[Federal Register Volume 59, Number 59 (Monday, March 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7166]
[Federal Register: March 28, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33792; File No. SR-NYSE-94-06]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Temporary 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.
March 21, 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, 1994, 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 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
The proposed rule change consists of extending the pilot for
amendments to Rule 116.30 for an additional year until March 21,
1995.\1\ The amendments permit a specialist, upon request, to grant a
stop in a minimum variation market for any order of 2,000 shares or
less, up to a total of 5,000 shares for all stopped orders.
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\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''); and 32031 (March 22, 1993), 58 FR 16563
(March 29, 1993) (File No. SR-NYSE-93-18) (``1993 Approval Order'').
Commission approval of these amendments to Rule 116.30 expires on
March 21, 1994. The Exchange seeks accelerated approval of the
proposed rule change in order to allow the pilot program to continue
without interruption.
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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 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 stocks, 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.
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\2\See 1991, 1992 and 1993 Approval Orders, supra, note 1.
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On February 12, 1993, 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.
The Commission staff has again requested that the Exchange extend the
pilot for the same reason. Therefore, the Exchange is now proposing to
extend the effectiveness of the amendments to Rule 116.30 for an
additional year through March 21, 1995.
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\3\See File No. SR-NYSE-93-11.
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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
Exchange's proposal to extend amendments to Rule 116.30 is consistent
with these objectives in that it permits 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. 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-94-06 and should be
submitted by April 18, 1994.
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)\4\ and section 11(b)\5\ 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.\6\
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\4\15 U.S.C. 78f (1988).
\5\15 U.S.C. 78k (1988).
\6\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,\7\ 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 receiving 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
including 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
being 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 the ten stocks receiving the
greatest number of stops); and (4) specialist compliance with the pilot
program's procedures.
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\7\See supra, note 1.
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On February 13, 1992, November 5, 1992, and October 15, 1993, the
Exchange submitted to the Commission 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 NYSE must provide further data,
particularly about Rule 116.30's impact on limit orders on the
specialist's book, before the Commission can fairly and comprehensively
evaluate the NYSE's use of the pilot procedures. To allow such
additional information to be gathered and reviewed, 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 March 21, 1995. During this extension,
the Commission expects the NYSE to respond fully to the concerns set
forth below.
First, the October monitoring report indicates that approximately
half of eligible orders (i.e., orders for 2,000 shares or less) stopped
in minimum variation markets received price improvement. The
Commission, therefore, believes that the pilot procedures provide a
benefit to investors by offering the possibility of price improvement
to customers whose orders are granted stops in minimum variation
markets. According to the latest NYSE report, moreover, virtually all
stopped orders were for 2,000 shares or 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. During the pilot extension,
the Commission requests that the NYSE continue to monitor the
percentage of stopped orders that are for 2,000 shares or less.
Second, in terms of market depth, the NYSE's October 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.\8\ 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.\9\ 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. Based on such data, the NYSE
concludes that the imbalances on the opposite side of the market from
the orders stopped were of sufficient size to suggest the likelihood of
price improvement to customers.\10\
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\8\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.
\9\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.
\10\The NYSE has stated, both to the Commission and to its
members, that 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.
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The Commission believes that the requirement of a sufficient market
imbalance is a critical aspect of the pilot program.\11\ Such a
requirement is necessary to 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.\12\ To evaluate how this standard is being
applied in practice, the Commission requests that the NYSE conduct
another comprehensive quantitative analysis of market depth. In its
next monitoring report, the NYSE should provide, in chart form, a
comparison of the size of the stopped order to any quote size
imbalance.\13\ The chart also should include the ratio of the size of
the bid to the size of the offer.\14\ The NYSE should concentrate on
orders for 2,000 shares or less, and should provide the requested
information in the form of an average for all buy orders stopped, and
then for all sell orders stopped, in that size range.
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\11\For a discussion of the relationship between quote size
imbalance and the likelihood of price improvement, see supra, note
8.
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.
