Document ID: SEC-2007-1149-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2007-08-16T04:00Z

[Federal Register: August 16, 2007 (Volume 72, Number 158)]
[Notices]               
[Page 46113-46116]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16au07-125]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56236; File No. SR-Amex-2007-85]

 
Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange LLC To Establish a New Class of 
Off-Floor Market Makers in ETFs and Equities Called Designated Amex 
Remote Traders

August 9, 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 August 8, 2007, 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 substantially prepared by the 
Amex. 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 adopt changes to its rules to create a new 
class of off-floor market makers in all ETF and equity-traded 
securities that trade on the Exchange, including the implementation of 
related changes to the Exchange's AEMI\SM\ trading platform. These 
market makers, to be called ``Designated Amex Remote Traders'' or 
``DARTs,'' will electronically enter competitive quotations on a 
regular basis sufficient to satisfy market maker regulatory 
requirements. Business requirements will include minimum performance 
standards, including that the quotations entered must be on one side of 
the NBBO for a required percentage of the time in all assigned 
securities. The purpose of the new program is to (1) encourage 
competitive quoting within the Amex and between the Amex and other 
market centers, (2) retain and increase order flow by attracting new 
market makers to the Exchange, and (3) encourage greater depth at or 
around the NBBO.
    The text of the proposed rule change is available on the Amex's Web 
site at http://www.amex.com, the Amex's principal office, 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 Amex 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 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
    In order to (1) Encourage competitive quoting within the Amex and 
between the Amex and other market centers, (2) retain and increase 
equity and ETF order flow in AEMI by attracting new market makers to 
the Exchange, and (3) encourage greater depth at or around the NBBO, 
the Exchange proposes to adopt changes to its rules to create a new 
class of off-floor market makers in all ETF and equity-traded 
securities that trade on the Exchange, including the implementation of 
related changes to the Exchange's AEMI trading platform. These market 
makers, to be called ``Designated Amex Remote Traders'' or ``DARTs,'' 
will electronically enter competitive quotations on a regular basis 
sufficient to satisfy market maker regulatory requirements. DARTs will 
also have to meet certain business requirements, which will include 
minimum performance standards. The Exchange anticipates that the 
implementation of the DARTs program should increase the liquidity 
available in those securities to which DARTs are assigned and reduce 
the likelihood of tolerance breaches in AEMI due to the resultant 
additional depth at or around the NBBO.
    DARTs will be members or member organizations physically located 
off-floor that will electronically enter competitive quotations into 
AEMI on a regular basis in all securities to which they are assigned in 
the DART program. The proposed DART program is similar to the 
Supplemental Registered Options Traders (``SROT'') program implemented 
by the Amex for options,\3\ with its own unique caveats. Under the DART 
proposal, an Amex specialist firm may also be a DART, although it may

[[Page 46114]]

not be registered as such in securities in which it is also the 
specialist. In ETFs, DARTs will trade in an identical way as Registered 
Traders in the same securities on the Exchange when auto-ex is on, with 
similar obligations under Exchange rules such as those relating to a 
course of dealings that contributes to the maintenance of a fair and 
orderly market. DARTs in equity-traded securities will be subject to 
the same obligations as DARTs in ETFs and will not be subject to the 
stabilization rules that are applicable to equity specialists. 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 amount of its quotation on the 
AEMI Book at the time of the pair-off.
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    \3\ See Amex Rule 993-ANTE (Supplemental Registered Options 
Traders).
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    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, they must provide competitive quotations on a regular basis 
sufficient to satisfy market maker regulatory requirements. Business 
requirements will include minimum performance standards determined from 
time-to-time by the Exchange, including that a DART's quotations must 
be on one side of the NBBO for a required percentage of the time in all 
assigned securities. Other such performance standards will include 
average displayed size, average quoted spread, and the ability of the 
DART to transact in underlying markets in the case of a derivative 
security. A DART that fails to comply with one or more of the 
performance standards, as determined by the Chief Executive Officer of 
the Exchange or his/her designee, may be subject to loss of the 
benefits to which it would otherwise be entitled under Amex rules by 
virtue of its status as a DART (e.g., rebates for providing liquidity), 
including suspension or termination of DART status. A DART may be 
either a regular member of the Exchange or an associate member of the 
Exchange that meets the requirements for electronic access to the 
Exchange's automated systems. DARTs will receive benefits for 
participating in and meeting the requirements of the DART program. The 
benefits currently being considered by the Exchange may include, but 
would not necessarily be limited to:
    (i) Rebates for providing liquidity as the contra to any customer 
orders/quotes executed on AEMI;
    (ii) no charges for proprietary trades by DART program 
participants; and/or
    (iii) no limitation on the number of equity and ETF securities in 
which a DART could be assigned to make markets.
    The Exchange expects that the proposed rules for the DART program 
will set a high bar for prospective DART participants, and, while 
management anticipates starting the program with a limited group of 
DARTS, no specific upper limit on the number of DARTs is anticipated. 
In addition to the requirements cited above, DARTs shall be required to 
meet eligibility criteria similar to those specified in the SROT 
program, which include:
    (i) Adequacy of resources including capital, technology and 
personnel;
    (ii) History of stability, superior electronic capacity, and 
superior operational capacity;
    (iii) Level of market-making and/or specialist experience in a 
broad array of securities;
    (iv) Ability to interact with order flow in all types of markets;
    (v) Existence of order flow commitments;
    (vi) 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 equity and ETF securities it trades; and
    (vii) The number of member organizations requesting approval to act 
as a DART.
    The Exchange would use the factor relating to the existence of 
order flow commitments to evaluate existing order flow commitments 
between a DART applicant and order flow providers. 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. Furthermore, the Exchange would not take 
remedial action solely because orders subject to any such commitments 
were not subsequently routed to the Exchange. The factor relating to 
willingness to promote the Exchange includes assisting in meeting and 
educating market participants, maintaining communications with member 
firms in order to be responsive to suggestions and complaints, 
responding to suggestions and complaints, and other similar activities. 
The Exchange would use this criterion to determine which applicants 
would best be able to enhance the competitiveness of the Exchange. The 
Exchange 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 handle orders 
held by it in a fiduciary capacity to which it owes a duty of best 
execution.
    Finally, the Exchange will propose in future rule filings certain 
other significant changes to AEMI in order to enhance the DART 
program's chances of success. Those proposed changes are expected to 
include:
    (i) Significantly reducing the parity window from the current two-
second joining time to a significantly shorter time period, which 
should increase the competition among liquidity providers to establish 
a new market;
    (ii) Providing reserve interest to DARTs and other quoting 
participants; and
    (iii) Allowing DARTs to use PPI orders (currently limited to 
Specialists and Registered Traders).
    The regulatory requirements applicable to DARTs will be surveilled 
for by the NASD Amex Regulatory Division (``NASD'') consistent with 
current surveillance procedures for Registered Traders on the Exchange. 
NASD staff will work with Amex technical staff on planning the 
necessary changes to AEMI to capture required surveillance data and in 
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 the DARTs 
will not be physically located on the floor of the Exchange.
    The specific AEMI rules to which changes are being proposed are 
discussed below.
Rule 110A-AEMI. Designated Amex Remote Traders
    This proposed new rule will contain the basic requirements for 
DARTs as described herein, in the same manner that Rule 110-AEMI 
contains the basic requirements for Registered Traders.
Rule 1A-AEMI. Applicability, Definitions, References and Phase-In
    The Exchange is proposing revisions to Rule 1A-AEMI in order to (i) 
Update the definition of the AEMI Book to include electronic 
submissions from DARTs, (ii) provide that a Crowd Order includes any 
bid or offer in the AEMI Book entered by a DART, (iii) provide a 
definition of a DART with a cross-reference to proposed Rule 110A-AEMI, 
(iv) update the definition of the Specialist Order Book to exclude bids 
and offers of DARTs, and (v) make a minor unrelated correction to the 
definition of Exchange Traded Funds (``ETFs'').

