[Federal Register Volume 59, Number 59 (Monday, March 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7214]
[Federal Register: March 28, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33791; File No. SR-Amex-93-47]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Partial Temporary Accelerated Approval to Proposed Rule Change
by American Stock Exchange, Inc. Relating to an Extension of Its Pilot
Program Which Permits Specialists To Grant Stops in a Minimum
Fractional Change Market
March 21, 1994.
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 December 29, 1993, the American Stock Exchange, Inc. (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the self-
regulatory organization.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1991).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange requests permanent approval of the pilot program which
amended Amex Rule 109 to permit a specialist, upon request, to grant
stops in a minimum fractional change market.\3\ In the alternative, the
Exchange proposes a one-year extension of the pilot program. The
complete text of the proposed rule change is available at the Office of
the Secretary, Amex, and at the Commission.
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\3\The Amex received approval to amend Rule 109, on a pilot
basis, in Securities Exchange Act Release No. 30603 (April 17,
1992), 57 FR 15340 (April 27, 1992) (File No. SR-Amex-91-05) (``1992
Approval Order''). The Commission subsequently extended the Amex's
pilot program in Securities Exchange Act Release Nos. 32185 (April
21, 1993), 58 FR 25681 (April 27, 1993) (File No. SR-Amex-93-10)
(``April 1993 Approval Order''); and 32664 (July 21, 1993), 58 FR
40171 (July 27, 1993) (File No. SR-Amex-93-22) (``July 1993 Approval
Order''). Commission approval of these amendments to Rule 109
expires on March 21, 1994. The Exchange seeks accelerated approval
of the proposed rule change in order to allow the pilot program to
continue without interruption. See letter from Claudia Crowley,
Special Counsel, Legal & Regulatory Policy Division, Amex, to Beth
Stekler, Attorney, Division of Market Regulation, SEC, dated March
4, 1994.
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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 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 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 July 21, 1993, the Commission extended its pilot approval of
amendments to Exchange Rule 109 until March 21, 1994.\4\ The amendments
permit a specialist, upon request, to grant a stop\5\ in a minimum
fractional change market\6\ for any order of 2,000 shares or less, up
to a total of 5,000 shares for all stopped orders, provided there is an
order imbalance, without obtaining prior Floor Official approval. A
Floor Official, however, must authorize a greater order size or
aggregate share threshold.
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\4\See July 1993 Approval Order, supra, note 3.
\5\When a specialist agrees to a floor broker's request to
``stop'' an order, the specialist is obligated to execute the order
at the best bid or offer, or better if obtainable. See Amex Rule
109(a).
\6\Amex Rule 127 sets forth the minimum fractional changes for
securities traded on the Exchange.
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During the course of the pilot program, the Exchange has closely
monitored compliance with the rule's requirements; analyzed the impact
on orders on the specialist's book resulting from the execution of
stopped orders at a price that is better than the stop price; and
reviewed market depth in a stock when a stop is granted in a minimum
fractional change market. The Exchange believes that the amendments to
Rule 109 have provided a benefit to investors by providing an
opportunity for price improvement, while increasing market depth and
continuity without adversely affecting orders on the specialist's book.
The Exchange's findings in this regard have been forwarded to the
Commission under separate cover.
The Exchange is therefore proposing permanent approval of the
amendments to Rule 109. In the alternative, the Exchange is requesting
an extension of the pilot program for an additional one-year period, if
the Commission feels that further study and monitoring of the effects
of the pilot program are necessary.
2. Statutory Basis
The proposed rule change is consistent with section 6(b) of the Act
in general and furthers the objectives of section 6(b)(5) in particular
in that it is 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 Exchange believes that the proposed amendments to Rule
109 are consistent with these objectives in that they are designed to
allow stops, in minimum fractional change markets, under limited
circumstances that provide for the possibility of price improvement to
customers whose orders are granted stops.
B. Self-Regulatory Organization's Statement on Burden on Competition
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
No written comments were solicited or received 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. 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-93-47 and should be
submitted by April 18, 1994.
IV. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
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 section 6(b)(5)\7\ and section 11(b)\8\ of the Act.
