[Federal Register Volume 62, Number 148 (Friday, August 1, 1997)]
[Notices]
[Pages 41456-41457]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20373]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38874; File No. SR-NYSE-96-33]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Granting Approval To Proposed Rule Change Relating to the
Execution of Odd-Lot Orders
July 25, 1997.
I. Introduction
On November 25, 1996, 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 price odd-lot transactions
according to the next round-lot execution to occur on the Exchange
under certain circumstances.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on February 19, 1997,\3\ and no comments were received. This
order approves the proposal.
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\3\ Securities Exchange Act Release No. 38267 (Feb. 11, 1997),
62 FR 7488 (Feb. 19, 1997).
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II. Description
Currently, odd-lot market orders are executed in the odd-lot system
against the specialist in that stock at a price based on the ``best
pricing quote'' (``BPQ''). This is either the NYSE quote or the best
quote from another Intermarket Trading System (``ITS'') market center.
(A buy odd-lot market order is executed at the offer price, and a sell
odd-lot market order is executed at the bid price.) However, in
situations where the quote for a stock does not qualify as a valid
quote, either because it is designated as a non-firm quote or it fails
a system validation check because it exceeds certain parameters, the
current procedure prices odd-lot executions using the last sale price
in the round lot market.\4\ The Exchange believes, however, that this
may not reflect the current market for the stock because the quote
condition (i.e. a non-firm or a gapped quote) strongly suggests that
the market is likely to move away from that last price. In these
situations, the Exchange believes the current procedure may
disadvantage customers or the specialist.
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\4\ See NYSE Rule 124.60 (detailing the circumstances when the
ITS best bid or offer will not be utilized).
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In instances when quotation information is not available or the
security has been determined to be in ``non-firm mode,'' \5\ the NYSE
proposes to price odd-lot orders by utilizing the price of the next
Exchange round sale or such other price deemed appropriate under
prevailing market conditions by the member organization designated by
the Exchange to act as a market maker for odd-lot orders. In instances
where the quote in a security does not meet the Exchange's odd-lot
system guidelines, the NYSE proposes to price odd-lot orders by
utilizing the price of the next Exchange round sale or the next
Exchange quote that is within the odd-lot system guidelines (whichever
occurs
[[Page 41457]]
first) or such other price deemed appropriate under prevailing market
conditions by the member organization designated by the Exchange to act
as a market maker for odd-lot orders.\6\ The Exchange believes this
would provide more appropriate pricing of odd-lot orders as it would
reflect actual round-lot market prices at the time the odd-lot orders
are executed.
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\5\ The Exchange considers a bid or offer as firm when the
members of the market center disseminating the bid or offer are not
relieved of their obligations with respect to such bid or offer
under paragraph (c)(2) of Rule 11Ac1-1 pursuant to the ``unusual
market'' exception of paragraph (b)(3) of Rule 11Ac1-1. See 17 CFR
240.11Ac1-1(b)(3); 17 CFR 240.11Ac1-1(c)(2).
\6\ These uncodified guidelines currently provide for the
following maximum valid spread ranges:
Common stock for prices less than or equal to $50, the valid
spread is 1 point
for prices between $50 1/64 and $100, the valid spread is 1\3/4\
points
for prices greater than $100, the valid spread is 2\1/2\ points
Preferred stock:
for prices less than or equal to $50, the valid spread is 2
points
for prices between 50\1/64\ and 100, the valid spread is 2\1/4\
points
for prices greater than $100, the valid spread is 2\1/2\ points
Spread between quote and last sale must not exceed:
prices less than or equal to $10, the valid spread is \3/8\
point
prices between 10\1/8\ and $25, the valid spread is \1/2\ point
prices between 25\1/8\ and $40, the valid spread is \5/8\ point
prices greater than $40, the valid spread is 2\1/2\ points
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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 section 6(b).\7\ Specifically, the
Commission believes the proposal is consistent with the section 6(b)(5)
\8\ requirements that the rules of an exchange be designed to remove
impediments to and perfect the mechanism of a free and open market, to
facilitate transactions in securities and, in general, to protect
investors and the public interest.\9\
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
\9\ In approving this rule, the Commission notes that it has
considered the proposal's impact on efficiency, competition, and
capital formation, consistent with section 3 of the Act. 15 U.S.C.
Sec. 78c(f).
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The Commission believes it is adequate for the NYSE to price
standard odd-lot market orders at the price of the next Exchange round-
lot sale when the BPQ is unavailable. Although the current pricing
algorithm provides investors with more advantageous prices in a
steadily declining market than the proposed algorithm, utilizing the
next Exchange round-lot sale price when the BPQ is unavailable is a
reasonable choice by the Exchange that is not inconsistent with the
Act. The proposal continues to provide procedures that facilitate the
execution of odd-lot orders when use of the ITS quote may not be
appropriate.
The Commission also believes it is appropriate for the Exchange to
price odd-lot orders by utilizing the price of the next Exchange round-
lot sale or the next Exchange quote that is within the odd-lot system
guidelines (whichever occurs first) in instances where the quote in a
security does not meet the Exchange's odd-lot system guidelines. The
Commission has previously found that it is appropriate for the Exchange
to impose certain, limited prerequisites on quotes from other market
centers before incorporating such quotes into the Exchange's odd-lot
pricing system.\10\ The Commission stated that such limitations help
protect the automatic execution features of the Exchange's odd-lot
pricing system against the inclusion of aberrant quotations.\11\
Similarly, the maximum valid spread parameters, as drafted, should help
to exclude stale quotations from the odd-lot system. If the Exchange
chooses to narrow these parameters, it must file the proposed change
with the Commission pursuant to Section 19(b) of the Act.\12\
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\10\ NYSE Rule 124 generally provides that odd-lot market orders
will be executed at the price of the ``adjusted ITS bid (offer)'' at
the time the order is received by the Exchange. NYSE Rule 124.60
states that a quotation in a stock from another ITS market center
will be considered if: (1) The stock is included in ITS in that
market center, (2) the size of the quotation is greater than 100
shares, (3) the bid or offer is not more than one-quarter dollar
away from the bid (offer) disseminated by the Exchange, (4) the
quotation conforms to the Exchange's requirements concerning minimum
fractional changes, (5) the quotation does not result in a ``locket
market,'' (6) the market center is not experiencing operational or
system problems with respect to the dissemination of quotation
information, and (7) the bid or offer is ``firm'' pursuant to the
Commission's and the market's rules.
\11\ Securities Exchange Act Release No. 27971 (May 2, 1990), 55
FR 19409 (May 9, 1990) (approving File No. SR-NYSE-90-60).
\12\ 15 U.S.C. 78s(b).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-NYSE-96-33) is approved.
\13\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-20373 Filed 7-31-97; 8:45 am]
BILLING CODE 8010-1-M
