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Notice

Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment Nos. 1, 2, 3 and 4 Thereto by the American Stock Exchange LLC To Adopt an Obvious Error Rule and Half-Point Error Guarantee for Trades on the Exchange in Nasdaq National Market Securities

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Information about this document as published in the Federal Register.

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Start Preamble February 25, 2004.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)[1] and Rule 19b-4 thereunder,[2] notice is hereby given that on April 30, 2003, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Amex submitted Amendment No. 1 to the proposed rule change on October 15, 2003.[3] The Amex submitted Amendment No. 2 to the proposed rule change on November 21, 2003.[4] The Amex submitted Amendment No. 3 to the proposed rule change on December 10, 2003.[5] The Amex submitted Amendment No. 4 to the proposed rule Start Printed Page 10082change on February 2, 2004.[6] The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The Amex proposes to adopt an obvious error rule and half point error guarantee for transactions on the Exchange in Nasdaq National Market securities.

The text of the proposed rule change is below. Additions are italicized:

* * * * *

Trading in Nasdaq National Market Securities

Rule 118. (a) through (j) No change.

(k) Reserved

(l) Clearly Erroneous Transactions in Nasdaq National Market Securities—

(i) A Floor Official shall, pursuant to the procedures set forth in below, have the authority to review any transaction in a Nasdaq National Market security that is claimed to be clearly erroneous arising out of the use or operation of any facility of the Exchange. In reviewing a trade in a Nasdaq National Market security that is claimed to be clearly erroneous, a Floor Official shall review the transaction with a view toward maintaining a fair and orderly market and the protection of investors and the public interest. Based upon this review, the Floor Official shall decline to “break” a disputed transaction if the Floor Official believes that the transaction under dispute is not clearly erroneous. If the Floor Official determines the transaction in dispute is clearly erroneous, however, he or she shall declare that the transaction is null and void or modify one or more terms of the transaction. When adjusting the terms of a transaction, the Floor Official shall seek to adjust the price and/ or size of the transaction to achieve an equitable rectification of the error that would place the parties to a transaction in the same position, or as close as possible to the same position, as they would have been in had the error not occurred. For the purposes of this Rule, the terms of a transaction are clearly erroneous when there is an obvious error in any term, such as price, number of shares or other unit of trading, or identification of the security.

(ii) Any member who seeks to have a transaction reviewed pursuant to subparagraph (i) above shall submit the matter to a Floor Official and deliver a written complaint to Service Desk within 30 minutes of the transaction. Once a complaint has been received, the complainant shall have up to thirty 30 minutes, or such longer period as the Floor Official may specify, to submit any supporting written information concerning the complaint necessary for a review of the transaction. The other party to the trade shall have up to thirty minutes after being notified of the complaint, or such longer period as specified by the Floor Official, to submit any supporting written information concerning the complaint necessary for a review of the transaction. Either party to a disputed trade may request the written information provided by the other party pursuant to this subparagraph. Once a party to a disputed trade communicates that he or she does not intend to submit any further information concerning a complaint, the party may not thereafter provide additional information unless requested to do so by the Floor Official. If both parties to a disputed trade indicate that they have no further information to provide concerning the complaint before their respective thirty-minute information submission period has elapsed, then the matter may be immediately considered by a Floor Official. Members or persons associated with members and member organizations involved in the transaction shall provide the Floor Official with any information that he or she requests in order to resolve the matter on a timely basis notwithstanding the time parameters set forth above. Once a member has applied to a Floor Official for a ruling, the Floor Official shall review the transaction and make a ruling unless both parties to the transaction agree to withdraw the application for review prior to the time that the Floor Official makes the ruling. A member may seek review of a Floor Official's ruling pursuant to the procedures described in Rule 22(d) and Commentary .02 to Rule 22.

