Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Change the Method By Which Specialists on the Exchange Execute Odd-Lot Market Orders Under Rule 205-AEMI, 28529-28531 [E7-9659]
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Federal Register / Vol. 72, No. 97 / Monday, May 21, 2007 / Notices
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definition of ‘‘accredited investor,’’
disqualification provisions, and
integration safe harbor and to provide
interpretive guidance regarding
integration;
• To propose revisions to Form D and
mandate electronic filing of Form D; and
• To propose amendments to Rule
144 to revise the holding period for the
resale of restricted securities, simplify
compliance for non-affiliates, revise the
Form 144 filing thresholds, and codify
certain staff interpretations, as well as to
propose amendments to Rule 145.
3. The Commission will consider
whether to adopt rules to implement
provisions of the Credit Rating Agency
Reform Act of 2006.
The subject matter of the Open
Meeting scheduled for Thursday, May
24, 2007 at 9 a.m. will be:
The Commission will hold a
roundtable discussion regarding proxy
voting mechanics.
The subject matter of the Closed
Meeting scheduled for Thursday, May
24, 2007 at 2 p.m. will be.
Formal orders of investigations;
Institution and settlement of
injunctive actions;
Institution and settlement of
administrative proceedings of an
enforcement nature;
Resolution of litigation claims;
Regulatory matter regarding a
financial institution; and
Other matters related to enforcement
proceedings.
The subject matter of the Open
Meeting scheduled for Friday, May 25,
2007 at 9 a.m. will be:
The Commission will hold a
roundtable discussion regarding
proposals of shareholders.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
added, deleted or postponed, please
contact:
The Office of the Secretary at (202)
551–5400.
Dated: May 16, 2007.
Nancy M. Morris,
Secretary.
[FR Doc. E7–9743 Filed 5–18–07; 8:45 am]
15:57 May 18, 2007
[Release No. 34–55762; File No. SR–Amex–
2007–47]
Self-Regulatory Organizations;
American Stock Exchange LLC; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change To Change
the Method By Which Specialists on
the Exchange Execute Odd-Lot Market
Orders Under Rule 205—AEMI
May 15, 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 May 11,
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 Exchange.
Amex has filed this proposal pursuant
to Section 19(b)(3)(A) of the Act 3 and
Rule 19b–4(f)(5) thereunder,4 which
renders it effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to adopt
changes to Rule 205—AEMI in order to
change the method by which specialists
on the Exchange execute odd-lot market
orders.
The text of the proposed rule change
is available on Amex’s Web site at
https://www.amex.com, at the
Exchange’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,
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. Amex has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(5).
BILLING CODE 8010–01–P
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COMMISSION
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is currently operating,
and has adopted rules in connection
with the operation of, its new hybrid
market trading platform for equity
products and exchange-traded funds,
designated as AEMISM (the Auction and
Electronic Market Integration platform).
Rule 205—AEMI (‘‘Manner of Executing
Odd-Lot Orders’’) requires the specialist
for a relevant security to be the contraparty for executions of any odd-lot
orders in that security received by AEMI
and specifies, in relevant part, the
pricing at which such executions must
occur. In the case of odd-lot market
orders that are not executed within 30
seconds of receipt by AEMI, the
specialist is currently required to
execute such orders at the price of the
qualifying national best bid or offer
(‘‘NBBO’’). In order to ensure a fair and
orderly market, the Exchange proposes
to amend Rule 205—AEMI to provide
for such odd-lot market orders to now
be executed at the specialist’s quote,
rather than the NBBO.
