[Federal Register Volume 60, Number 121 (Friday, June 23, 1995)]
[Notices]
[Pages 32723-32725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-15422]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35854; File No. SR-NYSE-95-09]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change and Amendment No. 1 to
Proposed Rule Change Relating to Entry of Limit-at-the-Close Orders
June 16, 1995.
I. Introduction
On March 3, 1995, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities and Exchange Commission of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to replace its current pilot \3\
for the entry of limit-at-the-close (``LOC'') orders \4\ to offset a
published market-at-the-close (``MOC'') order \5\ imbalance of 50,000
shares or more in stocks selected from expiration day \6\ pilot stocks
with a pilot including all stocks for which MOC order imbalances are
published. On April 18, 1995, the NYSE submitted Amendment No. 1 to the
proposed rule change.\7\
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 33706 (March3,
1994), 59 FR 11093.
\4\ A LOC order is a limited price order entered for execution
at the closing price if the closing price is within the limit
specified. See NYSE Rule 13.
\5\ A MOC order is a market order to be executed in its entirety
at the closing price on the Exchange. Id.
\6\ See infra note 11.
\7\ See Letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Glen Barrentine, Team Leader, SEC dated April
17, 1995.
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The proposed rule change, including Amendment No. 1, was published
for comment in Securities Exchange Act Release No. 35653 (April 27,
1995), 60 FR 21839. No comments were received on the proposal.
II. Description of the Proposal
The proposed rule change proposes to expand the universe of stocks
in which LOC orders may be entered to all stocks for which MOC
imbalances are published pursuant to such procedures regarding time of
order entry and order cancellation as the Exchange may establish from
time to time.
Currently, the NYSE allows entry of LOC orders to offset published
imbalances of MOC orders of 50,000 shares or more in five of the so-
called ``pilot stocks.'' \8\ The Commission approved the current LOC
order entry procedures on a 15-month pilot basis through July 15,
1995.\9\ Thus far, LOC orders been entered rarely. Members cite the
limited number of stocks for which LOC orders may be entered as a
primary reason for not committing resources to effect system program
changes necessary to support the pilot program.
\8\ For purposes of LOC order entry, the term ``pilot stocks''
refers to the Expiration Friday pilot stocks plus any additional QIX
Expiration Day pilot stocks. Specifically, the Expiration Friday
pilot stocks consist of the 50 most highly capitalized Standard &
Poors (``S&P'') 500 stocks and any component stocks of the Major
Market Index (``MMI'') not included therein. The QIX Expiration Day
pilot stocks consist of the 50 most highly capitalized S&P 500
stocks, any component stocks of the MMI not included therein and the
10 highest weighted S&P Midcap 400 stocks.
\9\ See Release No. 33706, supra, note 3.
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The Exchange believes that by expanding the universe of eligible
LOC stocks, it will make it more feasible for member firms to effect
the systems changes required to use LOC orders.\10\ The Exchange is
therefore proposing to replace the current pilot to permit the entry of
LOC orders to offset a MOC order imbalance of 50,000 shares or more in
all stocks for which MOC order imbalances are published.\11\ The
[[Page 32724]] Exchange intends to keep the 3:55 p.m. cutoff time for
the entry of LOC orders, except to correct a bonafide error. On
expiration days, LOC orders will continue to be irrevocable after 3:40
p.m., except to correct a bonafide error. For non-expiration days,
cancellation of LOC orders would be prohibited after 3:55 p.m., except
to correct errors.\12\
\10\ The NYSE has represented that, before initiating the
expanded pilot program, it will submit to the Commission a letter
(1) stating that the NYSE is operationally ready to accept LOC
orders and (2) informing the Commission of the start-up date for
this pilot. Telephone conversation between Donald Siemer, Director
of Market Surveillance, NYSE, to Elisa Metzger, Senior Counsel, SEC,
on June 7, 1995.
\11\ Currently, MOC imbalances are published for pilot stocks on
expiration days and non-expiration days. The term ``expiration
days'' refers to both (1) the trading day, usually the third Friday
of the month, when some stock index options, stock index futures and
options on stock index futures expire or settle concurrently
(``Expiration Fridays'') and (2) the trading day on which end of
calendar quarter index options expire (``QIX Expiration Days'').
In addition, on non-expiration days, MOC imbalances are
published for stocks that are being added to or dropped from an
index and, upon the request of a specialist, any other stock with
the approval of a Floor Official. See Securities Exchange Act
Release No. 35589 (April 10, 1995), 60 FR 19313.
\12\ The NYSE modified its electronic display book, such that
LOC orders are prioritized relative to other LOC orders by time of
entry, but are required to yield priority to all conventional limit
orders on the specialist's book at the same price. Telephone
conversation between Donald Siemer, Director of Market Surveillance,
NYSE, to Elisa Metzger, Senior Counsel, SEC, on June 16, 1995.
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The Exchange believes that LOC orders may be a useful means to help
address the prospect of excess market volatility that may be associated
with an imbalance of MOC orders at the close. Therefore, the Exchange
believes it is appropriate to replace the current pilot for LOC orders
to a pilot including all stocks for which MOC imbalances are published
that will last for one year from the date of approval of this proposed
rule change.
III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with the requirements of Sections 6(b).\13\ The Commission
believes the proposal is consistent with the Section 6(b))5)
requirements that the rules of an exchange be designed to promote just
and equitable principles of trade, to prevent fraudulent and
manipulative acts, and, in general, to protect investors and the
public.
\13\ 15 U.S.C. 78f(b).
