Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC, 34323-34325 [E7-12015]


[Federal Register: June 21, 2007 (Volume 72, Number 119)]
[Page 34323-34325]
From the Federal Register Online via GPO Access []



[Release No. 34-55913; File No. SR-Amex-2007-13]

Self-Regulatory Organizations; American Stock Exchange LLC; Order
Approving Proposed Rule Change as Modified by Amendment No. 1 Relating
to the Codification of Exchange Policy Regarding Specialist Commissions

June 15, 2007.

I. Introduction

    On January 29, 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
proposed rule change to amend Amex Rule 154--AEMI and Amex Rule 154--
AEMI-One to expand the scope of its rules that specify when specialists
may charge commissions. The proposed rule change was published for
comment in the Federal Register on April 2, 2007.\3\ The Commission
received three comment letters regarding the proposal.\4\ On May 29,
2007, Amex filed Amendment No. 1 to the proposed rule change.\5\ This
order approves the proposed rule change, as modified by Amendment No.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 55533 (March 26,
2007), 72 FR 15733.
    \4\ See letters to Nancy M. Morris, Secretary, Commission, from
Samuel F. Lek, Lek Securities Corporation, dated April 26, 2007
(``Lek Letter''); from Jonathan Q. Frey, Managing Partner, J.
Streicher & Co. L.L.C., Brendan E. Cryan, Brendan E. Cryan and
Company, LLC, Robert B. Nunn, Cohen Specialists LLC, and Michael
Marchisi, AIM Specialists, dated April 17, 2007 (``Equity Specialist
Firms Letter''); and from Jerry O'Connell, Chief Regulatory Officer,
Susquehanna Investment Group, to, dated February 13, 2007
(``Susquehanna Letter'').
    \5\ In Amendment No. 1, Amex removed all references to Amex Rule
154--AEMI-One in the proposed rule change because the AEMI-One rules
have been replaced by the AEMI rules. This is a technical amendment
and is not subject to notice and comment.

II. Description

    The Exchange proposes to adopt Amex Rule 154-AEMI(k) to prohibit
specialists from charging a commission for orders or portions of orders
that have not been executed. The proposed rule would extend the
prohibitions on specialist commissions contained in Amex Rule 154(b) to
Exchange-Traded Funds (``ETFs'') and equities trading on the AEMI
System. These restrictions prohibit specialists from (i) charging a
commission on off floor orders that are electronically delivered to the
specialist except in cases of orders that require special handling by
the specialist or for which the specialist provides a service, and (ii)
billing customers for electronically delivered orders that are executed
automatically by the Exchange's order processing facilities upon
receipt. In addition, proposed Rule 154-AEMI(k) would reference Rule
152-AEMI(c), which prohibits specialists from charging a commission
where they act as principal in the execution of an order entrusted to
them as agent. Lastly, the proposed rule sets forth the types of orders
specialists would be allowed to bill a commission. These orders would
include: (i) Limit orders that remain on the book for more than two
minutes; (ii) tick sensitive orders (e.g., an order to sell short in a
security subject to the Commission's ``tick-test''); (iii) stop or stop
limit orders; (iv) fill-or-kill and immediate-or-

[[Page 34324]]

cancel orders; and (v) orders for the account of a competing market

III. Summary of Comments

    The Commission received three comment letters regarding the
proposed rule change. One comment letter, submitted by Lek Securities
Corporation, supported the proposed rule change, agreeing with the
Exchange's rationale for the proposed rule change.\6\ In this regard,
the commenter asserted that commissions on cancellations are
particularly harmful to fair and orderly markets'' and that
cancellation fees ``amount to a tax or toll on an instrumentality of
the exchange.'' \7\ This commenter also asserted that permitting a
specialist ``to bill for transactions that involve no work sanctions an
abuse of the specialist's privileged position.'' \8\

    \6\ See Lek Letter at 2.
    \7\ Id. at 2.
    \8\ Id. at 3.

    Another comment letter, submitted by a group of equity specialist
firms active on Amex, stated that they are not taking a position
regarding the ``substantive terms'' of the proposed rule change but,
rather, are expressing ``strong disagreement with the Exchange's stated
rationale'' for the proposed rule change.\9\ The specialist firms noted
that Amex's stated rationale for the proposed rule change is that
``specialist commissions weaken the Exchange's competitive position.''
\10\ The specialist firms suggested that, rather than focusing on
costs, the focus should be on whether specialists bring value in excess
of their costs.\11\ These specialist firms also suggested that it
``might be more productive for the Amex to focus on reducing its own
rather more significant costs rather than specialist commissions.''

    \9\ See Equity Specialist Firms Letter at 1.
    \10\ Id. at 1-2.
    \11\ Id. at 2-4.
    \12\ Id. at 2.

    The third comment letter, submitted by Susquehanna, opposed the
Exchange's proposal. Susquehanna, in particular, expressed concern
about the timing of the proposal, as it believed ``exponential
increases in order and cancel volume levels are expected with the
implementation of Regulation NMS.'' \13\ Susquehanna asserted that
these increased levels of volume on the Exchange could have a
significant impact on the ability of specialists to fulfill their
agency obligations.\14\ In this regard, Susquehanna asserted that the
Exchange should not eliminate the ability of specialists ``to charge
for providing agency functions'' until the Exchange determines whether
the increased order and cancel volume levels significantly affect the
ability of specialists to perform their agency obligations.\15\
Susquehanna also requested that ``[i]f this proposal is approved * * *
any specialist agency responsibility for orders and cancels on AEMI be
set forth so that the respective specialist is duly advised as to such
attendant obligations.'' \16\

    \13\ See Susquehanna Letter at 1-2.
    \14\ Id. at 1-3.
    \15\ Id. at 2-4.
    \16\ Id. at 4.

