[Federal Register Volume 73, Number 26 (Thursday, February 7, 2008)]
[Notices]
[Pages 7335-7336]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-2123]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57241; File No. SR-Amex-2007-138]


Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Approving a Proposed Rule Change to Establish a New Class of Off-Floor 
Market Makers in ETFs Called Designated Amex Remote Traders

January 31, 2008.

I. Introduction

    On December 19, 2007, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with 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 
proposal to create a new class of off-floor market makers, called 
``Designated Amex Remote Traders'' or ``DARTs,'' in ETF securities. The 
proposed rule change was published for comment in the Federal Register 
on December 31, 2007.\3\ The Commission received no comments regarding 
the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 57022 (December 20, 
2007), 72 FR 74375.
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II. Description

    The Exchange proposes to create a new class of off-floor market 
makers in ETF securities and to make related changes to the Exchange's 
AEMI trading platform.\4\ These market makers, to be called 
``Designated Amex Remote Traders'' or ``DARTs,'' will electronically 
enter competitive quotations on a regular basis to satisfy market maker 
regulatory requirements. DARTs will also have to meet certain business 
requirements, which will include minimum performance standards as 
discussed below.
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    \4\ See Securities Exchange Act Release No. 56446 (September 17, 
2007), 72 FR 54303 (September 24, 2007) (approving File No. SR-Amex-
2007-085) (establishing DART program in ETFs and common stocks); 
letter dated September 5, 2007 to Nancy M. Morris, Secretary, 
Commission, from Brendan E. Cryan, Managing Member, Brendan E. Cryan 
& Company, LLC; Jonathan Q. Frey, Managing Partner, J. Streicher & 
Co.; Michael Marchisi, Managing Partner, AIM Securities Co.; and 
Robert B. Nunn, Chief Operating Officer, Cohen Specialist, LLC 
(``Comment Letter'') (commenting on SR-Amex-2007-085); Securities 
Exchange Act Release No. 56764 (November 7, 2007), 72 FR 64095 
(November 14, 2007) (immediate effectiveness of File No. SR-Amex-
2007-113) (eliminating DART rules).
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    A DART will be a member or member organization physically located 
off-floor that will electronically enter competitive quotations into 
AEMI on a regular basis in all ETF securities to which it is assigned 
in the DARTs program. A DART may be either a regular or associate 
member of the Exchange that meets the requirements for electronic 
access to the Exchange's automated systems. The proposed DARTs program 
is similar to the Supplemental Registered Options Traders (``SROT'') 
program implemented by the Amex for options,\5\ with certain unique 
features. Under the DARTs proposal, an Amex specialist firm may also be 
a DART, although it may not be registered as a DART in securities in 
which it is also the specialist.
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    \5\ See Amex Rule 993-ANTE (Supplemental Registered Options 
Traders).
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    Amex's rules already provide for one type of competing market maker 
in ETF securities--Registered Traders. A Registered Trader is a member 
who is authorized to initiate trades in certain securities \6\ for his 
or her account, while on the floor.\7\ Like Registered Traders, DARTs 
will not be permitted to initiate transactions in equity securities.\8\ 
DARTs will have obligations similar to Registered Traders under 
Exchange rules, such as those relating to a course of dealings that 
contributes to the maintenance of a fair and orderly market.
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    \6\ These include in index warrants, currency warrants, 
securities listed pursuant to Section 107 of the Amex Company Guide, 
Trust Issued Receipts, and Partnership Units.
    \7\ See Amex Rule 1A(g)-AEMI. A DART would only be permitted to 