(i) How Rule 205—AEMI Works Today
Rule 205—AEMI(b)(i)–(iii) currently
requires the specialist to execute a
market odd-lot order at the price of a
subsequent round-lot execution that
occurs in the subject security on the
Exchange for 30 seconds after the oddlot order is entered. However, a market
odd-lot order is executed at this roundlot price only to the extent that there are
a sufficient number of shares
subsequently transacted in round-lots
on the Exchange within that 30 second
window to match any imbalance
between the pending odd-lot market buy
and sell orders. If there are an
insufficient number of shares in roundlot executions within that 30 seconds
from which to benchmark the market
odd-lot execution price of the
imbalance, Rule 205—AEMI(b)(iv)
dictates that the NBBO be used as the
default price at which the specialist is
required to execute.5
5 Applying the rule, assume AEMI receives
market odd-lot buy orders aggregating 1,500 shares
and market odd-lot sell orders aggregating 3,500
shares in a security. The next and only round-lot
execution on the Amex within the next 30 seconds
is 500 shares at $10, and, at the expiration of the
30 seconds, the NBB is 100 shares at $10.50 on
NYSE. The specialist is required in time priority of
receipt of the odd-lot orders into AEMI to:
• Sell/buy an equal number of shares on each
side of the odd-lot market at $10, which clears the
1,500 shares of odd-lot market buy orders and
Continued
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Federal Register / Vol. 72, No. 97 / Monday, May 21, 2007 / Notices
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(ii) The Identified Deficiency in Rule
205—AEMI
It has become apparent to the
Exchange that the current version of
Rule 205—AEMI (insofar as it forces the
specialist to execute any unexecuted
imbalance in odd-lot orders at the
NBBO) provides too much opportunity
for manipulation to the detriment of
both the specialists and accuracy in
pricing. In practice, the Exchange has
recently observed a high number of oddlot market orders in less liquid
securities and believes that this is a
direct result of the rule’s guarantee of
execution at the NBBO irrespective of
whether the size or timeliness of the
NBBO is comparable to those of the
odd-lot orders on the Exchange. The
Exchange is concerned that off-floor
participants may be breaking up larger
round-lots into multiple odd-lots to take
advantage of NBBO pricing on the
Exchange where such pricing would be
unattainable if the larger orders were
submitted and price discovery was
possible. This behavior would violate
Exchange rules 6 but unfortunately can
be ascertained only via case-by-case
post-trade investigation. Additionally,
in the case of very highly-priced, yet
thinly traded, securities, specialists are
bearing inappropriate burdens as oddlot dealers as well. Below are two
examples of what can occur:
• Assume that an illiquid security has
an average daily volume of 15,000
shares. Assume also that the NBBO is
$5.00 bid for 100 shares on NASDAQ
leaves an imbalance of 2,000 of the original 3,500
shares of odd-lot market sell orders.
• In response to the remaining 2,000 shares of
odd-lot market sell orders, buy a maximum of 500
shares at $10 because that is the total size of
subsequent round-lot transactions within the 30second window. (This assumes that the remaining
odd-lot sell orders with greatest time priority total
500 shares exactly. If a partial execution would
result by stopping the specialist from buying at $10
once the 500 share threshold was reached, then the
specialist could buy more than 500 shares at $10
so as to permit execution in full of the last odd-lot
order at that price. See Rule 205—AEMI(b)(ii).)
• At the expiration of 30 seconds, purchase the
1,500 shares remaining from the odd-lot sell orders
at $10.50 (the NBB), even though the NBB was for
only 100 shares and might not reflect the price at
which the specialist would or should otherwise be
willing to purchase 1,500 shares.
6 See Rule 4 (generally prohibiting manipulation
of securities prices) and Rule 208 (applicable in
AEMI via Rule 1A–AEMI(d)), entitled ‘‘Bunching of
Odd-Lot Orders,’’ which provides in relevant part:
When a person gives, either for his own account,
for various accounts in which he has an actual
monetary interest, or for accounts over which such
person is exercising investment discretion, buy or
sell odd-lot orders which aggregate one or more
round-lots, a member or member organization shall
not accept such orders for execution unless they
are, as far as possible, consolidated into round-lots,
except that selling orders marked ‘‘long’’ or ‘‘short
exempt’’ need not be so consolidated with selling
orders marked ‘‘short.’’
