[Federal Register Volume 59, Number 121 (Friday, June 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15361]
[[Page Unknown]]
[Federal Register: June 24, 1994]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34231; File No. SR-NYSE-90-10]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Granting Approval and Notice and Order Granting Accelerated
Approval to Amendments No. 1, 2, and 3 to Proposed Rule Change Relating
to Various Rule Revisions Recommended by the Market Regulation Review
Committee of the New York Stock Exchange
June 17, 1994.
I. Introduction
On March 12, 1990, 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 Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend various exchange rules.
On October 2, 1990, the NYSE submitted to the Commission Amendment No.
1 to the proposal.\3\ On March 19, 1993, the NYSE submitted Amendment
No. 2 to the proposal.\4\ On March 4, 1994, the NYSE submitted
Amendment No. 3 to the proposal.\5\
---------------------------------------------------------------------------
\1\15 U.S.C. Sec. 78s(b)(1) (1988).
\2\17 CFR Sec. 240.19b-4 (1991).
\3\Amendment No. 1 deleted the proposed amendments to Rule
116.30 dealing with ``stopping stock.'' See letter from James E.
Buck, Senior Vice President and Secretary, NYSE to Mary Revell,
Branch Chief, Exchange Branch, Division of Market Regulation,
Commission, dated October 2, 1990, forwarding to the Commission
Amendment No. 1 to the proposal.
\4\Amendment No. 2 deleted ten of the proposed rule changes and
added a new amendment to Rule 107. The Exchange deleted the
following proposed changes contained in the original proposal:
amendments to Rule 440B pertaining to the short sale rule;
amendments to Rule 104 pertaining to dealings by specialists;
amendments to Rule 104.10(5)(i) and 104.10(b)(i) pertaining to
functions of specialists; amendments to Rule 104.12 pertaining to
the reasonable necessity test for proprietary dealings and regarding
the requirement that specialists make their investment accounts
available to maintain fair and orderly markets; amendments to Rule
104.13 which impose restrictions on transactions of spouses and
children and which delete restrictions on acquisitions and
liquidations of investment accounts; amendment to Rule 113 which
requires that certain orders be identified if greater than 2,000
shares; amendment to Rule 107B(6) pertaining to RCMM trading;
amendment to Rule 107B(7).10(ii)(B) pertaining to RCMM's purchase of
up to half of the offer on a zero plus tick in an \1/8\ point
market; amendments to Rule 112 pertaining to restrictions on
competitive traders. See letter from James E. Buck, Senior Vice
President and Secretary, NYSE to Diana Luka-Hopson, Branch Chief,
Exchange Branch, Division of Market Regulation, Commission, dated
March 18, 1993, forwarding to the Commission Amendment No. 2 to the
proposal.
\5\Amendment No. 3 deleted the agency facilitation trader
provisions from the proposal. See letter from James E. Buck, Senior
Vice President and Secretary, NYSE to Cheryl Evans Dunfee, Attorney,
Exchange Branch, Division of Market Regulation, Commission, dated
February 28, 1994.
---------------------------------------------------------------------------
Notice of the proposal appeared in the Federal Register on May 1,
1990.\6\ Two comment letters were received supporting the proposed rule
change.\7\ This order approves the proposed rule change, including
Amendments No. 1, 2, and 3 on an accelerated basis.
---------------------------------------------------------------------------
\6\The proposed rule change was published in Securities Exchange
Act Release No. 27939 (April 24, 1990), 55 FR 18207 (May 1, 1990).
\7\Both comment letters were supportive of the work done by the
Market Regulation Review Committee in developing the changes. Both
expressed specific support for changes that were subsequently
withdrawn from the proposal. See letter from Robert M. Newman, Jr.,
Managing Partner, Equitrade Partners, dated June 11, 1990, and
letter from George A. Corroon, Jr., Partner, Corroon, Lichtenstein &
Co., dated May 31, 1990.
---------------------------------------------------------------------------
II. Discussion
A. Introduction
The NYSE's Board of Directors established the Market Regulation
Review Committee (``Committee'')\8\ to examine the structure of market
trading regulations. The Committee was charged with reviewing existing
regulations to enable the Exchange, in a manner consistent with
maintaining market integrity and protecting investors, to compete more
effectively with its current and future competitors, to provide
additional intra-market trading opportunities for all Exchange market
participants, and to eliminate requirements that may no longer serve a
meaningful regulatory purpose.
