[Federal Register Volume 63, Number 102 (Thursday, May 28, 1998)]
[Notices]
[Pages 29272-29274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14116]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40019; File No. SR-Amex-97-40]


Self-Regulatory Organizations; American Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Notice of Filing 
and Order Granting Accelerated Approval to Amendment No. 1 to Proposed 
Rule Change Relating to Proposed Revisions to the Exchange's Policy 
Regarding the Use of Wireless Data Communications Devices

May 21, 1998.

I. Introduction

    On October 29, 1997, the American Stock Exchange, Inc. (``Amex'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend its policy regarding the use of wireless 
data communications devices on the trading floor.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposed rule change, together with the substance of 
the proposal, was published for comment in Securities Exchange Act 
Release No. 39411 (December 8, 1997), 62 FR 65727 (December 15, 1997). 
No comments were received on the proposal. The Exchange subsequently 
filed Amendment No. 1 on March 17, 1998.\3\ The order approves the 
proposed rule filing, as amended.
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    \3\ See Letter from William Floyd-Jones, Assistant General 
Counsel, Amex, to Heather Seidel, Attorney, Market Regulation, 
Commission, dated March 16, 1998 (``Amendment No. 1''). Amendment 
No. 1 explains in further detail why the Exchange is eliminating the 
Gateway; which records members are required to keep pursuant to 
Exchange and Commission rules that the Gateway would have separately 
maintained; how the Exchange will obtain records from its members 
for surveillance purposes without the Gateway; and how the Exchange 
will monitor overall radio frequency usage and individual firm usage 
in the absence of the a Gateway in order to determine that the 
wireless infrastructure is approaching its capacity, and which 
firm(s) is using a disproportionate amount of the radio frequently 
capacity.
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II. Description

