[Federal Register Volume 62, Number 56 (Monday, March 24, 1997)]
[Notices]
[Pages 13918-13921]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7342]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38379; File No. SR-Amex-97-12]
Self-Regulatory Organizations; Notice of Filing of, and Order
Granting Accelerated Approval to, Proposed Rule Change by the American
Stock Exchange, Inc. Relating to Execution of Specialists' Liquidating
Transactions
March 10, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on February 28, 1997, the
American Stock Exchange, Inc. (``Amex'' or ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I and II below, which Items have been
prepared by the self-regulatory organization. Subsequently, the
Exchange submitted Amendment No. 1 to the proposed rule change.\2\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons and to grant accelerated
approval to the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Letter from Claudia Crowley, Special Counsel, Amex, to
Anthony Pecora, Attorney, Division of Market Regulation, SEC, dated
March 4, 1997 (``Amendment No. 1''). Amendment No 1 added a
paragraph explaining the Exchange's enforcement policy concerning
``substantive'' violations of Amex Rule 170 and included an
interpretation of that rule in the form of an information circular
that the Exchange has represented to be binding on it.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex is proposing permanent approval of a pilot program that
amended Exchange Rule 170 to permit a specialist to effect a
liquidating transaction on a zero minus tick,\3\ in the case of a
``long'' position, or a zero plus tick,\4\ when covering a ``short''
position, without Floor Official approval. The pilot program also
amended Exchange Rule 170 to set forth the affirmative action that
specialists are required to take subsequent to effecting various types
of liquidating transactions.
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\3\ A zero minus tick is a price equal to the last sale where
the last preceding transaction at a different price was at a higher
price.
\4\ A zero plus tick is a price equal to the last sale where the
last preceding transaction at a different price was at a lower
price.
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The text of the proposed rule change is available at the Office of
the Secretary, the Amex, and at the Commission.
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 self-regulatory organization
included statements concerning the purpose of land 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 III below. The self-regulatory
organization 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
On February 18, 1997, the Commission approved an extension until
March 7, 1997 of a pilot program that amended exchange Rule 170 to
permit a specialist to effect a liquidating transaction on a zero minus
tick, in the case of a ``long'' position, or a zero plus tick, when
covering a ``short'' position, without Floor Official approval.\5\ The
Rule continues to require that Floor Official approval be obtained
prior to effecting a liquidating transaction on a straight
destabilizing tick (i.e., a minus tick in the case of a ``long''
position or a plus tick when covering a ``short'' position). The
amendments also set forth the affirmative action that specialists are
required to take subsequent to effecting various types of liquidating
transactions.
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\5\ Securities Exchange Act Release No. 38299 (Feb. 18, 1997),
62 FR 8464 (``February 1997 Approval Order'') (approving File No.
SR-Amex-97-01).
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During the course of the pilot program, the Exchange has carefully
monitored compliance with the requirements of the Rule. The Amex
believes that the amendments have provided specialists with flexibility
in liquidating specialty stock positions in order to facilitate their
ability to maintain fair and orderly markets, particularly during
unusual market conditions. In addition, the specialist's concomitant
obligation to participate as dealer on the opposite side of the market
after a liquidating transaction has been strengthened. The Exchange is
therefore proposing permanent approval of the amendments to Amex Rule
170.
In addition, the Exchange is proposing to adopt a formal policy to
address its enforcement with respect to ``non-substantive'' (i.e., if
the approval would have been granted if it had been sought) violations
of the requirement that specialists obtain Floor Official approval for
reliquidating transactions on straight destabilizing ticks. Absent
unusual circumstances, the Exchange will, at a minimum, take the
following action:
--The Exchange staff will issue a cautionary letter to the
specialist for an initial violation, during a ``rolling'' twelve-
month period.
--Any subsequent violation(s) by the same specialist during the
``rolling'' twelve-month period will be referred to the Minor Floor
Violation Disciplinary Committee for appropriate action. Pursuant to
Rule 590 and its commentary, the Committee has the authority to
issue a cautionary letter to the specialist or impose fines ranging
from $500 to $2,500 ($1,000 to $5,000 for member organizations).
