Document ID: SEC-2007-1305-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2007-09-24T04:00Z

[Federal Register: September 24, 2007 (Volume 72, Number 184)]
[Notices]               
[Page 54303-54304]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24se07-76]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56446; File No. SR-Amex-2007-85]

 
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 and Equities Called Designated Amex Remote 
Traders

September 17, 2007.

I. Introduction

    On August 8, 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 all ETF and equity-
traded securities that trade on the Exchange. The proposed rule change 
was published for comment in the Federal Register on August 16, 
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. 56236 (August 9, 2007), 
72 FR 46113.
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II. Description

    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 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. DARTs will also have to meet certain business requirements, 
which will include minimum performance standards. The proposed DART 
program is similar to the Supplemental Registered Options Traders 
(``SROT'') program implemented by the Amex for options,\4\ with its own 
unique caveats. Under the DART proposal, an Amex specialist firm may 
also be a DART, although it may 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. A DART 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 size of its quotation on the AEMI Book at the time of the pair-off.
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    \4\ 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. 
Business requirements will include minimum performance standards, 
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 
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.
    While the Exchange 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 will be 
required to meet eligibility criteria similar to those

[[Page 54304]]

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 regulatory requirements applicable to DARTs will be surveilled 
for by the FINRA Market Regulation Amex Division (``FINRA'') consistent 
with current surveillance procedures for Registered Traders on the 
Exchange. FINRA 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.

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.\5\ 
In particular, the Commission finds that the proposal is consistent 
with Section 6(b)(5) of the Act,\6\ 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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    \5\ 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).
    \6\ 15 U.S.C. 78f(b)(5).
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    Under the proposal, DARTs would be permitted to quote 
electronically in equities and ETFs from off the Exchange's physical 
trading floor. Introducing a new class of market participant able to 
enter quotes from off the physical trading floor should attract new 
market makers to the Exchange, which should increase the liquidity 
available in those classes to which DARTs are assigned.
    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 Exchange represents, and the Commission emphasizes, 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 Committee 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 
Exchange represents, and the Commission emphasizes, 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 an 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 
securities that are on at least one side of the NBBO for a specified 
percentage of the time. A DART's affirmative obligations appear to be 
sufficient to justify the benefits it would receive as a market maker.
    The proposal also requires information barriers to be in place 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. DARTs 
would also be required to comply with Amex Rule 193 regarding the 
misuse of material non-public information.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\7\ that the proposed rule change (SR-Amex-2007-85)  is approved.
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    \7\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
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pursuant to delegated authority.\8\

    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-18727 Filed 9-21-07; 8:45am]

BILLING CODE 8010-01-P