    The Exchange has undertaken to build an infrastructure 
(``Infrastructure'') to support wireless data communications on the 
trading floor by members and Exchange staff. On September 26, 1996, the 
Commission approved various rule changes and a policy regarding the use 
of wireless data communications devices on the trading floor (the 
``Wireless Communications Policy'' or ``Policy'').\4\ The Wireless 
Communications Policy was originally based upon a design for the 
Infrastructure that called for all wireless data transmissions to pass 
through an application residing between the member firms and the 
Exchange's wireless infrastructure (the ``Gateway''). The Gateway would 
have monitored data that was being transmitted to and from the 
Infrastructure and would have repackaged it to conform to a standard 
format for all members to use. The Gateway would have permitted the 
Exchange to make a record of all wireless communications and to 
unilaterally ``throttle'' all, or selected, member communications in 
the event that such transmissions used a disproportionate amount of the 
available radio frequency or threatened to exceed available radio 
frequency capacity. The Exchange is now proposing to eliminate the 
Gateway.
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    \4\ See Securities Exchange Act Release No. 37728 (September 26, 
1996), 61 FR 51476 (October 2, 1996).
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    As noted above, the Gateway would have maintained a record of all 
wireless communications. The Exchange states that the records obtained 
through the Gateway would have been duplicative of records already 
maintained by member firms pursuant to Commission and Exchange rules 
and that the proposed rule change will eliminate this duplicative data 
base. Under the revised Wireless Communications Policy, members will 
still be required to maintain books and records pursuant to Exchange 
rules and policies and federal securities laws. According to the 
Exchange, the relevant Exchange rules require members to prepare and 
maintain records of orders and transactions containing the information 
specified in Exchange Rule 111, Commentary .04; Exchange Rule 114, 
Commentary .09; and Exchange Rules 153, 180, 181, and Exchange Rule 
950(a), (c) and (d), Commentary .03. The Exchange's audit trail 
policies also require members to records the time of trade, executing 
broker badge number and contra broker badge number with respect to all 
trades. In addition, the Exchange states that Rules 17a-3(a) (6) and 
(7) under the Act require registered brokers and dealers to prepare 
records of brokerage orders and dealer transactions meeting the 
requirements of these rules, and that these records must be maintained 
for the period stated in Rule 17a-4(b)(1) under the Act.\5\
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    \5\ The Commission notes that in general members, brokers, and 
dealers are subject to the Commission's recordkeeping and record 
retention rules, Rule 17a-3, and 17a-4 under the Act (17 CFR 
240.17a-3 and 240.17a-4).
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    In addition, the Exchange states that the elimination of the record 
keeping capabilities of the Gateway will not cause any diminution of 
the Exchange's surveillance capabilities because the Exchange will 
retain the same access to member books and records that it currently 
possesses. The Exchange currently has the ability to obtain records 
from its members for investigative purposes pursuant to its authority 
to require members to produce their books and records and to discipline 
members (and their employees) that fail to comply with such 
requests.\6\ In the Absence of a Gateway, the Exchange would continue 
to employ its current procedures for obtaining information from its 
members and their employees.\7\
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    \6\ See, e.g., Article II, Section 3(a) of the Exchange 
Constitution, Article V, Section 4(k) of the Exchange Constitution, 
and Exchange Rule 31.
    \7\ The Exchange also states that to the best of its knowledge, 
the Exchange's current procedures for obtaining member books and 
records are consistent with existing practice at all other 
exchanges.
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    With respect to monitoring radio frequency capacity and usage, the 
revised Wireless Communications Policy will state that the Exchange's 
staff may request members to reduce radio traffic if and when required 
because a particular user is using more than its fair share to radio 
frequency capacity of overall usage is reaching its maximum. Members 
will be obligated to comply immediately with any such request and their 
ability to send wireless communications may be immediately terminated 
for failure to comply.
    The Exchange also proposes some further changes to the Wireless 
Communications Policy to include a requirement that members using 
wireless technology maintain a record of orders and quotes initiated on 
the Floor and transmitted to other markets, a statement that members do 
not acquire a property interest in their assigned band width, a 
requirement that affiliates be treated as a single entity for purposes 
of band width assignment and a reduction in the number of handheld 
terminals that the system is able to support in view of anticipated 
demand for this capacity.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with

[[Page 29273]]

