[Federal Register: March 3, 2004 (Volume 69, Number 42)]
[Notices]
[Page 10081-10085]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03mr04-133]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49319; File No. SR-Amex-2003-39]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1, 2, 3 and 4 Thereto by the American Stock
Exchange LLC To Adopt an Obvious Error Rule and Half-Point Error
Guarantee for Trades on the Exchange in Nasdaq National Market
Securities
February 25, 2004.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 30, 2003, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The Amex
submitted Amendment No. 1 to the proposed rule change on October 15,
2003.\3\ The Amex submitted Amendment No. 2 to the proposed rule change
on November 21, 2003.\4\ The Amex submitted Amendment No. 3 to the
proposed rule change on December 10, 2003.\5\ The Amex submitted
Amendment No. 4 to the proposed rule
[[Page 10082]]
change on February 2, 2004.\6\ 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 Bill Floyd Jones, Associate General Counsel,
Amex, to Nancy J. Sanow, Assistant Director, Division of Market
Regulation (``Division''), Commission, dated October 14, 2003
(``Amendment No. 1''). Amendment No. 1 replaced the original
proposed rule change in its entirety.
\4\ See Letter from Bill Floyd Jones, Associate General Counsel,
Amex, to Nancy J. Sanow, Assistant Director, Division, Commission,
dated November 20, 2003 (``Amendment No. 2''). Amendment No. 2
replaced the original proposed rule change and Amendment No. 1 in
their entirety.
\5\ See Letter from Bill Floyd Jones, Associate General Counsel,
Amex, to Nancy J. Sanow, Assistant Director, Division, Commission,
dated December 9, 2003 (``Amendment No. 3''). Amendment No. 3
replaced the original proposed rule change and Amendment Nos. 1 and
2 in their entirety. In Amendment No. 3, Amex also represented that
Exchange Staff plans to propose the adoption of an obvious error
rule similar to proposed Amex Rule 118(l) for Amex listed securities
similar to that contained in the proposed rule change, at the next
regularly scheduled Amex board meeting.
\6\ See Letter from Bill Floyd Jones, Associate General Counsel,
Amex, to Nancy J. Sanow, Assistant Director, Division, Commission,
dated January 30, 2004 (``Amendment No. 4''). In Amendment No. 4,
Amex revised the proposed rule change to: (1) make technical
amendments to the rule text to better reflect the proposed rule
change, and (2) confirm that the Exchange has determined for
business reasons not to extend the half-point error guarantee to
other securities traded on the Exchange at this time.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex proposes to adopt an obvious error rule and half point
error guarantee for transactions on the Exchange in Nasdaq National
Market securities.
The text of the proposed rule change is below. Additions are
italicized:
* * * * *
Trading in Nasdaq National Market Securities
Rule 118. (a) through (j) No change.
(k) Reserved
(l) Clearly Erroneous Transactions in Nasdaq National Market
Securities--
(i) A Floor Official shall, pursuant to the procedures set forth in
below, have the authority to review any transaction in a Nasdaq
National Market security that is claimed to be clearly erroneous
arising out of the use or operation of any facility of the Exchange. In
reviewing a trade in a Nasdaq National Market security that is claimed
to be clearly erroneous, a Floor Official shall review the transaction
with a view toward maintaining a fair and orderly market and the
protection of investors and the public interest. Based upon this
review, the Floor Official shall decline to ``break'' a disputed
transaction if the Floor Official believes that the transaction under
dispute is not clearly erroneous. If the Floor Official determines the
transaction in dispute is clearly erroneous, however, he or she shall
declare that the transaction is null and void or modify one or more
terms of the transaction. When adjusting the terms of a transaction,
the Floor Official shall seek to adjust the price and/ or size of the
transaction to achieve an equitable rectification of the error that
would place the parties to a transaction in the same position, or as
close as possible to the same position, as they would have been in had
the error not occurred. For the purposes of this Rule, the terms of a
transaction are clearly erroneous when there is an obvious error in any
term, such as price, number of shares or other unit of trading, or
identification of the security.
(ii) Any member who seeks to have a transaction reviewed pursuant
to subparagraph (i) above shall submit the matter to a Floor Official
and deliver a written complaint to Service Desk within 30 minutes of
the transaction. Once a complaint has been received, the complainant
shall have up to thirty 30 minutes, or such longer period as the Floor
Official may specify, to submit any supporting written information
concerning the complaint necessary for a review of the transaction. The
other party to the trade shall have up to thirty minutes after being
notified of the complaint, or such longer period as specified by the
Floor Official, to submit any supporting written information concerning
the complaint necessary for a review of the transaction. Either party
to a disputed trade may request the written information provided by the
other party pursuant to this subparagraph. Once a party to a disputed
trade communicates that he or she does not intend to submit any further
information concerning a complaint, the party may not thereafter
provide additional information unless requested to do so by the Floor
Official. If both parties to a disputed trade indicate that they have
no further information to provide concerning the complaint before their
respective thirty-minute information submission period has elapsed,
then the matter may be immediately considered by a Floor Official.
