Self-Regulatory Organizations; Notice of Filing and Order Granting Partial Temporary Accelerated Approval to Proposed Rule Change by American Stock Exchange, Inc. Relating to an Extension of Its Pilot Program Which Permits Specialists To Grant Stops in a Minimum Fractional Change Market

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33791; File No. SR-Amex-93-47]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Partial Temporary Accelerated Approval to Proposed Rule Change

by American Stock Exchange, Inc. Relating to an Extension of Its Pilot

Program Which Permits Specialists To Grant Stops in a Minimum

Fractional Change Market

March 21, 1994.

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 December 29, 1993, the American Stock Exchange, Inc. (``Amex'' or

``Exchange'') filed with the Securities and Exchange Commission

(``Commission'' or ``SEC'') the proposed rule change as described in

Items I and II below, which Items have been prepared by the self-

regulatory organization.

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

\2\17 CFR 240.19b-4 (1991).

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The Exchange requests permanent approval of the pilot program which

amended Amex Rule 109 to permit a specialist, upon request, to grant

stops in a minimum fractional change market.\3\ In the alternative, the

Exchange proposes a one-year extension of the pilot program. The

complete text of the proposed rule change is available at the Office of

the Secretary, Amex, and at the Commission.

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\3\The Amex received approval to amend Rule 109, on a pilot

basis, in Securities Exchange Act Release No. 30603 (April 17,

1992), 57 FR 15340 (April 27, 1992) (File No. SR-Amex-91-05) (``1992

Approval Order''). The Commission subsequently extended the Amex's

pilot program in Securities Exchange Act Release Nos. 32185 (April

21, 1993), 58 FR 25681 (April 27, 1993) (File No. SR-Amex-93-10)

(``April 1993 Approval Order''); and 32664 (July 21, 1993), 58 FR

40171 (July 27, 1993) (File No. SR-Amex-93-22) (``July 1993 Approval

Order''). Commission approval of these amendments to Rule 109

expires on March 21, 1994. The Exchange seeks accelerated approval

of the proposed rule change in order to allow the pilot program to

continue without interruption. See letter from Claudia Crowley,

Special Counsel, Legal & Regulatory Policy Division, Amex, to Beth

Stekler, Attorney, Division of Market Regulation, SEC, dated March

4, 1994.

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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 self-regulatory organization

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 III below. The self-regulatory

organization 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

On July 21, 1993, the Commission extended its pilot approval of

amendments to Exchange Rule 109 until March 21, 1994.\4\ The amendments

permit a specialist, upon request, to grant a stop\5\ in a minimum

fractional change market\6\ for any order of 2,000 shares or less, up

to a total of 5,000 shares for all stopped orders, provided there is an

order imbalance, without obtaining prior Floor Official approval. A

Floor Official, however, must authorize a greater order size or

aggregate share threshold.

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\4\See July 1993 Approval Order, supra, note 3.

\5\When a specialist agrees to a floor broker's request to

``stop'' an order, the specialist is obligated to execute the order

at the best bid or offer, or better if obtainable. See Amex Rule

109(a).

\6\Amex Rule 127 sets forth the minimum fractional changes for

securities traded on the Exchange.

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During the course of the pilot program, the Exchange has closely

monitored compliance with the rule's requirements; analyzed the impact

on orders on the specialist's book resulting from the execution of

stopped orders at a price that is better than the stop price; and

reviewed market depth in a stock when a stop is granted in a minimum

fractional change market. The Exchange believes that the amendments to

Rule 109 have provided a benefit to investors by providing an

opportunity for price improvement, while increasing market depth and

continuity without adversely affecting orders on the specialist's book.

The Exchange's findings in this regard have been forwarded to the

Commission under separate cover.

The Exchange is therefore proposing permanent approval of the

amendments to Rule 109. In the alternative, the Exchange is requesting

an extension of the pilot program for an additional one-year period, if

the Commission feels that further study and monitoring of the effects

of the pilot program are necessary.

2. Statutory Basis

The proposed rule change is consistent with section 6(b) of the Act

in general and furthers the objectives of section 6(b)(5) in particular

in that 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, in general, to protect investors and the public

interest. The Exchange believes that the proposed amendments to Rule

109 are consistent with these objectives in that they are designed to

allow stops, in minimum fractional change markets, under limited

circumstances that provide for the possibility of price improvement to

customers whose orders are granted stops.

