Self-Regulatory Organizations; Notice of Filing of, and Order Granting Accelerated Approval to, Proposed Rule Change by the American Stock Exchange, Inc. Relating to a Pilot Program for Execution of Specialists' Liquidating Transactions

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37958; File No. SR-Amex-96-42]

November 15, 1996.

Self-Regulatory Organizations; Notice of Filing of, and Order

Granting Accelerated Approval to, Proposed Rule Change by the American

Stock Exchange, Inc. Relating to a Pilot Program for Execution of

Specialists' Liquidating Transactions

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on November 12, 1996, the

American Stock Exchange, Inc. (``Amex'' or ``Exchange'') filed with the

Securities and Exchange Commission (``SEC'' or ``Commission'') the

proposed rule change as described in Items I and II below, which Items

have been prepared by the self-regulatory organization. The Exchange

submitted Amendment No. 1 on November 15, 1996.\2\ The Commission is

publishing this notice to solicit comments on the proposed rule change

from interested persons and to grant accelerated approval to the

proposed rule change.

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

\2\ See letter from Claudia Crowley, Special Counsel, Amex, to

Anthony P. Pecora, Attorney, Division of Market Regulation, SEC,

dated November 15, 1996. Amendment No. 1 removed a footnote

detailing the Amex's perception of how this rule is supposed to be

enforced.

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

of the Proposed Rule Change

The Amex is proposing permanent approval of the pilot program that

amended Exchange Rule 170 to permit a specialist to effect a

liquidating transaction on a zero minus tick,\3\ in the case of a

``long'' position, or a zero plus tick,\4\ when covering a ``short''

position, without Floor Official approval. The pilot program also

amended Rule 170 to set forth the affirmative action that specialists

are required to take subsequent to effecting various types of

liquidating transactions. In the alternative, the Exchange is

requesting a three-month extension of the pilot program.

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\3\ A zero minus tick is a price equal to the last sale where

the last preceding transaction at a different price was at a higher

price.

\4\ A zero plus tick is a price equal to the last sale where the

last preceding transaction at a different price was at a lower

price.

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

the Secretary, the Amex, and at the Commission.

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.

[[Page 59477]]

A. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

1. Purpose

On September 19, 1996, the Commission approved an extension until

November 15, 1996 of a pilot program that amended Exchange Rule 170 to

permit a specialist to effect a liquidating transaction on a zero minus

tick, in the case of a ``long'' position, or a zero plus tick, when

covering a ``short'' position, without Floor Official approval.\5\ The

amendments also set forth the affirmative action that specialists are

required go take subsequent to effecting various types of liquidating

transactions.

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\5\ Securities Exchange Act Release No. 37704 (Sept. 19, 1996),

61 FR 50525 (approving File No. SR-Amex-96-33) (``September 1996

Approval Order'').

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During the course of the pilot program, the exchange has monitored

compliance with the requirements of the Rule, and its findings in this

regard have been forwarded to the Commission under separate cover. The

Amex believes the amendments have provided specialists with flexibility

in liquidating specialty stock positions in order to facilitate their

ability to maintain fair and orderly markets, particularly during

unusual market conditions. In addition, the specialist's concomitant

obligation to participate as a dealer on the opposite side of the

market after a liquidating transaction has been strengthened.

The Exchange is therefore proposing permanent approval of the

amendments to Rule 170 or, in the alternative, a three-month extension

of the pilot program.

2. Statutory Basis

The Exchange believes the proposed rule change is consistent with

Section 6(b) of the Act \6\ in general and furthers the objectives of

Section 6(b)(5) \7\ in particular in that it is 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 Exchange also believes

the proposed rule change is consistent with Section 11(b) of the Act

\8\ which allows exchanges to promulgate rules relating to specialists

in order to maintain fair and orderly markets.

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\6\ 15 U.S.C. 78f(b).

\7\ 15 U.S.C. 78f(b)(5).

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

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

The Exchange believes the proposed rule change will impose on

burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received From Members, Participants, or Others

The Exchange has neither solicited nor received written comments

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, N.W., Washington, D.C. 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. Sec. 552, will be available for inspection and copying at

the Commission's Public Reference Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Also, copies of such filing will be available

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

submissions should refer to File No. SR-Amex-96-42 and should be

submitted by December 13, 1996.

IV. Commission's Findings and Order Granting Accelerated Approval to

the Proposed Rule Change

The Commission finds that the Exchange's proposal to extend its

pilot program concerning the execution of specialists' liquidating

transactions until February 14, 1997, is consistent with the

requirements of the Act and the rules and regulations thereunder

applicable to a national securities exchange. Specifically, the

Commission believes the proposal is consistent with the Section 6(b)(5)

\9\ requirements that the rules of an exchange 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, in general, to

protect investors and the public interest. The Commission also believes

the proposal is consistent with Section 11(b) of the Act \10\ and Rule

11b-1 \11\ thereunder, which allow exchanges to promulgate rules

relating to specialists in order to maintain fair and orderly markets.

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\9\ 15 U.S.C. 78f(b)(5).

\10\ 15 U.S.C. 78k(b).

\11\ 17 CFR 240.11b-1.

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The Exchange originally proposed to amend Amex Rule 170 in File No.

