[Federal Register Volume 63, Number 246 (Wednesday, December 23, 1998)]
[Notices]
[Pages 71176-71179]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33910]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40797; File No. SR-NYSE-98-45]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the New York Stock Exchange, Inc. Relating to Amendments to
Rule 80A
December 15, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act''), notice is hereby given that on December 8, 1998,
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, II and III 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.
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange proposes to amend the NYSE's Rule 80A. Below is the
current text of Rule 80A which would be deleted under the proposed rule
change and the proposed text of Rule 80A as it would read under the
proposed rule change. Deletions are in brackets and additions are in
italics.
[(a)(i) If, during any trading day, the price of the primary
Standard and Poor's 500 Stock Price Index futures contract traded on
the Chicago Mercantile Exchange (``S&P 500 futures'')* reaches a value
12 points below the S&P 500 future's closing value on the previous
trading day (the ``trigger value''), for the next five minutes market
orders involving program trading in each of the stocks underlying the
S&P 500 futures entered into the Exchange's automated order-routing
facilities shall be routed to a separate file for each such stock. Buy
and sell orders for each stock will be paired in the file to determine
the extent of the order imbalance, if any.
(ii) Five minutes after the price of the S&P 500 futures reaches
the trigger value, the orders in the program trading file for each
stock, and the order imbalance, if any, shall be reported to the
specialist in the stock and the orders shall be eligible for execution;
provided, however, that trading in a stock on the Exchange shall halt
if there is not sufficient trading interest on the Exchange to allow
for an orderly execution of a transaction in the stock.
(b) Whenever the price of the S&P 500 futures reaches the trigger
value, no member or member organization shall enter any stop order or
stop limit order for the remainder of the trading day except that a
member or member organization may enter a stop order or a stop limit
order of 2,099 shares or less for the account of an individual investor
pursuant to instructions received directly from the individual
investor.
(c) On any day when the Dow Jones Industrial Average** has advanced
by 50 points or more from its closing value on the previous trading
day, all index arbitrage orders to buy any component stock of the S&P
500 Stock Price Index must be entered with the instruction ``buy
minus.'' If, on that day, the Dow Jones Industrial Average subsequently
reaches a value that is 25 points or less above the closing value on
the previous trading day, this requirement shall not apply. This
principle shall govern the imposition and removal of the buy minus
requirement as to all subsequent movements in the Dow Jones Industrial
Average on that day. On any day when the Dow Jones Industrial Average
has declined by 50 points or more from its closing value on the
previous day, all index arbitrage orders to sell must be entered with
the instruction ``sell plus.'' If, on that day, the Dow Jones
Industrial Average subsequently reaches a value that is 25 points or
less below the closing value on the previous trading day, this
requirement shall not apply. This principle shall govern the imposition
and removal of the sell plus requirement as to all subsequent movements
in the Dow Jones Industrial
[[Page 71177]]
Average on that day. All orders containing the instruction buy minus or
sell plus shall be executed as provided in Rule 13.
(d) On any day when the Dow Jones Industrial Average has advanced
by 50 points or more from its closing value on the previous trading
day, no transaction to buy a basket of stocks may be effected at a
price which is equal to or greater than the aggregate Tier 1 offer (as
defined in Rule 803(e)) or the cash equivalent. If, on that day, the
Dow Jones Industrial Average subsequently reaches a value that is 25
points or less above the closing value on the previous trading day,
this restriction regarding the purchase of a basket of stocks shall not
apply. This principle shall govern the imposition and removal of the
restriction regarding the purchase of a basket of stocks as to all
subsequent movements in the Dow Jones Industrial Average on that day.
On any day when the Dow Jones Industrial Average has declined by 50
points or more from its closing value on the previous trading day, no
transaction to sell a basket of stocks may be affected at a price which
is equal to or less than the aggregate Tier 1 bid (as defined in Rule
803(e)) or the cash equivalent. If, on that day, the Dow Jones
Industrial Average subsequently reaches a value that is 25 points or
less below the closing value on the previous trading day, this
restriction regarding the sale of a basket of stocks shall not apply.
This principle shall govern the imposition and removal of the
restriction regarding the sale of a basket of stocks as to all
subsequent movements in the Dow Jones Industrial Average on that day.
For purposes of this paragraph (d), the term ``basket'' shall have the
definition contained in Rule 800(b)(iii).
