[Federal Register: June 28, 2004 (Volume 69, Number 123)]
[Notices]
[Page 36141-36144]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jn04-96]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49892; File No. SR-Amex-2004-46]
Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Relating to an Extension of Automatic Execution for Exchange Traded
Funds
June 18, 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 June 7, 2004, 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 the Amex has prepared. The Commission is
publishing this notice to solicit comments from interested persons on
the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex seeks an extension of Amex Rule 128A to continue its pilot
program for the automatic execution of orders for Exchange Traded Funds
until the implementation of the new technology embodied in SR-Amex
2004-04 or six months, whichever is sooner.
The text of the proposed rule change is available at the Office of
the Secretary, the Amex and at the Commission.
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 its proposal and discussed any
comments it had received regarding the proposal. The text of these
statements may be examined at the places specified in Item IV below.
The Amex has prepared summaries, set forth in Sections A, B, and C
below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On June 19, 2001, the Commission approved the Exchange's proposal
to permit the automatic execution of orders for Exchange Traded Funds
(``ETFs'') on a six-month pilot program basis.\3\ On December 20, 2001,
June 17, 2002, December 30, 2002, July 17, 2003, and December 5, 2003,
the Exchange extended the pilot for consecutive terms of six months.\4\
The Exchange now seeks to extend the pilot until the implementation of
the new technology embodied in SR-Amex 2004-04 or another six months,
whichever is sooner.
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\3\ See, Securities Exchange Act Release No. 34-44449 (June 19,
2001), 66 FR 33724 (June 25, 2001), approving File No. SR-Amex-2001-
29.
\4\ See, Securities Exchange Act Release Nos. 45176, 66 FR 67582
(December 31, 2001); 46085, 67 FR 42836 (June 25, 2002); 47105, 68
FR 592 (January 6, 2003); and 48126, 68 FR 41189 (July 10, 2003)
(notices of filing and immediate effectiveness of File Nos. SR-Amex-
2001-105, SR-Amex-2002-42, SR-Amex-2002-99, and SR-Amex-2003-61,
48964, 68 FR 75664 (December 31, 2003) SR-Amex-2003-107,
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, Inc., the Philadelphia Stock Exchange,
Inc., and the Pacific Stock Exchange, Inc. established similar
automatic option order execution features at about the same time as the
Amex, and the newest options exchange, the International Stock
Exchange, Inc., also features automatic order execution. Auto-Ex,
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 of the Exchange's
increasingly popular ETFs. 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
options, ETFs are a derivative security. Their price is a function of
the value of the portfolio of securities underlying the ETF. Thus, as
is the case with options, the Exchange is not the price discovery
market for ETFs; 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
[[Page 36142]]
for an additional six months to ETFs listed under Amex Rules 1002,
1002A, and 1202. This will provide investors that send eligible orders
to the Exchange with faster executions than they otherwise would
receive. 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 incorporate a price improvement algorithm into Auto-Ex for ETFs.
This will 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''), Auto-Ex will be programmed to execute eligible incoming ETF
orders at the Amex Published Quote (``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 Amex Published Quote 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 did not constitute the NBBO, Auto-Ex would execute
eligible orders unless a trade through would result from an away ITS
participant market. If a trade through would result, the order would be
routed to the specialist for electronic processing through the Amex
electronic order book.\5\ Using the example above, 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. (Recall that
Auto-Ex in the example is programmed to execute the order at the Amex
bid plus two ticks.) Continuing the 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 electronic order book.
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\5\ 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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The amount of price improvement will be 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. The Exchange anticipates that the amount of
price improvement will vary among securities based upon factors such as
the width of the spread, the volatility of the underlying basket of
securities, and liquidity of available hedging vehicles. The amount of
price improvement may be adjusted intra-day. Auto-Ex for ETFs with
price improvement will be unavailable when the spread is at a specified
minimum and maximum variation that 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 will be
unavailable.
