[Federal Register Volume 59, Number 82 (Friday, April 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10251]
[[Page Unknown]]
[Federal Register: April 29, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33957; File No. SR-Amex-92-26]
Self-Regulatory Organizations; American Stock Exchange; Order
Approving Proposed Rule Change Relating to Amendments to Rule 170
Pertaining to Specialists' Liquidating Transactions
April 22, 1994.
I. Introduction
On August 13, 1992, the American Stock Exchange (``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 amend Amex 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. The Amex also
proposes to amend this Rule to set forth the affirmative action that
specialists would be required to take subsequent to effecting various
types of liquidating transactions. The Amex proposes to implement the
proposed rule change for a one-year pilot period.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1990).
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 32804 (August 25, 1993), 58 FR 45926 (August
31, 1993). No comments were received on the proposal. This order
approves the proposed rule change for a one year period.
II. Description of the Proposal
Amex Rule 170, which is the primary Amex rule governing the
functions of specialists, restricts a specialist's purchases or sales
of his or her specialty stock to those dealings that are reasonably
necessary to permit the specialist to maintain a fair and orderly
market.\3\
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\3\Amex Rule 170(c) states that a specialist shall not effect on
the Exchange purchases or sales of any security in which such
specialist is registered, for any account in which he or his member
organization is directly or indirectly interested, unless such
dealings are reasonably necessary to permit such specialist to
maintain a fair and orderly market, or to act as an odd-lot dealer
in such security.
In general, specialist's activities are circumscribed by Section
11 of the Act [15 U.S.C. 78k] and the rules thereunder, and by the
rules of the exchange where the specialist is registered. Commission
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, so far as
practicable, of a fair and orderly market. 17 CFR 240.11b-1(a)(2).
Rule 11b-1(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.
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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.\4\ Conversely, pursuant to their negative obligations,
specialists are precluded from trading for their own accounts unless
such dealing is necessary for the maintenance of a fair and orderly
market.\5\ In view of these obligations, the price trend in a security
should be determined not by specialist trading, but by the movements of
the incoming orders that initiate the trades. Amex Rule 170.02, which
contains one of the specalist's ``negative'' obligations, sets forth
distinct prohibitions against specialist trades on destablizing ticks
(i.e., purchases on plus or zero plus ticks and sales on minus or zero
minus ticks).\6\ Rule 170.02 also provides that, unless a specialist
has Floor Official approval, he or she should avoid liquidation of all,
or substantially all, of a position by selling stock at prices below
the last different price (on a direct minus or zero minus tick) or by
purchasing stock at prices above the last different price (on a direct
plus or zero plus tick), unless the transaction is reasonably necessary
in relation to the specialist's overall position in his or her
specialty stocks.\7\
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\4\Amex Rule 170(d) states, in part, that it is ordinarily
expected that a specialist will engage, to a reasonable degree under
the existing circumstances, in dealings for his own account in full
lots when lack of price continuity or lack of depth in the full lot
market or temporary disparity between supply and demand in either
the full lot or the odd-lot market exists or is reasonably to be
anticipated. in addition, Rule 170(d) states that transactions on
the Exchange for his own account effected by a specialist in the
securities in which he is registered are to constitute a course of
dealings reasonably calculated to contribute to the maintenance of
price continuity with reasonable depth, and to the minimizing of the
effects of temporary disparity between supply and demand, immediate
or reasonably to be anticipated, in either the full lot or the odd-
lot market.
\5\See Amex Rule 170(c).
\6\A plus tick is a price above the price of the last preceding
sale. A zero plus tick is a price equal to the last sale if the last
preceding transaction at a different price was at a lower price.
Conversely, a minus tick is a price below the price of the last
preceding sale. A zero minus tick is a price equal to the last sale
if the last preceding transaction at a different price was at a
higher price.
\7\Rule 170.02 also provides that, unless a specialist has Floor
Official approval, he or she should avoid: Failing to re-enter the
market where necessary, after effecting transactions such as those
described above; and failing to maintain a fair and orderly market
during liquidations. The Amex proposes to delete these two
provisions and replace them with new language described infra.
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The Exchange proposes to amend Rule 170.02 regarding how
specialists can ``reliquify'' a dealer position. When reliquifying, a
specialist is reducing a large inventory position in order to be able
to fully participate on the contra side of the market during periods of
substantial buying or selling interest. The amended rule would permit a
specialist, when reliquifying, to sell ``long'' inventory stock on a
zero minus tick, or purchase stock to ``cover'' a ``short'' position on
a zero plus tick, without Floor Official approval. In addition, the
Amex proposes to amend Rule 170.02 to emphasize the specialist's
affirmative role in providing stabilizing dealer participation to the
marketplace, especially during periods of volatile or unusual market
activity, involving significant price movement in a security, where
reliquification may be required to facilitate the maintenance of a fair
and orderly market. In this regard, Rule 170.02 would be amended on a
one year pilot basis to provide that:
Liquidations involving the principal selling of any specialty
stock on a direct minus tick, or the purchasing of such stock on a
direct plus tick will require Floor Official approval, and should be
effected only in conjunction with the specialist's re-entering the
market on the opposite side of the market from the liquidating
transaction where the imbalance indicates that the immediate
succeeding transactions would result in a lower price following the
sale (or higher price following the purchase).