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15:57 May 18, 2007
Jkt 211001
and 500 shares offered at $5.10 on
NYSE. The liquidity around the NBBO
is very thin, and no round-lot
executions have taken place over the
last four hours, during which period
Amex nonetheless receives many oddlot market orders. In accordance with
Rule 205—AEMI, each odd-lot order is
executed after 30 seconds against the
specialist at the NBBO automatically,
although the specialist is not quoting at
the NBBO, the NBBO has not changed,
and no round-lot trades have occurred
in the marketplace. Over the course of
the four hours, the specialist is forced to
purchase an aggregate of 10,553 shares
in odd-lots, each at a price of $5.00,
even though grossly disproportionate to
the 100 share order size connected to
the $5.00 NBB, the overall activity in
the marketplace, and the likely lower
value at which an equivalent aggregate
volume of round lots would have
transacted in such an illiquid market.
As such, the specialist is forced to bear
an inappropriate amount of risk of loss
as odd-lot dealer because, rather than
price discovery being permitted to occur
as would occur with round-lot quotes,
the specialist is forced to purchase all of
the odd-lots at the stale NBBO price.
• Assume a very highly-priced thinlytraded security with an NBBO of 100
shares bid for $800 on NASDAQ and
100 shares offered at $806 on NYSE.
Because of the high price of the shares,
round-lot executions are infrequent and
no round-lot executions have taken
place on Amex over the last four hours.
Nonetheless, Amex receives multiple
odd-lot market sale orders aggregating
367 shares over that time period. In
accordance with Rule 205—AEMI, each
odd-lot order is executed after 30
seconds against the specialist at $800,
and, over the course of the four hours,
the specialist is forced to purchase an
aggregate of 367 shares in odd-lots at
$800 per share for $293,600. Because of
the high stock price, the absence of
price discovery amplifies the costs to
the specialist in the event of disparity
between the stale NBBO and the true
value of the security. Had the
mandatory $800 bid been reduced by a
mere 0.5% (to $796)—to reflect what a
hypothetical reasonable investor would
pay for a thinly-traded $800 security
with an imbalance of sell interest in the
market—the aggregate outlay would be
$1468 less.
(iii) The Solution
As described above, the Exchange
believes that the way odd-lot market
orders are currently being executed
today (only insofar as the NBBO price
is imposed under Rule 205—
AEMI(b)(i)–(iv) as a default price upon
PO 00000
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the specialists in the absence of a
sufficient number of round-lot order
executions on the Exchange within 30
seconds of each odd-lot market order) is
inconsistent with the specialists’
obligations to quote and maintain a fair
and orderly market. Moreover, odd-lot
orders are not subject to the Limit Order
Display Rule 7 or Order Protection Rule 8
under Regulation NMS and do not have
the same standing as round-lot orders
with regard to price protection.
Accordingly, the Exchange proposes to
change the default price in Rule 205—
AEMI(b) under which specialists are
required to execute odd-lot market
orders not executed within 30 seconds
after receipt by AEMI from the NBBO to
the specialist’s own best bid or offer.
The Exchange believes that this
proposal properly balances a more
reasonable level of risk exposure for the
specialists with their obligation to trade
odd lots and deliver timely executions
to investors. In particular, the proposal
would permit price discovery to occur
(via programmed automated
adjustments flowing from executions
against the specialist’s quote) while still
requiring the specialist to provide
timely executions of odd-lot market
orders. As such, executions of odd lots
on the Exchange will be more likely to
occur at prices which reflect the most
current market conditions. In this
regard, the Exchange points out that
specialists are specifically required by
Exchange rules to formulate quotes to
avoid wide swings in the pricing of
prior and subsequent transactions,9 so
the substitution of the specialist’s quote
for the NBBO in Rule 205—AEMI is not
intended to, and should not result in,
unreasonably priced executions of oddlot market orders.
*
*
*
*
*
The proposed rule change would
result in the following textual changes
in Rule 205—AEMI:
• Substitution of the words
‘‘specialist’s best bid’’ and ‘‘specialist’s
best offer’’ for ‘‘qualified national best
bid’’ and ‘‘qualified national best offer’’
where such terms appear in the rule.
