Self-Regulatory Organizations; Notice of Filing of Proposed Change by the American Stock Exchange LLC Relating to Solicitation of Options Transactions

[Federal Register Volume 64, Number 199 (Friday, October 15, 1999)]
[Notices]
[Pages 55998-56000]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26890]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41985; File No. SR-Amex-99-36]


Self-Regulatory Organizations; Notice of Filing of Proposed 
Change by the American Stock Exchange LLC Relating to Solicitation of 
Options Transactions

October 7, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 2, 1999, the 
American Stock Exchange LLC (``Amex'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Amex.\2\ The Commission is publishing 
this notice to solicit comments on the proposed rule change firm 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ The proposal replaces an earlier proposal (File No. SR-Amex-
98-19), which the Amex has withdrawn. See Securities Exchange Act 
Release No. 41864 (September 10, 1999).
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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 Amex Rule 950(d), Commentary .02 to 
provide that a member firm seeking to facilitate its own public 
customer's order or 400 contracts or more will be permitted to 
participate in the firm's proprietary account as the contra-side of 
that order to the extent of at least 25% of the order, provided that no 
public customer order has priority over the facilitation order. If a 
public customer order on the specialist's book or represented in the 
trading crowd has priority over the facilitation order, the member firm 
may participate to the extent of at least 25% of only those contracts 
remaining after the public customer's order has been filled. In 
addition, the Amex proposes to adopt Commentary .04 to Amex Rule 
950(d), which will require members to share information about 
solicited, facilitated, and crossed orders with the trading crowd.

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

[[Page 55999]]

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 
Statutory Basis for, the Proposed Rule Change

