48686 Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices

17 15 U.S.C. 78s(b)(2) (1988).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 38573

(May 5, 1997).

4FR 25984 (May 12, 1997).

5See Amex Rule 104.10(5)(i).

Commission has approved the proposals

for a two-year pilot period. The

Exchanges will undertake to monitor,

among other things, open interest and

potential adverse market effects and to

report to the Commission on the status

of the program no later than eighteen

months after the order’s date of

effectiveness. The reporting of the

Exchanges’ experiences should include,

among other things, such information

as: (i) The type of strategies used by

FLEX Equity options market

participants and whether FLEX Equity

options are being used in lieu of existing

standardized equity options; (ii) the

type of market participants using FLEX

Equity options both before and during

the pilot program, including how the

utilization of FLEX Equity options has

changed; (iii) the average size of the

FLEX Equity option contract both before

and during the pilot program, the size

of the largest FLEX Equity option

contract on any given day both before

and during the pilot program, and the

size of the largest FLEX Equity option

held by any single customer/member

both before and during the pilot

program; and (iv) any impact on the

prices of underlying stocks during the

establishment or unwinding of FLEX

positions that are greater than three

times the standard position limit.

Finally, the Commission expects the

Exchanges to take prompt action,

including timely communication with

the Commission and other marketplace

self-regulatory organizations responsible

for oversight of trading in component

stocks, should any unanticipated

adverse market effects develop.

The Commission finds good cause to

approve Amex Amendment No. 1 and

CBOE Amendment No. 1 to the

proposed rule filings prior to the

thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. Specifically, by

restricting the elimination of position

and exercise limits for FLEX Equity

options to a two-year pilot period, as

well as requiring members holding large

positions to report such positions to the

Amex and to the CBOE, the proposed

rule changes are more restrictive than

the original proposals, which are

published for the entire twenty-one day

comment period and generated no

responses. In addition, by authorizing

the Amex and the CBOE to impose

margin and/or assess capital charges,

the Commission believes that the Amex

and the CBOE have established

important safeguards to address

concerns regarding potential

manipulation or other market

disruptions. Accordingly, the

Commission believes that it is

consistent with Section 6(b)(5) of the

Act to approve Amex Amendment No.

1 and CBOE Amendment No. 1 to the

proposed rule changes on an accelerated

basis.

Interested persons are invited to

submit written data, views, and

arguments concerning Amex

Amendment No. 1 and CBOE

Amendment No. 1 to the rule proposals.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

changes that are filed with the

Commission, and all written

communications relating to the

proposed rule changes 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 at

the Commission’s Public Reference

Section, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of such

filings also will be available for

inspection and copying at the principal

offices of the Amex and the CBOE. All

submissions should refer to File Nos.

SR–Amex–96–19 and SR–CBOE–96–79

and should be submitted by October 7,

1997.

V. Conclusion

For the foregoing reasons, the

Commission finds that the Exchanges’

proposals to eliminate position and

exercise limits for FLEX Equity options

for a two-year pilot period, as amended,

is consistent with the requirements of

the Act and the rules and regulations

thereunder.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,17 that the

proposed rule changes (SR–Amex–96–

19), SR–CBOE–96–79 and SR–PCX–97–

09), as amended, are approved on a pilot

basis until September 9, 1999.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–24443 Filed 9–15–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39035; File No. SR–Amex–

97–10]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change by

the American Stock Exchange, Inc.

Relating to Amendments to Rule

170.01 Relating to Specialists

Establishing a Position in Specialty

Stocks

September 9, 1997.

I. Introduction

On February 24, 1997, the American

Stock Exchange, Inc. (‘‘Amex’’ or

‘‘Exchange’’) submitted to the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’),1 and Rule 19b–4

thereunder,2 the proposed rule to

change to permit specialists to engage in

certain types of transactions by

removing existing restrictions that

currently limit specialists approval

when establishing or increasing a

position in their specialty stocks.3

Notice of the filing appeared in the

Federal Register on May 12, 1997.4 No

comment letters were received

concerning the proposed rule change.

This order approves the Amex’s

proposal.

II. Description of the Proposal

The Amex, pursuant to Rule 19b–4 of

the Act, proposes to amend Amex Rule

170.01 (‘‘Rule’’) to remove certain

restrictions on specialists’ ability to

establish or increase their positions in

their specialty stocks.

