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Following the close of trading on Friday, June 27, 2008, the 2008 reconstitution of the Russell Indexes will take place. 1 As a result of this reconstitution of the Russell Indexes and the consequent rebalancing of portfolios that are based on such Indexes, there is a potential for significant trading volume and greater than normal market volatility on that day and the days leading up to it. These effects may well be seen in stocks that are not being added or removed from the various Indexes as well as in those that are.
This Notice describes procedural and regulatory matters related to this event including:
(i) American Stock Exchange ("Amex" or "Exchange") rules that govern market-on-close and limit-on-close ("MOC" and "LOC") order entry and amendment, which are particularly relevant as the potential for increased volume and volatility are likely to be greater toward the closing; (ii) contingencies in the event of system interruption; and (iii) certain regulatory cautions.
To help facilitate communications on June 27, 2008 and to advise market participants of any unexpected circumstances arising on the day of the Russell Reconstitution there will be an industry-wide conference call beginning at 3:00 p.m. The call will be held by Amex, NYSE, NYSE-Arca and NASDAQ and will last approximately two hours. This call will be closed to members of the media. Call details are as follows:
Entering and Amending MOC and LOC (On-close) Orders
Amex Rule 131A-AEMI 2 describes market-on-close policy, and these rules will apply equally on June 27, 2008. In an attempt to minimize price volatility at the closing, all MOC and LOC orders should be entered as early in the day as possible to provide market participants an opportunity to better ascertain possible order imbalances that might exist at the closing. Members and member organizations must enter all MOC and LOC orders into AEMI prior to the applicable deadlines in order for them to be eligible to participate in the closing. MOC and LOC orders that are not entered into AEMI by the applicable deadlines will not participate in the closing. On-close orders entered after the respective deadlines that do not offset a published imbalance will be rejected.
Between 3:00 and 3:40 p.m. (Eastern Time), imbalances of any size may be published by the specialist with Floor Official approval. These are informational only and do not limit MOC and LOC order entry before 3:40 p.m.
Imbalance publication as of 3:40 p.m. - At or as soon after 3:40 p.m. as possible, AEMI will publish MOC order imbalances of 25,000 shares or more. In addition, in certain circumstances, an order imbalance below 25,000 shares may also be published. A "No Imbalance" notice will only be published for any stock at 3:40 p.m. if there had been a prior informational imbalance publication.
Imbalance publication as of 3:50 p.m. - At or as soon after 3:50 p.m. as possible, AEMI will publish MOC order imbalances of 25,000 shares or more. In addition, in certain circumstances, an order imbalance below 25,000 shares may also be published. If there was an imbalance publication at 3:40 p.m. and the imbalance at 3:50 p.m. is less than 25,000 shares, either a "No Imbalance" notice will be published or the size and side of the imbalance may be published.
Prior to 3:40 p.m. MOC and LOC orders may be entered, amended or cancelled without regard to order imbalances. Between 3:40 p.m. and 3:50 p.m., however, no MOC or LOC orders may be entered except to offset a published on-close imbalance at 3:40 p.m. Also, between 3:40 p.m. and 3:50 p.m., MOC and LOC orders are irrevocable, except to correct an error (e.g., incorrect stock, side, size, or price, or a duplication of a previously entered order). Properly cancelled MOC and LOC orders may not be replaced after 3:40 p.m. unless the replacement order offsets a published on-close imbalance.
After 3:50 p.m., no MOC or LOC orders may be entered except to offset a published on-close imbalance at 3:50 p.m. Cancellation or reduction in size of MOC and/or LOC orders after 3:50 p.m. is not permitted for any reason, including in case of legitimate error.
Printing the Close
Where there is an imbalance between the buy and sell MOC and marketable LOC orders, the specialist will, at the close or as soon after the close of trading in the security as practicable, execute the imbalance at an auction price under prevailing market conditions that is consistent with auction market procedures. The specialist will then conduct a post trade allocation with respect to the shares necessary to offset the imbalance of buy/sell interest at the closing price, and AEMI will send notification of individual trades to active crowd participants, consisting of Floor Brokers and Registered Traders in the crowd with a bid or offer on the AEMI Book on the contra side of the imbalance.
Following the printing of the imbalance, AEMI will pair-off and execute the remaining executable buy and sell orders against each other at the price of the imbalance trade described above. This "pair-off" transaction is reported to the tape as "stopped stock".
Subsequently, AEMI will execute at that same price stop orders on the AEMI Book that are elected by the execution of the MOC and marketable LOC imbalance at the price of the imbalance trade as provided above if they are executable. Where the aggregate size of the MOC (and marketable LOC) orders to buy equals the aggregate size of the MOC (and marketable LOC) orders to sell, the specialist will pair-off the buy orders and sell orders and execute them at the price of the last sale on the Exchange prior to the close of trading in that stock on that day. This transaction is reported to the tape as "stopped stock".
Effect on At-the-Close Procedures in the Event of a System Interruption
In the event that Amex experiences an intraday system interruption, at-the-close procedures may be affected, depending on when the interruption begins and when functionality is restored. In the following six situations, an interruption is assumed to occur during the trading day, with starting and ending times as shown. Although we would expect to follow the procedures as outlined below, Amex reserves the right to adjust times and/or actions to respond to unforeseen occurrences.
