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U.S. Securities and Exchange Commission

AMEX Rulemaking:
Proposed Rule Change and Amendment Nos. 1 and 2 to the Proposed Rule Change Relating to Solicitation of Options Transactions

SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-40345; File No. SR-Amex-98-19)

August 19, 1998

Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2 to the Proposed Rule Change by the American Stock Exchange, Inc. Relating to Solicitation of Options Transactions

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 ("Act"), 1 notice is hereby given that on May 18, 1998, 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, II, and III below, which Items have been prepared by the Amex. On July 7, 1998, the Amex filed Amendment No. 1 to the proposal. 2 On August 18, 1998, the Amex filed Amendment No. 2 to the proposal.3 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

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

Currently, Amex Rule 950(d), Commentary .03 allows a member representing an order in options (the "originating order") to solicit another member, member organization, or non-member broker-dealer outside the trading crowd to participate in the transaction on a proprietary basis provided that the conditions specified in Commentary .03 are satisfied. The Amex proposes to amend Amex Rule 950(d), Commentary .03 to (1) allow a member representing an originating order to solicit a customer (as well as another member, member organization, or non-member broker-dealer) to participate in the transaction; and (2) provide that a ROT, when establishing or increasing a position, may retain priority over an off-floor order (including that of a customer) that is subject to Commentary .03. In addition, the Amex proposes to adopt Commentary .04 to Amex Rule 950(d), which will state that it may be considered conduct inconsistent with just and equitable principles of trade for any member or associated person who has knowledge of all material terms and conditions of (1) an originating order and a solicited order; (2) an order being facilitated; or (3) orders being crossed,4 the execution of which are imminent, to enter, based on that knowledge, an order to buy or sell an option of the same class as any option that is the subject of the order, an order to buy or sell the security underlying that class, or an order to buy or sell a related instrument until either (1) all the terms of the order and any changes in the terms and conditions of the order of which the member or associated person has knowledge are disclosed to the trading crowd; or (2) the trade can no longer reasonably be considered imminent in view of the passage of time since the order was received. For purposes of Commentary .04, a "related instrument" means, in reference to an index option, an order to buy or sell securities comprising 10% or more of the component securities in the index or an order to buy or sell a futures contract on any economically equivalent index.

The proposed rule change is attached as Exhibit A.

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 Amex 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 IV below. The Amex 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

(a) Purpose

In 1989, the Amex adopted the "solicitation rule" (Amex Rule 950(d), Commentary .03) to govern the manner in which members may solicit other members and non-member broker-dealers to participate in options transactions. According to the Amex, members generally solicit participation in large size orders and/or orders with more complex terms and conditions, including orders involving both stock and options. Amex Rule 950(d), Commentary .03 permits the solicitation of on-floor and off-floor members and non-member broker-dealers outside of a trading crowd to participate as the contra side of an order only if the trading crowd is given (1) the same information about the options order as is given to the solicited party; and (2) a reasonable opportunity to accept the bid or offer before the solicited party participates in the transaction. The Amex recently has become aware of a growing practice among member firms to solicit not only other members and broker-dealers, but also customers to participate in these large options orders.

Amex Rule 950(d), Commentary .02 describes facilitation orders, in which a member or member organization executes a crossing transaction with an order for a public customer. According to the Amex, the purpose of the facilitation rule is to provide procedures that allow a customer's order to be executed completely. The Amex notes that while the facilitation rule is similar in many ways to the solicitation rule, i.e., it requires disclosure to the trading floor crowd and allows the crowd to supplant the facilitating member, it does not allow the trading floor crowd to supplant the customer. In addition, floor members may also facilitate customer orders using the Amex's crossing rule (Amex Rule 151, "On Order' Transactions"). However, Amex Rule 151 does not protect a customer order from being supplanted by the trading crowd, nor would the current proposed change to the Amex's solicitation rule.

The Exchange policy regarding the use of non-public market information that applies to solicited orders currently does not apply to facilitation orders. Since the adoption of the solicitation rule, the Amex has prohibited the use of non-public information by the solicited party for its own benefit by trading in the underlying stock or in related options. Use of such non-public information by the solicited party or by the trading crowd (regardless of whether that party ultimately completes the options transaction) generally is considered conduct inconsistent with just and equitable principles of trade. The Amex also proposes to codify in Amex Rule 950(d), Commentary .04 the policy regarding the use of non-public information and to apply that newly codified policy to non-public information obtained by a member facilitating a customer order or information obtained by a member crossing customer orders.

The Amex proposes to amend the solicitation rule (Amex Rule 950(d), Commentary .03) to apply the rule to the solicitation of customers and to indicate that a ROT, when establishing or increasing a position, may retain priority over an off-floor order that is subject to the solicitation rule. The Amex states that its rules are designed to promote the interaction of orders in options in an open-outcry auction. Such rules impose order exposure requirements on floor brokers seeking to cross buy orders and sell orders. Applying the solicitation rule to customers will preserve the right of members to solicit customer participation in orders in advance of submitting a proposed trade to the trading floor crowd, while at the same time assuring that orders that are the subject of a solicitation are exposed to the auction market in a meaningful way.

Moreover, the proposal seeks to reconcile the practice of soliciting participation in orders from customers with the rules and practices of the auction market. The Amex believes that the proposal will help in giving fair and equal access to information regarding solicited transactions to participants in trading crowds. In addition, the Amex believes that providing trading crowds with an opportunity to participate in transactions from which they had been excluded will result in more competitive markets and executions for customers at the best available prices.