submit quotations electronically from off the floor of the Exchange.
    \8\ See Amex Rule 110A(n)-AEMI.
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    Due to their lack of a physical presence in the trading crowd, 
which is a basic requirement of the auction market, DARTs will not 
participate in any post-trade allocation in connection with an auction 
trade. Instead, a DART's participation in an auction pair-off on the 
Exchange will be limited to the marketable amount of its quotation on 
the AEMI Book at the time of the pair-off. For purposes of the priority 
and parity rules of Rule 126-AEMI, a DART's quotation would be treated 
as another crowd order, similar to a Registered Trader.
    Amex will establish minimum requirements for a DART to remain in 
the program, which may be modified by the Exchange from time to time. 
First, a DART must provide competitive quotations on a regular basis to 
satisfy market maker regulatory requirements.\9\ The Exchange from time 
to time will determine minimum performance standards, including a 
volume participation rate and trade participation rate. A DART that 
fails to comply with one or more of these standards may be subject to 
loss of all or a portion of any benefits to which it would otherwise be 
entitled under Amex rules by virtue of its status as a DART, including 
possible suspension or termination of DART status. The number of ETF 
securities in which a DART may be permitted to make markets will be 
determined by the Exchange in accordance with Commentary .05 in 
proposed Rule 110A-AEMI. While management anticipates starting the 
program with a limited group of DARTs, no specific upper limit on the 
number of DARTs is anticipated.
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    \9\ See proposed Rule 110A-AEMI(b)(i), which requires a DART to 
``provide continuous two-sided quotations in all assigned securities 
* * *'' This basic market maker requirement mirrors the definition 
of ``market maker'' set forth in Section 3(a)(38) of the Act, 15 
U.S.C. 78c(3)(38), which requires a dealer in the security involved 
to hold himself out ``as being willing to buy and sell such security 
for his own account on a regular or continuous basis.'' The 
following additional regulatory requirements will be imposed by 
proposed Rule 110A-AEMI(b)(ii): ``With respect to each security to 
which he/she is assigned by the Exchange, a DART's transactions must 
constitute a course of dealings reasonably calculated to contribute 
to the maintenance of a fair and orderly market. In connection with 
this function, a DART is required to make competitive bids and 
offers as reasonably necessary to contribute to the maintenance of a 
fair and orderly market and shall engage, to a reasonable degree 
under the existing circumstances, in dealings for his/her own 
account when there exists a lack of price continuity, a temporary 
disparity between the supply of and demand for the security(ies) in 
which he/she is trading, or a temporary distortion of the price 
relationships between the security(ies) in which he/she is trading 
and the security(ies) underlying or otherwise related to such 
security(ies).''
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    In addition to the requirements described above, a DART will be 
required to meet eligibility criteria similar to those specified in the 
SROT program, which will include:
    <bullet> Adequacy of resources including capital, technology, and 
personnel;
    <bullet> History of stability, superior electronic capacity, and 
superior operational capacity;
    <bullet> Level of market-making and/or specialist experience in a 
broad array of securities;
    <bullet> Ability to interact with order flow in all types of 
markets;
    <bullet> Existence of order flow commitments;
    <bullet> Willingness and ability to make competitive markets on the 
Exchange and otherwise promote the Exchange in a manner that is likely 
to enhance the ability of the Exchange to compete successfully for 
order flow in the ETF securities it trades;
    <bullet> The number of member organizations requesting approval to 
act as a DART; and

