[Federal Register: January 6, 2003 (Volume 68, Number 3)]
[Notices]
[Page 592-595]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06ja03-82]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47105; File No. SR-Amex-2002-99]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the American Stock Exchange
LLC Relating to a Six-Month Extension of the Exchange's Pilot Program
for Automatic Execution of Orders for Exchange Traded Funds
December 30, 2002.
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 December 4, 2002, 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
proposed rule change has been filed by the Amex as a ``non-
controversial'' rule change under Rule 19b-4(f)(6) under the Act.\3\
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex seeks a six-month extension of Amex Rule 128A to continue
its pilot program for the automatic execution of orders for Exchange
Traded Funds (``ETFs''), with certain modifications as described below.
Proposed changes to the text of Rule 128A are set forth below.\4\ New
text is in italics. Deleted text is in brackets.
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\4\ The Commentary to Rule 128A, providing details of the pilot
program that are summarized in Section II of this notice, will
remain unchanged.
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Automatic Execution for Exchange Traded Funds
Rule 128A. 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 [30] 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 [30] seconds.
* * * * *
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 parts of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On June 19, 2001, the Commission approved the Exchange's proposal,
adopted as Amex Rule 128A, to permit the automatic execution of orders
for ETFs on a six-month pilot program basis.\5\ Since that time, the
Exchange has extended the pilot program twice, in December 2001 and
June 2002, each time for six months.\6\ The Exchange now seeks to
extend the pilot program, with certain modifications, for an additional
six months.
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\5\ See Securities Exchange Act Release No. 44449 (June 19,
2001), 66 FR 33724 (June 25, 2001) (``June 2001 Release'')
(approving File No. SR-Amex-2001-29).
\6\ See Securities Exchange Act Release Nos. 45176 (December 20,
2001), 66 FR 67582 (December 31, 2001) and 46085 (June 17, 2002) 67
FR 42836 (June 25, 2002) (notices of filing and immediate
effectiveness of File Nos. SR-Amex-2001-105 and SR-Amex-2002-42,
respectively).
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Since 1986, the Exchange has had an automatic order execution
feature (``Auto-Ex'') for eligible orders in listed options. The
Chicago Board Options Exchange, Philadelphia Stock Exchange, and
Pacific Exchange established similar automatic option order execution
features at about the same time as the Amex, and the newest options
exchange, the International Securities Exchange, also features
automatic order execution. Auto-Ex,
[[Page 593]]
accordingly, has been a standard feature of the options markets for a
number of years.
In 1993, the Amex commenced trading Standard and Poor's Depositary
Receipts[reg] (``SPDRs[reg]''), the first ETF to
be listed and traded on the Exchange. ETFs are individual securities
that represent a fractional, undivided interest in a portfolio of
securities. Currently, more than 100 ETFs are listed on the Amex. Like
an option, an ETF is a derivative security, and, according to the Amex,
its price is a function of the value of the portfolio of securities
underlying the ETF. Thus, as is the case with options, the Exchange
asserts that it is not the price discovery market for ETFs, and that
the price discovery market is the market or markets where the
underlying securities trade.
The Exchange is now proposing to extend its current Auto-Ex
technology for an additional six months to ETFs listed under Amex Rules
1002, 1002A, and 1202. The Amex represents that this will provide
investors that send eligible orders to the Exchange with faster
executions than they otherwise would receive. The Exchange believes
that many investors desire rapid executions in trading securities that
are priced derivatively since the value of the underlying instruments
may fluctuate during order processing. The Amex, moreover, will
continue under the pilot extension to incorporate a price improvement
algorithm into Auto-Ex for ETFs, thus to provide investors with better
execution prices on their orders. The price improvement algorithm works
in the following manner:
When the Amex establishes the National Best Bid or Offer
(``NBBO''),\7\ Auto-Ex is programmed to execute eligible incoming ETF
orders at the APQ plus a programmable number of trading increments with
respect to the Amex bid, and less a programmable number of trading
increments in the case of the Amex offer. For example, if the APQ were
90.10 to 90.20, and the APQ constituted the NBBO, incoming sell orders
might be automatically executed at 90.12 (the Amex bid plus two ticks)
and incoming buy orders might be executed at 90.18 (the Amex offer less
two ticks). If the Amex does not establish the NBBO, Auto-Ex is
programmed to execute eligible incoming ETF orders at or better than
the NBBO up to a specified number of trading increments relative to the
APQ.\8\ Auto-Ex executes an eligible order at the improved price
relative to the APQ unless such execution would result in a trade-
through with respect to the price of an away market that is a
participant in the Intermarket Trading System (``ITS''). If a trade
through would result, the order is routed to the specialist for
electronic processing through the Amex electronic order book.\9\
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\7\ The term ``establish'' as used in this context of Amex Rule
128A means that the Amex Published Quote (``APQ'') is currently at
the NBBO, regardless of whether or not the Amex was the first
exchange to be at that price. See June 2001 Release, supra note.
