[Federal Register Volume 64, Number 67 (Thursday, April 8, 1999)]
[Notices]
[Pages 17206-17208]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8683]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41234; File No. SR-NYSE-99-01]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendment No.
1 by the New York Stock Exchange, Inc. Relating to a Pilot for Adjusted
Stabilization Measure of Specialist Performance
March 31, 1999.
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 January 11, 1999, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') a proposed rule change regarding ``adjusted
stabilization'' as a measure of specialist performance. The Exchange
filed an amendment to its proposal on March 25, 1999.\3\ The proposed
rule change, as amended, is described in Items I and II below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice and order to solicit comments on the proposed rule change
and Amendment No. 1 from interested persons and to approve the
proposal, as amended, until June 30, 2000, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Donald Siemer, Director, Market
Surveillance, NYSE, to Richard Strasser, Assistant Director,
Division of Market Regulation (``Division''), Commission, dated
March 25, 1999 (``Amendment No. 1''). Amendment No. 1 provides
further details regarding use of the specialist performance measure
under the Exchange's Allocation Policy and provides an example of an
adjusted stabilization transaction.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The proposed rule change consists of a pilot program which would
utilize a new measure of specialist performance that the NYSE refers to
as an ``adjusted stabilization'' rate.
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 NYSE 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 Exchange 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
On November 21, 1997, the Commission approved a rule proposal to
add, on a one-year pilot basis, a new measure of specialist performance
that the NYSE refers to as an ``adjusted stabilization'' rate.\4\ The
pilot expired on November 21, 1998. The current rule filing clarifies
the scope of the pilot and proposes to renew it through June 30, 2000.
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\4\ See Securities Exchange Act Release No. 39344 (November 21,
1997), 62 FR 63592 (December 1, 1997).
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The Exchange generally expects a specialist to stabilize stock
price movements in the stocks traded by the specialist unit by buying
and selling from its own account against the prevailing trend of the
market. The rate at which the specialist performs such stabilizing
function (i.e., stabilization rate) is the percentage of shares
purchased by specialists on minus and zero-minus ticks and the
percentage of shares sold by specialists on plus and zero-plus ticks.
This measurement focuses on the specialist's obligation as a dealer,
which holds that a specialist must buy or sell securities as principal
when such transactions are necessary to minimize an actual or
reasonably anticipated short-term imbalance between supply and demand
in the market.\5\
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\5\ NYSE Rule 104.10(3) states, in pertinent part,
``[t]ransactions on the Exchange for his own account affected by a
member acting as specialist must constitute a course of dealings
reasonably calculated to contribute to the maintenance of price
continuity with reasonable depth, and to the minimizing of the
effects of temporary disparity between supply and demand, immediate
or reasonably to be anticipated.''
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Under the proposal, the Exchange would adopt a new measure of
specialist performance which it refers to as ``adjusted
stabilization.'' Adjusted stabilization would measure a specialist's
proprietary purchases on zero-plus ticks on the current bid (provided
the current bid is below the offer at the time of the immediately
preceding trade) and proprietary sales on zero-minus tickets on the
current offer (provided the current offer is above the bid at the time
of the immediately preceding trade).\6\ These trades would be grouped
with stabilizing trades to determine the adjusted stabilization rate.
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\6\ In Amendment No. 1, the Exchange provided the following
example of an adjusted stabilization transaction: The market in XYZ
is 25 4/16-25 8/16. The last sale is 25 6/16 on minus tick. Broker A
enters the crowd and offers to sell 1,000 shares at 25 6/16. The
quotation becomes 25 4/16-25 6/16. Broker B then enters the crowd
with an order to buy 2,500 shares at the market. Broker A sells the
1,000 shares at 25 6/16 to Broker B. The specialist, whose dealer
position is long, then fills the remainder of Broker B's order by
selling, 1,500 shares at 25 6/16. Thus, the specialist's transaction
would qualify as an adjusted stabilization transaction because the
specialist is selling on a zero-minus tick on the current offer
(i.e. 25 6/16) and that offer is above the bid at the time of the
immediately preceding trade (i.e., 25 4/16).
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The Exchange believes that ``adjusted stabilization'' could be a
useful measure of specialist performance in that it might reflect depth
added to the market by specialists. In the example provided by the
Exchange in Amendment No. 1,\7\ the specialist's sale has added depth
to the current market by allowing Broker B to complete his order at a
single price, and the trade was executed at a price set by the market,
not by the specialist.
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\7\ See note 6.
