[Federal Register Volume 59, Number 214 (Monday, November 7, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-27443] [[Page Unknown]] [Federal Register: November 7, 1994] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-34916; File No. SR-NYSE-94-32] Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by the New York Stock Exchange, Inc., Relating to a One-Year Extension of the Pilot for Auxiliary Closing Procedures for Expiration Days October 31, 1994. 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 September 22, 1994, the New York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') filed with the Securities and Exchange Commission (``Commission'' or ``SEC'') the purposed rule change as described in Items I and II below, which Items have been prepared by the self- regulatory organization. While the NYSE has not requested accelerated approval of the proposal, the auxiliary closing procedures are scheduled to expire on October 31, 1994. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\15 U.S.C. 78s(b)(1) (1988). \2\17 CFR 240.19b-4 (1991). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to extend the pilot for auxiliary closing procedures for market-at-the-close (``MOC'') orders utilized on expiration Fridays and quarterly expiration days until October 31, 1995. 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 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 Special procedures regarding the entry of market-at-the-close (``MOC'') orders on expiration Fridays were originally adopted in 1986 for quarterly triple expiration of derivative instrument products.\3\ Since November 1988, these procedures have been used for each monthly expiration and apply to the so-called ``pilot stocks'' (the 50 most highly capitalized S&P 500 stocks and any component stocks of the Major Market Index that are not included in this group of 50).\4\ In April 1992, the Exchange modified the pilot procedures and included additional special procedures for handling MOC orders in all stocks on expiration Fridays. In March 1993, the Exchange extended the expiration Friday auxiliary closing procedures to days on which quarterly index expiration (``QIX'') options expire.\5\ In September 1993, the Exchange again modified the pilot procedures to change the cut-off time for entry, cancellation or reduction of MOC orders to 3:40 p.m. --------------------------------------------------------------------------- \3\Expiration Friday is the trading day, usually the third Friday of the month, when some stock index futures, stock index options and options on stock index futures expire or settle concurrently. Triple expirations are the four times a year during the months of March, June, September, and December when all stock index futures, stock index options, options on stock index futures and individual equity options expire. \4\The NYSE auxiliary closing procedures for expiration Fridays were initially approved by the Commission on a pilot basis for a one-year period beginning in November, 1988 and extending through October, 1989. The pilot has since been extended each year between October 1989 through October 1994 on a one-year pilot basis. See Securities Exchange Act Release Nos. 26293 (November 17, 1988), 53 FR 47599; 26408 (December 29, 1988), 54 FR 343 (approving File No. SR-NYSE-88-37); 27448 (November 16, 1989), 54 FR 48343 (approving File No. SR-NYSE-89-38); 28564 (October 22, 1990), 55 FR 43427 (approving File No. SR-NYSE-90-49); 29871 (October 28, 1991), 56 FR 30004 (approving File No. SR-NYSE-91-31): 31386 (October 30, 1992), 57 FR 52814 (approving File No. SR-NYSE-92-30); and 32868 (September 10, 1993), 58 FR 48687 (approving File No. SR-NYSE-93-33) (``1993 Approval Order''). \5\On QIX expiration days, the ``pilot stocks'' include the ten highest weighted stocks of the S&P MidCap 400 Index (in addition to the fifty highest weighted stocks underlying the S&P 500 Index, any component stocks of the Major Market Index not included in that group). --------------------------------------------------------------------------- The current procedures require that MOC orders in any stock related to a strategy involving derivative index products be entered for execution by 3:40 p.m. and that no cancellation or reduction of any MOC order in any stock take place after 3:40 p.m. In addition, Floor brokers representing orders related to a strategy involving derivative index products must indicate their MOC interest to the specialist by 3:40 p.m. However, a Floor broker who is handling a working order that is not derivative-related, may continue to work that order until just before the close, and if so instructed by his or her customer, may turn the unfilled balance over to the specialist for execution at the market at the close. For the pilot stocks, a single publication of imbalances of 50,000 shares or more is made as soon as practicable after 3:40 p.m. After the imbalance publication, MOC orders in the pilot stocks may be entered only to offset a published imbalance. The entry of MOC orders after 3:40 p.m. to establish or liquidate positions related to a strategy involving derivative instruments is not permitted even if such orders might offset published imbalances. The auxiliary procedures utilized for expiration days have been approved as a pilot on a yearly basis and are due to expire on October 31, 1994. These procedures have been effective in minimizing excess volatility on the close on expiration days. The Exchange recommends that the procedures described above be extended to October 31, 1995. The Exchange continues to believe, however, that concerns about excess market volatility that may be associated with the expiration or settlement of derivative index products would be most appropriately addressed if the expiration or settlement value of all such products were based on the NYSE opening rather than the closing price on the last business day prior to the expiration or settlement of the product. 