[Federal Register Volume 59, Number 146 (Monday, August 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18583]
[[Page Unknown]]
[Federal Register: August 1, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34431; File No. SR-Amex-93-23]
Self-Regulatory Organizations; Notice of Filing and Partial
Accelerated Approval of a Proposed Rule Change by the American Stock
Exchange, Inc. Relating to the Definition of Public Customer Orders and
Requirements That Specialists Fill Incoming Orders or Update Existing
Markets
July 22, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on July 25,
1993, the American Stock Exchange (``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. The Commission is
publishing this notice to solicit comments from interested persons and
is simultaneously granting partial accelerated approval to the portion
of the rule change relating to requirements that Specialists fill
incoming orders or update existing markets.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex proposes to amend Amex Rule 958A to (i) clarify the
definition of ``public customer order'' and (ii) incorporate a
requirement that Amex specialists respond to orders, at the currently
disseminated bid or offer, either by satisfying the order or updating
the existing market in the subject series.
The text of the proposal is available at the Office of the
Secretary, 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 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 Items IV 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
The Exchange states that the purpose of the proposed rule change is
to (i) clarify the definition of what is a ``public customer order'' in
options for purposes of Exchange Rule 958A (the ``Rule''), (ii) give
the Exchange the ability to determine the option series which are
subject to the rule, (iii) provide for appropriate order marking
procedures for such orders and (iv) incorporate a ``trade or fade''
requirement for Specialists applicable to multiply-traded options.
First, the proposed rule change clarifies the definition of what is
a ``public customer order.'' The Exchange states that options
specialists are required by Amex Rule 958A to guarantee execution of
customer orders for at lest 10 contracts at a single price. The Rule
mandates that such specialists are required to buy (sell) at least 10
contracts at the bid (offer) price disseminated on the display screen a
the time the order reaches the specialist's post. This is frequently
referred to as the ``firm quote'' or ``ten up'' rule. Holding
specialists to a firm quote requirement ensures that they will
continually update options market quotations on a timely basis and
execute customer orders at such quoted markets.
The Exchange states that while specialists are willing to ensure
``ten up'' single price executions at displayed market quotes for
``true'' off-floor public customers, they are understandably reluctant
to do so for off-floor professionals. The Exchange believes that the
term ``non-broker dealer customer orders'' as presently used in
paragraph (b) of the Rule has proven to be vague and imprecise,
creating uncertainty as to whether a particular order is entitled to
the guarantee.
Accordingly, the Exchange proposes to amend paragraph (b) of the
Rule to use the term ``public customer order'' and to define such term.
Under the amendment, a ``public customer order'' would be entitled to
receive the ten-up guarantee. The proposal defines a ``public customer
order'' as an order which is not for a ``professional trading
account.'' The proposal further defines a ``professional trading
account'' as: (1) An account of a registered broker-dealer; or (2) an
account of a person engaged in business or employed as a professional
trader in securities; or (3) an account of a person whose orders are
computer generated and automatically transmitted to the Exchange via
Auto-Ex, the Exchange's automatic execution system; or (4) an account
of a person who has been determined by the Exchange to have engaged in
a pattern of trading that has previously been determined to have the
effect of abusing the purposes of the Auto-Ex system. Lastly, any
account in which any person referred to in clauses (1) through (4) of
the preceding sentence is a participant, has an interest or exercises
investment control shall be deemed to be an account of such person. The
Exchange believes that this proposed definition will serve to identify
those persons originally intended to receive the benefits of the ten-up
rule.
With respect to orders entered by registered representatives for
their own accounts, paragraph (c) of the proposed rule considers such
orders to be ``public customer order'' (thereby entitled to ``ten-up''
treatment), provided the representative's account does not fall within
the purview of the definition of ``professional trading account.''
Further, the proposed rule seeks to prohibit persons engaged in a
``pattern of trading'' from using the Exchange's Auto-Ex system to
profit from the inability of the Specialists to post quoted markets in
response to market movement. In determining what constitutes a
``pattern'' or abuse of the system, the Exchange would consider, among
other things, the frequency of transactions in an account; whether the
account has direct access to the Exchange's electronic order entry,
delivery and execution systems; and whether participants in the account
have access to non-public market information. Additionally, since the
Auto-Ex system was designed for small orders (currently equity option
orders of ten contracts or less), persons entering a number of small
orders for the same series within a relatively short period of time
could be deemed to be abusing the system.
The Exchange believes that these changes will address Specialists'
needs to have sufficient time within which to adjust quotes to reflect
changes in the markets underlying their options. The Exchange further
believes that this proposal will also provide all market makers
(Specialists and non-Specialists alike) who participate in the Auto-Ex
system with legitimate relief in situations where other professionals
from ``off floor'' seek to profit by placing their orders through Auto-
Ex before Specialists can update their quotes.