---------------------------------------------------------------------------
\8\The Committee was established in December 1985 and it was
originally given an 18-month chartered life. The charter was
subsequently extended 27 months, until March 31, 1988.
---------------------------------------------------------------------------
Over seventy recommendations for changes to Exchange rules were
made by the Committee. Several of these recommendations have been
approved by the Commission previously.\9\
---------------------------------------------------------------------------
\9\See Securities Exchange Act Release No. 29318 (June 17,
1991), 56 FR 28937 (June 25, 1991) (File No. SR-NYSE-89-2)
(approving changes to 18 NYSE Rules). In conjunction with its filing
of File No. SR-NYSE-90-10, the NYSE also filed Amendment No. 1 to
File SR-NYSE-89-02, which withdrew certain provisions of File No.
SR-NYSE-89-02 as filed originally and resubmitted them in file No.
SR-NYSE-90-10, in order to expedite the Commission's consideration
of the Market Regulation Review Committee's recommendations. See
Amendment No. 1 to File No. SR-NYSE-89-2. See also letter from
Howard Kramer, Assistant Director, Division of Market Regulation,
Commission, to Brian McNamara, Managing Director, Market
Surveillance Division, NYSE, dated June 29, 1989.
---------------------------------------------------------------------------
The proposed rule change reflects the recommendations of the
Committee.\10\ The specific proposals fall within three categories:
``general auction market rules''; ``trading rules applicable to
specialists''; and ``member proprietary and on-floor trading.''
---------------------------------------------------------------------------
\10\The text of the Exchange rules to be amended and complete
descriptions of the proposed amendments are set forth in the
Exchange's original filing and in Amendments No. 1 and 2 thereto,
all of which are available for inspection at the Commission and at
the principal office of the NYSE. The changes being approved herein
are also discussed in detail infra.
---------------------------------------------------------------------------
B. Commission Findings
The Commission has reviewed carefully the NYSE's proposed rule
change and concludes that the proposal is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange and, in particular with
Section 6(b)(5), 6(b)(8), 11(b) and 11A(a)(1) of the Act.\11\ The
Commission supports the NYSE's efforts to continue to review the
structure of market trading regulation in response to changes in market
structure. The Commission believes it important to market quality that
the Exchange have a regulatory program that is tailored to the current
market structure, especially in light of the significant role played by
the NYSE in the U.S. markets. The Commission agrees that the proposed
rule change will be helpful in updating Exchange Rules. The
Commission's detailed discussion regarding the significant changes
proposed by the NYSE follows.
---------------------------------------------------------------------------
\11\15 U.S.C. Sec. 78f(b)(5), 78f(b)(8), 78k(b), and 78 k-
1(a)(1) (1988).
---------------------------------------------------------------------------
C. General Auction Market Rules
1. Rule 64: Bonds, Rights and 100-Share-Unit Stocks
NYSE Rule 64 specifies the time periods within which trades on the
Exchange must be settled. It provides that all trades shall be
considered ``regular way'' trades, which currently settle within five
business days after the transaction date, unless certain conditions are
specified, such as ``cash,'' ``next day'' and ``seller's option,'' or
any other settlement periods that may be determined by the Exchange.
Currently, the NYSE rule specifies a number of business days following
the date of the trade for settlement of most ``non-regular way''
trades. Seller's option trades currently settle between six and sixty
business days following the trade date.
The Exchange is amending Rule 64(a)(4) to provide that seller's
options shall be delivered not less than 2 business days nor more than
180 days following the day of the contract. The Exchange has indicated
that this change provides an alternative settlement mechanism with
which investors may more closely match their investment objectives with
their trading opportunities.\12\
---------------------------------------------------------------------------
\12\Telephone conversation between Don Siemer, Director Market
Surveillance, Division, NYSE, and Cheryl Dunfee, Attorney, Division
of Market Regulation, February 9, 1994.
---------------------------------------------------------------------------
The Commission agrees that this change in the delivery time for
seller's options is appropriate in light of current market realities.