• Removal of Commentary .04 to the
rule, which deals solely with explaining
the definition of ‘‘qualified national best
bid or offer,’’ which will no longer be
relevant to Rule 205—AEMI.
7 17
CFR 242.604.
CFR 242.611.
9 Commentary .03 to Rule 170—AEMI provides in
relevant part: ‘‘A specialist’s quotation, made for his
own account, should be such that a transaction
effected at his quoted price or within the quoted
spread * * * would bear a proper relation to
preceding transactions and anticipated succeeding
transactions or, in the case of ETFs or other
derivatively priced securities, to the value of
underlying or related securities.’’
8 17
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Federal Register / Vol. 72, No. 97 / Monday, May 21, 2007 / Notices
2. Statutory Basis
Electronic Comments
The proposed rule change is designed
to be consistent with Section 6(b) of the
Act,10 in general, and furthers the
objectives of Section 6(b)(5) of the Act,11
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.
• Use the Commission’s Internet
comment form at https://www.sec.gov/
rules/sro.shtml; or
• Send an e-mail to
rule-comments@sec.gov. Please include
File No. SR–Amex–2007–47 on the
subject line.
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
Because the proposed rule change
does not: (1) Significantly affect the
protection of investors or the public
interest; (2) impose any significant
burden on competition; and (3) have the
effect of limiting the access to or
availability of an existing order entry or
trading system of the Exchange, the
foregoing rule change has become
effective immediately pursuant to
Section 19(b)(3)(A)(iii) of the Act 12 and
Rule 19b–4(f)(5) thereunder.13 At any
time within 60 days of the filing of such
proposed rule change, the Commission
may summarily abrogate such rule
change if it appears to the Commission
that such action is necessary or
appropriate in the public interest, for
the protection of investors, or otherwise
in the furtherance of the purposes of the
Act.
pwalker on PROD1PC71 with NOTICES
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:
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–2007–47. 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 (https://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 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–2007–47 and should be
submitted on or before June 11, 2007.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.14
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E7–9659 Filed 5–18–07; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–55764; File No. SR–ISE–
2007–18]
Self-Regulatory Organizations;
International Securities Exchange,
LLC.; Order Approving Proposed Rule
Change Relating to Information
Regarding Customer Interest on the
Book
May 15, 2007.
I. Introduction
On March 5, 2007, the International
Securities Exchange, LLC (‘‘ISE’’ 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 proposed rule change to
allow the ISE to make available to all
ISE members information regarding the
quantity of public customer contracts
included in the ISE’s highest bid and
lowest offer. The proposed rule change
was published for comment in the
Federal Register on April 12, 2007.3
The Commission received no comments
regarding the proposal. This order
approves the proposed rule change.
II. Description of the Proposal
Currently, the ISE provides
information regarding the quantity of
public customer contracts at the ISE’s
best bid and best offer (‘‘BBO’’) only to
Primary Market Makers (‘‘PMMs’’). The
ISE proposes to adopt ISE Rule 713,
Supplementary Material .04, to allow
the ISE to make such information
available to all ISE members. According
to the ISE, the Chicago Board Options
Exchange (‘‘CBOE’’) currently provides
its members with information regarding
customer interest at the CBOE’s BBO.
The ISE believes that it is necessary to
provide its members with similar
information to remain competitive with
the CBOE. In addition, the ISE notes
that the information would allow an ISE
member to know the number of
customer contracts it would need to
satisfy before the member could cross a
large block-sized order. The ISE believes
that such information is particularly
useful for members seeking to execute
larger-sized orders through the ISE’s
block and facilitation mechanisms.4
In addition, the proposal corrects
several cross-references in ISE Rule
713(a).
1 15
10 15
U.S.C. 78f(b).
11 15 U.S.C. 78f(b)(5).
12 15 U.S.C. 78s(b)(3)(A)(iii).
13 17 CFR 240.19b–4(f)(5).
