Self-Regulatory Organizations; American Stock Exchange, Inc.; Order Granting Permanent Approval of the Exchange's Pilot Program for Specialists in Portfolio Depositary Receipts, Investment Trust Securities, and Index Fund Shares To Participate in the After-Hours Trading Facility

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40613; File No. SR-Amex-98-20]

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

Order Granting Permanent Approval of the Exchange's Pilot Program for

Specialists in Portfolio Depositary Receipts, Investment Trust

Securities, and Index Fund Shares To Participate in the After-Hours

Trading Facility

October 28, 1998.

I. Introduction

On June 9, 1998, the American Stock Exchange, Inc. (``Amex'' or

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

(``SEC'' or ``the Commission'') a proposed rule change pursuant to

Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\

and Rule 19b-4 \2\ thereunder seeking permanent approval of the pilot

program permitting specialists in Portfolio Depositary Receipts \3\

(``PDRs''), investment trust securities, and Index Fund Shares to

participate in the after-hours trading (``AHT'') facility to ``clean-

up'' order imbalances and to effect closing price coupled orders.\4\

The proposed rule change was published for comment in the Federal

Register on July 23, 1998.\5\ No comments were received on the Amex's

proposal.

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

\2\ 17 CFR 240.19b-4.

\3\ The Exchange currently lists three Portfolio Depositary

Receipts, viz., Depositary Receipts on the Standard and Poor's

500 and MidCap Indexes, and Depositary Receipts

on the Dow Jones Industrial Average TM. The Exchange also

lists 17 Index Fund Shares which are commonly referred to as WEBS

sm. WEBS are shares issued by an open-end management

investment company that seek to provide investment results that

correspond generally to the price and yield performance of a

specified foreign or domestic equity market index. The Exchange

currently lists WEBS based on the following Morgan Stanley Capital

International (``MSCI'') indices: MSCI Australia Index, MSCI Austria

Index, MSCI Belgium Index, MSCI Canada Index, MSCI France Index,

MSCI Germany Index, MSCI Hong Kong Index, MSCI Italy Index, MSCI

Japan Index, MSCI Malaysia Index, MSCI Mexico Index, MSCI

Netherlands Index, MSCI Singapore (Free) Index, MSCI Spain Index,

MSCI Sweden Index, MSCI Switzerland Index, and MSCI United Kingdom

Index. The Commission notes that due to certain restrictions imposed

by the Malaysian government WEBS based on the MSCI Malaysia Index

currently trade differently than the other WEBS trading on Amex.

\4\ Pursuant to the pilot program, the specialist in PDRs,

investment trust securities, and Index Fund Shares may participate

in a coupled price closing 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.

\5\ Securities Exchange Act Release No. 40201 (July 15, 1998),

63 FR 39608.

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II. Description of the Proposal

The Commission originally approved the pilot program on August 29,

1994 (``Original Pilot Approval'').\6\ The pilot was scheduled to

expire on August 29, 1995, but was extended for three successive one-

year periods, and a thirty-day period.\7\ With this proposed rule

change, the Amex seeks permanent approval of the pilot program, which

otherwise will expire on October 31, 1998.

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\6\ See Securities Exchange Act Release No. 34611 (Aug. 29,

1994), 59 FR 45739 (Sept. 2, 1994).

\7\ See Securities Exchange Act Release Nos. 36123 (Aug. 18,

1995), 60 FR 44519 (Aug. 28, 1995); 37529 (Aug. 6, 1996), 61 FR

41814 (Aug. 12, 1996); 38986 (Aug. 27, 1997), 62 FR 46785 (Sept. 4,

1997); and 40533 (October 8, 1998), 63 FR 55660 (October 16, 1998).

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In the Original Pilot Approval and in each one-year extension, the

Commission requested that the

[[Page 59818]]

Exchange submit a report and analysis regarding the operation of the

pilot program. The Exchange did not submit a report until 1997,

however, as specialists made little or no use of the pilot program

until the period September 3, 1996 to May 30, 1997. The 1997 report

stated that during that period, there were two trades for a total of

600 shares of PDRs in the AHT session for PDRs, investment trust

securities, and Index Fund Shares.\8\ The 1998 report stated that

during the period June 1, 1997 to April 30, 1998, there were 12 trades

for a total of 56,320 shares of PDRs in the AHT session.\9\ No single-

sided orders remained unexecuted at the end of the AHT session during

the review period and there were no problems with any of these

trades.\10\

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\8\ See letter dated August 5, 1997, from William Floyd-Jones,

Jr., Assistant General Counsel, Amex, to Michael Walinskas, Senior

Special Counsel, Division of Market Regulation (``Division''),

Commission.

\9\ See letter dated June 8, 1998, from William Floyd-Jones,

Jr., Assistant General Counsel, Amex, to Michael Walinskas, Senior

Special Counsel, Division, Commission.

\10\ Id.

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The Exchange believes that permanent approval of the Exchange's

pilot program to permit specialists in PDRs, investment trust

securities, and Index Fund Shares to participate in the AHT facility in

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

orders will benefit investors by providing additional liquidity to the

listed cash market for derivative securities based upon market indexes.

