[Federal Register Volume 59, Number 46 (Wednesday, March 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5396]
[[Page Unknown]]
[Federal Register: March 9, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33706; File No. SR-NYSE-92-37]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Amendment No. 1 and No. 2 to
Proposed Rule Change Relating to Entry of Limit at the Close Orders
March 3, 1994.
I. Introduction
On December 23, 1992, 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 NYSE Rule 13 to permit
the entry of limit at the close (``LOC'') orders to offset published
imbalances of market at the close (``MOC'') orders. On September 8,
1993, the NYSE submitted Amendment No. 1 to the proposed rule change in
order to conform the filing with the recent amendments to the
Exchange's auxiliary closing procedures.\3\ On September 29, 1993, the
NYSE submitted Amendment No. 2 to the proposed rule change in order to
clarify certain terms used in the original filing.\4\
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1991).
\3\See letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Diana Luka-Hopson, Branch Chief, Division of
Market Regulation, SEC, dated September 3, 1993 (``Amendment No.
1'').
\4\See letter from Donald Siemer, Director, Market Surveillance,
NYSE, to Diana Luka-Hopson, Branch Chief, Division of Market
Regulation, SEC, dated September 29, 1993 (``Amendment No. 2'').
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The proposed rule change, together with Amendments No. 1 and No. 2,
was published for comment in Securities Exchange Act Release No. 32994
(September 30, 1993), 58 FR 52126 (October 6, 1993). No comments were
received on the proposal. This order approves the proposed rule change,
including both amendments, contingent upon the NYSE submitting to the
Commission a satisfactory Information Memorandum.
II. Description of the Proposal
NYSE rule 13 currently defines an ``at the close order'' as a
market order to be executed in its entirety at the closing price. The
Exchange proposes to amend this rule to provide that an ``at the close
order'' also will include a limit order for execution at the closing
price. The NYSE proposal will enable a member firm to enter a LOC
order, pursuant to such procedures regarding time of order entry and
cancellation as the NYSE periodically will establish,\5\ only to offset
a published imbalance of MOC orders in that stock.\6\ The initial LOC
order entry and cancellation times are set forth below.
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\5\See infra, note 16.
\6\Presently, the NYSE utilizes two sets of closing procedures,
one for expiration days (as defined below) and one for all other
trading days, pursuant to which specialists may be required to
disseminate MOC order imbalances of 50,000 shares or more. Amendment
No. 2, see supra note 4, clarifies that 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'').
On expiration days, the NYSE's auxiliary closing procedures
establish a 3:40 p.m. deadline for (1) the entry of MOC orders
related to a trading strategy involving an expiring index derivative
product and 92) the cancellation or reduction of any MOC order.
Moreover, in the pilot stocks (as defined below, (see infra note 9),
the specialist must, as soon as practicable after 3:40 p.m.,
disseminate any MOC order imbalance of 50,000 shares or more;
thereafter, MOC orders in the pilot stocks may be entered only to
offset a published imbalance. See Securities Exchange Act Release
No. 32868 (September 10, 1993), 58 FR 48687 (September 17, 1993)
(File No. SR-NYSE-93-33) (approving modifications to auxiliary
closing procedures and extending pilot program until October 31,
1994). Amendment No. 1, see supra note 3, made conforming changes to
the original LOC order filing.
On other trading days, the specialist must, as soon as
practicable after 3:45 p.m., disseminate any MOC order imbalance of
50,000 shares or more in (1) the pilot stocks and (2) any stock
being added to or dropped from certain stock indexes (or, with Floor
Official approval, from other stock indexes). For non-expiration
days, a published imbalance (or the lack thereof) does not preclude
the entry or cancellation of any MOC order on either side of the
market. See Securities Exchange Act Release No. 31291 (October 6,
1992), 57 FR 47149 (October 14, 1992) (File No. SR-NYSE-92-12).
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The Exchange will modify its automated order routing system to
accept the new LOC order type, and anticipates that the necessary
system changes will be completed in spring 1994.\7\ At that time, the
NYSE will initiate LOC order entry, on a 15-month pilot basis,\8\ in
five of the so-called ``pilot stocks.''\9\ According to the NYSE, the
initial stocks will be selected based on their having a level of market
activity and trading interest that suggests LOC orders would be a
useful investment vehicle;\10\ other stocks will be added, during the
15-month period, as the NYSE gains experience with this pilot
program.\11\
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\7\The NYSE has represented that, before initiating LOC order
entry, it will submit to the Commission a letter (1) stating that
the modifications to its SuperDot system have been tested and are
fully operational and (2) informing the Commission of the start-up
date for this pilot program. Telephone conversation between Donald
Siemer, Director, Market Surveillance, NYSE, and Beth Stekler,
Attorney, Division of Market Regulation, SEC, on January 28, 1994.
\8\See letter from Donald Siemer, Director, Market Surveillance,
NYSE, to Diana Luka-Hopson, Branch Chief, Division of Market
Regulation, SEC, dated August 25, 1993.
\9\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.
\10\The NYSE has represented that, before initiating LOC order
entry, it will submit to the Commission a letter containing the
names of the five stocks. Telephone conversation between Donald
Siemer, Director, Market Surveillance, NYSE, and Beth Stekler,
Attorney, Division of Market Regulation, SEC, on January 28, 1994.
