[Federal Register Volume 60, Number 25 (Tuesday, February 7, 1995)]
[Notices]
[Pages 7236-7239]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2971]



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SECURITIES AND EXCHANGE COMMISSION
 [Release No. 34-35310; File No. SR-Amex-95-01]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to Proposed Rule Change by American Stock 
Exchange, Inc. Relating to an Extension of Its Pilot Program Which 
Permits Specialists To Grant Stops in a Minimum Fractional Change 
Market

January 31, 1995.
    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 January 11, 1995, the American Stock Exchange, Inc. (``Amex'') or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the self-
regulatory organization.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex requests a four month extension of a pilot program which 
amended Exchange Rule 109 to permit a specialist, upon request, to 
grant stops in a minimum fractional change market.\3\ The text of the 
proposed rule [[Page 7237]] change is available at the Office of the 
Secretary, Amex and at the Commission.

    \3\The Amex received approval to amend Rule 109, on a pilot 
basis, in Securities Exchange Act Release No. 30603 (April 17, 
1992), 57 FR 15340 (April 27, 1992) (File No. SR-Amex-91-05) (``1992 
Approval Order''). The Commission subsequently extended the Amex's 
pilot program in Securities Exchange Act Release Nos. 32185 (April 
21, 1993), 58 FR 25681 (April 27, 1993) (File No. SR-Amex-93-10) 
(``April 1993 Approval Order''); 32664 (July 21, 1993), 58 FR 40171 
(July 27, 1993) (File No. SR-Amex-93-22) (``July 1993 Approval 
Order''); and 33791 (March 21, 1994), 59 FR 14432 (March 28, 1994) 
(File No. SR-Amex-93-47) (``1994 Approval Order''). Commission 
approval of these amendments to Rule 109 expires on March 21, 1995. 
The Exchange seeks accelerated approval of the proposed rule change 
in order to allow the pilot program to continue without 
interruption. See letter from Linda Tarr, Special Counsel, Legal & 
Regulatory Policy Division, Amex, to Glen Barrentine, Senior 
Counsel, Division of Market Regulation, SEC, dated January 31, 1995.
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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 III 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
    On March 21 1994, the Commission extended its pilot approval of 
amendments to Exchange Rule 109 until March 21, 1995.\4\ The amendments 
permit a specialist, upon request, to grant a stop\5\ in a minimum 
fractional change market\6\ for any order of 2,000 shares or less, up 
to a total of 5,000 shares for all stopped orders, provided there is an 
order imbalance, without obtaining prior Floor Official approval. A 
Floor Official, however, must authorize a greater order size or 
aggregate share threshold.

    \4\See 1994 Approval Order, supra, Note 3.
    \5\When a specialist agrees to a floor broker's request to 
``stop'' an order, the specialist is obligated to execute the order 
at the best bid or offer, or better if obtainable. See Amex Rule 
109(a).
    \6\Amex Rule 127 sets forth the minimum fractional changes for 
securities traded on the Exchange.
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    During the course of the pilot program, the Exchange has closely 
monitored compliance with the rule's requirements; analyzed the impact 
on orders on the specialist's book resulting from the execution of 
stopped orders at a price that is better than the stop price; and 
reviewed market depth in a stock when a stop is granted in a minimum 
fractional change market. The Exchange believes that the amendments to 
Rule 109 have provided a benefit to investors by providing an 
opportunity for price improvement, while increasing market depth and 
continuity without adversely affecting orders on the specialist's book. 
The Exchange's findings in this regard have been forwarded to the 
Commission under separate cover.
    The Exchange is therefore proposing a four month extension of the 
pilot program which amended Rule 109.
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) in particular 
in that it is designed to promote just and equitable principles of 
trade, to remove impediments to and perfect the mechanism of a free and 
open market and, in general, to protect investors and the public 
interest. The Exchange believes that the proposed amendments to Rule 
109 are consistent with these objectives in that they are designed to 
allow stops, in minimum fractional change markets, under limited 
circumstances that provide for the possibility of price improvement to 
customers whose orders are granted stops.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will impose no 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 solicited or received with respect to the 
proposed rule change.

