Document ID: SEC-2007-0165-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2007-02-02T05:00Z

[Federal Register: February 2, 2007 (Volume 72, Number 22)]
[Notices]               
[Page 5091-5093]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02fe07-97]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55179; File No. SR-Amex-2007-08]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change To Establish a Passive Price 
Improvement Order for Specialists and Registered Traders

January 26, 2007.
    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 19, 2007, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission the 
proposed rule change as described in Items I, II, and III below, which 
Items have been substantially prepared by the Exchange. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to amend its rules with respect to its new 
AEMISM trading platform and hybrid market structure for 
equity products and exchange-traded funds (``ETFs''), recently approved 
by the Commission,\3\ to add a new Passive Price Improvement (``PPI'') 
order type to encourage Specialists and Registered Traders to provide 
aggressing orders with increased opportunities for price improvement. 
PPI orders would be the only method by which Specialists and Registered 
Traders could offer price improvement electronically and would provide 
undisplayed liquidity that reacts to aggressing orders according to 
criteria met at the time of order entry. PPI orders are intended to 
replicate in part the dynamics of floor-based trading in an electronic 
environment, and the Exchange believes that they would act as an 
incentive for the Exchange's Specialists and Registered Traders to 
quote more aggressively and add liquidity to the market. This should 
serve to assist the specialists and market makers in maintaining the 
continuity and depth of the marketplace, increase the quality of the 
market, and dampen volatility.
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    \3\ See Securities Exchange Act Release No. 54552 (September 29, 
2006), 71 FR 59546 (October 10, 2006).
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    The text of the proposed rule change is available on Amex's Web 
site at http://www.amex.com, at Amex's Office of the Secretary and at 

the Commission's Public Reference Room.

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 Exchange 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 Exchange 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
    To encourage Specialists and Registered Traders to provide 
aggressing orders with increased opportunities for price improvement, 
the Exchange is proposing to adopt a new Passive Price Improvement 
(``PPI'') order type. This would be the only method by which 
Specialists and Registered Traders could offer price improvement 
electronically. This interest would be undisplayed and reside inside 
the APQ, and its purpose is to offer price improvement to an aggressing 
order. The ability to offer price improvement would be linked to the 
competitiveness and size of the Amex liquidity provider's own displayed 
quote. PPI orders are intended to replicate in part the dynamics of 
floor-based trading in an electronic environment and the Exchange 
believes that they would act as an incentive for the Exchange's 
Specialists and Registered Traders to quote more aggressively and add 
liquidity to the market. This should also serve to maintain continuity 
and depth in the marketplace as well as to increase the quality of the 
market and dampen volatility.
    A Specialist or Registered Trader could have only a single, 
undisplayed PPI order per side in a particular security on the AEMI 
Book at any point in time, which must be inside the APQ and would be 
permitted only if the user has at least one quote for that side in the 
AEMI Book. A PPI order would not form part of the APQ and would be 
visible only to the entering Specialist or Registered Trader or his 
firm or group. A PPI order on the AEMI Book could be of any size, but 
its eligibility for execution would be assessed at the time of 
execution against an incoming order, and would be based on the 
competitiveness of the participant's quote at that time.
    AEMI would make a PPI order eligible for execution if at least one 
of the following two conditions is met; otherwise AEMI would ignore the 
PPI order:
    1. The Specialist's or Registered Trader's displayed quote is at 
the APQ on the side of the PPI order that would be executed. In this 
case, the PPI order would be executed up to (a) the size of the 
Specialist's or Registered Trader's displayed quote or (b) the size of 
the incoming order, whichever is smaller. Any balance of the PPI order 
would be considered ineligible to trade against the incoming order and 
will be ignored.
    2. The Specialist's or Registered Trader's displayed quote is (i) 
one tick away from the APQ on the side of the PPI order that would be 
executed, and (ii) at least double the size of the APQ on the side of 
the PPI order that would be executed. In this case, the PPI order would 
be executed up to (a) half of the size of the Specialist's or 
Registered Trader's displayed quote or (b) the size of the incoming 
order, whichever is smaller. Any balance of the PPI order would be 
considered ineligible to trade against the incoming order and would be 
ignored.
    In both cases, as with other aggressing orders, intermarket sweep 
orders would be generated to clear any better-priced protected 
quotations at other markets.
    The two conditions above balance the need to provide meaningful 
price improvement opportunities in the form of undisplayed liquidity 
with the need to ensure the competitiveness of displayed quotations.
    The AEMI platform would ignore (i.e., make ineligible for execution 
against an aggressing order, without canceling) a PPI order on the AEMI 
Book that locks or crosses the automated NBBO or APQ as a result of a 
change in the automated NBBO or APQ or equals the APQ on the same side 
of the market. If there are multiple PPI orders at the same price, the 
Specialist's PPI order would take priority over a Registered Trader's 
PPI order. This provision recognizes the fact that Specialists have 
higher capital requirements, more stringent quoting obligations, and 
more trading obligations (both negative and