\11\The NYSE has represented that, at such time as stocks are
added to this pilot program, it will submit to the Commission a
letter containing the names of the stocks. Telephone conversation
between Donald Siemer, Director, Market Surveillance, NYSE, and Beth
Stekler, Attorney, Division of Market Regulation, SEC, on January
28, 1994. The Commission notes that the total number of pilot stocks
(as defined above, see supra note 9), and thus the maximum number of
stocks which could be selected for LOC order entry, is presently 62.
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In terms of the procedures for handling LOC orders, the NYSE
proposes to establish a 3:55 p.m. deadline for their entry. On
expiration days, LOC orders will be irrevocable after 3:40 p.m. (except
in the event of a legitimate error); on other trading days,
cancellation of LOC orders will be prohibited after 3:55 p.m. (except
in the event of a legitimate error).\12\ In addition, the NYSE will
notify its electronic display book, such that LOC orders will be
prioritized relative to other LOC orders by time of entry, but will be
required to yield priority to all conventional limit orders on the
specialist's book at the same price. Under these procedures, LOC orders
at the closing price (as opposed to a better price) will not be
guaranteed an execution.
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\12\As noted above, member firms will be able to enter LOC
orders only to offset a published imbalance of MOC orders in that
stock. Under the NYSE's closing procedures, see supra note 6, MOC
order imbalances of 50,000 shares or more must be disseminated as
soon as practicable after 3:40 p.m. on expiration days and after
3:45 p.m. on other trading days. LOC order entry will be permitted
thereafter.
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The Exchange believes that, with respect to expiration days, the
pilot to permit the use of LOC orders on a limited basis, as described
above, should be viewed as an interim measure to help address the
prospect of excess market volatility that may be associated with an
imbalance of MOC orders at the close. The NYSE states that the basis
for the proposed rule change is Section 6(b)(5), which requires that
the rules of the Exchange be 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.
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).\13\ In particular,
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.
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\13\15 U.S.C. Sec. 78f(b) (1988).
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In recent years, the self-regulatory organizations, with the
support of the Commission, 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. As recently
amended,\14\ these procedures establish a simultaneous 3:40 p.m.
deadline for the entry of expiration-related MOC orders and for the
cancellation or reduction of any MOC order. The procedures allow the
NYSE 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.
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\14\For further discussion of the NYSE's auxiliary closing
procedures, see supra, note 6.
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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.
After careful review, the Commission preliminarily has concluded
that LOC orders should provide the NYSE with an additional means of
attracting contra-side interest to help alleviate MOC order imbalances
arising from the liquidation of index derivative related positions. As
a practical matter, the Commission believes that the new LOC order type
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.\15\
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\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 which 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.\16\ 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 on expiration days is consistent with the
Exchange's auxiliary closing procedures and, like those procedures,
should allow specialists to make a timely and reliable assessment of
expiration-related order flow and its potential impact on the closing
price.
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\16\While Rule 13, as amended, provides the NYSE with discretion
in establishing the procedures for LOC order entry and cancellation,
the Commission expects that any modification to the procedures
described herein will be submitted to the Commission as a proposed
rule change pursuant to section 19(b) of the Act.
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The Commission is approving LOC order entry on a 15-month pilot
basis, beginning with five of the pilot stocks, contingent upon the
NYSE submitting to the Commission a satisfactory Information
Memorandum.\17\ As long as some index derivative products continue to
expire based on closing stock prices on expiration days, the Commission
agrees with the NYSE that such procedures are necessary to provide a
mechanism to handle the potentially large imbalances that can be
engendered by firms unwinding index derivative related positions.
During the pilot program, the Commission expects the NYSE to monitor
the effectiveness of its LOC order procedures.
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\17\The NYSE has agreed to the Information Memorandum being a
prerequisite for the implementation of its LOC order pilot program.
Telephone conversation between Robert McSweeney, Senior Vice
President, Market Surveillance, NYSE, and Sharon Lawson, Assistant
Director, Division of Market Regulation, SEC, on February 2, 1994.
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The Commission therefore requests that the NYSE submit a report to
the Commission, by the date 12 months after the start-up date for LOC
order entry, describing its experience with the pilot program. At a
minimum, this report should contain the following data for each
expiration day during that 12-month period: (1) The names of all LOC
pilot stocks as of that expiration day (including both the initial five
stocks and any pilot stocks added thereafter); (2) for all LOC pilot
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; (3) for
each stock listed in (2) 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 p.m.; (4) for each stock listed in (2) 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 (5) the average price
volatility for all stocks listed in (2) above as compared to the
average price volatility for all other pilot stocks. 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 of the pilot procedures also should be
submitted to the Commission, by the date 12 months after the date for
the start-up of LOC order entry, as a proposed rule change pursuant to
section 19(b) of the Act.
IV. Conclusion
For the reasons set forth above, the Commission finds that the
proposed rule change is consistent with section 6(b)(5) of the Act.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-NYSE-92-37) is approved on a
15-month pilot basis, contingent upon the NYSE submitting to the
Commission a satisfactory Information Memorandum.
\18\15 U.S.C. 78s(b)(2) (1988).
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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) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5396 Filed 3-8-94; 8:45 am]
BILLING CODE 8010-01-M