[Federal Register Volume 63, Number 200 (Friday, October 16, 1998)]
[Notices]
[Pages 55661-55664]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-27822]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40538; File No. SR-BSE-98-06]
Self-Regulatory Organizations; Boston Stock Exchange, Inc.;
Notice of Filing and Order Granting Accelerated Approval to Proposed
Rule Change and Amendment No. 1 to the Proposed Rule Change Seeking
Permanent Approval of the Exchange's Market-On-Close Order Handling
Requirements Pilot Program
October 9, 1998.
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 August 13, 1998, the Boston Stock Exchange, Inc. (``BSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the BSE. On
September 17, 1998, the Exchange submitted Amendment No. 1 to the
proposal.\3\ The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons and to
grant accelerated approval to the proposal, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Karen A. Aluise, Vice President, BSE to
Richard Strasser, Assistant Director, Division of Market Regulation,
Commission dated September 15, 1998 (``Amendment No. 1''). In
Amendment No. 1, the Exchange requests permanent approval of the
pilot program relating to market on-close orders.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange seeks to amend its current pilot program regarding
procedures for market-on-close (``MOC'') orders\4\ to mirror changes
recently made to the comparable New York Stock Exchange (``NYSE'') and
American Stock Exchange (``Amex'') rules. Also, the Exchange seeks
permanent approval of its MOC pilot procedures as amended by this
proposal.
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\4\ A MOC order is a market order to be executed in its entirety
at the closing price on the Exchange.
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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 BSE 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 BSE 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 purpose of the proposed rule change is to amend the current
pilot program for the handling of MOC orders\5\ to mirror recent
changes made by the NYSE\6\ and the Amex\7\ and to seek permanent
approval of the pilot program. The Exchange's current rules provide for
different treatment of MOC orders on Expiration Fridays and Quarterly
Index Expiration Days\8\ than on non-expiration days.\9\ In addition,
[[Page 55662]]
the current rules provide for the publication of order imbalances of
50,000 shares or more only in the pilot stocks,\10\ stocks being added
to or dropped from an index, and upon the request of a specialist, any
other stock with the approval of a floor official.\11\
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\5\ The Exchanges' current pilot program will expire on October
31, 1998. See Securities Exchange Act Release No. 39327 (November
14, 1997), 62 FR 62381 (November 21, 1997).
\6\ See Securities Exchange Act Release No. 40094 (June 15,
1998), 63 FR 33975 (June 22, 1998) (NYSE MOC Approval Order).
\7\ See Securities Exchange Act Release No. 40123 (June 24,
1998), 63 FR 36280 (July 2, 1998) (Amex MOC Approval Order). In the
Amex MOC approval order, the Amex also adopted a rule allowing the
Amex to accept limit-at-the-close (``LOC'') orders. Id. At this
time, the BSE does not accept LOC orders.
\8\ The term ``expiration days'' refers to both (1) the trading
day, usually the third Friday of the month, when some stock index
options, stock index futures and options on stock index futures
expire or settle concurrently (``Expiration Fridays'') and (2) the
trading day on which end of calendar quarter index options expire
(``QIX Expiration Days'').
\9\ See BSE Rules Secs. 22(A) and 22(B).
\10\ The pilot stocks consist of the 50 most highly capitalized
Standard & Poor's (``S&P'') 500 stocks and any component stocks of
the Major Market Index (``MMI'') not included in the S&P 500 groups
of stocks.
\11\ See BSE Rules Secs. 22(A)(c) and 22(B)(c).
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While the deadline for entry of indications of interest by floor
brokers to the specialist and the cancellation of MOC orders on
Expiration Fridays and Quarterly Index Expiration Days is currently set
at 3:40 p.m., the deadline on non-expiration days is currently set at
3:50 p.m.\12\ The Exchange seeks to adopt the same time frame as the
primary markets, which recently amended their respective procedures to
set the deadline at 3:40 p.m. in all stocks on all trading days.\13\
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\12\ See BSE Rules Secs. 22(A)(a) and 22(B)(a).
\13\ See Amex MOC Approval Order, supra note 7 and NYSE MOC
Approval Order, supra note 6.