(iii) In the event of (1) a disruption or malfunction in the use or operation of any facility of the Exchange, (2) a disruption or malfunction in the use or operation of any facility of Nasdaq that results in Nasdaq nullifying or modifying trades in the Nasdaq market pursuant to its rules, or (3) extraordinary market conditions or other circumstances in which the nullification or modification of transactions executed on the Exchange in Nasdaq National Market securities may be necessary for the maintenance of a fair and orderly market or the protection of investors and the public interest, a Floor Governor may review any transactions arising out of or reported through any facility of the Exchange; provided, however, that a Floor Governor may not review transactions arising out of the use or operation of any execution or communication system owned or operated by Nasdaq. Prior to the nullification or modification of transactions as a result of a disruption or malfunction in the use or operation of any facility of Nasdaq, the Exchange must receive confirmation from NASD or Nasdaq that there is a disruption or malfunction on Nasdaq's market that has resulted in the nullification or modification of trades in that market. A Floor Governor acting pursuant to this subsection may declare any Amex transaction null and void or modify the terms of any such transactions if the Floor Governor determines that (1) the transaction is clearly erroneous, or (2) such actions are necessary for the maintenance of a fair and orderly market or the protection of investors and the public interest; provided, however, that, in the absence of extraordinary circumstances, the Floor Governor must take action pursuant to this subsection within thirty (30) minutes of detection of the transaction, but in no event later than 3 p.m., Eastern Time, on the next trading day following the date of the trade at issue. A member may seek review of a Floor Governor's ruling from a three Governor Panel as described in Rule 22(d) and Commentary .02 to Rule 22 without first seeking review of the ruling from a Floor Official or Exchange Official.

(m) Half-Point Error Guarantee. The provisions of Rule 129 shall not apply to orders for Nasdaq National Market securities of 1,000 shares or less received by the specialist through the Exchange's electronic order routing system (“System”). As to such orders, erroneous execution reports sent by the specialist via the System shall be binding except that (i) if the erroneous report is at a price which is more than $.50 away from the execution price, then the price of the execution shall be binding, and (ii) if the member organization that entered the order requests a correction from the specialist prior to the opening on the second business day following the day of the transaction, the specialist shall correct Start Printed Page 10083the execution report to the price of the execution and that price shall be binding. If the erroneous execution report sent by the specialist is at a price which is more than $.50 away from the execution price and if a transaction has appeared on the tape at the price of the erroneous report and in a quantity equal to or exceeding the amount reported, the specialist must render a corrected report no later than noon on the business day following the day of the transaction. If not so corrected, the specialist will be responsible for any resulting loss. However, as to limit orders, erroneous execution reports sent by the specialist shall also not be binding where the subject security did not trade at or below (or above, as the case may be) the limit price specified on the order on that trading day.

(n) Rule 390 shall not preclude a member, member organization, allied member, registered representative, or officer from sharing or agreeing to share in any losses in any customer's account with respect to Nasdaq National Market securities after the member organization has established that the loss was caused in whole or in part by the action or inaction of such member, member organization, allied member, registered representative or officer, provided, however, that this provision shall not permit a member, member organization, allied member, registered representative or officer to guarantee any customer against loss in his account. Commentary: No Change.

* * * * *

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 Exchange 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 Exchange 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

1. Purpose

Trades in Nasdaq securities may occur at clearly erroneous prices due to human or system errors. The Exchange, accordingly, is proposing to adopt an obvious error rule for use on the Exchange in connection with unlisted trading privileges (“UTP”) transactions on the Exchange in Nasdaq securities. New Amex Rule 118(l) would be similar to Rule 11890 (Clearly Erroneous Transactions) of the National Association of Securities Dealers, Inc. (“NASD”) for the Nasdaq Stock Market.

Like the NASD's rule, the proposed Amex obvious error rule would allow the Exchange to break or revise single or multiple trades that are obviously erroneous. Under the proposed rule, a member may request an Amex Floor Official [7] to review a transaction that is claimed to be clearly erroneous. Once a ruling is requested, a Floor Official must review the trade unless both parties agree to withdraw the application before the Floor Official makes a ruling.

The proposed rule requires a Floor Official to review a transaction or series of transactions with a view toward maintaining a fair and orderly market and the protection of investors and the public interest. Based upon this review, a Floor Official would decline to “break” a disputed transaction if the Floor Official believes that the transaction under dispute is not clearly erroneous. If the Floor Official determines the transaction in dispute is clearly erroneous, however, the Floor Official may declare the transaction null and void or modify one or more terms of the transaction. When adjusting the terms of a transaction, the Floor Official would seek to adjust the price and/or size of the transaction to achieve an equitable rectification of the error that would place the parties to a transaction in the same position, or as close as possible to the same position, as they would have been in had the error not occurred.

