[Federal Register: January 20, 2004 (Volume 69, Number 12)]
[Notices]
[Page 2754-2761]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20ja04-68]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49058; File No. SR-Amex-2002-35]
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 Codify in Rules 128A, 1000, and 1000A the Current
Practices Regarding the Participation in Exchange Traded Fund Trades
Executed on the Exchange by Registered Traders and Specialists and the
Allocation by the Specialist of Those Trades to the Appropriate Party
January 12, 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 22, 2002, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change. On February 13, 2003,
September 8, 2003, November 3, 2003,
[[Page 2755]]
and December 10, 2003, respectively, the Amex filed Amendment Nos. 1,
2, 3, and 4 to the proposed rule change.\3\ The proposed rule change is
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, 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 letters from Claire P. McGrath, Senior Vice President
and Deputy General Counsel, Amex, to Nancy Sanow, Assistant
Director, Division of Market Regulation (``Division''), Commission,
dated February 12, 2003 (``Amendment No. 1''); September 5, 2003
(``Amendment No. 2''); October 30, 2003 (``Amendment No. 3''); and
December 9, 2003 (``Amendment No. 4''). Amendment No. 4 replaced
Form 19b-4 in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex proposes to codify in Amex Rules 128A, 1000, and 1000A
current practices regarding the participation in Exchange Traded Fund
trades executed on the Exchange by registered traders and specialists
and the allocation by the specialist of those trades to the appropriate
party. The text of the proposed rule change, as amended, is set forth
below. Deleted language is in [brackets]; proposed new language is
italicized.\4\
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\4\ With the Exchange's consent, the Commission has made
technical corrections to the text of the proposed rule change, which
the Exchange has committed to correct formally by filing an
amendment. Telephone conversation between Claire P. McGrath, Senior
Vice President and Deputy General Counsel, Amex, and Cyndi N.
Rodriguez, Special Counsel, Division, Commission, on January 8,
2004.
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* * * * *
Rule 128A Automatic Execution for Exchange Traded Funds
The Exchange shall determine the size and other parameters of
orders eligible for execution by its Automatic Execution System (Auto-
Ex). An Auto-Ex eligible order for any account in which the same person
is directly or indirectly interested may only be entered at intervals
of no less than 10 seconds between entry of each such order on the same
side of the market in a security. Members and member organizations are
responsible for establishing procedures to prevent orders in a security
on the same side of the market for any account in which the same person
is directly or indirectly interested from being entered at intervals of
less than 10 seconds.
* * * Commentary
.01 through .04 No change.
.05 Specialists and Registered Options Traders that sign-on to
Auto-Ex will be automatically allocated the contra side of Auto-Ex
trades for ETFs [according to the following schedule:] in accordance
with participation percentages (``target ratios'') determined by the
ETF Trading Committee.
------------------------------------------------------------------------
Approximate Number
Approximate Number of Trades
of Trades Allocated Allocated to ROTs
[Number of ROTs Signed on to to the Specialist Signed on to Auto-
Auto-Ex in a Crowd Throughout the Day Ex Throughout the
(``Target Ratio'') Day (``Target
Ratio'')
------------------------------------------------------------------------
1.............................. 60% 40%
2-4............................ 40% 60%
5-7............................ 30% 70%
8-15........................... 25% 75%
16 or more..................... 20% 80%]
------------------------------------------------------------------------
At the start of each trading day, the sequence in which trades will
be allocated to the specialist and Registered Options Traders signed-on
to Auto-Ex will be randomly determined. Auto-Ex trades then will be
automatically allocated in sequence on a rotating basis to the
specialist and to the Registered Options Traders that have signed-on to
the system so that the specialist and the crowd achieve their ``target
ratios'' over the course of a trading session. If an Auto-Ex eligible
order is greater than 100 shares, Auto-Ex will divide the trade into
lots of 100 shares each. Each lot will be considered a separate trade
for purposes of determining target ratios and allocating trades within
Auto-Ex.
.06 No change.
* * * * *
Rule 1000 Portfolio Depositary Receipts
(a) through (b) No change.
