[Federal Register Volume 59, Number 214 (Monday, November 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27443]
[[Page Unknown]]
[Federal Register: November 7, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34916; File No. SR-NYSE-94-32]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the New York
Stock Exchange, Inc., Relating to a One-Year Extension of the Pilot for
Auxiliary Closing Procedures for Expiration Days
October 31, 1994.
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 September 22, 1994, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the purposed rule change as described in
Items I and II below, which Items have been prepared by the self-
regulatory organization. While the NYSE has not requested accelerated
approval of the proposal, the auxiliary closing procedures are
scheduled to expire on October 31, 1994. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1991).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to extend the pilot for auxiliary closing
procedures for market-at-the-close (``MOC'') orders utilized on
expiration Fridays and quarterly expiration days until October 31,
1995.
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 III 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
Special procedures regarding the entry of market-at-the-close
(``MOC'') orders on expiration Fridays were originally adopted in 1986
for quarterly triple expiration of derivative instrument products.\3\
Since November 1988, these procedures have been used for each monthly
expiration and apply to the so-called ``pilot stocks'' (the 50 most
highly capitalized S&P 500 stocks and any component stocks of the Major
Market Index that are not included in this group of 50).\4\ In April
1992, the Exchange modified the pilot procedures and included
additional special procedures for handling MOC orders in all stocks on
expiration Fridays. In March 1993, the Exchange extended the expiration
Friday auxiliary closing procedures to days on which quarterly index
expiration (``QIX'') options expire.\5\ In September 1993, the Exchange
again modified the pilot procedures to change the cut-off time for
entry, cancellation or reduction of MOC orders to 3:40 p.m.
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\3\Expiration Friday is the trading day, usually the third
Friday of the month, when some stock index futures, stock index
options and options on stock index futures expire or settle
concurrently. Triple expirations are the four times a year during
the months of March, June, September, and December when all stock
index futures, stock index options, options on stock index futures
and individual equity options expire.
\4\The NYSE auxiliary closing procedures for expiration Fridays
were initially approved by the Commission on a pilot basis for a
one-year period beginning in November, 1988 and extending through
October, 1989. The pilot has since been extended each year between
October 1989 through October 1994 on a one-year pilot basis. See
Securities Exchange Act Release Nos. 26293 (November 17, 1988), 53
FR 47599; 26408 (December 29, 1988), 54 FR 343 (approving File No.
SR-NYSE-88-37); 27448 (November 16, 1989), 54 FR 48343 (approving
File No. SR-NYSE-89-38); 28564 (October 22, 1990), 55 FR 43427
(approving File No. SR-NYSE-90-49); 29871 (October 28, 1991), 56 FR
30004 (approving File No. SR-NYSE-91-31): 31386 (October 30, 1992),
57 FR 52814 (approving File No. SR-NYSE-92-30); and 32868 (September
10, 1993), 58 FR 48687 (approving File No. SR-NYSE-93-33) (``1993
Approval Order'').
\5\On QIX expiration days, the ``pilot stocks'' include the ten
highest weighted stocks of the S&P MidCap 400 Index (in addition to
the fifty highest weighted stocks underlying the S&P 500 Index, any
component stocks of the Major Market Index not included in that
group).
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The current procedures require that MOC orders in any stock related
to a strategy involving derivative index products be entered for
execution by 3:40 p.m. and that no cancellation or reduction of any MOC
order in any stock take place after 3:40 p.m. In addition, Floor
brokers representing orders related to a strategy involving derivative
index products must indicate their MOC interest to the specialist by
3:40 p.m. However, a Floor broker who is handling a working order that
is not derivative-related, may continue to work that order until just
before the close, and if so instructed by his or her customer, may turn
the unfilled balance over to the specialist for execution at the market
at the close.
For the pilot stocks, a single publication of imbalances of 50,000
shares or more is made as soon as practicable after 3:40 p.m. After the
imbalance publication, MOC orders in the pilot stocks may be entered
only to offset a published imbalance. The entry of MOC orders after
3:40 p.m. to establish or liquidate positions related to a strategy
involving derivative instruments is not permitted even if such orders
might offset published imbalances.
The auxiliary procedures utilized for expiration days have been
approved as a pilot on a yearly basis and are due to expire on October
31, 1994. These procedures have been effective in minimizing excess
volatility on the close on expiration days. The Exchange recommends
that the procedures described above be extended to October 31, 1995.
