[Federal Register Volume 63, Number 32 (Wednesday, February 18, 1998)]
[Notices]
[Pages 8244-8246]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3930]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39634; File No. SR-NYSE-94-34]
Self-Regulatory Organizations; Notice of Filing of Amendment No.
4 to Proposed Rule Change by the New York Stock Exchange, Inc. Relating
to Exchange Rule 92, ``Limitations on Members' Trading Because of
Customers' Orders''
February 9, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on December 15, 1997, 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 Exchange. 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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
In its original form, the proposed rule change extended the
applicability of Exchange Rule 92 to trades by a member or member
organization on any market center and provided a limited exemption to
permit member organizations to trade along with their customers when
liquidating a block facilitation position or engaging in bona fide or
risk arbitrage. Amendment No. 4 provides an additional limited
exemption for hedging a facilitation position, as well as explanations
of the manner in which the amended rule will operate.
The following is the text of the proposed rule change marked to
reflect all of the proposed changes.\2\ Additions to the current text
of Exchange Rule 92 appear in italics while deletions appear in
brackets.
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\2\ The text of the proposed rule change incorporates all of the
proposed changes made to the original rule proposal by Amendment
Nos. 1, 2, 3, and 4. See Securities Exchange Act Release Nos. 35139
(Dec. 22, 1994), 60 FR 156 (Jan. 3, 1995) (notice of filing of
proposed rule change, including Amendment No. 1); 36015 (July 21,
1995), 60 FR 38875 (July 28, 1995) (notice of filing of Amendment
No. 2); 37428 (July 11, 1996), 61 FR 37523 (July 18, 1996) (notice
of filing of Amendment No. 3). On January 20, 1998, the Exchange
submitted a technical correction to Amendment No. 4 to better
identify the cumulative proposed changes to Exchange Rule 92. See
Letter from Betsy Lampert Minkin, Regulatory Development Project
Manager, Exchange, to Michael Loftus, Attorney, Division of Market
Regulation, Commission, dated January 12, 1998.
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Rule 92: Limitations on Members' Trading Because of Customers'
Orders
[(a) No member shall (1) personally buy or initiate the purchase of
any security on the Exchange for his own account or for any account in
which he, his member organization or any other member, allied member or
approved person, in such organization or officer thereof, is directly
or indirectly interested, while such member personally holds or has
knowledge that his member organization holds an unexecuted market order
to buy such security in the unit of trading for a customer, or (2)
personally sell or initiate the sale of any security on the Exchange
for any such account, while he personally holds or has knowledge that
his member organization holds an unexecuted market order to sell such
security in the unit of trading for a customer.
(b) No member shall (1) personally buy or initiate the purchase of
any security on the Exchange for any such account, at or below the
price at which he personally holds or has knowledge that his member
organization holds an unexecuted limited price order to buy such
security in the unit of trading for a customer, or (2) personally sell
or initiate the sale of any security on the Exchange for any such
account at or above the price at which he personally holds or has
knowledge that his member organization holds an unexecuted limited
price order to sell such security in the unit of trading for a
customer.]
(a) Except as provided in this Rule, no member or member
organization shall cause the entry of an order to buy (sell) any
Exchange-listed security on the Exchange or any other market center for
any account in which such member or member organization or any approved
person thereof is directly or indirectly interested (a ``proprietary
order''), if the person responsible for the entry of such order has
knowledge of any particular unexecuted customer's order to buy (sell)
such security which could be executed at the same price.
(b) A member or member organization may enter an proprietary order
while representing a customer order which could be executed at the same
price, provided the customer's order is not for the account of an
individual investor, and the customer has given express permission,
including and understanding of the relative price and sized of
allocated execution reports, under the following conditions:
(1) the member or member organization is liquidating a position
held in a proprietary facilitation account, and the customer's order is
for 10,000 shares or more; or
(2) the member or member organization is creating a bona fide hedge
and (i) the risk to be hedged is the result of a previously-established
position, recorded as acquired in the course of facilitating a
customer's order; (ii) the size of the offsetting hedging order is
commensurate with such risk; and (iii) the customer's order is for
10,000 shares or more; or
(3) the member or member organization is engaging in bona fide
arbitrage or risk arbitrage transactions, and recording such
transactions in an account used solely to record arbitrage transactions
(an ``arbitrage account'').
(c) The provisions of this Rule shall not apply to:
[[Page 8245]]
(1) [to] any purchase or sale of any security in an amount of less
than the unit of trading made by an odd-lot dealer to offset odd-lot
orders for customers; [or]
(2) [to] any purchase or sale of any security upon terms for
delivery other than those specified in such unexecuted market or
limited price order[.];
(3) transactions by a member or member organization acting in the
capacity of a market maker pursuant to Securities and Exchange
Commission Rule 19c-3 in a security listed on the Exchange; and
(4) transactions by a member or member organization acting in the
capacity of a specialist or market maker on another national securities
exchange.
Supplementary Material
.10 A member or employee of a member or member organization
responsible for entering proprietary orders shall be presumed to have
knowledge of a particular customer order unless the member organization
has implemented a reasonable system of internal policies and procedures
to prevent the misuse of information about customer orders by those
responsible for entering such proprietary orders.
.20 If both the propriety and customer orders which are the
subject of the transaction under review were executed in another market
center, the Exchange would refer the trading to that market's
regulatory staff, unless that market center does not have a
substantially similar rule relating to ``trading along'' activity
executed in that market center. If the market does not have a
substantially similar rule, Exchange Rules would govern the analysis.