The Commission believes that this change will give ``seller's options''
parties increased flexibility in settling such transactions, thereby
removing impediments to a free and open market in accordance with
Section 6(b)(5) of the Act.
The Exchange is adding new paragraph (b) to Rule 64 to provide that
all trades effected for other than `'regular way'' settlement must be
approved by a Floor Official, except during the last calendar week of
the year, at which time Floor Official approval is required only for
sales which are more than \1/4\ point away from the ``regular way'' bid
or offer. In addition, in considering whether to grant such approval,
the rule states that the Floor Official should take into consideration
whether the price of the transaction is reasonable in relation to the
``regular way'' market. The Exchange states that this provision is a
codification of existing practice.\13\ The Exchange believes that Floor
Official approval is generally beneficial prior to the execution of
each non-regular way transaction to ensure that each is appropriately
priced in relation to the regular way market. The Exchange does not,
however, believe that it is appropriate to require Floor Official
approval during the last calendar week of the year when numerous non-
regular way trades are affected for legitimate tax purposes, unless the
non-regular way trade is more than \1/4\ point away from the regular
way market.
---------------------------------------------------------------------------
\13\Id.
---------------------------------------------------------------------------
The Commission agrees that Rule 64(b) is an appropriate change to
ensure adequate pricing of such trades and agrees that it may not be
practical to obtain Floor Official approval for every non-regular way
trade during the last calendar week of the year, which traditionally
has more non-regular way trades for tax purposes. The \1/4\ point limit
related to receiving Floor Official approval for non-regular way trades
during the last calendar week of the year should provide enough
protection to ensure adequate pricing of such trades. The Commission
therefore believes that new paragraph (b) will help to remove
impediments to and perfect the mechanism of a free and open market in
accordance with Section 6(b)(5) of the Act.
The Exchange is adding new paragraph (c) to Rule 64 to provide
that: all ``seller's option'' trades, for delivery between two and 180
business days, should be reported to the tape only in calendar
days;\14\ weekends and holidays are counted; and the trade date is not
included when calculating the print for ``seller's option'' trades. In
addition, the settlement date of a ``seller's option'' transaction
printed as calendar days cannot coincide with the normal five business
day ``regular way'' settlement.
---------------------------------------------------------------------------
\14\The Exchange provides the following example in Rule 64(c): A
trade settling in six business days would print as a ``seller's 8''
unless there is an intervening holiday (in which case it would print
as a ``seller's 9'').
---------------------------------------------------------------------------
The Commission believes that Rule 64(c) accurately reflects the
method by which seller's options trades are settling and will serve to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing, and
processing information with respect to transactions in securities in
accordance with Section 6(b)(5) of the Act.
D. Trading Rules Applicable to Specialists
1. Rule 104.10(7): ``Clean-ups''
Rule 104.10(7) currently provides that when an inquiry is made of a
specialist as to the price at which a block of stock may be sold, the
specialist may advise the broker of the ``clean up'' price of the
block, but may not specify the amount that would be purchased by the
book and the amount that he would take as dealer. The Rule further
provides that when a specialist participates as a dealer in the block
at the ``clean-up'' price, the specialist must give all the executable
orders that he is holding the ``clean-up'' price, except for the amount
of the block that can be executed at the price of the current bid
(whether such bid is for orders held by him or for the account of the
specialist, or both).\15\
---------------------------------------------------------------------------
\15\The same principles apply to inquiries respecting an order
to purchase a block of stock.
---------------------------------------------------------------------------
In the interest of facilitating the overall transaction, the
Exchange is deleting the provision whereby the specialist may not
specify the amount that would be purchased by the book and the amount
that he would take as dealer in cleaning up the block. The Exchange is
also deleting the provision that limits who can get the ``clean-up''
price when the specialist participates as a dealer in the block
sale,\16\ thereby providing that all executable orders would receive
the clean-up price.
---------------------------------------------------------------------------
\16\Specifically, the Exchange is deleting the following
language: ``. . . except for the amount of the block which can be
executed at the current bid, whether such bid is for orders held by
him or for the account of the specialist or both.''
