Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Require That the AEMI Trading Platform Function To Assure Compliance With the Exchange's Priority and Parity Rules, 55262-55264 [E7-19163]
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55262
Federal Register / Vol. 72, No. 188 / Friday, September 28, 2007 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–56495; File No. SR–Amex–
2007–105]
Self-Regulatory Organizations;
American Stock Exchange LLC; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change To Require
That the AEMI Trading Platform
Function To Assure Compliance With
the Exchange’s Priority and Parity
Rules
September 21, 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
September 18, 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 prepared substantially by the
Amex. The Amex has designated the
proposed rule change as one
constituting a stated policy, practice, or
interpretation with respect to the
meaning, administration, or
enforcement of an existing rule under
section 19(b)(3)(A)(i) of the Act 3 and
Rule 19b–4(f)(1) thereunder,4 which
renders the proposal 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
In compliance with a Commission
order in a recent administrative
proceeding,5 the Amex proposes to
adopt new Commentary .06 to Amex
Rule 126–AEMI, ‘‘Precedence of Bids
and Offers,’’ to provide that the Amex’s
new hybrid trading platform for equity
products and exchange-traded funds
(‘‘ETFs’’), designated as AEMISM
(‘‘AEMI’’), shall function at all times in
a manner that assures compliance with
the Amex’s priority and parity rules. In
particular, AEMI shall systemically
prevent a Specialist attempting to
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(i).
4 17 CFR 240.19b–4(f)(1).
5 See In the Matter of American Stock Exchange
LLC, Order Instituting Administrative and Ceaseand-Desist Proceedings, Making Findings, and
Imposing Remedial Sanctions, a Censure, and a
Cease-and-Desist Order Pursuant to Sections
19(h)(1) and 21C of the Securities Exchange Act of
1934, Securities Exchange Act Release No. 55507
(March 22, 2007) (Administrative Proceeding File
No. 3–12594) (‘‘Settlement Order’’).
jlentini on PROD1PC65 with NOTICES
2 17
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execute his/her proprietary order from
trading ahead of a customer order in the
Specialist’s possession or for which the
Specialist otherwise has responsibility
and which customer order could trade
in place of some or all of the Specialist’s
side of the trade, unless the trade meets
a specified exemption in the Exchange’s
rules.
The proposed rule change is available
at the Amex, in the Commission’s
Public Reference Room, and on the
Amex’s Web site at http://
www.amex.com.
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
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is proposing to add to
its AEMI rules a provision requiring that
the AEMI platform function at all times
in a manner that assures compliance
with the Exchange’s priority and parity
rules. More specifically, AEMI must
ensure that, when a Specialist is in the
process of executing his/her proprietary
order while a customer order in the
Specialist’s possession or for which the
Specialist otherwise has responsibility
could trade in place of some or all of the
Specialist’s side of the trade, AEMI will
systemically (i) prevent the reporting of
the execution, and (ii) allocate the
appropriate portion of the Specialist’s
trade to the customer order, unless the
trade meets a specified exemption in the
Exchange’s rules and has thereby been
programmed into the AEMI system as an
allowable trade. All of the Exchange’s
priority and parity rules for equity
products and ETFs are pre-programmed
into AEMI and may not be disabled or
otherwise changed by the Specialist or
any other market participant. The
provision with the foregoing
requirements is being added as new
Commentary .06 to Amex Rule 126–
AEMI.6
6 As noted above, the Amex is making this rule
filing in compliance with the Settlement Order. See
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The Exchange believes that the new
AEMI platform, as currently operational,
does in fact meet the foregoing
requirements.7 The implementation of
AEMI, whose operation has been
described in detail in previous filings,
goes well beyond simply adding
enhancements to the Amex’s legacy
trading systems to bring the Exchange
into compliance. AEMI is an entirely
new trading platform whose design and
operation will, in transactions involving
equity products and ETFs,8 prevent
Specialists from violating the
Exchange’s priority and parity rules in
ways that the Amex’s legacy systems
could not.
