[Federal Register Volume 60, Number 52 (Friday, March 17, 1995)]
[Notices]
[Pages 14471-14473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6571]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35474; File No. SR-BSE-95-03]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval to Proposed Rule Change by Boston Stock
Exchange, Inc. Relating to an Extension of a Pilot Program for Stopping
Stock in Minimum Variation Markets
March 10, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 13, 1995, the Boston Stock Exchange, Inc. (``BSE'' 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 organization. On February 28, 1995, the BSE submitted to the
Commission Amendment No. 1 to the proposed rule change in order to
clarify certain language in the original filing and to request
accelerated approval of the proposal.\3\ The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1991).
\3\See letter from Karen A. Aluise, Assistant Vice President,
BSE, to Beth A. Stekler, Attorney, Division of Market Regulation,
SEC, dated February 28, 1995 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange seeks a four month extension of its pilot program
regarding stopping stock in minimum variations markets.\4\ The text of
the proposed rule change is available at the Commission.
\4\The Commission initially approved the BSE's proposal to
codify procedures for stopping stock and to establish a pilot
program permitting specialists to stop stock in minimum variation
markets in Securities Exchange Act Release No. 35068 (December 8,
1994), 59 FR 64717 (December 15, 1994) (File No. SR-BSE-94-09)
(``1994 Pilot Approval Order''). See also Ch. II, Sec. 38 of the BSE
Rules.
Independent of the BSE's request for an extension of its pilot
program, the Commission has received a comment letter regarding
permanent approval of the New York Stock Exchange's procedures for
stopping stock in minimum variation markets. See letter from Junius
W. Peake, Monfort Professor of Finance, University of Northern
Colorado, to Secretary, SEC, dated March 1, 1995. The comment letter
addresses the broader issue of whether stopping stock is consistent
with the specialist's agency obligations and recommends that the
Commission not grant permanent approval to the minimum variation
market pilot programs. The current BSE filing, however, merely
extends its pilot program for four months to permit additional
information to be gathered and reviewed. The Commission believes
that it would be more appropriate to address the issues raised by
the comment letter in the context of proposals requesting permanent
approval of the exchanges' stopping stock pilot programs.
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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 SEC-
approved pilot provision regarding the execution of stopped orders in
minimum variation markets for an additional four months. The pilot
provision expires on March 21, 1995, and this proposal would extend the
pilot until July 21, 1995.
The pilot rule requires the execution of stopped orders in minimum
variation markets (a) after a transaction takes place on the primary
market at the stop price or higher in the case of a buy order (lower in
the case of a sell order), (b) after the applicable Exchange share
volume is exhausted or (c) at any time prior to (a) or (b) if filled at
an improved price.\5\ In no event will a stopped order be executed at a
price inferior to the stop price. The Exchange states that, as in the
case of greater than minimum variation markets, the proposed rule will
continue to benefit customers because they might receive a better price
than the stop price, yet it also protects prior-entered same-price
limit orders on the book.
\5\The Commission notes that, in certain narrow circumstances, a
BSE specialist may execute a stopped order before limit order
interest on the Exchange is exhausted. To do so, however, the
specialist must make the determination that such action is
necessary, in his or her professional judgment, to prevent an
execution that would create a new high or new low, a double up or
down tick or an out-of-range print.
Moreover, the specialist must follow certain procedures designed
to ensure that the BSE's limit order book is adequately protected.
First, the specialist must split any contra-side order flow between
the stopped order and limit orders with priority at the better
price. In addition, if the specialist elects to fill a stopped order
at a price better than the stop price before it is otherwise due an
execution, he or she must allocate an equal number of shares, up to
a maximum of 500 shares, to orders at that price on the limit order
book. Finally, if any portion of a stopped order remains unexecuted
at the end of the trading day, the specialist must fill such order
in its entirety and, as described above, allocate an appropriate
number of shares to the book.
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2. Statutory Basis
The proposed rule change is consistent with Section 6(b)(5) of the
Act in that it furthers the objectives to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to and [[Page 14472]] facilitating
transactions in securities, 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.
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-95-03 and should be
submitted by April 7, 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 the requirements of Sections 6(b) and 11(b).\6\ 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. The Commission also believes that the proposed
rule change is consistent with the requirement of Section 11(b), and
Rule 11b-1 thereunder,\7\ that specialist transactions must contribute
to the maintenance of fair and orderly markets.
\6\15 U.S.C. 78f(b) (1988).
\7\17 CFR 240.11b-1 (1991).
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In its order approving the pilot procedures,\8\ the Commission
asked the BSE to study the effects of stopping stock in a minimum
variation market. Specifically, the Commission requested information on
(1) the number of orders stopped in minimum variation markets; (2) the
average size of such orders; and (3) the percentage of stopped orders
that received price improvement. In addition, the Commission encouraged
the BSE to develop an appropriate measure of the pilot program's impact
on limit orders, particularly those limit orders on the specialist's
book ahead of the stopped stock.
\8\See 1994 Pilot Approval Order, supra, note 4.