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The current rules also address the publication of order imbalances
of 50,000 shares or more on Expiration Fridays and Quarterly Index
Expiration Days. Currently, publication is required as soon as
practicable after 3:40 p.m. on expiration days, and as soon as
practicable after 3:50 p.m. on nonexpiration days. The Exchange seeks
to provide that publication of order imbalances of 50,000 shares or
more in NYSE-listed securities (and 25,000 shares or more in Amex-
listed securities) shall occur as soon as practicable after 3:40 p.m.
on all trading days, bringing the BSE rule into conformity with its
primary market counterparts.
An additional publication shall be required at 3:50 p.m. on all
trading days for any NYSE-listed security that had an imbalance
publication at 3:40 p.m. If the imbalance at 3:50 p.m. is less than
50,000 shares, a ``no imbalance'' status must be published, although an
imbalance of less than 50,000 shares may be published with floor
official approval, provided there had been an imbalance publication at
3:40 p.m. If the 3:50 p.m. imbalance publication reversed the first
imbalance publication, only MOC orders that offset the 3:50 p.m.
imbalance would be permitted to be entered thereafter. This requirement
is intended to present market participants with a more timely and
accurate picture of imbalances before the close.
In addition, the current rules provide for the publication of order
imbalances (on both Expiration Fridays/Quarterly Index Expiration Days
and non-expiration days) in the pilot stocks, stocks being added to or
dropped from an index, and upon the request of a specialist, any other
stock with the approval of a floor official. The Exchange seeks to
publish order imbalances in all stocks on all trading days, also in
conformity with the primary market rules.\14\
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\14\ See NYSE MOC Approval Order, supra note 6.
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The Exchange proposes to adopt language that will permit, but not
require, the publication of order imbalances of less than 50,000 shares
in NYSE-listed securities (and less than 25,000 shares in Amex-listed
securities) as soon as practicable after 3:40 p.m. in any stock with
the approval of a floor official, thereby permitting the publication of
an imbalance which, although less than 50,000 (25,000) shares, may be
significantly greater than the average daily volume in a stock.
III. Discussion
The Commission finds that the proposed rule change is consistent
with Section 6 of the Act \15\ and the rules and regulations
thereunder. In particular, the Commission believes that the proposal is
consistent with the Section 6(b)(5) \16\ requirements 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
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.\17\
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\15\ 15 U.S.C. 78f.
\16\ 15 U.S.C. 78f(b)(5).
\17\ In approving the proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78f(b).
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In recent years, the Exchange and other self-regulatory
organizations have instituted certain safeguards to minimize excess
market volatility that may arise from the liquidation of stock
positions at the end of the trading day. Special procedures regarding
the entry of MOC orders on Expiration Fridays were first used by the
NYSE in 1986 for assisting in handling the order flow associated with
the concurrent quarterly expiration of stock index futures, stock index
options and options on stock index futures on Expiration Fridays.\18\
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\18\ See Securities Exchange Act Release No. 24926 (September
17, 1987), 52 FR 24926 (approving File No. SR-NYSE-87-32 and noting
that the MOC procedures described therein had been utilized on a
quarterly basis since September 1986).
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[[Page 55663]]
These procedures allow specialists to determine the burying and selling
interest in MOC orders and, if there is a substantial imbalance on one
side of the market, to provide the investing public with timely and
reliable notice of the imbalance and with an opportunity to make
appropriate investment decisions in response. Based on the NYSE's
experience,\19\ the Commission believes that the MOC order handling
requirements work relatively well and may result in more orderly
markets at the close on expiration days.
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\19\ The NYSE has submitted to the Commission several monitoring
reports describing its experience with the auxiliary closing
procedures. For further discussion of the reports filed by the NYSE,
see Securities Exchange Act Release No. 36404 (October 20, 1995), 60
FR 55071 (approving File No. SR-NYSE-95-28). The most recent report
filed by the NYSE was received on May 14, 1998.
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In today's highly competitive market environment, however, it is
possible that a regional exchange, which trades NYSE-and Amex-listed
stocks but does not have comparable closing procedures, could be
utilized by market participants to enter MOC orders prohibited on the
primary markets. Although the Commission has no reason to believe that
the BSE market has become a significant alternative market to enter
otherwise prohibited MOC orders, the Commission agrees with the BSE
that, if this possibility were realized, it could have a negative
impact on the fairness and orderliness of the national market
system.\20\ Accordingly, the Commission believes that it is reasonable
for the BSE to adopt procedures for the handling of MOC orders that
mirror those of the NYSE and Amex, thereby ensuring the equal treatment
of orders in those markets and, in the event of unusual market
conditions, offering the BSE the same benefits in terms of potentially
reducing volatility.