* * * Commentary
.01 through .04 No change.
.05 [Reserved]
.06 [Reserved]
.07 (a) When two or more bids (offers) are made simultaneously by
the specialist dealing for his own account and by registered traders,
all such bids (offers) shall be on parity and any securities sold
(bought) in execution of such bids (offers) shall be divided among the
specialist and registered trader(s) so that the specialist shall
receive a percentage, as determined by the ETF Trading Committee, of
the shares executed and the registered traders shall divide the
remainder in accordance with Commentary .08(a)(iii). Notwithstanding
the foregoing, neither the specialist nor a registered trader will be
allocated more executed shares than the number representing the
specialist's or registered trader's portion of the aggregate quote
size, except when the number of executed shares to be allocated exceeds
the aggregate quotation size disseminated for that Portfolio Depositary
Receipt.
(b) The above provision applies only when the specialist and
registered trader(s) are on parity and does not include situations
where a customer order is also on parity with the specialist and
registered traders. When a customer is on parity with the specialist
and registered traders, the specialist will allocate executed shares
(1) to the customer and to those registered traders or specialist on
parity with the customer on equal basis subject to Commentary .08(a)(v)
below; and then (2) to the specialist and the registered trader in
accordance with Commentary .08(a)(iii) below. The following rules set
forth provisions regarding priority and parity of registered traders
and specialists when customer orders are involved: Rule 111, Commentary
.07 provides that registered traders in establishing or increasing a
position may not retain priority over or have parity with a customer
order, and Rule 155 requires a specialist to yield precedence to orders
entrusted to him as agent before executing a purchase or sale at the
same price for an account in which he has an interest.
.08 (a) It is the responsibility of the specialist to allocate
executed Portfolio Depositary Receipts among all participants to a
trade.
(i) In order for specialists to fulfill this function, registered
traders must announce either at the start of the trading day, upon
entry into the trading crowd or prior to the dissemination of a
quotation, the number of shares for each Portfolio Depositary Receipts
in which they are willing to participate. The specialist may not assume
a size for any registered trader and only those registered traders that
have announced their sizes as discussed above will be allocated any
executed shares.
(ii) The registered traders announced sizes shall be promptly
communicated to the Exchange as required by SEC Rule 11Ac1-1(c).
(iii) As transactions occur the specialist shall allocate to the
extent mathematically possible (A) the portion of the executed shares
that the customer is entitled to and the portion of the executed shares
to those on parity with the customer on an equal basis subject to
subparagraph (v) of this paragraph (a); (B) the portion of the executed
shares that the specialist is entitled to in accordance with Commentary
.07 above; and (C) the portion of the
[[Page 2756]]
executed shares participating registered traders are entitled to
individually. The allocation pursuant to (C) is subject to the
following provisions:
1. Where all participants have equal stated sizes, their
participations shall be equal;
2. Where participants' stated sizes are not equal, their
participations will depend upon whether the number of executed shares
left to be allocated exceeds in the aggregate the participants' stated
sizes;
3. If the number of executed shares left to be allocated does not
exceed the participants' aggregate stated sizes, the specialist will
allocate the executed shares equally, unless a participant's stated
size is for an amount less than an equal allocation, then the smallest
sizes will be allocated first, until the number of executed shares
remaining to be allocated requires an equal allocation.
4. If the number of executed shares left to be allocated does
exceed the participants' aggregate stated sizes, the specialist will
allocate the executed shares by first allocating to each participant
the number of executed shares equal to each participant's stated size
with the remainder being allocated based on the percentage a
participant's stated size is of the participants' aggregate stated
size.
5. The following chart illustrates how different numbers of
executed shares will be allocated to participants whose aggregate
stated size is 1,000 shares:
Number of Executed Shares To Be Allocated
----------------------------------------------------------------------------------------------------------------
Each participant's stated size 2,000 900 700 500
----------------------------------------------------------------------------------------------------------------
500............................................. 1,000 400 250 168
300............................................. 600 300 250 167
200............................................. 400 200 200 165
----------------------------------------------------------------------------------------------------------------
(iv) In the event a specialist or registered trader declines to
accept any portion of the available executed shares, any remaining
executed shares shall be apportioned among the remaining participants
who bid or offered at the best price at the time the market was
established in accordance with paragraph (iii) above, until all
executed shares have been allocated.
