Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act” or “Act”)  and rule 19b-4 thereunder, notice is hereby given that on April 28, 1999, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self-regulatory organization. Amex filed an amendment to the proposed rule change on July 13, 1999. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
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 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 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 Amex proposes to amend rule 108 (“Priority and Parit at Openings” by adding Commentary .02 to modify procedures applicable to proprietary orders sent by market makers in other ITS participant markets to the Amex by means of the Common Message Switch (“CMS”) and Amex Order File (“AOF”) or through a floor broker before an ITS pre-opening notification or indication of an anticipated opening price range is issued by the Exchange specialist.
The proposed procedures are comparable to those in effect for pre-opening orders sent by ITS participants to another market that has issued a pre-opening notification or indication. The ITS Plan provides that, after a specialist issues an ITS pre-opening notification or an indication through the consolidated tape of an opening price range for a security, market makers on other ITS Participants must route orders for execution at the opening prices only through ITS and not by other means (paragraph (c)(4) of Exhibit A relating to the “Pre-Opening Application Rule”). Start Printed Page 10572The execution of such orders is subject to the provisions of Exhibit A of the ITS Plan. Current pre-opening procedures on the Amex, however, allow market makers on other ITS participant markets to enter orders into CMS and AOF or through a floor broker for their own account before an indication or ITS pre-opening notification is issued, and to then received an execution in full at the opening price (or the re-opening price following a halt or suspension in trading). This contrasts with ITS Plan procedures that would apply if the order were entered after the indication or pre-opening notification.
Proposed Rule 108, Commentary .02 would set forth procedures that apply to an order for the account of market makers on another ITS participating market center entered on the Exchange before the Amex specialist issues an ITS pre-opening notification or an indication through the consolidated tape. Paragraph (a) would provide that the Amex specialist would not be required to execute such orders if they would add to the imbalance at the opening or reopening, but the specialist could execute all or part of such orders in his or her discretion, and any portion not executed at the opening or reopening would be canceled. Paragraph (b) would provide that, if such orders would offset the imbalance, the specialist may take or supply as principal 50 percent of the imbalance at the opening price, rounded up or down to avoid allocation of odd-lots. Where orders have been received from more than one market maker, the Amex specialist would allocate the remaining imbalance among them in proportion to the amount that each obligated itself to take or supply. For purposes of paragraph (b), multiple market makers, in the same security in the same market would be deemed to be a single market maker.  Paragraph (d) provides that proprietary orders from market makers in other ITS participant markets shall be marked and identified as such.
Orders originating from a market maker on another ITS Participant can add to the imbalance of buy or sell orders at openings or reopenings, and satisfying such orders in full can significantly increase the burden and market risk of the Amex specialist. (Openings and reopenings in Amex securities are virtually always conducted by the Amex specialist, rather than regional exchange specialists or over-the-counter market makers.) Even when orders of market makers in the other ITS participant markets offset the imbalance, the Amex specialist is subject to additional market risk if such specialist is foreclosed from participating in the opening by the need to accommodate the orders.
In order to facilitate orderly openings and reopenings in a manner similar to procedures for openings and reopenings in the ITS Plan, the Exchange proposed to treat the orders of market makers in other ITS participant markets entered prior to an indication or pre-opening notification in a manner comparable to the manner such orders would be handled pursuant to the ITS Plan if they were entered after an indication or pre-opening notification. Orders of market makers in other ITS participant markets would be executed in accordance with current procedures if the Amex specialists fails to issue a notice or indication before the opening or reopening.
The following examples illustrate the operation of the proposed rule and its benefits. Assume under the current procedures that prior to the opening, the Amex specialist is long 50,000 shares and receives customer orders to sell 25,000 shares at the market. The Amex specialist in this example opens the stock down a quarter point and takes the 25,000 shares into inventory. Now assume that market maker in another ITS participant market sends an order to the Amex to sell 10,000 shares for its principal account. The Amex specialist now has orders to sell 35,000 shares at the market and, due to the increased selling pressure, opens the stock down half a point and takes all 35,000 shares into inventory. As a result of the increased size of the sell side order imbalance, the customer orders on the Amex receive an inferior fill to what they would have received if the specialist did not have to execute the principal order of the market maker.
Under the Exchange's proposed procedures, if the Amex specialist sends an ITS pre-opening notification or indication, the specialist would not be required to execute the 10,000 share principal order from the market maker that added to the 25,000 share sell side imbalance. As a result, the customer orders on the Amex would receive a better execution than under the current procedures where the specialist is required to accommodate the interest of the market maker. Under the proposed procedures, the customer sell orders on the Amex in the example would be executed down a quarter point from the prior close rather than down a half a point as they would be under the current procedure. The Amex specialist, moreover, would not acquire the additional 10,000 shares of inventory, leaving him or her better able to accommodate additional sell side interest.
