

[Federal Register: March 20, 2007 (Volume 72, Number 53)]
[Notices]               
[Page 13146-13147]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20mr07-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55464; File No. SR-Amex-2007-08]

 
Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Granting Approval of a Proposed Rule Change to Establish a Passive 
Price Improvement Order for Specialists and Registered Traders

March 13, 2007.

I. Introduction

    On January 19, 2007, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on February 2, 2007.\3\ The Commission received 
one comment letter.\4\ On March 12, 2007, Amex submitted a response to 
the comment letter.\5\ 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 Release Act 55179 (January 26, 
2007), 72 FR 05091 (February 2, 2007).
    \4\ See Letter from Christopher Cornette, Member, Amex, to 
Florence E. Harmon, Deputy Secretary, Commission, received February 
14, 2007.
    \5\ See Letter from Claire P. McGrath, Senior Vice President & 
General Counsel, Amex, to Nancy M. Morris, Secretary, Commission, 
dated March 12, 2007 (``Amex Response Letter'').
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II. Description of the Proposal

    Amex proposes to amend the rules for its AEMI trading platform \6\ 
to add a Passive Price Improvement (``PPI'') order type. PPI orders are 
undisplayed orders that, to execute, would have to be inside the 
automated best bid and offer of the Exchange (also referred to as the 
``Amex Published Quote'' or ``APQ'') by at least a tick. They would be 
the only method for Specialists and Registered Traders to offer price 
improvement electronically. A Specialist or Registered Trader would 
have to have at least one active quote on a particular side of a 
security on the AEMI book to enter and maintain a PPI order in the same 
security on the same side. A Specialist or Registered Trader that meets 
this quoting requirement could enter only one PPI order on each side 
for a security. A PPI order could not form part of the APQ and would be 
visible only to the entering Specialist or Registered Trader (or his 
firm).
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    \6\ See Securities Exchange Act Release No. 54552 (September 29, 
2006), 71 FR 59546 (October 10, 2006).
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    AEMI would make a PPI order eligible for execution if at least one 
of the following conditions were met:
    1. The Specialist's or Registered Trader's displayed quote is at 
the APQ on the side of the PPI order that would be executed. In this 
case, the PPI order would be executed up to (a) the size of the 
Specialist's or Registered Trader's displayed quote on that side or (b) 
the size of the incoming order, whichever is smaller.
    2. The Specialist's or Registered Trader's displayed quote is one 
tick away from the APQ on the side of the PPI order that would be 
executed. In this case, the PPI order would be executed up to (a) half 
of the size of the Specialist's or Registered Trader's displayed quote 
on that side or (b) the size of the incoming order, whichever is 
smaller.
    The AEMI system would ignore (i.e., make ineligible for execution 
against an otherwise marketable aggressing order, without canceling) 
the remaining size of a PPI order beyond the thresholds described 
above.\7\ The AEMI system would also ignore a PPI order in the 
following circumstances:
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    \7\ For example, assume that a Specialist's bid for 1,000 shares 
is part of the Amex best bid and there are no better-priced 
protected quotations at other trading centers. The Specialist has a 
PPI order to buy 3,000 shares priced one tick better than the Amex 
best bid. Assume that an incoming market order to sell 3,000 shares 
is received by AEMI. The system would execute 1,000 shares against 
the Specialist's PPI order, and the remainder would execute one tick 
down at the Amex best bid (based on the Exchange's rules of priority 
and parity). The remaining size of the PPI order (2,000 shares) is 
ignored because the PPI order may execute only up to the size of the 
Specialist's displayed bid at the APQ.
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     The PPI order locks or crosses the automated NBBO or APQ 
as a result of a change in the automated NBBO or APQ;
     The PPI order equals the APQ on the same side of the 
market;

[[Page 13147]]

     There is a negotiated trade; or
     AEMI's auto-execution functionality is disabled.
    In addition, the AEMI system would cancel a PPI order in three 
circumstances: (1) if the Specialist's or Registered Trader's best 
quote is withdrawn; (2) at the end of the day; or (3) there is a 
trading halt in the security.
    If there were multiple PPI orders at the same price, the 
Specialist's PPI order would have priority, and any remaining size of 
an aggressing order would be executed against Registered Trader PPI 
orders in time priority. Intermarket sweep orders would be generated as 
necessary to clear any better-priced protected quotations at other 
trading centers before executing any PPI orders on the AEMI system.
    To reflect the proposed rule change as described above, changes are 
proposed to the following AEMI rules: Rule 123-AEMI (Manner of Bidding 
and Offering), Rule 131-AEMI (Types of Orders), Rule 157-AEMI (Orders 
with More than One Broker), and Rule 170-AEMI (Registration and 
Functions of Specialists).