(v) Specialists and registered traders may direct some or all of
their participation amount to competing public orders in the trading
crowd.
(b) Notwithstanding the foregoing, when the transaction occurs
without the participation of the specialist (either as principal or
agent), the floor broker representing the contra-side of the trade
distributes the executed shares equally among the participating
registered traders, unless a registered trader's portion of the
disseminated size is less than an equal distribution. That registered
trader will be given a less than equal distribution and the remaining
contracts will be allocated equally among the remaining participants to
the trade. In addition, if neither the specialist nor a floor broker
representing a customer is participating in the trade, the
participating registered traders shall allocate the executed shares
among themselves and other participants on parity in accordance with
subparagraph (a)(iii) above.
* * * * *
Rule 1000A Index Fund Shares
(a) through (b) No change.
* * * Commentary
.01 through .05 No change.
.06 [Reserved]
.07 [Reserved]
.08 (a) When two or more bids (offers) are made simultaneously by
the specialist dealing for his own account and by registered traders,
all such bids (offers) shall be on parity and any securities sold
(bought) in execution of such bids (offers) shall be divided among the
specialist and registered trader(s) so that the specialist shall
receive a percentage, as determined by the ETF Trading Committee, of
the orders executed and the registered traders shall divide the
remainder in accordance with Commentary .09(a)(iii). Notwithstanding
the foregoing, neither the specialist nor a registered trader will be
allocated more executed shares than the number representing the
specialist's or registered trader's portion of the aggregate quote
size, except when the number of executed shares to be allocated exceeds
the aggregate quotation size disseminated for that Portfolio Depositary
Receipt.
(b) The above provision applies only when the specialist and
registered trader(s) are on parity and does not include situations
where a customer order is also on parity with the specialist and
registered traders. When a customer is on parity with the specialist
and registered traders, the specialist will allocate executed shares
(1) to the customer and to those registered traders or specialist on
parity with the customer on equal basis subject to Commentary .09(a)(v)
below; and then (2) to the specialist and the registered trader in
accordance with Commentary .09(a)(iii) below. The following rules set
forth provisions regarding priority and parity of registered traders
and specialists when customer orders are involved: Rule 111, Commentary
.07 provides that registered traders in establishing or increasing a
position may not retain priority over or have parity with a customer
order, and Rule 155 requires a specialist to yield precedence to orders
entrusted to him as agent before executing a purchase or sale at the
same price for an account in which he has an interest.
.09 (a) It is the responsibility of the specialist to allocate
executed Index Shares among all participants to a trade.
(i) In order for specialists to fulfill this function, registered
traders must announce either at the start of the trading day, upon
entry into the trading crowd or prior to the dissemination of a
quotation, the number of shares for each Index Fund Share in which they
are willing to participate. The specialist may not assume a size for
any registered trader and only those registered traders that have
announced their sizes as discussed above will be allocated any executed
shares.
(ii) The registered traders announced sizes shall be promptly
communicated to the Exchange as required by SEC Rule 11Ac1-1(c).
(iii) As transactions occur the specialist shall allocate to the
extent mathematically possible (A) the portion of the executed shares
that the customer is entitled to and the portion of the executed shares
to those on parity with the customer on an equal basis subject to
subparagraph (v) of this paragraph (a); (B) the portion of the executed
shares that the specialist is entitled to in accordance with Commentary
.08 above; and (C) the portion of the executed shares participating
registered traders are entitled to individually. The allocation
pursuant to (C) is subject to the following provisions:
[[Page 2757]]
1. Where all participants have equal stated sizes, their
participations shall be equal;
2. Where participants' stated sizes are not equal, their
participations will depend upon whether the number of executed shares
left to be allocated exceeds in the aggregate the participants' stated
sizes;
3. If the number of executed shares left to be allocated does not
exceed the participants' aggregate stated sizes, the specialist will
allocate the executed shares equally, unless a participant's stated
size is for an amount less than an equal allocation, then the smallest
sizes will be allocated first, until the number of executed shares
remaining to be allocated requires an equal allocation.
