[Federal Register Volume 59, Number 88 (Monday, May 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11029]
[[Page Unknown]]
[Federal Register: May 9, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33992; File No. SR-NYSE-93-50]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the New York Stock Exchange, Inc. Relating to the Off-Hours
Trading Facility.
May 2, 1994.
I. Introduction
On December 23, 1993, the New York Stock Exchange, Inc. (``NYSE''
or ``Exchange'') submitted to the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to request permanent approval of
the Exchange's Off-Hours Trading facility.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1993).
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 33803 (March 22, 1994), 59 FR 14694 (March 29,
1994). No comments were received on the proposal. This order approves
the proposed rule change.
II. Description of the Proposal
The NYSE requests permanent approval of its Off-Hours Trading
(``OHT'') facility.\3\ During the pilot, the NYSE submitted monitoring
reports.\4\ The Commission's order approving the Exchange's Off-Hours
Trading facility contained a two-year ``sunset'' provision.\5\ The
Commission several times extended the ``sunset'' date for the Crossing
Sessions I and II, most recently until April 30, 1994.\6\
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\3\The NYSE also requested permanent approval of its pilot
program for procedures regulating matched market-on-close orders
(``MOC''). The Exchange subsequently withdrew the request for
permanent approval of the matched MOC procedures. As a result, the
matched MOC pilot expired on April 30, 1994. See letter from James
E. Buck, Senior Vice President and Secretary, NYSE, to Brandon
Becker, Director, Division of Market Regulation, Commission, dated
April 29, 1994.
\4\See letters from Catherine R. Kinney, Executive Vice
President, Equities/Audit, NYSE, to Brandon Becker, Director,
Division of Market Regulation, Commission, dated September 30, 1993
and March 15, 1994.
\5\See Securities Exchange Act Release No. 29237 (May 31, 1991),
56 FR 24853 (June 3, 1991) (File Nos. SR-NYSE-90-52 and SR-NYSE-90-
53) (``OHT Approval Order'').
\6\See Securities Exchange Act Release Nos. 33563 (February 1,
1994), 59 FR 5795 (February 8, 1994), and 32362 (May 25, 1993), 58
FR 31565 (June 3, 1993).
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The Exchange's OHT facility, consisting of Crossing Sessions I and
II, extends the NYSE's trading hours beyond the 9:30 a.m. to 4 p.m.
trading session (``regular trading session''). Crossing Session I
permits the execution of single-stock, single-sided closing-price
orders and crosses of single-stock, closing-price buy and sell orders.
Crossing Session II allows the execution of crosses of multiple-stock
(portfolios of 15 or more securities) aggregate price buy and sell
orders.
Crossing Session I accepts orders in a particular stock for
execution at the last price at which the stock traded on the NYSE
during the 9:30 to 4 session. Two different types of closing-price
orders could be entered into, and executed in, Crossing Session I: (1)
Single-stock, single-sided orders (``closing-price single-sided
orders'') in round lots of up to 99,900 shares only, including certain
limit orders from the regular trading session; and (2) coupled single-
stock orders (odd lots and partial round lots permitted), so long as
both sides of such orders are not proprietary to members (``closing-
price coupled orders'').
Crossing Session I, which operates on each day that the Exchange is
open, commences following the close of the regular trading session and
ends at 5 p.m. Orders are executed at 5 p.m. Closing-price single-sided
and coupled orders can be entered into the OHT facility only through
the NYSE's Designated Order Turnaround System (``SuperDOT''), the
Exchange's network of electronic order processing and post-trade
systems. In addition, only NYSE-listed equity securities that have been
designated by the Exchange and are not subject to a trading halt as of
the close of the regular trading session may be entered into Crossing
Session I.\7\
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\7\The Exchange has stated that any SuperDOT-eligible issue,
including rights, warrants, and American Depositary Receipts, may be
entered into the OHT facility.
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In addition to closing-price single-sided and coupled orders that
are entered into the OHT facility after 4 p.m., certain limit orders
that have migrated from the regular trading session would be able to
participate in Crossing Session I. Members may designate unconditional
round-lot limit orders entered during the regular trading session as
``GTX'' (``good 'til cancelled,\8\ executable through crossing
session'') to enable the orders to be executed against closing-price
single-sided orders during Crossing Session I.\9\ When the NYSE closing
price of a security is known, SuperDOT ``sweeps'' the specialists'
limit order books for GTX orders that are at or better than the closing
price and enters those orders into the OHT facility.\10\
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\8\NYSE Rule 13 states that a good 'til cancelled (or ``GTC'')
order to buy or sell remains in effect until it is either executed
or cancelled.
