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Notice

Self-Regulatory Organizations; Order Approving a Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 to the Proposed Rule Change by the American Stock Exchange LLC Relating to Its Performance Evaluation Procedures for Option, Equity and ETF Specialists

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Start Preamble June 26, 2002.

On February 19, 2001, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with 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 codify the Exchange's performance evaluation procedures for options, equity and Exchange Traded Fund (“ETF”) specialists. The Amex filed Amendment Nos. 1,[3] 2,[4] and 3 [5] to the proposed rule change, respectively. The proposed rule change, as amended, was published for public comment in the Federal Register on April 1, 2002.[6] The Commission received no comments on the proposal. On May 28, 2002, the Amex filed Amendment No. 4 to the proposed rule change.[7] This order approves the proposed rule change, as amended.

I. Description of the Proposed Rule Change

The Exchange proposes to amend Amex Rule 26, and adopt Commentaries .04, .05, .06, and .07 to Amex Rule 26 to revise the current system for evaluating option, equity and ETF specialists by adding and codifying a number of objective criteria in the rating scheme and implementing defined consequences for poor performance. The Exchange also proposes to codify its existing market share methodology for evaluating options specialist performance.[8]

Under the proposed specialist evaluation systems, specialists would be evaluated quarterly based upon data from the prior quarter with respect to various criteria. The Exchange may change the criteria used to evaluate specialists and the weightings of these criteria from time to time as warranted by market conditions in order to enhance the Exchange's competitiveness relative to other markets and/or market quality. The Exchange would notify specialists of any changes to the criteria, and the weightings thereof, in advance of the calendar quarter in which the change would be implemented.

The Exchange proposes to use the following performance criteria for specialist evaluation until further notice:

Option Specialist Evaluation Criteria

  • Percentage of trades executed at or better than the National Best Bid and Offer (“NBBO”). Start Printed Page 44653
  • Percentage of orders that receive price improvement.
  • Percentage of time at NBBO.
  • Average bid/offer spread.
  • Liquidity enhanced trades.[9]
  • Average execution time.
  • Size of orders eligible for Auto-Ex.
  • Timeliness of openings relative to the underlying security.
  • Floor Broker Questionnaire rankings.
  • Average number of Performance Committee actions per option.
  • Average number of Minor Floor Violation Disciplinary Committee actions [10] per option.

Equity Specialist Evaluation Criteria

  • Percentage of volume executed better than the NBBO.
  • Percentage of volume at the NBBO.
  • Percentage of time at the NBBO.
  • Percentage of market orders executed within sixty seconds.
  • Percentage of manual display of better limit orders.
  • Number of issues opened after 9:45.
  • Floor Broker Questionnaire rankings.
  • Average response time to ITS [11] commitments.

ETF Specialist Evaluation Criteria

  • Percentage of orders that receive price improvement.
  • Percentage of time at the NBBO.
  • Average bid/offer spread.
  • Average execution time for market and marketable limit orders.
  • Floor Broker Questionnaire rankings.
  • Average response time to ITS commitments.
  • Average number of Performance or Minor Floor Violation Disciplinary Committee actions per ETF.

The Exchange would rate all specialists from “1” to “5” on a curve based upon their scores with respect to the criteria. ETFs would be “tiered” and evaluated for rating purposes in separate groups based upon trading volume to ensure that comparisons between specialists are based upon securities with similar trading characteristics. The Exchange would notify specialists of their ratings following calculation.[12] The Exchange notes that the Performance Committee may consider any relevant information, including the Specialist Floor Broker Questionnaire, trading data, a member's regulatory history, market share, order flow statistics, level and adequacy of staffing, and other pertinent information in reviewing a specialist or unit.

In addition to the performance ratings system described above, the Exchange also proposes to codify its current program for evaluating options specialists based upon market share. Under this program, options specialists are regularly evaluated with respect to non-market maker contract volume in options that are actively traded in the United States.[13] The Exchange may change the minimum market share criteria used to evaluate specialists from time to time as warranted by market conditions. The Exchange would notify specialists of any changes to the market share criteria in advance of the calendar quarter in which the change will be implemented. The Exchange also would notify specialists of their market share.

The market share evaluation program for options specialists would be separate from the performance ratings system. Thus, for example, an options specialist with performance ratings that would not trigger remedial action could be referred to the Performance Committee for consideration of reallocation or other action based upon sub-standard market share in one or more options.

II. Discussion

The Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.[14] In particular, the Commission finds that the proposal, as amended, is consistent with Section 6(b)(5) of the Act, which requires, among other things, that the Exchange's procedures be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest.[15]

The Commission believes that codifying the Exchange's performance evaluation procedures for options, equity and ETF specialists should help to protect investors, issuers and ETF sponsors by ensuring that the better qualified specialists receive and retain allocations, thus potentially making this marketplace more competitive. The Commission also believes that the proposal helps the Exchange maintain market quality and integrity by providing the Exchange's Performance Committee with a means to identify the specialists that fail to satisfy market responsibilities. Further, the Commission believes that the proposal provides specialists more guidance regarding how the Exchange evaluates market performance.

