[Federal Register: January 13, 2004 (Volume 69, Number 8)]
[Notices]
[Page 2015-2018]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13ja04-109]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49022; File No. SR-Amex-2001-46]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1, 2, and 3 Thereto by the American Stock
Exchange LLC Relating to the Adoption of a Facilitation Rule and Member
Firm Guarantee for Index Shares
January 5, 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 July 11, 2001, 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. On
November 7, 2001, Amex filed Amendment No. 1 to the proposed rule
change.\3\ On September 24, 2003, Amex filed Amendment No. 2 to the
proposed rule change.\4\ On December 4, 2003, Amex filed Amendment No.
3 to the proposed rule change.\5\ The Commission is publishing this
notice to solicit comments on the proposed rule change, as amended,
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Claire P. McGrath, Vice President and
Special Counsel, Amex, to Nancy Sanow, Assistant Director, Division
of Market Regulation (``Division''), Commission, dated November 5,
2001. In Amendment No. 1, Amex increased the proposed participation
guarantee for member firms facilitating transactions in Portfolio
Depositary Receipts and Index Fund Shares from 30% or 40% of the
facilitation trade to 40% or 50% of the facilitation trade.
\4\ See letter from Claire P. McGrath, Senior Vice President and
Deputy General Counsel, Amex, to Nancy Sanow, Assistant Director,
Division, Commission, dated September 23, 2003. In Amendment No. 2,
which replaced the original filing and previous amendment, Amex
clarified the specialist's allocation of executed shares in
facilitation transactions and made other, minor changes.
\5\ See letter from Claire P. McGrath, Senior Vice President and
Deputy General Counsel, Amex, to Nancy Sanow, Assistant Director,
Division, Commission, dated December 3, 2003. In Amendment No. 3,
Amex made a technical correction to the proposed rule text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex proposes to adopt a facilitation rule and a member firm
participation guarantee for member firms facilitating transactions in
Portfolio Depositary Receipts and Index Fund Shares and to codify the
Exchange's policy prohibiting the use of non-public information
received during the facilitation process. The text of the proposed rule
change, as amended, is set forth below. Italics indicate material to be
added.
* * * * *
Rule 1000 Portfolio Depositary Receipts
(a) through (b) No change.
* * * Commentary
.01 through .04 No change.
.05 (1) Facilitation Orders--A member who holds both an order for a
public customer of a member organization and a facilitation order may
cross such orders if:
(a) the member organization discloses on its order ticket for the
public customer order which is subject to facilitation, all the terms
of such order, including, if applicable, any contingency involving
options or other related securities; and
(b) the member requests bids and offers for the shares subject to
facilitation, then discloses the public customer order and any
contingency respecting such order which is subject to facilitation and
identifies the order as being subject to facilitation; and
(c) after providing an opportunity for such bids and offers to be
made, the member, on behalf of the public customer whose order is
subject to facilitation, either bids above the highest bid or offers
below the lowest offer in the market. After all other market
participants are given an opportunity to accept the bid or offer made
on behalf of the public customer whose order is subject to
facilitation, the member may cross all or any remaining
[[Page 2016]]
part of such order and the facilitation order at such customer's bid or
offer by announcing in public outcry that (s)he is crossing such orders
stating the quantity and price(s).
(2) Member Firm Participation--(a) Notwithstanding provisions of
paragraph (c), a member firm seeking to facilitate its own public
customer's Portfolio Depositary Receipt order for the eligible order
size will be permitted to participate in the firm's proprietary account
as the contra-side of that order to the extent of the percentages set
forth below:
(i) 40% of the order if the order is traded at the best bid or
offer given by the trading crowd in response to a floor broker's
request for a market; or
(ii) 50% of the order if the member firm improves the market that
was provided by the trading crowd in response to a floor broker's
request and the order is traded at that best bid or offer.
If, however, a public customer order on the specialist's book or
represented in the trading crowd has priority over the facilitation
order, the member firm may participate in only those shares remaining
after the public customer's order has been filled.
(b) the eligible order size shall be 25,000 shares or larger,
unless the Exchange has established a smaller eligible order size.
