[Federal Register Volume 60, Number 145 (Friday, July 28, 1995)]
[Notices]
[Pages 38872-38874]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18601]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36004; File No. SR-BSE-95-13]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Boston
Stock Exchange, Incorporated Relating to a Nine Month Extension of a
Pilot Program for Stopping Stock in Minimum Variation Markets
July 21, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on July 12,
1995, the Boston Stock Exchange, Incorporated (``BSE'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III 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.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange seeks a nine month extension of its pilot program
regarding stopping stock in minimum variation markets.\1\
\1\ The Commission initially approved the BSE's proposal to
codify procedures for stopping stock and to establish a separate
pilot program for stopping stock in minimum variation markets in
Securities Exchange Act Release No. 35068 (Dec. 8, 1994), 59 FR
64717 (Dec. 15, 1994) (File No. SR-BSE-94-09) (``1994 Pilot Approval
Order''). The Commission subsequently extended the BSE's pilot
program in Securities Exchange Act Release No. 35474 (Mar. 10,
1995), 60 FR 14471 (Mar. 17, 1995) (File No. SR-BSE-95-03) (``March
1995 Pilot Approval Order'').
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Propose 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 purpose of the proposed rule change is to extend the Commission
approved pilot provision regarding the execution of stopped orders in
minimum variation markets for an additional nine months. The pilot
provision expires on July 21, 1995, and this proposal would extend the
pilot until April 21, 1996.
The pilot rule requires the execution of stopped orders in minimum
variation markets (a) after a transaction takes place on the primary
market at the stop price or higher in the case of a buy order (lower in
the case of a sell order), (b) after the applicable Exchange share
volume is exhausted or (c) at any time prior to (a) or (b) if filled at
an improved price.\2\ In no event will a stopped order be executed at a
price inferior to the stop price. The Exchange states that, as in the
case of greater than minimum variation markets, the proposed rule will
continue to benefit customers because they might receive a better price
than the stop price, yet it also protects prior-entered same-price
limit orders on the book.
\2\ The Commission notes that, in certain narrow circumstances,
a BSE specialist may execute a stopped order before limit order
interest on the Exchange is exhausted. To do so, however, the
specialist must make the determination that such action is
necessary, in his or her professional judgment, to prevent an
execution that would create a new high or new low, a double up or
down tick or an out-of-range print.
Moreover, the specialist must follow certain procedures
designeed to ensure that the BSE's limit order book is adequately
protected. First, the specialist must split any contra-side order
flow between the stopped order and limit orders with priority at the
better price. In addition, if the specialist elects to fill a
stopped order at a price better than the stop price before it is
otherwise due an execution, he or she must allocate an equal number
of shares, up to a maximum of 500 shares, to orders at that price on
the limit order book. Finally, if any portion of a stopped order
remains unexecuted at the end of the trading day, the specialist
must fill such order in its entirety and, as described above,
allocate an appropriate number of shares to the book.
---------------------------------------------------------------------------
2. Statutory Basis
The proposed rule change is consistent with Section 6(b)(5) of the
Act in that it furthers the objectives to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest; and is not designed to
permit unfair discrimination between customers, issuers, brokers or
dealers.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either soliciteed or received.
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, N.W., 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
[[Page 38873]]
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,
N.W., Washington, D.C. 20549. Copies of such filing will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-BSE-95-13 and
should be submitted by August 18, 1995.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
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 Section 6(b) \3\ and Section 11(b)
\4\ of the Act. Specifically, 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 interest. The Commission also believes
that the proposed rule change is consistent with the requirement of
Section 11(b), and Rule 11b-1 thereunder.\5\ that specialist
transactions must contribute to the maintenance of fair and orderly
markets.
\3\ 15 U.S.C. 78f(b) (1988 & Supp. V 1993).
\4\ 15 U.S.C. 78k (1988).
\5\ 17 CFR 240.11b-1 (1994).
---------------------------------------------------------------------------
The Commission historically has been concerned that the practice of
stopping stock may compromise the specialist's fiduciary duty to
unexecuted customer orders on the limit order book.\6\ The Commission,
however, has approved the practice in limited circumstances where the
potential harm is offset by the improvement in the marketplace
liquidity and the possibility of price improvement for the customer.
Accordingly, those exchanges with stopping stock rules,\7\ including
the BSE, require their specialists to reduce the spread between the
consolidated best bid and offer or, in a minimum variation market, to
add size at the inside quote.\8\ The Commission believes that such a
requirement strikes an appropriate balance between the interests of
various market participants. Moreover, by encouraging accurate
representation of the trading interest held by the specialist, it also
facilitates greater transparency in the securities market.
\6\ See e.g., SEC. Report of the Special Study of the Securities
Markets of the Securities and Exchange Commission, H.R. Doc. No. 95,
88th Cong., 1st Sess. Pt 2 (1963). When stock is stopped, book
orders on the opposite side of the market that are entitled to
immediate execution lose their priority. If the stopped order then
receives a better price, limit orders at the stop price are bypassed
and, if the market turns away from that limit, may never be
executed.
