Self-Regulatory Organizations; American Stock Exchange, Inc.; Order Approving Proposed Rule Change Relating to Specialist Participation in the After-Hours Trading Facility in Portfolio Depositary Receipts and Investment Trust Securities Based on Stock Indexes for a One-Year Pilot Period

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34611; File No. SR-Amex-93-15]

Self-Regulatory Organizations; American Stock Exchange, Inc.;

Order Approving Proposed Rule Change Relating to Specialist

Participation in the After-Hours Trading Facility in Portfolio

Depositary Receipts and Investment Trust Securities Based on Stock

Indexes for a One-Year Pilot Period

August 29, 1994.

I. Introduction

On April 21, 1993, the American Stock Exchange, Inc. (``Amex'' or

``Exchange'') submitted to the Securities and Exchange Commission

(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4

thereunder,\2\ a proposed change concerning its After-Hours Trading

(``AHT'') facility (File No. SR-Amex-93-15). As originally filed, the

proposed rule change requested permanent approval of Amex's pilot

After-Hours Trading facility and approval on a pilot basis for

specialists in investment trust securities based on stock indexes to

participate in the AHT Facility. On January 4, 1994, the Amex amended

the filing to request a three-month extension of the pilot until April

30, 1994, which the Commission approved.\3\ On May 2, 1994, the

Commission granted permanent approval to that portion of File No. SR-

Amex-93-15 concerning the Amex's After-Hours Trading facility, not

including the specialist participation request.\4\

\1\15 U.S.C. 78s(b)(1) (1988).

\2\17 CFR 240.19b-4 (1994).

\3\See Securities Exchange Act Release No. 33561 (February 1,

1994), 59 FR 5789 (February 8, 1994).

\4\See Securities Exchange Act Release No. 33993 (May 2, 1994),

59 FR 23902 (May 9, 1994).

On August 3, 1993, the Exchange amended the filing to request that

specialists in Portfolio Depository Receipts (``PDRs'') also be

permitted to participate in the AHT facility.\5\ On July 5, 1994, the

Exchange amended the proposed rule change to eliminate the migration of

limit orders for PDRs and investment trust securities from the

specialist's limit order book to the AHT facility.\6\

\5\See letter from William Floyd-Jones, Jr., Assistant General

Counsel, Amex, to Diana Luka-Hopson, SEC, dated August 3, 1993.

\6\See letter from William Floyd-Jones, Jr., Assistant General

Counsel, Amex, to Sandra Sciole, Special Counsel, SEC, dated July 1,

1994.

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The proposed rule change was published for comment in Securities

Exchange Act Release No. 34316 (July 5, 1994), 59 FR 35547 (July 12,

1994). No comments were received on the proposal. This order approves

the proposed rule change as amended for a one year period.

II. Description of the Proposal

The Exchange is amending Rules 1300 (``Applicability of 1300

Series'') and 1302 (``After-Hours Trading Orders'') for a one year

pilot period to permit specialists in PDRs and investment trust

securities listed pursuant to Section 118B of the Exchange's Listing

Guidelines\7\ to participate in the AHT facility to ``clean-up'' order

imbalances in the AHT facility by entering an order for the

specialist's account. For example, if there were single sided orders to

buy 10,000 and sell 20,000 SPDRs immediately prior to the 5:00 p.m.

close of the AHT facility, the specialist would be permitted under the

Exchange's proposed rule amendments to enter an order for its account

to buy up to 10,000 SPDRs in order to eliminate the sell side order

imbalance.

\7\The Exchange currently lists one Portfolio Depositary

Receipt, viz., Standard and Poor's Depositary Receipts (``SPDRs'');

and two investment trust securities pursuant to Section 118B of the

Exchange's Listing Guidelines: LOR Index Trust SuperUnits and LOR

Money Market SuperUnits.

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The Exchange is also amending Rule 1302(b) to eliminate the

migration of limit orders for PDRs and investment trust securities from

the specialist's limit order book to the AHT facility. Currently, Amex

Rule 1302(b) provides that a regular way good 'til cancelled order that

is designated as After-Hours eligible, that is on the specialist's

limit order book, and that is executable at the closing price or

better, shall migrate from the specialist's limit order book to the AHT

program. Any order for an account in which the specialist member

organization or any associated party has a direct or indirect interest

is prohibited from migrating to the AHT program. The rule is being

amended to provide that any order for a Portfolio Depositary Receipt or

an investment trust security listed on the Exchange pursuant to Section

118B of the Exchange's Listing Standards, Policies and Requirements

will not be permitted to migrate to the AHT program.

The Exchange is also amending Rule 1302 to permit specialists in

PDRs and investment trust securities to participate in a coupled

closing price order so long as the other side of the order is not for

an account in which a member or member organization has a direct or

indirect interest.\8\ For example, under the Exchange's amendment, the

specialist in SPDRs would be permitted to agree prior to the 4:15 close

of the regular trading session for such securities to take the other

side of a customer order to buy or sell SPDRs for execution in the AHT

facility as a closing price coupled order. The Exchange believes that

such a capability would conform the trading of PDRs and investment

trust securities to the practices of the ``basket'' market for equities

where it is customary for a dealer to agree prior to the close of the

regular trading session to take the contra side of a customer basket

order and the closing index value.

\8\As amended, Amex Rule 1300 (e)(i) defines ``closing price''

as the price established by the last regular way sale on the

Exchange prior to the official closing of the 9:30 a.m. to 4:15 p.m.

trading session, as determined by the Exchange.