The Commission notes that under the proposed specialist evaluation systems, specialists would be evaluated quarterly based upon data from the prior quarter with respect to various criteria. The Exchange will notify specialists of their ratings.[16] The Commission notes that the Exchange may change the criteria used to evaluate specialists and the weightings of these criteria from time to time as warranted by market conditions in order to enhance the Exchange's competitiveness relative to other markets and/or market quality. The Exchange will notify specialists of any changes to the criteria, and/or weightings thereof, in advance of the calendar quarter in which the change will be implemented, which should provide specialists with reasonable notice of the measures being used to judge their market performance.

Start Printed Page 44654

III. Conclusion

It is therefore ordered, pursuant to section 19(b)(2) of the Act,[17] that the proposed rule change (SR-Amex-2001-95), as amended, is approved.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to the delegated authority.[18]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See Letter from Geraldine M. Brindisi, Vice President and Corporate Secretary, Amex, to Nancy J. Sanow, Esq., Assistant Director, Division of Market Regulation (“Division”), Commission (December 13, 2001) (“Amendment No. 1”).

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4.  See Letter from Geraldine M. Brindisi, Vice President and Corporate Secretary, Amex, to Nancy J. Sanow, Esq., Assistant Director, Division, Commission (January 31, 2002) (“Amendment No. 2”).

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5.  See Letter from Geraldine M. Brindisi, Vice President and Corporate Secretary, Amex, to Nancy J. Sanow, Esq., Assistant Director, Division, Commission (February 14, 2002) (“Amendment No. 3”).

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6.  See Securities Exchange Act Release No. 45643 (March 25, 2002), 67 FR 15434 (proposing SR-Amex-2001-95).

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7.  See Letter from Geraldine M. Brindisi, Vice President and Corporate Secretary, Amex, to Nancy J. Sanow, Esq., Assistant Director, Division, Commission (May 24, 2002) (“Amendment No. 4”). Amendment No. 4 clarifies that the Exchange may change the performance rating criteria and their weightings from time to time as warranted by market conditions without filing such changes pursuant to Section 19(b) of the Act, 15 U.S.C. 78s(b), provided that the Exchange follows the procedures in the proposed rule for changing the criteria and their weightings. This was a technical amendment and is not subject to notice and comment.

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8.  The Exchange notes that upon implementation of the new evaluation system for equity specialists, the Performance Committee will no longer assign performance ratings for specific transactions, but may take such other action as is available to the Performance Committee that would be appropriate in the circumstances. The Exchange will continue to order ticket reviews for options and ETFs for regulatory purposes. The Exchange may incorporate the results of these reviews into the performance evaluation rating system with the criteria that measure the number of Minor Floor Violation Disciplinary actions.

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9.  The Amex states that liquidity enhancement is a measure of the depth of a market. The percentage of trades that receive liquidity enhancement equals the percentage of trades where an order for more than 20 contracts was executed at one price, at or between the NBBO.

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10.  The Amex states that the term “action” would be defined to include any time the Committees did something other than “no action” the matter. For example, an admonitory letter from the Performance or Minor Floor Violation Disciplinary Committee would be considered “action” for the purposes of calculating specialist performance ratings.

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11.  The term “ITS” means Intermarket Trading System.

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12.  A rating of “1” would represent the best possible score. A specialist unit that received a “4” or a “5” rating in any quarter would be referred to the Performance Committee for consideration of a preclusion on new allocations, or other appropriate remedial action. A specialist unit that received a “5” rating in any two of four consecutive quarters would be referred to the Performance Committee for consideration of possible reallocation of one or more securities, or other appropriate remedial action. A specialist unit that received ratings of “4” or “5” in any three of six consecutive quarters would be referred to the Performance Committee for consideration of possible reallocation of one or more securities, or other appropriate remedial action.

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13.  The Exchange represents that options specialists are not evaluated on their market share in a newly listed option for the six months following listing on the Exchange. In addition, under the program, a specialist that falls below the minimum market share criteria in one or more options is referred to the Performance Committee for consideration of reallocation or other remedial action based upon poor market share in one or more options.

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14.  In approving this proposed rule change, the Commission has considered its impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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16.  The Commission notes Amex Rule 26(e), amongst other things, provides that the Performance Committee may meet with specialists who fail to satisfy minimum performance standards. In such an event, specialists would be notified in writing of the grounds to be considered by the Performance Committee and given access to all written materials to be reviewed by the Performance Committee.

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[FR Doc. 02-16689 Filed 7-2-02; 8:45 am]

BILLING CODE 8010-01-P