\8\ The number of trading increments designated for price
improvement when the Amex establishes the NBBO may be different than
the number of increments designated for price improvement when the
Amex does not establish the NBBO. Id.
\9\ Once an order that is Auto-Ex eligible is sent to the
Exchange, the person that initiated the order has no control over
its execution. This is the case regardless of whether the order is
executed by Auto-Ex or is executed by the specialist because Auto-Ex
is unavailable. If the order is routed to the specialist for
handling because Auto-Ex is unavailable, the specialist does not
know if the order is for the account of a broker-dealer or for the
account of a customer. This information is in the Exchange's order
processing systems and is unavailable to the specialist.
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For example, assume that Auto-Ex is programmed to execute the order
at the Amex bid plus two ticks. If the Amex bid were 90, and an away
ITS market were bidding 90.01, an incoming sell order would be
automatically executed on the Amex at 90.02. Continuing with this
example, if the away market were bidding 90.02, an incoming sell order
would be automatically executed on the Amex at 90.02 (matching the away
market). If the away market were bidding 90.03, the incoming sell order
would not be automatically executed. Instead, it would be routed to the
specialist for electronic processing through the Amex electronic order
book.
The amount of price improvement that the system provides, both when
the Amex establishes the NBBO and when it does not, is determined by
the Auto-Ex Enhancements Committee (``Committee'') upon the request of
a specialist and may differ among ETFs. The Committee consists of the
Exchange's four Floor Governors and the Chairmen (or their designees)
of the Specialists Association, Options Market Makers Association, and
the Floor Brokers Association, respectively. The Exchange anticipates
that the amount of price improvement will vary among securities based
upon such factors as the width of the spread, the volatility of the
basket of securities underlying the ETF, and liquidity of available
hedging vehicles. The amount of price improvement may be adjusted
intra-day by the Committee.
As detailed in Amex Rule 128A, Auto-Ex for ETFs with price
improvement is unavailable when the spread is at a specified minimum
and maximum variation, which may be adjusted security to security. The
Committee will determine, upon the request of a specialist, the minimum
and maximum spreads at which Auto-Ex is unavailable. As further
provided in the rule, Auto-Ex is also unavailable with respect to
incoming sell orders when the Amex bid is for 100 shares, and similarly
unavailable with respect to incoming buy orders when the Amex offer is
for 100 shares.
Orders that are otherwise Auto-Ex eligible orders are also routed
to the specialist, and not automatically executed, in situations where
the specialist in conjunction with a Floor Governor or two Floor
Officials determine that quotes are not reliable and the Exchange is
experiencing communications or systems problems, ``fast markets,'' or
delays in the dissemination of quotes. Members and member organizations
are notified when the Exchange has determined that quotes are not
reliable prior to disengaging Auto-Ex.
Specialists and Registered Options Traders (``ROTs'') that sign
onto the system are automatically allocated the contra side of Auto-Ex
trades for ETFs. Due to the automatic price improvement feature, the
specialist and ROTs that sign onto Auto-Ex for ETFs are deemed to be on
parity for purposes of allocating the contra side of ETF Auto-Ex
trades. Amex Rule 128A incorporates the following methodology for the
allocation of the contra side to Auto-Ex ETF trades.
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Approximate number of
Approximate number of trades allocated ROTs
trades allocated to the signed on to auto-ex
Number of ROTs signed on to auto-ex in a crowd specialist throughout the throughout the day
day (``target ratio'') (``target ratio'')
(percent) (percent)
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1....................................................... 60 40
2-4..................................................... 40 60
[[Page 594]]
5-7..................................................... 30 70
8-15.................................................... 25 75
16 or more.............................................. 20 80
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At the start of each trading day, the sequence in which trades are
to be allocated to the specialist and ROTs signed onto Auto-Ex is
randomly determined. Auto-Ex trades then are automatically allocated in
sequence on a rotating basis to the specialist and to the ROTs that
have signed onto 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
divides the trade into lots of 100 shares each. Each lot is considered
a separate trade for purposes of determining target ratios and
allocating trades within Auto-Ex.
Round lot orders delivered to the post electronically for 2,000
shares or less are eligible for Auto-Ex for ETFs. Orders for an account
in which a market maker in ETFs registered as such on another market
has an interest are ineligible for Auto-Ex for ETFs. If orders for such
market makers were eligible for Auto-Ex with price improvement, the
Exchange represents, Amex specialists and ROTs would be unable to make
markets with the proposed liquidity for other investors. (Orders for
Amex Registered Traders are ineligible for Auto-Ex for ETFs pursuant to
Commentaries .04 and .05 to Rule 111 and Amex Rule 950(c).)