The Exchange continues to believe, however, that concerns about
excess market volatility that may be associated with the expiration or
settlement of derivative index products would be most appropriately
addressed if the expiration or settlement value of all such products
were based on the NYSE opening rather than the closing price on the
last business day prior to the expiration or settlement of the product.
2. Statutory Basis
The basis under the Securities Exchange Act of 1934 (the ``Act'')
for the proposed rule change is the requirement under section 6(b)(5)
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.
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 that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. 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 NW., 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. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Section, 450 Fifth Street NW.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the NYSE. All
submissions should refer to File No. SR-NYSE-94-32 and should be
submitted by November 28, 1994.
IV. Commission's Findings and Order Granting Temporary Accelerated
Approval of Proposed Rule Change
The Commission finds that the NYSE's proposal to extend the pilot
for auxiliary closing procedures on expiration days through October
1995, is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange.
Specifically, the Commission finds that an extension of the pilot for
auxiliary closing procedures on expiration days is consistent with
section 6(b)(5) of the Act.\6\ Section 6(b)(5) requires, among the
other things, that the rules of a national securities exchange be
designed to promote just and equitable principles of trade, to perfect
the mechanism of a free and open market, and to protect investors and
the public interest. For the reasons set forth below, the Commission
believes that the NYSE proposal furthers the objectives of section
6(b)(5) of the Act.
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\6\15 U.S.C. 78f(b)(5) (1988).
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The NYSE's auxiliary closing procedures were initially adopted in
September 1986 to apply to triple expirations.\7\ The Commission has
extended these procedures to all monthly expiration Fridays on a yearly
pilot basis since 1988.\8\ These procedures resulted from efforts by
the Commission and the self-regulatory organizations to address stock
market volatility associated with the expiration of index derivative
products traded in conjunction with the underlying component stocks as
part of index derivative related trading strategies.
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\7\See supra note 3.
\8\See supra notes 3-4.
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In our 1993 Approval Order, the Commission extended the NYSE's MOC
pilot program procedures through October 31, 1994, and requested that
the NYSE provide the Commission with specific data by July 31, 1994,
detailing the NYSE's experience with the pilot program and containing
an analysis of the effectiveness of the expiration Friday procedures in
reducing volatility. Specifically, the Commission requested data
covering expiration Fridays from October 1993 through June 1994. The
Commission requested that the report include: (1) The names of the
pilot stocks and the imbalance (if any) at 3:40 and at the close for
those stocks that had an imbalance of MOC orders of 50,000 shares or
more at 3:40; (2) for those stocks with an imbalance of 50,000 shares
or more at 3:40, the names of the stocks where the imbalance changed
from one side of the market (sell or buy) to the other side (buy or
sell) due to cancellations of MOC orders; (3) for all pilot stocks, all
MOC order imbalances (of any size) as of 4:00 p.m.; (4) the change in
price of the closing transactions from the previous trade for all pilot
stocks; (5) the change in price of the closing transactions from the
price of transactions at 4:00 p.m. (if there were no transactions
precisely at 4:00 p.m., the NYSE was to use the price from the
transaction effected closet in time to 4:00 p.m.) for all pilot stocks;
and (6) for each pilot stock, the number of shares in MOC orders
submitted by 3:40 p.m. that were canceled for any reason prior to the
close. The Commission also stated that the report should include: (1)
The change in the Dow Jones Industrial Average (``DJIA'') at the close
on each expiration Friday; (2) opening prices and daily trading ranges
of the pilot stocks on expiration Fridays, as well as the following
Mondays; and (3) price volatility as measured by the change in price
from the last regular way trade to the closing price, including
historical data analyzing price volatility at the close prior to the
implementation of the prohibition on canceling MOC orders after 3:45
p.m. and the other MOC procedures. Finally, in our approval order
regarding QIX auxiliary closing procedures, the Commission requested
that the Exchange also include in its report all of the above requested
data for QIX expiration days which expire at the en of the calendar
quarter. The Commission requested that the NYSE provide the Commission
with a report by July 31, 1994 covering expirations through June 1994.
The NYSE submitted a report to the Commission on July 26, 1994. The
report covers expiration Fridays for the period November 1993 through
June 1994 and the December 31, 1993 and March 31, 1994 quarterly
expirations. For that period, the NYSE reports that there were 117 (out
of 413 total) stocks with buy imbalances greater than 50,000 shares at
3:40 p.m. Of these, 84 still had MOC buy imbalances greater than 50,000
at the close and three had reversed to sell imbalances under 50,000. In
contrast, there were only 10 stocks with sell imbalances over 50,000 at
3:40 p.m., of which five still had sell balances over 50,000 shares at
the close. In general, both the number of stocks with imbalances over
50,000 shares and the average number of shares in the imbalance
declined between 3:40 p.m. and the close.
