

[Federal Register: January 5, 2007 (Volume 72, Number 3)]
[Notices]               
[Page 597-599]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05ja07-66]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55008; File No. SR-Amex-2006-98]

 
Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Approving Proposed Rule Change Relating to the Codification of Exchange 
Policy Regarding Specialist Commissions

December 22, 2006.

I. Introduction

    On October 4, 2006, 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 to codify policies 
regarding specialist commissions. The proposed rule change was 
published for comment in the Federal Register on October 25, 2006.\3\ 
The Commission received two comment letters regarding the proposal.\4\ 
On November 28, 2006, the Exchange submitted a response to the 
comments.\5\ On December 5, 2006, one of the initial commenters 
submitted a response to the Amex Response.\6\ This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 54618 (October 18, 
2006), 71 FR 62492.
    \4\ See letter from Jonathan Q. Frey, Managing Partner, J. 
Streicher & Co. L.L.C., to Nancy M. Morris, Secretary, Commission, 
dated November 13, 2006 (``Streicher Letter I''), and Web comment 
from William Silver, Managing Partner, Weiskopf, Silver Co, dated 
November 6, 2006 (``Weiskopf Letter'').
    \5\ See letter from Neal L. Wolkoff, Chairman & Chief Executive 
Officer, Amex, to Nancy M. Morris, Secretary, Commission, dated 
November 28, 2006 (``Amex Response'').
    \6\ See letter from Jonathan Q. Frey, Managing Partner, J. 
Streicher & Co. L.L.C., to Nancy M. Morris, Secretary, Commission, 
dated December 5, 2006 (``Streicher Letter II'').
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 II. Description

    The Exchange proposes to codify in new subparagraph (b) to Amex 
Rule 154 its policies regarding situations where specialists may charge 
a commission for trades that are executed in whole or in part. 
Specifically, proposed Amex Rule 154(b) would prohibit a specialist 
from: (i) Charging a commission on an off-floor order in equities that 
is electronically delivered to the specialist unless the order requires 
special handling by the specialist or the specialist provides a 
service, and (ii) billing for electronically delivered orders in 
equities that are executed automatically by the Exchange's order 
processing facilities upon receipt. In addition, proposed Amex Rule 
154(b) would reference Amex Rule 152(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, proposed Amex Rule 
154(b) sets forth the types of orders specialists would be allowed to 
bill a commission. In particular, these orders would include limit 
orders that remain on the book for more than two minutes, market on 
close or limit on close orders, tick sensitive orders, orders for non-
regular way settlement, stop or stop limit orders, orders stopped at 
one price and executed at a better price, fill-or-kill, and immediate-
or-cancel orders, and orders for the account of a competing market 
maker.

III. Summary of Comments

    The Commission received three comment letters regarding the 
proposed rule change from two specialists. Two of these comment 
letters, submitted by Streicher, opposed the proposed rule change for 
the three reasons discussed below.\7\ The third comment letter, 
submitted by Weiskopf, supported the proposed rule change, because 
``the specialist's commission charges, if not competitive, have the 
potential to drive business away from the exchange and eliminate an 
important competitor from the market place.'' \8\ Weiskopf also stated 
its view that the proposed rule change is ``a very constructive step 
towards fostering greater competition in The National Market System.'' 
\9\
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    \7\ See Streicher Letter I and Streicher Letter II.
    \8\ See Weiskopf Letter.
    \9\ Id.
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    Streicher argued that the proposed rule change would ``adversely 
impact investors by reducing the qualify [sic] of markets offered by 
the Amex.'' In particular, Streicher argued that Amex's proposed 
elimination of certain specialist commissions would harm investors by 
putting pressure on specialists to increase spreads to offset the lost 
commissions. Streicher stated that ``[w]hile an increase in spreads may 
not be practical in highly competitive markets, many of the securities 
listed on the Amex are thinly traded with most of their trading volume 
taking place primarily on the Amex.'' According to Streicher, ``there 
is often little effective competition from other markets'' for these 
securities, and, thus, the resulting increased spreads will ``have an 
adverse impact investors * * *.'' \10\
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    \10\ Streicher Letter I at 2-3.
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    In its response, the Exchange stated that the purpose of the 
proposed rule change ``is to attract and maintain order flow to Amex 
specialists by providing transparency, clarity and consistency to the 
costs of doing business on the Exchange.'' The Exchange argued that 
Streicher's position that the elimination of certain specialist 
commissions would lead to specialists seeking higher spreads is flawed, 
because ``it is against each specialist's own economic interest to 
widen its spreads and thereby risk losing order flow.'' Furthermore, 
the Exchange disagreed with Streicher's assertion that ``there is often 
little effective competition from other markets'' and noted that 
``[a]ll Amex listed securities trade in at least one additional market 
center'' and that ``[t]he large majority of Amex issues trade on 
multiple venues.'' The Exchange concluded that ``[w]idening of the 
spreads in these securities will likely result in further market share 
erosion as order flow providers mindful of their best execution 
responsibilities direct their orders elsewhere.'' \11\
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    \11\ Amex Response at 3-4.