During volatile or unusual market conditions involving
significant price movement in a security, the specialist should re-
enter the market following a liquidation transaction which was
effected by selling stock on a direct minus or zero minus tick, or
purchasing stock on a direct plus or zero plus tick and, at a
minimum, participate as a dealer to the extent of his or her usual
level of dealer participation in the subject security.
During such periods, a series of such liquidating transactions
effected within a brief period of time should be accompanied by the
specialist's re-entry in the market and effecting transactions which
reflect a significant degree of dealer participation.
The Exchange believes that its proposed amendments to Rule 170.02
will provide specialists with the ability to respond to periods of
extreme market volatility, particularly those characterized by high
volume and selling pressure, by permitting him or her to liquidate
large dealer positions acquired as a result of such selling pressure.
In addition, the Exchange believes that the amendments would reinforce
the specialist's affirmative obligation to maintain a fair and orderly
market by providing stabilizing dealer participation to the
marketplace, and would reinforce his or her negative obligations in
that a specialist would not be able to liquidate in the absence of a
large dealer position, but could only do so if reasonably necessary to
maintain a fair and orderly market.
The Exchange proposes to implement the proposed rule change as a
one-year pilot, and will monitor compliance with the requirements of
the Rule through existing surveillance procedures. In particular, the
Exchange stated that liquidation transactions effected by specialists
on direct plus or minus destabilizing ticks will initially be reviewed
as to whether the requisite Floor Official approval was obtained, and
will be subjected to a further review with respect to the specialist's
dealer participation levels, re-entry into the market in terms of
timing and support, and whether the transactions were counter to the
market trend. The Exchange stated that it would provide the Commission
with a report summarizing the results of its surveillance prior to the
conclusion of the pilot period.
The Exchange believes that the proposed rule change is consistent
with section 6(b)(5) of the Act 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, by enabling specialists to
facilitate orderly and continuous markets during periods of unusual
volatility of price changes.
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, with sections 6(b) (5) and 11 of the Act.\8\ 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, remove impediments to and perfect
the mechanism of a free and open market, and, in general, protect
investors and the public interest. The Commission also believes that
the proposal is consistent with section 11(b) of the Act and Rule 11b-1
thereunder,\9\ which allow exchanges to promulgate rules relating to
specialists in order to maintain fair and orderly markets.
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\8\15 U.S.C. 78f and 78k (1988).
\9\17 CFR 240.11b-1 (1991).
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Both the Act and Exchange rules reflect the crucial role played by
specialists in providing stability, liquidity, and continuity in the
Exhange's auction market. Recognizing the importance of the specialist
in the auction market, the Act, as well as Exchange rules, impose
stringent obligations upon specialist.\10\ Primary among the
obligations are the requirements to maintain fair and olderly markets
and to restrict specialist dealings to those that are ``reasonably
necessary'' in order to maintain a fair and orderly market.\11\
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\10\See Rule 11b-1 under the Act, 17 CFR 240.11b-1 (1993); Amex
Rule 170.
\11\17 CFR 240.11b-1(A)(2) (1993).
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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'') report on the October
1987 market break (``1987 Market Break Report''), the Division examined
specialist performance on the Amex on October 19 and 20, 1987.\12\ The
Division found that, although some Amex specialists appeared to perform
well under adverse conditions, others did not.\13\
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\12\See Division of Market Regulation, The October 1987 Market
Break, February 1988, at 4-29 to 4-41.
\13\See 1987 Market Break Report at 4-41.
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The Division also examined Amex specialist performance during the
volatile conditions of October 13 and 16, 1989 (``October 1989
Report''), and found that specialist performance during the time was
similar in many respects to the pattern of specialist performance
during the October 1987 Market Break.\14\ Specifically, the Division
found that, during these two periods of adverse market conditions,
specialists were confronted with extreme volume and volatility.\15\
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\14\See Division of Market Regulation, Market Analysis of
October 13 and 16, 1989, at 33.
\15\1987 Market Break Report at 4-30; October 1989 Report, at
27.
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Both the 1987 Market Break Report and the October 1998 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.
One area of specialist performance specifically reviewed by the
October 1989 Report involved specialist's compliance with their
obligation to maintain and orderly market by buying and selling stocks
for their own accounts to relieve imbalances between supply and demand.
