[Federal Register Volume 62, Number 12 (Friday, January 17, 1997)]
[Notices]
[Pages 2704-2706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1220]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38158; File No. SR-NYSE-96-34]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Partial Accelerated Approval of a Proposed Rule Change by the
New York Stock Exchange, Inc. to Make Permanent the Near Neighbor,
Capital Utilization and Rule 103A Pilot Programs for Measuring
Specialist Performance and Adopt a New Specialist Performance Measure
January 10, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder, \2\ notice is hereby given
that on December 3, 1996, the New York Stock Exchange, Inc. (``NYSE''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons and to
grant accelerated approval to the portion of the proposal to make
permanent the Near Neighbor, Capital Utilization, and Rule 103A pilot
programs for measuring specialist performance.\3\
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In partially approving the NYSE proposal, the Commission is
not approving, at this time, the portion of the proposal relating to
implementing a new specialist performance measure, the ``adjusted
stabilization'' rate. That portion of the proposal is being
published for comment in this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change consists of making permanent certain pilot
programs for measuring specialist performance and adopting a new
specialist performance measure. The three pilots are the Near Neighbor
pilot, the Capital Utilization Data pilot, and the Rule 103A pilot.\4\
The Exchange also proposes to adopt a new performance measure, the
``adjusted stabilization'' rate measure.
\4\ The Commission notes that the capital utilization and near
neighbor measures currently are only used by the Allocation
Committee in making specialist allocation decisions. The Commission
initially approved the capital utilization program on a one-year
pilot basis in Securities Exchange Act Release No. 33369 (December
22, 1993), 58 FR 69431 (December 30, 1993). The Commission approved
a six-month extension of the pilot program in Securities Exchange
Act Release No. 35175 (December 29, 1994), 60 FR 2167 (January 6,
1995) (extending pilot through June 30, 1995). The Commission
approved two subsequent extensions of the pilot so that the Exchange
and the Commission could evaluate the capital utilization, near
neighbor, and Rule 103A programs concurrently. See Securities
Exchange Act Release Nos. 35926 (June 30, 1995), 60 FR 35760 (July
11, 1995) (extending pilot through September 10, 1996) and 37668
(September 11, 1996), 61 FR 49371 (September 19, 1996) (extending
pilot through January 10, 1997). The Commission approved the near
neighbor program on a pilot basis in Securities Exchange Act Release
No. 35927 (June 30, 1995), 60 FR 35927 (July 11, 1995) (pilot
approved through September 10, 1996). The Commission approved an
extension of the near neighbor pilot program, until January 10,
1997, in Securities Exchange Act Release No. 37668 (September 11,
1996), 61 FR 49371 (September 19, 1996). The Rule 103A pilot program
was initially adopted in 1979. See Securities Exchange Act Release
Nos. 15827 (May 15, 1979), 44 FR 100 (May 22, 1979). Since then, the
program has been extended many times. The most recent extension
continues the pilot until January 10, 1997. See Securities Exchange
Act Release No. 37667 (September 11, 1996), 61 FR 49185 (September
18, 1996).
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[[Page 2705]]
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 IV 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.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange currently uses several programs to measure specialist
performance, including specialist capital utilization, the ``near
neighbor'' approach, and the standards of acceptable performance
specified in Rule 103A. Information on these measures is supplied to
the Allocation Committee for its use in determining allocation of
listing companies.\5\ The ``near neighbor'' measure compares certain
performance measures of a stock (price continuity, depth, quotation
spread, and capital utilization) to those stocks with similar trading
characteristics; the comparison is made over ``rolling'' three-month
periods.\6\ The ``near neighbor'' measure has been in use on a pilot
basis since August 1995. Capital utilization focuses on a specialist
unit's use of its own capital in relation to the total dollar volume of
trading activity in the unit's stocks.\7\ It has been utilized as a
pilot since February 1994. These measures are presented to the
Allocation Committee in summary form for each unit applying for a new
listing and are a factor in allocating newly-listed stock.
