[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: 94-11030]
[[Page Unknown]]
[Federal Register: May 9, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33991; File Nos. SR-CHX-93-23; SR-BSE-93-24; SR-PSE-94-
2; SR-Phlx-94-8]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Boston Stock Exchange, Inc.; Pacific Stock Exchange, Inc.; and
Philadelphia Stock Exchange, Inc.; Order Approving Proposed Rule
Changes Relating to Pilot Programs Providing Price Protection of Limit
Orders Executable After the Close of Regular Trading Hours
I. Introduction
The Chicago Stock Exchange, Inc. (``CHX''), Boston Stock Exchange,
Inc. (``BSE''), Pacific Stock Exchange, Inc. (``PSE''), and
Philadelphia Stock Exchange, Inc. (``Phlx'') (collectively, the
``Regional Exchanges'') have filed with 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\ proposed rule changes to request permanent approval of
their respective pilot programs relating to price protection of limit
orders.\3\
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1993).
\3\The CHX originally submitted File No. SR-CHX-93-23 to request
permanent approval of its pilot program relating to price protection
of limit orders. On December 22, 1993, the CHX filed Amendment No. 1
to the proposal requesting that, in addition, the Commission approve
a three month extension of its pilot program until April 30, 1994.
See letter from David T. Rusoff, Attorney, Foley & Lardner, to Louis
A. Randazzo, Attorney, Office of Derivative and Exchange Oversight,
SEC, dated December 21, 1993.
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The proposed rule changes were published for comment in Securities
Exchange Act Release Nos. 33798 (March 22, 1994), 59 FR14693 (March 29,
1994); 33800 (March 22, 1994), 59 FR 14691 (March 29, 1994); 33799
(March 22, 1994), 59 FR 14697 (March 29, 1994); and 33801 (March 22,
1994), 59 FR 14700 (March 29, 1994). No comments were received on the
proposals. This order grants permanent approval to the pilot programs.
II. Description of the Proposal
The Regional Exchanges request permanent approval of their
respective pilot programs relating to price protection of limit orders
based on after-hours prints in a primary market.\4\ The pilot programs
require Exchange specialists to provide primary market protection for
those limit orders entered during an Exchange's primary trading session
which are designated as executable after the close of the regular
Exchange auction market trading session, known as ``GTX'' orders
(``good until canceled, executable in the afternoon session'').\5\
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\4\For a complete description of each Regional Exchange's pilot
program, See their respective approval orders, infra note 5.
The Commission notes that the PSE, in an earlier proposed rule
change (File No. SR-PSE-91-21) proposed to permit the creation and
trading of a new type of order, one-sided (``OS'') closing price
orders for after hours trading. The proposed OS order is a ``day
limit order'' entered for execution after 1 p.m. PT and eligible for
execution as determined by the Exchange. The PSE has withdrawn the
request for OS orders for after hours trading. See letter to Sharon
Lawson, Assistant Director, Division of Market Regulation,
Commission, from David P. Semak, Vice President, PSE, dated April
20, 1994.
\5\On June 13, 1991, the Commission approved, on a pilot basis,
File Nos. SR-MSE-91-11 (in 1991, the CHX was named the Midwest Stock
Exchange or MSE), SR-BSE-91-04, SR-PSE-91-21, and SR-Phlx-91-26,
which amended the Exchanges' respective Rules relating to price
protection of limit orders. See Securities Exchange Act Release No.
29297, 56 FR 28191 (June 19, 1991) (``MSE Approval Order'');
Securities Exchange Act Release No. 29301, 56 FR 28182 (June 19,
1991) (``BSE Approval Order''); Securities Exchange Act Release No.
29305, 56 FR 28208 (June 19, 1991) (``PSE Approval Order''); and
Securities Exchange Act Release No. 29300, 56 FR 28212 (June 19,
1991 (``Phlx Approval Order''). Additional approvals were granted in
Securities Exchange Act Release Nos. 29543 (August 16, 1991), 56 FR
40929 (``Order approving File No. SR-PSE-91-28'') and 29749 (October
4, 1991), 56 FR 50405 (``Order approving File No. SR-Phlx-91-32'').