Of course, the Exchange, even for an initial violation, has the
authority to take more stringent action either pursuant to Rule 590 or
in accordance with the Exchange's formal disciplinary procedures. In
addition, the Exchange's policy with respect to ``substantive''
violations of this rule (e.g., failure to properly re-enter the market
or failure to obtain the required Floor Official approval when such
approval, if sought, would not have been granted) remains unchanged.
Such instances of noncompliance will be dealt with according to the
Exchange's formal disciplinary procedures.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act \6\ in general and furthers the objectives of
Section 6(b)(5) \7\ in particular in that it is designed to 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 pubic interest. The Exchange also believes
the proposed rule change is consistent with Section 11(b) of the Act
\8\ which allows exchanges to promulgate rules relating to specialists
in order to maintain fair and orderly markets.
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
\8\ 15 U.S.C. 78k(b).
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[[Page 13919]]
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will impose no
burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
The Exchange has neither solicited nor received written comments
with respect to the proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 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. 552, will be available for inspection and copying at the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. Also, copies of such filing will be available for
inspection and copying at the principal office of the Amex. All
submissions should refer to File No. SR-AMEX-97-12 and should be
submitted by April 14, 1997.
IV. Commission's Findings and Order Granting Accelerated Approval to
the Proposed Rule Change
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, and, in particular, with the requirements of Section 6(b) and
Section 11 of the Act.\9\ Specifically, the Commission believes the
proposal is consistent with the Section 6(b)(5) \10\ requirements that
the rules of an exchange 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, in general, to protect investors and the
public interest. The Commission also believes the proposal is
consistent with Section 11(b) of the Act \11\ and Rule 11b-1 \12\
thereunder, which allow exchanges to promulgate rules relating to
specialists in order to maintain fair and orderly markets.
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\9\ 15 U.S.C. 78f(b) and 78k.
\10\ 15 U.S.C. 78f(b)(5).
\11\ 15 U.S.C. 78k(b).
\12\ 17 CFR 240.11b-1.
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Both the Act and the Exchange's rules reflect the crucial role
played by specialists in providing stability, liquidity, and continuity
in the Exchange's auction market. Recognizing the importance of the
specialist to the auction market, the Act and the Exchange's rules
impose stringent obligations upon specialists.\13\ Primary among these
obligations is the requirement to restrict a specialist's dealings to
those that are ``reasonably necessary'' to maintain a fair and orderly
market.\14\
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\13\ In general specialists' activities are circumscribed by
Section 11 of the Act and the rules thereunder and by the rules of
the exchange where the specialist is registered. See 15 U.S.C. 78k
(prohibiting members of a national securities exchange from
effecting transactions on such exchange for their own accounts but
allowing, among other things, market making transactions). Rule 11b-
1(a)(2), which sets forth the primary responsibilities of a
specialist, states that a specialist's course of dealings for his or
her own account must assist in the maintenance of a fair and orderly
market, so far as practicable. 17 CFR 240.11b-1(a)(2). Rule 11b-
(a)(2) also states, however, that a specialist should restrict his
or her dealings, so far as practicable, to those reasonably
necessary to permit him or her to maintain a fair and orderly
market. Id. See also Amex Rule 170(c) (prohibiting a specialist from
effecting purchases or sales of any security in which that
specialist is registered for any account in which that specialist is
directly or indirectly interested, unless such dealings are
reasonably necessary to maintain a fair and orderly market in such
security); Amex Rule 170(d) (stating that transactions effected by a
specialist on the Exchange for his or her own account in the
securities in which he or she is registered are to constitute a
course of dealings reasonably calculated to contribute to the
maintenance of price continuity with reasonable depth and minimize
the effects of temporary disparities between supply and demand).
\14\ 17 CFR 240.11b-1(a)(2).
