[Federal Register Volume 59, Number 92 (Friday, May 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11701]
[[Page Unknown]]
[Federal Register: May 13, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34022; File No. SR-NYSE-94-7]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by New York Stock
Exchange, Inc., Relating to the Extension of Rule 103A--Specialist
Stock Reallocation--Until May 9, 1995
May 6, 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
10, 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. At the same time, the
Commission is granting temporary accelerated approval to the proposal
pursuant to Section 19(b)(2) of the Act.\1\
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\1\15 U.S.C. 78s(b)(2) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to extend the effectiveness of Rule 103A
(Specialist Stock Reallocation) for an additional year until May 9,
1995.
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 intent of Rule 103A is to encourage a high level of market
quality and performance in Exchange listed securities. Rule 103A grants
authority to the Exchange's Market Performance Committee (``MPC'') to
develop and administer systems and procedures, including the
determination of appropriate standards and measurements of performance,
designed to measure specialist performance and market quality on a
periodic basis to determine whether or not particular specialist units
need to take actions to improve their performance.\2\ Based on such
determinations, the MPC is authorized to conduct a formal Performance
Improvement Action in an appropriate case.
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\2\The Commission originally approved the implementation of the
Rule 103A pilot program in Securities Exchange Act Release No. 25681
(May 9, 1988), 53 FR 17287 (May 16, 1988) (order approving File No.
SR-NYSE-87-25) and subsequently extended the effectiveness of Rule
103A in Release Nos. 28215 (July 17, 1990) (``July 1990 Order''), 55
FR 30060 (July 24, 1990) (order approving File No. SR-NYSE-90-24);
29180 (May 8, 1991), 56 FR 22498 (order approving File No. SR-NYSE-
91-14) and 32285 (May 10, 1993), 58 FR 28905 (May 17, 1993) (``May
10 Order''). The July 1990 Order also approved various substantive
revisions to Rule 103A including, among other things, enhancing the
performance criteria for administrative messages received through
the Designated Order Turnaround (``DOT'') system, and, at the same
time, extended the effectiveness of the revised Rule 103A until May
9, 1991 [see Securities Exchange Act Release No. 28215].
Subsequently, on February 27, 1991, the Commission approved the
NYSE's proposal to adopt relative performance standards into the
Rule 103A program [see Securities Exchange Act Release No. 28923
(February 27, 1991), 56 FR 9993 (order approving File No. SR-NYSE-
90-44)].
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On May 10, 1993, the SEC extended the effectiveness of Rule 103A
until May 9, 1994.\3\ In this order, the Commission stated its belief
that the Exchange should develop objective performance standards to
measure specialist performance.\4\ In this regard, the Commission
recently approved, on a one-year pilot basis, an objective measure of
specialist performance dealing with specialist utilization of capital
for market-making.\5\ This measure of performance focuses on a
specialist unit's use of its own capital in relation to the total
dollar value of trading activity in the unit's stocks. Tiered rankings
based on a unit's capital utilization are provided to the Exchange's
Allocation Committee as one of the objective measures it considers in
allocating stocks to specialist units under its Allocation Policy and
Procedures.
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\3\See Securities Exchange Act Release No. 32285, supra note 2.
\4\The Commission notes that the Exchange's current evaluation
criteria under Rule 103A.10 include objective standards that measure
specialist performance at the opening (both regular and delayed),
systematized order turnaround, and the timeliness of a unit's
response to status requests. Specialist performance also is measured
by the Exchange's Specialist Performance Evaluation Questionnaire.
However, objective market making measures currently are not included
in the Rule 103A program.
\5\See Securities Exchange Act Release No. 33369 (December 22,
1993), 58 FR 69431 (December 30, 1993). This measure of performance
has not to date been incorporated into the Rule 103A evaluation
program. See note 17, infra.
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The Exchange, with the assistance of outside consultants, continues
to work to develop additional objective measures of specialist
performance. As Rule 103A is working well, the Exchange requests that
its effectiveness be extended for an additional year, until May 9,
1995.
2. Statutory Basis
The statutory basis under the Act for this 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 a national market system and, in general, to protect
investors and the public interest. The proposed extension of Rule 103A
is consistent with these objectives in that it will allow the Exchange
to continue to administer the rule on an uninterrupted basis ensuring
quality specialist performance.
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 Room, 450 Fifth Street NW., Washington,
DC 20549. Copies of the 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-94-7 and should be submitted by June 3, 1994.
IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change
The rules of the Exchange, in addition to the rules set forth under
the Act, impose certain obligations upon the specialist unit,
including, but not limited to, the maintenance of fair and orderly
markets.\6\ Because specialist units play a crucial role in providing
stability, liquidity and continuity to the trading of stocks on the
Exchange, the Commission believes that effective oversight, including
periodic evaluation of the specialists' performance, is important to
the maintenance of a fair and efficient marketplace. Critical to this
oversight is the specialist performance evualation process embodied in
Rule 103A.