[[Page 7336]]

    <bullet> Ability to transact in any ETF underlying markets.
    The regulatory requirements applicable to DARTs will be surveilled 
for by the FINRA Amex Regulation Division (``FINRA Amex'') consistent 
with current surveillance procedures for Registered Traders on the 
Exchange. FINRA Amex staff will work with Amex technical staff on 
planning the necessary changes to AEMI to capture required surveillance 
data and surveilling the increased number of market makers that the 
program is expected to attract. Adjustments to current technology and 
surveillance procedures will likely also be necessitated by the fact 
that DARTs will not be physically located on the floor of the Exchange.
    DARTs will interface with the Amex's Floor Officials in the case of 
trade disputes substantially in accordance with existing procedures 
used for SROTs. Each DART accordingly will be required to designate 
persons on and/or off-floor to be in direct real-time contact with 
Floor Officials on such matters. Regulation M will apply to DARTs in 
the same way that it applies to other market participants, as will Amex 
Rule 193 to the extent a DART is affiliated with a specialist member 
organization. However, no expansion of the application of Amex Rule 193 
beyond current practice is intended.\10\
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    \10\ The language in Rule 110A-AEMI(c)(ii) cross-referencing 
Amex Rule 193 is substantively identical to language also contained 
in Amex Rules 993-ANTE(d)(iii) (Supplemental Registered Options 
Traders) and 994-ANTE(d)(iii) (Remote Registered Options Traders), 
neither of which have been interpreted to expand the applicability 
of Amex Rule 193 beyond affiliates of specialists.
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    Finally, the Comment Letter had observed that a provision proposed 
in SR-Amex-2007-85 relating to minimum capital requirements for DARTs 
is unnecessary due to its current inapplicability to DARTs (who will be 
subject to the Commission's net capital rule).\11\ The Exchange has 
eliminated that provision from the current proposed rule change.
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    \11\ Rule 15c3-1 under the Act, 17 CFR 240.15c3-1.
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III. Discussion

    After careful review, 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.\12\ In particular, the Commission finds that the proposal is 
consistent with section 6(b)(5) of the Act,\13\ which requires, among 
other things, that a national securities exchange's rules be designed 
to promote just and equitable principles of trade, to remove 
impediments to and to perfect the mechanism of a free and open market 
and a national market system, and, in general, to protect investors and 
the public interest.
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    \12\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    Under the proposal, DARTs would be permitted to quote 
electronically in ETFs from off the Exchange's physical trading floor. 
Amex's rules already provide for one type of competing market maker in 
ETF securities--Registered Traders. Like Registered Traders, DARTs will 
not be permitted to enter quotations in equity securities. In addition, 
similar rules would govern the allocations of DARTs and Registered 
Traders, except DARTs will not be permitted to participate in a post-
trade allocation in connection with an auction trade. The Commission 
believes it is reasonable and consistent with the Act for Amex to 
establish DARTs as remote competitive market makers subject to the 
allocation rules described in the proposal.
    The Commission notes that DARTs will be required to meet certain 
eligibility requirements. The existence of order flow commitments 
between a DART applicant and order flow providers is one such factor. 
The Commission notes the Exchange's representation that a future change 
to, or termination of, any such commitments would not be used by the 
Exchange at any point in the future to terminate or take remedial 
action against a DART, and that the Exchange would not take remedial 
action solely because orders subject to any such commitments were not 
subsequently routed to the Exchange. Similarly, the Exchange has 
included the ``willingness to promote the Exchange'' as a factor that 
the Committee may consider when making its application decisions. The 
Commission notes the Exchange's representation that the Committee would 
not apply this factor to in any way restrict, either directly or 
indirectly, a DART's activities as a market maker or specialist on 
other exchanges, or to restrict how a DART handles orders it holds in a 
fiduciary capacity to which it owes a duty of best execution.
    The Commission also notes that, should the Committee decide not to 
approve a DART applicant, or should a DART's appointment be suspended 
or terminated in one or more classes, a DART applicant or DART, 
respectively, would be entitled to a hearing under Article IV, section 
1(g) of the Amex Constitution and Amex Rule 40.
    Proposed Amex Rule 110A(b)-AEMI sets forth the obligations that a 
DART would be required to fulfill. Specifically, a DART would be 
required to generate continuous, two-sided quotations in all assigned 
ETF securities. A DART's affirmative market making obligations appear 
to be sufficient to justify the benefits it would receive as a market 
maker.
    The proposal also appears reasonably designed to prevent the misuse 
of material, non-public information with any affiliates that may 
conduct a brokerage business in securities assigned to a DART, or that 
may act as a specialist or market maker in any security underlying a 
derivative security assigned to a DART.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-Amex-2007-138) is approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-2123 Filed 2-6-08; 8:45 am]
BILLING CODE 8011-01-P