Purpose

Amex Rule 170 governs specialists’

dealings in their specialty stocks. In

particular, Amex Rule 170.01 describes

certain types of transactions to establish

or increase a specialist’s position which

are not to be effected unless they are

‘‘reasonably necessary to render the

specialist’s position adequate to’’ the

needs of the market. Additionally, these

types of transactions require floor

official approval unless they are

conducted in ‘‘less active markets’’

where such transactions are an essential

part of a proper course of dealings and

where the amount of stock involved and

the price change, if any, are normal in

relation to the market.5 Currently, such
Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices 48687

6 15 U.S.C. 78f.

7 15 U.S.C. 78(c).

8 15 U.S.C. 78k and 17 CFR 240.11b–1(a)(2).

9Rule 11b–1 under the Act, 17 CFR 240.11b–1

and Amex Rule 170.

10 17 CFR 240.11b–1(a)(2).

11See 1987 Report, February 1988 at xvii, 4–1.

12See 1987 Report 4–23 to 4–24 and 4–26, to 4–

27. Generally, ‘‘upstairs firms,’’ or block trading

desks of large broker dealers (as opposed to

specialists and other traders on the Amex Floor),

can, at times, provide an additional source of

liquidity for Amex-listed issues through their

trading activities. During the 1987 market break,

however, particularly on October 19, 1987, very

little buying was effected by upstairs firms, forcing

specialists to be the contra-side to large blocks of

stock.

restrictions apply equally to

transactions that are beneficial to the

market by being against the market

trend and those that are

disadvantageous to the market by being

with the market trend. The Exchange is

proposing to apply these restrictions

only to those transactions that are

disadvantageous to the market by being

with the market trend.

Specifically, Amex Rule 170 provides

that a specialist is affirmatively required

to engage in a course of dealings for his

own account to minimize order

disparities and contribute to continuity

and depth in the market, and is

precluded from trading for his own

account unless such dealing is

necessary for the maintenance of a fair

and orderly market. The price trend of

a security should thus be determined by

incoming orders rather than the

specialist’s proprietary dealings.

Commentary .01 to Amex Rule 170

sets forth specific requirements which

are applicable when a specialist is

establishing or increasing a position,

and provides that a specialist should

effect such transactions in a reasonable

and orderly manner in relation to the

condition of the general market, the

market in the particular stock and the

adequacy of his position to meet the

immediate and reasonably anticipated

needs of the market. In particular, Amex

Rule 170.01(a) prohibits a specialist

from purchasing stock at a price above

the last sale in the same trading session,

without Floor Official approval. Amex

Rule 170.01(b) provides that a specialist

must obtain Floor Official approval

prior to effecting the purchases of all or

substantially all the stock offered on the

book at a price equal to the last sale,

when such offer represents all or

substantially all the stock offered in the

market. Amex Rule 170.01(c) provides

that a specialist similarly must obtain

Floor Official approval prior to

supplying all or substantially all the

stock bid for on the book at a price equal

to the last sale. Amex Rule 170.01(d)

requires the specialist to re-offer or rebid where necessary after effecting the

transactions described in paragraphs (a),

(b) and (c) of the Rule.

The Amex states that the restrictions

contained in paragraphs (b) and (c) of

the Rule were intended to strike a

balance between protecting the auction

market from unnecessary specialist

trading and providing immediate

liquidity to orders that come to the

Floor. The Floor Official’s function, at

the time Rule 170 was adopted, was to

operate as a control mechanism to

ensure that the specialist did not trade

unnecessarily.

The Amex contends that although the

need to obtain Floor Official approval

was reasonable in the past, before

technology enabled markets to move

quickly within seconds, it now has the

effect, under certain circumstances, of

reducing liquidity and disadvantaging

orders entered with the specialist.

Accordingly, the Exchange proposes to

amend Amex Rule 170.01 to provide

that a specialist is not required to obtain

Floor Official approval with respect to

the purchase, on a zero minus tick, of

stock offered on the book, or the sale, on

a zero plus tick, of stock bid for on the

book. A specialist is the buyer and seller

of last resort, and is expected to step in

when there is a disparity between

supply and demand. In this situation,

the Amex contends that a specialist

would only be purchasing the stock

offered because there is inadequate

demand for the stock.