---------------------------------------------------------------------------
The Exchange asserts that the amendment to Rule 104.10(7)
incorporates a concept that currently exists in Exchange rule 127,
which provides that when a member is crossing block-sized orders, and
will be positioning all or part of one side of the cross, he must give
public orders limited to the clean-up price the benefit of that price.
The Commission believes that the changes to Rule 104.10(7) increase
fairness in execution of block orders in accordance with Section
6(b)(5) of the Act, which requires that the rules of an exchange be
designed to promote just and equitable principles of trade. The
Commission also believes that the changes to Rule 104.10(7) help to
assure that investors' orders are executed at the best possible market
in accordance with Section 11A(a)(1) of the Act which provides, inter
alia, that, it is in the public interest and appropriate for the
protection of investors and the maintenance of fair and orderly markets
to assure the practicability of brokers executing investors' orders in
the best market.
2. Rule 104.12: Specialists' Investment Accounts
Rule 104.12 concerns reporting by specialists about investment
positions in speciality stocks. The Exchange is replacing current
reporting requirements for specialist investment accounts with a
simplified, aggregated, monthly reporting requirement.\17\
---------------------------------------------------------------------------
\17\Currently, the rule lists three circumstances in which a
specialist must file equity trading data reports. Whenever a
specialist assigns a specialty stock to an investment account, he
must file a report (on Form 81) covering his transactions in that
stock for the calendar week in which the purchase was made, and for
the day of the assignment. A specialist must file a report (on Form
81) of all transactions in any stock on a day in which his dealer
accounts show a ``short'' position in excess of 500 shares while he
maintains a long position in his investment account. A report must
be filed as of the last business day of each month in which a
specialist had an investment position in a specialty stock
indicating the number of shares held ``long'' in the investment
account and the extent of any ``short'' position existing in the
dealer account with respect to such stock.
---------------------------------------------------------------------------
The Exchange is adopting the following simplified reporting
requirement. In connection with investment positions in specialty
stocks, a specialist shall report to the Exchange, on such form and in
such format as the Exchange may from time to time prescribe, a record
of all transactions effected for investment purposes and shall also
report a record of all such transactions effected for investment
purposes for the account of any person specified in Rule 104.13.
The Commission believes that the changes to Rule 104.12 are
reasonable because the NYSE's reporting requirements still ensure that
the NYSE receives information about all transactions effected for
investment purposes by a specialist in specialty stocks.
3. Rule 104.13: Investment Transactions
Rule 104.13 generally requires that transactions in specialty
stocks by specified persons, such as the specialist's spouse and
persons residing in his household, be for investment purposes. The
Exchange is adding new paragraph (d) to this rule\18\ that states that
specialists should not originate orders in the specialty stocks in
which they are registered for any accounts over which they may have
discretion.
---------------------------------------------------------------------------
\18\The Exchange states that the information in paragraph (d)
was transposed from NYSE Rule 95.20.
---------------------------------------------------------------------------
The Commission believes that paragraph (d) is an appropriate
addition to Rule 104.13 in accordance with Section 11(a) of the Act
which generally makes it unlawful, with certain exceptions, for any
member of a national securities exchange to effect a transaction on
such exchange for his own account, the account of an associated person,
or an account with respect to which it or an associated person thereof
exercises investment discretion. The Commission also believes that
paragraph (d) is an appropriate limitation on specialist trading
designed to prevent fraudulent and manipulative actions in accordance
with Section 6(b)(5) of the Act.
4. Rule 113(c): Specialists' Public Customers
Rule 113 governs a specialist's actions when handling public
customer orders in stocks for which he is registered as a specialist.
Rule 113(c) currently provides that every specialist shall report to
the Exchange such information as the Exchange may require with respect
to transactions which are made in a stock in which he is registered for
any customer account not prohibited under Section (a)\19\ which is: (1)
Carried by a member organization; (2) serviced by him or his member
organization; or (3) introduced by him or his member organization to
another member organization on a disclosed basis.
---------------------------------------------------------------------------
\19\Section (a) of Rule 113 deals with when a specialist or his
member organization or corporate subsidiary of such organization may
accept an order for the purchase or sale of any stock in which he is
registered as a specialist.