SR-Amex-92-26.\12\ The proposed rule change, filed as a one-year pilot

program, amended Amex Rule 170 to permit specialists to ``reliquidate''

a dealer position by selling stock on a direct minus tick or by

purchasing stock on a direct plus tick, but only if such transactions

are reasonably necessary for the maintenance of a fair and orderly

market and only if the specialist has obtained the prior approval of a

Floor Official. Under the pilot program, a specialist also may sell

``long'' on a zero minus tick, or by purchasing on a zero plus tick to

cover a ``short'' position, without Floor Official approval. Although

liquidations on a zero minus or on a zero plus tick can be effected

under the pilot procedures without a Floor Official's prior approval,

such liquidations are still subject to the restriction that they be

effected only when reasonably necessary to maintain a fair and orderly

market. In addition, the specialist must maintain a fair and orderly

market during the liquidation.

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\12\ See Securities Exchange Act Release No. 33957 (Apr. 22,

1994), 59 FR 22188 (``1994 Approval Order'') (approving File No. SR-

Amex-92-26). See also Securities Exchange Act Release No. 35635

(Apr. 21, 1995), 60 FR 20780 (``April 1995 Approval Order'')

(approving File No. SR-Amex-95-11); Securities Exchange Act Release

No. 36014 (July 21, 1995), 60 FR 38870 (``July 1995 Approval

Order'') (approving File No. SR-Amex-95-19); Securities Exchange Act

Release No. 37448 (July 17, 1996), 61 FR 38487 (approving File No.

SR-Amex-96-19) (``July 1996 Approval Order''); September 1996

Approval Order, supra note 5.

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After the liquidation, the specialist is required to reenter the

market on the opposite side of the market from the liquidating

transaction to offset any imbalances between supply and demand. During

any period of volatile or unusual market conditions resulting in

significant price movement in a specialist's specialty stock, the

specialist's re-entry into the market must reflect, at a minimum, his

or her usual level of dealer participation in the specialty stock. In

addition, during such periods of volatile or unusual price movements,

re-entry into the market following a series of transactions must

reflect a significant level of dealer participation.

In the 1994 Approval Order, the Commission requested that the Amex

submit a report setting forth the criteria developed by the Exchange to

determine whether any reliquidation by specialists

[[Page 59478]]

were necessary and appropriate in connection with fair and orderly

markets.\13\ The Commission also asked, among other things, that the

Exchange provide information regarding the Exchange's monitoring of

liquidation transactions effected by specialists on any destabilizing

tick. In both of the 1995 approval orders, the Commission requested

that the Amex continue to monitor the pilot and update its report where

appropriate.\14\ In particular, the Commission asked the Amex to report

any noncompliance with the Rule and the action the Amex took as a

result of such noncompliance.

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\13\ See 1994 Approval Order, supra note 12.

\14\ See April 1995 Approval Order and July 1995 Approval Order,

supra note 12.

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The Amex submitted it reports concerning the pilot program to the

Commission in May 1995 and April 1996. As noted above, the Amex

believes the pilot procedures appear to be working well in enabling

specialists to reliquidate appropriately to meet the needs of the

market. After reviewing the date, the Commission agrees with the

Exchange that the pilot program generally is working well. In

particular, the Commission believes the report indicates that

specialists generally are entering the aftermarket after effecting

liquidating transactions when appropriate.

Nevertheless, the Commission believes certain issues concerning the

pilot program need to be revisited before permanent approval can be

granted. In this regard, the Exchange should continue to emphasize the

requirements of Amex Rule 170, including the necessity for Floor

Official approval of specialists' purchases and sales on direct plus or

minus ticks and that such transactions can only be effected if

reasonably necessary for the maintenance of fair and orderly markets.

In addition, where proper procedures are not followed, the Amex should

take appropriate disciplinary action.\15\ Finally, the Amex should

prepare an additional report as described above and submit the data to

the Commission for its consideration of whether the pilot program

should be granted permanent approval.\16\

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\15\ All technical violations of this rule (e.g., failure to

obtain the required Floor Official approval when such approval, if

sought, would have been granted) should be referred to the Minor

Floor Violation Disciplinary Committee, as required by Amex Rule

590. Also, as the Amex has indicated previously, all substantive

violations of this rule (e.g., failure to properly reenter the

market or failure to obtain the required Floor Official approval

when such approval, if sought, would not have been granted) will be

dealt with according to the Exchange's formal disciplinary

procedures.

\16\ The Commission request that this report be submitted by

January 7, 1997, along with any requests for extension or permanent

approval of the pilot.

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The Commission finds good cause for approving the proposed rule

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

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

continue on an uninterrupted basis. In addition, the Exchange proposes

to continue using the identical procedures contained in the pilot

program. These procedures have been published in the Federal Register

on several occasions for the full comment period,\17\ and no comments

have been received. Furthermore, the Commission approve a similar rule

change for the NYSE also without receiving comments on the

proposal.\18\ For these reasons, the Commission finds that accelerating

approval of the proposed rule change is consistent with Section

19(b)(2) of the Act.\19\ Any requests to modify this pilot program, to

extend its effectiveness, or to seek permanent approval for the pilot

program also should include an update on the disciplinary actions taken

for violations of these procedures.

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\17\ See 1994 Approval Order, supra note 12; April 1995 Approval

Order, supra note 12; July 1995 Approval Order, supra note 12; July

1996 Approval Order, supra note 12; September 1996 Approval Order

supra note 5.

\18\ See Securities Exchange Act Release No. 31797 (Jan 29,

1993), 58 FR 7277 (approving File No. SR-NYSE-92-20).

\19\ 15 U.S.C. 78s(b)(2).

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V. Conclusion

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

Act,\20\ that the proposed rule change (SR-Amex-96-42), as amended, is

approved for a pilot period ending on February 14, 1997.

\20\ Id.

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For the Commission, by the Division of Market Regulations,

pursuant to delegated authority.\21\

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\21\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-29933 Filed 11-21-96; 8:45 am]

BILLING CODE 8010-01-M