[Federal Register Volume 61, Number 152 (Tuesday, August 6, 1996)]
[Notices]
[Pages 40871-40873]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19939]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37507; File No. SR-NYSE-96-18]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the New York
Stock Exchange, Inc. Relating to the Pilot for Entry of Limit-at-the-
Close Orders
July 31, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 1, 1996, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities and exchange Commission
(``SEC'' or ``Commission'') the proposed rule change and on July 31,
1996, filed Amendment No. 1 to the proposed rule change,\3\ 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, and simultaneously publishing an order granting accelerated
approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from James E. Buck, Senior Vice President and
Secretary, NYSE to Michael Walinskas, Senior Special Counsel, SEC,
dated July 30, 1996.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change would extend the current pilot \4\ for the
entry of limit-at-the-close (``LOC'') orders to offset a published
market-at-the-close (``MOC'') order imbalance of 50,000
[[Page 40872]]
shares or more in all stocks for which MOC order imbalances are
published.
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\4\ See Securities Exchange Act Release No. 35854 (June 16,
1995), 60 FR 32723.
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II. Self-Regulatory Organization's Statement of the Purpose 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 IV below and is set forth in Sections A,
B, and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
A LOC order is one that is entered for execution at the closing
price, provided that the closing price is at or within the limit
specified. Currently, LOC orders may be entered only to offset
published imbalances of market-on-close (``MOC'') orders.\5\ On
expiration days,\6\ MOC imbalances of 50,000 shares or more: (1) In the
so-called ``pilot'' stocks; \7\ (2) in stocks being added to or dropped
from an index; and (3) in any other stock with the approval of a Floor
Official must be published on the tape as soon as practicable after
3:40 p.m.\8\ On non-expiration days, the same listed types of
imbalances must be published as soon as practicable after 3:50 p.m. LOC
orders must be entered between 3:40 and 3:55 p.m. on expiration days
and between 3:50 and 3:55 p.m. on non-expiration days. On expiration
days, LOC orders are irrevocable once entered, except in the case of
legitimate error.\9\ On non-expiration days LOC orders are irrevocable
after 3:55 p.m., except in the case of legitimate error.\10\
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\5\ A MOC order is a market order to be executed in its entirety
at the closing price on the Exchange. See NYSE Rule 13.
\6\ 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'').
\7\ 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.
\8\ In Securities Exchange Act Release No. 36404 (October 20,
1995), 60 FR 55071, the Commission approved an amendment to the
pilot program relating to MOC orders to allow imbalance publications
of 50,000 shares or more to be made not only in the pilot stocks,
but also in stocks being added to or dropped from an index, and in
any other stock with the approval of a Floor Official. Telephone
conversation between Donald Siemer, Director of Market Surveillance,
NYSE, and Elisa Metzger, Special Counsel, SEC, on July 29, 1996.
\9\ Telephone conversation between Donald Siemer, Director of
Market Surveillance, NYSE, and Elisa Metzger, Special Counsel, SEC,
on July 29, 1996.
\10\ Id.
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In June 1995, the permitted use of LOCs was expanded from five
stocks to all stocks that have published MOC order imbalances of 50,000
shares or more in the hope that this would stimulate use of this order
type.\11\ LOCs were approved by the SEC on a pilot basis, and the pilot
is scheduled to expire at the end of July. To date, the use of LOCs has
remained limited. LOCs are restricted by time of entry and by the fact
that they must offset published MOC imbalances. The Exchange is
proposing to extend the LOC pilot for an additional year.\12\ The
Exchange continues to believe that the LOC order type may prove to 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.\13\
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\11\ Telephone conversation between Betsy Minkin, Regulatory
Development Project Manager, NYSE, and Elisa Metzger, Special
Counsel, SEC, on July 31, 1996.
\12\ Amendment No. 1 withdrew a proposed amendment to the LOC
pilot which would permit the entry of LOC orders at any time during
the trading day up to 3:40 p.m. on expiration days, and 3:50 p.m. on
non-expiration days.
\13\ 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, Special Counsel, SEC, on July 29, 1995.
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2. Statutory Basis
The basis under the Act for the proposed rule change is the
requirement under Section 6(b)(5) that an Exchange have rules that are
designed to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
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 NW., Washington, DC 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 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. 552, will be available for inspection and copying in the
Commission's Public Reference Room at 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to File No.
SR-NYSE-96-18 and should be submitted by August 27, 1996.
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, the requirements of Section 6 \14\ and the rules and
regulations thereunder. Specifically, the Commission finds that the
proposed rule change is consistent with the Section 6(b)(5) \15\
requirements that the rules of an exchange be designed to promote just
and equitable principals of trade, to remove impediments to, and
perfect the mechanism of a free and open market and, in general, to
protect investors and the public interest.
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\14\ 15 U.S.C. 78f.
\15\ 15 U.S.C. 78f(b)(5).
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As noted in the Commission's approval of the current pilot, the
self-regulatory organizations have instituted certain safeguards to
minimize excess market volatility that may arise from the
[[Page 40873]]
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 Commission continues to believe preliminarily that LOC orders
should provide 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
otherwise 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.\16\
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\16\ 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
canceling 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. \17\ During
the pilot program, the Commission expects the NYSE to monitor the
effectiveness of its LOC order procedures.
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\17\ The pilot program for MOC procedures expires on October 31,
1996. See Securities Exchange Act Release No. 36404 (October 20,
1995), 60 FR 55071.
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The Commission therefore requests that the NYSE submit a report to
the Commission, by May 31, 1997, describing its experience with the
pilot program. At a minimum, this report should contain the following
data for each expiration day: (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 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, 1997,
as a proposed rule change pursuant to Section 19(b) of the Act.
V. Conclusion
The Commission finds good cause for approving the rule filing prior
to the thirtieth day after the date of publication of the notice of
filing thereof in the Federal Register, in that accelerated approval is
appropriate to extend the pilot program until July 31, 1997 without
interruption.
It is therefore ordered, pursuant to Section 19(b)(2) \18\ of the
Act, the proposed rule change, including Amendment No. 1, extending the
pilot for the entry of LOC orders until July 31, 1997, be and hereby is
approved.
\18\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority. \19\
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19939 Filed 8-5-96; 8:45 am]
BILLING CODE 8010-01-M