\7\ See NYSE Rule 116.30; American Stock Exchange (``Amex'')
Rule 109; and Article XX, Rule 37 of the Chicago Stock Exchange
(``CHX'') Rules. The relevant NYSE, Amex, and CHX pilot programs
permit specialists to stop stock in minimum variation markets. See
also Securities Exchange Act Release No. 34614 (Aug. 30, 1994), 59
FR 46280 (Sept. 7, 1994) (File No. SR-Phlx-93-41) (approving a
Philadelphia Stock Exchange (``Phlx'') proposal to codify its
procedures for stopping stock into Equity Floor Procedure Advice A-
2, Stopping Orders).
\8\ See Interpretation .50 of Section 38(d), Chapter II of BSE's
Rules.
---------------------------------------------------------------------------
Despite these potential benefits, the Commission continues to be
concerned that, in minimum variation markets, limit orders on the
specialist's book may be bypassed when stopped orders are executed at a
better price.\9\ These concerns are particularly applicable to the
BSE's pilot because of the Exchange's unique provisions regarding the
execution of stopped orders at an improved price before pre-existing
limit order interest at that price is exhausted.\10\
\9\ The NYSE, Amex, and CHX pilot programs for stopping stock in
minimum variation markets raise concerns with respect to bypassing
of limit orders on the opposite side of the market from the stopped
order and not of limit orders on the same side. The BSE's pilot
program, however, raises concerns with respect to limit orders on
both sides of the specialist's book because of the special provision
in the BSE's pilot program regarding the execution of stopped orders
at an improved price before the pre-existing limit orders. The NYSE,
Amex, and CHX pilot programs have been extended until October 21,
1995, to allow the Commission to determine whether the benefits of
the practice substantially outweigh the costs thereof for permanent
approval purposes. For further discussion of the NYSE, Amex and CHX
pilot programs and the Commission's rationale for extending them
until October 21, 1995, see Securities Exchange Act Release Nos.
36009 (July 21, 1995), (File No. SR-NYSE-95-26); 36010 (July 21,
1995), (File No. SR-Amex-95-27); and 36011 (July 21, 1995) (File No.
SR-CHX-95-17).
\10\ See supra, note 2. Because the pilot programs on the NYSE,
Amex, and CHX do not have a similar provision as the BSE regarding
the execution of stopped orders before pre-existing limit orders and
the BSE has limitations on its ability to surveil compliance with
procedures when the stopped orders are executed before pre-existing
limit orders, the BSE pilot program is only being extended for nine
months.
---------------------------------------------------------------------------
As a result, in the orders approving the BSE's pilot
procedures,\11\ the Commission asked the Exchange to study the effects
of stopping stock in a minimum variation market. Specifically, the
Commission requested information on (1) the number of orders stopped in
minimum variation markets; (2) the average size of such orders; and (3)
the percentage of stopped orders that received price improvement. In
addition, the Commission encouraged the BSE to develop an appropriate
measure of the pilot program's impact on limit orders, particularly
those limit orders on the specialist's book ahead of the stopped stock.
\11\ See 1994 Pilot Approval Order and March 1995 Pilot Approval
Order, supra, note 1.
---------------------------------------------------------------------------
Although the BSE has provided the Commission with the requested
information on the number of orders stopped, their average size, and
the percentage of such orders that received price improvement, the BSE
has not yet developed a measure of the pilot's impact on limit orders.
The Commission believes that the BSE needs to submit comprehensive data
on the operation of this rule and, in particular, on the impact on
limit orders on the specialist's book before the Commission can
evaluate fairly the BSE's use of its pilot procedures. To allow such
information to be gathered and reviewed, the Commission believes that
it is reasonable to extend the pilot program until April 21, 1996.
During this extension, the Commission expects the BSE to respond fully
to the concerns set forth below.
Accordingly, before the Commission would consider another extension
or permanent approval of the Exchange's pilot program, the BSE must
submit comprehensive quantitative data on the impact of stopping stock
in minimum variation markets on customer limit orders on the
specialist's book and demonstrate that the Exchange has the
technological capabilities necessary to monitor specialist compliance
with the pilot procedures.
The Commission requests that the BSE calculate data based on twenty
stocks chosen by the Commission during three different days showing (1)
how many orders and shares were stopped in each stock, (2) the average
number of limit orders and the average number of shares on the book
ahead of the stopped stock, (3) how many orders and shares received
price improvement, and (4) how many orders and shares were on the limit
order book at the time each order was stopped and the number of such
limit orders and shares that were not executed by the end of the
trading day. The Exchange should provide the data for each stock for
each day, aggregate figures for each stock for all three days, and for
all stocks aggregate numbers for each day and for all three days. The
Commission requests that the BSE submit a report describing
[[Page 38874]]
its findings on the above matters by November 17, 1995.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice of filing thereof. This will permit the pilot to continue on an
uninterrupted basis. In addition, the procedures the Exchange proposes
to continue using are the identical procedures that were published in
the Federal Register for the full comment period and were approved by
the Commission.
It Is Therefore Ordered, pursuant to Section 19(b)(2) \12\ that the
proposed rule change (SR-BSE-95-13) is hereby approved on a pilot basis
until April 21, 1996.
\12\ 15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
\13\ 17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18601 Filed 7-27-95; 8:45 am]
BILLING CODE 8010-01-M