---------------------------------------------------------------------------
The Exchange proposes to simplify the reporting requirements of
Rule 113(c) with regard to transactions in specialty stocks for
accounts carried by a specialist,\20\ by requiring reports on all such
transactions to be submitted to the Exchange on a monthly rather than
weekly basis.\21\ The Exchange states that experience has shown that
monthly reporting of customer account data by specialists is adequate
and will allow the Exchange to properly review specialist
activities.\22\
---------------------------------------------------------------------------
\20\Under the amended rule, every specialist shall report to the
Exchange on a monthly basis, on such forms and in such format as the
Exchange may prescribe, a record of all purchases and sales effected
in stocks in which he is registered for any customer account not
prohibited under section (a).
\21\In addition, Rule 113(c), Supplementary Material .10, which
requires specialists to submit weekly reports on Form SPA, is being
deleted.
\22\Telephone conversation between Don Siemer, Director, Market
Surveillance Division NYSE, and Cheryl Evans Dunfee, Staff Attorney,
Division of Market Regulation, Commission, February 9, 1994.
---------------------------------------------------------------------------
In this regard, we note that the revised rule, although decreasing
the frequency of specialist reports, requires all purchases and sales
in specialty stocks to be reported to the Exchange. The Commission
believes that the changes to Rule 113(c) could facilitate transactions
in securities in accordance with Section 6(b)(5) of the Act by
requiring specialists to spend less time on compiling and reporting
activities without compromising the information available to the NYSE
to adequately surveil its markets.
E. Member Proprietary and On-Floor Trading
Rules 107A and B govern Registered Competitive Market Makers
(``RCMMs''). A RCMM is an individual who may initiate trades for his
own account or for the account of his member organization or who may
execute orders as broker for the purchase or sale of stock which has
been left with him for execution by his member or any other member
organization. A RCMM may initiate such trades on the Floor and is
expected to trade in certain market situations on the other side of the
market imbalance.\23\ The Exchange is making a number of changes to
Rules 107A and B to facilitate the contribution of RCMMs to the NYSE
market.
---------------------------------------------------------------------------
\23\All RCMM purchases and sales on the Exchange shall
constitute a course of dealings reasonably calculated to contribute
to the maintenance of price continuity with reasonable depth, and to
the minimizing of the effects of any temporary disparity between
supply and demand. At the request of any Floor Official, a RCMM
shall make a bid or offer for his own account or for the account of
his member organization in order to contribute to the maintenance of
a fair and orderly market. All purchases and sales of any stock on
the Exchange by a RCMM for his own account or the account of his
member organization shall be effected in a reasonable and orderly
manner in relation to the condition of the general market and the
market in such stock. See Rule 107B (3), (4) and (5).
---------------------------------------------------------------------------
1. Rule 107A(2)(a): Requirements (RCMM)
Rule 107A(2)(a) currently requires that an RCMM be able to
establish that he can meet, at all times, with his own liquid assets, a
minimum net capital requirement of $25,000 over and above any and all
other federal and or Exchange capital requirement to which he may be
subject. The Exchange is increasing that amount to $100,000, and making
the $100,000 inclusive of all other federal and/or Exchange capital
requirements to which he may be subject, unless federal or Exchange
capital rules require a greater amount. The Exchange asserts that the
$100,000 capital requirement is a reasonable figure in today's markets
which are characterized by greater trading volume and volatility than
existed when the $25,000 figure was first specified in 1977.
The Commission agrees that an increase in RCMM capital requirements
is appropriate in light of significant trading volume increases in the
last 15 years. In response to price and trading volume increases, the
Commission, in 1992, increased the federal minimum net capital
standards for broker-dealers, market makers, and certain dealers, in
order to provide greater investor protection. The Commission,
therefore, believes that this increase in the RCMM aggregate minimum
capital requirement will serve to protect investors and the public
interest in accordance with Section 6(b)(5) of the Act.
2. Rule 107A(3): Voluntary Withdrawal of Registration
Rule 107A(3) currently provides that a RCMM may withdraw his
registration as such upon no less than 10 days written notice of such
withdrawal given to the Exchange. The Exchange is amending Rule 107A(3)
to state that a RCMM may withdraw his registration by giving notice to
the Market Surveillance Division and such withdrawal shall become
effective immediately on the giving of the notice. The Exchange also is
prohibiting an RCMM from re-entering the Exchange market as an RCMM for
six months after withdrawing his registration.