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Although the BSE has begun to gather certain information requested
by the Commission and to upgrade its technological capabilities in this
regard, there has not been sufficient time since initial approval of
the pilot program for the Exchange to produce conclusive results. The
Commission believes that the BSE needs to submit comprehensive data on
the operation of this rule and, in particular, on the impact on limit
orders on the specialist's book before the Commission fairly can
evaluate the BSE's use of its pilot procedures. To allow such
information to be gathered and reviewed, the Commission believes that
it is reasonable to extend the pilot program until July 21, 1995.
During this extension, the Commission expects the BSE to respond fully
to the concerns set forth below.
The Commission historically has been concerned that the practice of
stopping stock may compromise the specialist's fiduciary duty to
unexecuted customer orders on the limit order book.\9\ The Commission,
however, has approved the practice in limited circumstances where the
potential harm is offset by the improvement in marketplace liquidity
and the possibility of price improvement for the customer. Accordingly,
those exchanges with stopping stock rules,\10\ including the BSE,
require their specialists to reduce the spread between the consolidated
best bid and offer or, in a minimum variation market, to add size at
the inside quote. The Commission believes that such a requirement
strikes an appropriate balance between the interests of various market
participants. Moreover, by encouraging accurate representation of the
trading interest held by the specialist, it also facilitates greater
transparency in the securities markets.
\9\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).
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 a better price, limit orders at
the stop price are bypassed and, if the market turns away from that
limit, may never be executed.
\10\See NYSE Rule 116.30; American Stock Exchange (``Amex'')
Rule 109; and Article XX, Rule 12 of the Chicago Stock Exchange
(``CHX'') Rules. The relevant NYSE, Amex and CHX rules incorporate
their pilot programs to permit specialists to stop stock in minimum
variation markets. See also Securities Exchange Act Release No.
34614 (August 30, 1994), 59 FR 46280 (September 7, 1994) (File No.
SR-Phlx-93-41) (approving a Philadelphia Stock Exchange (``Phlx'')
proposal to codify its procedures for stopping stock into Equity
Floor Procedure Advice A-2, Stopping Orders).
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Despite these potential benefits, the Commission continues to be
particularly concerned that, in minimum variation markets, limit orders
on the specialist's book may be bypassed when stopped orders are
executed at a better price. For that reason, the Commission has
required that procedures for stopping stock in minimum variation
markets be implemented on a pilot basis. These pilot programs have been
extended until July 21, 1995, in order to allow the Commission and the
relevant exchanges to determine whether the benefits of the practice
substantially outweight the costs thereof.\11\
\11\For further discussion of the NYSE, Amex and CHX pilot
programs and the Commission's rationale for extending them until
July 21, 1995, see Securities Exchange Act Release Nos. 35309
(January 31, 1995), 60 FR 7247 (February 7, 1995) (File No. SR-NYSE-
95-02); 35310 (January 31, 1995), 60 FR 7236 (February 7, 1995)
(File No. SR-Amex-95-01); and 35431 (March 1, 1995) (File No. SR-
CHX-95-04).
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The Commission has concluded that it is appropriate to place the
BSE on equal competitive footing with the other exchanges by extending
its pilot program until July 21, 1995. Nevertheless, the Commission
believes that the BSE rule, specifically the provisions regarding
execution of stopped orders at an improved price before limit order
interest at the price is exhausted,\12\ raises certain unique issues.
Accordingly, before the Commission would consider another extension or
permanent approval of the Exchange's pilot program, the Commission
would expect the BSE to submit comprehensive quantitative data on the
impact of stopping stock in minimum variation markets on customer limit
orders on the specialist's book and to demonstrate that the Exchange
has the technological capabilities necessary to monitor specialist
compliance with the pilot procedures.
\12\See supra, note 5.
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At a minimum, the Commission requests that the BSE calculate (1)
the average number of limit orders and the average number of shares on
the book ahead of the stopped stock and (2) how much of that volume
typically is executed by the close. Similarly, the Exchange should
determine how often limit orders against which stock is stopped in a
minimum variation market are executed by the close of the day's
trading. This should include a one-day review of all book orders in the
five stocks receiving the greatest numbers of stops.
Finally, in its order initially approving the BSE proposal, the
Commission requested that the BSE determine how often stopped orders
received price improvement and which investors were most affected by
the pilot program. At this time, the Commission believes that further
information is necessary to ensure that BSE specialists are handling
stopped orders in a manner which is consistent with their obligation to
maintain fair and orderly markets. Accordingly, the Exchange should
continue to monitor (1) the number of orders stopped in minimum
variation markets; (2) the average size of such orders; and (3) the
percentage of stopped orders that receive price improvement.
The Commission requests that the BSE submit a report describing its
findings on the above matters by April 15, 1995. In addition, if the
Exchange determines to request an extension of the pilot program beyond
July 21, 1995, the BSE should submit to the Commission a proposed rule
change by April 15, 1995.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
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.\13\ [[Page 14473]]
\13\No comments were received in connection with the proposed
rule change that implemented these procedures. See Approval Order,
supra note 4.
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It is therefore ordered, pursuant to Section 19(b)(2)\14\ that the
proposed rule change (SR-BSE-95-03) is hereby approved on a pilot basis
until July 21, 1995.
\14\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.\15\
\15\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-6571 Filed 3-16-95; 8:45 am]
BILLING CODE 8010-01-M