As noted in approving the current pilot, the self-regulatory
organizations have instituted certain safeguards to minimize excess
market volatility that may arise from the liquidation of stock
positions related to trading strategies involving index derivative
products. For instance, since 1986, the NYSE has utilized auxiliary
closing procedures on expiration days. These procedures allow NYSE
specialists to obtain an indication of the buying and selling interest
in MOC orders at expiration and, if there is a substantial imbalance on
one side of the market, to provide the investing public with timely and
reliable notice thereof and with an opportunity to make appropriate
investment decisions in response.
The NYSE auxiliary closing procedures have worked relatively well
and may have resulted in more orderly markets on expiration days.
Nevertheless, both the Commission and the NYSE remain concerned about
the potential for excess market volatility, particularly at the close
on expiration days. Although, to date, the NYSE has been able to
attract sufficient contra-side interest to effectuate an orderly
closing, adverse market conditions could converge on an expiration day
to create a market dislocation which could make member firms and their
customers unwilling to acquire significant positions.
The NYSE recently adopted auxiliary closing procedures for MOC
orders on non-expiration days that are substantially similar to those
in place for expiration days.\14\ This allows members and member
organizations to follow comparable procedures at the close on all
trading days. Although there is less likelihood of an influx of MOC
orders at the close on non-expiration days, certain trading and asset
allocation strategies use NYSE closing prices and, accordingly, could
employ MOC orders. In the event of unusual market conditions, the
Commission believes that the MOC procedures for non-expiration days
offer benefits in terms of assessing volatility at the close of trading
in the same manner as the NYSE's procedures for expiration days.
\14\ See supra note 11.
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The Commission continues to believe preliminarily that LOC orders
should provided the NYSE with an additional means of attracting contra-
side interest to help alleviate MOC order imbalances both on expiration
and non-expiration days. As a practical matter, the Commission believes
that LOC orders will appeal to certain market participants who other
wise might be reluctant to commit capital at the close. Specifically,
unlike a MOC order, which results in significant exposure to adverse
price movements, a LOC order will allow each investor to determine the
maximum/minimum price at which he or she is willing to buy/sell. To the
extent that such risk management benefits encourage NYSE member firms
and their customers to enter orders to offset MOC order imbalances of
50,000 shares or more, thereby adding liquidity to the market, the
Commission agrees with the NYSE that LOC orders could become a useful
investment vehicle for curbing excess price volatility at the
close.\15\
\15\ Furthermore, the Commission notes that LOC orders could
allow the NYSE to accomplish this goal without diminishing any
benefit to investors from trading strategies that rely on MOC orders
to guarantee a fill at the closing price.
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The Commission also finds that the NYSE has established appropriate
procedures for the handling of LOC orders and that the NYSE's existing
surveillance should be adequate to monitor compliance with those
procedures. Because LOC orders will be required to yield priority to
conventional limit orders at the same price, the Commission is
satisfied that public customer orders on the specialist's book will not
be disadvantaged by this proposal. In addition, the Commission believes
that the proposed 3:55 p.m. deadline for LOC order entry strikes a
reasonable balance between the need to effectuate an orderly closing
and the need to avoid unduly infringing upon legitimate trading
strategies. Similarly, in the Commission's opinion, the prohibition on
cancelling LOC orders is consistent with the Exchange's auxiliary
closing procedures and, like those procedures, should allow specialists
to make a timely and reliable assessment of order flow and its
potential impact on the closing price.
The Commission is approving LOC order entry for all stocks for
which MOC order imbalances are published on a pilot basis contingent on
the extension or permanent approval of the MOC procedures.\16\ During
the pilot program, the Commission expects the NYSE to monitor the
effectiveness of its LOC order procedures.
\16\ The pilot program for MOC procedures expires on October 31,
1995. See Securities Exchange Act Release No. 34916 (October 31,
1994), 59 FR 55507.
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The Commission therefore requests that the NYSE submit a report to
the Commission, by May 31, 1996, describing its experience with the
expanded pilot program. At a minimum, this report should contain the
following data for each expiration day during the 10-month period after
the start-up date for LOC order entry for all stocks: (1) For all
stocks which had a MOC order imbalance of 50,000 shares or more at 3:40
p.m., the names of those stocks and the size of the imbalance; (2) for
each stock listed in (1) above, the size of the MOC order imbalance at
4:00 p.m. and an appropriate measure of the size of conventional limit
order and LOC order interest, on the opposite side of the market from
the imbalance, at 4:00 p.m.; (3) for each stock listed in (1) above,
(i) the price of the transaction effected closest in time to 3:40 p.m.,
the price of the last regular way trade and the closing price, (ii) the
change in price of the closing transaction, measured as a percentage,
from the last regular way [[Page 32725]] trade and from the transaction
effected closest in time to 3:40 p.m., (iii) historical data analyzing
price volatility for the same stock on expiration days prior to the
implementation of this pilot program; and (4) the average price
volatility for all stocks listed in (1) above. The NYSE report also
should contain, for one week per calendar quarter (including at least
one week with no expiration days) the data described herein, as
modified to reflect the MOC procedures for non-expiration days. Any
requests to modify this pilot program, to extend its effectiveness or
to seek permanent approval for the pilot procedures also should be
submitted to the Commission, by May 31, 1996, as a proposed rule change
pursuant to Section 19(b) of the Act.
IV. Conclusion
It is therefore ordered, pursaunt to Section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-NYSE-95-09) is approved on a
pilot basis to expire on July 31, 1996.
\17\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\.
\18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-15422 Filed 6-22-95; 8:45 am]
BILLING CODE 8010-01-M