Auto-Ex will be unavailable with respect to incoming sell orders
when the Amex bid is for 100 shares. Auto-Ex will similarly be
unavailable with respect to incoming buy orders when the Amex offer is
for 100 shares. Orders that are otherwise Auto-Ex eligible orders also
will be routed to the specialist and will not be automatically executed
in situations where the specialist in conjunction with a Floor Governor
or two Floor Officials determines 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 will be notified when the Exchange has determined that
quotes are not reliable prior to disengaging Auto-Ex.
Specialists and Registered Options Traders that sign-on to the
system will be automatically allocated the contra side of Auto-Ex
trades for ETFs. Due to the automatic price improvement feature, the
specialist and Registered Options Traders that sign onto Auto-Ex for
ETFs will be deemed to be on parity for purposes of allocating the
contra side of ETF Auto-Ex trades. The Exchange proposes to use 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 to
trades allocated to the ROTs signed on to Auto-
Number of ROTs signed on to Auto-Ex in a crowd specialist throughout Ex throughout the day
the day (``Target (``Target Ratio'')
Ratio'') (percent) (percent)
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1............................................................. 60 40
2-4........................................................... 40 60
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 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.
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
[[Page 36143]]
market makers were eligible for Auto-Ex with price improvement, Amex
specialists and Registered Options Traders 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 Amex Rule 111 and Amex Rule 950(c).)
The specialist may request the Exchange to increase the maximum
size of Auto-Ex eligible orders. Such requests will be reviewed by the
Committee, which will approve, disapprove or conditionally approve such
requests. The Committee will balance the interests of investors, the
specialist, Registered Options Traders 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 will consider requests from the
specialist or Registered Options Traders 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, however, may not reduce the size of Auto-Ex eligible
orders below 2,000 shares. In the event of system problems or unusual
market conditions, a Floor Governor may 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 will be temporary
and will only last 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.
The Chairman and Vice Chairman of the Exchange, acting jointly,
will determine which ETFs are Auto-Ex eligible.
2. Statutory Basis
The Amex believes the proposed rule change is consistent with
Section 6(b) of the Act,\6\ in general, and with Section 6(b)(5) \7\ 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. The Amex believes that the proposed rule change will allow the
Auto-Ex for ETFs pilot program to continue for an additional six
months. The Amex further believes that the proposal will facilitate the
comparison and settlement of trades since Auto-Ex transactions result
in ``locked-in'' trades.
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Amex 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
The Amex neither solicited nor received written comments with
respect to the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not:
(i) Significantly affect the protection of investors or the public
interest;
(ii) Impose any significant burden on competition; and
(iii) Become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \8\ and
Rule 19b-4(f)(6) thereunder.\9\ At any time within 60 days of the
filing of the 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.
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\8\ 15 U.S.C. 78s(b)(3)(A).
\9\ 17 CFR 240.19b-4(f)(6).
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A proposed rule change filed under Rule 19b-4(f)(6) \10\ normally
does not become operative prior to 30 days after the date of filing.
However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Amex has requested
that the Commission waive both the five-day notice and the 30-day
operative delay specified in Rule 19b-4(f)(6)(iii).\11\
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\10\ 17 CFR 240 19b-4(f)(6).
\11\ 17 CFR 240 19b-4(f)(6)(iii).
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The Commission believes that waiving the five-day notice and the
30-day operative delay is consistent with the protection of investors
and the public interest \12\ because it will allow the Amex to continue
to the pilot without interruption. For these reasons, the Commission
designates the proposed rule change as effective and operative on June
7, 2004. At any time within 60 days of the filing of such proposed rule
change, the Commission may summarily abrogate such proposed 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.
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\12\ For purposes of waiving 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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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. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-Amex-2004-46 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-Amex-2004-46. 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, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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
[[Page 36144]]
available for inspection and copying in the Commission's Public
Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies
of such filing also will be available for inspection and copying at the
principal office of the Amex. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-Amex-2004-46 and should be submitted on or before July
19, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-14586 Filed 6-25-04; 8:45 am]
BILLING CODE 8010-01-P