(e) For the purposes of this Rule 80A,
(i) ``program trading'' means either (A) index arbitrage or (B) any
trading strategy involving the related purchase or sale of a ``basket''
or group of 15 or more stocks having a total market value of $1 million
or more. Program trading includes the purchases or sales of stocks that
are part of a coordinated trading strategy, even if the purchases or
sales are neither entered or executed contemporaneously, nor part of a
trading strategy involving options or futures contracts on an index
stock group, or options on any such futures contracts, or otherwise
relating to a stock market index;
(ii) ``index arbitrage'' means an arbitrage trading strategy
involving the purchase or sale of a ``basket'' or group of stocks in
conjunction with the purchase or sale, or intended purchase or sale, of
one or more cash-settled options or futures contracts on index stock
groups, or options on any such futures contracts (collectively,
``derivative index products'') in an attempt to profit by the price
difference between the ``basket'' or group of stocks and the derivative
index products. While the purchase or sale of the stocks must be in
conjunction with the purchase or sale of derivative index products, the
transactions need not be executed contemporaneously to be considered
index arbitrage; and
(iii) ``account of an individual investor'' means an account
covered by Section 11(a)(1)(E) of the Securities Exchange Act of 1934.
(f) The provisions of paragraphs (a) and (b) of Rule 80A shall not
apply during the last 35 minutes of a trading day.
(g) The provisions of paragraphs (c) and (d) of Rule 80A shall not
apply to index arbitrage ``market-at-the-close'' orders in liquidation
of previously established stock positions against derivative index
products entered on the last business day prior to the expiration or
settlement of such derivative index products. Such orders shall be
entered pursuant to such procedures as the Exchange may from time to
time prescribe.
Supplementary Material
.10 When determining the priority of bids and offers pursuant to
Rule 72, the orders in the program trading file reported to the
specialist pursuant to paragraph (c) shall be considered as entered on
the Exchange at the time the orders are reported to the specialist.
.20 The reopening of trading following a trading halt shall be
conducted pursuant to procedures adopted by the Exchange and
communicated by notice to its members and member organizations.
.30 Nothing in this Rule 80A shall be construed to limit the
ability of the Exchange to otherwise halt or suspend the trading in any
stock or stocks pursuant to any other Exchange rule or policy.
* ``Standard & Poor's 500 Stock Price Index'' and ``S&P 500'' are
service marks of Standard & Poor's Corporation.
** ``Dow Jones Industrial Average'' is a service mark of Dow Jones
& Company, Inc.]
(a) All index arbitrage orders to sell any component stock of the
S&P 500 Stock Price Index SM* must be entered with the
instruction ``sell plus'' on any trading day when the Dow Jones
Industrial Average SM** (``DJIA'') declines below its
closing value on the previous trading day by at least the ``two-percent
value'' as calculated below. This index arbitrage order entry
requirement shall remain in effect for the remainder of the trading
day. However, the index arbitrage order entry requirement pursuant to
this paragraph (a) shall be removed if the DJIA subsequently reaches a
value below its closing value on the previous trading day that is a
decline equal to the ``one-percent value'' or less as calculated below.
(b) All index arbitrage orders to buy any component stock of the
S&P 500 Stock Price Index must be entered with the instruction ``buy
minus'' on any trading day when the DJIA advances above its closing
value on the previous trading day by at least the ``two-percent value''
as calculated below. This index arbitrage order entry requirement shall
remain in effect for the remainder of the trading day. However, the
index arbitrage order entry requirement pursuant to this paragraph (b)
shall be removed if the DJIA subsequently reaches a value above its
closing value on the previous trading day that is an advance equal to
the ``one-percent value'' or less as calculated below.
(c) The principles in paragraphs (a) and (b) shall govern the
imposition and removal of the index arbitrage order entry requirements
as to all subsequent movements in the DJIA on that day. Supplementary
Material:
.10 The ``two-percent value'' shall be calculated at the beginning
of each calendar quarter and shall be two-percent (2.0%), rounded down
to the nearest ten points, of the average closing value of the DJIA for
the last month of the previous quarter. The ``one-percent value'' shall
be one-half, rounded down to the nearest ten points, of the ``two-
percent value''.
.20 The index arbitrage order entry restrictions shall not apply to
index arbitrage market-at-the-close orders in liquidation of previously
established stock positions against derivative index products entered
on the last business day prior to the expiration or settlement of such
derivative index products. Such orders shall be entered pursuant to
each procedures as the Exchange may from time to time prescribe.
.30 All orders containing the instruction ``buy minus'' or ``sell
plus'' shall be executed as provided in Rule 13.
