[Federal Register Volume 61, Number 231 (Friday, November 29, 1996)]
[Notices]
[Pages 60735-60736]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30399]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37969; File No. SR-NYSE-96-21]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Relating to the Entry
of Limit-at-the-Close Orders
November 20, 1996.
On July 31, 1996, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to permit limit-at-the-close
(``LOC'') orders to be entered in any stock at any time during the
trading day up to 3:40 p.m. on expiration days and 3:50 on non-
expiration days. On October 2, 1996, the Exchange submitted Amendment
No. 1 to the proposed rule change.\3\
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter and Form 19b-4 from James E. Buck, Senior Vice
President and Secretary, NYSE, to Ivette Lopex, Assistant Director,
Division of Market Regulation, SEC, dated September 27, 1996.
Amendment No. 1 expanded the purpose section of the filing to
provide a more detailed explanation of the reasons the Exchange is
seeking to permit limit-at-the-close (``LOC'') orders to be entered
in any stock at any time during the trading day up to 3:40 p.m. on
expiration days and 3:50 p.m. on non-expiration days. Thereafter, as
with market-on-close (``MOC'') orders, LOC orders could be entered
only to offset published imbalances. This proposed revision of the
LOC pilot would subject LOC orders to the same type of order entry
and cancellation restrictions currently imposed on MOC orders.
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The proposed rule change, including Amendment No. 1, was published
for comment in Securities Exchange Act Release No. 37786 (Oct. 4,
1996), 61 FR 53473 (Oct. 10, 1996). No comments were received on the
proposal.
In 1994, the Commission approved, on a pilot basis, NYSE's proposed
rule change to permit entry of LOC orders to offset published
imbalances of market-on-close (``MOC'') \4\ orders in certain
stocks.\5\ A LOC order is one that is entered for execution at the
closing price, provided that the closing price is at or within the
limit specified. LOC orders are executed behind limit orders at the
same price and behind MOC orders.
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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. See NYSEW Rule 13.
\5\ See Securities Exchange Act Release No. 33706 (Mar. 3,
1994), 59 FR 11093 (Mar. 9, 1994) (approving the original LOC pilot
program). The latest pilot program for LOC orders expires on July
31, 1997. See Securities Exchange Act Release No. 37507 (July 31,
1996) (File No. SR-NYSE-96-18 and Amendment No. 1 thereto).
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Currently, LOC orders may be entered only to offset published
imbalances of MOC orders. MOC imbalances of 50,000 shares or more in
(1) the so-called ``pilot'' stocks,\6\ (2) stocks being added to or
dropped from an index, and (3) any other stock with the approval of a
Floor Official, must be published on the tape as soon as practicable
after 3:40 p.m. for expiration days \7\and after 3:50 p.m. on non-
expiration days. LOC orders currently must be entered only between 3:40
and 3:55 p.m. on expiration days and between 3:50 and 3:55 p.m. on non-
expiration days. On expiration days, LOC orders are irrevocable once
entered except in case of legitimate error. On non-expiration days, LOC
orders are irrevocable after 3:55 p.m. except in case of legitimate
error.
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\6\ The term ``pilot stocks'' refers to the Expiration Friday
pilot stocks plus any additional QIX Expiration Day pilot stocks.
Specifically, the Expiration Friday pilot stocks consist of the 50
most highly capitalized Standard & Poors (``S&P'') 500 stocks and
any component stocks of the Major Market Index (``MMI'') not
included therein. The QIX Expiration Day pilot stocks consist of the
50 most highly capitalized S&P 500 stocks, any component stocks of
the MMI not included therein and the 10 highest weighted S&P Midcap
400 stocks.
\7\ 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'').
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In 1995, the pilot program for LOC orders was expanded from five
stocks to all stocks that have published MOC order imbalances of 50,000
shares or more in order to help stimulate use of this order type. At
the present time, the NYSE proposes to expand further the use of LOC
orders by allowing these orders to be entered in any stock at any time
during the trading day up to 3:40 p.m. on expiration days and up to
3:50 p.m. on non-expiration days. Thereafter, consistent with current
policy, LOC orders could be entered only to offset published MOC
imbalances. Under the proposed rule change, LOC orders would be subject
to the same type of order entry and cancellation restrictions currently
imposed on MOC orders.\8\
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\8\ On expiration days, there is a 3:40 p.m. deadline for the
entry, reduction, or cancellation of any MOC order. On non-
expiration days, there is a 3:50 p.m. deadline for the entry,
reduction, or cancellation of any MOC order. Currently, LOC orders
can be canceled until 3:55 p.m. on non-expiration days. Under the
proposed rule change, LOC orders will be irrevocable on non-
expiration days, except in the case of legitimate error, after 3:50
p.m. Telephone conversation between Donald Siemer, Director of
Market Surveillance, NYSE, and Elisa Metzger, Special Counsel, SEC,
on November 19, 1996.