The Exchange states that it does not believe it is necessary to
require 10 days notice of withdrawal. The Exchange believes that there
is no reason for RCMMs to be prevented from immediately withdrawing
from the marketplace as long as RCMMs are not able to immediately re-
enter the marketplace. The Exchange states that the re-entry limitation
will ensure that RCMM withdrawal is not based upon transitory
events.\24\
---------------------------------------------------------------------------
\24\Telephone conversation between Don Siemer, Director, Market
Surveillance Division, NYSE and Cheryl Evans Dunfee, Attorney,
Exchange Branch, Division of Market Regulation, Commission, March
30, 1994.
---------------------------------------------------------------------------
The Commission agrees that there is no reason to prevent RCMMs from
immediately withdrawing from their RCMM status as long as they are
prevented from re-entering as an RCMM for six months. As noted above,
RCMMs have certain obligations to the market and as a result receive
the benefits from their status as a market maker. Because of their
obligations as a market maker, the Commission believes that it is
appropriate to prevent RCMMs from re-entering the Exchange market as an
RCMM for a six month period after their withdrawal. Without such a
requirement, RCMMs could easily avoid their market obligations by
withdrawing during volatile market conditions and then re-entering the
market soon thereafter. The Commission also believes that the need for
the six month re-entry bar outweighs any burden on competition that
such a bar would impose in accordance with Section 6(b)(8) of the Act
because it assures that RCMMs are adequately fulfilling their market
making obligations required under the Act.
3. Dealings of Registered Competitive Market-Makers Rule 107B(7)
The Exchange states that it has informed RCMMs that it would be
desirable for them to respond, on a monthly average basis, to at least
one market imbalance ``call-in'' as disseminated electronically on the
floor.\25\ The Exchange, therefore, is adding new Rule 107B(7) to
provide that a RCMM shall respond, on a monthly averaged basis, to at
least one market imbalance call-in notification disseminated
electronically on the floor for each trading session that he is on the
floor. It would also provide that a RCMM shall not be required to
respond to more than three individual call-ins, in the aggregate, by
Floor Officials or brokers, for any trading session that he is on the
floor. Notwithstanding the aforementioned, the rule makes clear that a
RCMM shall be required to respond to as many call-ins as required by
market circumstances and needs. The Exchange states that it is
proposing Rule 107B(7) as a means of strengthening an RCMM's
affirmative commitment to providing additional depth and liquidity to
the market as may be needed.
---------------------------------------------------------------------------
\25\The Exchange states that these call-ins are popularly
referred to as ``bluelight call-ins.''
---------------------------------------------------------------------------
The Commission does not believe that it is unreasonable for the
NYSE to set forth specific guidelines for call-ins for RCMMs. Requiring
RCMMs to respond to at least one but not more than three call-ins for
any trading session will help to ensure adequate market depth and
liquidity when needed. Most important, however, is the rule's
requirement that RCMMs should be required to respond to all call-ins
that are necessary under market circumstances. This should ensure that
RCMMs are using their market making obligations to provide liquidity to
the market when needed, consistent with Sections 6(b)(5) and 11(b) of
the Act.
4. Rule 107B(7).10(ii) and 107B(7).30:
Rule 107B(7).10(ii) currently provides that when two or more RCMMs,
or one or more RCMMs and the specialist, are purchasing or supplying
stock, they may not, in the aggregate, supply or take more than 50% of
the stock bid for or offered. The Exchange is deleting the reference to
the specialist's participation with respect to the aggregated 50%
limitation. In conjunction with this change, the Exchange is also
eliminating the requirement that RCMMs report instances when they trade
along with a specialist.\26\
---------------------------------------------------------------------------
\26\Specifically, the Exchange is deleting the language in Rule
107B(7).30 which requires a RCMM to submit a Form 81/RCMM Report to
the Exchange whenever having purchased or sold pursuant to paragraph
B(4) he also effects a transaction on the other side of the market
at the same price with a specialist on the same day.
