[Federal Register Volume 62, Number 9 (Tuesday, January 14, 1997)]
[Notices]
[Pages 1936-1937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-862]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38128; File No. SR-AMEX-96-46]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange, Inc. Relating to Amending Rule 
170 to Permit Options Specialist Organizations and Their Approved 
Persons to Engage in Market Making Activities on Other Options 
Exchanges in the Options in Which They Are Registered on the AMEX

January 6, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on November 
27, 1996, the American Stock Exchange, Inc. (``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 self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Exchange Rule 950(n) to permit 
options specialist organizations and their approved persons to engage 
in market making activities on other options exchanges in the options 
in which they are registered on the AMEX.

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 self-regulatory organization 
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 self-regulatory organization 
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
    Exchange Rule 950(n) currently prohibits AMEX options specialists 
and their ``approved persons'' \1\ from effecting transactions in 
specialty options except insofar as reasonably necessary to satisfy 
their specialist obligations on the Exchange. Thus, among its several 
consequences, Rule 950(n) prohibits an AMEX specialist organization and 
its approved persons from acting as a market maker in a specialty 
option on the floor of another options market.\2\ The other options 
exchanges have rules that are similar to AMEX Rule 950(n) with respect 
to persons that perform functions similar, or identical, to those of a 
specialist.\3\ However, it is the Exchange's understanding that not all 
those markets interpret their rules in the same manner as the AMEX. 
Thus, the Exchange has observed Registered Options Traders (``ROTs'') 
on its Floor trading as market makers in options in which affiliates of 
such ROTs perform a specialist function on another exchange.
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    \1\ An ``approved person'' is a person or entity that controls a 
member or member organization or that is engaged in a securities or 
kindred business and is controlled by or under common control with a 
member or member organization. See Article I, Section 3(g) of the 
Exchange Constitution.
    \2\ The approved persons of Exchange specialists may obtain 
relief from the restrictions of Rule 950(n) by establishing an 
Exchange approved information barrier pursuant to Rule 193. In 
practice, however, it has generally proven impractical for all but 
the largest broker-dealers to establish information barriers that 
would satisfy the requirements of Rule 193.
    \3\ Chicago Board Option Exchange Rule 8.81(a), Pacific Stock 
Exchange Rule 6.83(a), Philadelphia Stock Exchange Rule 1020(e).
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    The restrictions on the trading activities of options specialists 
and their approved persons have their origin in the Exchange's and the 
New York Stock Exchange's equity trading rules. The AMEX extended these 
restrictions to listed options at the outset of the Exchange's option 
program in the mid-1970s in order to expeditiously commence trading 
options using a combination specialist/competitive market maker system. 
While these restrictions reflect historical regulatory concerns, the 
federal securities laws do not require that trading by specialists and 
their approved persons in specialty securities should be limited to 
that necessary to the specialist function on any one market. In many 
respects, moreover, the policy reasons behind the trading restrictions 
on equity specialists are not compelling in the context of options due 
to the derivative pricing of these securities. In addition, the 
limitations contained in Rule 950(n) on principal trading by the 
affiliates of options specialists predate multiple trading of listed 
options. When you add to these factors the extraordinary level of self-
regulatory organization surveillance of specialists and market makers, 
the Exchange believes that the

[[Page 1937]]

prophylactic restrictions on trading represented by Rule 950(n) are not 
essential to ensure compliance with standards of fair dealing.
    For the foregoing reasons, the Exchange believes that it is 
appropriate to permit Exchange specialist organizations and their 
affiliates to engage in market making in specialty options on the floor 
of other options exchanges. This measure will eliminate a regulatory 
disparity between the rules of the Exchange and other markets. To 
ensure that specialist organizations and their affiliates do not 
intentionally trade ahead of, or otherwise disadvantage, orders on the 
AMEX limit order book, the Exchange will require any AMEX member 
organization that seeks to act as a market maker on the floor of 
another options exchange in an option in which they are a specialist on 
the AMEX to implement policies and procedures designed to prevent the 
misuse of information regarding limit orders on the AMEX limit order 
book.\4\ These policies and procedures will not have to conform to the 
specific requirements of Rule 193. Instead, the Exchange proposes to 
adopt the approach used by Congress in enacting Sections 15(f) and 21A 
of the Act, and by the Commission in adopting Rule 14(e)(3) under the 
Act, which require firms to adopt information barriers, but do not 
legislate the design of these internal controls.\5\ The Exchange 
believes that specialist firms and their affiliates should have the 
ability (subject to Exchange oversight) to structure information 
barriers that are appropriate to the structure of their firms.
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    \4\ As proposed, these policies and procedures will not be 
subject to pre-approval by the Exchange. Telephone conversation 
between Bill Floyd-Jones, Assistant General Counsel, AMEX, and 
Heather Seidel, Attorney, Division of Market Regulation, Commission, 
on January 2, 1997.
    \5\ See Broker-Dealer Policies and Procedures Designed to 
Segment the Flow and Prevent the Misuse of Material Nonpublic 
Information, Securities and Exchange Commission Division of Market 
Regulation, March 1990.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
in general and furthers the objectives of Section 6(b)(5) \6\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and, in general, protect 
investors and the public interest.
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    \6\ 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 inappropriate 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 either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the 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 self-regulatory organization consents, the Commission will:
    (A) By order approve the 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities sand 
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 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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-AMEX-96-46 and 
should be submitted by January 27, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-862 Filed 1-13-97; 8:45 am]
BILLING CODE 8010-01-M