On April 28, 1999, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) a proposed rule change pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)  and Rule 19b-4 thereunder, relating to Amex Rule 108, Priority and Parity at Openings. On July 13, 1999, the Amex filed an amendment to the Start Printed Page 81941proposed rule change. Notice of the proposed rule change, as amended, was published for comment in the Federal Register on February 28, 2000. The Commission received one comment letter regarding the proposal. This order approves the proposed rule change, as amended.
I. Introduction and Background
The proposed rule change would amend Amex Rule 108, Priority and Parity at Openings, by adding Commentary .02 to modify procedures applicable to proprietary orders sent by market makers in other Intermarket Trading System (“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.
Presently, the Amex pre-opening procedures 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 then to receive an execution in full at the opening price (or the re-opening price following a halt or suspension in trading).
II. Description of the Proposal
Proposed Commentary .02 to Amex Rule 108, 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 re-opening, 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 re-opening would be canceled. Paragraph (b) would provide that, if such orders would offset the imbalance, the Amex 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 (c) would note that Paragraphs (a) and (b) of Commentary .02 would only apply if the Amex specialist issues an ITS pre-opening notification or indication through the Consolidated Tape. Paragraph (d) would provide that proprietary orders from market makers in other ITS participant markets shall be marked and identified as such.
III. Summary of Comments
The Commission received one comment letter on the proposed rule change. In general, the Commenter stated that the proposed rule change would place an unnecessary burden on competition, hinder, rather than facilitate, transactions in securities, create an obstacle to price discovery at the opening, and serve to restrict rather than to promote a free and open market.
Specifically, the Commenter stated that under the Amex's current practice, the Amex specialist is able to allow the full supply and demand for the security to determine the opening price because all trading interests are aggregated at the opening, including proprietary orders of other market makers. However, the Commenter opined that allowing the Amex specialist to reject orders of regional specialists is contrary to the concept of a national market system because it singles out a particular form of trading interest for exclusion from the opening.
In addition, the Commenter stated that the proposal, if approved, would allow Amex specialists, upon issuance of a pre-opening indication, to exclude proprietary trading interest if it increases an imbalance, even if such interest was entered before an indication was published. As a result, the proposal would hinder price discovery, and by discriminating against regional exchange specialists, might further fragment the National Market System (“NMS”) 
The Commenter stated that the proposal would impose an unnecessary burden on regional specialists, who, believing that they have taken appropriate steps to minimize risk exposure in given issues prior to the opening by entering orders on the Amex for execution at the opening, would find it necessary to monitor the Amex market for the possibility of a pre-opening indication. The specialist would then have to cancel orders out of the Amex system and re-enter trading interest through ITS to ensure participation in the opening. The Commenter further opined creating additional differences between the pre-opening procedures on the Amex and the NYSE would be overly burdensome.
The Commenter recommended that the Commission not approve the Amex's proposed rule change, in order to avoid unfair discrimination, obstacles to price discovery and transactions of regional specialists, and further fragmentation of the NMS.
The Amex responded by stating that (1) the proposal would benefit investors; and (2) the proposed procedures have already been reviewed and approved by the Commission in the context of interest of market makers on other ITS participant markets that is sent to the Amex after an indication or pre-opening notification.
In response to the Commenter's issues regarding price discovery, discrimination, and unnecessary burden on competition, the Amex stated that the proposed procedures are comparable to those already in effect at the Amex and other markets for pre-opening interest sent by ITS Participants after a pre-opening notification or indication has been sent by the Exchange. The Amex stated that applying the proposed procedures to the orders of the market makers before, rather than after, an indication or pre-opening notification does not place any burden on transactions in securities that the Commission has not already reviewed and approved. The Amex believes it is therefore reasonable and consistent with the Act to conform the procedures for handling orders that are received before a notification or indication to the procedures that would apply to interest Start Printed Page 81942received after a pre-opening notification or indication.
In response to the issue of further fragmentation of the NMS, the Amex provided an illustration in which a riskless principal transaction by a market maker on other ITS participant markets may result in a double printing of trades and a misleading appearance of activity in a stock. The Amex states that the practice, along with the generation of tape revenue for the regional exchange, which is used to subsidize cash payments for order flow arrangements, may lead to further fragmentation in the market. However, the Amex opined the proposal would reduce fragmentation and enhance price discovery at openings and re-openings because the proposal is designed to help provide moire accurate pricing at the opening.
