[Federal Register Volume 60, Number 94 (Tuesday, May 16, 1995)]
[Notices]
[Pages 26060-26062]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12003]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35704; File No. SR-NYSE-95-18]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the New York
Stock Exchange, Inc., Relating to the Extension of Rule 103A
(Specialist Stock Reallocation)
May 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 May 2, 1995, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') 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.
\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NYSE proposes to extend the effectiveness of Rule 103A until
September 10, 1996. [[Page 26061]]
The Exchange requests the Commission to find good cause, pursuant
to section 19(b)(2) of the Act, for approving the proposed rule change
prior to the thirtieth day after publication in the Federal Register.
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 grant
authority to the Exchange's Market Performance Committee 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. Based on such determinations, the
Market Performance Committee is authorized to conduct a formal
Performance Improvement Action in appropriate cases.
On May 6, 1994 the SEC extended the effectiveness of the rule until
May 9, 1995.\3\ In its approval order, the Commission stated its belief
that the Exchange should develop objective performance standards to
measure specialist performance.\4\ In this regard, the Exchange has
developed two objective measures of specialist performance. The first
objective measure of performance pertains to specialist capital
utilization. Adopted in December 1993 on a pilot basis, the capital
utilization measure of specialist 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.\5\ The pilot has been extended
until June 30, 1995.\6\ The Exchange's Allocation Committee is being
provided with specialist capital utilization information for its use in
allocation decisions. The second objective measure of performance,
which was recently developed, pertains to ``near neighbors.'' On
February 27, 1995, the Exchange filed, on a fifteen month pilot basis,
for Commission approval of this new measure.\7\ The ``near neighbors''
measure compares certain performance measures of a given stock (price
continuity, depth, quotation spread and capital utilization) to those
of its ``near neighbors,'' i.e., stocks that have certain similar
characteristics. The Exchange would provide ``near neighbor''
information to the Allocation Committee for its use in allocating
newly-listed stocks.\8\
\3\ See Securities Exchange Act Release No. 34022 (May 6, 1994),
59 FR 25143 (May 13, 1994).
\4\ See id. 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.
\5\ See Securities Exchange Act Release No. 33369 (December 23,
1993), 58 FR 69431 (December 30, 1993). The Commission notes that
the capital utilization measure currently is not included in the
Exchange's Rule 103A program
\6\ See Securities Exchange Act Release No. 35175 (December 29,
1994), 60 FR 2167 (January 6, 1995).
\7\ See Securities Exchange Act Release No. 35661 (May 2, 1995)
(File No. SR-NYSE-95-05).
\8\ The near neighbor measure would provide the Allocation
Committee with performance data. The Exchange has not proposed to
include the measure in the Rule 103A program.
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Regarding the Intermarket Trading System (``ITS''), the Commission
has stated its belief that the mature status of the ITS as a market
structure facility warrants the incorporation of ITS turnaround and
``trade-through'' concern into the NYSE's Rule 103A performance
standards. The Exchange continues to believe that ITS matters are more
appropriately addressed by means of the Exchange's regulatory process
rather than through its performance measurement system, but will
continue to study the matter.
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
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, fostering 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, 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 NW.,
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-95-18 and should be
submitted by June 6, 1995.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission has reviewed carefully the NYSE's proposed rule
change and believes that, for the reasons set forth below, the proposal
is consistent with the requirements of Sections 6 and 11 of the Act \9\
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
[[Page 26062]] principles of trade, perfect the mechanism of a free and
open national market system, and, in general, further investor
protection and the public interest.\10\ Further, the Commission finds
that the proposal is consistent with Section 11(b) of the Act,\11\ and
Rule 11b-1 thereunder,\12\ which allow securities exchanges to
promulgate rules relating to specialists consistent with the
maintenance of fair and orderly markets.
\9\ 15 U.S.C. 78f and 78k (1988).
\10\ 15 U.S.C. 78f(5) (1988).
\11\ 15 U.S.C. 78k(b) (1988).
\12\ 17 CFR 240.11b-1 (1994).