In addition, the Amex contends that

with the advent of improved

technology, the Exchange’s surveillance

systems can now provide an adequate

substitute for Floor Official Approval in

such circumstances. In the last few

years, the Exchange has developed an

automated computer program which

identifies each instance in which a

specialist crosses the market (i.e., buys

on the offer and sells on the bid). Each

of these situations can then be

individually reviewed by the Exchange

Trading Analysis staff to determine

whether the specialist was acting

appropriately. With respect to the

proposed rule change, the Exchange

staff would look at how large the

specialist’s position was prior to the

transaction, whether there were

imbalances in the limit orders on the

specialist’s book which necessitated the

transaction, and whether, if the market

subsequently ‘‘turned around’’ the

specialist used a reasonable amount of

the inventory acquired in the

transaction to offset any imbalance

between supply and demand.

The Amex believes that the proposed

change carves out an exception to the

existing provisions, but would provide

a distinct benefit to the market by

permitting the specialist to satisfy a

customer’s order more expeditiously,

while enabling the specialist to enhance

the liquidity, depth and transparency of

the market as the buyer or seller of last

resort.

III. Commission Findings and

Conclusions

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to a national securities

exchange, and, in particular, with

Section 6(b)(5) of the Act.6 The

Commission believes the proposal is

consistent with the Section 6(b)(5)

requirements that the rules of an

exchange be designed to promote just

and equitable principals of trade,

remove impediments to and perfect the

mechanism of a free and open market,

and, in general, protect investors and

the public interest, promote efficiency,

competition and capital formation.7 The

Commission also believes that the

proposal is consistent with Section

11(b) of the Act and Rule 11b–1

thereunder,8 which allow exchanges to

promulgate rules relating to specialists

in order to maintain fair and orderly

markets.

Both the Act and Amex Rules reflect

the crucial role played by specialists in

providing stability, liquidity and

continuity in the Exchange’s auction

market. Recognizing the importance of

the specialist in the auction market, the

Act and Amex Rules impose stringent

obligations upon specialists.9 Primary

among these obligations are the

requirements to maintain fair and

orderly markets and to restrict specialist

dealings to those that are ‘‘reasonably

necessary’’ in order to maintain a fair

and orderly market.10

The importance of specialist

performance to the quality of markets

was highlighted during the 1987 and

1989 market breaks. In The October

1987 Market Break Report (‘‘1987

Report’’), the Division examined

specialist performance on the Amex on

October 19 and 20, 1987.11 The Division

found that, during periods of the

greatest volatility in 1987, particularly

on October 19, 1987, Amex specialists

had to act as the primary, or sometimes

the only, buyers for many of the

specialty stocks because of the lack of

buying interest by upstairs firms.12 The

increased volume of order flow, coupled

with the lack of participation on the part

of the upstairs firms, resulted in Amex

specialists having to take large dealer
48688 Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices

13See 1987 Report at 4–48.

14See Market Analysis of October 13 and 16, 1989

(‘‘1989 Analysis’’) at 3–4 and 33–44.

15See 1987 Report at 4–8 and 1989 Report at 23–

26.

16A specialist’s dealer responsibilities consist of

‘‘affirmative’’ and ‘‘negative’’ obligations. In

accordance with their affirmative obligations,

specialists are obligated to trade for their own

accounts to minimize order disparities and

contribute to continuity and depth in the market.

Conversely, pursuant to their negative obligations,

specialists are precluded from trading for their own

accounts unless such dealing is necessary for the

maintenance of a fair and orderly market. In view

of these obligations, the price trend in a security

should be determined not by specialist trading but

by the movements of the incoming orders that

initiate these trades.

17The Commission notes that Rule 170.01

currently only requires floor official approval for

purchases or sales at a price equal to the last sale

price when all or substantially all the stock offered/

bid on the limit order book represents all or

substantially all the stock offered/bid in the market.

Moreover, the rule currently does not require floor

official approval of such transactions if they are

effected in ‘‘less active markets’’ where they are an

essential part of a proper course of dealings and

where the amount of stock involved and the price

change, if any, are normal in relation to the market.