In the October 1989 Report, the Division requested that the Amex
examine the language of Rule 170.02.\16\ Amex Rule 170.02 states that,
unless a specialist has the prior approval of a Floor Official, he or
she should avoid liquidation of all or substantially all of position by
selling stock at prices below the last different price or by purchasing
stock at prices above the last different price unless such transactions
are reasonably necessary in relation to the specialist's overall
position in the stocks in which he or she is registered. The Division
indicated that Rule 170.02 appeared to provide specialists with
unnecessarily broad latitude for effecting transactions on
destabilizing tricks.\17\
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\16\See October 1989 Report at 29. The Division also requested
that the New York Stock Exchange (``NYSE'') examine the language of
NYSE Rule 104.10, which contains similar language to Amex Rule
170.02. Specifically, the Division stated that the suggestion
regarding NYSE Rule 104.10's treatment of estabilizing transactions
is equally applicable to Amex Rule 170.02. See October 1989 Report
at 29-30, note 56.
\17\See October 1989 Report at 19, note 31.
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The proposed rule change is responsive to the request regarding
Rule 170.02 as well as the conclusions of the two market break reports.
The Amex, recognizing that market conditions may necessitate that a
specialist participate heavily in a rapidly declining market, has
proposed amendments to Rule 170.02 to provide 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. At the same time, the
amendments also would strengthen the specialist's concomitant
obligation to participate as dealer on the opposite side of the market
after a liquidating transaction.
Under the amended Rule, 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 a zero plus tick, which previously required Floor Official
approval, can be effected under the pilot procedures without a Floor
Official's approval, but 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.
Both the Act and Exchange 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
in the auction market, the Act, as well as Exchange rules, impose
stringent obligations upon
After the liquidation, a specialist is required to re-enter the
market on the opposite side of the market from the liquidating
transaction to offset any imbalances between supply and demand. During
any period of volatile or unusual market conditions resulting in a
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 market conditions or unusual
price movements, re-entry into the market following a series of
transactions must reflect a significant level of dealer participation.
Thus, the amendments to Rule 170.02 would reinforce the
specialist's affirmative 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 would specifically have to reenter the
market after a liquidating transaction. Similarly, the amendments to
Rule 170.02 would reinforce the negative market making obligations of
specialists. For example, a specialist would not be permitted to
reliquify in the absence of a large dealer position; rather he or she
would only be able to do so if reasonably necessary to enable him or
her to maintain fair and orderly market. Thus, the new amendments to
Rule 170.02 would not allow the specialist to use the rule as a vehicle
for trading.
During future periods of market volatility, accompanied by
increasing volume and selling pressure, specialists may be under
extreme pressure to keep the markets orderly and continuous by entering
the market as buyers. In these instances, the Commission believes that
the amendments to Rule 170.02 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 Sections 6 and 11 under the Act.
The Commission emphasizes that reliquifications are not precluded
during periods of significant price movements, but they should be
accompanied by the necessary dealer participation against the trend of
the market, even in situations where continuity and depth reflect
variations that may normally be experienced in the stock.
In addition, the Commission believes that approval of the Amex
proposal for a one year pilot period will provide the Commission and
Exchange an opportunity to monitor the operation of the rule during
periods of unusual or volatile market conditions. This one year period
also will allow the Commission and the Exchange the opportunity to
monitor specialist compliance with the new rule to ensure that
specialists are properly assuming their responsibilities of re-entering
the market following liquifying transactions.
Finally, in its rule filing, the Amex indicated that, during the
one year pilot period, the Exchange would monitor compliance with the
requirements of the Rule. Specifically, the Amex stated that
liquidation transactions effected by specialists on direct plus or
minus destabilizing ticks will initially be reviewed as to whether the
requisite Floor Official approval was obtained, and will be subjected
to a further review with respect to the specialist's dealer
participation levels, re-entry into the market in terms of timing and
support, and whether to transactions were counter to the market trend.
The Exchange also stated that it would provide the Commission with a
report summarizing the results of its surveillance prior to the
conclusion of the pilot period. In this regard, the Commission requests
that the Exchange submit a report, by January 22, 1995, setting forth
the criteria developed by the Exchange to determine whether any
reliquifications by specialists were necessary and appropriate in
connection with fair and orderly markets and providing information
gathered regarding the Exchange's monitoring of liquidation
transactions effected by specialists on any destabilizing tick. In
addition, the Commission requests that the Amex provide, among other
things, the following information in its report:
(1) A review of all liquidation transactions effected by
specialists on any destabilizing ticks;
(2) A review of liquidating transactions by specialists to
determine that the required Floor Official approval was obtained where
necessary;
(3) And a review of liquidating transactions in light of dealer
participation levels and re-entry into the market in terms of timing
and support (e.g., whether the specialist's transactions were counter
to the market trend).
It therefore is ordered, pursuant to section 19(b)(2) of the
Act,\18\ that the proposed rule change is approved for a one year pilot
period ending on April 22, 1995.
\18\18 U.S.C. 78s(b)(2) (1988).
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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) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-10251 Filed 4-28-94; 8:45 am]
BILLING CODE 8010-01-M