---------------------------------------------------------------------------
In the Exchange's view, possible regulatory concerns that a
specialist and one or more RCMMs may be improperly trading in collusion
with each other can be effectively addressed by review of audit trail
data and other surveillance activities. The Exchange believes that it
is not necessary to place an arbitrary limitation on trading that may
provide liquidity to the market and which is otherwise permissible in
terms of specialist trading regulations.\27\
---------------------------------------------------------------------------
\27\Telephone conversation between Don Siemer, Director, Market
Surveillance Division, NYSE, and Cheryl Dunfee, Attorney, Division
of Market Regulation, Commission, March 30, 1994.
---------------------------------------------------------------------------
The Commission agrees that the trading restrictions in Rule
107B(7).10(ii) and the reporting obligations in Rule 107B(7).30 are
unnecessary in view of Exchange surveillance capabilities. Moreover,
specialists would continue to have to comply with specialist
obligations under NYSE Rule 104 and the requirements under Section
11(b) and Rule 11(b)(1) thereunder.
5. Rule 107B(7).60
Rule 107B(7).60 currently provides that, with respect to orders
received by the specialist by means of the Exchange's SuperDot
System,\28\ the specialist may request a Floor Official to consider
whether to call in an RCMM to trade with an order imbalance. In
particular, Rule 107B(7).60 states that, with respect to orders
received by a specialist via the SuperDot system, the specialist may
request that a Floor Official consider whether to call upon RCMMs to
discharge obligations as set forth in subparagraph .10(i).\29\ The
Exchange is deleting Rule 107B(7).60. The Exchange states that it is
unnecessary in light of other call-in provisions in Rule 107.\30\
---------------------------------------------------------------------------
\28\The SuperDot system is an electronic order-routing system
that enables member firms to quickly transmit market and limit
orders in all NYSE-list securities directly to the specialist post
where the securities are traded, or to the member firm's booth.
After the order has been executed in the action market, a report of
execution is returned directly to the member firm office over the
same electronic circuit that brought the order to the trading floor,
and the execution is submitted directly to the comparison system.
\29\Subparagraph .10(i) states that each RCMM shall comply with
the provisions of paragraphs B (2), (3), (4) and (5) which govern
dealings by RCMMs. Subparagraph .10(i) describes, for example, what
actions should be taken by an RCMM who is called upon by a Floor
Broker holding an unexecuted customer order.
\30\According to the NYSE, a specialist always has the ability
to go to a floor official and ask for an RCMM. The Exchange believes
that the general call-in provisions under Rule 107 are sufficient.
Telephone conversation between Don Siemer, Director, Market
Surveillance Division, NYSE, and Cheryl Evans Dunfee, Attorney,
Commission, February 9, 1994.
---------------------------------------------------------------------------
The Commission agrees that Rule 107B(7).60 is unnecessary as other
call-in provisions, such as the call-in requirements of Rule 107B(4),
are sufficient. This change will serve to eliminate unnecessary
regulations, streamline market regulation, and thereby remove
impediments to and perfect the mechanism of a free and open market in
accordance with Section 6(b)(5) of the Act.
6. Rule 110: Congregating in, Dominating Market and Effecting Purchases
or Sales in Orderly Manner
Rule 110 currently provides that members who are acting as
Competitive Traders (``CTs'')\31\ on the floor of the Exchange and who
desire to purchase or sell stock for accounts in which they have an
interest: (1) shall not congregate in a particular stock and
individually or as a group intentionally or unintentionally dominate
the market in that stock; (2) shall not effect such purchases or sales
except in a reasonable and orderly manner and shall not be conspicuous
in the general market or in the market in a particular stock.
---------------------------------------------------------------------------
\31\A member who is registered as a CT may initiate transactions
while on the Floor for an account in which he has an interest. A CT
must be approved for such trading by the Exchange.
---------------------------------------------------------------------------
Supplementary Material .10 to Rule 110 provides that, when
establishing, increasing or liquidating a position, no more than three
CTs may be in the trading crowd for one stock at the same time unless
an increase is approved in writing by a Floor Director whenever he
believes that the presence of a larger number of CTs would be
constructive. It further provides that this limitation includes brokers
who are attempting to execute orders for CTs; in such cases, brokers
must announce publicly that they are so acting for CTs.
