[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