Situation #1 - Interruption ends prior to 3:40 p.m.
In this situation, the regular at-the-close procedures would apply. Imbalance publications and order entry deadlines, as described above, would be unaffected.
Situation #2 - Interruption begins prior to 3:40 p.m. and ends between 3:40 p.m. and 3:50 p.m.
If trading is halted floorwide and Amex systems are capable of receiving MOC, LOC and other orders, we will accept them during the halt. Following the halt, an order imbalance of 25,000 shares or more will be published as of the reopening time and again at 3:50 p.m. MOC and LOC order entry after resumption will be permitted only to offset a published imbalance. Pursuant to Rule 22-AEMI(a)(3), cancellation of MOC and LOC orders will be deemed to be for the correction of an error and will be permitted prior to 3:50 p.m.
Situation #3 - Interruption begins and ends between 3:40 p.m. and 3:50 p.m.
Order imbalances will be published normally at 3:40 and at 3:50 p.m. MOC and LOC order entry following resumption of trading will be permitted only to offset a published imbalance. Cancellation of MOC and LOC orders will be permitted prior to 3:50 p.m. only to correct an error.
Situation #4 - Interruption begins prior to 3:40 p.m. and ends between 3:50 p.m. and 4:00 p.m.
If trading is halted floorwide and Amex systems are capable of receiving MOC, LOC and other orders, we will accept them during the halt. AEMI will publish order imbalances of 25,000 shares or more upon resumption of trading. An imbalance of less than 25,000 shares may be published with the concurrence of a Floor Official. MOC and LOC order entry following resumption of trading will be permitted only to offset a published imbalance. Pursuant to Rule 22-AEMI(a)(3), cancellation of MOC and LOC orders will be deemed to be for the correction of an error and will be permitted prior to 3:50 p.m.
Situation #5 - Trading is likely to resume after 4:00 p.m.
In the unlikely event that trading will not resume in time for an orderly closing print at 4:00 p.m. Amex will extend the trading day by up to one-and-one-half hours (up to 5:30 p.m.) In this situation, the Amex will announce the expected reopening and extended closing times as soon as possible. Furthermore, members will have the same amount of time prior to the closing print in which to enter or amend MOC and LOC orders, as long as Auto-Ex capability is present. For example, if the closing is extended to 4:30 p.m., then the imbalance publications and order entry restrictions that normally take place at 3:40 and 3:50 p.m. would, in this case, occur at 4:10 and 4:20 p.m., respectively.
Situation #6 - Trading is unlikely to resume by 5:30 p.m.
In the unlikely event that trading cannot resume by 5:30 p.m. then MOC and LOC orders will be cancelled by AEMI. Amex will properly notify market participants through the Consolidated Tape, CMS administrative messages and the Amex web site (amextrader.com). In such an instance there will be no closing Amex print and the consolidated last sale price should be used for purposes of the Russell reconstitution.
Readiness by Member Organizations
Pursuant to Rule 184, specialists or specialist units must employ an adequate number of clerks to enable the specialist unit to efficiently handle trading volume in the unit's registered securities and to meet its regulatory responsibilities. Staffing levels must enable the unit to efficiently handle actual and reasonably anticipated volume in the unit's registered securities. As volume may reasonably be expected to be higher than normal as a result of the reconstitution of the Russell Indexes on June 27, 2008, members are advised to ensure that they are sufficiently staffed on that day. Further guidance on Rule 184 can be found in Amex Notice 2006-12.
As described above, under certain circumstances normal processing times may be delayed. Therefore, firms that are connected via FIX should be prepared to extend their session hours on June 27, 2008, in the event of system interruption.
Regulatory Cautions
Members are reminded that they must not engage in market manipulation by attempting to influence the closing price of a security. Such violative conduct may involve "marking the close" or withholding the entry of an order until shortly before the close in an effort to artificially inflate or depress the closing price of a security.
In the event that a system interruption causes a change to occur in the normal at-the-close procedures, such as described in the above situations, members are reminded that they must continue to comply with all applicable Amex rules and federal securities laws and rules thereunder. In particular, members must be especially cognizant of their customers' requirements with regard to orders that may be executed or cancelled at different times than were expected when the orders were initially entered. Members are reminded of the application of Rule 411 in connection with their obligation to know their customers.
Member firms must have in place sufficient internal controls, including supervision, reasonably designed to ensure compliance with all applicable Amex and SEC rules. In addition, members must perform appropriate due diligence to ensure that customers' interests are properly represented. 3
Staff Contacts
Operational matters - David Gordon at 212-306-1070
Regulatory matters - Rick Farber at 212-306-5310
1 Information about the annual reconstitution of the Russell Indexes can be found on the web at http://www.russell.com/indexes/membership/Reconstitution/default.asp.
2 Approved Amex rules can be found on the web at http://wallstreet.cch.com/AMEX/Rules/.
3 The use of the term "due diligence" is not intended to equate the responsibilities of a member for its sales conduct obligations with the requirements of an underwriter under Section 11 of the Securities Act of 1933 and Securities Act Rule 176.