Similar benefits would accrue to investors in situations where the orders of market makers in other ITS participant markets offset the imbalance. Assume in this hypothetical that the specialist is short 50,000 shares and receives customer orders to sell 25,000 shares at the market prior to the open. In this example, the specialists normally would be willing to buy 25,000 shares down an 1/8 from the prior close to partially cover the short position. Now assume that a market maker in another ITS participant market sends a principal order to the Amex to buy 20,000 shares. Under the present procedures, the market maker order would be executed in full, and the specialist would be entitled to only 5,000 shares, reducing his or her ability to accommodate subsequent buy side interest since the specialist already has a substantial short position in the stock. Under the Exchange's proposal, however, if the specialist sent an ITS pre-opening notice or an indication, the specialist and market maker would be entitled to buy 12,500 shares. The Exchange does not believe that its proposed rule change will create any disincentive for specialists to send ITS Start Printed Page 10573pre-opening notifications because these would continue to be sent in accordance with the terms of the ITS Plan which is not being altered.
The Exchange believes that the proposal is consistent with Section 6(b)  of the Act, in general, and Section 6(b)(5)  of the Act, in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and in general, to protect investors and the public interest, and is not designed to permit unfair discrimination between customer, issuers, brokers or dealers.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others
Written comments on the proposed rule change were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
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 finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission 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, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. 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, located at the above address. Copies of such filing will also be available for inspection and copying at the principal office of the self-regulatory organization. All submissions should refer to File No. SR-Amex-99-16 and should be submitted by March 20, 2000.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority. Start Signature
Margaret H. McFarland,
3. See Letter to Michael Walinskas, Associate Director, Division of Market Regulation, Commission, from William Floyd-Jones, Assistant General Counsel, Amex, dated July 8, 1999 (“Amendment No. 1”). Amendment No. 1 replaces and supersedes the original filing.Back to Citation
4. The ITS Plan's Pre-Opening Application rule (paragraph (b)(i)(B)) provides that, if the Consolidated Tape Association Plan or the Exchange's rules require or permit that an “indication of interest” be furnished to the consolidated tape before an opening, then the furnishing of an indication of interest in such situations shall, without any other additional action required of the specialists, initiate the ITS Pre-Opening process, and, if applicable, substitute for and satisfy specified pre-opening notification requirements in the Pre-Opening application Rule. These provisions are also included in Amex Rule 232(b)(i)(B).Back to Citation
5. These provisions are comparable to those in the ITS Plan, Exhibit A, Paragraph (b)(ii)(c)-(E). See also Amex Rules 232(b)(ii)(c)-(E), NASD Rule 5240(f)-(h), NYSE Rule 15(c)(ii)(C)-(E), CHX Chapter XXXI Section 3(a)(II)(C)-(E), CSE Rule 14.3(f), (h) & (i), PCX Rule 5.20(b)(8)(ii)(C)-(E), and Phlx Rule 2000(c)(ii)(C)-(E). The ITS Plan establishes the following protocol for the execution of ITS commitments received after a pre-opening notification or indication:
(C) Allocation of Imbalances—Whenever pre-opening responses from one or more responding market makers include obligations to take or supply as principal more than 50 percent of the opening imbalance, the Exchange specialist may take or supply as principal 50 percent of the imbalance at the opening price, rounded up or down as may be necessary to avoid the allocation of odd lots. In any such case, where the pre-opening response is from more than one responding market maker, the specialist shall allocate the remaining imbalance (which may be greater than 50 percent if the specialist elects to take or supply less than 50 percent of the imbalance) among them in proportion to the amount each obligated himself to take or supply as principal at the opening price in his pre-opening response, rounded up or down as may be necessary to avoid the allocation of odd lots. For the purpose of this paragraph (b), multiple responding market makers in the same Eligible Listed Security in the same Participant market shall be deemed to be a single responding market maker.
(D) Treatment of Obligations to Trade—In receiving a pre-opening response, an Exchange specialist shall accord to any obligation to trade as agent included in the response the same treatment as he would to an order entrusted to him as agent on the Exchange at the same time such obligation is received.
(E) Responses Increasing the Imbalance—An Exchange specialist shall not reject a pre-opening response that has the effect of further increasing the existing imbalance for that reason alone.Back to Citation
[FR Doc. 00-4558 Filed 2-25-00; 8:45 am]
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