III. Summary of Comments and Amex Response

    The Commission received one comment letter opposing the proposed 
rule change. The commenter argued that limiting the use of PPI Orders 
to Specialists and Registered Traders gives them ``an unfair 
advantage'' and thus is not consistent with Section 6(b) of the Act.
    The commenter noted that the Specialist would have access to 
aggressing orders that could be price-improved but Floor Brokers would 
not. The commenter suggested that there would be many instances where 
Floor Brokers would be willing to provide price improvement but would 
not publicly display such interest in order to minimize any potential 
market impact. The commenter also suggested that PPI Orders could be 
misused to trade ahead of a Floor Broker's marketable orders instead of 
providing price improvement.
    In its response to comments, Amex asserted that Floor Brokers are 
able to operate effectively and compete with Specialists and Registered 
Traders. For example, Amex pointed out that Floor Brokers have the 
exclusive use of certain order types on AEMI (e.g., percentage orders 
and reserve orders). Amex also emphasized that the use of PPI Orders 
would be monitored and policed electronically. Amex stated that its 
regulatory program would be able to detect possible unfair trading 
practices. Finally, Amex represented that it ``is in the process of 
developing the means by which other market participants, including 
floor brokers, would have the ability to systematically provide such 
price improvement.'' \8\
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    \8\ Amex Response Letter at 1.
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IV. Discussion and Commission's Findings

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\9\ In particular, the Commission finds that the proposal is 
consistent with the requirements of Section 6(b)(5) of the Act,\10\ 
which requires, among other things, that the Exchange's rules be 
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.
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    \9\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Commission previously has found similar exchange rules to be 
consistent with the Act.\11\ The Commission does not believe that the 
comment raises any issue that would preclude approval of the current 
proposal. As the Commission noted in the NYSE Hybrid Approval Order, 
Specialists today are permitted to offer price improvement to incoming 
orders in the auction market.\12\ In this proposal, Amex seeks to 
provide its Specialists and Registered Traders with the ability to 
continue to offer price improvement in an electronic environment, but 
only if certain conditions are met. A Specialist's or Registered 
Trader's PPI order is eligible for execution only if its quote on the 
same side of the market is at or one tick away from the APQ. If the 
Specialist's or Registered Trader's quotation is at the APQ, a PPI 
order is eligible to execute up to the same size as its quotation; if 
it is one tick away from the APQ, the PPI order is eligible to execute 
up to one half the size of its quotation. A PPI order will be ignored 
if the Specialist's or Registered Trader's quotation is more than one 
tick away from the APQ. Thus, a Specialist's ability to benefit from 
the PPI order is directly correlated with the extent to which it quotes 
competitive markets in size. The Commission notes, moreover, that Amex 
has represented that it ``is in the process of developing the means by 
which other market participants, including floor brokers, would have 
the ability to systematically provide such price improvement.'' \13\
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    \11\ See Securities Exchange Act Release Nos. 53539 (March 22, 
2006), 71 FR 16353, 16381-82 (March 31, 2006) (``NYSE Hybrid 
Approval Order'') and 54511 (September 25, 2006), 71 FR 58460 
(October 3, 2006).
    \12\ See 71 FR at 16382.
    \13\ Amex Response Letter at 1.
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    The Commission further notes that a PPI order could execute only 
against a marketable incoming limit order. An incoming order that is 
not marketable against a PPI order (or a protected quotation) and that 
improves the APQ would be quoted as part of the new APQ.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-Amex-2007-08), be, and it 
hereby is, approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-5005 Filed 3-19-07; 8:45 am]

BILLING CODE 8010-01-P