These pilot programs were established in response to the new after
hours trading sessions established by the New York Stock Exchange,
Inc. (``NYSE'') and American Stock Exchange, Inc. (``Amex''). The
NYSE Off-Hours trading (``OHT'') sessions extend the NYSE's trading
hours beyond the 9:30 a.m. to 4:00 p.m. trading session. See
Securities Exchange Act Release No. 29237 (May 24, 1991), 56 FR
24853 (May 31, 1991) (approving File Nos. SR-NYSE-90-52 and NYSE-90-
53), and Securities Exchange Act Release No. 29515 (August 2, 1991),
56 FR 37736 (August 8, 1991) (approving File No. SR-Amex-91-15). The
Regional Exchanges' procedures provide primary market protection for
customer GTX orders (good until cancelled, executable in the
afternoon session) in securities listed both on the NYSE and on the
Amex. The Commission several times approved extensions of all the
pilot programs, most recently until April 30, 1994. See Securities
Exchange Act Release No. 32365 (May 25, 1993), 58 FR 31560 (June 3,
1993) (order extending approval of File No. SR-BSE-93-10);
Securities Exchange Act Release No. 32363 (May 25, 1993), 58 FR
31558 (June 3, 1993) (order extending approval of File No. SR-Amex-
93-19); Securities Exchange Act Release No. 32368 (May 25, 1993), 58
FR 31563 (June 3, 1993) (order extending approval of File No. SR-
MSE-93-6); Securities Exchange Act Release No. 32367 (May 25, 1993),
58 FR 31570 (June 3, 1993) (order extending approval of File No. SR-
PSE-93-6); Securities Exchange Act Release No. 32364 (May 25, 1993),
58 FR 31574 (June 3, 1993) (order extending approval of File No. SR-
Phlx-93-16); Securities Exchange Act Release No. 32362 (May 25,
1993), 58 FR 31565 (June 3, 1993) (order extending approval of File
No. SR-NYSE-93-23); Securities Exchange Act Release No. 33561
(February 1, 1994), 59 FR 5789 (February 8, 1994) (order extending
approval of File No. SR-Amex-93-15); Securities Exchange Act Release
No. 33562 (February 1, 1994), 59 FR 5792 (February 8, 1994) (order
approving File Nos. SR-CHX-93-23; SR-BSE-93-18; SR-PSE-94-1; and SR-
Phlx-94-7); and Securities Exchange Act Release No. 33563 (February
1, 1994), 59 FR 5795 (February 8, 1994) (order approving File No.
SR-NYSE-93-51).
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III. Discussion
The Commission finds that permanent approval of the Regional
Exchanges' respective pilot programs to provide price protection to
limit orders executable after the close of regular trading hours is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange.
Specifically, the Commission believes that the proposals are reasonably
designed to promote just and equitable principles of trade, perfect the
mechanism of a free and open market and a national market system, and,
in general, further investor protection and the public interest in fair
and orderly markets on national securities exchanges.\6\
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\6\As requested by the Regional Exchanges, the Commission has
granted an exemption from Rule 10a-1 under the Act to permit short
sales of GTX orders on the Exchanges without complying with the
``tick'' provisions of the rule, subject to certain conditions. See
letters from Larry E. Bergmann, Associate Director, Division of
Market Regulation, Commission, to William W. Uchimoto, General
Counsel, Phlx, dated June 13, 1991; Daniel J. Liberti, Associate
Counsel, MSE, dated June 13, 1991; Karen A. Aluise, BSE, dated June
13, 1991; and David P. Semak, Vice President, PSE, dated June 13,
1991.
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In the Commission's release 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.\7\ Although the
Regional Exchanges' programs do not establish after-hours sessions
identical to that of the NYSE, the Commission believes that they
provide a reasonable competitive response. By allowing GTX orders that
would be executed on the NYSE and Amex to receive a similar fill on the
Regional Exchanges, the programs provide a mechanism for maintaining
each Regional Exchange's individual marketplace on a competitive level
with the primary market.\8\
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\7\See Securities Exchange Act Release No. 29237, supra note 5.
\8\The Commission's rationale for approving the proposals on a
pilot basis is contained in the discussion section of the original
approval orders. The discussions in those orders are incorporated by
reference into this order.
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The Commission believes that the Regional Exchanges' programs
demonstrate the competitiveness of the U.S. securities markets. As a
result, investors have new opportunities for trading. Moreover, the
Commission believes that the increased competition that results from
permitting Regional specialists to attract GTX order should enhance the
quality of customer order execution. In addition, the Commission
believes that the Regional programs are consistent with the maintenance
of fair and orderly markets and contribute to the practicability of
brokers achieving a best execution for customer orders. The programs
achieve this by imposing additional obligations on Exchange specialists
to provide their customers with primary market price protection.
Additionally, since the parameters of the rule are expressed clearly in
the text of the rule and do not disturb the priority rules currently in
force at the Exchanges, the programs provide fair and reasonable
procedures for the protection of limit orders.
Furthermore, the Commission believes that, although specialists
will know which limit orders are designed ``GTX'' and will manually
execute GTX orders, they should not be able to use this information to
their own advantage. The programs consist of execution guarantee
systems. Specialist participation would be limited to filling the
contra side of a customer limit order that is eligible, pursuant to the
new rule, for a fill. The specialist would have no discretion in
choosing which orders to fill and which priority to give orders. In
addition, orders would be eligible to be filled according to the
priority that already exists on the specialists' books. Thus, the
Commission is satisfied that, although specialists will have knowledge
of which limit orders have been designated GTX, they would not be able
to use this knowledge to the detriment of investors because their
participation in the execution of GTX orders will be limited. The
Commission expects, however, that the Exchanges will monitor carefully
the execution of GTX orders to ensure that specialists are not taking
unfair advantage of this information.
The Commission continues to expect the Regional Exchanges, through
use of their 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 Exchanges keep the Commission
apprised of any technical problems which may arise regarding the
operation of the programs.
It is therefore ordered, pursuant to section 19(b)(2) of the Act\9\
that the proposed rule changes (SR-CHX-93-23, SR-BSE-93-24, SR-PSE-94-
2, and SR-Phlx-94-8) are hereby approved on a permanent basis.
\9\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.\10\
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\10\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-11030 Filed 5-6-94; 8:45 am]
BILLING CODE 8010-01-M