B. Self-Regulatory Organization's Statement on Burden on Competition

The proposed rule change will impose no burden on competition.

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. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. 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 at the

Commission's Public Reference Section, 450 Fifth Street NW.,

Washington, DC 20549. Copies of such filing will also be available for

inspection and copying at the principal office of the Amex. All

submissions should refer to File No. SR-Amex-93-47 and should be

submitted by April 18, 1994.

IV. Commission's Findings and Order Granting Accelerated Approval

of Proposed Rule Change

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 section 6(b)(5)\7\ and section 11(b)\8\ of the Act.

The Commission believes that the amendments to Rule 109 should further

the objectives of section 6(b)(5) and section 11(b) through pilot

program procedures designed to allow stops, in minimum fractional

change markets, under limited circumstances that provide the

possibility of price improvement to customers whose orders are granted

stops.\9\

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\7\15 U.S.C. 78f (1988).

\8\15 U.S.C. 78k (1988).

\9\For a description of Amex procedures for stopping stock in

minimum fractional change markets, and of the Commission's rationale

for approving those procedures on a pilot basis, see 1992 Approval

Order, supra, note 3. The discussion in the aforementioned order is

incorporated by reference into this order.

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In its orders approving the pilot procedures,\10\ the Commission

asked the Amex to study the effects of stopping stock in a minimum

fractional change market. Specifically, the Commission requested

information on: (1) The percentage of stopped orders executed at the

stop price, versus the percentage of such orders receiving a better

price; (2) whether limit orders on the specialist's book were being

bypassed due to the execution of stopped orders at a better price (and,

to this end, the Commission requested that the Amex conduct a one-day

review of all book orders in the ten stocks receiving the greatest

number of stops); (3) market depth, including a comparison of the size

of stopped orders to the size of the opposite side of the quote and to

any quote size imbalance, and including an analysis of the ratio of the

size of the bid to the size of the offer; and (4) specialist compliance

with the pilot program's procedures.

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\10\See supra, note 3.

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On March 12, 1993, June 28 and July 1, 1993, and October 15, 1993

and January 5, 1994, the Exchange submitted to the Commission

monitoring reports regarding the amendments to Rule 109. The Commission

believes that, although these monitoring reports provide certain useful

information concerning the operation of the pilot program, the Amex

must provide further data, particularly about Rule 109's impact on

limit orders on the specialist's book, before the commission can fairly

and comprehensively evaluate the Amex's use of the pilot procedures. To

allow such additional information to be gathered and reviewed, without

compromising the benefit that investors might receive under Rule 109,

as amended, the Commission believes that it is reasonable to extend the

pilot program until March 21, 1995. During this extension, the

Commission expects the Amex to respond fully to the concerns set forth

below.

First, the January monitoring report indicates that approximately

three-quarters of orders stopped in minimum fractional change markets

received price improvement. The Commission, therefore, believes that

the pilot procedures provide a benefit to investors by offering the

possibility of price improvement to customers whose orders are granted

stops in minimum fractional change markets. According to the latest

Amex report, moreover, nearly all stopped orders were for 2,000 shares

or less. In this respect, the amendments to Rule 109 should mainly

affect small public customer orders, which the Commission envisioned

could most benefit from professional handling by the specialist. During

the pilot extension, the commission requests that the Amex continue to

monitor the percentage of stopped orders that are for 2,000 shares or

less.

Second, the Amex preliminarily believes that, with respect to a

significant majority of stops granted under these amendments to Rule

109, customer limit orders existing on the specialist's book were not

disadvantaged.\11\ This conclusion is based on the Exchange's review of

limit orders on the opposite side of the market at the time a stop was

granted pursuant to this pilot program. As part of its one-day review

of the ten stocks receiving the greatest number of stops, the Amex

determined how often book orders which might have been entitled to an

execution had the order not been stopped, in fact, were executed at

their limit price by the close of the day's trading.\12\ The Commission

does not consider that data to be conclusive given the narrow scope of

the Exchange's analysis of the pilot program's impact.

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\11\When stock is stopped, book orders on the opposite side of

the market that are entitled to immediate execution lose their

priority. If the stopped order then receives an improved price,

limit orders at the stop price are bypassed and, if the market turns

away from that limit, may never be executed.

As for book orders on the same side of the market as the stopped

stock, the Commission believes that Rule 109's requirements make it

unlikely that these limit orders would not be executed. Under the

Amex's pilot program, an order can be stopped only if a substantial

imbalance exists on the opposite side of the market. See infra, text

accompanying notes 19-25. In those circumstances, the stock would

probably trade away from the large imbalance, resulting in execution

of orders on the book.