the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange, and, in particular, with 
the requirements of Section 6(b).\8\ Specifically, 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 principles of trade, to prevent fraudulent and 
manipulative acts, and, in general, to protect investors and the 
public.\9\
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    \8\ 15 U.S.C. 78f(b).
    \9\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    The Commission continues to believe that the Wireless Communication 
Policy should help remove impediments to and perfect the mechanism of a 
free and open market, and protect investors and the public interest, by 
expediting and making more efficient the process by which members 
receive and execute orders on the floor of the Exchange. In particular, 
the Commission believes that the removal of the Gateway should increase 
efficiency by eliminating any time delay that the requirement that all 
orders pass through the Gateway subsystem may have caused. The 
Commission finds, based upon the Exchange's representations concerning 
the lack of need for a Gateway \10\ and the excessive cost and 
difficulty of designing and implementing the Gateway,\11\ that it is 
consistent with the Act for the Exchange to eliminate the Gateway.
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    \10\ In late 1996, the Exchange reviewed the design of the 
Infrastructure. The Exchange determined that there was no immediate 
need for throttling because the amount of radio frequency capacity 
available in the 2.4 GHz frequency could support all foreseeable 
wireless communications, and that it was unclear when it might 
become necessary. The Exchange also noted that it could control 
excessive radio frequency use by denying requests to use wireless 
applications that required excessive capacity. Also, the Exchange 
noted there are other radio frequencies and emerging technologies 
that could be employed in the unlikely event that the capacity of 
the 2.4 GHz frequency is exhausted. The Exchange concluded that 
since there was no need for throttling, there was no need for a 
Gateway and that, if and when necessary, throttling could be 
accomplished by the member firms without a Gateway.
    \11\ Also during this 1996 review, the Exchange estimated that 
the use of a Gateway instead of a router would have more than 
doubled its costs to develop and install the infrastructure and 
would have also necessitated a high degree of customized programming 
which raised reliability issues. In addition to concerns with the 
Exchange's costs and system reliability, members using the 
infrastructure with a gateway would have had to conform their 
message formats to the gateway's requirements, which would have 
required members that already had developed wireless communications 
capabilities to incur significant costs to reprogram their existing 
systems to comply with the Exchange's unique requirements. 
Potentially, these members would have had to operate different 
wireless systems on different exchanges.
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    The Commission believes that it is reasonable for the Exchange to 
conclude that the Gateway is not necessary because the selected radio 
frequency should be able to support all foreseeable wireless 
communications and because the Exchange will have the ability to 
monitor radio frequency capacity and usage and require member firms to 
cut down on their usage to ensure that the system does not become 
overloaded. The Exchange states that the Wireless Network Management 
System (``WNMS'') is a monitoring tool that will enable it to monitor 
radio frequency usage by (1) all wireless users collectively, (2) a 
particular firm, and (3) an individual using a handheld terminal within 
a particular firm. The WNMS combines some of the capabilities of the 
Gateway and Wireless Control Subsystem which existed in the former 
design of the wireless infrastructure. The next version of the WNMS 
will allow the Exchange's personnel to see all, or a selected number, 
of users sorted according to their use of the system. Each firm (or 
group of affiliated firms) that has been approved to use wireless 
technology currently may use up to 1/30th of total radio frequency 
capacity, and the Exchange would consider a member's use of more than 
1/30th of total system capacity to be a disproportionate usage of its 
radio frequency capacity.\12\
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    \12\ According to Amex, the Infrastructure has been designed to 
support 4 million megabits per second; thus, overall usage that 
approaches the four million megabit level would be considered to be 
approaching system capacity.
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    The Commission also believes that the Exchange and member firms 
should be able to adequately maintain records of all wireless 
transactions, because of the already existing recordkeeping and 
surveillance procedures, in the absence of the Gateway. Member firms 
currently are, and will still be, subject to Exchange and Commission 
recordkeeping and record retention rules.\13\ In addition, the 
elimination of the recordkeeping capabilities of the Gateway should not 
cause undue diminution of the Exchange's surveillance capabilities 
because the Exchange has the ability to obtain those records from 
members for investigative purposes, with the authority to discipline 
members who do not comply with such requests.\14\
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    \13\ See Description Section supra.
    \14\ The Commission also believes that the miscellaneous 
amendments to the Wireless Communications policy are reasonable 
under the Act because the changes are designed to enhance the Policy 
in light of the Exchange's experience with wireless technology since 
the Policy was first adopted.
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    The Commission finds good cause to approve Amendment No. 1 to the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Amendment No. 1 clarifies and strengthens the proposed rule change by 
more fully explaining why the Exchange is amending the Wireless 
Communications Policy to eliminate the Gateway, and how the Exchange 
will still have adequate ability to monitor and surveille wireless 
usage and wireless transactions without the Gateway. Amendment No. 1 
does not make any substantive changes to the proposed rule change. 
Also, the proposed rule change was noticed for the full statutory 
notice and comment period and no comment letters were received. 
Accordingly, the Commission believes that it is consistent with Section 
6(b)(5) of the Act to approve Amendment No. 1 to the proposal on an 
accelerated basis.
    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1 to the rule proposal, including 
whether Amendment No. 1 is consistent with the Act. Persons making 
written submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 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 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 also will be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-Annex-97-40 and should be submitted by June 18, 1998.

IV. Conculsion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-Amex-97-40), as amended, is 
approved.

    \15\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).

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[[Page 29274]]

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-14116 Filed 5-27-98; 8:45 am]
BILLING CODE 8010-01-M