[Federal Register Volume 59, Number 38 (Friday, February 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4338]
[[Page Unknown]]
[Federal Register: February 25, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33639; File No. SR-BSE-93-04]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Temporary Accelerated Approval to Proposed Rule Change by the
Boston Stock Exchange, Inc. Relating to Procedures for the Handling of
Market-On-Close Orders on Expiration Fridays and Quarterly Index
Expiration Days
February 17, 1994.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 9,
1993, the Boston Stock Exchange, Inc. (``BSE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I and II below, which
Items have been prepared by the self-regulatory organization. On May 3,
1993, the BSE submitted to the Commission Amendment No. 1 to the
proposed rule change to clarify the scope of this filing, to agree to
its framing as a pilot program and to request accelerated approval
thereof.\1\ On September 17, 1993, the BSE submitted Amendment No. 2 to
the proposed rule change in order to conform its proposal with recent
amendments to comparable procedures on another exchange.\2\ On February
3, 1994, the BSE submitted to the Commission Amendment No. 3 to the
proposed rule change regarding the dissemination of order
imbalances.\3\ On February 10, 1994, the BSE submitted Amendment No. 4
to the proposed rule change in order to define certain terms used in
the filing and to correct certain typographical errors.\4\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\See letter from Karen A. Aluise, Staff Attorney, BSE, to
Diana Luke-Hopson, Branch Chief, Division of Market Regulation, SEC,
dated April 29, 1993 (``Amendment No. 1'').
\2\See letter from Karen A. Aluise, Assistant Vice President,
BSE, to Diana Luke-Hopson, Branch Chief, Division of Market
Regulation, SEC, dated September 15, 1993 (``Amendment No. 2'').
\3\See letter from Karen A. Aluise, Assistant Vice President,
BSE, to Sandra Sciole, Acting Branch Chief, Division of Market
Regulation, SEC, dated January 31, 1994 (``Amendment No. 3'').
\4\See letter from Karen A. Aluise, Assistant Vice President,
BSE, to Sandra Sciole, Acting Branch Chief, Division of Market
Regulation, SEC, dated February 3, 1993 (``Amendment No. 4'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The purpose of the proposed rule change is to establish a set of
procedures for the handling of Market-on-Close (``MOC'') orders\5\ on
Expiration Fridays\6\ and Quarterly Index Expiration days\7\ which
mirror the procedures in place on the New York Stock Exchange
(``NYSE'')\8\ in order to ensure equal treatment of orders in both
markets.\9\
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\5\The BSE defines an ``at the close order'' as a market order
which is to be executed at or as near to the close as practicable.
See Ch. I, Sec. 3 of the BSE Rules.
\6\The term ``Expiration Friday'' refers to 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.
\7\The term ``Quarterly Index Expiration day'' refers to the
trading day, currently the last trading day of each calendar
quarter, on which Quarterly Index Expiration (``QIX'') options
expire. Amendment No. 1, see supra note 1, expanded the scope of
this proposal to include Quarterly Index Expiration days as well as
Expiration Fridays.
\8\The Commission recently approved modifications to the NYSE's
auxiliary closing procedures for Expiration Fridays and Quarterly
Index Expiration days (collectively, ``expiration days''), and
extended the effectiveness of the NYSE pilot program until October
31, 1994. See Securities Exchange Act Release No. 32868 (September
10, 1993), 58 FR 48687 (September 17,1993) (File No. SR-NYSE-93-33)
(``1993 Auxiliary Closing Procedures Approval Order''). As modified,
the NYSE procedures establish, for all stocks, a 3:40 p.m. deadline
for (1) the entry of MOC orders related to a strategy including any
expiring stock index options, stock index futures or options on
stock index futures and (2) the cancellation or reduction of any MOC
order. In addition, for the pilot stocks (as defined below, see
infra note 10), the NYSE specialist must, as soon as practicable
after 3:40 p.m. disseminate any MOC order imbalance of 50,000 shares
or more; thereafter, MOC orders in the pilot stocks may be entered
only to offset a published imbalance.