[[Page 5092]]

affirmative) and responsibilities to maintain a fair and orderly 
market, and seeks to reward the Specialist for his central role in 
providing liquidity to the marketplace. It also encourages Registered 
Traders to make tighter markets and enhances competition among the 
liquidity providers. PPI orders would not participate in negotiated 
trades, and they would be ignored when auto-ex is disabled.
    For example, assume that the NBB is $6.90 bid for 2,500 shares, 
comprising NYSE and ARCA for 1,000 shares each, and INET for 500 
shares. The Specialist is bidding $6.89 for 2,000 shares, and 
represents the Amex best bid which is published in the APQ. Registered 
Traders 1, 2, and 3 are each quoting $6.87 
bid for 500 shares each. The Specialist has a PPI order at $6.91 bid 
for 3,000 shares; Registered Traders 1 and 2 each 
have a PPI order at $6.91 bid for 500 shares; and Registered Trader 
3 has a PPI order at $6.91 bid for 300 shares. An incoming 
order to sell 3,000 shares at $6.90 would trade 2,000 shares against 
the Specialist at $6.91, since the Specialist's quote is at the APQ and 
the PPI order may be executed only up to the size of the Specialist's 
displayed quote. The remaining balance of 1,000 shares would be routed 
away at $6.90. The PPI orders of the Registered Traders were ignored in 
this case since none of their displayed quotes were either at the APQ 
or a tick away from the APQ.
    As a second example, assume that the NBB is $6.89 bid for 3,000 
shares, comprising the Amex best bid. The Specialist is bidding $6.89 
for 2,000 shares and a Registered Trader is bidding $6.89 for 1,000 
shares. The Specialist has a PPI order at $6.91 bid for 3,000 shares 
and the Registered Trader has a PPI order at $6.91 bid for 1,000 
shares. An incoming limit order to buy 100 shares at $6.90 arrives on 
the AEMI Book, creating a new NBB and Amex best bid. This is followed 
by an incoming order to sell 2,500 shares at the market. At the time of 
execution of the incoming order, the Specialist and the Registered 
Trader are a tick away from the APQ, and their PPI orders may therefore 
each trade up to only half of the size of the participant's displayed 
quote. Both PPI orders are eligible since both participants are quoting 
at least double the size of the APQ. The incoming order trades 1,000 
shares at $6.91 against the Specialist's PPI order, 500 shares at $6.91 
against the Registered Trader's PPI order, 100 shares at $6.90 against 
the order on the AEMI Book, and the balance of 900 shares at $6.89 
against the displayed quotes of the Specialist and the Registered 
Trader. The unexecuted balances of the PPI orders remain on the AEMI 
Book.
    The specific AEMI rules to which changes are being proposed are 
discussed below.
    Rule 123--AEMI--Manner of Bidding and Offering
    An additional phrase is being added to section (e) of Rule 123--
AEMI to provide that AEMI would not display a PPI order.
    Rule 131--AEMI--Types of Orders
    The Exchange is proposing to add the definition of a PPI order to 
section (q) of Rule 131-AEMI. The proposed definition would contain the 
two conditions under which a PPI order would be eligible for execution 
by AEMI, as described above. Under the proposed definition, a PPI order 
would be an order submitted to AEMI by a Specialist or a Registered 
Trader to buy or sell a stated amount of a security at a specified, 
undisplayed price. A Specialist or Registered Trader could have only 
one PPI order to buy and/or one PPI order to sell a particular security 
on the AEMI Book at any point in time. A Registered Trader would have 
to be actively quoting a security in order to enter a PPI order in the 
security.
    The proposed definition would provide that AEMI would reject a new 
PPI order (i) if it is not priced inside APQ (above the bid and below 
the offer) at the time of entry into AEMI, (ii) if it is marked ``sell 
short'' (except for certain securities that have been granted no-action 
relief from a short sale price test, such as ETFs and Regulation SHO 
Pilot securities), although not if it is marked ``sell short exempt'' 
or (iii) if the order would lock or cross the automated NBBO.
    AEMI would cancel a PPI order on the AEMI Book (i) if the 
Specialist's or Registered Trader's best quote is withdrawn, (ii) at 
the end of the day, or (iii) if there is a trading halt in the 
security.
    AEMI would ignore (i.e., make ineligible for execution against an 