\12\Beyond the one-day review, the Amex could make this

determination only for those stocks in which the electronic display

book had been implemented. For other stocks, the Amex determined how

often an equivalent volume (i.e., the same number of shares as the

stopped order) was executed at the opposite side's limit price by

the close of the day's trading.

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The Commission historically has been concerned that book orders may

get bypassed when stock is stopped, especially in a minimum fractional

change market.\13\ Based on the Amex's experience to date, the

Commission believes that additional data is necessary before the

Commission can determine whether there are sufficient grounds to

conclude that this long-standing concern has been alleviated. Thus to

ensure that Rule 109, as amended, will not potentially harm public

customers with limit orders on the specialist's book, the Amex should

provide detailed facts supporting its arguments about the impact of its

pilot procedures. The Commission therefore requests that the Amex

conduct another review of this issue. At a minimum, the Amex should

determine how often limit orders against which stock is stopped in a

minimum fractional change market are executed by the close of the day's

trading.\14\ Further, the Amex should conduct, on a date to be selected

by the Commission, another one-day review of all book orders in the ten

stocks receiving the greatest number of stops, and should submit to the

Commission both raw trade data for,\15\ and a description of the final

disposition of,\16\ each such order.

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\13\See, e.g., SEC, Report of the Special Study of the

Securities Markets of the Securities and Exchange Commission, H.R.

Doc. No. 95, 88th Cong., 1st Sess. Pt. 2 (1963).

\14\Specifically, the Amex would first calculate the total

number of shares of limit orders against which stock is stopped in

minimum fractional change markets. The Amex would then determine how

many of those shares actually are executed by the close of the day's

trading. As noted above, see supra note 12, electronic display book

technology is necessary to determine the final disposition of limit

orders. The Amex expects the electronic book to be implemented

Floor-wide by mid-1994. Telephone conversation between Claudia

Crowley, Special Counsel, Legal & Regulatory Policy Division, Amex,

and Beth Stekler, Attorney, Division of Market Regulation, on March

11, 1994. As the phase-in of the electronic book continues, the Amex

should provide the Commission with complete information for all

stocks in which it has the capability to monitor the final

disposition of limit orders, even if it has not yet completed Floor-

wide implementation of the electronic book.

\15\In this regard, the Commission requests that the Amex submit

the documentation the Amex is relying upon to support its

conclusions about the final disposition of these limit book orders.

See infra, note 16.

\16\See supra, note 14.

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In terms of market depth, the Amex's January monitoring report

suggests that stock tends to be stopped in minimum fractional change

markets where there is a significant disparity (in both absolute and

relative terms) between the number of shares bid for and the number of

shares offered.\17\ That report also suggests that, given the depth of

the opposite side of the market, orders affected by the Rule 109 pilot

tend to be relatively small.\18\ The Amex repeatedly has stated, both

to the Commission\19\ and to its members,\20\ that specialists can only

stop stock in a minimum fractional change market when (1) an imbalance

exists on the opposite side of the market and (2) such imbalance is of

sufficient size to suggest the likelihood of price improvement.\21\

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\17\There is a direct relationship between such a quote size

imbalance and the likelihood of price improvement. A large imbalance

on one side of the market suggests that subsequent transactions will

take place on the other side. In those circumstances, it could be

appropriate to grant a stop, since the delay might allow the

specialist to execute the order at a better price for the customer.

\18\A relatively large order might begin to counteract the

pressure the imbalance on the opposite side of the market is putting

on the stock's price. Accordingly, it might not be as appropriate to

stop such an order.

\19\See letter from Claire P. McGrath, Senior Counsel, Legal &

Regulatory Policy Division, Amex, to Mary Revell, Branch Chief,

Division of Market Regulation, SEC, dated January 6, 1992 (Amendment

No. 1 to File No. SR-Amex-91-05). Amendment No. 1 formally

incorporated the requirement that the indicia of market depth

discussed below must, without exception, be satisfied before a

specialist is permitted to stop stock in a minimum fractional change

market.

\20\See Amex Information Circular Nos. 92-74 (April 24, 1992)

and 93-333 (April 7, 1993).

\21\For further discussion of the relationship between quote

size imbalance and the likelihood of price improvement, see supra

note 17.