(c) if a facilitation transaction pursuant to this subparagraph (2)
occurs at the specialist's bid or offer, the specialist shall be
allocated the greater of either (i) 10% of the executed shares if the
facilitating member firm, pursuant to subparagraph (2)(a)(i), has
participated to the extent of 40% of the executed shares; or (ii) a
share of the executed shares that have been divided equally among the
specialist and other participants to the trade. The specialist's
participation allocation shall only apply to the number of shares
remaining after all public customer orders and the member firm's
facilitation order have been satisfied. However, the total number of
shares guaranteed to be allocated to the member firm and the specialist
in the aggregate shall not exceed 50% of the facilitation transaction.
If the facilitation transaction occurs at a price at which the
specialist is not on parity, the specialist is entitled to no
guaranteed participation allocation.
(d) nothing in this Commentary .05 is intended to prohibit a member
firm or specialist from trading more than their guaranteed
participation allocations if the other members of the trading crowd
choose not to trade the remaining portion of the facilitation order.
With respect to paragraphs (1) and (2) above, when accepting a bid
or offer made on behalf of a public customer whose order is subject to
facilitation, all contingencies of the public customer order must be
satisfied. Once the bid or offer has been made on behalf of the public
customer whose order is subject to facilitation, such order has
precedence over any other bid or offer in the crowd to trade
immediately with the facilitation order.
For purposes of this Commentary .05 the term ``public customer of a
member organization'' means a customer that is neither a member nor a
broker/dealer.
* * * * *
.06 It may be considered conduct inconsistent with just and
equitable principles of trade for any member or person associated with
a member, who has knowledge of all material terms and conditions of (i)
an order being facilitated, or (ii) orders being crossed, the execution
of which are imminent, to enter, based on such knowledge, an order to
buy or sell a Portfolio Depositary Receipt that is the subject of the
order, an order to buy or sell the overlying option class, or an order
to buy or sell any related instrument until either (i) all the terms of
the order and any changes in the terms and conditions of the order of
which that member or associated person has knowledge are disclosed to
the trading crowd or (ii) the trade can no longer reasonably be
considered imminent in view of the passage of time since the order was
received. For purposes of this Commentary .06, an order to buy or sell
a ``related instrument,'' means an order to buy or sell securities
comprising ten percent or more of the component securities in the
Portfolio Depositary Receipt or an order to buy or sell a futures
contract on any economically equivalent index.
* * * * *
Rule 1000A Index Fund Shares
(a) through (b) No change.
* * * Commentary
.01 through .05 No change.
.06 (1) Facilitation Orders--A member who holds both an order for a
public customer of a member organization and a facilitation order may
cross such orders if:
(a) the member organization discloses on its order ticket for the
public customer order which is subject to facilitation, all the terms
of such order, including, if applicable, any contingency involving
options or other related securities; and
(b) the member requests bids and offers for the shares subject to
facilitation, then discloses the public customer order and any
contingency respecting such order which is subject to facilitation and
identifies the order as being subject to facilitation; and
(c) after providing an opportunity for such bids and offers to be
made, the member, on behalf of the public customer whose order is
subject to facilitation, either bids above the highest bid or offers
below the lowest offer in the market. After all other market
participants are given an opportunity to accept the bid or offer made
on behalf of the public customer whose order is subject to
facilitation, the member may cross all or any remaining part of such
order and the facilitation order at such customer's bid or offer by
announcing in public outcry that (s)he is crossing such orders stating
the quantity and price(s).
(2) Member Firm Participation--(a) Notwithstanding provisions of
paragraph (c), a member firm seeking to facilitate its own public
customer's Index Fund Share order for the eligible order size will be
permitted to participate in the firm's proprietary account as the
contra-side of that order to the extent of the percentages set forth
below:
(i) 40% of the order if the order is traded at the best bid or
offer given by the trading crowd in response to a floor broker's
request for a market; or
(ii) 50% of the order if the member firm improves the market that
was provided by the trading crowd in response to a floor broker's
request and the order is traded at that best bid or offer.
If, however, a public customer order on the specialist's book or
represented in the trading crowd has priority over the facilitation
order, the member firm may participate in only those shares remaining
after the public customer's order has been filled.
(b) the eligible order size shall be 25,000 shares or larger,
unless the Exchange has established a smaller eligible order size.