Members or persons associated with members and member organizations
involved in the transaction shall provide the Floor Official with any
information that he or she requests in order to resolve the matter on a
timely basis notwithstanding the time parameters set forth above. Once
a member has applied to a Floor Official for a ruling, the Floor
Official shall review the transaction and make a ruling unless both
parties to the transaction agree to withdraw the application for review
prior to the time that the Floor Official makes the ruling. A member
may seek review of a Floor Official's ruling pursuant to the procedures
described in Rule 22(d) and Commentary .02 to Rule 22.
(iii) In the event of (1) a disruption or malfunction in the use or
operation of any facility of the Exchange, (2) a disruption or
malfunction in the use or operation of any facility of Nasdaq that
results in Nasdaq nullifying or modifying trades in the Nasdaq market
pursuant to its rules, or (3) extraordinary market conditions or other
circumstances in which the nullification or modification of
transactions executed on the Exchange in Nasdaq National Market
securities may be necessary for the maintenance of a fair and orderly
market or the protection of investors and the public interest, a Floor
Governor may review any transactions arising out of or reported through
any facility of the Exchange; provided, however, that a Floor Governor
may not review transactions arising out of the use or operation of any
execution or communication system owned or operated by Nasdaq. Prior to
the nullification or modification of transactions as a result of a
disruption or malfunction in the use or operation of any facility of
Nasdaq, the Exchange must receive confirmation from NASD or Nasdaq that
there is a disruption or malfunction on Nasdaq's market that has
resulted in the nullification or modification of trades in that market.
A Floor Governor acting pursuant to this subsection may declare any
Amex transaction null and void or modify the terms of any such
transactions if the Floor Governor determines that (1) the transaction
is clearly erroneous, or (2) such actions are necessary for the
maintenance of a fair and orderly market or the protection of investors
and the public interest; provided, however, that, in the absence of
extraordinary circumstances, the Floor Governor must take action
pursuant to this subsection within thirty (30) minutes of detection of
the transaction, but in no event later than 3 p.m., Eastern Time, on
the next trading day following the date of the trade at issue. A member
may seek review of a Floor Governor's ruling from a three Governor
Panel as described in Rule 22(d) and Commentary .02 to Rule 22 without
first seeking review of the ruling from a Floor Official or Exchange
Official.
(m) Half-Point Error Guarantee. The provisions of Rule 129 shall
not apply to orders for Nasdaq National Market securities of 1,000
shares or less received by the specialist through the Exchange's
electronic order routing system (``System''). As to such orders,
erroneous execution reports sent by the specialist via the System shall
be binding except that (i) if the erroneous report is at a price which
is more than $.50 away from the execution price, then the price of the
execution shall be binding, and (ii) if the member organization that
entered the order requests a correction from the specialist prior to
the opening on the second business day following the day of the
transaction, the specialist shall correct
[[Page 10083]]
the execution report to the price of the execution and that price shall
be binding. If the erroneous execution report sent by the specialist is
at a price which is more than $.50 away from the execution price and if
a transaction has appeared on the tape at the price of the erroneous
report and in a quantity equal to or exceeding the amount reported, the
specialist must render a corrected report no later than noon on the
business day following the day of the transaction. If not so corrected,
the specialist will be responsible for any resulting loss. However, as
to limit orders, erroneous execution reports sent by the specialist
shall also not be binding where the subject security did not trade at
or below (or above, as the case may be) the limit price specified on
the order on that trading day.
(n) Rule 390 shall not preclude a member, member organization,
allied member, registered representative, or officer from sharing or
agreeing to share in any losses in any customer's account with respect
to Nasdaq National Market securities after the member organization has
established that the loss was caused in whole or in part by the action
or inaction of such member, member organization, allied member,
registered representative or officer, provided, however, that this
provision shall not permit a member, member organization, allied
member, registered representative or officer to guarantee any customer
against loss in his account. Commentary: No Change.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Trades in Nasdaq securities may occur at clearly erroneous prices
due to human or system errors. The Exchange, accordingly, is proposing
to adopt an obvious error rule for use on the Exchange in connection
with unlisted trading privileges (``UTP'') transactions on the Exchange
in Nasdaq securities. New Amex Rule 118(l) would be similar to Rule
11890 (Clearly Erroneous Transactions) of the National Association of
Securities Dealers, Inc. (``NASD'') for the Nasdaq Stock Market.