Subparagraph (ii) of proposed Amex Rule 118(l) establishes deadlines and procedures for Floor Official review of a disputed transaction. Any member who seeks to have a transaction or series of transactions reviewed must submit the matter to a Floor Official and deliver a written complaint to Service Desk within 30 minutes of the transaction. Once a complaint has been received, the complainant would have up to thirty 30 minutes, or such longer period as the Floor Official may specify, to submit any supporting written information concerning the complaint necessary for a review of the transaction. The other party to the trade would have up to thirty minutes after being notified of the complaint, or such longer period as specified by the Floor Official, to submit any supporting written information concerning the complaint necessary for a review of the transaction. Either party to a disputed trade may request the written information provided by the other party. Once a party to a disputed trade communicates that he or she does not intend to submit any further information concerning a complaint, the party may not thereafter provide additional information unless requested to do so by the Floor Official. If both parties to a disputed trade indicate that they have no further information to provide concerning the complaint before their respective thirty-minute information submission period has elapsed, then the matter may be immediately considered by a Floor Official. Members or persons associated with members and member organizations involved in the transaction would be required to provide the Floor Official with any information that he or she requests in order to resolve the matter on a timely basis.

Subparagraph (iii) of proposed Amex Rule 118(l) provides that, in the event of (1) a disruption or malfunction in the use or operation of any facility of the Exchange, (2) a disruption or malfunction in the use or operation of any facility of Nasdaq that results in the nullification or modification of trades in that market,[8] or (3) extraordinary market conditions or other circumstances in which the nullification or modification of transactions in Nasdaq National Market securities may be necessary for the maintenance of a fair and orderly market or the protection of investors and the public interest, a Floor Governor may review any transactions arising out of or reported through any facility of the Exchange. A Floor Governor acting pursuant to this subsection may declare any Amex transaction null and void or modify the terms of any such transactions if the Floor Governor determines that (1) the transaction is clearly erroneous, or (2) Start Printed Page 10084such actions are necessary for the maintenance of a fair and orderly market or the protection of investors and the public interest; provided, however, that, in the absence of extraordinary circumstances, the Floor Governor must take action pursuant to proposed Amex Rule 118(l)(iii) within thirty minutes of detection of the transaction, but in no event later than 3 p.m., Eastern Time, on the next trading day following the date of the trade at issue.

A member seeking a prompt, i.e., prior to settlement, review of a Floor Official's ruling under proposed Amex Rule 118(l) would follow the procedures outlined in Amex Rule 22(d). These procedures provide possible appeals first to an Exchange Official, next to a Floor Governor, and finally to a three governor panel. Proposed Amex Rule 118 also provides that a member aggrieved by a Floor Governor's ruling under subsection (iii) of the proposed rule may appeal the ruling directly to a three Governor panel pursuant to Amex Rule 22(d) and Commentary .02. Commentary .02 to Amex Rule 22 requires Floor Officials to prepare and submit a written record of their decisions as soon as practical after making a ruling.[9] Floor Officials, consequently, would have to prepare and submit written decisions regarding rulings on trades that may be clearly erroneous. The Commission recently reviewed and approved amendments to the Exchange's procedures for appealing Floor Official rulings.[10]

In conjunction with the adoption of an obvious error rule, the Exchange also proposes the adoption of a Half-Point Error Guarantee for transactions in Nasdaq stocks (proposed Amex Rule 118(m)). The proposed Amex error guarantee would allow small investors to rely upon reports of executions of system orders of sizes that may be designated by the Exchange from time to time where the report is within $.50 of the execution price. System orders of 1,000 shares or less would be eligible for the Half-Point Error Guarantee.

As to such others, erroneous execution reports sent by the specialist via the Exchange's electronic order routing system would be binding except that if the erroneous report is at a price which is more than $.50 away from the execution price, then the execution price would be binding. In addition, if the member organization that entered the order requests a correction from the specialist prior to the opening on the second business day following the day of the transaction, the specialist would correct the execution report to the price of the execution and that price would be binding. If the erroneous execution report sent by the specialist is at a price which is more than $.50 away from the execution price and if a transaction has appeared on the tape at the price of the erroneous report and in a quantity equal to or exceeding the amount reported, the specialist would be required to render a corrected report no later than noon on the business day following the day of the transaction. If not so corrected, the specialist would be responsible for any resulting loss. However, as the limit orders, erroneous execution reports sent by the specialist would also not be binding where the subject security did not trade at or below (or above, as the case may be) the limit price specified on the order on that trading day.[11] The Exchange believes that the Half-Point Error Guarantee would encourage investors to use the Exchange's electronic order routing facilities.[12]

To implement the Half-Point Error Guarantee, the Exchange also is proposing to adopt a rule (Rule 118(n)) that would codify current practice with respect to the resolution of errors in Nasdaq securities traded on the Exchange. The proposed rule change would state that members and member organizations may share in losses in a customer's account when the member or member organizations determine that the member or firm was responsible for the loss.[13]

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act [14] in general and furthers the objectives of Section 6(b) [15] 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 regulating, clearing, settling, processing information with respect to, and 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.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange believes that the proposed rule change will impose no burden on competition 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

No written comments were solicited or received with respect to the proposed rule change.