4. If the number of executed shares left to be allocated does
exceed the participants' aggregate stated sizes, the specialist will
allocate the executed shares by first allocating to each participant
the number of executed shares equal to each participant's stated size
with the remainder being allocated based on the percentage a
participant's stated size is of the participants' aggregate stated
size.
5. The following chart illustrates how different numbers of
executed shares will be allocated to participants whose aggregate
stated size is 1,000 shares:
Number of Executed Shares To Be Allocated
----------------------------------------------------------------------------------------------------------------
Each participant's stated size 2,000 900 700 500
----------------------------------------------------------------------------------------------------------------
500............................................. 1,000 400 250 168
300............................................. 600 300 250 167
200............................................. 400 200 200 165
----------------------------------------------------------------------------------------------------------------
(iv) In the event a specialist or registered trader declines to
accept any portion of the available executed shares, any remaining
executed shares shall be apportioned among the remaining participants
who bid or offered at the best price at the time the market was
established in accordance with paragraph (iii) above, until all
executed shares have been allocated.
(v) Specialists and registered traders may direct some or all of
their participation amount to competing public orders in the trading
crowd.
(b) Notwithstanding the foregoing, when the transaction occurs
without the participation of the specialist (either as principal or
agent), the floor broker representing the contra-side of the trade
distributes the executed shares equally among the participating
registered traders, unless a registered trader's portion of the
disseminated size is less than an equal distribution. That registered
trader will be given a less than equal distribution and the remaining
contracts will be allocated equally among the remaining participants to
the trade. In addition, if neither the specialist nor a floor broker
representing a customer is participating in the trade, the
participating registered traders shall allocate the executed shares
among themselves and other participants on parity in accordance with
subparagraph (a)(iii) above.
* * * * *
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, as
amended, 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
Since the inception of trading Exchange Traded Funds \5\ at the
Exchange, both specialists together with registered traders
(``traders'') have had the responsibility of making markets in these
products.\6\ Exchange rules require that both specialists' and traders'
transactions constitute a course of dealings reasonably calculated to
contribute to the maintenance of a fair and orderly market, and they
should not enter into transactions or make bids or offers that are
inconsistent with such a course of dealings. Specialists and traders
shall engage, to a reasonable degree under the existing circumstances,
in dealings for their own accounts when there exists a lack of price
continuity or a temporary disparity between the supply of and demand
for a specific ETF. In discussing the role of a registered trader, the
Commission has stated `` * * * registered floor traders will be
expected to trade in a way that assists the specialist in maintaining a
fair and orderly market * * * ''\7\ (emphasis supplied). Specialists
do, however, have additional obligations and responsibilities and are
subject to certain costs that registered traders do not have, which
include: (1) Their continuous obligation to the market, updating and
disseminating quotes in all securities; (2) reflecting all market
interest in the displayed quotes; (3) acting as contra-party on the
automatic execution system at all times; (4) the fixed staffing costs
committed to market making in a particular security whether it is
actively traded or not; (5) the costs of licenses to list and trade
these products; (6) the costs associated with participating in
educational and marketing functions; and (7) the costs associated with
a course of dealings designed to attract order flow to the Exchange.
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\5\ Exchange Traded Funds include SPDRS, DIAMONDS and the NASDAQ
100 shares as well as other products listed pursuant to Rules 1000
and 1000A. These products will be referred to hereinafter as
``ETFs.''
\6\ See Amex Rule 958, Commentary 10.
\7\ See Securities Exchange Act Release No. 11144 (December 19,
1974), 40 FR 3258 (January 20, 1975).
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In the course of making markets, specialists are often on parity
with registered traders, that is, bidding and offering simultaneously
to provide liquidity. Generally, Exchange Rule 126 provides that when
bids (offers) are made simultaneously all such bids (offers) are on
parity, and any securities sold (bought) in execution of such bids
(offers) shall be divided as equally as possible between those on
parity up to the participant's stated or generally known sizes. In
addition, as further discussed below, the trading crowds in many option
classes give the specialist a greater than equal share when on parity
with registered traders. This proposal seeks to codify in the
Exchange's rules these current allocation practices.