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The Exchange believes that permitting specialists in PDRs and

investment trust securities to participate in the AHT facility in order

to ``clean-up'' order imbalances and effect closing price coupled

orders would benefit investors by providing additional liquidity to the

listed cash market for derivative securities based upon well known

market indexes, such as those described above. The market price of

these securities is based upon transactions largely effected in markets

other than the Amex. The Exchange states that the specialist in such

securities has no unique access to market sensitive information

regarding the market for the underlying securities or closing index

values. The Exchange, therefore, believes that specialist participation

in the AHT facility in PDRs and investment trust securities in the

manner described above does not raise any market integrity issues. In

addition, should a customer not care for an execution at the closing

price, the rules of the Exchange's AHT facility permit cancellation of

an order up to the close of the AHT session at 5:00 p.m. (orders in the

AHT facility are not executed until the 5:00 p.m. close of the after-

hours session.) A customer, therefore, will have approximately 40

minutes to determine if an execution at the closing price suits its

needs, and may cancel its order if it believes that the closing price

does not suit its objectives.

III. Discussion

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, and, in

particular, with Sections 6(b)(5) and 11 of the Act.\9\ The Commission

believes that the rule change is consistent with the Section 6(b)(5)

requirements that the rules of an exchange be designed to promote just

and equitable principles of trade, remove impediments to and perfect

the mechanism of a free and open market, and, in general, protect

investors and the public interest. The Commission also believes that

the proposal is consistent with Section 11(b) of the Act and Rule 11b-1

thereunder,\10\ which allow exchanges to promulgate rules relating to

specialists in order to maintain fair and orderly markets.

\9\15 U.S.C. Sec. 78f and 78k (1988).

\10\17 CFR 240.11b-1 (1994).

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Both the Act and Exchange rules reflect the crucial role played by

specialists in providing stability, liquidity, and continuity in the

Exchange's market. Recognizing the importance of the specialist in the

market, the Act, as well as Exchange rules, impose stringent

obligations upon specialists.\11\ Primary among these obligations is

the requirement to maintain fair and orderly markets by engaging in,

among other things, dealings for their own account to minimize the

effects of temporary disparity between supply and demand.\12\

\11\See Rule 11b-1 under the Act, 17 CFR 240.11b-1 (1994); Amex

Rule 170.

\12\See Amex Rule 170(d).

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The Commission believes that the rule change permitting specialists

in PDRs and investment trust securities listed pursuant to Section 118B

to participate in the AHT facility by entering an order for the

specialist's account only to eliminate order imbalances should assist

specialists in their obligation to minimize temporary disparity between

supply and demand. In addition, the Commission agrees with the Exchange

that permitting specialists in PDRs and investment trust securities to

participate in the AHT facility in order to ``clean-up'' order

imbalances and effect closing price coupled orders would benefit

investors by providing additional liquidity to the listed cash market

for derivative securities based upon well known market indexes.

The Commission also believes that the Amex's rule change strikes a

reasonable balance between the Exchange's need to accommodate the needs

of investors by increasing liquidity in the listed cash market for

derivative securities based on market indexes, and the need to prevent

the potential for manipulation or misuse of information. For example,

although Amex specialists will know which limit order are eligible for

execution in the AHT facility, they will not be able to use this

information to their own advantage because Rule 1302(b) is being

amended to eliminate the migration of limit orders for PDRs and

investment trust securities from the specialist's limit order book to

the AHT facility.

In addition, the Commission believes that approval of the Amex rule

change for a one year pilot period will provide the Commission and

Exchange an opportunity to monitor the operation of the amendments to

Rules 1300 and 1302. This one year period also will allow the

Commission and the Exchange the opportunity to monitor specialist

compliance with the amended rules to ensure that specialists are

properly executing their responsibilities.

Finally, in its rule filing, the Amex indicated that, during the

one year pilot period, the Exchange would study the operation of the

facility to determine if there are any additional issues that need to

be addressed. In this regard, the Commission requests that the Exchange

submit a report and analysis, by May 1, 1995, of the following

information (broken down by month): (1) trading volume (trades and

number of shares of PDRs and investment trust securities) in the after-

hours session; (2) the number of trades, if any, of (a) single-sided

orders, and (b) coupled buy and sell orders which specialists executed

in the after-hours session; (3) the number of shares, if any, of (a)

single-sided orders, and (b) coupled buy and sell orders which

specialists executed in the after-hours session; and (4) the number, if

any, of single-sided orders that remained unexecuted at the end of the

after-hours session. In addition, the Commission expects the Amex,

through use of its surveillance procedures, to monitor closely the

trading of PDRs and investment trust securities in the AHT facility to

ensure that trading in these issues is not subject to any patterns of

manipulation or trading abuses or unusual trading activity. Finally,

the Commission requests that the Amex keep the Commission apprised of

any technical problems which may arise regarding the operation of the

pilot program.

It is therefore ordered, Pursuant to Section 19(b)(2) of the

Act\13\ that the proposed rule change (SR-Amex-93-15) is hereby

approved for a one year period until August 29, 1995.

\13\15 U.S.C. 78s(b)(2) (1988).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\14\

\14\17 CFR 200.30-3(a)(12) (1994).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-21750 Filed 9-1-94; 8:45 am]

BILLING CODE 8010-01-M