aggressing order, without canceling) a PPI order on the AEMI Book (i) 
if the two conditions for execution eligibility described above are not 
met, (ii) if automatic execution becomes disabled, (iii) if the price 
of the PPI order locks or crosses the automated NBBO or APQ as a result 
of a change in the automated NBBO or APQ, or (iv) if the price of the 
PPI order equals the APQ on the same side of the market. With respect 
to (iii) and (iv) in the previous sentence, AEMI would continue to 
ignore the PPI order and prevent the person who entered it from 
entering a new PPI order on the same side of the market until the 
automated NBBO or APQ, changes so that the PPI order no longer locks or 
crosses the automated NBBO or APQ, or no longer is equal to the APQ on 
the same side of the market, or the person who entered the PPI order 
cancels it.
    The proposed rule change also provides that, if there is more than 
one PPI order in the AEMI Book, AEMI would execute the orders in price/
time priority, provided, however, that Specialist PPI orders would be 
given priority over Registered Trader PPI orders at the same price. A 
PPI order would not be displayed in the APQ and would be visible only 
to the Specialist or Registered Trader who entered it or to his or her 
firm. AEMI would only execute PPI orders only when automatic execution 
is enabled. AEMI would execute PPI orders only against aggressing 
orders (or elected or converted stop and percentage orders). PPI orders 
would not participate in the execution of cross-only or mid-point cross 
orders or in the execution of auction trades.
    Finally, the proposed definition provides that a PPI order could be 
entered only during the regular trading session and will not 
participate in an opening, reopening, cash closing, or regular closing.
    The proposed rule change also would add language to section (r) of 
Rule 131--AEMI relating to cross orders to clarify how PPI orders would 
interact with the new electronic cross order types that will be 
available in AEMI. While ``cross-only'' or ``mid-point'' cross orders 
would not execute against PPI orders, ``IOC cross,'' ``cross,'' and 
``PNP cross'' orders could execute against any executable PPI orders at 
the price of the PPI orders. In the case of auction cross orders, the 
displayed order could be price-improved by PPI orders in the AEMI Book 
as well as by new bids, offers, or orders entering the AEMI Book during 
the three-second auction cross duration.
    Rule 157--AEMI--Orders with More than One Broker
    The Exchange is proposing to add a phrase to section (b) of Rule 
157--AEMI to clarify that a Registered Trader may maintain a PPI order 
in AEMI while he is maintaining a bid or offer for the same security in 
AEMI.
    Rule 170--AEMI--Registration and Functions of Specialists
    The Exchange is proposing to add language to Commentaries .01 and 
.02 of Rule 170--AEMI to allow transactions by the Specialist in 
certain ``tick'' situations without the approval of a Floor Official if 
the Specialist effects the transaction by means of a PPI order.

[[Page 5093]]

(2) Statutory Basis
    The proposed rule change is designed to be consistent with 
Regulation NMS, as well as consistent with Section 6(b) of the Act,\4\ 
in general, and furthers the objectives of Section 6(b)(5),\5\ in 
particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest.
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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 proposed rule change does not impose any 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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 is consistent with the 1934 Act. Comments may be submitted by 
any of the following methods:

Electronic Comments

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

include File No. SR-Amex-2007-08 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 No. SR-Amex-2007-08. 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 at 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, 100 F Street, NE., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. 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 No. SR-Amex-2007-08 and should be 
submitted on or before February 23, 2007.

    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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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-1689 Filed 2-1-07; 8:45 am]

BILLING CODE 8011-01-P