[Federal Register Volume 59, Number 39 (Monday, February 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4474]
[Federal Register: February 28, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33642; File No. SR-NYSE-93-17]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by New York Stock Exchange, Inc. Relating To Initiation of On-
Floor Orders in a Stock by Floor Professionals Who Have a Listed Option
Position in That Stock
February 18, 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
14, 1993, the New York Stock Exchange, Inc. (``NYSE''` or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'' or
``SEC'') 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
Exchange Rule 96 currently prohibits a member registered as a
Competitive Trader\1\ or Registered Competitive Market Maker
(``RCMM'')\2\ from initiating, while on the Floor of the Exchange, the
purchase or sale, for his own account or his member organization's
account, of any stock in which he has an option position, or in which
he knows his firm has an option position. Rule 96 currently applies to
all options, including those traded on a national securities exchange
(``listed options''). The proposed rule change would remove the
prohibition in Rule 96 as to listed options.
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\1\A Competitive Trader is a NYSE member who is authorized to
initiate proprietary transactions on the Floor of the Exchange but
who is not registered as a specialist, odd-lot dealer or Registered
Competitive Market Maker. See NYSE Rules 111 & 112(e). Competitive
Traders exist pursuant to, and must comply with the requirements of,
Section 11(a)(1)(G) of the Act. See also SEC Rule 11a1-1(T). In
addition, the NYSE requires that 75 percent of a Competitive
Trader's monthly transactions must be stabilizing transactions under
the tick-test. See NYSE Rule 112(d).
\2\A RCMM is a NYSE member who is authorized to initiate
proprietary transactions on the Floor of the Exchange. See NYSE Rule
107. RCMMs are not subject to the same tick-test as Competitive
Traders; however, they must comply with a complex series of rules
about the price at which they can trade and the size of those
trades. Id. Unlike Competitive Traders, RCMMs have an affirmative
obligation to maintain a fair and orderly market. See NYSE Rule
109(B)(4).
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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 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 96 was adopted in the mid-1930's after extensive
investigations and public hearings by the Commission concerning
manipulative practices and ``pool'' operations involving the use of
options. At present, Rule 96 prohibits a member registered as a
Competitive Trader or RCMM from initiating, while on the Floor, the
purchase or sale, for his own account or his member organization's
account, of any stock in which he has an option position, or in which
he knows his firm has an option position. Rule 96 does not prohibit a
Competitive Trader or RCMM from trading in options; rather, the rule
simply provides that such members may not initiate a proprietary trade
in a stock on the Floor where they have an option position in the
stock. Rule 96 currently applies to all options, including those traded
over-the-counter (``OTC options``) and listed options.
The purpose of the proposed rule change is to remove the
prohibition in Rule 96 as to listed options. Thus, under the proposed
rule change, a Competitive Trader or RCMM would be permitted to
initiate a proprietary purchase or sale of stock on the Floor where he
has a listed option position in that stock, but not where he has an OTC
option position in that stock.
The Exchange believes that the proposed rule change is appropriate
for three reasons:
(1) By removing a restraint on members' initiating transactions on
the Floor, the proposed rule change can be expected to add to the depth
and liquidity of the Exchange market.
(2) Listed options are substantially different from the OTC options
which Rule 96 was originally intended to regulate, and any regulatory
concerns that might arise as to listed options can be addressed by
monitoring and surveillance of revised Rule 96.
(3) The proposed rule change will remove a competitive barrier to
fair competition, since no other professionals are subject to
comparable restrictions.
Enhancement to the Exchange Market
The Exchange established the membership categories of Competitive
Trader and RCMM to provide a means whereby members, subject to certain
conditions, could add to the quality of the Exchange market by
initiating proprietary transactions on the Floor. The current
restriction in Rule 96 defeats this purpose in some instances by
precluding Floor professionals from initiating such Floor transactions
in any stock where they have an option position overlying such stock
(or where they know their member organization has such an option
position).
The Exchange believes the proposed rule change will further the
purposes of Rule 107 by facilitating RCMM participation as dealers on
the Exchange. Currently, the prohibition in Rule 96 conflicts with the
purposes of Rule 107 by effectively precluding RCMMs from participating
as dealers in any stock where they have an option positin in that
stock. By deleting the prohibition in Rule 96 as to listed options, the
proposed rule change will eliminate this barrier to RCMM dealer
participation, thereby permitting RCMMs to add to the depth and
liquidity of the Exchange market in situation where they currently may
not do so.
In a similar vein, the proposed rule change will facilitate
transactions by Competitive Traders on the Floor by permitting them to
initiate such transactions in a stock where they have an option
position in such stock. This enhanced ability to initiate transactions
on the Floor will, as with RCMMs, add to the depth and liquidity of the
Exchange market.
Regulatory Concerns
Rule 96 was adopted in the mid-1930's to regulate trading where
members have a position in OTC options, not listed options, and the
trading abuses in the OTC market that gave rise to Rule 96 are simply
not present with respect to today's closely surveilled trading in
listed options. The Exchange believes that regulatory concerns as to
listed option trading can be addressed by monitoring and surveillance
of revised Rule 96.
The Exchange notes that if the prohibition in Rule 96 were to be
removed as to listed options, RCMMs and Competitive Traders would
remain subject to the restrictions on members' on-Floor proprietary
transactions stated in Rules 108 and 112,\3\ and thus would not be in
any greater position to exploit their alleged time and place advantage
over public investors.
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\3\Under Rule 108, an on-Floor order placed by a member to
establish or increase a position in the member's proprietary account
is not entitled to priority, or precedence based on size, over an
off-Floor order placed by a public customer. On-Floor and off-floor
are defined in rule 112; that rule also prohibits frontrunning of
block transactions.