III. 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 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 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 Section, 450 Fifth Street, NW., 
Washington, DC 20549. 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-95-01 and should be 
submitted by February 28, 1995.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    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)\7\ and Section 11(b)\8\ of the Act. 
The Commission believes that the amendments to Rule 109 should further 
the objectives of Section 6(b)(5) and Section 11(b) through pilot 
program procedures designed to allow stops, in minimum fractional 
change markets, under limited circumstances that provide the 
possibility of price improvement to customers whose orders are granted 
stops.\9\

    \7\15 U.S.C. 78f (1988).
    \8\15 U.S.C. 78k (1988).
    \9\For a description of Amex procedures for stopping stock in 
minimum fractional change markets, and of the Commission's rationale 
for approving those procedures on a pilot basis, see 1992 Approval 
Order, supra, note 3. The discussion in the aforementioned order is 
incorporated by reference into this order.
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    In its orders approving the pilot procedures,\10\ the Commission 
asked the Amex to study the effects of stopping stock in a minimum 
fractional change market. Specifically, the Commission requested 
information on (1) the percentage of stopped orders executed at the 
stop price, versus the percentage of such orders that received a better 
price; (2) whether limit orders on the specialist's book were bypassed 
due to the execution of stopped orders at a better price (and, to this 
end, the Commission requested that the Amex conduct a one-day review of 
all book orders in the ten stocks receiving the greatest number of 
stops); (3) market depth, including a comparison of the size of stopped 
orders to the size of the opposite side of the quote and to any quote 
size imbalance, and an analysis of the ratio of the size of the bid to 
the size of the offer; and (4) specialist compliance with the pilot 
program's procedures.

    \10\See supra, note 3.
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    The Exchange has submitted to the Commission several monitoring 
reports regarding the amendments to Rule 109. The Commission believes 
that, although these monitoring reports provide certain useful 
information concerning the operation of the pilot program, the 
Commission must conduct further [[Page 7238]] analysis of the Amex data 
and, in particular, of Rule 109's impact on limit orders on the 
specialist's book, before it can consider permanent approval thereof. 
To allow the Commission fairly and comprehensively to evaluate the 
Amex's use of its pilot procedures, without compromising the benefit 
that investors might receive under Rule 109, as amended, the Commission 
believes that it is reasonable to extend the pilot program until July 
21, 1995.
    First, the Amex's latest monitoring report indicates that 
approximately half of orders stopped in minimum fractional change 
markets received price improvement. The Commission, therefore, believes 
that the pilot procedures provide a benefit to certain investors by 
offering the possibility of price improvement to customers whose orders 
are granted stops in minimum fractional change markets. According to 
the Amex report, moreover, nearly all stopped orders were for 2,000 
shares or less. In this respect, the amendments to Rule 109 should 
mainly affect small public customer orders, which the Commission 
envisioned could most benefit from professional handling by the 
specialist.
    Second, the Amex states that the amendments to Rule 109 have not 
adversely affected customer limit orders existing on the specialist's 
book.\11\ This conclusion is based on the Exchange's review of limit 
orders on the opposite side of the market at the time a stop was 
granted pursuant to this pilot program. As part of its one-day review 
of the ten stocks receiving the greatest number of stops, the Amex 
determined how often book orders which might have been entitled to an 
execution had the order not been stopped, in fact, were executed at 
their limit price by the close of the day's trading.\12\ In addition to 
aggregated data, the Amex provided a detailed breakdown of the 
disposition of each order.

    \11\When stock is stopped, book orders on the opposite side of 
the market that are entitled to immediate execution lose their 
priority. If the stopped order then receives an improved price, 
limit orders at the stop price are bypassed and, if the market turns 
away from that limit, may never be executed.
    As for book orders on the same side of the market as the stopped 
stock, the Commission believes that Rule 109's requirements make it 
unlikely that these limit orders would not be executed. Under the 
Amex's pilot program, an order can be stopped only if a substantial 
imbalance exists on the opposite side of the market. See infra, text 
accompanying notes 14-20. In those circumstances, the stock would 
probably trade away from the large imbalance, resulting in execution 
of orders on the book.
    \12\Beyond the one-day review, the Amex could make this 
determination only for those stocks in which the electronic display 
book had been implemented. For other stocks, the Amex determined how 
often an equivalent volume (i.e., the same number of shares as the 
stopped order) was executed at the opposite side's limit price by 
the close of the day's trading.
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    The Commission historically has been concerned that book orders may 
get bypassed when stock is stopped, especially in a minimum fractional 
change market.\13\ Based on the Amex's prior experience, the Commission 
did not have sufficient grounds to conclude that this long-standing 
concern had been alleviated. The Commission acknowledges, however, that 
Amex's recent monitoring reports provide new information on this aspect 
of the pilot program. As a result, the Commission finds that additional 
time is necessary for the Commission to review such information and to 
ensure that Rule 109, as amended, does not harm public customers with 
limit orders on the specialist's book.