(c) if a facilitation transaction pursuant to this subparagraph (2)
occurs at the specialist's bid or offer, the specialist shall be
allocated the greater of either (i) 10% of the executed shares if the
facilitating member firm, pursuant to subparagraph (2)(a)(i), has
participated to the extent of 40% of the executed shares; or (ii) a
share of the executed shares that have been divided equally among the
specialist and other participants to the trade. The specialist's
participation allocation shall only apply to the number of shares
remaining after all public customer orders and the member firm's
[[Page 2017]]
facilitation order have been satisfied. However, the total number of
shares guaranteed to be allocated to the member firm and the specialist
in the aggregate shall not exceed 50% of the facilitation transaction.
If the facilitation transaction occurs at a price at which the
specialist is not on parity, the specialist is entitled to no
guaranteed participation allocation.
(d) nothing in this Commentary .06 is intended to prohibit a member
firm or specialist from trading more than their guaranteed
participation allocations if the other members of the trading crowd
choose not to trade the remaining portion of the facilitation order.
With respect to paragraphs (1) and (2) above, when accepting a bid
or offer made on behalf of a public customer whose order is subject to
facilitation, all contingencies of the public customer order must be
satisfied. Once the bid or offer has been made on behalf of the public
customer whose order is subject to facilitation, such order has
precedence over any other bid or offer in the crowd to trade
immediately with the facilitation order.
For purposes of this Commentary .06 the term ``public customer of a
member organization'' means a customer that is neither a member nor a
broker/dealer.
* * * * *
.07 It may be considered conduct inconsistent with just and
equitable principles of trade for any member or person associated with
a member, who has knowledge of all material terms and conditions of (i)
an order being facilitated, or (ii) orders being crossed, the execution
of which are imminent, to enter, based on such knowledge, an order to
buy or sell a Index Fund Share that is the subject of the order, an
order to buy or sell the overlying option class, or an order to buy or
sell any related instrument until either (i) all the terms of the order
and any changes in the terms and conditions of the order of which that
member or associated person has knowledge are disclosed to the trading
crowd or (ii) the trade can no longer reasonably be considered imminent
in view of the passage of time since the order was received. For
purposes of this Commentary .06, an order to buy or sell a ``related
instrument,'' means an order to buy or sell securities comprising ten
percent or more of the component securities in the Index Fund Share or
an order to buy or sell a futures contract on any economically
equivalent index.
* * * * *
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 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
Amex is proposing amendments to Amex Rules 1000 and 1000A to
provide for the adoption of a facilitation rule and participation
guarantee for member firms facilitating public customer orders in
Portfolio Depositary Receipts and Index Fund Shares (``Index Shares'').
As explained by Amex, a facilitation order is utilized to cross a
public customer order with an order for a member firm. Other market
participants can compete only with the member firm order by accepting
the bid or offer made on behalf of the public customer. According to
Amex, since, under the proposed facilitation rule, other market
participants would not be permitted to compete with the public customer
side of the order, using the facilitation rule will assure that the
public customer's order is completely executed. Members wishing to
engage in a facilitation cross on behalf of their public customers
would be required to comply with the procedures set forth in the
proposed amendments.\6\
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\6\ The proposed procedures provide that a member who holds both
an order for a public customer of a member organization and a
facilitation order may cross such orders if the member organization
discloses, for the public customer order, all the terms of such
order, requests bids and offers, identifies the order as being
subject to facilitation and bids/offers above/below the highest bid/
lowest offer.
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Amex states that member firms, however, believe that when seeking
to facilitate large public customer Index Share orders with an order
for the firm's own proprietary account, they should be able to
participate to some extent with their customer's order. Therefore, Amex
proposes that Commentary .05 to Rule 1000 and Commentary .06 to Rule
1000A be adopted to provide that a member firm whose proprietary
account is facilitating its own customer's order of 25,000 Index Shares
or more may participate as contra-party to the extent of either 50% or
40% the trade.\7\ The member firm would be required to follow the
procedures set forth in the proposed rules for the facilitation of a
public customer order to be eligible for the participation guarantee.
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\7\ A member firm seeking to facilitate its own public
customer's order would be permitted to participate in the firm's
proprietary account as the contra-side of that order to the extent
of 50% of the order if the member firm improves the market provided
by the trading crowd in response to the floor broker's initial
request for a market and the order is executed at the improved bid
or offer. A member firm would be guaranteed to participate to the
extent of 40% of the order if the order is traded at the best bid or
offer given by the trading crowd in response to a floor broker's
request for a market.