Finally, the Amex noted that the proposal made no changes in the procedures for handling specific customer orders or net imbalances or agency interest. If a specialist on a regional market is unable to execute the agency orders, he or she may send the orders via an ITS commitment to the Amex at no charge to the regional specialist and those orders will be treated as any other customer orders at the Amex. The Amex believes that the proposal will neither impede price discovery nor increase market fragmentation so long as the regional specialist continues to send orders that the regional specialist is either unable or unwilling to execute, to the Exchange via ITS. The Amex also noted that the proposal would only affect the occasional regional specialist proprietary order.
After careful review, the Commission finds that the proposal is consistent with the requirements of Section 6(b) of the Act in general, and furthers the objectives of 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 respect to 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.
The Commission also finds that the changes are consistent with Section 11A(a)(1)(D) of the Act, in that the linking of markets for qualified securities though communication and data processing facilities should help to foster efficiency, enhance competition, increase the information available to brokers, dealers, and investors, facilitate the offsetting of investors' orders, and contribute to the best execution of such orders.
In determining that the proposed procedures that apply to orders entered on the Exchange before the Amex specialist issues an ITS pre-opening notification or indication through the Consolidated Tape are reasonable and consistent with Section 6(b)(5)  and 11A(a)(1)(D)  of the Act, the Commission has considered carefully the Commenter's concerns that the proposed procedure place an unnecessary burden on competition, hinder transactions in securities, create obstacles to price discovery and restrict rather than promote a free and open market. The Commission is not persuaded by these arguments. The proposed procedures should reduce the imbalances of buy or sell orders at openings or re-openings, and decrease the market risk on the Amex specialist, thus helping to facilitate orderly openings and re-openings. In addition, the orders of market makers in other ITS participant markets entered before an indication or pre-opening notification has been sent will be treated 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.
The Commission also has considered carefully the Commenter's concern of further market fragmentation because of discrimination against regional exchange specialists. The Commission believes that the proposed procedures will help to contribute to enhance execution of orders and foster cooperation and coordination with other ITS participant markets because the proposal is designed to promote accurate pricing at the opening; orders of market makers in other ITS participant markets would be executed in accordance with the current procedures if the Amex specialist does not issue a notice or indication before the opening or re-opening. The proposal does not make any changes to the Amex's current procedures of handling specific customer orders or net imbalances of agency interest.
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act, that the proposal, as amended (SR-Amex-99-16), be and hereby is approved.Start Signature
For the Commission by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
3. See Letter from William Floyd-Jones, Assistant General Counsel, Amex, to Michael Walinskas, Associate Director, Division of Market Regulation (“Division”), Commission (July 8, 1999) (“Amendment No. 1”). Amendment No 1 replaces and supercedes the original filing.Back to Citation
4. Securities Exchange Act Release No. 42441 (February 18, 2000), 65 FR 10571 (February 28, 2000) (SR-Amex-99-16).Back to Citation
5. See Letter from Peter G. Armstrong, Vice President, San Francisco Equity Operations, Pacific Exchange, Inc. (“PCX”) to Jonathan G. Katz, Secretary, Commission, (April 7, 2000).Back to Citation
6. See note 5, supra.Back to Citation
7. See note 5, supra, p. 1.Back to Citation
8. See note 5, supra, p. 2.Back to Citation
9. See note 5, supra, p. 2.Back to Citation
10. See note 5, supra, p. 2.Back to Citation
11. See note 5, supra, p. 3.Back to Citation
11. See Letter from Bill Floyd-Jones, Assistant General Counsel, Amex, to Katherine England, Assistant Director, Division, Commission (July 28, 2000).Back to Citation
13. Id. at p.1.Back to Citation
14. See ITS Plan, Exhibit A, Paragraph (b)(i)(B).Back to Citation
15. See note 12, supra, p. 1.Back to Citation
16. See note 12, supra, pp. 2-3.Back to Citation
17. See note 12, supra, p. 2.Back to Citation
18. See note 12, supra, p. 2. These are two of the three types of orders that PCX sends to the Amex.Back to Citation
19. See note 12, supra, p. 2.Back to Citation
20. See note 12, supra, p. 2.Back to Citation
23. In approving the proposal, the Commission has considered the rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).Back to Citation
[FR Doc. 00-32892 Filed 12-26-00; 8:45 am]
BILLING CODE 8010-01-M