2. Statutory Basis The basis under the Securities Exchange Act of 1934 (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, 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 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 NW., Washington, D.C. 20549. Copies of such filing will also be available for inspection and copying at the principal office of the NYSE. All submissions should refer to File No. SR-NYSE-94-32 and should be submitted by November 28, 1994. IV. Commission's Findings and Order Granting Temporary Accelerated Approval of Proposed Rule Change The Commission finds that the NYSE's proposal to extend the pilot for auxiliary closing procedures on expiration days through October 1995, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. Specifically, the Commission finds that an extension of the pilot for auxiliary closing procedures on expiration days is consistent with section 6(b)(5) of the Act.\6\ Section 6(b)(5) requires, among the other things, that the rules of a national securities exchange be designed to promote just and equitable principles of trade, to perfect the mechanism of a free and open market, and to protect investors and the public interest. For the reasons set forth below, the Commission believes that the NYSE proposal furthers the objectives of section 6(b)(5) of the Act. --------------------------------------------------------------------------- \6\15 U.S.C. 78f(b)(5) (1988). --------------------------------------------------------------------------- The NYSE's auxiliary closing procedures were initially adopted in September 1986 to apply to triple expirations.\7\ The Commission has extended these procedures to all monthly expiration Fridays on a yearly pilot basis since 1988.\8\ These procedures resulted from efforts by the Commission and the self-regulatory organizations to address stock market volatility associated with the expiration of index derivative products traded in conjunction with the underlying component stocks as part of index derivative related trading strategies. --------------------------------------------------------------------------- \7\See supra note 3. \8\See supra notes 3-4. --------------------------------------------------------------------------- In our 1993 Approval Order, the Commission extended the NYSE's MOC pilot program procedures through October 31, 1994, and requested that the NYSE provide the Commission with specific data by July 31, 1994, detailing the NYSE's experience with the pilot program and containing an analysis of the effectiveness of the expiration Friday procedures in reducing volatility. Specifically, the Commission requested data covering expiration Fridays from October 1993 through June 1994. The Commission requested that the report include: (1) The names of the pilot stocks and the imbalance (if any) at 3:40 and at the close for those stocks that had an imbalance of MOC orders of 50,000 shares or more at 3:40; (2) for those stocks with an imbalance of 50,000 shares or more at 3:40, the names of the stocks where the imbalance changed from one side of the market (sell or buy) to the other side (buy or sell) due to cancellations of MOC orders; (3) for all pilot stocks, all MOC order imbalances (of any size) as of 4:00 p.m.; (4) the change in price of the closing transactions from the previous trade for all pilot stocks; (5) the change in price of the closing transactions from the price of transactions at 4:00 p.m. (if there were no transactions precisely at 4:00 p.m., the NYSE was to use the price from the transaction effected closet in time to 4:00 p.m.) for all pilot stocks; and (6) for each pilot stock, the number of shares in MOC orders submitted by 3:40 p.m. that were canceled for any reason prior to the close. The Commission also stated that the report should include: (1) The change in the Dow Jones Industrial Average (``DJIA'') at the close on each expiration Friday; (2) opening prices and daily trading ranges of the pilot stocks on expiration Fridays, as well as the following Mondays; and (3) price volatility as measured by the change in price from the last regular way trade to the closing price, including historical data analyzing price volatility at the close prior to the implementation of the prohibition on canceling MOC orders after 3:45 p.m. and the other MOC procedures. Finally, in our approval order regarding QIX auxiliary closing procedures, the Commission requested that the Exchange also include in its report all of the above requested data for QIX expiration days which expire at the en of the calendar quarter. The Commission requested that the NYSE provide the Commission with a report by July 31, 1994 covering expirations through June 1994. The NYSE submitted a report to the Commission on July 26, 1994. The report covers expiration Fridays for the period November 1993 through June 1994 and the December 31, 1993 and March 31, 1994 quarterly expirations. For that period, the NYSE reports that there were 117 (out of 413 total) stocks with buy imbalances greater than 50,000 shares at 3:40 p.m. Of these, 84 still had MOC buy imbalances greater than 50,000 at the close and three had reversed to sell imbalances under 50,000. In contrast, there were only 10 stocks with sell imbalances over 50,000 at 3:40 p.m., of which five still had sell balances over 50,000 shares at the close. In general, both the number of stocks with imbalances over 50,000 shares and the average number of shares in the imbalance declined between 