Like the NASD's rule, the proposed Amex obvious error rule would
allow the Exchange to break or revise single or multiple trades that
are obviously erroneous. Under the proposed rule, a member may request
an Amex Floor Official \7\ to review a transaction that is claimed to
be clearly erroneous. Once a ruling is requested, a Floor Official must
review the trade unless both parties agree to withdraw the application
before the Floor Official makes a ruling.
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\7\ Floor Officials are deemed to be Officers of the Exchange.
See Amex Rule 22(c). Floor Officials are generally responsible for
the supervision of operations the Exchange Floor. There are four
classifications of Floor Official. In ascending order of
responsibility, these classifications are: (1) Floor Official, (2)
Exchange Official, (3) Senior Floor Official, and (4) Senior
Supervisory Officer. The Vice Chairman of the Exchange is a Floor
Governor and serves as the Senior Supervisory Officer. Governors of
the Exchange that spend a significant amount of time on the Floor
are Senior Floor Officials. Numerous provisions of the Exchange's
rules specifically call for Floor Official involvement in the
Exchange's operations.
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The proposed rule requires a Floor Official to review a transaction
or series of transactions with a view toward maintaining a fair and
orderly market and the protection of investors and the public interest.
Based upon this review, a Floor Official would decline to ``break'' a
disputed transaction if the Floor Official believes that the
transaction under dispute is not clearly erroneous. If the Floor
Official determines the transaction in dispute is clearly erroneous,
however, the Floor Official may declare the transaction null and void
or modify one or more terms of the transaction. When adjusting the
terms of a transaction, the Floor Official would seek to adjust the
price and/or size of the transaction to achieve an equitable
rectification of the error that would place the parties to a
transaction in the same position, or as close as possible to the same
position, as they would have been in had the error not occurred.
Subparagraph (ii) of proposed Amex Rule 118(l) establishes
deadlines and procedures for Floor Official review of a disputed
transaction. Any member who seeks to have a transaction or series of
transactions reviewed must submit the matter to a Floor Official and
deliver a written complaint to Service Desk within 30 minutes of the
transaction. Once a complaint has been received, the complainant would
have up to thirty 30 minutes, or such longer period as the Floor
Official may specify, to submit any supporting written information
concerning the complaint necessary for a review of the transaction. The
other party to the trade would have up to thirty minutes after being
notified of the complaint, or such longer period as specified by the
Floor Official, to submit any supporting written information concerning
the complaint necessary for a review of the transaction. Either party
to a disputed trade may request the written information provided by the
other party. Once a party to a disputed trade communicates that he or
she does not intend to submit any further information concerning a
complaint, the party may not thereafter provide additional information
unless requested to do so by the Floor Official. If both parties to a
disputed trade indicate that they have no further information to
provide concerning the complaint before their respective thirty-minute
information submission period has elapsed, then the matter may be
immediately considered by a Floor Official. Members or persons
associated with members and member organizations involved in the
transaction would be required to provide the Floor Official with any
information that he or she requests in order to resolve the matter on a
timely basis.
Subparagraph (iii) of proposed Amex Rule 118(l) provides that, in
the event of (1) a disruption or malfunction in the use or operation of
any facility of the Exchange, (2) a disruption or malfunction in the
use or operation of any facility of Nasdaq that results in the
nullification or modification of trades in that market,\8\ or (3)
extraordinary market conditions or other circumstances in which the
nullification or modification of transactions in Nasdaq National Market
securities may be necessary for the maintenance of a fair and orderly
market or the protection of investors and the public interest, a Floor
Governor may review any transactions arising out of or reported through
any facility of the Exchange. A Floor Governor acting pursuant to this
subsection may declare any Amex transaction null and void or modify the
terms of any such transactions if the Floor Governor determines that
(1) the transaction is clearly erroneous, or (2)
[[Page 10084]]
such actions are necessary for the maintenance of a fair and orderly
market or the protection of investors and the public interest;
provided, however, that, in the absence of extraordinary circumstances,
the Floor Governor must take action pursuant to proposed Amex Rule
118(l)(iii) within thirty minutes of detection of the transaction, but
in no event later than 3 p.m., Eastern Time, on the next trading day
following the date of the trade at issue.
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\8\ Prior to the nullification or modification of transactions
as a result of a disruption or malfunction in the use or operation
of any facility of Nasdaq, the Exchange must receive confirmation
from NASD or Nasdaq that there is a disruption or malfunction on
Nasdaq's market that has resulted in the nullification or
modification of trades in that market.