.40 Definitions. (a) For purposes of this Rule 80A, ``index
arbitrage'' means a trading strategy in which pricing is based on
discrepancies between a ``basket'' or group of stocks and the
derivative index product (i.e., a basis trade) involving the purchase
or sale of a ``basket'' or group of stocks in conjunction with the
purchase or sale,
[[Page 71178]]
or intended purchase or sale, of one or more derivative index products
in an attempt to profit by the price difference between the ``basket''
or group of stocks and the derivative index products. While the
purchase or sale of the stocks must be in conjunction with the purchase
or sale of derivative index products, the transactions need not be
executed contemporaneously to be considered index arbitrage. The
term``derivative index products'' refers to cash-settled options or
futures contracts on index stock groups, and options on any such
futures contracts.
(b) ``Program trading'' means either (A) index arbitrage or (B) any
trading strategy involving the related purchase or sale of a ``basket''
or group of 15 or more stocks having a total market value of $1 million
or more. Program trading includes the purchases or sales of stocks that
are part of a coordinated trading strategy, even if the purchases or
sales are neither entered or executed contemporaneously, nor part of a
trading strategy involving options or futures contracts on an index
stock group, or options on any such futures contracts, or otherwise
relating to a stock market index.
(c) ``Account of an individual investor'' means an account covered
by Section 11(a)(1)(E) of the Securities Exchange Act of 1934.
*``Standard & Poor's 500 Stock Price Index'' is a service market of
Standard & Poor's Corporation
**``Dow Jones Industrial Average'' is a service mark of Dow Jones &
Company, Inc.
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 and is set forth in Sections A,
B, and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Current Rule. Rule 80A provides, among other things, for
limitations on index arbitrage trading in any component stock of the
S&P 500 Stock Price Index whenever the Dow Jones Industrial Average \1\
(``DJIA'') is up or down 50 points from its previous close. If the
market advances by 50 points or more, all index arbitrage orders to buy
must be stabilizing (buy minus); similarly, if the market declines, all
index arbitrage orders to sell must be stabilizing (sell plus). The
stabilizing requirements are removed if the DJIA moves back to or
within 25 points of the previous day's close. In addition, ``sidecar''
provisions, as discussed below, which temporarily divert program
trading orders and impose limitations on the entry of stop orders, go
into effect when the primary S&P 500 futures contract declines by 12
points from its previous close.
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\1\ ``Dow Jones Industrial Average'' is a service mark of Dow
Jones & Company, Inc.
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Proposed Amendments. The stock market has risen dramatically over
the years since the 50-point ``collar,'' as discussed below, of Rule
80A was adopted in 1990.\2\ The Exchange is proposing to amend the Rule
to base the collars on a percentage of the average closing value of the
DJIA. In addition, the Exchange is proposing to eliminate the
``sidecar'' provisions of Rule 80A in their entirety. The Exchange is
also proposing to delete the provisions, contained in paragraph (d),
relating to purchases and sales of a ``basket'' (as that term is
defined in Rule 800(b)(iii)), as the ``basket'' product is no longer
traded on the Exchange. The definition of index arbitrage contained in
the rule is also proposed to be modified, as discussed below.
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\2\ The DJIA was at 2905 when the 50-point collar first went
into effect on July 31, 1990. The DJIA closed at 8915 on November 5,
1998, the day the Board adopted this amendment.
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Collars. The proposed collars are to be calculated quarterly based
on the average closing value of the DJIA for the last month of the
previous calendar quarter. This methodology is similar to that used for
the calculation of the circuit breakers in the recent amendments to
Rule 80B. The collars would be imposed when the DJIA declines or
advances from the prior day's close by an amount equal to two percent,
rounded down to the nearest ten points, of the average closing value.
The collars would be removed when the DJIA comes back or retreats to a
value which represents a decline or advance from the prior day's close
by an amount equal to one half of the ``two-percent value,'' rounded
down to the nearest ten points.
Under the proposed rule change, when the collar is imposed based
upon a decline in the DJIA, all index arbitrage orders to sell any
component stock of the S&P 500 must be marked ``sell plus'' for the
remainder of the day. If the DJIA advances by the ``collar value'', all
index arbitrage orders to buy any component stock of the S&P 500 must
be marked ``buy minus'' for the remainder of the trading day.