Second, the proposed rule change provides that Exchange Rule
958A(a) will apply to options series that are determined from time to
time at the discretion of the Exchange. Currently, Amex rule 958A(a)
provides that the ten-up guarantee applies to options series in the two
nearest-term expiration months. The Exchange represents that while
member firms have asked that such guarantees be expanded beyond near-
term expiration series, as a practical matter, on a voluntary basis,
Exchange Specialists in many cases do guarantee ten-up markets in the
two further-term months. Accordingly, the Exchange believes that in
order for it to have the needed flexibility to determine from time to
time which option series are to be subject to the Rule, the proposed
amendments to paragraph (a) are needed.
Third, the proposed rule change adds a new Commentary .01 to Rule
958A that provides that all orders subject to the Rule be marked in
accordance with procedures established by the Exchange. The Exchange
believes that this new Community will assist the Exchange in conducting
surveillance for violations of the Rule.
Fourth, the proposed rule change adds a new Commentary .03 to Amex
Rule 958A that provides:
With respect to broker-dealer order to buy (sell) at the
displayed offer (bid), or portions of customer orders that are not
entitled to an execution pursuant to the provisions of paragraph (a)
[the ten-up rule], the specialist is required to either (1) sell
(buy) the number of contracts specified in the order, or (2) change
the displayed offer (bid) to reflect that such displayed offer (bid)
is no longer available.\1\ In such an instance, where a displayed
offer (bid) is revised, it shall be considered conduct inconsistent
with just and equitable principles of trade for the specialist to
immediately re-display the previously disseminated offer (bid),
unless such action is warranted by a change in market conditions.
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\1\The Commission understands the provision to allow an
exchange, upon receipt of a market or marketable limit order, to
execute less than the total number of contracts contained in the
order, but the exchange then becomes obligated to update its
quotation if it is not willing to transact with any more of the
order at the same price. For example, if as a result of displaying a
more competitive offer, an exchange is sent an order to buy 50
contracts that was originally received by another exchange, it may
buy fewer than 50 contracts at its quoted price, but must then
revise its quotation to reflect that the price is no longer
available.
The Exchange states that Rule 19c-5 under the Act effectively
permitted multiple listing of all options selected for trading on or
after January 22, 1990. With respect to options on exchange-listed
stocks that began trading on one of the five option exchanges prior to
January 22, 1990 (``grandfathered options''), the Commission and the
options exchanges have been working to ``achieve the orderly
expansion'' of multiple trading to those options.\2\ The Exchange
states that an integral part of the expansion of multiple trading to
the grandfathered options is the adoption of joint-exchange procedures
to identify and minimize potential customer ``trade-throughs'' in
multiple traded options. A trade-through is an order executed on an
exchange at a price which appears to be inferior to a price displayed
at another exchange. Thus, a trade-through occurs when an order appears
to have ``traded through'' the better displayed price.
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\2\The Amex states that proposed Commentary .03 is in response
to a letter from Chairman Breeden to James R. Jones, Chairman, Amex,
dated June 30, 1992.
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In order to minimize the possibility of trade-throughs, the Amex
states that it is currently modifying the procedures and automated
systems to detect the existence of apparently better markets in
multiply-traded options. Further, to immediately address member firm
concerns about trade-throughs, the Exchange represents that its
specialists have agreed to guarantee best execution of customer orders
by either (i) matching the best bid (offer) quoted on another exchange,
or (ii) going to such other exchange, executing the trade (as
principal) at the better price and then filling the customer order at
that better price.
The Exchange states that to assure that a competing exchange's
disseminated price is in fact the best price at which a trade can be
effected, the options exchanges have discussed the need to develop a
``trade or fade'' rule. Such a rule requires that any exchange
displaying the best quoted market, upon receipt of an order, either
``trade'' at the displayed price of ``fade'' (withdraw) that price. For
example, if an Amex specialist in an option multiply listed at another
exchange is offering to sell at 2\3/4\ when a 2\1/4\ offer is being
displayed by such other exchange, the Amex specialist can either change
his offer to meet the better (2\1/4\) price or attempt to buy the
options at the other exchange for 2\1/4\ (before selling it to the
customer at that price). If however, the Amex specialist in attempting
to buy the option(s) at the other exchange finds that the competing
market maker/specialists is unwilling to trade at (honor) his displayed
price, then such market maker/specialist must fade (withdraw) the price
to reflect an offer of 2\3/8\ or higher. Thus, the Exchange believes
that incorporating a trade or fade requirement into Amex Rule 958A will
further ensure that options customers will receive the best executions
for the orders.
