[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] ----------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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''). --------------------------------------------------------------------------- \3\15 U.S.C. 78f(b)(5) (1988). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \4\See Securities Exchange Act Release No. 34435, 34434, 34433, and 34432, (July 22, 1994), respectively. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \7\15 U.S.C. 78s(b) (1988). For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\8\ --------------------------------------------------------------------------- \8\17 CFR 200.30-3(a)(12) (1993). --------------------------------------------------------------------------- Margart H. McFarland, Deputy Secretary. [FR Doc. 94-18583 Filed 7-29-94; 8:45 am] BILLING CODE 8010-01-M