32664 (July 21, 1993), 58 FR 40171 (July 27, 1993) (File No. SR-
Amex-93-22).
\12\See infra, text accompanying notes 15-20.
\13\Every time a specialist stops an order to buy, the NYSE
should calculate the size of that stopped order as a percentage of
the quote size imbalance, i.e., the difference between the size of
the offer and the size of the bid.
Every time a specialist stops an order to sell, the NYSE should
calculate the size of that stopped order as a percentage of the
quote size imbalance, i.e., the difference between the size of the
bid and the size of the offer.
\14\Every time a specialist stops an order to buy, the NYSE
should calculate the size of the bid as a percentage of the size of
the offer.
Every time a specialist stops an order to sell, the NYSE should
calculate the size of the offer as a percentage of the size of the
bid.
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Third, the NYSE does not believe that the amendments to Rule 116.30
significantly disadvantage customer limit orders existing on the
specialist's book.\15\ This conclusion is based on the Exchange's
review of limit orders against which orders receiving price improvement
were stopped pursuant to this pilot program. As part of its review, the
NYSE determined how often such book orders were executed at their limit
price by the close of the day's trading. The Commission does not
consider that data to be conclusive, because it does not reflect the
disposition of book orders in those circumstances (approximately half
of all stops granted) where the stopped order did not receive price
improvement.\16\
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\15\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 Committee 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 10-14 and accompanying text. In those circumstances, the stock
would probably trade away from the large imbalance, resulting in
execution of orders on the book.
\16\See infra, note 18.
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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.\17\ Based on the NYSE's experience to date, the Commission
believes that additional data is necessary before the Commission can
determine whether there are sufficient grounds to conclude that this
long-standing concern has been alleviated. Thus to ensure that Rule
116.30, as amended, does not harm public customers with limit orders on
the specialist's book, the NYSE should provide detailed facts
supporting its arguments about the impact of the pilot procedures. The
Commission therefore requests that the NYSE conduct another review of
this issue. At a minimum, the NYSE 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.\18\ Further, the NYSE
should conduct, on a date to be selected by the Commission, another
one-day review of all book orders in the ten stocks receiving the
greatest number of stops, and should submit to the Commission both raw
trade data for,\19\ and a description of the final disposition of,\20\
each such order.
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\17\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).
\18\Specifically, the NYSE would first calculate the total
number of shares of limit orders against which stock is stopped in
minimum variation markets (including book orders on the opposite
side of the market from stopped orders which do not receive price
improvement). The NYSE would then determine how many of those shares
actually are executed by the close of the day's trading.
\19\In this regard, the Commission requests that the NYSE submit
the documentation the NYSE is relying upon to support its
conclusions about the final disposition of these limit book orders.
See Infra, note 20.
\20\See supra, note 18.
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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.
During the pilot extension, the Commission requests that the NYSE
will continue to monitor closely specialist compliance with Rule
116.30's procedures. As before, the NYSE should determine how often
orders requiring Floor Official approval to be stopped do not receive
such approval. In so doing, the NYSE should distinguished between
instances where the specialist did not ask for permission and those
where it was denied (and, if so, on what grounds). The NYSE should
gather and report information about the market conditions prevailing at
the time of each instance of specialist non-compliance with these
procedures and the action taken by the Exchange in response thereto.
The Commission requests that the NYSE submit a report describing
its findings on these matters, specifically (1) the effect of Rule
116.30, as amended, on limit book orders and (2) specialist compliance
with the pilot program procedures, by December 31, 1994. In addition,
if the Exchange determines to request an extension of the pilot program
beyond March 21, 1995, the Commission requests that the NYSE also
submit a proposed rule change by December 31, 1994.
The Commission finds food 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.\21\
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\21\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,\22\ that the proposed rule change (SR-NYSE-94-06) is approved for
a one year period ending on March 21, 1995.
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\22\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
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\23\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-7166 Filed 3-25-94; 8:45 am]
BILLING CODE 8010-01-M