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\5\ The Exchange's Allocation Policy and Procedures govern the
allocation of equity securities to NYSE specialist units. The
Allocation Committee has sole responsibility for the allocation of
securities to specialist units pursuant to Board-delegated
authority, and is overseen by the Quality of Markets Committee of
the Board of Directors. The Allocation Committee renders decisions
based upon the allocation criteria specified in the Allocation
Policy. The Allocation Policy emphasizes that the most significant
allocation criterion is specialist performance. In this regard, the
Allocation Policy states that the Allocation Committee will base its
allocation decisions on the Specialist Performance Evaluation
Questionnaire (``SPEQ''), objective performance measures, and the
Committee's expert professional judgment. See Securities Exchange
Act Release No. 34906 (October 27, 1994), 59 FR 55142 (November 3,
1994) (order approving revisions to the NYSE's Allocation Policy).
The weight given in the allocation decision making process to
the SPEQ was reduced from 1/3 to 1/4 in recognition of the
Exchange's adoption for allocation decision purposes of the near
neighbor and capital utilization objective measures. See Securities
Exchange Act Release No. 35932 (June 30, 1995), 60 FR 35763 (June
30, 1995).
\6\ For a more detailed description of the near neighbor
measure, see Securities Exchange Act Release No. 35927, supra note.
1.
\7\ For a comprehensive description of the capital utilization
measure of specialist performance, see Securities Exchange Act
Release No. 35926, supra note 1.
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Rule 103A, adopted in 1979, codifies standards based on the
Specialist Performance Evaluation Questionnaire (``SPEQ'') and
specialist performance with respect to openings of stocks and
turnaround of order reports and administrative messages received. Data
with respect to these standards is also provided to the Allocation
Committee. In addition, the Market Performance Committee uses the Rule
103A information to initiate performance improvement actions for
specialist units that fall below the criteria detailed in the Rule. A
unit's continued inability to raise its performance level can lead to a
reallocation of one or more of its stocks.
Commission staff have indicated to the NYSE staff the position that
sufficient experience has been gained through extended operation of
these pilot programs in order for the NYSE to determine whether each
should be approved on a permanent basis. Permanent approval will not
mean that the programs cannot be periodically revised and amended to
improve their effectiveness. For example, the Exchange is currently
working with consultants from the Massachusetts Institute of Technology
to refine the near neighbor and capital utilization data to increase
its usefulness. The NYSE notes that these efforts are ongoing and may
lead to enhancements in the future.
In addition to making the three pilot programs permanent, the
Exchange proposes to add, as a new measure of specialist performance,
``adjusted stabilization'' rates. Specialists are expected to stabilize
stock price movements by buying and selling from their own account
against the prevailing trend of the market. ``Stabilization'' refers to
those instances where a stock dealer purchases on minus and zero minus
ticks, and sells on plus and zero plus ticks. For purposes of the
proposed specialist performance measure, ``adjusted stabilization''
would consist of proprietary purchases by specialists on minus and zero
minus ticks, as well as zero plus tick purchases on the current bid
(provided the current bid is below the offer of the immediately
preceding trade); and proprietary sales on plus and zero plus ticks, as
well as zero minus tick sales on the current offer (provided the
current offer is above the bid of the immediately preceding trade). The
Exchange believes that ``adjusted stabilization'' is a useful concept
in that it reflects liquidity added to the market by specialists, and
is consistent with the specialist's overall obligation to stabilize the
market in that the specialist is not initiating either a transaction or
a price change, but is rather adding depth to the market at prices at
which transactions have already occurred.
Adjusted stabilization rate information would be provided to the
Allocation Committee to assist the Committee in assessing the value
added by specialists to the depth and liquidity of stocks they
currently trade.
2. Statutory Basis
The basis under the Act for the proposed rule change is the
requirement under Section 6(b)(5) \8\ that an Exchange have rules that
are 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 Exchange believes that the proposed rule change is consistent with
these requirements in that continuing to develop objective measures of
specialist performance would help perfect the mechanism of a free and
open market and protect investors and the public interest.
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\8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any 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 either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the 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:
[[Page 2706]]
(A) by order approve the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The Exchange has requested that the Commission find good cause,
pursuant to Section 19(b)(2) of the Act, for approving the portion of
the proposed rule change relating to making permanent the three pilot
programs on an accelerated basis prior to the thirtieth day after
publication in the Federal Register.
IV. 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. 552, will be available for inspection and copying at the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-NYSE-96-34 and
should be submitted by [insert date 21 days from date of publication].
