95-2902. Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval To Proposed Rule Change by New York Stock Exchange, Inc. Relating to an Extension of its Pilot Program for Stopping Stock Under Amendments to Rule 116.30  

  • [Federal Register Volume 60, Number 25 (Tuesday, February 7, 1995)]
    [Notices]
    [Pages 7247-7249]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 95-2902]
    
    
    
    [[Page 7247]]
    
    SECURITIES AND EXCHANGE COMMISSION
    
    [Release No. 34-35309; File No. SR-NYSE-95-02]
    
    
    Self-Regulatory Organizations; Notice of Filing and Order 
    Granting Accelerated Approval To Proposed Rule Change by New York Stock 
    Exchange, Inc. Relating to an Extension of its Pilot Program for 
    Stopping Stock Under Amendments to Rule 116.30
    
    January 31, 1995.
        Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
    (``Act''), 15 U.S.C. Sec. 7s(b)(1), notice is hereby given that on 
    January 18, 1995, 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 and II below, which Items have been prepared by the self-
    regulatory organizations. 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 proposed rule change consists of a request to extend amendments 
    to Rule 116.30, with respect to the ability of specialists to stop 
    stock in minimum variation markets, for four months until July 21, 
    1995.\1\ The text of the proposed rule change is available at the 
    Office of the Secretary, NYSE, and at the Commission.
    
        \1\The NYSE received approval to amend Rule 116.30, on a pilot 
    basis, in Securities Exchange Act Release No. 28999 (March 21, 
    1991), 56 FR 12964 (March 28, 1991) (File No. SR-NYSE-90-48) (``1991 
    Approval Order''). The Commission subsequently extended the NYSE's 
    pilot program in Securities Exchange Act Release Nos. 30482 (March 
    16, 1992), 57 FR 10198 (March 24, 1992) (File No. SR-NYSE-92-02) 
    (``1992 Approval Order''); 32031 (March 22, 1993), 58 FR 16563 
    (March 29, 1993) (File No. SR-NYSE-93-18) (``1993 Approval Order''); 
    and 33792 (March 21, 1994), 59 FR 14437 (March 28, 1994) (File No. 
    SR-NYSE-94-06) (``1994 Approval Order''). Commission approval of 
    these amendments to Rule 116.30 expires on March 21, 1995. The 
    Exchange seeks accelerated approval of the proposed rule change in 
    order to allow the pilot program to continue without interruption. 
    See letter from James E. Buck, Senior Vice President and Corporate 
    Secretary, NYSE, to Glen Barrentine, Senior Counsel, Division of 
    Market Regulation, SEC, dated January 31, 1995.
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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 III 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 extend the 
    effectiveness of amendments to Exchange Rule 116.30, which permit a 
    specialist to grant a stop in a minimum variation market. The practice 
    of ``stopping'' stock by specialists on the Exchange refers to a 
    guarantee by the specialist that an order the specialist receives will 
    be executed at no worse a price than the contra-side price in the 
    market when the specialist receives the order, with the understanding 
    that the order may in fact receive a better price.
        Formerly, Exchange Rule 116.30 permitted a specialist to stop stock 
    only when the quotation spread was at least twice the minimum variation 
    (i.e., for most stock, at least a \1/4\ point), with the specialist 
    then being required to narrow the quotation spread by making a bid or 
    offer, as appropriate, on behalf of the order that is being stopped.
        For three years, on March 21, 1991, March 16, 1992, and March 22, 
    1993, the Commission approved, on a one-year pilot basis each time, 
    amendments to the rule which permit a specialist to stop stock in a 
    minimum variation market (generally referred to as an ``\1/8\th point 
    market'').\2\ The Exchange sought these amendments on the grounds that 
    many orders would receive an improved price if stopping stock in \1/
    8\th point markets were permitted. The amendments to Rule 116.30 permit 
    a specialist, upon request, to stop individual orders of 2,000 shares 
    or less, up to an aggregate of 5,000 shares when multiple orders are 
    stopped in an \1/8\th point market. A specialist may stop an order 
    pursuant to a specified larger order size threshold, or a specified 
    larger aggregate share threshold, after obtaining Floor Official 
    approval.
    