The Exchange proposes that Amex Rule 128A now stipulate that Auto-
Ex eligible orders for any account in which the same person is directly
or indirectly interested may be entered only at intervals of 10 seconds
or more between the entry of each such order in an ETF.\10\ The
Exchange states that Amex specialists and ROTs are willing to provide
Auto-Ex with price improvement for orders of a certain size. If persons
were allowed to enter more than one Auto-Ex eligible order for an
account in which they had a direct or indirect interest at intervals of
less than 10 seconds, according to the Exchange, Amex specialists and
ROTs would be unable to make markets with the proposed liquidity for
all investors. Under Amex Rule 128A, members and member organizations
are responsible for establishing procedures to prevent orders for any
account in which the same person is directly or indirectly interested
from being entered at intervals of less than 10 seconds with respect to
an ETF.
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\10\ The proposed rule change reduces the interval from 30
seconds to 10 seconds, as discussed in Section II.C. below.
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The specialist may request the Exchange to increase the maximum
size of Auto-Ex eligible orders. Under Amex Rule 128A, such requests
are reviewed by the Committee, which approves, disapproves, or
conditionally approves such requests. The rule directs the Committee to
balance the interests of investors, the specialist, ROTs in the crowd,
and the Exchange in determining whether to grant a request to increase
the size of Auto-Ex eligible orders. The Committee also may consider
requests from the specialist or ROTs to reduce the size of Auto-Ex
eligible orders, balancing the same interests that it would consider in
reviewing a request to increase the size of Auto-Ex eligible orders.
The Committee is not permitted, however, to reduce the size of Auto-Ex
eligible orders below 2,000 shares.
In addition, under Amex Rule 128A, the Committee may delegate its
authority to one or more Floor Governors. The rule provides, however,
that the Committee must meet promptly to review a Floor Official's
decision in the event that a Floor Governor acts pursuant to delegated
authority.
Amex Rule 128A further provides that in the event of system
problems or unusual market conditions, a Floor Governor is permitted to
reduce the size of Auto-Ex eligible orders below 2,000 shares or
increase the size of Auto-Ex eligible orders up to 5,000 shares. Any
such change is temporary and lasts only until the end of the unusual
market condition or the correction of the system problem. Members and
member organizations will be notified when the size of Auto-Ex eligible
orders is adjusted due to system problems or unusual market conditions.
Amex Rule 128A also provides that the Chairman and Vice Chairman of
the Exchange, acting jointly, will determine which ETFs are Auto-Ex
eligible.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \11\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \12\ 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,
and is not designed to permit unfair discrimination between customers,
issuers, brokers and dealers.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
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The proposed rule change will allow the Auto-Ex for ETFs pilot
program to continue for an additional six months. The proposal also
facilitates the comparison and settlement of trades since Auto-Ex
transactions result in ``locked-in'' trades. Auto-Ex for ETFs,
moreover, automatically provides investors with price improvement on
their orders.
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 not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange believes the
proposal, in fact, will enhance competition among markets and market
makers and thereby benefit investors by allowing the Exchange to
continue to provide Auto-Ex for ETFs with price improvement.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
A member firm submitted a comment letter to the Commission dated
September 4, 2002, on SR-Amex-2002-42 (the previous extension of the
Auto-Ex for ETFs Pilot). In this correspondence, the member
organization objected to the 30-second ``speed bump'' in Rule 128A and
sought
[[Page 595]]
clarification that the 30-second window applied only to electronic
orders on the same side of the market in a security. On November 20,
2002, the Amex Board authorized revisions to Rule 128A to reduce the
speed bump to 10 seconds (less than the 15 second window that is
standard at options exchanges) and to clarify that the new, 10 second,
window only applies to orders on the same side of the market in a
security. The Exchange believes that it has addressed the concerns
articulated by the member organization.
II. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing proposed rule change (1) does not significantly
affect the protection of investors or the public interest; (2) does not
impose any significant burden on competition; and (3) by its terms,
does not become operative until 30 days from the date on which it was
filed, or such shorter time as the Commission may designate. The
proposed rule change has therefore become effective pursuant to Section
19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) thereunder.\14\
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\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 17 CFR 240.19b-4(f)(6).
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The Amex has requested that the Commission waive the usual five-day
notice and 30-day pre-operative waiting periods. The Commission
believes that it is consistent with the protection of investors and the
public interest to accelerate the operative date and to waive the five-
day notice period so that the pilot can continue without the 30-day
delay. Thus, the Commission waives the five-day notice period and
designates that the proposal become operative immediately.\15\ The
pilot extension will expire June 19, 2003.
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\15\ For purposes only of accelerating the operative date of
this proposal, the Commission has considered the proposed rule's
impact on efficiency, competition, and capital formation. 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of this proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.\16\
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\16\ 17 CFR 240.19b-4(f)(6).
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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.
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 Section. 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-2002-99 and
should be submitted by January 27, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-182 Filed 1-3-03; 8:45 am]
BILLING CODE 8010-01-P