Under normal circumstances, when
auto-ex is enabled in AEMI, incoming
orders are executed against resting
orders on the AEMI Book in accordance
with the Exchange’s priority and parity
rules that are pre-programmed into the
system. The system also permits manual
trades to occur when auto-ex is enabled
in the form of negotiated trades
(between two crowd members), crosses
in the crowd (one crowd member), and
auctions (between multiple crowd
members). When auto-ex is disabled,
only auctions performed by the
Specialists may occur (see discussion of
auctions below).
The following illustrates the steps
involved in negotiated trades, which
have been relatively infrequent during
the first few months that AEMI has been
in effect. Suppose two Floor Brokers
negotiate the terms of a trade between
them while standing in the crowd. They
would then verbally request that the
Specialist enter the trade into AEMI.
Within a few seconds, the Specialist
note 5, supra. The Amex has withdrawn its original
filing with respect to this proposed rule change,
SR–Amex–2007–50, which the Amex filed on May
21, 2007, and is replacing it with the current rule
filing.
7 There are two exceptions to this statement that
the Amex has recently become aware of and that the
Amex is working to correct in the near future. First,
there are certain circumstances immediately
following the opening or reopening pair-off in an
equity or ETF under which the Specialist’s
quotation could be routed out to execute against a
better priced protected quotation of another market
ahead of a marketable customer order on the AEMI
Book. Secondly, the Exchange’s rules provide for a
post-opening pair-off of marketable orders held in
the message queue during the opening pair-off. This
post-opening pair-off is handled by the AEMI
system in such a way that it could result in the
Specialist’s quote being executed ahead of
marketable customer orders on the AEMI Book.
Although the Amex does not believe that either of
these situations occurs with any frequency and the
Specialist has no ability to direct their occurrence,
the Exchange is currently working to implement in
a timely manner the software changes necessary to
correct these system flaws and will make an
additional rule filing at the time that the corrections
become effective.
8 Options are not traded on AEMI at this time.
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Federal Register / Vol. 72, No. 188 / Friday, September 28, 2007 / Notices
would enter the badge identifiers of
both Floor Brokers along with the terms
of the trade (price and number of shares)
into AEMI and click the ‘‘GO’’ button,
during which time the two Floor
Brokers would be physically present. It
would be very obvious to these Floor
Brokers, and to other crowd members as
well, if the Specialist were to attempt to
delay the entry of the order into AEMI
or take other action that would
disadvantage the parties to the
negotiated trade and benefit the
Specialist (e.g., moving his quotation).
AEMI would automatically validate that
the trade meets all required parameters
(e.g., the trade price relative to the
Amex Published Quote (‘‘APQ’’)) and, if
so, accepts the trade into AEMI for
execution. If the price of the trade is
outside the national best bid or offer
(‘‘NBBO’’), then intermarket sweep
orders are immediately generated as
required to execute against the protected
quotations of away markets, while the
balance of the order prints on the Amex
and is allocated based on the Exchange’s
priority and parity rules. In that
allocation, electronic orders and
quotations that already exist on the
AEMI Book at the price of the verbal
trade have priority over the verbal trade
that has just been accepted by AEMI for
execution. Following the allocation,
AEMI will send a trade execution
message to each Floor Broker’s hand
held terminal (‘‘HHT’’) with the number
of shares allocated to the Floor Broker
at the trade price. Each Floor Broker
would then further allocate those shares
among the customer orders in his/her
HHT.
The following example illustrates the
automatic application of the priority
and parity rules by AEMI in a situation
involving a manual trade with auto-ex
enabled. As provided in Rule 128B—
AEMI, ‘‘Auction Trades,’’ a negotiated
trade may take place only at or inside
the APQ. A negotiated trade that takes
place at the APQ automatically
incorporates electronic orders and
quotes already resident on the AEMI
Book at the time of the print, because
these orders and quotes have priority
and standing over the verbal trade. For
example, assume that the APQ for an
ETF is 34.55 x 35.10 and the AEMI Book
has 4,000 shares on the bid side at that
price, comprised of a customer order for
3,000 shares and the Specialist’s bid for
1,000 shares. Assume that the customer
order is a reserve order with a display
size of 1,000 shares. Therefore, the size
of the APQ on the bid side is 2,000
shares (the visible size of the reserve
order and the Specialist’s bid). Two
Floor Brokers in the crowd wish to
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transact a negotiated trade for 5,000
shares at the price of 34.55, a price that
has been agreed to verbally and that
must be entered into AEMI by the
Specialist in order for the trade to
represent a valid contract. When the
Specialist prints the trade for the two
Floor Brokers, the electronic orders at
the price take priority and the seller will
sell 3,000 shares to the customer reserve
order (displayed and non-displayed
liquidity), 1,000 shares to the
Specialist’s quote, and 1,000 shares to
the contra party in the negotiated trade.