Although this rule proposal seeks to codify the participation in
and
[[Page 2758]]
allocation of trades among specialists and registered traders on
parity, the following is a general description of the Exchange's rules
regarding customer priority and parity. Exchange Rules 155 and 111 for
specialists and registered traders, respectively, set forth their
obligations and responsibilities when handling or interacting with
customer orders. Amex Rule 155 requires a specialist to yield
precedence to orders entrusted to him as agent before executing a
purchase or sale at the same price for an account in which he has an
interest. Amex Rule 111, Commentary .07 provides that registered
traders in establishing or increasing a position may not retain
priority over or have parity with a customer order. Thus, the rules
would require that, when the specialist as agent receives a customer's
marketable limit order, he and any registered trader establishing or
increasing a position yield precedence to the customer order. However,
registered traders closing or reducing a position and specialists not
acting in an agency capacity can be on parity with the customer order.
It is the specialist's responsibility to allocate executed ETF
shares among all participants to a trade. This is generally a manual
process involving the inputting of participant information into the
Point of Sale (or POS) Book. However, as provided in the proposed Rules
1000, Commentary .08(b) and 1000A, Commentary .09(b), whenever a trade
occurs without the participation of the specialist (i.e., the order is
represented by a floor broker with registered traders as contra-parties
to the trade), the Floor Broker representing the contra-side of the
trade would distribute the executed shares equally among the
participating registered traders, unless a registered trader's portion
of the disseminated quote size is less than an equal distribution. That
registered trader would be given a less than equal distribution, and
the remaining shares would be allocated equally among the remaining
participants to the trade. In addition, when only registered traders
are on both sides of a trade (i.e., neither the specialist nor a
customer is participating in the trade), the registered traders would
allocate the executed shares among themselves in accordance with the
same provisions setting forth allocations by the specialist.\8\ In this
situation, as well as others, registered traders are only required to
participate up to their portion of the Exchange's disseminated quote
size as required by the firm quote rule.\9\
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\8\ See proposed Rules 1000, Commentary .08(a)(iii) and 1000A,
Commentary .09(a)(iii).
\9\ See Rule 11Ac-1-1 under the Act, 17 CFR 240.11Ac-1-1.
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Depending upon the level of activity and volatility of a particular
ETF, the level of participation of an individual registered trader in
each ETF would vary. Registered traders who regularly or only
occasionally trade a particular ETF are currently expected to and would
be required under the proposed codification in Rules 1000 and 1000A, to
announce, either at the start of the trading day, upon entry into the
trading crowd, or prior to the dissemination of a quotation, the number
of shares in which they are willing to participate. These generally
known sizes would be aggregated into the size disseminated by the
Exchange pursuant to the firm quote rule so that the disseminated quote
in each ETF reflects the level of participation by the specialist and
each registered trader. While the specialist would not be required to
announce his size to the trading crowd, his size could be determined
from the disseminated quote size. As transactions occur, the specialist
would allocate ETF shares to registered traders based upon these stated
participation sizes.
The Exchange states that over the years, it, as well as registered
traders and specialists, has recognized that, given their role,
specialists should be entitled to a greater than equal share when on
parity with registered traders. As a result, a practice has developed
in Amex trading crowds for many products to give the specialist a
greater than equal share when on parity with registered traders. The
Exchange now seeks to codify this practice.
The Exchange believes that it is appropriate to provide a greater
participation to specialists since they have responsibilities and are
subject to certain costs that registered traders do not have. For
example, they have a continuous obligation to the market; to update and
disseminate quotes in all securities; to reflect all market interest in
the displayed quotes; and to act as contra-party on Auto-Ex at all
times. In addition, specialists incur the fixed staffing costs
committed to market making in a particular security whether it is
actively traded or not, and the costs associated with participating in
educational and marketing functions to attract order flow. In order to
attract to the Exchange specialist units that are willing to accept
these responsibilities, the Amex believes it is necessary to provide
specialists with an enhanced participation in ETFs. The Exchange also
believes that in order to be competitive with other exchanges that
currently trade ETFs without market makers or registered traders, it
must have the flexibility to determine the appropriate specialist
participation.
