the proposal is consistent with Section 6(b)(5) of the Act in
that it should remove impediments to and perfect the mechanism of a
free and open market, promote just and equitable principles of trade,
and protect investors and the public.\17\ The Commission believes that
the Amex has provided adequate safeguards to protect against market
manipulation and abuse of market information in this context. The
Commission also believes that the proposal will allow the Exchange
flexibility in moving trading posts while minimizing the potential for
abuse by ensuring that Amex traders will not be able to obtain unfair
informational advantages.
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\16\ 15 U.S.C. 78f(b).
\17\ In approving this rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
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In considering this filing, the Commission notes that floor traders
and market makers, by virtue of their close proximity to the trading
crowds and access to market information, may have a time and place
advantage over other market participants. For example, floor traders in
the crowd may be able to gain an insight into the future direction of
the market on the basis of, among other things, the other traders in
the crowd and their bidding/offering patterns. Likewise, market makers
have an informational advantage about order flow and quote changes. For
the reasons stated below, however, the Commission believes that the
restrictions contained in the Amex proposal adequately minimize any
potential for misuse of information or market manipulation. The
Commission concurs with the Exchange's view that the trading locations
for equities and options on equities are sufficiently separated in a
manner that will minimize the time and place advantage that can be
derived from the proximity of the equity and options trading areas.
Specifically, for options on Amex-listed stocks traded on the
Mezzanine, the Exchange has represented that: (1) Those options shall
not be traded in the portion of the Mezzanine that is visible from the
Main Trading Floor, and (2) members will be prohibited from using hand
signals or other like means of communication to communicate between the
Mezzanine and the Main Trading Floor. For options on Amex-listed stocks
traded at the Back Row of the Main Trading Floor: (1) Those options
shall remain separate from their corresponding underlying equities by
no less than one row of posts on the Main Trading Floor, and (2)
members will be prohibited from using hand signals or other like means
of communication to communicate between the Back Row and the Main
Trading Floor. Members will be notified in writing by the Exchange of
the new prohibitions on the use of hand signals or other like means of
communications.
By restricting the trading of options to areas outside the
visibility of trading of the underlying securities, the Commission
believes the proposal adequately limits the ability of Amex members to
unfairly use any material, nonpublic information they might possess.
Moreover, the Commission believes that current surveillance procedures
are adequate to identify and deter potential manipulations and other
trading abuses. Finally, by prohibiting hand signals and other forms of
communication between options and equity trading posts on the Main
Trading Floor, the Mezzanine, and the Back Row, the Exchange should be
able to significantly restrict abuses.
The Commission's approval of the proposed rule change is premised
on the belief that the Amex's proposed trading locations for equities
and options are sufficiently separated such that there is no time and
place advantage derived from the physical proximity of the two trading
locations which could be exploited by Amex members. Accordingly, any
decision by the Amex to change the location of the designated options
area relative to the designated stock area, or to modify the means of
access between them, would require submission of a proposed rule change
under Section 19(b) of the Act.
Based on the foregoing, the Commission believes that the proposal
will allow the Exchange to expand the trading locations for options on
Amex-listed stocks while providing adequate protections against market
participants that might attempt to manipulate the market or misuse any
market information, which results from the trading of options and the
stocks underlying those options in physical proximity to each other.
The Commission finds good cause consistent with the Act for
approving Amendment No. 1 to the proposed rule change prior to the
thirtieth day after the date of publication of notice of filing thereof
in the Federal Register. Specifically, Amendment No. 1 simply provides
additional details regarding, among other things, where options and
stocks are currently traded at the Amex and does not substantively
change the proposal as originally filed. Accordingly, the Commission
approves Amendment No. 1 on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments, including whether the submission is consistent with the Act,
concerning Amendment No. 1. Persons making written submissions should
file six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 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.
Sec. 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-97-37 and should
be submitted by March 11, 1998.
[[Page 8232]]
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act.\18\ that the proposed rule change (SR-AMEX-97-37), as amended, is
approved.
\18\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-3996 Filed 2-17-98; 8:45 am]
BILLING CODE 8010-01-M