The remaining 4,000 shares on the buy
side of the negotiated trade expire. The
4,000 shares on the AEMI Book,
including the Specialist’s quote, take
priority at the price because they
represent passive liquidity already
resident on the AEMI Book and the
Specialist is not agent to the negotiated
trade in the crowd. Similarly, a cross
from a crowd member must interact
with orders on the AEMI Book, with the
exception of crosses that meet the size
and value requirements outlined in
Commentary .01 and .02 of Rule 126—
AEMI, in which case they do not
interact with orders already on the
AEMI Book.
Next, suppose that the negotiated
trade in the crowd in the foregoing
example is for only 1,000 shares. The
priority and parity rules for ETFs in
AEMI will automatically result in the
seller executing all 1,000 shares against
the displayed size of the customer
reserve order, which has a higher
priority than the Specialist’s quote. On
the other hand, if the negotiated trade
had been for 2,000 shares, 1,000 shares
would have executed against the
displayed size of the customer reserve
order and 1,000 shares would have
executed against the Specialist’s quote,
because the latter has a higher priority
than the replenished reserve size (which
is not visible liquidity). This is an
example of a specified exemption in the
Exchange’s priority and parity rules that
allows the Specialist to have a higher
priority than part of a customer order.9
9 In addition to executing ahead of the
replenished reserve size of customer reserve orders
for both ETFs and equities, as provided by the
Amex’s priority and parity rules, the Specialist’s
quotation may also be executed, for both ETFs and
equities under those rules, ahead of a percentage
order that is a customer order and is elected by a
trade event. In addition, for equities only, the
Specialist’s quotation may be executed ahead of
some customer orders pursuant to the Amex
priority and parity rules (and depending on
whether public orders are also involved) under the
following circumstances: (i) Parity allocation takes
place among the Specialist’s quotation in parity and
the visible size of crowd customer orders in parity;
and (ii) the Specialist’s quotation and the visible
size of certain crowd customer orders not in parity
PO 00000
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Fmt 4703
Sfmt 4703
55263
Finally, a Specialist may conduct an
auction when auto-ex is either enabled
or disabled. In both circumstances,
resting orders on the AEMI Book are
automatically incorporated into the
pair-off, and the parity and priority
rules referred to above are
systematically applied. When
conducting a pair-off, the Specialist has
agency responsibility to orders on the
AEMI Book and may participate at the
pair-off price but only after all other
orders at the pair-off price trade first.
In the circumstance when auto-ex is
disabled, an auction pair-off would be
conducted to resolve any imbalance and
re-enable auto-ex. (If there were no
imbalance, auto-ex could be re-enabled
based simply on a quotation.) The only
auction trade that can take place in this
situation is one to resolve the
imbalance. During the time that auto-ex
is disabled, incoming orders,
amendments, and cancellations
continue to enter the AEMI Book and
members may not trade in the openoutcry market except as part of the
auction trade that re-enables AEMI. Any
verbal involvement by crowd members
would take place during the post-trade
allocation process as follows. The
Specialist would set the price of the
pair-off, with the contra interest that is
applied against the imbalance coming
from marketable orders on the contra
side of the AEMI Book (and with
intermarket sweep orders being
generated to away markets as
necessary).10 Once the Specialist has set
the auction price, he does not exercise
any additional discretion that would
influence the number of shares of the
`
imbalance that he is allocated vis-a-vis
the other members of the crowd. He
must announce the price of the trade to
the crowd before it is printed to the
tape, so crowd members will know
whether they are entitled to be part of
the trade. Any remainder of the
imbalance will be parity-allocated
against the Specialist and/or eligible
crowd participants represented
electronically on the contra side of the
AEMI Book. Each active crowd
participant with a bid, offer, or order on
the contra side of the aggressing order
will receive a message from AEMI with
the initial allocation that AEMI has
automatically calculated for that crowd
member. Following this initial posttrade allocation, those crowd
participants who receive an initial
allocation will verbally confirm their
are executed based on time priority. See Amex Rule
126—AEMI (b) and (d).