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act, in general, and Section 6(b)(5) in
particular, in that it is designed to remove impediments to and perfect
the mechanism of a free and open market and a national market system.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The Amex does not believe that the proposed rule change will impose
a burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. With respect to the portion of
the proposed rule change clarifying the definition of ``public customer
order,'' only ``professional trading accounts'' would be affected by
the amendments and the Amex believes that any incidental burden on such
accounts is justified by the more than countervailing benefits to
public customers and others that would result from the adoption of
these amendments.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
Written comments on the proposed rulechange were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Amex has requested that the current proposal be given
accelerated effectiveness. For the reasons set forth below, the
Commission has determined to give the portions of the proposed rule
change dealing solely with the addition of Commentary .03 to Amex Rule
958A, which will require specialists to trade at a disseminated quote
or update their markets, accelerated effectiveness prusuant to Section
19(b)(2) of the Act.
The Commission finds that the portions of the proposed rule change
relating to the requirement that specialists trade at a disseminated
quote or update their markets is consistent with the requirements of
the Act and the rules and regulations thereunder applicable to a
national securities exchange and, in particular, the requirements of
Section 6(c)(5).\3\ Specifically, the Commission finds that requiring
Amex specialists to execute orders or update their markets facilitates
transactions in securities, protects investors and the public interest,
and promotes fair competition among options markets by reducing the
likelihood that an outdated quote from one options market will hinder
the execution of an order on another options market by making such
execution appear to be at an inferior price (i.e., a ``trade-
through'').
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\3\15 U.S.C. 78f(b)(5) (1988).
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Currently, in light of the expansion in the multiple trading of
options, the options exchanges have either implemented or are working
to implement systems upgrades which will prevent orders that are
identified as potential ``trade-throughs'' from being automatically
executed and will re-route these orders to the appropriate market maker
or specialist for non-automated execution. Further, to attract order
flow, many market makers and specialists from the different options
exchanges have represented to their customers that they will execute
the orders they receive at the best price available at any of the five
options exchanges. The current proposal, therefore, will, consistent
with Section 6(b)(5) of the Act, facilitate options transactions by
encouraging Amex specialists to keep their markets up-to-date. This, in
turn, should reduce the likelihood that outdated quotes will cause
orders on other exchanges, that could be automatically executed, to be
rerouted for non-automated handling. It also should reduce the
likelihood that outdated quotes will cause orders executed on other
exchanges at current market prices to appear to be executed at inferior
prices. The commission further notes that, concurrently with approval
of this proposal, it is approving similar proposals by the Pacific
Stock Exchange, Inc. (``PSE''), the Philadelphia Stock Exchange, Inc.
(``PHLX''), the New York Stock Exchange (``NYSE'') and the Chicago
Board Options Exchange, Inc. (``CBOE'').\4\
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\4\See Securities Exchange Act Release No. 34435, 34434, 34433,
and 34432, (July 22, 1994), respectively.
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The Commission finds good cause for approving the above-noted
portions of the proposed rule change prior to the thirtieth day after
the date of publication of notice of filing thereof in the Federal
Register. The Amex proposal to require specialists to trade at a
disseminated quote or update their markets is substantially similar to
proposals by PSE, PHLX, NYSE and the CBOE. The PSE, PHLX and the CBOE
proposals were subject to a full notice and comment period and no
comments were received.\5\ Accordingly, since the Commission finds that
no new issues are raised by the current proposal, the Commission
believes it is consistent with Sections 19(b)(2) and 6(b)(5) of the
Act\6\ to approve the Amex's proposal to permit the Amex to implement
its trade or fade requirements at the same time as these requirements
are implemented by the other options exchanges.
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\5\See Securities Exchange Act Release Nos. 31962 (March 8,
1993), 58 FR 13661 (March 12, 1993), 34158 (June 3, 1994), 59 FR
30074 (June 10, 1994), and 32406 (June 3, 1993), 58 FR 32404 (June
9, 1993), respectively.
\6\15 U.S.C. 78s(b)(2) and 78f(b)(5) (1988).
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With respect to the other portions of the proposed rule change, the
Commission, within 35 days of the date of publication of this notice in
the Federal Register or within such longer period (i) as the Commission
may designate up to 90 days of such date if it find such longer period
to be appropriate and publishes its reasons for so finding or (ii) as
to which the self-regulatory organization consents, will:
(a) By order approve such proposed rule change, or
(b) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. 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, 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. 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
above-mentioned self-regulatory organization. All submissions should
refer to the file number in the caption above and should be submitted
by August 22, 1994.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\7\ that the portion of the proposed rule change (SR-Amex-93-23)
relating to the addition of Commentary .03 to Amex Rule 958A is
approved.
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\7\15 U.S.C. 78s(b) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\17 CFR 200.30-3(a)(12) (1993).
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Margart H. McFarland,
Deputy Secretary.
[FR Doc. 94-18583 Filed 7-29-94; 8:45 am]
BILLING CODE 8010-01-M