\9\Orders for an account in which the specialist, the
specialist's member organization, or any associated party has an
interest may not migrate to the OHT facility. If GTX is appended to
(i) any market, stop, or stop limit order; (ii) any odd-lot order;
or (iii) any order entered during the OHT session, the system would
reject it. Under the proposal, NYSE members would not have access to
the closing-price order file nor would NYSE systems indicate to
specialists whether limit orders would be eligible for Crossing
Session I.
\10\Although the system would begin as soon as possible after
the NYSE close by sweeping the limit order book for eligible GTX
orders, as a practical matter, closing-price single-sided and
coupled orders cannot be entered into the OHT facility until 4:15
p.m. in order to allow Exchange computer systems sufficient time to
perform the mechanics necessary for commencement of the OHT
facility.
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Migrated GTX orders would retain the same priority among themselves
as existed on the specialist's book, and would have priority over all
closing-price single-sided orders. Closing-price single-sided orders
would have priority based on the time of entry into the OHT facility.
Traditional rules of priority or precedence based on price or size
would not apply to transactions effected in Session I. Closing-price
coupled orders would be executed without regard to the priority of
other orders entered into the OHT facility and would not interact with
the single-sided orders.
Trading halts occurring during the regular trading session would
affect trading in Crossing Session I. For instance, if a particular
security is the subject of a trading halt at the end of the regular
trading session, then Crossing Session I would not be available for
that security that day. In addition, during the operation of Crossing
Session I, the Exchange may announce that, as the result of news of a
corporate development with respect to a particular security, it has
determined to: (i) Return unexecuted GTX orders to the specialist's
book, maintaining their priority; (ii) cancel all unexecuted single-
sided or coupled orders in that stock; and (iii) preclude the entry of
new closing-price orders into the OHT facility. Similarly, trading in
Crossing Session I would not commence if market activity during the
regular trading session were to trigger a market wide trading halt
pursuant to NYSE Rule 80B, the circuit breaker rule,\11\ and the
trading halt was in effect at the close of the regular trading session.
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\11\NYSE Rule 80B provides procedures for a one-hour trading
halt in the trading of all securities after a 250-point decline in
the Dow Jones Industrial Average (``DJIA'') and a two-hour trading
halt after a 400-point decline.
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At 5 p.m., both closing-price single-sided orders (including GTX
orders) and closing-price coupled orders would be executed. Members may
enter and cancel closing-price orders and GTX orders up until this
time. Any closing-price single-sided orders not executed during
Crossing Session I would expire; they would have to be re-entered to
participate in the next day's opening. Unexecuted GTX orders would be
returned to the book, maintaining their priority; therefore, they would
participate in the next day's opening, unless cancelled prior to the
opening by the entering broker. Closing-price coupled orders, which
would be entered without the possibility of break-up, would be executed
in full.
The NYSE implements trade reporting for Crossing Session I by
reporting executions of closing-price single-sided orders and closing-
price coupled orders at 5 p.m. over the high speed facility of the
Consolidated Tape Association (``CTA'') Plan and the low speed line as
two transactions per stock--one for closing-price single-sided orders
(and GTX orders) and one for closing-price coupled orders. Each print
would include the closing price and aggregate volume for each stock.
Closing-price coupled orders are printed as ``sold'' sales.
Crossing Session II, which occurs from 4 p.m. to 5:15 p.m., is an
aggregate-price session that enables members to enter crosses of buy
and sell program orders that include at least 15 NYSE-listed stocks
having a total market value of $1,000,000 or more (``aggregate-price
coupled orders''), and to effect their execution at an aggregate price.
Like closing-price single-sided orders and closing-price coupled
orders, aggregate-price coupled orders could not be entered until after
the close of the regular trading session. To participate in Crossing
Session II, members transmit data regarding aggregate-price coupled
orders to the Exchange via facsimile. Each side of the aggregate-price
order entered on a coupled basis is executed against the other side
without regard to the priority of other orders entered into the OHT
facility. The facsimiles are time-stamped immediately and confirmed
back to the entering brokers, thereby effecting continuous executions
of aggregate-price coupled orders upon entry into the OHT facility.
The NYSE proposes to implement trade reporting for the aggregate-
price session by reporting the total number of shares and the total
market value of the aggregate-price trades. After 5:15 p.m., the NYSE
would transmit the report over the high speed line as an administrative
message.
