[Federal Register Volume 63, Number 35 (Monday, February 23, 1998)]
[Notices]
[Pages 9034-9035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4401]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39666; File No. SR-NYSE-98-06]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the New York Stock Exchange, Inc. To Amend Exchange Rule 80B
(``Trading Halts Due to Extraordinary Market Volatility'')
February 13, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on February 10, 1998, the New York Stock Exchange,
Inc. (``NYSE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``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.
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change consists of amendments to Exchange Rule
80B (``Trading Halts Due to Extraordinary Market Volatility'').
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 test of these statements may be examined at
the places specified in Item IV 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.
Rule 80B provides, in part, that if the Dow Jones Industrial
Average sm (``DJIA'') \3\ falls 350 or more points below its
previous trading day's closing value, trading in all stocks on the
Exchange will halt for one half-hour, except that if the 350 or more
point decline is reached at or after 3:00 p.m., there will be no halt
in trading. It further provides that if on the same day the DJIA drops
550 or more points from its previous trading day's close, trading on
the Exchange will halt for one hour, except that if the 550 point
decline occurs after 2:00 p.m., but before 3:00 p.m., the halt will be
one half-hour instead of one hour. But if the 550 point drop occurs in
the last hour of trading (at or after 3:00 p.m.), the Exchange will
close for the rest of the day. These provisions are in effect on a
pilot basis through April 30, 1998.
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\3\ ``Dow Jones Industrial Average'' is a service mark of Dow
Jones & Company, Inc.
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Some believe that the current trigger levels are too low given the
current DJIA level of approximately 8000. Others believe that static
point values are unresponsive to dynamic market conditions, and prefer
triggers based on a percentage of the DJIA, so that the triggers will
move with the market. The Exchange is now proposing revisions to the
trigger levels that address these concerns.
a. The Proposal. The Exchange proposes to set the triggers at 10%,
20% and 30% of the DJIA, calculated at the beginning of each calendar
quarter, using the average closing value of the DJIA for the prior
month, thereby establishing specific point values for the quarter. Each
trigger will be rounded to the nearest 50 points.
Generally, the halt for a 10% decline will be one hour. If the 10%
trigger value is reached at or after 2:00 p.m., but before 2:30 p.m.,
the halt would be one half hour; at or after 2:30 p.m. the market would
continue trading, unless a 20% decline occurred, in which case the
market would close for the remainder of the day. Generally, the halt
for a 20% decline will be two hours. If the 20% trigger value is
reached at or after 1:00 p.m. but before 2:00 p.m. the halt would be
one hour; at or after 2:00 p.m., trading would halt for the rest of the
day. If the market declines by 30%, at any time, trading will be halted
for the remainder of the day.
The Exchange has expanded the duration of the halts early in the
day to address concerns that shorter periods were too compressed to
respond adequately to extreme declines in the market. The Exchange
believes that by varying the duration of the halt periods depending on
the severity of the decline and the time of day it occurs, Rule 80B
strikes a balance between the desire to reopen after a market-wide
trading halt due to extraordinary volatility, and the need for there to
be sufficient time before the scheduled close to allow for an orderly
reopening.
The Exchange has filed a petition \4\ with the Commission to amend
Rule 10b-18\5\ under the Exchange Act to extend the ``safe harbor''
provisions of the Rule. The Exchange wishes to reiterate its position,
expressed in the petition, particularly in view of the amendments to
Rule 80B proposed herein, that an expansion of the safe harbor
provisions of Rule 10b-18 following a market-wide trading halt would
benefit the market by providing additional liquidity during times of
market stress. The Exchange requests that the Commission address the
Exchange's concerns and amend Rule 10b-18 as proposed in the petition.
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\4\ See letter to Jonathan Katz, Secretary, Commission, from
James E. Buck, Senior Vice President and Secretary, NYSE, dated
January 8, 1998.
\5\ 17 CFR 240.10b-18.
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b. Price indications. The Exchange also proposes to amend Rule 80B
to require that price indications be made during an intra-day Rule 80B
trading halt for the stocks comprising the DJIA. This is designed to
supply information to market participants on expected pricing levels
for these highly capitalized stocks, and, thereby, the Index.