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The Commission believes that the requirement of a sufficient market

imbalance is a critical aspect of the pilot program.\22\ Such a

requirement is necessary to ensure that stops are only granted, in a

minimum fractional change market, when the benefit (i.e., price

improvement) to orders being stopped far exceeds the potential of harm

to orders on the specialist's book.\23\ To evaluate how this standard

is being applied in practice, the Commission requests that the Amex

conduct another comprehensive quantitative analysis of market depth. In

its next monitoring report, the Amex should provide, in chart form, a

comparison of the size of the stopped order to any quote size

imbalance.\24\ The chart also should include the ratio of the size of

the bid to the size of the offer.\25\ The Amex should concentrate an

orders for 2,000 shares or less, and should provide the requested

information in the form of an average for all buy orders stopped, and

the for all sell orders stopped, in that size range.

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\22\In extending a comparable pilot program on the New York

Stock Exchange, the Commission placed similar emphasis on the

critical nature of the sufficient size standard when stopping stock

in minimum fractional change markets. See Securities Exchange Act

Release No. 32031 (March 22, 1993), 58 FR 16563 (March 29, 1993)

(File No. SR-NYSE-93-18).

\23\See supra, text accompanying notes 11-16.

\24\Every time a specialist stops an order to buy, the Amex

should calculate the size of that stopped order as a percentage of

the quote size imbalance, i.e., the difference between the size of

the offer and the size of the bid.

Every time a specialist stops an order to sell, the Amex should

calculate the size of that stopped order as a percentage of the

quote size imbalance, i.e., the difference between the size of the

bid and the size of the offer.

\25\Every time a specialist stops an order to buy, the Amex

should calculate the size of the bid as a percentage of the size of

the offer.

Every time a specialist stops an order to sell, the Amex should

calculate the size of the offer as a percentage of the size of the

bid.

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Finally, the Amex report describes its efforts regarding compliance

with the pilot procedures. To alleviate confusion about how to evidence

Floor Official approval (which, as noted above, a specialist must

obtain to stop any order for more than 2,000 shares, or a total of more

than 5,000 shares for all stopped orders), the Exchange has developed

new manual and automated reports, which serve as a written audit trail

for surveillance purposes. As a result, the Commission believes that

the Amex has sufficient means to determine whether a specialist

complied with the amendments' order size and aggregate share thresholds

and, if not, whether Floor Official approval was obtained for larger

parameters. The Commission also notes the Amex's on-going effort to

keep its specialists properly informed about the pilot program's

requirements. In this context, the Amex has distributed Information

Circulars.\26\ and held continuing educational sessions on the pilot

program and its requirements for stopping stock in minimum fractional

change markets.

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\26\See supra, note 20.

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During the pilot extension, the Commission requests that the Amex

continue to monitor closely specialist compliance with Rule 109's

procedures. As before, the Amex should determine how often orders

requiring Floor Official approval to be stopped do not receive such

approval. In so doing, the Amex should distinguish between instances

where the specialist did not ask for permission and those where it was

denied (and, if so, on what grounds). The Amex should gather and report

information about the market conditions prevailing at the time of each

instance of specialist non-compliance with these procedures and the

action taken by the Exchange in response thereto.

The Commission requests that the Amex submit a report describing

its findings on these matters, specifically: (1) The effect of Rule

109, as amended, on limit book orders and (2) specialist compliance

with the pilot procedures, by December 31, 1994. In addition, if the

Exchange determines to request an extension of the pilot program beyond

March 21, 1995, the Commission requests that the Amex also submit a

proposed rule change by December 31, 1994.

The Commission finds good cause for approving the proposed rule

change prior to the thirtieth day after the date of publication of the

notice of filing thereof. This will permit the pilot program to

continue on an uninterrupted basis. In addition, the procedures the

Exchange proposes to continue using are the identical procedures that

were published in the Federal Register for the full comment period and

were approved by the Commission.\27\

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\27\No comments were received in connection with the proposed

rule change which implemented these procedures. See 1992 Approval

Order, supra, note 3.

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It is therefore ordered, pursuant to section 19(b)(2)\28\ that the

proposed rule change (SR-Amex-93-47) is hereby approved until March 21,

1995.

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\28\15 U.S.C. 78s(b)(2) (1988).

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\29\

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\29\17 CFR 200.30-3(a)(12) (1991).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-7214 Filed 3-25-94; 8:45 am]

BILLING CODE 8010-01-M