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According to the NYSE, the use of LOC orders has remained limited:
The narrow order entry window, along with the requirement that LOC
orders must offset published MOC imbalances, makes the opportunities
for their entry too limited to justify for many member firms the
programming necessary to support their use. The Exchange believes that
the expansion of the LOC pilot to allow for such orders to be entered
throughout the day (up until the cut-off time) would allow investors
the possibility of using LOC orders in conjunction with other
investment strategies. The Exchange therefore believes that this could
attract additional LOC orders, thereby increasing liquidity and
potentially reducing volatility at the close. According to the
Exchange, increased use of LOC orders may prove to be a useful means to
help address the prospect of excess market volatility that may be
associated with an imbalance of MOC orders at the close.
The Commission finds that the proposed rule change 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).\9\ Specifically, the
Commission believes the proposal is consistent with the Section 6(b)(5)
requirements that the rules of an exchange be designed to promote just
and equitable principles of trade, to prevent fraudulent and
manipulative acts, and, in general, to protect investors and the public
interest.\10\
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\9\ 15 U.S.C. Sec. 78f(b).
\10\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. Sec. 78c(f).
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[[Page 60736]]
As part of an effort by the Exchange to institute certain
safeguards to minimize excess market volatility that may arise from
liquidation of stock positions related to trading strategies involving
index derivative products, the Exchange proposed and the Commission
approved, on a pilot basis, the use of LOC orders under limited
circumstances. Now, the NYSE proposes to expand the use of LOC orders
by allowing such orders to be entered throughout the day up until the
cut-off time and removing the restriction that they be entered only to
offset published MOC imbalances. The Exchange believes that allowing
the entry of LOC orders throughout the day would encourage the use of
LOC orders, which in turn may alleviate excess market volatility
through the expected increase in market liquidity.
The Commission believes that the NYSE's proposed rule change is
consistent with the purposes of the Act. Although the NYSE, in effect,
is proposing the use of a new order type throughout the day, the
Commission does not believe that allowing entry of LOC orders would
have harmful effects on other orders or on the market in general. For
example, the LOC orders would continue to be executed behind
conventional limit orders at the same price and behind MOC orders.
Under the amended pilot, LOC orders may be entered throughout the
day for possible execution at the closing price. LOC orders, however,
will continue to be executed in the same manner as in the current
pilot: LOC orders at a better price than the closing price will be
treated as market orders and executed against each other, limit orders
on the book, or the specialist's own account. Moreover, as in the
current pilot program, the LOC orders at the closing price will not be
guaranteed an execution. Finally, as previously, after the cut-off
periods of 3:40 p.m. for expiration days and 3:50 p.m. for non-
expiration days, LOC orders may be entered only to offset published
imbalances.
To the extent that the proposal would encourage entry of LOC
orders, which may potentially offset imbalances of MOC orders at the
close, the Commission believes that LOC orders will continue to be a
useful investment vehicle for curbing excess price volatility at the
close. With respect to the use of LOC orders as another order type, the
Commission believes that the appropriate procedures for handling LOC
orders provided by the NYSE in the proposal will ensure that market,
limit and MOC orders will not be disadvantaged by the expanded use of
LOC orders.
Finally, the Commission notes that the LOC orders have been on a
pilot program since 1994 and the NYSE has submitted detailed reports
describing its experience with the pilot program. The Commission,
therefore, believes that the Exchange appears to have had sufficient
experience with the program to determine its effectiveness. The
Commission encourages the Exchange to seek permanent approval of the
procedures or to determine to discontinue the program after the
Exchange analyzes the data for the report due on May 31, 1997. If the
Exchange decides to seek permanent approval of the pilot procedures,
any such request should also be submitted to the Commission by May 31,
1997, as a proposed rule change pursuant to Section 19(b) of the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-NYSE-96-21) is approved.
\11\ 15 U.S.C. Sec. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-30399 Filed 11-27-96; 8:45 am]
BILLING CODE 8010-01-M