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\6\See generally NYSE Rule 104; Rule 11b-1 under the Act, 17 CFR
240.11b-1 (1993).
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In the May 10 Order, the Commission reiterated its desire for the
Exchange to develop objective measures of market making performance and
incorporate such measures into the proposed rule change to extend the
Rule 103A pilot.\7\ The Commission's request was consistent with its
previous orders approving the extension of the Rule 103A pilot program.
In fact, the Exchange informed the Commission that it had employed the
services of an outside expert to study the feasibility of adopting such
objective measures of specialist performance.\8\ To date, however, the
Exchange has not finished its development of objective measures of
market making performance. Indeed, in the proposed rule change, the
Exchange states that it continues to work to develop additional
objective performance standards. The Exchange requests that the
Commission extend the effectiveness of the rule for an additional year
because the rule is working well. However, the proposal herein to
extend Rule 103A until May 9, 1995, does not include objective measures
of market making performance as the Commission originally and
requested.
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\7\See Securities Exchange Act Release No. 32285, supra note 2.
\8\See Securities Exchange Act Release No. 28215, supra note 2
and letter from Robert J. McSweeney, Senior Vice President, Market
Surveillance, NYSE, to Sharon Lawson, Assistant Director,
Commission, dated August 31, 1992 (``August 1992 letter'').
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Even though the proposal lacks objective market marking performance
standards, the Commission has determined to approve the proposal to
extend the effectiveness of Rule 103A for an additional year in light
of the significant enhancements the NYSE has made to the Rule 103A
program thus far, and the substantial time and resources the Exchange
already has dedicated to the development of objective criteria. The
revision to Rule 103A, adopted in July, 1990\9\, the subsequent
adoption of relative performance standards\10\, and the refinement of
existing standards\11\ have augmented the Exchange's ability to
evaluate specialist performance. In this regard, the Commission also
notes that the Exchange has developed a new measure of capital
utilization by specialists, even though that measure has not yet been
incorporated in to the Rule 103A evaluation criteria.\12\
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\9\See Securities Exchange Act Release No. 30676 (May 7, 1992),
57 FR 20544 (May 13, 1992).
\10\Id.
\11\See Securities Exchange Act Release No. 32045 (March 24,
1993), 58 FR 16896 (March 31, 1993).
\12\See supra note 5.
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As noted in previous orders,\13\ the Commission stated that the
mature status of the Intermarket Trading System (``ITS''), as a market
structure facility, warrants the incorporation of ITS turnaround and
trade-through concerns\14\ into the NYSE's Rule 103A performance
standards. The NYSE has responded to the Commission's request that it
incorporate ITS turnaround and trade-through concerns into Rule
103A.\15\ In this regard, the Exchange stated that ITS matters are more
appropriately addressed by means of the Exchange's regulatory processes
rather than by its performance measurement system. According to the
Exchange, it has emphasized to speciality that all ITS commitments to
trade are expected to be executed, and will take appropriate regulatory
action if specialists are deficient in this matter. Moreover, the
Exchange states that trade-throughs are not always the responsibility
of the specialist and, therefore, would not appear to be an appropriate
measure of specialist performance. In the Exchange's view, the current
ITS trade-through resolution process works well, and is the
appropriated means for addressing ITS trade-through concerns.\16\
Despite the contentions of the Exchange, the Commission believes that
evaluating the ITS turnaround and trade-through concerns can be a valid
measurement of specialist performance and should be incorporated into
the evaluation process. For example, the NYSE should measure how many
times NYSE specialists trade-through other markets and how often
specialists' ITS commitments expire. Although we agree with the NYSE
that these factors should be addressed, where appropriate, by
regulatory action, we also believe these factors can be a valid
indication of specialist performance in the current trading
environment.
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\13\See Securities Exchange Act Release Nos. 30676, 29180,
28215, and 25681 supra note 2.
\14\ITS Plan, Section 8(d)(i) and (ii), (as last amended March
9, 1993).
\15\See August 1992 letter supra note 9.
\16\Id.
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The Commission continues to believe that the Exchange should
develop objective performance standards that would measure accurately
the traditional indicia of specialist performance, namely, market
depth, price continuity and dealer participation and stabilization. The
Commission continues to encourage the NYSE to incorporate objective
standards into the Rule 103A program prior to or simultaneous with the
NYSE's future proposal to extend the effectiveness of Rule 103A or
adopt the Rule on a permanent basis.\17\
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\17\In this regard, the Commission expects the NYSE to submit to
the Division of Market Regulation, by February 28, 1995, a proposed
rule change pursuant to Rule 19b-4 under the Act, 17 CFR 240.19b-4,
to extend the Rule 103A pilot or make the Rule permanent. As
emphasized above, this proposed rule change should include objective
measures of market making performance that have been developed by
the outside experts retained by the Exchange.