\9\The BSA proposes to implement its MOC order procedures on a
pilot basis expiring October 31, 1994. See Amendment No. 1, supra,
note 1. The BSE also requests accelerated approval to enable the
pilot program to take effect on the next expiration day. See
Amendment No. 3, supra, note 3.
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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 II 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
The purpose of the proposed rule change is to adopt certain
procedures to mirror those of the primary market for the handling of
MOC orders on Expiration Fridays and Quarterly Index Expiration days so
that the BSE does not become a haven for MOC orders that are prohibited
on the NYSE. In this way, all orders sent to the Exchange will receive
equal treatment to orders sent to the NYSE. The proposed procedures
include (a) prohibiting the cancellation or reduction of any MOC order
in any NYSE stock after 3:40 p.m. on Expiration Fridays and Quarterly
Index Expiration days, (b) providing a 3:40 p.m. deadline for the entry
of MOC orders, in all NYSE stocks, related to a strategy involving any
stock index future, stock index option or option on stock index futures
in expiring contracts, (c) publishing imbalances of 50,000 shares or
more in the pilot stocks, and (d) limiting the entry of MOC orders
after 3:40 p.m. in the pilot stocks to offsetting published imbalances.
With respect to item (a) above, the Exchange will permit cancellations
of MOC orders after 3:40 p.m. in those instances where a legitimate
error has been made. The term ``pilot stocks'' refers to the list of
stocks designated by the NYSE as pilot stocks for purposes of its
auxiliary closing procedures.\10\
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\10\As designated by the NYSE, 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. See 1993 Auxiliary Closing
Procedures Approval Order, supra, note 8. The Quarterly Index
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.
Id.
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2. Statutory Basis
The statutory basis for the proposed rule change is section 6(b)(5)
of the Act in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest; and is not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers. The BSE believes that, if investors, whose orders
are banned on the NYSE because of current market conditions, are able
to reroute those orders to the Exchange for execution on the BSE
without regard to current market conditions, there could be a negative
impact on the overall market as a result of the execution of those
orders.
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 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, DC 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 at the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the BSE. All
submissions should refer to File No. SR-BSE-93-04 and should be
submitted by March 18, 1994.
IV. Commission's Findings and Order Granting Temporary Accelerated
Approval of Proposed Rule Change
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). In particular, 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.
In recent years, the self-regulatory organizations, with the
support of the Commission, have instituted certain safeguards to
minimize excess market volatility that may arise from the liquidation
of stock positions related to trading strategies involving expiring
index derivative products. For instance, on expiration days, the NYSE
utilizes auxiliary closing procedures\11\ designed to help the
specialist attract any contra-side interest necessary to alleviate MOC
order imbalances and dampen their effect on the closing price. Based on
the NYSE's experience,\12\ the Commission believes that these
procedures work relatively well and may result in more orderly markets
at the close on expiration days.
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\11\See supra, note 8.
\12\The NYSE has submitted to the Commission several monitoring
reports describing its experience with the auxiliary closing
procedures. For further discussion of the NYSE's results, see 1993
Auxiliary Closing Procedures Approval Order, supra, note 8.
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In today's highly competitive market environment, however, it is
possible that a regional exchange, which trades NYSE-listed stocks but
does not have comparable closing procedures, could be utilized by
market participants to enter MOC orders prohibited on the NYSE.
Although the Commission has no reason to believe that the BSE market
has become a significant alternative market to enter otherwise
prohibited MOC orders, the Commission agrees with the BSE that, if this
possibility were realized, it could have a negative impact on the
fairness and orderliness of the national market system.\13\
Accordingly, the Commission initially believes that it is reasonable
for the BSE to adopt procedures for the handling of MOC orders that
mirror the NYSE's, thereby ensuring the equal treatment of orders in
both markets and, in the event of unusual market conditions, offering
the BSE the same benefits in terms of potentially reducing volatility.
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\13\For example, if MOC orders prohibited on the NYSE were
entered instead on the BSE, unusually large MOC order imbalances on
the regional exchange could contribute to overall market volatility.