18 In addition, Amex Rule 170.01 clearly requires

that covered transactions must be reasonably

necessary to render the specialist’s position

adequate to such needs.

19Section 19(g) of the Act requires every selfregulatory organization to comply with, and enforce

compliance with, the Act, the rules thereunder and

its own rules.

20 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)91) (1994).

positions.13 Although many Amex

specialists appeared to perform well

under the adverse conditions, specialist

performance during this period varied

widely.

The Division also examined Amex

specialist performance during the

volatile conditions of October 13 and

16, 1989. The Division found that

specialist performance during that time

was similar in many respects to

specialist performance during the 1987

market break.14 Specifically, the

Division found that, during these two

periods of extreme market volatility,

specialists were confronted with

extraordinary order imbalances that

required unprecedented capital

commitments.15 As in October 1987,

specialists as a whole on October 13,

1989 were substantial buyers in the face

of heavy selling pressure, although

performance varied among specialists.

Both the 1987 Report and the 1989

Analysis reaffirmed the importance of

specialist participation in countering

market trends during periods of market

volatility. At the same time, the reports

emphasized the importance the

Commission placed on the Amex’s

ability to ensure that all specialists

comply with their affirmative and

negative market making obligations

during such periods.16

The Commission recognizes that

market conditions may exist at times

where it is necessary or desirable to

provide specialists with additional

flexibility in establishing or increasing a

position in order to facilitate their

ability to maintain fair and orderly

markets, particularly during unusual

market conditions. Accordingly, the

Commission believes that it is

appropriate for the Amex to remove

those provisions of Rule 170.01 that

require floor official approval for certain

specialist purchases on zero-minus ticks

and specialist sales on zero-plus ticks.17

The proposed changes may allow

specialists, during periods of market

volatility, to keep any general price

movements orderly, thereby furthering

the maintenance of fair and orderly

markets consistent with Sections 6 and

11 of the Act. The Commission

emphasizes, however, that the expanded

flexibility afforded to specialists by the

proposal merely obviates the current

required floor official approval for the

affected transactions and does not

reflect that all specialist purchases on

zero-minus ticks and sales on zero-plus

ticks are appropriate. Notably,

specialists remain subject to their

‘‘negative obligations,’’ specifically, the

requirement that specialists are

precluded from trading for their own

account unless such dealing is

necessary for the maintenance of a fair

and orderly market.18

Finally, the Commission believes that

the Amex’s established surveillance

procedures and criteria, including the

automated computer program which

identifies each instance in which a

specialist crosses the market, should

allow the Exchange to monitor specialist

compliance with Amex Rule 170.01. In

addition, the Commission expects the

Amex to monitor carefully compliance

with the procedures of Amex Rule 170

as required under Section 19(g) of the

Act.19

For the foregoing reasons, the

Commission finds that the Amex’s

proposal to permit specialists to engage

in certain types of transactions by

removing existing restrictions that

currently limit specialists when

establishing or increasing a position in

their specialty stocks is consistent with

the requirements of the Act and the

rules and regulations thereunder.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act, that the

proposed rule change (SR–Amex–97–

10), as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.20

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–24544 Filed 9–15–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39033; File No. SR–NASD–

97–62]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

National Association of Securities

Dealers, Inc. Relating to Gross Income

Assessments to Member Firms

September 9, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

August 22, 1997, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) filed with

the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

the proposed rule change as described

in Items I, II, and III below, which Items

have been prepared by the NASD. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organizations’

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD is proposing a rule change

to amend Section 1(c) to Schedule A of

the NASD By-Laws (‘‘Schedule A’’) to

revise the credit allowed to members

against the annual assessment on their

gross income. The text of the proposed

rule change is below. Additions are

italicized; deletions are bracketed.

* * * * *

Schedule A to the NASD By-Laws

Assessments and fees pursuant to the

provisions of Article VI of the By-Laws

of the Corporation, shall be determined

on the following basis.

Section 1—Assessments

Each member shall pay an annual

assessment composed of:

(a) No Change.

(b) No Change.

(c) Members shall receive a credit

against the annual assessment on gross

income stated in paragraph (a) above as

follows:

(1) Portion of assessment > $5,000 —

21% [23%]

(2) Portion of assessment > $25,000 —

3% [4%] additional