Self-Regulatory Organizations; Order Approving Proposed Rule Change by the American Stock Exchange LLC Relating to the Amendment of Rule 126 on a Pilot Program Basis

I. Introduction

On February 3, 2000, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934, and Rule 19b-4 thereunder, a proposed rule change to implement a six month pilot program for processing electronically transmitted orders for equities traded on the Exchange (“eQPriority”). The proposed rule change was published for comment in the Federal Register on June 7, 2000. No comments were received on the proposal. This order approves the proposed rule change.

II. Description of the Proposal

The proposed rule change would add a new Commentary .03 to Amex Rule 126, which governs the precedence of bids and offers. The Exchange states that proposed Commentary .03 is intended to assure investors who send electronic orders to the Exchange that their orders will be filled at either: the Amex Published Quote (“APQ”) at the time the specialist announces the order, up to the depth of the quote; or at an improved price. The Exchange believes that this will encourage investors and order flow providers to send orders to the Amex.

Proposed Commentary .03 specifically applies to the handling of round lot, regular way orders for common stock sent to the Exchange electronically, at all times other than openings, reopenings, or instances where a block is sold at a “clean up” price. The commentary specifies that when a specialist's order book receives the electronic order, the specialist shall announce the order to the crowd, and the order will establish priority with respect to all other bids and offers. Upon that announcement, members whose bids or offers are incorporated into the APQ may not withdraw or modify those bids and offers except to provide price improvement to the electronic order. Once the specialist announces the order, the specialist and members of the crowd will have a brief opportunity to provide price improvement. If the electronic order is filled in part at an improved price, that sale would not remove bids and offers, and the incoming order retains priority over other bids and offers up to the full size APO (less any interest that provided price improvement). If the incoming order is larger than the size displayed in the APQ, the unfilled portion will be handled according to the customary auction market procedures.

The Exchange states that it believes eQPriority^sm will provide investors with the optimal combination of price improvement possibilities with speed and certainty of execution. The Exchange also notes that the proposed eQPriority^sm program is not limited to institutional size orders. The program will only apply to the common stock of business corporations admitted to dealings, because the Exchange believes that it would be inappropriate to apply the program to options and equity derivatives as the Amex is not the price discovery market for those securities and the value of the underlying instruments may change very-rapidly.

The Exchange also states that the program should not apply to openings and reopenings because openings involve a balancing of supply and demand to reach a consensus price that, by definition, is the best execution. Moreover, the program will not apply to “clean-up” sales of blocks because the Exchange believes that the current procedure for affecting a clean-up sale at a single price outside the APQ is fairest to all parties.

The Exchange's current auction market rules do not guarantee that an incoming electronic order will interact against the APQ. For example, when an electronic order arrives on the Exchange, the specialist in the security will announce a crossing market in an attempt to provide price improvement to the order. Although that procedure gives floor brokers an opportunity to execute the electronic order at an improved price, the procedure may also permit a floor broker to trade against the APQ despite the presence of the electronic order. Moreover, if an electronic order is filled in part at an improved price, current practice potentially allows floor brokers to interact with the APQ on parity with the unfilled remainder of the electronic order. The Amex believes that Commentary .03 addresses the perception that trading may occur in that manner when an electronic order arrives on the floor of the Exchange.

III. Discussion

The Commission finds that proposed rule change is consistent with section 6(b)(5) of the Act. Section 6(b)(5) requires, among other things, that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove the impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.

The Commission specifically finds that the proposed rule change would modify the Exchange's existing auction market rules in a way that should help assure that electronic orders sent to the Exchange from off the Amex floor will have an improved opportunity to interact with the published Amex quote. In particular, the Commission finds that the proposed rule change will help prevent two scenarios under which the Exchange's existing auction market rules may not always permit electronic orders an ideal opportunity to interact with the Amex quote: a scenario in which on-floor traders could trade against the Amex quote while the specialist is attempting to obtain price improvement for the electronic order, and a scenario in which the execution of part of an electronic order could put floor interest on parity with the remainder of the electronic order. The Commission finds that the proposed rule change should provide greater assurance that electronic orders sent to the Amex floor will have the opportunity to interact with the Amex quote, without having to make any findings about whether either of those practices currently occurs on the Amex floor.

The Commission further finds that the proposed rule change contains reasonable exceptions for openings and reopenings and for blocks sold at cleanup price, because the proposed priority rules are not needed in those circumstances. Moreover, the Commission also finds that it is reasonable for Amex to continue to apply its existing auction market procedures to those portions of an electronic order that are larger than the Amex quote.

Finally, the Commission finds that it is reasonable for the Exchange to implement this proposal for a six month pilot period, to permit the Exchange to assess the costs and the benefits of the program. Continuation of this program beyond that six month period would require the Exchange to file another proposed rule change.

It is Therefore Ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (SR-Amex-00-07) is hereby approved until March 12, 2001.