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Removal of Barrier to Fair Competition
The Exchange notes that off-Floor professionals (including
specialists and market makers on regional exchanges) are not subject to
any restrictions in effacing off-Floor proprietary trades in a stock
where they have an option position (whether a listed or OTC option) in
that stock. Thus, off-Floor professional can be said to enjoy a
significant competitive advantage over Floor professionals on the
Exchange, who are restricted in their on-Floor proprietary transactions
in a stock where they have an option position in that stock.
The Exchange acknowledges that a floor professional my initiate an
off-Floor order in a stock where he has an option position in that
stock. However, a significant reason why Competitive Traders and RCMMs
become registered as such is to be able, in the routine conduct of
their business, to initiate proprietary trades on the Floor rather than
``upstairs.'' Thus, the ability of Floor professionals to initiate off-
Floor orders in a stock in which they have an option position is
largely meaningless when viewed in the context of the way such
professionals routinely conduct their business. The Exchange does not
believe that any viewed in the context of the way such professionals
routinely conduct their business, when off-Floor professionals are not
subject to comparable restrictions in the routine conduct of their
business.
SEC Staff Comments on SR-NYSE-76-54
In response to proposed changes to Rules 96, 102, and 105 that were
submitted in file No. SR-NYSE-76-54, the SEC staff suggested that the
Exchange's proposals be revised so that Floor professionals would be
permitted to use listed options only for hedging purposes.\4\ Most of
the SEC staff's comments were directed specifically at specialists'
trading of specialty stock options pursuant to Rule 105.
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\4\The NYSE submitted File No. SR-NYSE-76-54 to the Commission
on October 22, 1976. The proposed rule change was noticed for
comment in Securities Exchange Act Release 12924 (October 27, 1976),
41 FR 48430 (November 3, 1976). The file, like other options
proposals that raised significant regulatory issues, became dormant
during the ``options moratorium'' in order to allow the Commission
to complete its Special Study of the Options Markets. Shortly
thereafter, the NYSE refiled its proposals to amend Rule 96 (File
No. SR-NYSE-82-19) and Rules 102 and 105 (File No. SR-NYSE-82-20).
In early 1985, the Commission approved the latter rule filing,
thereby permitting NYSE specialists to trade options on their
specialty stock but, consistent with the staff's earlier comments,
only for hedging purposes. See Securities Exchange Act Release No.
21710 (February 4, 1985), 50 FR 5708 (February 11, 1985). The
amendments to Rule 96, however, were noticed but never received
Commission approval. See Securities Exchange Act Release No. 20006
(July 26, 1983), 48 FR 35217 (August 3, 1983). On March 15, 1993,
the NYSE withdrew File No. SR-NYSE-82-19 and resubmitted the
substance of that proposal as this File No. SR-NYSE-93-17.
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While Rule 105 permits specialists to use listed options to offset
the risks of making markets in stocks in which they are registered, the
Exchange does not believe that it would be appropriate to re-structure
Rule 96 along the lines of Rule 105. A ``hedging limitation'' in such a
re-structured version of Rule 96 would have the effect of requiring
Competitive Traders and RCMMs to use listed options only to offset the
risk of loss in stock positions which they acquired as a result of
orders in such stocks that were initiated on the Floor. In practice,
such a limitation would be even more restrictive than the current
regulation, which, as noted above, permits Floor professionals to trade
in listed options, but simply precludes them from initiating an order
on the Floor in a stock which underlies such option position. The
Exchange does not believe that making Rule 96 even more stringent than
it is today would serve any valid regulatory purpose.
As noted above, Rule 96 does not prohibit a Competitive Trader or
RCMM from trading in options, but provides only that he may not
initiate a proprietary order on the Floor in any stock where he has an
option position in that stock. The Exchange does not believe that any
sort of ``reverse hedging limitation'' in Rule 96 would make sense
because it would mean, in effect, that a Competitive Trader or RCMM
could initiate a proprietary trade on the Floor if necessary to hedge
an option position. However, the primary dealings of RCMMs and
Competitive Traders are in stocks, not the overlying options. In the
Exchange's view, a ``reverse hedging limitation'' in Rule 96 would bear
no relation to the practical business dealings of RCMMs and Competitive
Traders, and would constitute an unnecessary burden of over-regulation
given the minimal potential for trading abuse.
2. Statutory Basis
The statutory bases for the proposed rule change are sections
6(b)(5), 6(b)(8) and 11A(a)(1)(c)(ii) of the Act. By removing the
prohibition on Competitive Traders and RCMMs initiating proprietary
transactions on the Floor in a stock where they have a listed option
position in such stock, and thereby permitting such members to add to
the depth and liquidity of the Exchange market in situations where they
may not currently do so, the proposed rule change will have the effect
of ``facilitating transactions in securities'' and will ``perfect the
mechanism of a free and open market,'' as called for in section
6(b)(5).
To the extent that the proposed rule change permits Floor
professionals to initiate transactions on a more equal regulatory
footing with other securities professionals, the proposed rule change
is designed to eliminate unfair discrimination between brokers or
dealers, as called for in section 6(b)(5); to remove a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act, as called for in section 6(b)(8); and to promote fair
competition among brokers and dealers, as called for in section
11A(a)(1)(C)(ii).
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. In fact, the proposed rule
change will enhance competition by permitting Floor professionals to
initiate proprietary transactions on a more equal regulatory plane with
all other securities professionals.
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 publication of this notice in the Federal
Register or within such other 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. 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 NYSE. All
submissions should refer to File No. SR-NYSE-93-17 and should be
submitted by March 21, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4474 Filed 2-25-94; 8:45 am]
BILLING CODE 8010-01-M