The market price of these exchange-traded funds is based upon

transactions largely effected in markets other than the Amex. (In the

case of Index Fund Shares, the market price of these securities is

based exclusively on transactions occurring outside the Amex.) The

Exchange represents that the specialist in the Amex-listed securities

has no unique access to market sensitive information regarding the

market for the underlying securities or closing index values. Further,

to prevent the potential for manipulation or misuse, the pilot program

eliminates the migration of limit orders for PDRs, investment trust

securities, and Index Fund Shares from the specialists limit order book

to the AHT facility. The Exchange, therefore, believes that permanent

approval of specialist participation in the AHT facility in PDRs,

investment trust securities and Index Fund Shares in the manner

previously approved by the Commission on a pilot basis 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 AHT session.) Amex represents, therefore,

that a customer has approximately 40 minutes to determine if an

execution at the closing price suits his needs and may cancel the order

if he believes that the closing price does not suit his 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, Sections 6(b)(5) and 11 of the Act.\11\ 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 prevent

fraudulent and manipulative acts and practices, 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.\12\ The Commission also believes that the

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

thereunder,\13\ which allow exchanges to promulgate rules relating to

specialists in order to maintain fair and orderly markets.

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\11\ 15 U.S.C. 78f(b)(5) and 78k.

\12\ In approving this rule, the Commission notes that it has

considered the proposed rule's impact on efficiency, competition,

and capital formation. 15 U.S.C. 78c(f).

\13\ 17 CFR 240.11b-1.

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Under the pilot program, specialists in PDRs, investment trust

securities and Index Fund Shares may participate in the AHT facility to

clean up order imbalances by entering an order for their own account.

The pilot program also allows specialists in PDRs, investment trust

securities and Index Fund Shares to participate in a coupled closing

price order as 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. Moreover, the pilot program eliminates the migration

of limit orders for PDRs, investment trust securities, and Index Fund

Shares from the specialists limit order book to the AHT facility to

prevent the potential for manipulation or misuse of specialists'

information regarding which limit orders are eligible for execution in

the AHT facility.

The Commission continues to believe, as it did when the pilot

program was initially approved, that permitting specialists in PDRs,

investment trust securities, and Index Fund Shares \14\ to participate

in the AHT facility by entering an order for the specialist's account

to eliminate order imbalances should assist specialists in their

obligation to minimize temporary disparity between supply and

demand.\15\ Moreover, the Commission agrees with the Amex that

permitting specialists in PDRs, investment trust securities, and Index

Fund Shares to participate in the AHT facility to effect closing price

coupled orders should benefit investors by providing additional

liquidity to the listed cash market for derivative securities based

upon market indexes.

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\14\ The Commission notes that when the original pilot program

was approved, it applied only to PDRs and investment trust

securities. The pilot program was modified to include Index Fund

Shares with the extension of the pilot program in August 1996. See

Securities Exchange Act Release No. 37529 (August 6, 1996), 61 FR

41814 (August 12, 1996).

\15\ See Original Pilot Approval, supra note 6.

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The Commission also continues to believe that the Amex's rule

change strikes a reasonable balance between the Exchange's need to

accommodate the needs of investors by increasing the liquidity in the

listed cash market for derivative securities based on market indexes

and the need to prevent the potential for manipulation or misuses of

information. With regard to the latter concern, although Amex

specialists will be aware of limit orders remaining on the specialist's

limit order book, they generally will not be able to use this

information to their advantage because, under the terms of the pilot

program, as permanently approved, Amex Rule 1302(b) has been amended to

eliminate the migration of limit orders for PDRs, investment trust

securities, and Index Fund Shares from the specialist's limit order

book to the AHT facility.\16\ Further, the Commission notes that all

orders entered by the specialist in the AHT facility receive the

closing price in the Amex market on that same trading day, rather than

a negotiated price. This should reduce the likelihood that any

additional information the specialist has as a result of making a

market in the speciality security could be misused in the AHT facility.

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\16\ The Commission notes that the permanent approval of the

pilot program includes permanent approval of the changes to Rule

1302(b) restricting the migration of limit orders.

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In addition, while the trading activity for PDRs, investment trust

securities, and Index Fund Shares in the AHT facility has been modest,

the Exchange

[[Page 59819]]

has reported no problems with any of these trades. Moreover, as

evidenced by the reports filed by the Exchange, the pilot program has

been used increasingly over the past two years.

Finally, the Commission expects the Amex, through use of its

surveillance procedures, to monitor closely the trading of PDRs,

investment trust securities, and Index Fund Shares in the AHT facility

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

of manipulation, trading abuses or unusual trading activity.

IV. Conclusion

For the reasons discussed above, the Commission believes that

permanent approval of specialist participation in the AHT facility in

PDRs, investment trust securities and Index Fund Shares in the manner

previously approved by the Commission is appropriate and consistent

with the Act.

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

Act,\17\ that the proposed rule change (SR-Amex-98-20) is approved.

\17\ 15 U.S.C. 78s(b)(2).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\18\

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\18\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98-29622 Filed 11-4-98; 8:45 am]

BILLING CODE 8010-01-M