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The importance of specialist performance to the quality of exchange
markets was highlighted during the 1987 and 1989 market breaks. In the
Division of Market Regulation's (``Division'') 1987 Market Break
Report, the Division examined specialist performance on the Amex on
October 19 and 20, 1987.\15\ Although some Amex specialists performed
well under the adverse conditions, the Division found that others
appeared to perform inadequately.\16\
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\15\ See SEC, Division of Market Regulation, The October 1987
Market Break 4-29 to 4-41 (Feb. 1988) [hereinafter 1987 Market Break
Report].
\16\ Id. at 4-40 to 4-41.
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The Division also examined Amex specialist performance during the
volatile conditions of October 13 and 16, 1989. It found that
specialist performance during that time was similar in many respects to
the pattern of specialist performance during the October 1987 Market
Break.\17\ Specifically, the Division found that specialists were
confronted with extreme volume and volatility.\18\
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\17\ See SEC, Division of Market Regulation, Market Analysis of
October 13 and 16, 1989, at 33 (Dec. 1990) [hereinafter 1989 Market
Analysis Report].
\18\ See 1987 Market Break Report, supra note 15, at 4-30; 1989
Market Analysis Report, supra note 17, at 27.
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Both the 1987 Market Break Report and the 1989 Market Analysis
Report reaffirmed the importance of specialist participation in
countering market trends during periods of market volatility. At the
same time, the reports emphasized the importance the Commission placed
on the Amex's ability to ensure that all specialists comply with their
affirmative and negative market making obligations during such
periods.\19\
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\19\ A specialist's dealer responsibilities consist of
``affirmative'' and ``negative'' obligations. In accordance with
their affirmative obligations, specialists are obligated to trade
for their own accounts to minimize order disparities and contribute
to continuity and depth in the market. Conversely, specialists,
pursuant to their negative obligations, are precluded from trading
for their own accounts unless such dealing is necessary for the
maintenance of a fair and orderly market. In view of these
obligations, the price trend in a security should be determined by
the movements of the incoming orders that initiate the trades, not
by a specialist's proprietary trading activity.
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One area of specialist performance specifically reviewed by the
1989 Market Analysis Report involved specialists' compliance with the
negative obligations imposed by Amex Rule 170.02. Prior to the
implementation of the Amex's pilot program, this rule stated that,
unless the specialist had the prior approval of a Floor Official, he or
she should avoid liquidating all or substantially all of a dealer
position on a destabilizing tick (i.e., purchases on plus or zero plus
ticks and sales on minus or zero minus ticks) unless the transaction
was reasonably necessary in relation to the specialist's overall
position in the stocks in which he or she was registered. The Division
requested in the 1989 Market Analysis Report that the Amex examine the
language of this rule \20\ because it appeared to provide specialists
with unnecessarily broad latitude for effecting transactions on
destabilizing ticks.\21\
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\20\ 1989 Market Analysis Report, supra note 17, at n.56.
\21\ 1989 Market Analysis Report, supra note 17, at n.31.
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The proposed rule change is responsive to the request regarding
Amex Rule 170.02, as well as the conclusions of the two market reports.
[[Page 13920]]
The Amex, recognizing that market conditions may necessitate that a
specialist participate heavily in a rapidly declining market, proposed
amendments to Amex Rule 170.02 to provide specialists with flexibility
in liquidating specialty stock positions in order to facilitate a
specialist's ability to maintain fair and orderly markets, particularly
during unusual market conditions. At the same time, the amendments were
designed to strengthen the specialist's concomitant obligation to
participate as dealer on the opposite side of the market after a
liquidating transaction. The Commission approved the proposed
amendments as a one-year pilot program, and subsequently extended the
pilot on several occasions.\22\
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\22\ See Securities Exchange Act Release No. 33957 (Apr. 22,
1994), 59 FR 22188 (approving File No. SR-Amex-92-26) (``1994
Approval Order''); Securities Exchange Act Release No. 35635 (Apr.
21, 1995), 60 FR 20780 (approving File No. SR-Amex-95-11) (``April
1995 Approval Order''); Securities Exchange Act Release No. 36014
(July 21, 1995), 60 FR 38870 (approving File No. SR-Amex-95-19)
(``July 1995 Approval Order''); Securities Exchange Act Release No.