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Specifically, 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. The
Commission believes that the NYSE's Rule 103A performance evaluation
process is critical to this oversight in that it provides the Exchange
with the means to identify and correct poor specialist performance and
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 thereunder.\13\ 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.
\13\ See generally NYSE Rule 104 (Dealing By Specialists); and
Commission Rule 11b-1 under the Act, 17 CFR 240.11b-1 (1994).
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In previous orders extending the Rule 103A pilot,\14\ the
Commission emphasized its desire for the Exchange to develop objective
measures of market making performance and incorporate such measures
into the Rule 103A pilot.\15\ In addition, the Commission previously
stated that it believes the mature status of the Intermarket Trading
System (``ITS''), as a market structure facility, warrants the
incorporation of ITS turnaround and trade-through concerns into the
NYSE's Rule 1903A performance standards. As discussed fully in the
previous extension order,\16\ the Commission believes that objective
measures of specialist performance with regard to these concerns should
be incorporated into the evaluation process.
\14\ See Securities Exchange Act Release Nos. 34022 (May 6,
1994), 59 FR 25143 (May 13, 1994); 32285 (May 10, 1993), 58 FR 28905
(May 17, 1993); 29180 (May 8, 1991), 56 FR 22489 (May 15m, 1991);
and 28215 (July 17, 1990), 55 FR 30060 (July 24, 1990).
\15\ See supra. Although the Exchange has developed the capital
utilization and near neighbor measures of market making performance
for use by the Allocation Committee, it has not yet proposed to
include these objective measures in its Rule 103A program.
\16\ See Securities Exchange Act Release No. 34022, supra note
3.
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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 sixteen months
in light of the substantial time and resources the Exchange has
dedicated to the development of the capital utilization and near
neighbor measures. The Commission notes that the NYSE has not proposed
to incorporate these objective measures into their specialist
evaluation program at this time.\17\ The Commission believes that it is
reasonable to extend the pilot to give the Exchange time to gain
experience with these measures before incorporating them into the Rule
103A evaluation criteria.\18\
\17\ See supra notes 5, 8 and 15.
\18\ As of July 1996, the NYSE should have two years experience
with the capital utilization measure and a full year's experience
with the near neighbor measure of specialist performance.
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The Commission continues to believe that the Exchange should
include objective performance standards that would measure accurately
the traditional indica of specialist performance, namely market depth,
price continuity and dealer participation and stabilization in the Rule
103A program. The Commission encourages the NYSE to incorporate
objective standards, including those relating to ITS and market making
performance, into the program prior to or simultaneous with future
proposals to extend the effectiveness of Rule 103A or adopt the Rule on
a permanent basis.\19\
\19\ Assuming that the experience with the capital utilization
and near neighbor measure is good, the NYSE should incorporate these
measures in the Rule 103A evaluation prior to the Exchange's next
request for an extension or permanent approval of the Rule. In this
regard, the Commission expects the NYSE to submit to the Division of
Market Regulation, by July 1, 1996, a proposed rule change pursuant
to Rule 19b-4 under the Act, 17 CFR 240.19b-4, to extend the Rule
103A pilot.
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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 extension of the
Rule, the Commission expects the NYSE to continue its examination of
the efficacy of its current specialist evaluation procedures.\20\ In
addition, 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 most recent of such
proposals being the extension of Rule 103A until May 9, 1995.\22\ 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.
\20\ The Commission requests that the Exchange submit to the
Division by July 1, 1996, a status report on the implementation of
Rule 103A. The report should contain data, for each quarter of 1995
and the first quarter of 1996, 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.
\21\ See Securities Exchange Act Release Nos. 24919 (September
15, 1987), 52 FR 35821 (September 23, 1987); and 25681 (May 9,
1988), 53 FR 17287 (May 16, 1987).
\22\ See supra note 3.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change is hereby approved on an
accelerated basis until September 10, 1996.
\23\ 15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
\24\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-12003 Filed 5-15-95; 8:45 am]
BILLING CODE 8010-01-M