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Amex states that member firms should be aware that public customer
orders on the specialist's book or represented in the crowd would have
priority over the member firm's guaranteed participation, and that
therefore, a member firm's minimum participation would be 50% or 40% of
the number of Index Shares remaining after the public customer orders
with priority have been filled. For example, if there is a public
customer order on the book or represented in the trading crowd for
10,000 Index Shares to buy, the member firm facilitating its customer
order to sell 25,000 Index Shares would have a guaranteed 50% or 40%
participation on only the remaining 15,000 Index Shares.
In addition, proposed subparagraphs 2(c) of Commentary .05 to Rule
1000 and Commentary.06 to Rule 1000A set forth the specialist's
participation in executed shares allocated after all public customer
orders and the member firm's facilitation order have been satisfied.
Subparagraphs 2(c) provide that the specialist would be allocated the
greater of either (i) 10% of the executed shares if the facilitating
member firm, pursuant to subparagraphs (2)(a)(i) of Commentary .05 to
Rule 1000 and Commentary.06 to Rule 1000A, has participated to the
extent of 40% of the executed shares; or (ii) a share of the executed
shares that have been divided equally among the specialist and other
participants to the trade.
The Exchange believes that providing member firms that are seeking
to facilitate their own public customer orders with a guaranteed
participation will provide an incentive for the member firms to bring
large Index Share orders to the floor of the Amex rather than to the
floor of another exchange or to the over-the-counter market. Thus, the
Exchange believes that this proposal is necessary for it to remain
competitive.
[[Page 2018]]
The adoption of Commentary .06 to Rule 1000 and Commentary .07 to
Rule 1000A would prohibit the use of non-public information received
during the facilitation processes. As discussed above, facilitation
orders are orders in which a member or member organization executes a
crossing transaction with an order for a public customer. The
facilitation rule provides procedures that allow the customer's order
to be completely executed and prohibits the trading floor from
supplanting the customer.
Amex states that since the proposed facilitation rule is designed
to promote the interaction of orders in an open-outcry auction, the
proposed rule requires the disclosure of information to the trading
crowd in order to provide the crowd with an opportunity to participate
in the transaction with the facilitating member. These proposed rules
impose order exposure requirements on floor brokers seeking to cross
buy orders and sell orders, and seek to reconcile these practices with
the rules and practices of the auction market. According to Amex,
affording trading crowds an opportunity to participate in transactions
from which they may be excluded results in more competitive markets and
executions for customers at the best available prices. In furtherance
of that effort, the Exchange now seeks to codify and expand its policy
that prohibits the use of non-public information, by either a member or
a person associated with a member, for their own benefit, by trading in
the Index Shares or in related instruments prior to that information
being disclosed. Use of such non-public information by such member or
associated person (regardless of whether that party ultimately
completes the Index Shares transaction) is generally considered conduct
inconsistent with just and equitable principles of trade.
Thus, Amex proposes to adopt provisions for both Portfolio
Depositary Receipts and Index Fund Shares that state that it may be
inconsistent with just and equitable principles of trade for any member
or associated person, who has knowledge of all the material terms of
(i) an order being facilitated, or (ii) orders being crossed, to enter
an order to buy or sell an Index Share or other related instrument
prior to the time the order's terms are disclosed to the trading floor
crowd or the execution of the facilitated transaction can no longer
reasonably be considered imminent. The term ``related instrument'' is
defined in the proposed rules as a security comprising ten percent or
more of the component securities in the Portfolio Depositary Receipt or
the Index Fund Share or a futures contract on any economically
equivalent index.
Amex states that the purpose of this policy is to prevent members
and associated persons from using undisclosed information about
imminent Index Share transactions to trade the relevant Index Shares or
any closely-related instrument in advance of persons represented in the
trading crowd. Without this prohibition, such trading can threaten the
integrity of the auction market or disadvantage other market
participants.
2. Statutory Basis
The Exchange states 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 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 facilitating transactions in securities, and 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 Exchange does not believe that the proposed rule change will
impose any 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 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 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-2001-46. This file number should be included on the
subject line if e-mail is used. To help the Commission process and
review 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 the filing will also be available for
inspection and copying at the principal offices of the Amex. All
submissions should refer to File No. SR-Amex-2001-46 and should be
submitted by February 3, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-609 Filed 1-12-04; 8:45 am]
BILLING CODE 8010-01-P