For example, if the average closing value of the DJIA for the last
month of the previous quarter is 8915, the ``two-percent value'' will
be 170, and one half the ``two-percent value'' will be 80 (85 rounded
down to the nearest ten points). Thus, the stabilizing requirement
would be imposed when the DJIA is down or up 170 points or more and
removed when the DJIA is down or up 80 points or less from the previous
close. The index arbitrage order entry restrictions would be re-imposed
each time the DJIA advances or declines from the prior day's close by
the amount calculated pursuant to the rule.
Sidecar. The sidecar provisions, contained in paragraphs (a) and
(b) of the current rule, are triggered by a 12-point decline from the
previous close in the primary S&P 500 futures contract. The sidecar
diverts program trading orders to a separate file for five minutes and
also bans the entry of stop orders or stop limit orders for the rest of
the day (except when such orders are 2099 shares or less and are for
the account of an individual investor). The Exchange is proposing to
delete the sidecar provisions in their entirety.
The Exchange represents that experience has shown that program
trading orders have not been entered in significant numbers while
sidecar is in effect and thus this additional restriction is not
necessary. The Exchange believes that the collars contained in Rule
80A, along with the Exchange's trading halt policy and the circuit
breakers contained in Rule 80B, obviate the need for a sidecar.
Definitions. The revised version of Rule 80A would retain the
definitions of program trading and individual investor contained in the
current rule, but would move them into the supplementary material. The
definition of index arbitrage is being amended to codify the Exchange's
1992 interpretation \3\ that includes ``basis trading'' \4\ as index
arbitrage. The Exchange represents that the Rule language is being made
explicit
[[Page 71179]]
because certain traders may not have considered some strategies that
are effected to capture differences between the cash and futures
market, such as liquidating or establishing exchanges for physicals,\5\
to be index arbitrage.
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\3\ See NYSE Information Memo No. 92-23, dated August 28, 1992.
\4\ The NYSE considers basis trading to be a trading strategy of
making orders to purchase or sell a basket of stocks in conjunction
with the purchase or sale, or intended purchase or sale, or
derivative index products, in order to take advantage of pricing
discrepancies between the basket and the derivative index product.
See NYSE Information Memo No. 92-23, dated August 28, 1992.
\5\ In the context of program trading, the term ``exchange-for-
physicals'' or ``EFP'' refers to a practice whereby an entity, such
as a broker-dealer or an institution, uses an off-exchange
transaction to acquire or liquidate a hedged position in a stock
basket and stock index futures or options. For example, an
institution wishing to liquidate a large long-stock/short-futures
hedged position might negotiate with a broker-dealer to conduct an
EFP outside of regular U.S. trading hours in London. In the EFP, the
institution would sell the stock basket to the broker-dealer and the
broker-dealer would sell the equivalent amount of stock index
futures to the institution. The difference in the prices for the
stock and futures trades is the negotiated price for the
transaction, and is usually denominated in hundredths of a
percentage point (``basis points'') of the value of the portfolio.
Once the EFP is completed, the broker-dealer has acquired the long-
stock/short-futures hedged position. The broker-dealer may
subsequently ``unwind'' this position through trades on U.S.
exchanges when profitable arbitrage spreads arise. In the example
cited above, if futures are trading at a ``discount'' to underlying
stocks, the broker-dealer could use program orders to sell the
higher priced stocks on the NYSE while buying the lower priced
futures. Such a transaction would be the functional equivalent of
index arbitrage for purposes of NYSE Rule 80A(c).
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Conclusion. The Exchange believes that the proposed amendments to
Rule 80A will allow the collars to move with the market in a similar
fashion to the triggers in Rule 80B. Thus, trading curbs would remain
at an appropriate level as the market changes, i.e., closer to the 1.7%
move that the 50 point collar represented when implemented in 1990 as
opposed to 0.56% currently.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) \6\ of the
Act in general and furthers the objectives of Section 6(b)(5) \7\ in
particular in that it is designed to promote just and equitable
principles of trade, to remove impediments to, and perfect the
mechanisms of a free and open market and, in general, to protect
investors and the public interest.
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will impose no
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. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of 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:
A. by order approve the proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Exchange 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 in the Commission's Public Reference Room in 450 Fifth Street,
N.W., Washington, D.C. 20549. Also, copies of such filing will also be
available for inspection and copying at the principal office of the
above-mentioned self-regulatory organization. All submissions should
refer to File No. SR-NYSE-98-45 and should be submitted by January 13,
1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-33910 Filed 12-22-98; 8:45 am]
BILLING CODE 8010-01-M