10 The Specialist may not be part of the pair-off
at that price; he participates only in the absorption
of the imbalance.
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Federal Register / Vol. 72, No. 188 / Friday, September 28, 2007 / Notices
participation or non-participation to the
Specialist.11 The Specialist enters the
necessary adjustments into AEMI, and
AEMI will compute the revised
individual allocations for each crowd
member. AEMI will then immediately
send a message to each of these crowd
participants with their respective
individual final trade allocations, with
Floor Brokers completing an additional
allocation of their individual trades to
existing orders in their HHTs.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Regulation NMS, as well as Section 6(b)
of the Act,12 in general, and furthers the
objectives of Section 6(b)(5) of the Act,13
in particular, in that it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities, 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 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 either
solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
jlentini on PROD1PC65 with NOTICES
Because the foregoing proposed rule
change constitutes a stated policy,
practice, or interpretation with respect
to the meaning, administration, or
enforcement of an existing rule, it has
become effective pursuant to section
11 If the Specialist were to ignore a particular
crowd member’s confirmation of participation
(arguably so that the Specialist could execute more
of the imbalance himself), this would be very
obvious to the disadvantaged crowd member
(because his allocation would go to zero from the
number that he initially was assigned by AEMI),
who could challenge the result. The Amex believes,
in other words, that it is highly unlikely that the
Specialist could get away with such a blatant act.
12 15 U.S.C. 78f(b).
13 15 U.S.C. 78f(b)(5).
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19(b)(3)(A)(i) of the Act 14 and Rule 19b–
4(f)(1) thereunder.15 At any time within
60 days of the filing of the 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 furtherance of the
purposes of the Act.
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 rulecomments@sec.gov. Please include File
Number SR–Amex–2007–105 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–2007–105. 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
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 the 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
14 15
15 17
PO 00000
U.S.C. 78s(b)(3)(A)(i).
CFR 240.19b–4(f)(1).
Frm 00093
Fmt 4703
Sfmt 4703
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–2007–105 and
should be submitted on or before
October 19, 2007.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.16
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–19163 Filed 9–27–07; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–56494; File No. SR–CBOE–
2007–110]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend Its Obvious
Error Rules
September 21, 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
September 13, 2007, the Chicago Board
Options Exchange, Incorporated
(‘‘CBOE’’ 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.
CBOE has designated this proposal as
one concerned solely with the
administration of the Exchange under
Section 19(b)(3)(A)(iii) of the Act 3 and
Rule 19b–4(f)(3) thereunder,4 which
renders the proposal 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 amend
CBOE Rules 6.25 and 24.16, which are
the Exchange’s rules applicable to the
nullification and adjustment of
transactions. The text of the proposed
rule change is available at the Exchange,
16 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(2).
1 15
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]]>Agencies
[Federal Register Volume 72, Number 188 (Friday, September 28, 2007)]
[Notices]
[Pages 55262-55264]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-19163]
[[Page 55262]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56495; File No. SR-Amex-2007-105]
Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Require That the AEMI Trading Platform Function To Assure Compliance
With the Exchange's Priority and Parity Rules
September 21, 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 September 18, 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 prepared substantially by the
Amex. The Amex has designated the proposed rule change as one
constituting a stated policy, practice, or interpretation with respect
to the meaning, administration, or enforcement of an existing rule
under section 19(b)(3)(A)(i) of the Act \3\ and Rule 19b-4(f)(1)
thereunder,\4\ which renders the proposal 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)(i).
\4\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
In compliance with a Commission order in a recent administrative
proceeding,\5\ the Amex proposes to adopt new Commentary .06 to Amex
Rule 126-AEMI, ``Precedence of Bids and Offers,'' to provide that the
Amex's new hybrid trading platform for equity products and exchange-
traded funds (``ETFs''), designated as AEMISM (``AEMI''),
shall function at all times in a manner that assures compliance with
the Amex's priority and parity rules. In particular, AEMI shall
systemically prevent a Specialist attempting to execute his/her
proprietary order from trading ahead of a customer order in the
Specialist's possession or for which the Specialist otherwise has
responsibility and which customer order could trade in place of some or
all of the Specialist's side of the trade, unless the trade meets a
specified exemption in the Exchange's rules.