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\20\ For example, if MOC orders prohibited on the NYSE and Amex
were entered instead on the BSE, unusually large MOC order
imbalances on the regional exchange could contribute to overall
market volatility.
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In this regard, the Commission notes that the proposed rule change
will standardize the BSE's closing procedures on expiration and non-
expiration days with those on the NYSE and Annex.\21\ The proposal will
impose a deadline of 3:40 p.m. for entry of all MOC orders on both
expiration and on-expiration days. Floor brokers representing MOC
orders also must indicate their MOC interest to the specialist by 3:40
p.m. every day. In conjunction with the prohibition on canceling or
reducing any MOC order after 3:40 p.m., the Commission believes that
these requirements should allow the specialist to make a timely and
reliable assessment, on expiration and non-expiration days alike, of
MOC order flow and its potential impact on closing prices.
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\21\ See Amex MOC Approval Order, supra note 7, and NYSE MOC
Approval Order, supra note 6.
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The proposal will also provide that publication of order imbalances
of 50,000 shares or more in all NYSE-listed securities (and 25,000
shares or more in all Amex-listed securities) shall occur as soon as
practicable after 3:40 p.m. on all trading days. An additional
publication shall be required at 3:50 p.m. on all trading days for any
NYSE-listed security which had an imbalance publication at 3:40 p.m. If
the imbalance at 3:50 p.m. is less than 50,000 shares, a ``no
imbalance'' status must be published, although an imbalance of less
than 50,000 shares may be published with floor official approval,
provided there had been an imbalance publication at 3:40 p.m. If the
3:50 p.m. imbalance publication reversed the first imbalance
publication, only MOC orders which offset the 3:50 p.m. imbalance would
be permitted to be entered thereafter.
Finally, the proposal permits, but does not require, the
publication of order imbalances of less than 50,000shares in NYSE-
listed securities (and less than 25,000 shares in Amex-listed
securities) as soon as practicable after 3:40 p.m. in any stock with
the approval of a floor official, thereby permitting the publication of
an imbalance which, although less than 50,000 (25,000) shares, may be
significantly greater than the average daily volume in a stock.
The Commission believes that the enhanced publication requirements
described above are appropriate and consistent with the Act. Requiring
an additional order imbalance publication at 3:50 p.m. for all NYSE-
listed securities having a published imbalance as of 3:40 p.m. is
consistent with the current practice on the NYSE and may help ease
market volatility at the close by attracting additional offsetting MOC
orders for stocks that have a significant order imbalance as of 3:50
p.m. In addition, the Commission believes that allowing the publication
of imbalances of less than 50,000 (25,000) shares in all stocks with
the approval of a floor official is consistent with the practice on the
NYSE and Amex and may assist in easing volatility at the close. With
respect to changing the deadline for entering MOC orders on non-
expiration days, the Commission believes that, by giving market
participants more time to
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react to published MOC order imbalances, the proposal may contribute to
reducing volatility at the close. Finally, the proposal requests that
the Commission permanently approve the Exchange's MOC pilot program. As
noted above, these auxiliary closing procedures have been used by the
NYSE since 1986 without significant difficulty. Therefore, the
Commission believes that it is appropriate at this time to approve the
Exchange's pilot program on a permanent basis.
The Commission finds good cause for approving the proposed rule
change and Amendment No. 1 to the proposed rule change prior to the
thirtieth day after the date of publication of notice of filing of this
proposal in the Federal Register. As discussed in more detail above,
the changes made in this proposal are identical to changes made by the
NYSE and the Amex.\22\ As a result, the Commission does not believe
that the proposal raises any new regulatory issues. Further, the
Commission notes that the Amex and NYSE proposals were published for
the full 21-day comment period during which no comment letters against
either proposal were received by the Commission. Accordingly, the
Commission believes there is good cause, consistent with Sections
6(b)(5) and 19(b) \23\ of the Act, to approve the Exchange's proposal
and Amendment No. 1 to the Exchange's proposal on an accelerated basis.
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\22\ Id.
\23\ 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78s(b).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the proposed rule change and Amendment No. 1,
including whether it 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 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 BSE. All submissions should refer to File No.
SR-BSE-98-06 and should be submitted by November 6, 1998.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change (SR-BSE-98-06) is approved.
\24\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-27822 Filed 10-15-98; 8:45 am]
BILLING CODE 8010-01-M