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Programming to initiate collection and storage of the data
necessary to calculate adjusted stabilization percentages was completed
in mid-1998. The Exchange then began to accumulate data to produce
percentages for ``rolling'' three-month performance review periods. A
separate programming effort was completed in November 1998 to revise:
(1) the monthly report to the Allocation Committee (covering the three
most recent months) that would provide each specialist unit's adjusted
stabilization percentage, and (2) the monthly report to each specialist
unit (covering the most recent month) that provides, for each stock and
the unit overall, its dealer participation percentage, stabilization
percentage, and the new adjusted stabilization percentage. To date, the
Exchange has not released adjusted stabilization information collected
during the initial pilot to the specialists or the Allocation
committee. However, the Exchange will begin including each specialist
unit's adjusted stabilization percentage in the monthly reports as soon
as practicable after approval of the new pilot.\8\
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\8\ Telephone conversation between Donald Siemer, Director,
Market Surveillance, NYSE, and Anitra Cassas, Attorney, Division,
Commission, on January 22, 1999.
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[[Page 17207]]
Under the new pilot, the Allocation Committee will receive
information on each specialist's stabilization and adjusted
stabilization percentages, along with other objective performance
measures under the Allocation Policy, such as capital utilization. The
Exchange expects that this data will assist the Committee in assessing
the value added by specialists to the depth and liquidity of stocks
that they currently trade. The Committee will use this information in
making new stock allocation decisions.\9\
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\9\ See Amendment No. 1.
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The new pilot would run through June 30, 2000, which would allow
the Exchange to gain experience with this new performance measure. The
Exchange will submit to the Commission a proposed rule change, no later
than three months prior to the expiration of the pilot, either to
continue, modify or terminate the pilot, or request permanent approval
of the proposal.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) \10\ of the Act, in general, and furthers the objectives
of Section 6(b)(5),\11\ in particular, in that it is designed 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 facilitating
transactions in securities and, in general, to protect investors and
the public interest.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change will impose no
inappropriate burden on competition.
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, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, DC 20549-0609.
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 Room. 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-99-01 and should
be submitted by April 29, 1999.
IV. Commission's Findings and Order Granting Accelerated Approval
of the Proposed Rule Change
The Commission finds, for the reasons set forth below, that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations under the Act applicable to a national
securities exchange and, in particular, with the requirements of
Section 6(b)\12\ of the Act. Specifically, the Commission believes the
proposal is consistent with the Section 6(b)(5)\13\ requirement that
the rules of an exchange be designed to facilitate transaction in
securities.\14\ Further, the Commission believes that the proposal is
consistent with Section 11(b)\15\ of the Act and Rule 11b-1\16\ under
the Act, which allows securities exchanges to permit exchange members
to register as specialists, provided that the exchange requires the
specialist to assist in maintaining a fair and orderly market.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
\14\ In approving this rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\15\ 15 U.S.C. 78k(b).
\16\ 17 CFR 240.11b-1.
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The Commission believes that, under certain circumstances,
``adjusted stabilization'' transactions could reflect depth and
liquidity added to the market by specialists. Thus, the Commission
believes that ``adjusted stabilization'' could be a relevant measure of
specialist performance because it might help the Exchange determine
whether a specialist is assisting in maintaining a fair and orderly
market.\17\
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\17\ The Commission notes that ``adjusted stabilization''
transactions would not constitute ``stabilizing'' as the Commission
has defined that term under the Act. In particular, Regulation M
under the Act defines ``stabilizing'' as ``the placing of any bid,
or the effecting of any purchase, for the purpose of pegging,
fixing, or maintaining the price of a security.'' 17 CFR 242.100(b).
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By providing for the performance measure on a pilot basis through
June 30, 2000, the Exchange and the Commission will have the
opportunity to study the effects of the use of the measure on the
NYSE's allocation process. It is unclear to the Commission, at this
point, whether adjusted stabilization transactions will, in practice,
promote the maintenance of a fair and orderly market (e.g., by adding
depth or liquidity) in the stocks the specialist's unit trades.
Accordingly, the Commission has requested the Exchange to report on the
following matters when the Exchange proposes to renew or modify the
proposal or when it seeks permanent approval for the pilot: (1) the
impact ``adjusted stabilization'' transactions have had on the depth
and liquidity of the stocks at issue; (2) the number of allocations
reviewed by the Committee and the number of applicants for each
allocation; (3) the monthly adjusted stabilization percentage as
presented to the Allocation Committee for each allocation applicant;
and (4) the Committee's allocation decisions and the effect, if any, an
applicant's ``adjusted stabilization'' rate had on the allocation
decision.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice of the filing in the Federal Register. The Exchange will be able
to continue to accumulate relevant data and provide such information to
the specialists and the Allocation Committee for their use without
further delay. The Commission also notes that the previous pilot was
noticed for the full statutory period and the Commission received no
comments on the proposal. Accordingly, the Commission does not believe
that the current filing raises any regulatory issues not raised by the
previous filing.
It is therefore ordered, pursuant to Section 19(b)(2)\18\ of the
Act, that the proposed rule change (SR-NYSE-99-01), as amended, is
approved as a pilot through June 30, 2000, on an accelerated basis.
\18\ 15 U.S.C. 78s(b)(2).
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[[Page 17208]]
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-8683 Filed 4-7-99; 8:45 am]
BILLING CODE 8010-01-M