The Commission believes that the amendments to Rule 109 should further
the objectives of section 6(b)(5) and section 11(b) through pilot
program procedures designed to allow stops, in minimum fractional
change markets, under limited circumstances that provide the
possibility of price improvement to customers whose orders are granted
stops.\9\
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\7\15 U.S.C. 78f (1988).
\8\15 U.S.C. 78k (1988).
\9\For a description of Amex procedures for stopping stock in
minimum fractional change markets, and of the Commission's rationale
for approving those procedures on a pilot basis, see 1992 Approval
Order, supra, note 3. The discussion in the aforementioned order is
incorporated by reference into this order.
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In its orders approving the pilot procedures,\10\ the Commission
asked the Amex to study the effects of stopping stock in a minimum
fractional change market. Specifically, the Commission requested
information on: (1) The percentage of stopped orders executed at the
stop price, versus the percentage of such orders receiving a better
price; (2) whether limit orders on the specialist's book were being
bypassed due to the execution of stopped orders at a better price (and,
to this end, the Commission requested that the Amex conduct a one-day
review of all book orders in the ten stocks receiving the greatest
number of stops); (3) market depth, including a comparison of the size
of stopped orders to the size of the opposite side of the quote and to
any quote size imbalance, and including an analysis of the ratio of the
size of the bid to the size of the offer; and (4) specialist compliance
with the pilot program's procedures.
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\10\See supra, note 3.
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On March 12, 1993, June 28 and July 1, 1993, and October 15, 1993
and January 5, 1994, the Exchange submitted to the Commission
monitoring reports regarding the amendments to Rule 109. The Commission
believes that, although these monitoring reports provide certain useful
information concerning the operation of the pilot program, the Amex
must provide further data, particularly about Rule 109's impact on
limit orders on the specialist's book, before the commission can fairly
and comprehensively evaluate the Amex's use of the pilot procedures. To
allow such additional information to be gathered and reviewed, without
compromising the benefit that investors might receive under Rule 109,
as amended, the Commission believes that it is reasonable to extend the
pilot program until March 21, 1995. During this extension, the
Commission expects the Amex to respond fully to the concerns set forth
below.
First, the January monitoring report indicates that approximately
three-quarters of orders stopped in minimum fractional change markets
received price improvement. The Commission, therefore, believes that
the pilot procedures provide a benefit to investors by offering the
possibility of price improvement to customers whose orders are granted
stops in minimum fractional change markets. According to the latest
Amex report, moreover, nearly all stopped orders were for 2,000 shares
or less. In this respect, the amendments to Rule 109 should mainly
affect small public customer orders, which the Commission envisioned
could most benefit from professional handling by the specialist. During
the pilot extension, the commission requests that the Amex continue to
monitor the percentage of stopped orders that are for 2,000 shares or
less.
Second, the Amex preliminarily believes that, with respect to a
significant majority of stops granted under these amendments to Rule
109, customer limit orders existing on the specialist's book were not
disadvantaged.\11\ This conclusion is based on the Exchange's review of
limit orders on the opposite side of the market at the time a stop was
granted pursuant to this pilot program. As part of its one-day review
of the ten stocks receiving the greatest number of stops, the Amex
determined how often book orders which might have been entitled to an
execution had the order not been stopped, in fact, were executed at
their limit price by the close of the day's trading.\12\ The Commission
does not consider that data to be conclusive given the narrow scope of
the Exchange's analysis of the pilot program's impact.
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\11\When stock is stopped, book orders on the opposite side of
the market that are entitled to immediate execution lose their
priority. If the stopped order then receives an improved price,
limit orders at the stop price are bypassed and, if the market turns
away from that limit, may never be executed.
As for book orders on the same side of the market as the stopped
stock, the Commission believes that Rule 109's requirements make it
unlikely that these limit orders would not be executed. Under the
Amex's pilot program, an order can be stopped only if a substantial
imbalance exists on the opposite side of the market. See infra, text
accompanying notes 19-25. In those circumstances, the stock would
probably trade away from the large imbalance, resulting in execution
of orders on the book.