[[Page 46115]]

Rule 109-AEMI. ``Stopping'' Stock
    The Exchange proposes to revise Rule 109-AEMI to add DARTs to the 
list of Amex market participants prohibited from granting or accepting 
a stop with respect to a security traded in AEMI.
Rule 112-AEMI. Suspension of Registration of Registered Trader or 
Designated Amex Remote Trader
    The Exchange is proposing to add a provision to this rule to 
provide for the suspension of the registration of a DART under 
circumstances similar to the current provision that provides for the 
suspension of a Registered Trader. Both types of participants are 
market makers with respect to securities traded in AEMI.
Rule 115-AEMI. Exchange Procedures for Use of Unusual Market Exception
    The Exchange proposes to revise Rule 115-AEMI to provide procedures 
that will cover situations in which DARTs are unable to publish 
quotations or are streaming in incorrect quotes under unusual market 
conditions. The Exchange also is proposing to correct an inaccuracy in 
the current rule in order to clarify that such issues with respect to 
Registered Traders are handled via the Service Desk and not by a Floor 
Official.
Rule 123-AEMI. Manner of Bidding and Offering
    The Exchange is proposing revisions to this rule to provide that 
AEMI shall accept electronic bids and offers from DARTs and include 
them in the AEMI Book. The proposed changes would also place DARTs on a 
par with Specialists and Registered Traders in terms of their ability 
to stream bids and offers into AEMI at multiple price levels and would 
require (as with Specialists and Registered Traders) that all quotes 
provided be two-sided. DARTs would also be prohibited from streaming in 
a quote that locks or crosses an existing quote that the same DART has 
previously streamed in for the same security.
Rule 128A-AEMI. Automatic Execution
    The Exchange is proposing two minor changes to Rule 128A-AEMI so 
that DARTs will be treated in the same manner as Registered Traders in 
connection with certain automatic executions when a DART's quotation 
(i) matches the Amex Published Quote (``APQ'') on the other side of the 
market or (ii) would lock or cross the APQ in certain circumstances.
Rule 128B-AEMI. Auction Trades
    The changes being proposed to this rule would exclude DARTs from 
participation in any post-trade allocation in connection with an 
auction, as described above.
Rule 157-AEMI. Orders With More Than One Broker
    The Exchange proposes to add a new paragraph to this rule that 
would place restrictions on DARTs similar to those that Registered 
Traders are subject to in terms of not being able to (i) Place a Crowd 
Order with a broker or (ii) maintain an order on the Specialist Order 
Book, while the DART is maintaining a bid or offer for the security in 
AEMI.
Rule 719-AEMI. Comparison of Exchange Transactions
    The Exchange is proposing to add DARTs to one of the equity account 
type codes used for market maker transactions in the equities and ETFs 
in which they are registered.
Rule 957. Accounts, Orders and Records of Registered Traders, 
Designated Amex Remote Traders, Specialists and Associated Persons
    The Exchange is proposing changes to Rule 957 that will place the 
same requirements on DARTs that Registered Traders are subject to with 
respect to reporting certain trading accounts and orders to the 
Exchange and producing books, records, and other information pertaining 
to certain transactions.
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, to remove impediments to and perfect the mechanism 
of a free and open market and national market system 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 Exchange 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 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-2007-85 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-2007-85. 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

[[Page 46116]]

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, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the 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-2007-85 and should be 
submitted on or before September 6, 2007.
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    \6\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-16052 Filed 8-15-07; 8:45 am]

BILLING CODE 8010-01-P