In addition, the Amex's proposal codifies the policy that it is inconsistent with just and equitable principles of trade for any member or associated person who has knowledge of all material terms and conditions of (1) an originating order and a solicited order; (2) an order being facilitated; or (3) orders being crossed, the execution of which are imminent, to enter, based on such knowledge, an order to buy or sell an option of the same class as any option that is the subject of the order, or an order to buy or sell the security underlying such class, or an order to buy or sell any related instrument prior to the time the order's terms and any changes in those terms are disclosed to the trading floor crowd or the trade can no longer reasonably be considered imminent in view of the passage of time since the order was received. The purpose of this policy is to prevent members and associated persons from using undisclosed information about imminent solicited option transactions to trade the relevant option or any closely-related instrument in advance of persons represented in the trading crowd. Without this prohibition, such trading can threaten the integrity of the auction market or disadvantage other market participants. The Amex believes that applying the same prohibitions on the use of non-public information obtained when facilitating a customer order is necessary and appropriate to prevent similar misuse of such information.

(b) Statutory Basis

The Amex believes that the proposed rule change is consistent with Section 6(b) of the Act, in general, and further the objectives of Section 6(b)(5) of the Act, in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and a national market system.

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

The Amex believes that 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. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will by order approve such proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. 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. § 552, will be available for inspection and copying in the Commission's Public Reference Room. 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-98-19 and should be submitted by [insert date 21 days from the date of publication].

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.5

 

Jonathan G. Katz
Secretary

Exhibit A

Additions are italicized; deletions are bracketed.

Rule 950 Rules of General Applicability

(a)-(c) No change.

Commentary

.01-.03 No change.

.04 A Registered Options Trader, in establishing or increasing a position, may retain priority over or have parity with an off-floor order that is subject to the solicitation rule set forth in Rule 950(d), Commentary .03.

(d) The provisions of Rule 126, with the exception of subparagraphs (a) and (b) thereof, shall apply to Exchange option transactions and the following additional commentary shall also apply:

Commentary

.01-.02 No change.

.03 A member or member organization representing an order in options ("originating order") may solicit another member, member organization , [or] non-member broker dealer or customer outside the trading crowd ("solicited party") to participate in the transaction on a proprietary basis provided the member or member organization, upon entering the trading crowd to execute the transaction announces to the trading crowd the same terms and conditions about the originating order as disclosed to the solicited party and bids at the price he is prepared to buy from the solicited party or offers at the price he is prepared to sell to the solicited party.

After all other market participants are given a reasonable opportunity to accept the bid or offer, the solicited party may accept all or any remaining part of such order or the member may cross all or any remaining part of the originating order with the solicited party at such bid or offer by announcing that the member is crossing the orders stating the quantity and price. Non-solicited market participants and floor brokers holding non-solicited discretionary orders in the trading crowd will have priority over the solicited party or the solicited order to trade with the original order at the best bid or offer price subject to the precedence rules set forth in Rule 155.

A Registered Options Trader, when establishing or increasing a position, may retain priority over an off-floor order that is subject to this solicitation rule.

All orders subject to solicitation pursuant to this Commentary, and all tickets reflecting orders solicited pursuant to this Commentary, must be marked as specified by the Exchange.

.04 With respect to Commentaries .02 and .03 above, it may be considered conduct inconsistent with just and equitable principles of trade for any member or person associated with a member, who has knowledge of all material terms and conditions of an original order and a solicited order, including a facilitation order, the execution of which are imminent, to enter, based on such knowledge, an order to buy or sell an option of the same class as any option that is the subject of the order, or an order to buy or sell the security underlying such class, or an order to buy or sell any related instrument until either (i) all the terms of the order and any changes in the terms and conditions of the order of which that member or associated person has knowledge are disclosed to the trading crowd or (ii) the solicited trade can no longer reasonably be considered imminent in view of the passage of time since the solicitation. For purposes of this paragraph (b), an order to buy or sell a "related instrument," means, in reference to an index option, an order to buy or sell securities comprising ten percent or more of the component securities in the index or an order to buy or sell a futures contract on any economically equivalent index.

(e)-(o) No change.


Footnotes

115 U.S.C. 78s(b)(1).

2See Letter from Claire P. McGrath, Vice President and Special Counsel, Derivative Securities, Amex, to Richard Strasser, Assistant Director, Division of Market Regulation ("Division"), Commission, dated July 6, 1998 ("Amendment No. 1"). Amendment No. 1 revises proposed Commentary .04 to Amex Rule 950(d) to indicate that it may be considered conduct inconsistent with just and equitable principles of trade for any member or associated person who has knowledge of the material terms and conditions of orders being crossed to use that information to buy or sell the underlying security or related securities until either the terms of the order are disclosed to the trading crowd or the trade can no longer reasonably be considered imminent. In addition, Amendment No. 1 revises proposed Commentary .04 to replace a reference to an "original" order with a reference to an "originating" order and to replace a reference to paragraph (b) with a reference to Commentary .04.

3See Letter from Claire P. McGrath, Vice President and Special Counsel, Derivative Securities, Amex, to Richard Strasser, Assistant Director, Division , Commission, dated August 18, 1998 ("Amendment No. 2"). Amendment No. 2 adds Commentary .04 to Amex Rule 950(c). Commentary .04 states that a Registered Option Trader ("ROT"), in establishing or increasing a position, may retain priority over or have parity with an off-floor order that is subject to the solicitation rule set forth in Amex Rule 950(d), Commentary .03. Off-floor orders that are not subject to the solicitation rule will retain priority and parity as set forth in Amex Rules 111 and 950(c).

4See Amendment No. 1, supra note 2.

517 CFR 200.30-3(a)(12).

http://www.sec.gov/rules/sro/am9819n.htm


Modified:08/27/98