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[[Page 598]]

    Streicher responded by taking issue with Exchange's assertion 
regarding competition from other markets, by stating that many of the 
other markets for Amex-listed securities ``frequently offer little more 
than a means to internalize order flow using the quote established by 
the Amex as the dominant marketplace for the security in question.'' 
Streicher also disagreed with Exchange's statement that ``it is against 
each specialist's own economic interest to widen its spreads and 
thereby risk losing order flow,'' by stating that there might be 
circumstances in which ``a greater return on fewer orders might very 
well make sense and be in [the commenter's] best economic interest.'' 
\12\
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    \12\ Streicher Letter II at 3.
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    Second, Streicher noted that Amex's purpose for this proposal is to 
strengthen Amex's competitive position. However, Streicher asserted 
that Amex's concerns regarding its competitive position would be better 
addressed by current Amex Rules 26 and 27.\13\ The Exchange, however, 
disagreed with Streicher, arguing that, while Amex Rules 26 and 27 are 
``useful to the Exchange in its efforts to be competitive,'' the two 
rules do not create the ``transparency and clarity'' that the current 
proposal would provide.\14\
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    \13\ Streicher Letter I at 3. Amex Rules 26 and 27 provide the 
Exchange with the ability to: (1) limit or prohibit the awarding of 
new allocations to specialists who fail to respond to competition by 
offering competitive markets and competitively priced services, and 
(2) remove allocations from specialists who fail to meet certain 
levels of performance in handling of those securities.
    \14\ Amex Response at 4.
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    Third, Streicher expressed concerns that the rule change would 
``result in significant implementation costs'' that are ``difficult to 
justify'' given the proposed rule change's temporary nature.\15\ The 
Exchange, however, disputed Streicher's argument, indicating that the 
implementation costs would be minimal since ``most if not all 
specialist units'' have already complied with the proposed limitations 
on specialist commissions.\16\ The Exchange also noted that it does not 
intend for the proposed rule to remain in effect for a short period; 
rather, the Exchange intends to expand the rule to apply to equities 
and ETFs traded on the Exchange's Auction and Electronic Market 
Integration Platform (``AEMI'') system.\17\ In response, Streicher 
suggested that implementation costs would be saved if the Exchange 
defers this proposed rule change and has one proposed rule change when 
the Exchange ``is ready to finalize and allowable commission schedule 
under AEMI.'' \18\
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    \15\ Streicher Letter I at 3.
    \16\ Amex Response at 4.
    \17\ Id.
    \18\ Streicher Letter II at 3.
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IV. Discussion

    The Commission has carefully reviewed the proposed rule change, the 
comment letters received, and Amex's response, and the Commission finds 
that the proposed rule change is consistent with the requirements of 
Section 6 of the Act \19\ and the rules and regulations thereunder 
applicable to a national securities exchange.\20\ In particular, the 
Commission finds that the proposal is consistent with Section 6(b)(5) 
of the Act,\21\ 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 \22\ 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.
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    \19\ 15 U.S.C. 78f.
    \20\ 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). The Commission notes that 
it previously approved a similar proposed rule change relating to 
commissions on options orders, filed by the Chicago Board Options 
Exchange, Inc. See Securities Exchange Act Release No. 51235 
(February 22, 2005), 70 FR 9687 (February 28, 2005) (Approval of 
CBOE Rule 8.85(b)(iv)). In addition, 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).
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ 15 U.S.C. 78k-1(a)(1)(C).
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    The Commission notes that the Exchange's proposed rule change 
codifies the Exchange's policy regarding specialist commissions by 
specifying the particular types of orders in which a specialist may 
charge a commission and the types of orders in which a specialist may 
not charge a commission. The Commission notes that the Streicher 
Letters' concern expressed about the possibility of specialists 
attempting to widen spreads to compensate for lost commissions. In this 
regard, the Commission believes that competition for order flow among 
competing markets should continue to provide an incentive for 
specialists not to widen spreads.
    In addition, the Commission finds that the proposal is consistent 
with Section 6(e)(1) of the Act,\23\ 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 \24\ 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.'' \25\ 
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 order in equities that is executed on an opening or 
reopening or an order in equities (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.\26\ 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.
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    \23\ 15 U.S.C. 78f(e)(1).
    \24\ 15 U.S.C. 78f(e).
    \25\ H.R. Rep. No. 94-123, 94th Cong., 1st Sess. 42 (1975).
    \26\ 15 U.S.C. 78f(e)(1).
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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,

[[Page 599]]

with Sections 6(b)(5) and 6(e)(1) of the Act.\27\
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change (SR-Amex-2006-98) is approved.
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    \27\ 15 U.S.C. 78f(b)(5) and 78f(e)(1).
    \28\ 15 U.S.C. 78s(b)(2).
    \29\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-22592 Filed 1-4-07; 8:45 am]

BILLING CODE 8011-01-P