        \2\See 1991, 1992 and 1993 Approval Orders, supra, note 1.
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        On February 12, 1992, the Exchange requested that the Commission 
    grant permanent approval to the amendments to Rule 116.30.\3\ At that 
    time, the Commission staff requested that the Exchange extend the pilot 
    for an additional year to allow the Commission more time to consider 
    the Exchange's request to make the amendments to Rule 116.30 permanent. 
    At the request of Commission staff, the Exchange again filed for an 
    extension of the rule's provisions, this time until March 21, 1995.\4\ 
    In its approval order, the Commission asked the Exchange to submit a 
    fourth monitoring report on the stopping stock pilot and to submit a 
    proposed rule change regarding Rule 116.30 by December 31, 1984. The 
    monitoring report has been submitted to the Commission under separate 
    cover. The Commission has asked the Exchange to file for a four month 
    extension of the amendments to Rule 116.30 so that the Commission may 
    evaluate the fourth monitoring report prior to determining if it will 
    grant permanent approval to the amendments. The Exchange believes that 
    the results obtained by its monitoring effort during the pilot period 
    show that the amendments to Rule 116.30 enable specialists to better 
    serve investors through the ability to offer price improvement to 
    stopped orders, while having relatively little adverse impact on other 
    orders on the book.
    
        \3\See File No. SR-NYSE-93-11.
        \4\See 1994 Approval Order, supra, note 1.
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    2. Statutory Basis
        The basis under the Act for the proposed rule change is the 
    requirement under Section 6(b)(5) 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 
    amendments to Rule 116.30 are consistent with these objectives in that 
    they permit the Exchange to better serve its customers by enabling 
    specialists to execute customer orders at improved prices.
    
    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 written comments on 
    the proposed rule change.
    
    III. Solicitation of Comments
    
        Interested persons are invited to submit written data, views and 
    arguments concerning the foregoing. [[Page 7248]] 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. Sec. 552, will be available for inspection and 
    copying at 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 
    NYSE. All submissions should refer to File No. SR-NYSE-95-02 and should 
    be submitted by February 28, 1995.
    
    IV. Commission's Findings and Order Granting 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 Section 6(b)(5)\5\ and Section 11(b)\6\ of the Act. 
    The Commission believes that the amendments to Rule 116.30 should 
    further the objectives of Section 6(b)(5) and Section 11(b) through 
    pilot program procedures designed to allow stops, in minimum variation 
    markets, under limited circumstances that provide the possibility of 
    price improvement to customers whose orders are granted stops.\7\
    
        \5\15 U.S.C. 78f (1988).
        \6\15 U.S.C. 78k (1988).
        \7\For a description of NYSE procedures for stopping stock in 
    minimum variation markets, and of the Commission's rationale for 
    approving those procedures on a pilot basis, see 1991 Approval 
    Order, supra, note 1. The discussion in the aforementioned order is 
    incorporated by reference into this order.
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        In its orders approving the pilot procedures,\8\ the Commission 
    asked the NYSE to study the effects of stopping stock in a minimum 
    variation market. Specifically, the Commission requested information on 
    (1) the percentage of stopped orders executed at the stop price, versus 
    the percentage of such orders that received a better price; (2) market 
    depth, including a comparison of the size of stopped orders to the size 
    of the opposite side of the quote and to any quote size imbalance, and 
    an analysis of the ratio of the size of the bid to the size of the 
    offer; (3) whether limit orders on the specialist's book were bypassed 
    due to the execution of stopped orders at a better price (and, to this 
    end, the Commission requested that the NYSE conduct a one-day review of 
    all book orders in three of the ten stocks receiving the greatest 
    number of stops); and (4) specialist compliance with the pilot 
    program's procedures.
    