A trading halt occurring during the regular trading session in one
or more individual stocks would not affect the execution of aggregate-
price coupled orders. Moreover, the unavailability of the OHT facility
to one or more individual stocks due to post-4 p.m. corporate news
would not affect the execution of aggregate-price coupled orders. NYSE
Rule 80B, however, would have the same effect on Crossing Session II as
it would have on Crossing Session I: a market-wide halt pursuant to
Rule 80B that is still in effect at 4 p.m. would halt aggregate-price
crossing.
III. Discussion
For the reasons discussed below, the Commission finds that
permanent approval of the NYSE's OHT facility is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange,\12\ and in particular,
with the requirements of sections 6(b)(5) and 11A.\13\ The Commission
is approving the NYSE's OHT facility on a permanent basis because the
Commission believes that the NYSE's OHT facility, comprised of Crossing
Sessions I and II, is reasonably designed to promote just and equitable
principles of trade, prevent fraudulent and manipulative acts and
practices, and remove impediments to and perfect the mechanism of a
free and open market and a national market system.\14\
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\12\See OHT Approval Order, supra note 5 for a complete
description of the NYSE OHT facility and the Commission's rationale
for approving the proposal on a pilot basis. The discussions in
those orders are incorporated by reference into this order.
\13\15 U.S.C. 78f(b)(5) and 78k-1 (1988).
\14\As previously noted, the NYSE also requested permanent
approval of the Exchange's market-on-close (``MOC'') pilot program.
The NYSE withdrew this request on April 29, 1994. Accordingly, the
matched MOC pilot expired on April 30, 1994. See supra note 3.
Concurrently with this order, the Commission is also permanently
approving similar proposals submitted by the Chicago Stock Exchange,
Inc., the American Stock Exchange Inc., the Philadelphia Stock
Exchange, Inc., the Boston Stock Exchange, Inc., and the Pacific
Stock Exchange, Inc. See File Nos. SR-CHX-93-23; BSE-93-24; SR-Amex-
93-15; SR-Phlx-94-8; and SR-PSE-94-2.
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There has been an increasing trend toward the internationalization
of the securities markets and the development of 24 hour markets in
which world class securities can be traded around the globe.\15\ This
has been accompanied by an increased desire among institutional
investors to be able to trade U.S. stocks outside of regular trading
hours. The NYSE has offered the OHT sessions in an effort to attract
back to the U.S. order flow in NYSE listed securities that is being
executed offshore.
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\15\See Division of Market Regulation, SEC, The October 1987
Market Break, at 11-1 to 11-2 (February 1988); Report of the
Presidential Task Force on Market Mechanisms, at I-1 (January 1988).
See also U.S. Congress, Office of Technology Assessment (``OTA''),
Trading Around the Clock: Global Securities Markets and Information
Technology-Background Paper, OTA-BP-CIT-66, (July 1990); U.S.
Congress, OTA, Electronic Bulls and Bears: U.S. Securities Markets
and Information Technology, OTA-CIT-469 (September 1990); and
Division of Market Regulation, SEC, Market 2000: An Examination of
Current Equity Market Developments, at 29 (January 1994).
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In the Commission's order temporarily approving the NYSE's OHT
facility, the Commission noted the benefits that would accrue to
investors through the development of an after-hours trading
session.\16\ The Commission stated its belief that Crossing Session I
would provide investors whose orders were not executed during the
regular trading session with another opportunity to have their orders
executed at the NYSE closing price. Crossing Session I also would
provide investors the flexibility to decide whether they want a
particular order to participate in this Session. With respect to good
til cancelled (``GTC'') orders entered for execution during the 9:30
a.m. to 4 p.m. trading session, a customer would have the option of
deciding whether to designate that order as a GTX (good til cancelled,
executable through crossing session) order, thus allowing the order to
migrate to Crossing Session I for possible execution. In addition, a
customer would have the option of cancelling any order entered into
Crossing Session I at any time prior to its execution at 5 p.m. The
benefits of Crossing Session I would accrue to both individual and
institutional investors. Moreover, the Commission stated its belief
that Crossing Session I may help recapture overseas order flow by
enabling firms wishing to facilitate portfolio trading strategies
involving small programs of stocks that are not eligible for Crossing
Session II to achieve executions at the NYSE closing price.
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\16\See OHT Approval Order, supra note 5.
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Similarly, the Commission stated its belief that Crossing Session
II would benefit the investing public by offering members the
opportunity to enter aggregate-price crossing portfolio orders with
their customers after-hours to be executed against each other. The
Commission recognized that Crossing Session II could help to recapture
overseas trade of U.S. stocks by providing a mechanism by which
portfolio trades arranged off the floor can be effected in an exchange
trading system.