In this regard, as of December 1994, the NYSE should have a full
year's experience with the new capital utilization measure. Assuming
that the experience with the capital utilization measure is good,
the NYSE should incorporate the new measure in the Rule 103A
evaluation prior to the Exchange's next request for an extension or
permanent approval.
The Commission also expects the Exchange to submit to the
Division, by February 28, 1995, a status report on the
implementation of Rule 103A. The report should contain data, for
each quarter of 1994, on (1) the number of specialists that fell
below acceptance levels of performance for each category; (2) the
number of performance improvement actions commenced; (3) the number
of units subjected to informal counseling to improve performance;
and (4) a list of stocks reallocated due to substandard performance
under the Rule and the Particular unit involved.
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The Commission has reviewed carefully the NYSE's proposed rule
change and, for the above reasons, believes that the proposal is
consistent with the requirements of sections 6 and 11 of the Act\18\
and the rules and regulations thereunder applicable to a national
securities exchange. In particular, the Commission believes that the
proposal is consistent with the section 6(b)(5) requirement that the
rules of the Exchange be designed to promote just and equitable
principles of trade, perfect the mechanism of a free and open national
market system, and, in general, further investor protection and the
public interest. Further, the Commission finds that the proposal is
consistent with section 11(b) of the Act,\19\ and Rule 11b-1
thereunder,\20\ which allow securities exchanges to promulgate rules
relating to specialists consistent with the maintenance of fair and
orderly markets.
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\18\15 U.S.C. 78f and 78k (1988).
\19\15 U.S.C. 78k(b) (1988).
\20\17 CFR 240.11b-1 (1993).
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Specifically, the Commission believes that the NYSE's Rule 103A
performance evaluation process provides the Exchange with the means to
identify and correct poor specialist performance. Accordingly, the
evaluation process is critical to the NYSE's duty to ascertain whether
specialists are maintaining fair and orderly markets in their assigned
securities, as required pursuant to Exchange rules and the Act, and the
rules and regulations thereunder. Moreover, the possibility of a
performance improvement action as a result of the evaluation process,
in addition to the use of the evaluation results in stock allocation
decisions, should help motivate and provide incentives for specialists
to maintain and improve their market making performance for the benefit
of investors. In summary, extension of Rule 103A's effectiveness until
May 9, 1995 will provide the Exchange with the ability to continue
evaluating specialist performance on an uninterrupted basis, which
should enhance market quality and performance in Exchange listed
securities. During the pilot, the Exchange should continue to consider
and develop objective measures which evaluate both ITS matters and
market making performance.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register. The Commission believes it is
appropriate to approve the proposed rule change on an accelerated basis
so that the Exchange can continue to administer, on an uninterrupted
basis, its Rule 103A evaluation process. During the one year extension
of the Rule, the Commission expects the NYSE to continue its
examination of the efficacy of its current specialist evaluation
procedures, as well as determine whether to extend the pilot for a
further period or, in the alternative, approve Rule 103A on a permanent
basis. Finally, a substantial portion of current Rule 103A was noticed
for the full statutory period in 1987, and the Commission did not
receive any adverse commentary on the revised Rule 103A program.\21\
Further, interested persons were invited to comment on the past
proposals to extend the effectiveness of Rule 103A, the most recent of
such proposals being the extension of Rule 103A until May 9, 1994. The
Commission received no comments on these proposals. The Commission
believes, therefore, that granting accelerated approval of the proposed
rule change is appropriate and consistent with section 6 of the
Act.\22\
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\21\See Securities Exchange Act Release Nos. 24919 (September
15, 1987), 52 FR 35821 (notice of filing of File No. SR-NYSE-87-25);
and 25681 (May 9, 1988), 53 FR 17287 (order approving File No. SR-
NYSE-87-25).
\22\15 U.S.C. 78f (1988).
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V. Conclusion
For the reasons set forth above, the Commission finds that the
proposed rule change is consistent with sections 6(b)(5) and 11(b)
under the Act, and Rule 11b-1 thereunder.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act\23\ that the proposed rule change (SR-NYSE-94-7) is approved for
the period ending May 9, 1995.
\23\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.\24\
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\24\17 CFR 200.30-3(a)(12) (1993).
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[FR Doc. 94-11701 Filed 5-12-94; 8:45 am]
BILLING CODE 8010-01-M