The Exchange is deleting Supplementary Material .10 because it
believes this provision is unnecessary given the relatively small
number of CTs active on the floor and the low level of their overall
activity. The Commission agrees that, given current market conditions
and the other market making obligations on the CT, that this provision
is not necessary and its deletion is consistent with removing
impediments to a free and open market in accordance with Section
6(b)(5) of the Act.
7. Rule 111(b)(1): Competitive Traders
Rule 111(b)(1) currently provides that a member who is registered
as a CT is required to establish and maintain minimum capital of
$25,000 over and above any other Federal or Exchange capital
requirements. The Exchange is revising the CT capital requirement to
parallel the change to the RCMM capital requirement in Rule 107A,
discussed above. As revised, Rule 111(b)(1) would provide that a member
who is registered as a CT must establish and maintain minimum capital
of $100,000, including all federal and Exchange capital requirements,
unless federal or Exchange capital rules require a greater amount.
As with Rule 107A(2)(a), the Commission agrees that the $100,000
capital requirement is a reasonable figure in today's markets which
have greater trading volume than when the $25,000 figure was enacted in
1965. The Commission believes that this increase in CT aggregate
minimum capital requirement will serve to protect investors and the
public interest in accordance with Section 6(b)(5) of the Act.
III. Conclusion
The Commission has reviewed carefully the Exchange's proposed rule
change and concludes that, for the above stated reasons, the proposal
is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange.
The Commission believes that the proposals developed by the Exchange's
Market Regulation Review Committee appropriately balance the competing
concerns of various Exchange constituencies in a manner consistent with
just and equitable principles of trade. Given the significant role
played by the NYSE as a primary market and the dynamic nature of
competitive forces shaping the national market system, the Commission
supports the NYSE's efforts to review the structure of market trading
regulation in order to have an efficient and meaningful regulatory
program consistent with the protection of investors and the public
interest.
Accordingly, based upon the aforementioned factors, the Commission
finds that the Exchange's proposal discussed above is consistent with
the Act, and in particular with sections 6(b)(5), 6(b)(8), 11(b) and
11A(a)(1) of the Act\32\ and the rules and regulations thereunder
applicable to a national securities exchange.
---------------------------------------------------------------------------
\32\15 U.S.C. Sec. 78f(b)(5), 78f(b)(8), 78k(b), 78k-1(a)(1)
(1988).
---------------------------------------------------------------------------
The Commission finds good cause for approving Amendments No. 1, 2
and 3 prior to the thirtieth day after the date of publication of
notice of filing thereof. Amendments No. 1, 2 and 3 appropriately
deleted certain proposed rule revisions from the proposal. Amendment
No. 2 made additional clarifying and technical changes. For example,
Amendment No. 2 clarified that the new capital requirements for RCMMs
and CTs must accommodate other federal or exchange rules concerning
capital requirements for those parties. Amendment No. 2 also clarified
that RCMMs would continue to have the obligation to respond to call-ins
as dictated by market circumstances, notwithstanding that, in normal
circumstances, they need respond only to three individual call-ins.
Finally, Amendment No. 2 codified that a member who withdrew as a RCMM
must wait six months before re-registering as a RCMM to ensure that
RCMMs do not withdraw based on short term market conditions. The
Commission believes these amendments are clarifying and strengthen the
proposal from a regulatory perspective.
Interested persons are invited to submit written data, views and
arguments concerning Amendments No. 1, 2, and 3 to the proposed rule
change. 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 changes that are filed with the Commission, and all
written communications relating to Amendments No. 1, 2 or 3 between the
Commission and any persons, 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 in the Commission's Public
Reference Section, 450 Fifth Street NW., Washington, DC 20549. Copies
of such filing will also be available at the principal office of the
NYSE. All submissions should refer to File No. SR-NYSE-90-10 and should
be submitted by July 15, 1994.
It Is Therefore Ordered, pursuant to section 19(b)(2)\33\ of the
Act, that the proposed rule change (SR-NYSE-90-10) be, and hereby is
approved, including Amendments No. 1, 2 and 3 on an accelerated basis.
---------------------------------------------------------------------------
\33\15 U.S.C. Sec. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\34\
---------------------------------------------------------------------------
\34\17 C.F.R. 200.30-3(a)(12) (1992).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-15361 Filed 6-23-94; 8:45 am]
BILLING CODE 8010-01-M