---------------------------------------------------------------------------
\5\ See In the Matter of American Stock Exchange LLC, Order
Instituting Administrative and Cease-and-Desist Proceedings, Making
Findings, and Imposing Remedial Sanctions, a Censure, and a Cease-
and-Desist Order Pursuant to Sections 19(h)(1) and 21C of the
Securities Exchange Act of 1934, Securities Exchange Act Release No.
55507 (March 22, 2007) (Administrative Proceeding File No. 3-12594)
(``Settlement Order'').
---------------------------------------------------------------------------
The proposed rule change is available at the Amex, in the
Commission's Public Reference Room, and on the Amex's Web site at
http://www.amex.com.
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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing to add to its AEMI rules a provision
requiring that the AEMI platform function at all times in a manner that
assures compliance with the Exchange's priority and parity rules. More
specifically, AEMI must ensure that, when a Specialist is in the
process of executing his/her proprietary order while a customer order
in the Specialist's possession or for which the Specialist otherwise
has responsibility could trade in place of some or all of the
Specialist's side of the trade, AEMI will systemically (i) prevent the
reporting of the execution, and (ii) allocate the appropriate portion
of the Specialist's trade to the customer order, unless the trade meets
a specified exemption in the Exchange's rules and has thereby been
programmed into the AEMI system as an allowable trade. All of the
Exchange's priority and parity rules for equity products and ETFs are
pre-programmed into AEMI and may not be disabled or otherwise changed
by the Specialist or any other market participant. The provision with
the foregoing requirements is being added as new Commentary .06 to Amex
Rule 126-AEMI.\6\
---------------------------------------------------------------------------
\6\ As noted above, the Amex is making this rule filing in
compliance with the Settlement Order. See note 5, supra. The Amex
has withdrawn its original filing with respect to this proposed rule
change, SR-Amex-2007-50, which the Amex filed on May 21, 2007, and
is replacing it with the current rule filing.
---------------------------------------------------------------------------
The Exchange believes that the new AEMI platform, as currently
operational, does in fact meet the foregoing requirements.\7\ The
implementation of AEMI, whose operation has been described in detail in
previous filings, goes well beyond simply adding enhancements to the
Amex's legacy trading systems to bring the Exchange into compliance.
AEMI is an entirely new trading platform whose design and operation
will, in transactions involving equity products and ETFs,\8\ prevent
Specialists from violating the Exchange's priority and parity rules in
ways that the Amex's legacy systems could not.
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\7\ There are two exceptions to this statement that the Amex has
recently become aware of and that the Amex is working to correct in
the near future. First, there are certain circumstances immediately
following the opening or reopening pair-off in an equity or ETF
under which the Specialist's quotation could be routed out to
execute against a better priced protected quotation of another
market ahead of a marketable customer order on the AEMI Book.
Secondly, the Exchange's rules provide for a post-opening pair-off
of marketable orders held in the message queue during the opening
pair-off. This post-opening pair-off is handled by the AEMI system
in such a way that it could result in the Specialist's quote being
executed ahead of marketable customer orders on the AEMI Book.
Although the Amex does not believe that either of these situations
occurs with any frequency and the Specialist has no ability to
direct their occurrence, the Exchange is currently working to
implement in a timely manner the software changes necessary to
correct these system flaws and will make an additional rule filing
at the time that the corrections become effective.
\8\ Options are not traded on AEMI at this time.
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Under normal circumstances, when auto-ex is enabled in AEMI,
incoming orders are executed against resting orders on the AEMI Book in
accordance with the Exchange's priority and parity rules that are pre-
programmed into the system. The system also permits manual trades to
occur when auto-ex is enabled in the form of negotiated trades (between
two crowd members), crosses in the crowd (one crowd member), and
auctions (between multiple crowd members). When auto-ex is disabled,
only auctions performed by the Specialists may occur (see discussion of
auctions below).