VerDate Aug<31>2005
15:57 May 18, 2007
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 55589
(April 5, 2007), 72 FR 18498.
4 See ISE Rule 716.
2 17
14 17
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CFR 200.30–3(a)(12).
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]]>Agencies
[Federal Register Volume 72, Number 97 (Monday, May 21, 2007)]
[Notices]
[Pages 28529-28531]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-9659]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55762; File No. SR-Amex-2007-47]
Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Change the Method By Which Specialists on the Exchange Execute Odd-Lot
Market Orders Under Rule 205--AEMI
May 15, 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 May 11, 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
Exchange. Amex has filed this proposal pursuant to Section 19(b)(3)(A)
of the Act \3\ and Rule 19b-4(f)(5) thereunder,\4\ which renders it
effective upon filing with the Commission. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(5).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt changes to Rule 205--AEMI in order
to change the method by which specialists on the Exchange execute odd-
lot market orders.
The text of the proposed rule change is available on Amex's Web
site at https://www.amex.com, at the Exchange'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, 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. 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
The Exchange is currently operating, and has adopted rules in
connection with the operation of, its new hybrid market trading
platform for equity products and exchange-traded funds, designated as
AEMISM (the Auction and Electronic Market Integration
platform). Rule 205--AEMI (``Manner of Executing Odd-Lot Orders'')
requires the specialist for a relevant security to be the contra-party
for executions of any odd-lot orders in that security received by AEMI
and specifies, in relevant part, the pricing at which such executions
must occur. In the case of odd-lot market orders that are not executed
within 30 seconds of receipt by AEMI, the specialist is currently
required to execute such orders at the price of the qualifying national
best bid or offer (``NBBO''). In order to ensure a fair and orderly
market, the Exchange proposes to amend Rule 205--AEMI to provide for
such odd-lot market orders to now be executed at the specialist's
quote, rather than the NBBO.
(i) How Rule 205--AEMI Works Today
Rule 205--AEMI(b)(i)-(iii) currently requires the specialist to
execute a market odd-lot order at the price of a subsequent round-lot
execution that occurs in the subject security on the Exchange for 30
seconds after the odd-lot order is entered. However, a market odd-lot
order is executed at this round-lot price only to the extent that there
are a sufficient number of shares subsequently transacted in round-lots
on the Exchange within that 30 second window to match any imbalance
between the pending odd-lot market buy and sell orders. If there are an
insufficient number of shares in round-lot executions within that 30
seconds from which to benchmark the market odd-lot execution price of
the imbalance, Rule 205--AEMI(b)(iv) dictates that the NBBO be used as
the default price at which the specialist is required to execute.\5\
[[Page 28530]]
(ii) The Identified Deficiency in Rule 205--AEMI
---------------------------------------------------------------------------
\5\ Applying the rule, assume AEMI receives market odd-lot buy
orders aggregating 1,500 shares and market odd-lot sell orders
aggregating 3,500 shares in a security. The next and only round-lot
execution on the Amex within the next 30 seconds is 500 shares at
$10, and, at the expiration of the 30 seconds, the NBB is 100 shares
at $10.50 on NYSE. The specialist is required in time priority of
receipt of the odd-lot orders into AEMI to:
Sell/buy an equal number of shares on each side of the
odd-lot market at $10, which clears the 1,500 shares of odd-lot
market buy orders and leaves an imbalance of 2,000 of the original
3,500 shares of odd-lot market sell orders.
In response to the remaining 2,000 shares of odd-lot
market sell orders, buy a maximum of 500 shares at $10 because that
is the total size of subsequent round-lot transactions within the
30-second window. (This assumes that the remaining odd-lot sell
orders with greatest time priority total 500 shares exactly. If a
partial execution would result by stopping the specialist from
buying at $10 once the 500 share threshold was reached, then the
specialist could buy more than 500 shares at $10 so as to permit
execution in full of the last odd-lot order at that price. See Rule
205--AEMI(b)(ii).)