3:40 p.m. and the close. The report also discusses MOC prices and price changes at 4:00 p.m. and at the close. The data show very little volatility at the close. Over half the stocks had no change at the close, 89.3% changed one- eighth point or less, and j96.1% changed one-quarter point or less. The stocks with large imbalances also did not exhibit much volatility at the close. The stocks with buy imbalances over 50,000 shares at the close averaged an increase of slightly more than one-eighth; the stocks with sell imbalances over 50,000 shares at the close averaged less than one-eighth point decline. With respect to QIX expiration procedures, the Exchange states that there were only 4 stocks with buy imbalances greater than 50,000 shares at 3:40 p.m., only one of which still had an MOC buy imbalance greater than 50,000 shares at the close. In contrast, there were 26 stocks with sell imbalances over 50,000 at 3:40 p.m., 17 of which still had sell balances over 50,000 shares at the close. The report also discusses quarterly expiration prices and price changes at 4:00 p.m. and the close. The data show very little volatility at the close. Nearly half the stocks had no change at the close, 79% changed one-eighth point or less, and 92% changed one- quarter point or less. The stocks with sell imbalances over 50,000 shares at the close on average declined more than one-eighth; the stocks with buy imbalances over 50,000 shares at the close increased 0.3125 points on average. As noted above, pursuant to the NYSE pilot program, the auxiliary closing procedures for expiration Fridays and QIX expiration days (cumulatively, ``expiration days'') place limitations on MOC order- entry with regard to orders related to any strategy involving an expiring derivative index product. The auxiliary closing procedures also restrict the cancellation of MOC orders and provide for the dissemination of MOC order imbalances of 50,000 shares or more in certain pilot securities. The present proposal would extend the existing pilot procedures for a one year pilot period through October 1995. MOC order cancellations for bona fide errors would continue to be accepted. Once a publication of an imbalance in a pilot stock has been made, any MOC orders subsequently entered in such pilot stock will be accepted only to trade on the opposite side of the market in relation to such published imbalance. The entry of a MOC order to establish or liquidate positions related to a strategy involving derivative instruments, however, would not be permitted even if such orders might offset published imbalances. The Commission believes that the auxiliary closing procedures should enable market participants to gain a more accurate picture of the buying and selling interest in MOC orders at expiration. The Commission continues to believe that, by requiring early submission of MOC orders and disseminating significant imbalances (50,000 shares or more) in certain specified stocks, the NYSE should be able to attract contra-side interest to help alleviate imbalances caused by the liquidation of stock positions related to index derivative product trading strategies. In this regard, the NYSE's most recent report concerning expiration Friday volatility and the expiration Friday closing procedures indicates that the procedures have worked relatively well and may have resulted in more orderly markets at the close on expiration Fridays. The Commission is approving an extension of the pilot program through October 1995. As long as some index derivative products continue to expire based on closing stock prices on expiration Fridays, the Commission agrees with the NYSE that such procedures are necessary to provide a mechanism to handle the potential large imbalances that can be engendered by firms unwinding index derivative related positions. During the pilot extension, the Commission expects the NYSE to continue to monitor closely the effectiveness of the procedures, and to submit a report with all of the same data previously requested for prior periods. The report should cover all expirations through June 1995, and must be submitted to the Commission no later than July 31, 1995\9\ along with a proposed rule change which should either request an additional extension of the pilot program or permanent approval of the pilot procedures. --------------------------------------------------------------------------- \9\The Commission notes that this request for information is not exclusive and that the NYSE should add any additional data and analysis to the report in order to assess the effectiveness of the procedures in reducing excess market volatility on expiration Fridays. --------------------------------------------------------------------------- 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 in the Federal Register. This will permit the procedures to continue on an uninterrupted basis. Further, on September 9, 1994, the NYSE issued an Information Memo to its members notifying them of the auxiliary closing procedures. Finally, special auxiliary closing procedures have been utilized by the NYSE since 1986, and the procedures are intended to reduce excessive market volatility at the close. It is therefore ordered, pursuant to Section 19(b)(2)\10\ that the proposed rule change is hereby approved on a pilot basis through October 31, 1995. --------------------------------------------------------------------------- \10\15 U.S.C. 78s(b)(2) (1988). For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\11\ --------------------------------------------------------------------------- \11\17 CFR 200.30-3(a)(12) (1991). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 94-27443 Filed 11-4-94; 8:45 am] BILLING CODE 8010-01-M