The following illustrates the steps involved in negotiated trades,
which have been relatively infrequent during the first few months that
AEMI has been in effect. Suppose two Floor Brokers negotiate the terms
of a trade between them while standing in the crowd. They would then
verbally request that the Specialist enter the trade into AEMI. Within
a few seconds, the Specialist
[[Page 55263]]
would enter the badge identifiers of both Floor Brokers along with the
terms of the trade (price and number of shares) into AEMI and click the
``GO'' button, during which time the two Floor Brokers would be
physically present. It would be very obvious to these Floor Brokers,
and to other crowd members as well, if the Specialist were to attempt
to delay the entry of the order into AEMI or take other action that
would disadvantage the parties to the negotiated trade and benefit the
Specialist (e.g., moving his quotation). AEMI would automatically
validate that the trade meets all required parameters (e.g., the trade
price relative to the Amex Published Quote (``APQ'')) and, if so,
accepts the trade into AEMI for execution. If the price of the trade is
outside the national best bid or offer (``NBBO''), then intermarket
sweep orders are immediately generated as required to execute against
the protected quotations of away markets, while the balance of the
order prints on the Amex and is allocated based on the Exchange's
priority and parity rules. In that allocation, electronic orders and
quotations that already exist on the AEMI Book at the price of the
verbal trade have priority over the verbal trade that has just been
accepted by AEMI for execution. Following the allocation, AEMI will
send a trade execution message to each Floor Broker's hand held
terminal (``HHT'') with the number of shares allocated to the Floor
Broker at the trade price. Each Floor Broker would then further
allocate those shares among the customer orders in his/her HHT.
The following example illustrates the automatic application of the
priority and parity rules by AEMI in a situation involving a manual
trade with auto-ex enabled. As provided in Rule 128B--AEMI, ``Auction
Trades,'' a negotiated trade may take place only at or inside the APQ.
A negotiated trade that takes place at the APQ automatically
incorporates electronic orders and quotes already resident on the AEMI
Book at the time of the print, because these orders and quotes have
priority and standing over the verbal trade. For example, assume that
the APQ for an ETF is 34.55 x 35.10 and the AEMI Book has 4,000 shares
on the bid side at that price, comprised of a customer order for 3,000
shares and the Specialist's bid for 1,000 shares. Assume that the
customer order is a reserve order with a display size of 1,000 shares.
Therefore, the size of the APQ on the bid side is 2,000 shares (the
visible size of the reserve order and the Specialist's bid). Two Floor
Brokers in the crowd wish to transact a negotiated trade for 5,000
shares at the price of 34.55, a price that has been agreed to verbally
and that must be entered into AEMI by the Specialist in order for the
trade to represent a valid contract. When the Specialist prints the
trade for the two Floor Brokers, the electronic orders at the price
take priority and the seller will sell 3,000 shares to the customer
reserve order (displayed and non-displayed liquidity), 1,000 shares to
the Specialist's quote, and 1,000 shares to the contra party in the
negotiated trade. The remaining 4,000 shares on the buy side of the
negotiated trade expire. The 4,000 shares on the AEMI Book, including
the Specialist's quote, take priority at the price because they
represent passive liquidity already resident on the AEMI Book and the
Specialist is not agent to the negotiated trade in the crowd.
Similarly, a cross from a crowd member must interact with orders on the
AEMI Book, with the exception of crosses that meet the size and value
requirements outlined in Commentary .01 and .02 of Rule 126--AEMI, in
which case they do not interact with orders already on the AEMI Book.
Next, suppose that the negotiated trade in the crowd in the
foregoing example is for only 1,000 shares. The priority and parity
rules for ETFs in AEMI will automatically result in the seller
executing all 1,000 shares against the displayed size of the customer
reserve order, which has a higher priority than the Specialist's quote.
On the other hand, if the negotiated trade had been for 2,000 shares,
1,000 shares would have executed against the displayed size of the
customer reserve order and 1,000 shares would have executed against the
Specialist's quote, because the latter has a higher priority than the
replenished reserve size (which is not visible liquidity). This is an
example of a specified exemption in the Exchange's priority and parity
rules that allows the Specialist to have a higher priority than part of
a customer order.\9\
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\9\ In addition to executing ahead of the replenished reserve
size of customer reserve orders for both ETFs and equities, as
provided by the Amex's priority and parity rules, the Specialist's
quotation may also be executed, for both ETFs and equities under
those rules, ahead of a percentage order that is a customer order
and is elected by a trade event. In addition, for equities only, the
Specialist's quotation may be executed ahead of some customer orders
pursuant to the Amex priority and parity rules (and depending on
whether public orders are also involved) under the following
circumstances: (i) Parity allocation takes place among the
Specialist's quotation in parity and the visible size of crowd
customer orders in parity; and (ii) the Specialist's quotation and
the visible size of certain crowd customer orders not in parity are
executed based on time priority. See Amex Rule 126--AEMI (b) and
(d).