At the expiration of 30 seconds, purchase the 1,500
shares remaining from the odd-lot sell orders at $10.50 (the NBB),
even though the NBB was for only 100 shares and might not reflect
the price at which the specialist would or should otherwise be
willing to purchase 1,500 shares.
---------------------------------------------------------------------------
It has become apparent to the Exchange that the current version of
Rule 205--AEMI (insofar as it forces the specialist to execute any
unexecuted imbalance in odd-lot orders at the NBBO) provides too much
opportunity for manipulation to the detriment of both the specialists
and accuracy in pricing. In practice, the Exchange has recently
observed a high number of odd-lot market orders in less liquid
securities and believes that this is a direct result of the rule's
guarantee of execution at the NBBO irrespective of whether the size or
timeliness of the NBBO is comparable to those of the odd-lot orders on
the Exchange. The Exchange is concerned that off-floor participants may
be breaking up larger round-lots into multiple odd-lots to take
advantage of NBBO pricing on the Exchange where such pricing would be
unattainable if the larger orders were submitted and price discovery
was possible. This behavior would violate Exchange rules \6\ but
unfortunately can be ascertained only via case-by-case post-trade
investigation. Additionally, in the case of very highly-priced, yet
thinly traded, securities, specialists are bearing inappropriate
burdens as odd-lot dealers as well. Below are two examples of what can
occur:
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\6\ See Rule 4 (generally prohibiting manipulation of securities
prices) and Rule 208 (applicable in AEMI via Rule 1A-AEMI(d)),
entitled ``Bunching of Odd-Lot Orders,'' which provides in relevant
part:
When a person gives, either for his own account, for various
accounts in which he has an actual monetary interest, or for
accounts over which such person is exercising investment discretion,
buy or sell odd-lot orders which aggregate one or more round-lots, a
member or member organization shall not accept such orders for
execution unless they are, as far as possible, consolidated into
round-lots, except that selling orders marked ``long'' or ``short
exempt'' need not be so consolidated with selling orders marked
``short.''
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Assume that an illiquid security has an average daily
volume of 15,000 shares. Assume also that the NBBO is $5.00 bid for 100
shares on NASDAQ and 500 shares offered at $5.10 on NYSE. The liquidity
around the NBBO is very thin, and no round-lot executions have taken
place over the last four hours, during which period Amex nonetheless
receives many odd-lot market orders. In accordance with Rule 205--AEMI,
each odd-lot order is executed after 30 seconds against the specialist
at the NBBO automatically, although the specialist is not quoting at
the NBBO, the NBBO has not changed, and no round-lot trades have
occurred in the marketplace. Over the course of the four hours, the
specialist is forced to purchase an aggregate of 10,553 shares in odd-
lots, each at a price of $5.00, even though grossly disproportionate to
the 100 share order size connected to the $5.00 NBB, the overall
activity in the marketplace, and the likely lower value at which an
equivalent aggregate volume of round lots would have transacted in such
an illiquid market. As such, the specialist is forced to bear an
inappropriate amount of risk of loss as odd-lot dealer because, rather
than price discovery being permitted to occur as would occur with
round-lot quotes, the specialist is forced to purchase all of the odd-
lots at the stale NBBO price.
Assume a very highly-priced thinly-traded security with an
NBBO of 100 shares bid for $800 on NASDAQ and 100 shares offered at
$806 on NYSE. Because of the high price of the shares, round-lot
executions are infrequent and no round-lot executions have taken place
on Amex over the last four hours. Nonetheless, Amex receives multiple
odd-lot market sale orders aggregating 367 shares over that time
period. In accordance with Rule 205--AEMI, each odd-lot order is
executed after 30 seconds against the specialist at $800, and, over the
course of the four hours, the specialist is forced to purchase an
aggregate of 367 shares in odd-lots at $800 per share for $293,600.
Because of the high stock price, the absence of price discovery
amplifies the costs to the specialist in the event of disparity between
the stale NBBO and the true value of the security. Had the mandatory
$800 bid been reduced by a mere 0.5% (to $796)--to reflect what a
hypothetical reasonable investor would pay for a thinly-traded $800
security with an imbalance of sell interest in the market--the
aggregate outlay would be $1468 less.