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Consistent with its rationale for approving the identical NYSE
procedures,\14\ the Commission preliminarily has concluded that this
proposal should allow the BSE to obtain an accurate view of the buying
and selling interest in MOC orders at expiration and, if there is a
substantial imbalance on one side of the market, to provide the
investing public with timely and reliable notice thereof. In reaching
this conclusion, the Commission noted that the proposed rule change
will establish a simultaneous 3:40 p.m. deadline for the entry of
expiration-related MOC orders and for the cancellation or reduction of
any MOC order. Substantial MOC order imbalances in the pilot stocks
will be disseminated promptly thereafter.\15\ Because the MOC orders
included in those imbalances will be irrevocable and because of the
restrictions on further MOC order entry, the Commission is satisfied
that BSE imbalance publications should reflect actual investor
interest.
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\14\See 1993 Auxiliary Closing Procedures Approval Order, supra
note 8.
\15\The BSE has indicated that it will disseminate imbalances to
its floor, its member firms and the investing public in a manner
which is substantially similar to that utilized by the NYSE.
Telephone conversation between Karen A. Aluise, Assistant Vice
President, BSE, and Beth Stekler, Attorney, Division of Market
Regulation, SEC, on February 10, 1994.
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In addition, the Commission finds that, in the event of unusual
market conditions, the BSE should have sufficient time to attract
contra-side interest to help alleviate imbalances created by the
unwinding of index derivative related positions. As noted above, the
proposed rule change will require both the early submission of
expiration-related MOC orders and, for the pilot stocks, prompt
dissemination of substantial MOC order imbalances. While the Commission
recognizes that 3:40 p.m. is relatively near the close, the Commission
tentatively believes that deadline strikes a reasonable balance between
the need to provide the investing public with timely and reliable
notice of expiration-related order flow and the need to avoid unduly
infringing upon legitimate trading strategies.
The Commission is approving the proposed rule change on a pilot
basis until October 31, 1994.\16\ As long as some index derivative
products continue to expire based on the closing stock prices on
expiration days, the Commission agrees with those self-regulatory
organizations which argue that such procedures are necessary to provide
a mechanism to handle the potentially large stock imbalances engendered
by the unwinding of index derivative related positions. During this
pilot program, the Commission expects the BSE to monitor the
effectiveness of its MOC order procedures.
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\16\Prior to the initiation of this pilot, the Commission
requests that the BSE submit to the Commission an Information
Memorandum substantially similar to the NYSE's.
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The Commission therefore requests that the BSE submit a report to
the Commission, by August 31, 1994, describing its experience with the
pilot program. At a minimum, this report should contain, for each
Expiration Friday and Quarterly Index Expiration day, the following
data: (1) For all pilot stocks, the size of the MOC order imbalance on
the BSE at 3:40 p.m. and at 4:00 p.m.; (2) for all pilot stocks, the
price (and time) of the last regular way trade on the BSE, the price of
the last consolidated trade and the closing price; and (3) for each
pilot stock which had a MOC order imbalance of 50,000 shares or more at
3:40 p.m., an appropriate measure of volatility at the close for the
BSE (for example, the change in price of the closing transaction,
measured as a percentage, from the last trade and/or the change in the
specialist's position) and a description of how the pilot procedures
influenced market conditions. Any requests to modify this pilot
program, to extend its effectiveness or to seek permanent approval of
the pilot procedures also should be submitted to the Commission, by
August 31, 1994, as a proposed rule change pursuant to section 19(b) of
the Act.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of the
notice of filing thereof. This will permit the pilot program to take
effect on the next expiration day. In addition, the procedures the
Exchange proposes to use are identical to NYSE procedures that were
published in the Federal Register for the full comment period and were
approved by the Commission.\17\
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\17\No comments were received in connection with the most recent
proposed rule change which modified and extended the NYSE
procedures. See 1993 Auxiliary Closing Procedures Approval Order,
supra, note 8.
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It is therefore ordered, Pursuant to section 19(b)(2) of the
Act\18\ that the proposed rule change (SR-BSE-93-04) is hereby approved
on a pilot basis until October 31, 1994.
\18\15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4338 Filed 2-24-94; 8:45 am]
BILLING CODE 8010-01-M