IV. Discussion

    The Commission has carefully reviewed the proposed rule change and
the comment letters received, and the Commission finds that the
proposed rule change is consistent with the requirements of Section 6
of the Act \17\ and the rules and regulations thereunder applicable to
a national securities exchange.\18\ In particular, the Commission finds
that the proposal is consistent with Section 6(b)(5) of the Act,\19\
because it is designed 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. The Commission also believes that
the proposed rule change is consistent with Section 11(A)(a)(1)(C) of
the Act \20\ which states that it is in the public interest and
appropriate for the protection of investors and the maintenance of fair
and orderly markets to assure, among other things, economically
efficient execution of securities transactions, and fair competition
among brokers and dealers, among exchange markets, and between exchange
markets and markets other than exchange markets.

    \17\ 15 U.S.C. 78f.
    \18\ In approving this proposed rule change the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ 15 U.S.C. 78k-1(a)(1)(C).

    The Commission notes that it previously approved a substantially
similar Amex rule that prohibited specialist commissions for equities
traded on the Exchange's legacy system.\21\ The Exchange is now
proposing to: (i) Apply the prohibition on specialist commissions to
equities and ETFs traded on the AEMI System; (ii) expand the
prohibition on specialist commissions to market at the close orders and
limit at the close order; and (iii) specify that specialist commissions
can only be charged for orders that are executed and not for orders
that are cancelled or expire unexecuted. One commenter, Susquehanna,
expressed concern about the timing of the proposal in light of the
implementation of Regulation NMS.\22\ The Commission notes that Amex-
traded equities and ETFs have been trading on the AEMI System, which
the Exchange designed to comply with Regulation NMS, since February 5,
2007, a period of nearly four months. In response to Susquehanna's
request that it be advised of its specialist agency responsibilities
for orders and cancels on AEMI if the proposed rule change is
approved,\23\ the Commission notes that its approval of the proposed
rule change does not change a specialist's agency responsibilities
under the federal securities laws or agency law principles.

    \21\ See Securities Exchange Act Release No. 55008 (December 22,
2006), 72 FR 597 (January 5, 2007) (Approval of amendment to Amex
Rule 154 regarding prohibition of specialist commissions for equity
orders). The Commission also approved a rule prohibiting specialist
commissions on options orders. See Securities Exchange Act Release
No. 51235 (February 22, 2005), 70 FR 9687 (February 28, 2005)
(Approval of CBOE Rule 8.85(b)(iv)). The New York Stock Exchange,
Inc. (``NYSE'') recently adopted a rule prohibiting specialists from
charging commissions on orders in their speciality securities. See
Securities Exchange Act Release No. 54850 (November 30, 2006), 71 FR
71217 (December 8, 2006) (Notice of Filing and Immediate
Effectiveness of Amendments to NYSE Rule 123B and Adoption of NYSE
Rule 104B).
    \22\ See Susquehanna Letter at 1-2.
    \23\ Id. at 4.

    In addition, the Commission finds that the proposal is consistent
with Section 6(e)(1) of the Act,\24\ because it is not designed to
permit unfair discrimination between customers, issuers, brokers and
dealers, or to impose any schedule or fix rates of commissions,
allowances, discounts, or other fees to be charged by its members.
Section 6(e) of the Act \25\ was adopted by Congress in 1975 to
statutorily prohibit the fixed minimum commission rate system. As noted
on a report of the House of Representatives one of the purposes of the
legislation was to ``reverse the industry practice of charging fixed
rates of commission for transaction on the securities exchanges.'' \26\
The fixed minimum commission rate system allowed exchanges to set
minimum commission rates that their members had to charge their
customers, but allowed members to charge more. Amex's proposal, by
contrast, does not establish a minimum commission rate, but instead
prohibits the Exchange's specialists from charging a commission for
handling an equity

[[Page 34325]]

order that is executed on an opening or reopening or an equity order
(or portion thereof) that is executed against the specialist as
principal, or for the execution of an off-floor equities order
delivered to the specialist through the Exchange's electronic order
routing systems, subject to certain exceptions. Accordingly, the
Commission does not believe that the Amex's proposal constitutes fixing
commissions, allowances, discounts, or other fees for purposes of
Section 6(e)(1) of the Act.\27\ The Commission also notes that Amex's
limits on fees that specialists may charge applies only to members who
choose to be specialists on Amex. By limiting fees, the Amex is merely
imposing a condition, which is consistent with the Act, on a member's
appointment as a specialist.

    \24\ 15 U.S.C. 78f(e)(1).
    \25\ U.S.C. 78f(e).
    \26\ H.R. Rep. No. 94-123, 94th Cong., 1st Sess. 42 (1975).
    \27\ 15 U.S.C. 78f(e)(1).

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with Sections 6(b)(5) and 6(e)(1) of the Act.\28\

    \28\ 15 U.S.C. 78f(b)(5) and 78f(e)(1).

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed rule change (SR-Amex-2007-13), as modified
by Amendment No. 1, is approved.

    \29\15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\30\

    \30\ 17 CFR 200.30-3(a)(12).

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-12015 Filed 6-20-07; 8:45 am]