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Finally, a Specialist may conduct an auction when auto-ex is either
enabled or disabled. In both circumstances, resting orders on the AEMI
Book are automatically incorporated into the pair-off, and the parity
and priority rules referred to above are systematically applied. When
conducting a pair-off, the Specialist has agency responsibility to
orders on the AEMI Book and may participate at the pair-off price but
only after all other orders at the pair-off price trade first.
In the circumstance when auto-ex is disabled, an auction pair-off
would be conducted to resolve any imbalance and re-enable auto-ex. (If
there were no imbalance, auto-ex could be re-enabled based simply on a
quotation.) The only auction trade that can take place in this
situation is one to resolve the imbalance. During the time that auto-ex
is disabled, incoming orders, amendments, and cancellations continue to
enter the AEMI Book and members may not trade in the open-outcry market
except as part of the auction trade that re-enables AEMI. Any verbal
involvement by crowd members would take place during the post-trade
allocation process as follows. The Specialist would set the price of
the pair-off, with the contra interest that is applied against the
imbalance coming from marketable orders on the contra side of the AEMI
Book (and with intermarket sweep orders being generated to away markets
as necessary).\10\ Once the Specialist has set the auction price, he
does not exercise any additional discretion that would influence the
number of shares of the imbalance that he is allocated vis-[agrave]-vis
the other members of the crowd. He must announce the price of the trade
to the crowd before it is printed to the tape, so crowd members will
know whether they are entitled to be part of the trade. Any remainder
of the imbalance will be parity-allocated against the Specialist and/or
eligible crowd participants represented electronically on the contra
side of the AEMI Book. Each active crowd participant with a bid, offer,
or order on the contra side of the aggressing order will receive a
message from AEMI with the initial allocation that AEMI has
automatically calculated for that crowd member. Following this initial
post-trade allocation, those crowd participants who receive an initial
allocation will verbally confirm their
[[Page 55264]]
participation or non-participation to the Specialist.\11\ The
Specialist enters the necessary adjustments into AEMI, and AEMI will
compute the revised individual allocations for each crowd member. AEMI
will then immediately send a message to each of these crowd
participants with their respective individual final trade allocations,
with Floor Brokers completing an additional allocation of their
individual trades to existing orders in their HHTs.
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\10\ The Specialist may not be part of the pair-off at that
price; he participates only in the absorption of the imbalance.
\11\ If the Specialist were to ignore a particular crowd
member's confirmation of participation (arguably so that the
Specialist could execute more of the imbalance himself), this would
be very obvious to the disadvantaged crowd member (because his
allocation would go to zero from the number that he initially was
assigned by AEMI), who could challenge the result. The Amex
believes, in other words, that it is highly unlikely that the
Specialist could get away with such a blatant act.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Regulation NMS, as well as Section 6(b) of the Act,\12\ in
general, and furthers the objectives of Section 6(b)(5) of the Act,\13\
in particular, in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, 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.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Amex believes that 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 either 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 foregoing proposed rule change constitutes a stated
policy, practice, or interpretation with respect to the meaning,
administration, or enforcement of an existing rule, it has become
effective pursuant to section 19(b)(3)(A)(i) of the Act \14\ and Rule
19b-4(f)(1) thereunder.\15\ At any time within 60 days of the filing of
the 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 furtherance of the purposes of the Act.
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\14\ 15 U.S.C. 78s(b)(3)(A)(i).
\15\ 17 CFR 240.19b-4(f)(1).
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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 (http://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-Amex-2007-105 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-2007-105. 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 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 the 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-2007-105 and should be
submitted on or before October 19, 2007.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-19163 Filed 9-27-07; 8:45 am]
BILLING CODE 8010-01-P