\12\Beyond the one-day review, the Amex could make this
determination only for those stocks in which the electronic display
book had been implemented. For other stocks, the Amex determined how
often an equivalent volume (i.e., the same number of shares as the
stopped order) was executed at the opposite side's limit price by
the close of the day's trading.
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The Commission historically has been concerned that book orders may
get bypassed when stock is stopped, especially in a minimum fractional
change market.\13\ Based on the Amex's experience to date, the
Commission believes that additional data is necessary before the
Commission can determine whether there are sufficient grounds to
conclude that this long-standing concern has been alleviated. Thus to
ensure that Rule 109, as amended, will not potentially harm public
customers with limit orders on the specialist's book, the Amex should
provide detailed facts supporting its arguments about the impact of its
pilot procedures. The Commission therefore requests that the Amex
conduct another review of this issue. At a minimum, the Amex should
determine how often limit orders against which stock is stopped in a
minimum fractional change market are executed by the close of the day's
trading.\14\ Further, the Amex should conduct, on a date to be selected
by the Commission, another one-day review of all book orders in the ten
stocks receiving the greatest number of stops, and should submit to the
Commission both raw trade data for,\15\ and a description of the final
disposition of,\16\ each such order.
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\13\See, e.g., SEC, Report of the Special Study of the
Securities Markets of the Securities and Exchange Commission, H.R.
Doc. No. 95, 88th Cong., 1st Sess. Pt. 2 (1963).
\14\Specifically, the Amex would first calculate the total
number of shares of limit orders against which stock is stopped in
minimum fractional change markets. The Amex would then determine how
many of those shares actually are executed by the close of the day's
trading. As noted above, see supra note 12, electronic display book
technology is necessary to determine the final disposition of limit
orders. The Amex expects the electronic book to be implemented
Floor-wide by mid-1994. Telephone conversation between Claudia
Crowley, Special Counsel, Legal & Regulatory Policy Division, Amex,
and Beth Stekler, Attorney, Division of Market Regulation, on March
11, 1994. As the phase-in of the electronic book continues, the Amex
should provide the Commission with complete information for all
stocks in which it has the capability to monitor the final
disposition of limit orders, even if it has not yet completed Floor-
wide implementation of the electronic book.
\15\In this regard, the Commission requests that the Amex submit
the documentation the Amex is relying upon to support its
conclusions about the final disposition of these limit book orders.
See infra, note 16.
\16\See supra, note 14.
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In terms of market depth, the Amex's January monitoring report
suggests that stock tends to be stopped in minimum fractional change
markets where there is a significant disparity (in both absolute and
relative terms) between the number of shares bid for and the number of
shares offered.\17\ That report also suggests that, given the depth of
the opposite side of the market, orders affected by the Rule 109 pilot
tend to be relatively small.\18\ The Amex repeatedly has stated, both
to the Commission\19\ and to its members,\20\ that specialists can only
stop stock in a minimum fractional change market when (1) an imbalance
exists on the opposite side of the market and (2) such imbalance is of
sufficient size to suggest the likelihood of price improvement.\21\
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\17\There is a direct relationship between such a quote size
imbalance and the likelihood of price improvement. A large imbalance
on one side of the market suggests that subsequent transactions will
take place on the other side. In those circumstances, it could be
appropriate to grant a stop, since the delay might allow the
specialist to execute the order at a better price for the customer.
\18\A relatively large order might begin to counteract the
pressure the imbalance on the opposite side of the market is putting
on the stock's price. Accordingly, it might not be as appropriate to
stop such an order.
\19\See letter from Claire P. McGrath, Senior Counsel, Legal &
Regulatory Policy Division, Amex, to Mary Revell, Branch Chief,
Division of Market Regulation, SEC, dated January 6, 1992 (Amendment
No. 1 to File No. SR-Amex-91-05). Amendment No. 1 formally
incorporated the requirement that the indicia of market depth
discussed below must, without exception, be satisfied before a
specialist is permitted to stop stock in a minimum fractional change
market.
\20\See Amex Information Circular Nos. 92-74 (April 24, 1992)
and 93-333 (April 7, 1993).
\21\For further discussion of the relationship between quote
size imbalance and the likelihood of price improvement, see supra
note 17.