(a) Purpose
    The Amex proposes to amend Exchange Rule 950 to provide 25% 
participation right to member firms facilitating customer transactions 
of 400 or more equity option contracts.\3\ Amex Rule 950(d), Commentary 
.02 provides for the execution of facilitation orders.\4\ A member that 
engages in facilitation cross on behalf of its public customer must 
comply with the procedures set forth in Commentary .02.\5\ Other market 
participants may compete only with the member firm order by accepting 
the bid or offer made on behalf of the public customer. Because other 
market participants may not compete with the public customer side of 
the order, use of its facilitation rule assures that the public 
customer's order is executed completely.
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    \3\ For a multi-part or spread order, at least one leg of the 
order must be for 400 contracts or more.
    \4\ Facilitation orders are orders in which a member or member 
organization executes a crossing transaction with an order for a 
public customer. See also Amex Floor Members Circular #89-614 
(facilitation occurs when a member representing an order in options 
agrees to take the contra-side of the transaction or has another 
customer order which he can use to fill the terms of the order.)
    \5\ Commentary .02 permits a member to cross an order for a 
public customer of a member and a facilitation order if the member 
discloses all of the terms of the public customer order, requests 
bids and offers, identifies the order as being subject to 
facilitation, and bids/offers above/below the highest bid/lowest 
offer.
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    According to the Amex, member firms believe that when a member 
seeks to facilitate a large public customer options order with an order 
for the firm's proprietary account, the firm should be able to 
participate to some extent with its customer's order. Therefore, the 
Amex proposes to amend Amex Rule 950(d), Commentary .02 to provide that 
a member firm whose proprietary account is facilitating its own 
customer's options order of 400 contracts or more may participate as 
contra-party to the extent of at least 25% of the trade.\6\ The member 
firm must follow the procedures set forth in Commentary .02 for the 
facilitation of a public customer order to be eligible for the proposed 
participation guarantee.
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    \6\ Amex Rule 904G(e)(iii) provides a similar participation 
right to member firms executing FLEX trades. Specifically, Amex Rule 
904G(e)(iii) permits a Submitting Member to execute 25% of the 
contra-side of the trade where the member has indicated an intention 
to cross or act as principal on the trade and has matched or 
improved the best bid or offer.
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    Under the proposed rule, public customer orders on the specialist's 
book or represented in the crowd will have priority over the member 
firm's guaranteed participation; therefore, a member firm's minimum 
participation will be 25% of the number of contracts remaining after 
public customer orders with priority have been filled. For example, if 
there is a public customer order to buy 250 contracts on the 
specialist's book or represented in the trading crowd, the member firm 
facilitating its customer order to sell 1,000 contracts will have a 
guaranteed 25% participation only on the remaining 750 contracts. In 
addition, if the trading crowd betters the bid or offer, the member 
firm will be given a reasonable opportunity to determine whether the 
member firm wishes to participate and receive the minimum 25% of the 
trade at the crowd's bettered market.
    The Exchange believes that providing a guaranteed 25% participation 
(subject to the limits described above) to member firms seeking to 
facilitate their own public customer orders will provide an incentive 
for member firms to bring large option orders to the floor of the Amex 
rather than to the floor of another options exchange or to the over-
the-counter market. The Amex notes that the Chicago Board Options 
Exchange (``CBOE'') has filed a similar proposal with the 
Commission,\7\ and that other actual and potential options market 
competitors also have announced plans to provide similar participation 
guarantees to member firms.\8\ Thus, the Amex believes that the 
proposed rule change is necessary for it to remain competitive.
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    \7\ See Securities Exchange Act Release No. 41609 (July 8, 
1999), 64 FR 38494 (July 16, 1999) File No. SR-CBOE-99-11) (notice 
of filing of proposed rule change). Under the CBOE's proposal, a 
floor broker seeking to execute an equity option order for 500 
contracts or more (the ``original order'') will have priority to 
cross a specified percentage of the original order against other 
customer orders from the firm that generated the original order of 
the firm that generated the original order.
    \8\ The International Securities Exchange (``ISE'') has applied 
for registration as a national securities exchange under Section 6 
of the Act. See Securities Exchange Act Release No. 41439 (May 24, 
1999), 64 FR 29867 (June 1, 1999). Proposed ISE Rule 716 provides a 
guaranteed participation for a facilitating Electronic Access 
Member.
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    The Exchange also proposes to adopt Amex Rule 950(d), Commentary 
.04 to prohibit the use of non-public information received during the 
facilitation and solicitation processes. The Amex notes that members 
generally solicit participation in large size orders and/or orders with 
more complex terms and conditions, including orders involving both 
stock and options. The facilitation rule provides procedures that allow 
the customer's order to be completely executed and prohibits the 
trading floor from supplanting the customer.
    Because the facilitation and solicitation rules are designed to 
promote the interaction of orders in an open-outcry auction, both rules 
require disclosure of information to the trading crowd to provide the 
crowd with an opportunity to participate in the transaction with the 
facilitating member of the solicited party. These rules impose order 
exposure requirements on floor brokers seeking to cross buy orders and 
sell orders and seek to reconcile these practices with the rules and 
practices of the auction market. The Amex believes that providing 
trading crowds with an opportunity to participate in transaction from 
which they had been excluded results in more competitive markets and 
executions for customers at the best available prices. In furtherance 
of the effort, the Exchange seeks to codify and expand its policy 
prohibiting either a member or a person associated with a member from 
using non-public information for the member's or associated person's 
benefit by trading in the underlying stock or in related instruments. 
Use of such non-public information by the member or associated person 
(regardless of whether that party ultimately completes the options 
transaction) is generally considered conduct inconsistent with just and 
equitable principles of trade.
    Thus, the Amex proposes to adopt Amex Rule 950(d), Commentary .04, 
which states that it may be inconsistent with just and equitable 
principles of trade for any member or person associated with a member, 
who has knowledge of all material terms and condition of (1) an 
originating order and a solicited order, (2) an order being 
facilitated, or (3) orders being crossed, the execution of which are 
imminent, to enter, based on such knowledge, an order to buy or sell an 
option of the same class as any option that is the subject of the 
order, or any order to buy or sell the security underlying such class, 
or an order to buy or sell any related instrument until either (1) all 
the terms of the order and any changes in the terms or condition of the 
order of which the member or associated person has knowledge are 
disclosed to the trading crowd, or (2) the trade can no longer 
reasonably be considered imminent in view of the passage of time

[[Page 56000]]

since the order was received.\9\ The purpose of this policy is to 
prevent members and associated persons from using undisclosed 
information about imminent solicited option transactions to trade the 
relevant option or any closely related instrument in advance of persons 
represented in the trading crowd. Without this prohibition, such 
trading can threaten the integrity of the auction market or 
disadvantage other market participants. Given the similarity between 
the facilitation and solicitation rules, the Amex believes that 
applying the same prohibitions concerning the use of non-public 
information to the facilitation rule is necessary and appropriate to 
prevent similar misuse of such information.
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    \9\ For purposes of Commentary .04, an order to buy or sell a 
``related instrument,'' means, in reference to an index option, an 
order to buy or sell securities comprising 10% or more of the 
component securities in the index or an order to buy or sell a 
futures contract on an economically equivalent index.
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(b) Statutory Basis
    The Amex believes that the proposed rule change is consistent with 
Section 6(b) of the Act, in general, and further the objectives of 
Section 6(b)(5) of the Act, 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 a national market system, 
and, in general, to protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Amex believes that the proposed rule change will impose no 
burden on competition.

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 data 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 by 
order approve such proposed rule change, or 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. 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 will also be 
available for inspection and copying at the principal office of the 
Amex. All submissions should refer to File No. SR-Amex-99-36 and should 
be submitted by November 5, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-26890 Filed 10-14-99; 8:45 am]
BILLING CODE 8010-01-M