The OHT facility has proved to be successful during the pilot
period. In its filing, the NYSE noted that in 1993, Crossing Session I
averaged 175,000 shares per day and has averaged nearly 260,000 shares
per day thus far in the fourth quarter of 1993. Members use Crossing
Session I primarily for the execution of small, two-sided baskets which
are ineligible for Crossing Session II and, most recently, for index
rebalancing. Over 200 firms have received executions in Crossing
Session I.
In addition, Crossing Session II has averaged approximately 3.9
million shares per day in 1993. To date, there have been 11 days where
volume has exceeded 15 million shares, with the record being 57 million
shares. The NYSE believes that Crossing Session II has successfully
repatriated business from foreign after-hours markets; the Exchange's
member firms have executed approximately 50 percent of all post-4 p.m.
program trades in Crossing Session II.
Finally, data submitted by the NYSE in the monitoring reports does
not indicate that trading in the OHT sessions has had any impact on
volatility, spreads or block transactions during the last hour of the
regular trading session.
Based on the above, the Commission believes that the NYSE's OHT
facility has provided benefits to the marketplace. While the Commission
recognizes that Crossing Session I is not a full auction market, the
Commission believes it to be consistent with the maintenance of fair
and orderly markets because it is a limited purpose facility designed
to bring buyers and sellers together with the benefits associated with
exchange trading. While it is not an auction market in terms of price
discovery, the Commission notes that the NYSE closing price would not
represent an artificial price, but rather a price that has been
determined by auction market trading during the 9:30 a.m. to 4 p.m.
trading session. Moreover, Crossing Session I also retains certain
other characteristics of an auction market, such as maintaining auction
priority rules for migrated limit orders. In addition, although
Crossing Session II does not provide a traditional auction market for
portfolio trades, the reality of the marketplace is that these
portfolio trades currently are being effected off-exchange and,
frequently, overseas. By bringing institutional trades that currently
are being exported overseas within the purview of U.S. regulatory
bodies, the marketplace generally benefits, for example, through
Commission and Exchange oversight, trade reporting, and consolidated
surveillance.\17\
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\17\The Commission continues to believe that the issue of
linkages between markets remains open, and that should multiple,
comparable after hours trading sessions develop, the resolution of
intermarket issues would fall equally upon all marketplaces offering
such sessions.
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In the original Approval Order the commission noted concerns about
transaction reporting. The NYSE requested exemptive relief from the
requirement of Rule 11Aa3-1(b)(2)(iv) under the Act that the NYSE
disseminate on a consolidated basis trading volume for each of the
component stocks traded in Crossing Session II. The Commission approved
the exemption on a temporary basis but requested that the NYSE consider
how to disseminate data on the volume of the individual stocks in the
aggregate-price orders executed in Crossing Session II before the next
day's opening. The NYSE has developed a plan under which the Exchange
would collect the required trade detail information by T+3 and would
publish this information on an aggregate stock basis in the Daily Sales
Report on T+4. The Commission acknowledges that this plan would provide
more information to market participants.\18\ Nevertheless, the
Commission believes the NYSE should continue to examine ways to report
such information earlier.\19\
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\18\See letter from Katherine A. England, Assistant Director,
Commission, to Catherine Kinney, Executive Vice President, NYSE,
dated May 2, 1994.
\19\The NYSE also requested and received an exemption from Rule
10a-1 under the Act to permit, subject to certain conditions, short
sales of certain orders during the OHT sessions without complying
with the ``tick'' provisions of the Rule; and interpretive advice
under Rule 10b-18 under the Act to permit issuers to purchase their
securities in the OHT Sessions. See letter from Larry E. Bergmann,
Associate Director, Division of Market Regulation, Commission, to
Catherine R. Kinney, Senior Vice President, NYSE, dated June 13,
1991.
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The Commission continues to expect the Exchange, through use of its
surveillance procedures, to monitor for, and report to the Commission,
any patterns of manipulation or trading abuses or unusual trading
activity resulting from these programs. In addition, the Commission
continues to request that the Exchange keep the Commission apprised of
any technical problems which may arise regarding the operation of the
programs.
IV. Conclusion
Based on the foregoing, the Commission finds that permanent
approval of the OHT facility is consistent with the Act.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act\20\ that the proposed rule change (SR-NYSE-93-50) is hereby
approved.
\20\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.\21\
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\21\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-11029 Filed 5-6-94; 8:45 am]
BILLING CODE 8010-01-M