Specialists in these stocks will have the responsibility to disseminate
these price indications. Indications may
[[Page 9035]]
also be disseminated in other stocks with Floor Official approval.
Floor Official supervision and approval is mandatory for any
indication, including stocks in the DJIA, that represents a change from
the last sale of one point or more for stocks priced under $10, the
lesser of 10% or three points from a last sale for stocks priced
between $10 and $99 \15/16\, and five points from the last sale for
stocks priced at $100 or more. Indications in stocks in the DJIA which
do not represent such a change do not require Floor Official approval.
c. Background. Rule 80B was enacted in response to studies of the
October 1987 Market Break. One such study was the Interim Report of the
Working Group on Financial Markets issued by the Under Secretary for
Finance of the Department of the Treasury and the Chairmen of the
Securities and Exchange Commission, the Commodity Futures Trading
Commission and the Board of Governors of the Federal Reserve System in
May, 1988. This ``Working Group'' recommended ``coordinated trading
halts and reopenings for large, rapid market declines that threaten to
create panic conditions.'' The ``Working Group'' specifically
recommended, and the Exchange endorsed, temporary halts in the trading
of all stocks, stock options, and stock index options as well as the
trading of stock index futures and options on stock index futures when
the DJIA reaches certain trigger values. The Presidential Task Force on
Market Mechanisms (``Brady Commission'') also endorsed the concept of
coordinated market trading halts.
Rule 80B was approved by the Commission on a pilot basis on October
19, 1988, and was extended annually, most recently until April 30,
1998.\6\ Originally, the halt periods and trigger values were one hour
for a decline of 250 points in the DJIA (11.7% of the DJIA at that
time), and two hours for a 400 point decline (18.7% of the DJIA at that
time). In July 1996, the SEC approved the Exchange's proposal to reduce
the duration of the halts to 30 minutes and one hour, respectively.\7\
In January 1997, the trigger values were increased to the current
levels of 350 (5.1% of the DJIA at that time) and 550 points (8.1% of
the DJIA at that time).\8\
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\6\ See Exchange Act Release No. 39582 (January 26, 1998) 63 FR
5408 (February 2, 1998).
\7\ See Exchange Act Release No. 37457 (July 19, 1996) 61 FR
39176 (July 26, 1996).
\8\ See Exchange Act Release No. 38221 (January 31, 1997) 62 FR
5871 (February 7, 1997).
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The circuit breakers have been triggered just once since their
adoption. On October 27, 1997, the market closed for 30 minutes at 2:35
p.m., and after reopening at 3:05 p.m., the Exchange halted trading for
the remainder of the trading day when the decline reached 550 points.
Several views on the appropriateness of the levels and the duration and
timing of the halts were expressed. The Exchange initiated immediate
discussions with the SEC, other markets and Exchange advisory
committees on possible refinements to the process.
d. Constituent input. Exchange committees comprised of trading
professionals, specialists, brokerage houses and representatives of the
individual investor community were asked for their views. Other
marketplaces, including equities, options and financial futures
markets, were likewise consulted for their views. Indeed, the Exchange
originally adopted Rule 80B with the understanding that all United
States stock and option exchanges and the National Association of
Securities Dealers would adopt rules or procedures substantively
identical to Rule 80B, and that the futures exchanges would adopt rules
halting the trading of stock index futures and options on such futures
contracts under circumstances substantively identical to those
contained in Rule 80B. The above-described rule change is proposed
contingent on that same understanding.
2. Statutory Basis
The Exchange represents that the proposed rule change is consistent
with Section 6(b)(5) of the Act \9\ in that it is 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 proposed rule change
accomplishes these ends by balancing the need to halt trading
temporarily during periods of extraordinary market volatility with the
need to provide an open marketplace for trading securities.
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\9\ 15 U.S.C. 78f(b).
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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 inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the 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 Act. Persons making written submissions
should file six copes 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. Sec. 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
Exchange. All submissions should refer to File No. SR-NYSE-98-06 and
should be submitted by March 16, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-4401 Filed 2-20-98; 8:45 am]
BILLING CODE 8010-01-M