        \8\See supra, note 1.
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        The Exchange has submitted to the Commission four monitoring 
    reports regarding the amendments to Rule 116.30. The Commission 
    believes that, although these monitoring reports provide certain useful 
    information concerning the operation of the pilot program, the 
    Commission must conduct further analysis of the NYSE data and, in 
    particular, of Rule 116.30's impact on limit orders on the specialist's 
    book before it can consider permanent approval thereof. To allow the 
    Commission fairly and comprehensively to evaluate the NYSE's use of its 
    pilot procedures, without compromising the benefit that investors might 
    receive under Rule 116.30, as amended, the Commission believes that it 
    is reasonable to extend the pilot program until July 21, 1995.
        First, the NYSE's latest monitoring report indicates that 
    approximately half of eligible orders (i.e., orders for 200 shares of 
    less) stopped in minimum variation markets received price improvement. 
    The Commission, therefore, believes that the pilot procedures provide a 
    benefit to certain investors by offering the possibility of price 
    improvement to customers whose orders are granted stops in minimum 
    variation markets. According to the NYSE report, moreover, virtually 
    all stopped orders were for 2,000 shares of less. In this respect, the 
    amendments to Rule 116.30 should mainly affect small public customer 
    orders, which the Commission envisioned could most benefit from 
    professional handling by the specialist.
        Second, in terms of market depth, the NYSE's monitoring report 
    suggests that stock tends to be stopped in minimum variation markets 
    where there is a significant disparity (in both absolute and relative 
    terms) between the number of shares bid for and the number offered.\9\ 
    That report also suggests that, given the depth of the opposite side of 
    the market, orders affected by the Rule 116.30 pilot tend to be 
    relatively small.\10\ For a substantial majority of stops granted, the 
    size of the stopped order was less than, or equal to, 25% of the size 
    of the opposite side quote.
    
        \9\As part of its initial proposed rule change, the NYSE 
    provided the following example illustrating the relationship between 
    quote size imbalance and the likelihood of price improvement: Assume 
    that the market for a given stock is quoted 30 to 30\1/8\, with 
    1,000 shares bid for and 20,000 shares offered. The large imbalance 
    on the offer side of the market suggests that subsequent 
    transactions will be on the bid side. Accordingly, the NYSE states 
    that it might be appropriate to stop a market order to buy, since 
    the delay might allow the specialist to execute the buyer's order at 
    a lower price. After granting such a stop, the specialist would be 
    required to increase his quote by the size of the stopped buy order, 
    thereby adding depth to the bid side of the market.
        \10\A relatively large order might begin to counteract the 
    pressure the imbalance on the opposite side of the market is putting 
    on the stock's price. Accordingly, it might not be as appropriate to 
    stop such an order.
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        In the Commission's opinion, the NYSE data generally supports its 
    conclusion that the imbalances on the opposite side of the market from 
    the stopped orders were of sufficient size to suggest the likelihood of 
    price improvement to customers.\11\ The Commission continues to believe 
    that the requirement of a sufficient market imbalance is a critical 
    aspect of the pilot program.\12\ When properly applied, such a 
    requirement should help the NYSE ensure that stops are only granted in 
    a minimum variation market when the benefit (i.e., price improvement) 
    to orders being stopped far exceeds the potential for harm to orders on 
    the specialist's book.\13\
    
        \11\The NYSE has stated, both to the Commission and to its 
    members, the specialists should only stop stock in a minimum 
    variation market when an imbalance exists on the opposite side of 
    the market and such imbalance is of sufficient size to suggest the 
    likelihood of price improvement. See, e.g., letter from James E. 
    Buck, Senior Vice President and Secretary, NYSE, to Mary N. Revell, 
    Branch Chief, Division of Market Regulation, SEC, dated December 27, 
    1990; NYSE information memo #1809, dated September 12, 1991.
        \12\For a discussion of the relationship between quote size 
    imbalance and the likelihood of price improvement, see supra, note 
    9.
        In extending a comparable pilot program by the American stock 
    Exchange, the Commission placed similar emphasis on the critical 
    nature of the sufficient size standard when stopping stock in 
    minimum variation markets. See Securities Exchange Act Release No. 
    33791 (March 21, 1994), 59 FR 14432 (March 28, 1994) (File No. SR-
    Amex-93-47).
        \13\See infra, text accompanying notes 14-15.
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        Third, the NYSE states that the amendments to Rule 116.30 have 
    relatively little adverse impact on other orders on the specialist's 
    book.\14\ This [[Page 7249]] conclusion is based, in large part, on the 
    Exchange's one-day review of limit orders against which orders were 
    stopped pursuant to this pilot program. As part of this review, which 
    focused on three of the ten stocks receiving the greatest number of 
    stops, the NYSE determined how often such book orders were executed at 
    their limit price by the close of the day's trading. In addition to 
    aggregated data, the Exchange provided a detailed breakdown of the 
    disposition of each order.
    
