

[Federal Register: May 21, 2007 (Volume 72, Number 97)]
[Notices]               
[Page 28529-28531]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21my07-83]                         

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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.
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    \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).
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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 http://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
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    \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.
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    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 http://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 (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. 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