The report also discusses MOC prices and price changes at 4:00 p.m.
and at the close. The data show very little volatility at the close.
Over half the stocks had no change at the close, 89.3% changed one-
eighth point or less, and j96.1% changed one-quarter point or less. The
stocks with large imbalances also did not exhibit much volatility at
the close. The stocks with buy imbalances over 50,000 shares at the
close averaged an increase of slightly more than one-eighth; the stocks
with sell imbalances over 50,000 shares at the close averaged less than
one-eighth point decline.
With respect to QIX expiration procedures, the Exchange states that
there were only 4 stocks with buy imbalances greater than 50,000 shares
at 3:40 p.m., only one of which still had an MOC buy imbalance greater
than 50,000 shares at the close. In contrast, there were 26 stocks with
sell imbalances over 50,000 at 3:40 p.m., 17 of which still had sell
balances over 50,000 shares at the close.
The report also discusses quarterly expiration prices and price
changes at 4:00 p.m. and the close. The data show very little
volatility at the close. Nearly half the stocks had no change at the
close, 79% changed one-eighth point or less, and 92% changed one-
quarter point or less. The stocks with sell imbalances over 50,000
shares at the close on average declined more than one-eighth; the
stocks with buy imbalances over 50,000 shares at the close increased
0.3125 points on average.
As noted above, pursuant to the NYSE pilot program, the auxiliary
closing procedures for expiration Fridays and QIX expiration days
(cumulatively, ``expiration days'') place limitations on MOC order-
entry with regard to orders related to any strategy involving an
expiring derivative index product. The auxiliary closing procedures
also restrict the cancellation of MOC orders and provide for the
dissemination of MOC order imbalances of 50,000 shares or more in
certain pilot securities. The present proposal would extend the
existing pilot procedures for a one year pilot period through October
1995. MOC order cancellations for bona fide errors would continue to be
accepted. Once a publication of an imbalance in a pilot stock has been
made, any MOC orders subsequently entered in such pilot stock will be
accepted only to trade on the opposite side of the market in relation
to such published imbalance. The entry of a MOC order to establish or
liquidate positions related to a strategy involving derivative
instruments, however, would not be permitted even if such orders might
offset published imbalances.
The Commission believes that the auxiliary closing procedures
should enable market participants to gain a more accurate picture of
the buying and selling interest in MOC orders at expiration. The
Commission continues to believe that, by requiring early submission of
MOC orders and disseminating significant imbalances (50,000 shares or
more) in certain specified stocks, the NYSE should be able to attract
contra-side interest to help alleviate imbalances caused by the
liquidation of stock positions related to index derivative product
trading strategies. In this regard, the NYSE's most recent report
concerning expiration Friday volatility and the expiration Friday
closing procedures indicates that the procedures have worked relatively
well and may have resulted in more orderly markets at the close on
expiration Fridays.
The Commission is approving an extension of the pilot program
through October 1995. As long as some index derivative products
continue to expire based on closing stock prices on expiration Fridays,
the Commission agrees with the NYSE that such procedures are necessary
to provide a mechanism to handle the potential large imbalances that
can be engendered by firms unwinding index derivative related
positions. During the pilot extension, the Commission expects the NYSE
to continue to monitor closely the effectiveness of the procedures, and
to submit a report with all of the same data previously requested for
prior periods. The report should cover all expirations through June
1995, and must be submitted to the Commission no later than July 31,
1995\9\ along with a proposed rule change which should either request
an additional extension of the pilot program or permanent approval of
the pilot procedures.
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\9\The Commission notes that this request for information is not
exclusive and that the NYSE should add any additional data and
analysis to the report in order to assess the effectiveness of the
procedures in reducing excess market volatility on expiration
Fridays.
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The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. This will permit the
procedures to continue on an uninterrupted basis. Further, on September
9, 1994, the NYSE issued an Information Memo to its members notifying
them of the auxiliary closing procedures. Finally, special auxiliary
closing procedures have been utilized by the NYSE since 1986, and the
procedures are intended to reduce excessive market volatility at the
close.
It is therefore ordered, pursuant to Section 19(b)(2)\10\ that the
proposed rule change is hereby approved on a pilot basis through
October 31, 1995.
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\10\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-27443 Filed 11-4-94; 8:45 am]
BILLING CODE 8010-01-M