The Exchange has determined that the specialist's participation for
each ETF can and should vary depending upon the liquidity of the
product, the type of orders sent to the Exchange and its competitors,
and the type of order flow the Exchange seeks to attract in each ETF
product. As a result, the Exchange has established the ETF Trading
Committee (``Committee'') to determine the level of the specialist's
participation on a case-by-case basis for ETFs.\10\ The Committee shall
not determine in any ETF the specialist's participation level at
anything less than the specialist participation level in place
today.\11\
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\10\ The Exchange states that the Committee would be described
and approved by the Exchange's Board of Governors on an annual basis
as part of the Exchange's Committee structure. The Committee and its
structure would also be discussed in an Information Circular that is
expected to be issued after this proposed rule change is approved by
the Commission.
\11\ Footnote 11, which includes a table, has been incorporated
in the text.
Exchange policy currently applies the following specialist's
participation levels:
------------------------------------------------------------------------
Approximate number
Approximate number of shares
Number of traders on parity of shares allocated allocated to the
to the specialist traders (as a
group)
------------------------------------------------------------------------
1.............................. 60% 40%
2-4............................ 40% 60%
5-7............................ 30% 70%
8-15........................... 25% 75%
16 or more..................... 20% 80%
------------------------------------------------------------------------
The Committee would be composed of the Exchange's four Floor Governors,
the Chairmen (or their designee) of the Specialists Association, the
Options Market Makers Association and the Floor Brokers Association,
and three members of the Exchange's senior staff. It is expected that
the designated Committee member from the Specialists Association
specialize in one or more ETF products, and that the designated
Committee member from the Options Market Maker Association trade one or
more ETF products on a regular basis. All members of the Committee,
including Exchange senior staff members, would have a vote on
determining the level of specialist participation for each ETF. The
Exchange currently trades over 100 different ETFs whose volume and
liquidity vary widely. Each ETF would be evaluated individually by the
Committee to determine the appropriate
[[Page 2759]]
level of specialist participation based on the liquidity of the
product, the type of orders sent to the Exchange and its competitors,
and the type of order flow the Exchange seeks to attract in each ETF
product. An enhanced participation, if deemed appropriate by the
Committee, would give specialists the ability to attract order flow to
the Exchange and thereby give its customers tighter, more competitive
markets. As a result, the Exchange would be able to attract new
specialist units and retain the services of existing units.
It should be emphasized that the participation rights being
established by the Committee would apply only when the specialist and/
or registered traders are on parity and would not include situations
where a customer order is also on parity with the specialist and
registered traders. It should be noted, however, that a specialist
cannot be on parity with an order for which he is acting as agent, and
registered traders (who never act as agents and trade only for their
own accounts) cannot be on parity with a customer when either
establishing or increasing their position in the ETF. In such
situations, as provided in proposed Rules 1000, Commentary .08(a)(iii)
and 1000A, Commentary .09(a)(iii), the specialist would first allocate
executed shares to the customer and to the specialist and/or those
registered traders on parity with the customer. Any shares that remain
would be allocated among the specialist and registered traders in
accordance with proposed Rules 1000, Commentary .07 and 1000A,
Commentary .08, which provides that the specialist would receive a
participation in the remaining shares in accordance with the level set
by the Committee. In addition, neither the specialist nor a registered
trader would be allocated more executed shares than the number of
shares representing the specialist's or registered trader's portion of
the aggregate quotation size that the responsible broker or dealer
would be obligated to communicate to the Exchange pursuant to firm
quote rule, except when the number of executed shares to be allocated
exceeded the aggregate quotation size disseminated for that ETF. Thus,
for the following two examples, assume that the aggregate quotation
size is 1,000 shares, the specialist's portion is 250 shares, and the
registered trader's portion is 750 shares.