(iii) The Solution
As described above, the Exchange believes that the way odd-lot
market orders are currently being executed today (only insofar as the
NBBO price is imposed under Rule 205--AEMI(b)(i)-(iv) as a default
price upon the specialists in the absence of a sufficient number of
round-lot order executions on the Exchange within 30 seconds of each
odd-lot market order) is inconsistent with the specialists' obligations
to quote and maintain a fair and orderly market. Moreover, odd-lot
orders are not subject to the Limit Order Display Rule \7\ or Order
Protection Rule \8\ under Regulation NMS and do not have the same
standing as round-lot orders with regard to price protection.
Accordingly, the Exchange proposes to change the default price in Rule
205--AEMI(b) under which specialists are required to execute odd-lot
market orders not executed within 30 seconds after receipt by AEMI from
the NBBO to the specialist's own best bid or offer.
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\7\ 17 CFR 242.604.
\8\ 17 CFR 242.611.
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The Exchange believes that this proposal properly balances a more
reasonable level of risk exposure for the specialists with their
obligation to trade odd lots and deliver timely executions to
investors. In particular, the proposal would permit price discovery to
occur (via programmed automated adjustments flowing from executions
against the specialist's quote) while still requiring the specialist to
provide timely executions of odd-lot market orders. As such, executions
of odd lots on the Exchange will be more likely to occur at prices
which reflect the most current market conditions. In this regard, the
Exchange points out that specialists are specifically required by
Exchange rules to formulate quotes to avoid wide swings in the pricing
of prior and subsequent transactions,\9\ so the substitution of the
specialist's quote for the NBBO in Rule 205--AEMI is not intended to,
and should not result in, unreasonably priced executions of odd-lot
market orders.
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\9\ Commentary .03 to Rule 170--AEMI provides in relevant part:
``A specialist's quotation, made for his own account, should be such
that a transaction effected at his quoted price or within the quoted
spread * * * would bear a proper relation to preceding transactions
and anticipated succeeding transactions or, in the case of ETFs or
other derivatively priced securities, to the value of underlying or
related securities.''
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* * * * *
The proposed rule change would result in the following textual
changes in Rule 205--AEMI:
Substitution of the words ``specialist's best bid'' and
``specialist's best offer'' for ``qualified national best bid'' and
``qualified national best offer'' where such terms appear in the rule.
Removal of Commentary .04 to the rule, which deals solely
with explaining the definition of ``qualified national best bid or
offer,'' which will no longer be relevant to Rule 205--AEMI.
[[Page 28531]]
2. Statutory Basis
The proposed rule change is designed to be consistent with Section
6(b) of the Act,\10\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\11\ 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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\10\ 15 U.S.C. 78f(b).
\11\ 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
Because the proposed rule change does not: (1) Significantly affect
the protection of investors or the public interest; (2) impose any
significant burden on competition; and (3) have the effect of limiting
the access to or availability of an existing order entry or trading
system of the Exchange, the foregoing rule change has become effective
immediately pursuant to Section 19(b)(3)(A)(iii) of the Act \12\ and
Rule 19b-4(f)(5) thereunder.\13\ At any time within 60 days of the
filing of such proposed rule change, the Commission may summarily
abrogate such rule change if it appears to the Commission that such
action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in the furtherance of the
purposes of the Act.
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\12\ 15 U.S.C. 78s(b)(3)(A)(iii).
\13\ 17 CFR 240.19b-4(f)(5).
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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 at https://
www.sec.gov/rules/sro.shtml; or
Send an e-mail to rule-comments@sec.gov. Please include
File No. SR-Amex-2007-47 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-2007-47. 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 (https://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 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-2007-47 and should be submitted on or before June 11,
2007.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E7-9659 Filed 5-18-07; 8:45 am]
BILLING CODE 8010-01-P