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 Exchange 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, as amended, is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Comments may also be submitted electronically at the following e-mail address: rule-comments@sec.gov. All comment letters should refer to File No. SR-Amex-2003-39. This file number Start Printed Page 10085should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, comments should be sent in hardcopy or by e-mail but not by both methods. 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 Amex. All submissions should refer to File No. SR-Amex 2003-39 and should be submitted by March 24, 2004.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[16]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See Letter from Bill Floyd Jones, Associate General Counsel, Amex, to Nancy J. Sanow, Assistant Director, Division of Market Regulation (“Division”), Commission, dated October 14, 2003 (“Amendment No. 1”). Amendment No. 1 replaced the original proposed rule change in its entirety.

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4.  See Letter from Bill Floyd Jones, Associate General Counsel, Amex, to Nancy J. Sanow, Assistant Director, Division, Commission, dated November 20, 2003 (“Amendment No. 2”). Amendment No. 2 replaced the original proposed rule change and Amendment No. 1 in their entirety.

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5.  See Letter from Bill Floyd Jones, Associate General Counsel, Amex, to Nancy J. Sanow, Assistant Director, Division, Commission, dated December 9, 2003 (“Amendment No. 3”). Amendment No. 3 replaced the original proposed rule change and Amendment Nos. 1 and 2 in their entirety. In Amendment No. 3, Amex also represented that Exchange Staff plans to propose the adoption of an obvious error rule similar to proposed Amex Rule 118(l) for Amex listed securities similar to that contained in the proposed rule change, at the next regularly scheduled Amex board meeting.

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6.  See Letter from Bill Floyd Jones, Associate General Counsel, Amex, to Nancy J. Sanow, Assistant Director, Division, Commission, dated January 30, 2004 (“Amendment No. 4”). In Amendment No. 4, Amex revised the proposed rule change to: (1) make technical amendments to the rule text to better reflect the proposed rule change, and (2) confirm that the Exchange has determined for business reasons not to extend the half-point error guarantee to other securities traded on the Exchange at this time.

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7.  Floor Officials are deemed to be Officers of the Exchange. See Amex Rule 22(c). Floor Officials are generally responsible for the supervision of operations the Exchange Floor. There are four classifications of Floor Official. In ascending order of responsibility, these classifications are: (1) Floor Official, (2) Exchange Official, (3) Senior Floor Official, and (4) Senior Supervisory Officer. The Vice Chairman of the Exchange is a Floor Governor and serves as the Senior Supervisory Officer. Governors of the Exchange that spend a significant amount of time on the Floor are Senior Floor Officials. Numerous provisions of the Exchange's rules specifically call for Floor Official involvement in the Exchange's operations.

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8.  Prior to the nullification or modification of transactions as a result of a disruption or malfunction in the use or operation of any facility of Nasdaq, the Exchange must receive confirmation from NASD or Nasdaq that there is a disruption or malfunction on Nasdaq's market that has resulted in the nullification or modification of trades in that market.

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9.  Floor Governors would also have to comply with similar procedures under this rule. Telephone Conversation between Bill Floyd Jones, Associate General Counsel, Amex, and Ian K. Patel, Attorney, Division, Commission, dated January 16, 2004.

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10.  See, Securities Exchange Act Release No. 47078 (December 30, 2002), 67 FR 79668 (December 20, 2002) (SR-Amex-2001-07).

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11.  Thus, if the subject security did not trade at or below (above) the limit price specified on the order on that trading day, then the provisions of Amex Rule 129 would apply. If the subject security did trade at or below (above) the limit price specified on the order on that trading day, then the Half-Point Error Guarantee would apply. Telephone conversation between Bill Floyd Jones, Associate General Counsel, Amex, David Fisch, Managing Director, Amex, Susie Cho, Special Counsel, Division, Commission, and Ian Kiran Patel, Attorney, Division, Commission, on January 29, 2004.

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12.  Proposed Amex Rule 118(m) is similar to New York Stock Exchange, Inc. Rule 123B(b)(2).

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13.  Proposed Amex Rule 118(n) is based upon Supplementary Material .20 to NYSE Rule 352. The Exchange has represented that it plans to propose an obvious error rule for listed securities. See supra n. 5. However, for business reasons, the Exchange does not plan to propose a Half-Point Error Guarantee for listed securities. See Amendment No. 4, supra note 6.

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[FR Doc. 04-4715 Filed 3-2-04; 8:45 am]

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