[Federal Register Volume 62, Number 91 (Monday, May 12, 1997)]
[Pages 25982-25984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12283]



[Release No. 34-38573; File No. SR-Amex-97-10]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange, Inc. Relating to Amendments to 
Rule 170.01 Pertaining to Specialists Establishing a Position

May 5, 1997.
    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 February 24, 1997, the American Stock Exchange, Inc. (``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 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

    \1\ 15 U.S.C. 78s(b)(1)
    \2\ 17 CFR 240.19b-4.

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

    The Amex, pursuant to Rule 19b-4 of the Act, proposes to amend 
Commentary .01 to Exchange Rule 170 to permit a specialist to provide 
liquidity to orders on the book in stabilizing transactions without the 
necessity of first obtaining Floor Official approval.

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 Amex 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 Amex 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
    Rule 170 (``Rule''), the primary rule governing a specialist's 
functions, restricts a specialist's transactions in his or her 
specialty stock to those that are reasonably necessary to the 
maintenance of a fair and orderly market. Specifically, paragraph (d) 
of the Rule provides that a specialist is affirmatively required to 
engage in a course of dealings for his own account to minimize order 
disparities and contribute to continuity and depth in the market, and 
is precluded from trading for his own account unless such dealing is 
necessary for the maintenance of a fair and orderly market. The price 
trend of a security should thus be determined by incoming orders rather 
than the specialist's proprietary dealings.
    Commentary .01 to the Rule sets forth specific requirements which 
are applicable when a specialist is establishing or increasing a 
position, and provides that a specialist should effect such 
transactions in a reasonable and orderly manner in relation to the 
condition of the general market, the market in the particular stock and 
the adequacy of his position to meet the immediate and reasonably 
anticipated needs of the market. In particular, paragraph (b) of the 
Rule provides that a specialist must obtain Floor Official approval 
prior to effecting the purchase of all or substantially all the stock 
offered on the book at a price equal to the last sale, when such offer 
represents all or substantially all the stock offered in the market. 
Paragraph (c) provides that he similarly must obtain Floor Official 
approval prior to supplying all or substantially all the stock bid for 
on the book at a price equal to the last sale. In addition, paragraph 
(a) prohibits a specialist from purchasing stock at a price above the 
last sale in the same

[[Page 25983]]

trading session, without Floor Official approval. Paragraph (d) 
requires him to re-offer or re-bid where necessary after effecting the 
transactions described in paragraphs (a), (b), and (c).
    The Amex states that the restrictions contained in paragraphs (b) 
and (c) were intended to strike a balance between protecting the 
auction market from unnecessary specialist trading and providing 
immediate liquidity to orders that come to the Floor. The Floor 
Official's function, at the time Rule 170 was adopted, was to operate 
as a control mechanism to ensure that the specialist did not trade 
    The Amex contends that although the need to obtain Floor Official 
approval was reasonable in the past, before technology enabled markets 
to move quickly within seconds, it now has the effect, under certain 
circumstances, of reducing liquidity and disadvantaging orders entered 
with the specialist. If an order is brought to the specialist, he is 
free to execute it immediately without displaying it first. Under such 
circumstances, the specialist may purchase or sell all or substantially 
all the stock offered or bid for, at a price equal to the last sale, 
without obtaining Floor Official approval. However, if the specialist 
initially decides instead to display the order, providing transparency, 
in the hopes of either narrowing the market or generating interest on 
the opposite side, but thereafter determines to take the offer or hit 
the bid, he must obtain Floor Official approval.
    Accordingly, it is proposed that Commentary .01 be amended to 
provide that a specialist is not required to obtain Floor Official 
approval with respect to the purchase, on a zero minus tick, of stock 
offered on the book, or the sale, on a zero plus tick, of stock bid for 
on the book. A specialist is the buyer and seller of last resort, and 
is expected to step in when there is a disparity between supply and 
demand. In this situation, the specialist would only be purchasing the 
stock offered because there is inadequate demand for the stock. The 
transaction in question would be stabilizing, in that he is buying on a 
zero minus tick, against the direction of the market, rather than 
directing the course of the market.
    In addition, the Amex contends that with the advent of improved 
technology, the Exchange's surveillance systems can now provide an 
adequate substitute for Floor Official Approval in such circumstances. 
In the last few years, the Exchange has developed an automated computer 
program which identifies each instance in which a specialist crosses 
the market (i.e., buys on the offer and sells on the bid). Each of 
these situations can then be individually reviewed by the Exchange 
Trading Analysis staff to determine whether the specialist was acting 
appropriately. With respect to the proposed rule change, the Exchange 
staff would look at how large the specialist's position was prior to 
the transaction, whether there were imbalances in the limit orders on 
his book which necessitated the transaction, and whether, if the market 
subsequently ``turned around'' he used a reasonable amount of the 
inventory acquired in the transaction to offset any imbalance between 
supply and demand.
    For example, assume that a customer enters an order to sell XYZ 
stock at 10\1/8\ (the last sale and a minus tick) when the market is 
quoted 10-10\1/4\. And assume that instead of executing the order 
immediately, which the specialist is entitled to do, he displays it, 
changing the quote to 10-10\1/8\. Because no buy side interest develops 
at 10\1/8\, several minutes later the specialist determines that it is 
appropriate to take the offer. He must now locate and explain the 
circumstances to a Floor Official, and during this time the market may 
move lower, either on the Amex or on another market, so that the 
specialist would no longer pay 10\1/8\ for the stock. Had the 
specialist been free to take the offer without seeking Floor Official 
approval, the customer would have received an execution and the 
Exchange staff would have reviewed the circumstances surrounding the 
transaction to determine whether it appeared to be consistent with the 
specialist's affirmative and negative obligations. In appropriate 
cases, the specialist's actions could, of course, be referred to the 
Exchange's Enforcement Division for possible disciplinary action.
    The Amex believes that the proposed change carves out an exception 
to the existing provisions, but would provide a distinct benefit to the 
market by permitting the specialist to satisfy a customer's order more 
expeditiously, while enabling him to enhance the liquidity, depth and 
transparency of the market as the buyer or seller of last resort.
2. Basis
    The Amex believes that the proposed rule change is consistent with 
Section 6(b) of the Act in general and furthers the objectives of 
Section 6(b)(5) \3\ in particular in that it is designed to promote 
just and equitable principles of trade, to prevent fraudulent and 
manipulative acts and practices, and to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, as well as to protect investors and the public interest.

    \3\ 15 U.S.C. 78f(b)(5).

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

    The Amex does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

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 Amex 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. 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 in Washington, D.C. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Amex. All submissions should refer to the file 
number in the caption above and should be submitted by June 2, 1997.

[[Page 25984]]

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-12283 Filed 5-9-97; 8:45 am]