37448 (July 17, 1996), 61 FR 38487 (approving File No. SR-Amex-96-
16); Securities Exchange Act Release No. 37704 (Sept. 19, 1996), 61
FR 50525 (approving File No. SR-Amex-96-33); Securities Exchange Act
Release No. 37958 (Nov. 15, 1996), 61 FR 59476 (approving File No.
SR-Amex-96-42); February 1997 Approval Order, supra note 5.
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The Exchange is requesting permanent approval of the pilot program
procedures. Under the proposal, a specialist may liquidate a position
by selling stock on a direct minus tick or by purchasing stock on a
direct plus tick only if such transactions are reasonably necessary for
the maintenance of a fair and orderly market and only if the specialist
has obtained the prior approval of a Floor Official. Liquidations on a
zero minus or zero plus tick, which previously required Floor Official
approval, can be effected under the pilot procedures without a Floor
Official's approval, but would continue to be subject to the
restriction that they be effected only when reasonably necessary to
maintain a fair and orderly market. In addition, the specialist must
maintain a fair and orderly market during the liquidation.
After the liquidation, a specialist is required to re-enter the
market on the opposite side to offset any imbalances between supply and
demand. During any period of volatile or unusual market conditions
resulting in significant price movement in a specialist's specialty
stock, the specialist's re-entry into the market must reflect, at a
minimum, his or her usual level of dealer participation in the
specialty stock. In addition, during such periods of volatile or
unusual price movements, re-entry into the market following a series of
transactions must reflect a significant level of dealer participation.
In the prior approval orders concerning this pilot program, the
Commission requested that the Amex submit a report setting forth the
criteria developed by the Exchange to determine whether any
reliquidating transactions by specialists were necessary and
appropriate in connection with fair and orderly markets. The Commission
also asked, among other things, that the Exchange provide information
regarding the Exchange's monitoring of liquidating transactions
effected by specialists on any destabilizing tick. In particular, the
Commission asked the Amex to report any noncompliance with the rule and
the action the Amex took as a result of such noncompliance.
The Amex submitted its reports concerning the pilot program to the
Commission in January 1997, April 1996, and May 1995. As noted above,
the Amex believes that the pilot procedures appear to be working well
in enabling specialists to reliquidate appropriately to meet the needs
of the market.
After careful review, the Commission finds that it is appropriate
to approve the amendments to Amex Rule 170.02 on a permanent basis. In
making this determination, the Commission notes that the pilot period
has provided the Commission and the Exchange an opportunity to monitor
the operation of the amendments during unusual or volatile market
conditions. The Commission believes that the experience with the pilot
indicates that specialists, for the most part, have been meeting their
obligations under the Rule and are properly assuming their
responsibilities of re-entering the market following liquidating
transactions.
In sum, the Commission believes the amendments to Amex Rule 170.02
reinforce a specialist's obligation to maintain a fair and orderly
market by providing stabilizing dealer participation to the
marketplace, especially during periods of volatile or unusual market
activity. For example, during periods of high market volatility, not
only would specialists continue to be obligated to temper disparities
between supply and demand, but specialists would specifically have to
re-enter the market at a specified rate after a liquidating
transaction. Similarly, the amendments to Amex Rule 170.02 reinforce
the negative market making obligations of specialists. For example, a
specialist is not permitted to reliquidate in the absence of a large
dealer position; rather, he or she is able to do so only if reasonably
necessary to enable him or her to maintain a fair and orderly market.
Thus, the amendments to Amex Rule 170.02 do not allow the specialist to
use the rule as a vehicle for trading.
The Commission recognizes that future periods of market volatility
accompanied by increasing volume and selling pressure may place
specialists under extreme duress to keep the markets orderly and
continuous by entering the market as buyers. In these instances, the
Commission believes the amendments should assist specialists in
tempering sudden price movements and keeping any general price
movements orderly, thereby furthering the maintenance of fair and
orderly markets consistent with Section 6 and Section 11 of the
Act.\23\
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\23\ 15 U.S.C. 78f and 78k.