V. Commission's Findings and Order Granting Partial Accelerated
Approval of Proposed Rule Change
The Commission finds that the portion of the proposed rule change
making permanent the specialist performance measure pilot programs is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and, in particular, with the requirements of Section 6(b)(5) of the
Act.\9\ Section 6(b)(5) requires, among other things, that the Exchange
have rules that are 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. Further, the Commission finds that the portion of the
proposal to make permanent the pilot programs is consistent with
Section 11(b) of the Act \10\ and Rule 11b-1 thereunder,\11\ which
allow exchanges to promulgate rules relating to specialists to ensure
fair and orderly markets. For the reasons set forth below, the
Commission continues to believe that the consideration of specialist
near neighbor and capital utilization analysis and the Rule 103A
performance evaluation process by the Allocation Committee will enhance
the Exchange's allocation process and encourage improved specialist
performance, consistent with helping to perfect the mechanism of a free
and open market and to protect investors and the public interest.
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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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Specialists play a crucial role in providing stability, liquidity
and continuity to the trading of securities. Among the obligations
imposed upon specialists by the Exchange, and by the Act and rules
thereunder, is the maintenance of fair and orderly markets in
designated securities.\12\ To ensure that specialists fulfill these
obligations, it is important that the Exchange implement objective
measures of specialist performance and prescribe stock allocation
procedures and policies that encourage specialists to strive for
optimal performance. The Commission supports NYSE's ongoing efforts to
develop objective measures of specialist capital utilization and near
neighbor analysis for use in the allocation process to encourage
improved specialist performance and market quality. In addition,
effective oversight, including periodic evaluation of the specialist's
performance, is important to the maintenance of a fair and efficient
marketplace. The Commission believes that the NYSE's Rule 103A
performance evaluation is critical to this oversight in that it
provides the Exchange with the means to identify and correct poor
specialist performance, to ascertain whether specialists are
maintaining fair and orderly markets in their assigned securities, and
to bring performance evaluation actions as a result of the evaluation
process.
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\12\ See, e.g., 17 CFR 240.11b-1; NYSE Rule 104.
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The Commission also believes that making permanent the pilot
programs for these three measures is appropriate because the Exchange
indicates that it has found these measures useful in providing the NYSE
Allocation Committee with measures of specialist performance. The
NYSE's Allocation Policy emphasizes that the most significant
allocation criterion is specialist performance.\13\ In the Commission's
view, performance based stock allocations not only help to ensure that
stocks are allocated to specialists who will make the best markets, but
will provide an incentive for specialists to improve their performance
or maintain superior performance.\14\
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\13\ See e.g., Securities Exchange Act Release No. 34906, supra
note 4.
\14\ The Commission notes that it would still like the near
neighbor and capital utilization measures to be incorporated into
the Rule 103A evaluation process.
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The Commission finds good cause for approving the portion of the
proposed rule change relating to making permanent the pilot programs
prior to the thirtieth day after the date of publication of notice of
filing thereof in the Federal Register. The Commission believes that
accelerated approval of that portion of the proposal is appropriate
because it will enable the Exchange to continue to make use of the
capital utilization, near neighbor, and Rule 103A evaluation measures
of specialist performance on an uninterrupted basis and will ensure
continuity and consistency in the stock allocation deliberation
process. Further, the initial proposals to adopt the capital
utilization pilot and the near neighbor pilot were noticed previously
in the Federal Register for the full statutory period and the
Commission did not receive any comments on these proposals.\15\ In
addition, a substantial portion of current Rule 103A was noticed for
the full statutory period in 1987, and the Commission did not receive
any adverse commentary on the revised Rule 103A program.\16\
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\15\ See supra Securities Exchange Act Release Nos. 33369 and
35927, note 2.
\16\ See Securities Exchange Act Release Nos. 24919 (September
15, 1987), 52 FR 35821 (September 23, 1987); 25681 (May 9, 1988), 53
FR 17287 (May 16, 1988).
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\17\ that the portion of the proposed rule change (File No. SR-NYSE-96-
34) relating to making permanent the pilot programs is hereby approved
on an accelerated basis.
\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. 97-1220 Filed 1-16-97; 8:45 am]
BILLING CODE 8010-01-M