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A member seeking a prompt, i.e., prior to settlement, review of a
Floor Official's ruling under proposed Amex Rule 118(l) would follow
the procedures outlined in Amex Rule 22(d). These procedures provide
possible appeals first to an Exchange Official, next to a Floor
Governor, and finally to a three governor panel. Proposed Amex Rule 118
also provides that a member aggrieved by a Floor Governor's ruling
under subsection (iii) of the proposed rule may appeal the ruling
directly to a three Governor panel pursuant to Amex Rule 22(d) and
Commentary .02. Commentary .02 to Amex Rule 22 requires Floor Officials
to prepare and submit a written record of their decisions as soon as
practical after making a ruling.\9\ Floor Officials, consequently,
would have to prepare and submit written decisions regarding rulings on
trades that may be clearly erroneous. The Commission recently reviewed
and approved amendments to the Exchange's procedures for appealing
Floor Official rulings.\10\
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\9\ Floor Governors would also have to comply with similar
procedures under this rule. Telephone Conversation between Bill
Floyd Jones, Associate General Counsel, Amex, and Ian K. Patel,
Attorney, Division, Commission, dated January 16, 2004.
\10\ See, Securities Exchange Act Release No. 47078 (December
30, 2002), 67 FR 79668 (December 20, 2002) (SR-Amex-2001-07).
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In conjunction with the adoption of an obvious error rule, the
Exchange also proposes the adoption of a Half-Point Error Guarantee for
transactions in Nasdaq stocks (proposed Amex Rule 118(m)). The proposed
Amex error guarantee would allow small investors to rely upon reports
of executions of system orders of sizes that may be designated by the
Exchange from time to time where the report is within $.50 of the
execution price. System orders of 1,000 shares or less would be
eligible for the Half-Point Error Guarantee.
As to such others, erroneous execution reports sent by the
specialist via the Exchange's electronic order routing system would be
binding except that if the erroneous report is at a price which is more
than $.50 away from the execution price, then the execution price would
be binding. In addition, if the member organization that entered the
order requests a correction from the specialist prior to the opening on
the second business day following the day of the transaction, the
specialist would correct the execution report to the price of the
execution and that price would be binding. If the erroneous execution
report sent by the specialist is at a price which is more than $.50
away from the execution price and if a transaction has appeared on the
tape at the price of the erroneous report and in a quantity equal to or
exceeding the amount reported, the specialist would be required to
render a corrected report no later than noon on the business day
following the day of the transaction. If not so corrected, the
specialist would be responsible for any resulting loss. However, as the
limit orders, erroneous execution reports sent by the specialist would
also not be binding where the subject security did not trade at or
below (or above, as the case may be) the limit price specified on the
order on that trading day.\11\ The Exchange believes that the Half-
Point Error Guarantee would encourage investors to use the Exchange's
electronic order routing facilities.\12\
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\11\ Thus, if the subject security did not trade at or below
(above) the limit price specified on the order on that trading day,
then the provisions of Amex Rule 129 would apply. If the subject
security did trade at or below (above) the limit price specified on
the order on that trading day, then the Half-Point Error Guarantee
would apply. Telephone conversation between Bill Floyd Jones,
Associate General Counsel, Amex, David Fisch, Managing Director,
Amex, Susie Cho, Special Counsel, Division, Commission, and Ian
Kiran Patel, Attorney, Division, Commission, on January 29, 2004.
\12\ Proposed Amex Rule 118(m) is similar to New York Stock
Exchange, Inc. Rule 123B(b)(2).
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To implement the Half-Point Error Guarantee, the Exchange also is
proposing to adopt a rule (Rule 118(n)) that would codify current
practice with respect to the resolution of errors in Nasdaq securities
traded on the Exchange. The proposed rule change would state that
members and member organizations may share in losses in a customer's
account when the member or member organizations determine that the
member or firm was responsible for the loss.\13\
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\13\ Proposed Amex Rule 118(n) is based upon Supplementary
Material .20 to NYSE Rule 352. The Exchange has represented that it
plans to propose an obvious error rule for listed securities. See
supra n. 5. However, for business reasons, the Exchange does not
plan to propose a Half-Point Error Guarantee for listed securities.
See Amendment No. 4, supra note 6.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \14\ in general and furthers the
objectives of Section 6(b) \15\ in particular in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change will impose no
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. Comments may also be submitted electronically at the
following e-mail address: rule-comments@sec.gov. All comment letters
should refer to File No. SR-Amex-2003-39. This file number
[[Page 10085]]
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 such filing will also be
available for inspection and copying at the principal office of the
Amex. All submissions should refer to File No. SR-Amex 2003-39 and
should be submitted by March 24, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-4715 Filed 3-2-04; 8:45 am]
BILLING CODE 8010-01-P