Document ID: SEC-2006-0483-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2006-04-12T04:00Z

[Federal Register: April 12, 2006 (Volume 71, Number 70)]
[Notices]               
[Page 18789-18790]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12ap06-126]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53597; File No. SR-Amex-2005-112]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Relating to the Prohibition of 
Trade Shredding by Members

April 4, 2006.

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, as amended, (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on November 1, 2005, the American Stock Exchange LLC 
(``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 
Exchange. On March 27, 2006, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240. 19b-4.
    \3\ See Form 19b-4 dated March 27, 2006 (``Amendment No. 1''). 
Amendment No. 1 replaced the original filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Amex Rule 3 (``General Prohibitions 
and Duty to Report'') by adding a new paragraph (i) to prohibit a 
member or member organization from splitting trading interest into 
multiple orders for any purpose other than seeking the best execution 
of the entire order. The text of the proposed rule change, as amended, 
appears below. Additions are in italics.

* * * * *

Rule 3. General Prohibitions and Duty To Report

    (a) through (h)--no change.
    (i) It shall be inconsistent with just and equitable principles 
of trade for a member or member organization to split trading 
interest into multiple orders for any purpose other than seeking the 
best execution of the entire order.
* * * * *

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 Amex included statements 
concerning the purpose of, and basis for, the proposed rule change, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. The text of these statements may be examined at the 
places specified in Item IV below. The Amex 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    ``Trade shredding'' is the practice of splitting large customer 
orders for securities into multiple smaller orders for the primary 
purpose of increasing the receipt of market data revenue by market 
centers that allow or encourage this practice. The practice is based on 
the fact that, as a result of the manner in which market data revenues 
are calculated, market centers can derive a greater share of market 
data revenue by increasing the number of trades they report to the 
consolidated tape. For example, Network B, which disseminates 
consolidated market information on securities listed on the Amex, 
allocates net income based solely on the number of trades reported by a 
self-regulatory organization (``SRO''), no matter how small each trade 
is.
    The Amex has expressed its serious concern in the past over the 
practice of trade shredding. The Exchange believes that trade shredding 
is incompatible with just and equitable principles of trade. Among 
other things, it constitutes clearly misleading trade reporting in that 
it presents a false impression regarding the nature and extent of bona 
fide trading activity.
    Some SROs provide incentives for trade shredding by sharing the 
increased market data revenue that results from the practice with the 
market participants, including non-members, who send in orders for 
execution. Such revenue sharing arrangements may create a conflict of 
interest between the customers and the market participants handling 
their orders if, for example, an order is routed to a market center 
based on such revenue incentives instead of the obligation to obtain 
best execution for the order.
    The Commission has requested that each SRO adopt rule changes that 
would prohibit its members from trade shredding. Although the Amex does 
not rebate revenues from tape reporting to members or non-members and 
provides no other incentive for its order providers to engage in trade 
shredding on orders sent to the Exchange, the Amex is responding to the 
Commission's request by adding a new paragraph (i) to Amex Rule 3 
(``General Prohibitions and Duty to Report''). This new paragraph would 
prohibit a member or member organization from splitting trading 
interest into multiple orders for any purpose other than seeking the 
best execution of the entire order.

[[Page 18790]]

2. Statutory Basis
    The proposed rule change, as amended, is consistent with Section 
6(b) of the Act,\4\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\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 a national market 
system, and is not designed to permit unfair discrimination between 
customers, brokers, or dealers, or to regulate by virtue of any 
authority matters not related to the administration of the Exchange.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change, as amended, 
will impose no burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received comments on this 
proposal, as amended.

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

    Within 35 days of the date of 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 such 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, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-Amex-2005-112 on the subject line.

Paper comments:

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-Amex-2005-112. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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 in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal offices of Amex. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-Amex-2005-112 and should be submitted on or before May 3, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-5363 Filed 4-11-06; 8:45 am]

BILLING CODE 8010-01-P