First example. An off-floor order to sell 800 shares is
submitted for execution at the disseminated bid. The Committee has
determined for this ETF that the specialist would be entitled to 60%
of the executed shares. The specialist, however, would only be
allocated 250 executed shares, and the registered trader would be
allocated 550 executed shares.
Second example. An off-floor order to sell 2,000 shares is
submitted for execution at the disseminated bid. The specialist and
registered trader would first be allocated 250 shares and 750 shares
respectively, plus the specialist would receive 60% of the remaining
1,000 shares for a total of 850 shares, and the registered trader
would receive 40% for a total of 1,150 shares.
Once the specialist determines his portion of the trade depending
upon the number of traders on parity, he would deduct his portion and
allocate the remaining shares to the registered traders based upon: (i)
An equal distribution, as described in the first example below; (ii)
filling the smallest size(s) first, as described in the second example
below; (iii) a combination based on filling the smallest size first and
equal distribution, as described in the third example below; or (iv)
prorated based on the registered traders' generally known sizes and the
percentage those sizes represent of their aggregate disseminated size,
as described in the fourth example below. The number of shares in the
incoming order would determine which of the methods would be used in
the allocation.
Assume the following information for each of the following four
examples: the disseminated bid for a particular ETF has an aggregate
size of 10,000 shares. The specialist is bidding for 6,500 shares, and
four registered traders' generally known sizes are as follows: Trader
A--2,000 shares; Trader B--1,000 shares; Trader C--300 shares; and
Trader D--200 shares. There are no customer orders participating in the
bid. The Committee has determined for this ETF that the specialist
would receive 40% of the executed shares, and the registered traders
would split the remaining 60%.
First example. An off-floor order to sell 1,000 shares is
submitted for execution at the disseminated bid. The specialist
would allocate the executed shares as follows: the specialist would
receive 400 shares (or 40%), and would allocate the remaining
executed shares equally to each of the four traders 150 shares (or
25% of the remaining 600 shares).
Second example. An off-floor order to sell 5,000 shares is
submitted for execution at the disseminated bid. The executed shares
would be allocated by the specialist as follows: (i) The specialist
would receive 40% (2,000 shares) of the 5,000 executed shares
pursuant to the Committee's determination; and (ii) the remaining
60% (3,000 shares) would be divided among the registered traders
based upon their generally known sizes with an attempt to completely
fill the smallest size(s) first, which in this example would be 200
shares for Trader D, 300 shares for Trader C, and 1,000 shares for
Trader B. A total of 1,500 shares would be deducted, leaving 1,500
shares to be allocated to Trader A.
Third example. An off-floor order to sell 2,000 shares is
submitted for execution at the disseminated bid. The executed shares
would be allocated by the specialist as follows: (i) The specialist
would receive 40% (800 shares) of the 2,000 executed shares pursuant
to the Committee's determination; and (ii) the remaining 60% (1,200
shares) would be divided among the registered traders based upon
their generally known sizes with an attempt to completely fill the
smallest size(s) first and an equal distribution of any remainder.
Thus, the smallest sizes would be filled first: 200 shares for
Trader D, and 300 shares for Trader C, and the remaining 1,100
shares would be divided equally, with 550 shares distributed each to
Trader A and Trader B. Trader B would not receive 1,000 shares (its
generally known size) because such size would be more than an equal
share of the remaining 1,100 shares.