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The Commission believes that the requirement of a sufficient market
imbalance is a critical aspect of the pilot program.\22\ Such a
requirement is necessary to ensure that stops are only granted, in a
minimum fractional change market, when the benefit (i.e., price
improvement) to orders being stopped far exceeds the potential of harm
to orders on the specialist's book.\23\ To evaluate how this standard
is being applied in practice, the Commission requests that the Amex
conduct another comprehensive quantitative analysis of market depth. In
its next monitoring report, the Amex should provide, in chart form, a
comparison of the size of the stopped order to any quote size
imbalance.\24\ The chart also should include the ratio of the size of
the bid to the size of the offer.\25\ The Amex should concentrate an
orders for 2,000 shares or less, and should provide the requested
information in the form of an average for all buy orders stopped, and
the for all sell orders stopped, in that size range.
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\22\In extending a comparable pilot program on the New York
Stock Exchange, the Commission placed similar emphasis on the
critical nature of the sufficient size standard when stopping stock
in minimum fractional change markets. See Securities Exchange Act
Release No. 32031 (March 22, 1993), 58 FR 16563 (March 29, 1993)
(File No. SR-NYSE-93-18).
\23\See supra, text accompanying notes 11-16.
\24\Every time a specialist stops an order to buy, the Amex
should calculate the size of that stopped order as a percentage of
the quote size imbalance, i.e., the difference between the size of
the offer and the size of the bid.
Every time a specialist stops an order to sell, the Amex should
calculate the size of that stopped order as a percentage of the
quote size imbalance, i.e., the difference between the size of the
bid and the size of the offer.
\25\Every time a specialist stops an order to buy, the Amex
should calculate the size of the bid as a percentage of the size of
the offer.
Every time a specialist stops an order to sell, the Amex should
calculate the size of the offer as a percentage of the size of the
bid.
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Finally, the Amex report describes its efforts regarding compliance
with the pilot procedures. To alleviate confusion about how to evidence
Floor Official approval (which, as noted above, a specialist must
obtain to stop any order for more than 2,000 shares, or a total of more
than 5,000 shares for all stopped orders), the Exchange has developed
new manual and automated reports, which serve as a written audit trail
for surveillance purposes. As a result, the Commission believes that
the Amex has sufficient means to determine whether a specialist
complied with the amendments' order size and aggregate share thresholds
and, if not, whether Floor Official approval was obtained for larger
parameters. The Commission also notes the Amex's on-going effort to
keep its specialists properly informed about the pilot program's
requirements. In this context, the Amex has distributed Information
Circulars.\26\ and held continuing educational sessions on the pilot
program and its requirements for stopping stock in minimum fractional
change markets.
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\26\See supra, note 20.
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During the pilot extension, the Commission requests that the Amex
continue to monitor closely specialist compliance with Rule 109's
procedures. As before, the Amex should determine how often orders
requiring Floor Official approval to be stopped do not receive such
approval. In so doing, the Amex should distinguish between instances
where the specialist did not ask for permission and those where it was
denied (and, if so, on what grounds). The Amex should gather and report
information about the market conditions prevailing at the time of each
instance of specialist non-compliance with these procedures and the
action taken by the Exchange in response thereto.
The Commission requests that the Amex submit a report describing
its findings on these matters, specifically: (1) The effect of Rule
109, as amended, on limit book orders and (2) specialist compliance
with the pilot procedures, by December 31, 1994. In addition, if the
Exchange determines to request an extension of the pilot program beyond
March 21, 1995, the Commission requests that the Amex also submit a
proposed rule change by December 31, 1994.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of the
notice of filing thereof. This will permit the pilot program to
continue on an uninterrupted basis. In addition, the procedures the
Exchange proposes to continue using are the identical procedures that
were published in the Federal Register for the full comment period and
were approved by the Commission.\27\
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\27\No comments were received in connection with the proposed
rule change which implemented these procedures. See 1992 Approval
Order, supra, note 3.
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It is therefore ordered, pursuant to section 19(b)(2)\28\ that the
proposed rule change (SR-Amex-93-47) is hereby approved until March 21,
1995.
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\28\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\29\
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\29\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-7214 Filed 3-25-94; 8:45 am]
BILLING CODE 8010-01-M