        \14\When stock is stopped, book orders on the opposite side of 
    the market that are entitled to immediate execution lose their 
    priority. If the stopped order then receives an improved price, 
    limit orders at the stop price are bypassed and, if the market turns 
    away from that limit, may never be executed.
        As for book orders on the same side of the market as the stopped 
    stock, the Commission believes that Rule 116.30's requirements make 
    it unlikely that these limit orders would not be executed. Under the 
    NYSE pilot program, an order can be stopped only if a substantial 
    imbalance exists on the opposite side of the market. See supra, 
    notes 9-13 and accompanying text. In those circumstances, the stock 
    would probably trade away from the large imbalance, resulting in 
    execution of orders on the book.
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        The Commission has historically been concerned that book orders get 
    bypassed when stock is stopped, especially in a minimum variation 
    market.\15\ Based on the NYSE's prior experience, the Commission did 
    not have sufficient grounds to conclude that this long-standing concern 
    had been alleviated. The Commission acknowledges, however, that the 
    fourth monitoring report proves new information on this aspect of the 
    pilot program. As a result, the Commission finds that additional time 
    is necessary for the Commission to review such information and to 
    ensure that Rule 116.30, as amended, does not harm public customers 
    with limit orders on the specialist's book.
    
        \15\See, e.g., SEC. Report of the Special Study of the 
    Securities Markets of the Securities and Exchange Commission, H.R. 
    Doc. No. 95, 88th Cong., 1st Sess. Pt. 2 (1963).
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        Finally, the NYSE report describes its compliance efforts (e.g., 
    automated surveillance, review of Floor Official records, information 
    memos, continuing education). The Commission believes that these 
    programs provide specialists with adequate notice of their 
    responsibilities. Similarly, the Exchange has sufficient means to 
    determine whether a specialist complied with the amendments' order size 
    and aggregate share thresholds and, if not, whether Floor Official 
    approval was obtained for larger parameters. The Commission would 
    expect the NYSE to take appropriate action in response to any instance 
    of specialist non-compliance with the pilot procedures. In considering 
    permanent approval of the amendments to Rule 116.30, the Commission 
    would place great, weight on the Exchange's record in compliance 
    matters.
        During the pilot extension, the Commission requests that the 
    Exchange continue to monitor the effects of stopping stock in a minimum 
    variation market and to provide additional information where 
    appropriate. Moreover, if the Exchange determines to request permanent 
    approval of the pilot program or an extension thereof beyond July 21, 
    1995, the NYSE should submit to the Commission a proposed rule change 
    by April 1, 1995.
        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 
    continue on an uninterrupted basis. In addition, the procedures the 
    Exchange proposes to continue using are the identical procedures that 
    were published in the Federal Register for the full comment period and 
    were approved by the Commission.\16\
    
        \16\No comments were received in connection with the proposed 
    rule change which implemented these procedures. See 1991 Approval 
    Order, supra, note 1.
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        It is therefore ordered, pursuant to Section 19(b)(2) of the 
    Act,\17\ that the proposed rule change (SR-NYSE-95-02) is approved for 
    a four month period ending on July 21, 1995.
    
        \17\15 U.S.C. 78s(b)(2) (1988).
    
        For the Commission, by the Division of Market Regulation, 
    pursuant to delegated authority.\18\
    
        \18\17 CFR 200.30-3(a)(12) (1991).
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    Margaret H. McFarland,
    Deputy Secretary.
    [FR Doc. 95-2902 Filed 2-6-95; 8:45 am]
    BILLING CODE 8010-01-M
    
    

Document Information

Published:
02/07/1995
Department:
Securities and Exchange Commission
Entry Type:
Notice
Document Number:
95-2902
Pages:
7247-7249 (3 pages)
Docket Numbers:
Release No. 34-35309, File No. SR-NYSE-95-02
PDF File:
95-2902.pdf