Fourth example. An off-floor order to sell 20,000 shares is
submitted for execution at the disseminated bid. Pursuant to the
firm quote rule, the specialist and registered traders, as the
responsible broker or dealers, would be obligated to execute
order(s) at the disseminated bid up to their disseminated size. The
specialist and traders would be able to execute the first 10,000
shares at the disseminated bid and execute the remaining shares at a
lower bid or bids. If, however, the specialist and registered
traders have determined, either individually or collectively
(pursuant to Rule 958(h)(ii)), to execute the entire order at their
disseminated bid, the executed shares would be allocated as follows:
(i) The specialist would receive 6,500 executed shares representing
his portion of the aggregate quotation size, plus 40% of the
remaining 10,000 executed shares pursuant to the participation rates
set forth above for a total of 10,500 executed shares; and (ii) the
remaining 60% (9,500 shares) would be divided among the registered
traders proportionally based upon their generally known sizes, the
aggregate of which, in this example would be 3,500 shares: Trader A
would receive an allocation of approximately 5,420 shares (2,000/
3,500=57% of the 9,500); Trader B would receive an allocation of
approximately 2,750 shares (1,000/3,500=29% of the 9,500 shares);
Trader C would receive an allocation of approximately 810 shares
(300/3,500=8.5% of the 9,500 shares); and Trader D would receive an
allocation of approximately 520 shares (200/3,500=5.5% of the 9,500
shares).
In addition, the proposed rule text sets forth a chart that
illustrates how different numbers of executed shares would be allocated
to registered traders after the specialist has allocated portions to
the customer and to the specialist. In each example, the chart assumes
the aggregate stated size is 1,000 shares:
[[Page 2760]]
Number of Executed Shares To Be Allocated
----------------------------------------------------------------------------------------------------------------
Each participant's stated size 2,000 900 700 500
----------------------------------------------------------------------------------------------------------------
500............................................. 1,000 400 250 168
300............................................. 600 300 250 167
200............................................. 400 200 200 165
----------------------------------------------------------------------------------------------------------------
The first column illustrates the situation when the number of
executed shares exceeds the registered traders' aggregate stated size,
and each registered trader has determined either individually or
collectively to participate for a larger size. The rest of the columns
illustrate situations when the number of executed shares is less than
the registered traders aggregate stated size: The second column
illustrates the situation when two of the three registered traders'
smaller sizes would be filled first and the third registered trader
would be allocated the remainder; the third column illustrates the
situation when only one registered trader's smallest size would be
filled and the remaining executed shares would be allocated equally
between the two remaining registered traders; and the fourth column
illustrates the situation when all executed shares would be allocated
equally among the participating registered traders.
In addition, a question has arisen with respect to other products
in which the Exchange has codified its rules regarding the allocation
of executed orders \12\ of whether a specialist or registered options
trader can decline an allocation of executed contracts. As noted above,
the firm quote rule requires specialists and registered traders to be
``firm'' up to their disseminated size unless one of the exceptions set
forth in the rule applies. If a specialist or registered trader
declines an allocation or ``backs away'' from his disseminated size in
whole or in part, he would be in violation of the firm quote rule,
investigated, and sanctioned accordingly. If the other participants to
the disseminated quote size determine to increase the size of their
participation to cover for the declining specialist or registered
trader, the executed shares would be allocated based upon the
principles discussed above. That is, the specialist's participation
would be based upon one less registered trader participating, and the
allocation among registered traders would be increased proportionately.
Moreover, if the size of the incoming order is greater than the
disseminated size and one or more registered traders are not willing to
participate in a size larger than their disseminated size, then the
additional executed shares would be allocated to the remaining
participants based upon their participation rights as set forth in
proposed Rules 1000, Commentary .08 and 1000A, Commentary .09.
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\12\ See Securities Exchange Act Release No. 47729 (April 24,
2003), 68 FR 23344 (May 1, 2003) (codifying the allocation of option
contracts and trades).
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Finally, with respect to automatic execution for ETFs, the Exchange
proposes to amend Rule 128A to replace the schedule set forth in the
rule, which shows the percentage of the approximate number of trades
allocated to the specialist and registered traders signed on to Auto-Ex
in a given ETF, with a reference to the Committee's determination of
the appropriate percentages to be used in allocating Auto-Ex executed
ETF shares.
2. Statutory Basis
The Exchange believes that the proposed rule change, as amended, is
consistent with section 6(b) of the Act \13\ in general, and furthers
the objectives of section 6(b)(5) of the Act \14\ 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.
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
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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, 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-2002-35. This file number should 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 the 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-2002-35 and should be
submitted by February 10, 2004.
[[Page 2761]]
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1082 Filed 1-16-04; 8:45 am]
BILLING CODE 8010-01-P