If either the proprietary or customer order was executed on the
Exchange and the other market center has a rule which is not
substantially similar, the Exchange would pursue the matter under its
Rules. However, if the rules are substantially similar, the rule of the
market center where the proprietary trading occurred would govern the
analysis of that trading. In any case, all investigations would be
coordinated through existing Intermarket Surveillance Group procedures.
To be substantially similar, the difference in application of the
rules to the transaction must be minor and technical in nature, and not
materially different such as would be the case if the other rule
contained an additional broad exemptive clause under which the
proprietary trading is exempted.
.30 This Rule shall also apply to a member organization's member
on the Floor, who may not execute a proprietary order at the same
price, or at a better price, as an unexecuted customer order that he or
she is representing, except to the extent the member organization
itself could do so under this Rule.
.40 For purpose of paragraph (b) above, the term ``account of an
individual investor'' shall have the same meaning as the meaning
ascribed to that term in Exchange Rule 80A. For purposes of paragraph
(b)(1) above, the term ``proprietary facilitation account'' shall mean
an account in which a member organization has a direct interest and
which is used to record transactions whereby the member organization
acquires positions in the course of facilitating customer orders. Only
those positions which are recorded in a proprietary facilitation
account may be liquidated as provided in paragraph (b)(1). For purposes
of paragraph (b)(3) above, the terms ``bona fide arbitrage'' and ``risk
arbitrage'' shall have the meaning ascribed to such terms in Securities
Exchange Act Release 15533, January 26, 1979. All transactions effected
pursuant to paragraph (b)(3) above must be recorded in an arbitrage
account.
[.10].50 A member who issues a commitment or obligation to trade
from the Exchange through ITS or any other Application of the System
shall, as a consequence thereof, be deemed to be initiating a purchase
or a sale of a security on the Exchange as referred to in this Rule.
[.20].60 See paragraph (c)(i) of Rule 900 (Basket Trading:
Applicability and Definitions) and Rule 900 (Off-Hours Trading:
Applicability and Definitions) in respect of the ability to initiate
basket transactions and transactions through the ``Off-Hours Trading
Facility'' (as Rule 900 defines that term), respectively,
notwithstanding the limitations of this Rule.
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 Exchange 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 Exchange 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
As previously amended, the proposed rule change would extend the
applicability of Exchange rule 92 to trades by a member or member
organization in NYSE-listed securities on any market center and provide
limited exemptions to permit member organizations to trade along with
their customers when liquidating a block facilitation position or
engaging in bona fide arbitrage or risk arbitrage. The Exchange seeks
to further revise the application of Exchange Rule 92 as set forth
below.
(a) Hedge Exemption. The Exchange proposes to add to Exchange Rule
92 and exemption to permit member organizations to trade along with
their customers when creating a bona fide hedge. The member or member
organization would be allowed to trade along with a customer order of
10,000 shares or more where the customer is not an individual investor
and has given express permission to allow the member organization to
trade along, provided the hedging activity meets certain conditions.
The member or member organization must be trading to hedge the risk of
a previously-established position, recorded as acquired in the course
of facilitating a customer order, and the size of the offsetting
hedging order must be commensurate with such risk. this means that a
member organization's proprietary hedging order that meets the above
criteria could be represented along with a working order of a customer
who had granted consent to do so.
The determination of what constitutes an offset or reduction of
risk may be made by using any responsible method of calculating the
size of the risk and type of securities which would appropriately hedge
that risk.
(b) Application to Other Market Centers. The previously proposed
amendments to Exchange Rule 92 contain prohibitions against a member or
member organization entering an order for its own or a related account
if the person entering the order has knowledge of a customer order
capable of execution at the same price. This prohibition is proposed to
apply whether the trade for the customer or the member or member
organization in a NYSE-listed security occurs on the Exchange or on
``any other market center.'' The Exchange now proposes to incorporate
into paragraph .20 of the proposed rule's Supplementary Material
[[Page 8246]]
the manner in which this provision concerning ``any other market
center'' would be applied, as described below.
If both the proprietary and agency trading which are under review
were executed in another market center, the Exchange would refer the
matter to that market's regulatory staff, unless that market center
does not have a substantially similar rule relating to ``trading
along'' activity executed in that market center. If the market does not
have a substantially similar rule, Exchange rules would govern the
analysis.
If either the proprietary or agency trading were executed on the
Exchange and the other market center has a rule which is not
substantially similar, the Exchange would pursue the matter under
Exchange rules. However, if the rules are substantially similar, the
rule of the market center where the proprietary trading occurred would
govern the analysis of that trading. All investigations would be
coordinated through existing Intermarket Surveillance Groups
procedures.
To be ``substantially similar,'' the difference in application of
the rules to the transaction must be minor and technical in nature, and
not materially different such as would be the case if the other rule
contained an additional broad exemptive clause under which the
proprietary trading is exempted.
2. Statutory Basis
The statutory basis for the proposed rule change is the requirement
under Section 6(b)(5) of the Act \3\ 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 the proposed rule change will enable member
organizations to add depth and liquidity to the Exchange's market,
while continuing to provide customer protection through the requirement
of customer approval for trading along situations.
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\3\ 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 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 did not solicit or receive written comments with
respect to 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 Exchange 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
Inerested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change 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 submissions, 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 persons, 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 in
the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. 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-94-34 and should be
submitted by March 11, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-3930 Filed 2-17-98; 8:45 am]
BILLING CODE 8010-01-M