    \13\See, e.g., SEC, Report of the Special Study of the 
Securities Markets of the Securities and Exchange Commission, H.R. 
Doc. No. 95, 88th Cong., 1st Sess. Pt. 2 (1963).
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    In terms of market depth, the Amex's monitoring report suggests 
that stock tends to be stopped in minimum fractional change markets 
where there is a significant disparity (in both absolute and relative 
terms) between the number of shares bid for and the number of shares 
offered.\14\ That report also suggests that, given the depth of the 
opposite side of the market, orders affected by the Rule 109 pilot tend 
to be relatively small.\15\ The Amex repeatedly has stated, both to the 
Commission\16\ and to its members,\17\ that specialists can only stop 
stock in a minimum fractional changed market when (1) an imbalance 
exists on the opposite side of the market and (2) such imbalance is of 
sufficient size to suggest the likelihood of price improvement.\18\

    \14\There is a direct relationship between such a quote size 
imbalance and the likelihood of price improvement. A large imbalance 
on one side of the market suggests that subsequent transactions will 
take place on the other side. In those circumstances, it could be 
appropriate to grant a stop, since the delay might allow the 
specialist to execute the order at a better price for the customer.
    \15\A relatively large order might begin to counteract the 
pressure the imbalance on the opposite side of the market is putting 
on the stock's price. Accordingly, it might not be as appropriate to 
stop such an order.
    \16\See letter from Claire P. McGrath, Senior counsel, Legal & 
Regulatory Policy Division, Amex, to Mary Revell, Branch Chief, 
Division of Market Regulation, SEC, dated January 6, 1992 (Amendment 
No. 1 to File No. SR-Amex-91-05). Amendment No. 1 formally 
incorporated the requirement that the indicia of market depth 
discussed below must, without exception, be satisfied before a 
specialist is permitted to stop stock in a minimum fractional change 
market.
    \17\See Amex Information Circular Nos. 92-74 (April 24, 1992) 
and 93-333 (April 7, 1993).
    \18\For further discussion of the relationship between quote 
size imbalance and the likelihood of price improvement, see supra 
note 14.
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    In the Commission's opinion, the Amex data generally supports its 
conclusions regarding market depth. The Commission continues to believe 
that the requirement of a sufficient market imbalance is a critical 
aspect of the pilot program.\19\ When properly applied, such a 
requirement should help the Amex ensure that stops are only granted in 
a minimum fractional change market when the benefit (i.e., price 
improvement) to orders being stopped far exceeds the potential of harm 
to orders on the specialist's book.\20\

    \19\In extending a comparable pilot program on the New York 
Stock Exchange, the Commission placed similar emphasis on the 
critical nature of the sufficient size standard when stopping stock 
in minimum fractional change markets. See Securities Exchange Act 
Release No. 33791 (March 21, 1994), 59 FR 14437 (March 28, 1994) 
(File No. SR-NYSE-94-06).
    \20\See supra, text accompanying notes 11-13.
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    Finally, the Amex report describes its efforts regarding compliance 
with the pilot procedures. To alleviate confusion about how to evidence 
Floor Official approval (which, as noted above, a specialist must 
obtain to stop any order for more than 2,000 shares, or a total of more 
than 5,00 shares for all stopped orders), the Exchange has developed 
new manual and automated reports, which serve as a written audit trail 
for surveillance purposes. As a result, the Commission believes that 
the Amex has sufficient means to determine whether a specialist 
complied with the amendments' order size and aggregate share thresholds 
and, if not, whether Floor Official approval was obtained for larger 
parameters. The Commission also notes the Amex's ongoing effort to keep 
its specialists properly informed about the pilot program's 
requirements. In this context, the Amex has distributed Information 
Circulars,\21\ and held continuing educational sessions on the pilot 
program and its requirements for stopping stock in minimum fractional 
change markets. The Commission would expect the Amex to take 
appropriate action in response to any instance of specialist non-
compliance with Rule 109's procedures.

    \21\See supra, note 17.
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    During the pilot extension, the Commission requests that the 
Exchange continue to monitor the effects of stopping stock in a minimum 
fractional change market and to provide additional information where 
appropriate. Moreover, if the Exchange determines to request permanent 
approval of the pilot program or an extension thereof beyond July 21, 
1995, the Amex should submit to the Commission a proposed rule change 
by April 1, 1995. [[Page 7239]] 
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of the 
notice of filing thereof. This will permit the pilot program to 
continue on an uninterrupted basis. In addition, the procedures the 
Exchange proposes to continue using are the identical procedures that 
were published in the Federal Register for the full comment period and 
were approved by the Commission.\22\

    \22\No comments were received in connection with the proposed 
rule change which implemented these procedures. See 1992 Approval 
Order, supra, note 3.
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    It is therefore ordered, pursuant to Section 19(b)(2),\23\ that the 
proposed rule change (SR-Amex-95-01) is hereby approved until July 21, 
1995.

    \23\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\

    \24\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-2971 Filed 2-6-95; 8:45 am]
BILLING CODE 8010-01-M