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Finally, the Commission believes aggressive enforcement of this
rule is warranted given the negative effect noncompliance has on the
market. Therefore, the Commission expects the Exchange to continue to
carefully monitor specialist compliance with Amex Rule 170's procedures
as required under Section 19(g) of the Act.\24\ In particular, the
Exchange should continue to ensure that specialists are meeting their
market making obligations and appropriately re-entering the market as
required under the Rule.\25\ If a specialist fails to properly enter
the aftermarket or fails to seek Floor Official approval where such
approval, if sought, would not have been granted, the Commission
expects the Exchange to bring full disciplinary procedures.
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\24\ 15 U.S.C. 78s(g) (requiring every self-regulatory
organization to comply with, and enforce compliance with, the Act,
the rules thereunder, and its own rules).
\25\ Although liquidating transactions are not precluded during
periods of significant price movements, the Commission emphasizes
that such transactions should be accompanied by the necessary dealer
participation against the trend of the market, even in situations
where continuity and depth reflect variations that normally may be
experienced in the stock.
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In addition, the Commission expects the Exchange to address all
``nonsubstantive'' violations of this rule (i.e., instances where a
specialist fails to seek Floor Official approval where such approval,
if sought, would have been granted). The Commission recognizes that
most, if not all, ``nonsubstantive'' violations of these procedures
will be inadvertent. Nevertheless, given the crucial role that
specialists play in providing stability to the Exchange's market, it is
important to reinforce the specialists' obligations. Thus, consistent
with the interpretation adopted by the Amex in conjunction with its
request for
[[Page 13921]]
permanent approval, the Commission expects, at a minimum, that the
Exchange's staff will issue a cautionary letter to a specialist for an
initial ``nonsubstantive'' violation during a rolling twelve-month
period and to refer any subsequent ``nonsubstantive'' violations by the
same specialist during this period to the Minor Floor Violation
Disciplinary Committee (``Committee'') for a fine pursuant to the
Amex's Minor Rule Plan (``MRP'').\26\
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\26\ See Amex Rule 590(h). Although Amex Rule 590 states that
the Committee ``may'' impose a fine, the Commission believes the use
of such ``prosecutorial discretion'' to issue a cautionary letter in
lieu of a fine for ``nonsubstantive'' violations of this rule should
be exercised only in extraordinary circumstances. This position is
bolstered by the fact that the specialist, at a minimum, already
would have received such a letter from the Amex's staff in
connection with its first ``nonsubstantive'' violation of this rule
within the last twelve months.
In addition, each instance of noncompliance should be addressed
individually. Although instances of noncompliance by a specialist
that occur between regularly scheduled meetings of the Committee may
be presented as a single bundle, each infraction should be
considered a separate offense for calculating the appropriate fine.
For example, if a specialist fails to properly obtain Floor Official
approval 15 times during a 5 month period, that specialist should be
fined for 15 violations, instead of the minimum amount for a first
offense simply because all 15 violations were presented to the
Committee at the same meeting.
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The Commission finds good cause for approving the proposed rule
change, including Amendment No. 1, prior to the thirtieth day after the
date of publication of notice of filing thereof. The Exchange will
continue to use the identical procedures contained in the pilot
program. These procedures have been published in the Federal Register
on several occasions for the full comment period, and no comments have
ever been received. Furthermore, the Commission approved a similar rule
change for the NYSE, also without receiving comments on that
proposal.\27\ For these reasons, the Commission finds that accelerating
approval of the proposed rule change is consistent with Section 6,
Section 11, and Section 19(b)(2) of the Act.\28\
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\27\ See Securities Exchange Act Release No. 31797 (Jan. 29,
1993), 58 FR 7277 (approving File No. SR-NYSE-92-20).
\28\ 15 U.S.C. 78f, 78k, and 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed rule change (SR-Amex-97-12), as amended, is
approved.
\29\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-7342 Filed 3-21-97; 8:45 am]
BILLING CODE 8010-01-M
