[Federal Register Volume 63, Number 119 (Monday, June 22, 1998)]
[Notices]
[Pages 33975-33978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-16510]
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SECURITIES AND EXCHANGE COMMISSION
[Docket No. 34-40094; File No. SR-NYSE-97-36]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Notice of Filing and Order
Granting Accelerated Approval to Amendment No. 2 Thereto To Revise
Exchange Policy for Entry of MOC/LOC Orders and Publication of
Imbalances
June 15, 1998.
I. Introduction
On December 29, 1997, the New York Stock Exchange, Inc. (``NYSE''
or ``Exchange'') filed with 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
[[Page 33976]]
thereunder,\2\ a proposed rule change to revise the Exchange's policy
for entry of market-on-close (``MOC'') and limit-at-the-close (``LOC'')
orders and publication of order imbalances for both expiration and non-
expiration days. On March 18, and June 4, 1998, respectively, the
Exchange submitted Amendments No. 1\3\ and No. 2\4\ to the proposed
rule change to the Commission.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Donald Siemer, Director, Market
Surveillance, NYSE to Richard Strasser, Assistant Director, Division
of Market Regulation (``Division''), Commission dated March 13, 1998
(``Amendment No. 1'').
\4\ See Letter from Agnes M. Gautier, Vice President, Market
Surveillance, NYSE to David Sieradzki, Attorney, Division,
Commission dated June 1, 1998 (``Amendment No. 2''). In Amendment
No. 2, the Exchange clarifies the proposal to indicate that, where a
bona fide error has been made, causing the cancellation of an order,
or an order was improperly entered when there was no imbalance,
resulting in an imbalance of 50,000 shares or more at 3:50 p.m., the
Exchange would publish the imbalance even though there had been no
3:40 p.m. publication.
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The proposed rule change, including Amendment No. 1, was published
for comment in the Federal Register on March 26, 1998.\5\ One comment
was received on the proposal.\6\ This order approves the proposal as
amended.
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\5\ Securities Exchange Act Release No. 39770 (Mar. 18, 1998),
63 FR 14747 (Mar. 26, 1998).
\6\ See Letter from Terry McCloskey, Vice President, BNP
Securities, Inc. to Jonathan G. Katz, Secretary, Commission dated
April 15, 1998 (``BNP Letter'').
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II. Description of the Proposal
Special procedures regarding the entry of MOC and LOC orders \7\
have been in place on the Exchange for more than ten years.\8\ These
procedures are designed to alleviate excess volatility at the close by
providing MOC and LOC imbalance information to market participants in a
timely manner to attract contra-side interest. The procedures have been
refined over the years based on the Exchange's experience and input
from constitutes.\9\ The Exchange is now proposing additional
refinements to the procedures to enhance their usefulness.
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\7\ A MOC order is a market order to be executed in its entirely
at the closing price on the Exchange. A LOC order is a limit order
entered for execution at the closing price, provided that the
closing price is at or within the limit specified. See NYSE Rule 13.
\8\ The Exchange's pilot program for expiration day auxiliary
closing procedures was permanently approved by the Commission on
October 30, 1996. See Securities Exchange Act Release No. 37894
(Oct. 30, 1996), 61 FR 56987 (Nov. 5, 1996) (order approving SR-
NYSE-96-31).
\9\ The Exchange's LOC pilot program will expire on July 31,
1998. The Exchange has requested that the Commission permanently
approve the program (SR-NYSE-98-15).
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Current Procedures
The current procedures require that MOC and LOC orders in any stock
be entered by 3:40 p.m. on expiration days, and by 3:50 p.m. on non-
expiration days.\10\ A member may not cancel or reduce a MOC or LOC
order in any stock after 3:40 p.m. on expiration days or 3:50 p.m. on
non-expiration days, (except in a case of legitimate error or to comply
with the provisions of Exchange Rule 80A). In addition, Floor brokers
representing any MOC orders must indicate their MOC interest to the
specialist by 3:40 p.m. or 3:50 p.m., for expiration and non-expiration
days, respectively.
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\10\ 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'').
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For the selected stocks identified by the Exchange (formerly known
as ``pilot stocks'') \11\ and published in its ``special stock list,''
a single publication of imbalances of 50,000 shares or more must be
made as soon as practicable after 3:40 p.m. on expiration days or 3:50
p.m. on non-expiration days. On expiration days, stocks on the special
stock list that do not have an imbalance of 50,000 shares or more at
3:40 p.m. must publish a ``no imbalance'' status. Imbalances of 50,000
shares or more must also be published for stocks going into or out of
an index. For all other stocks (i.e., those that are not on the
``special stock list'' and those not going into or out of an index), an
imbalance of 50,000 shares or more may be (but is not required to be)
published at the request of the specialist, with Floor Official
approval. After the 3:40 p.m. or 3:50 p.m. imbalance publication, MOC
and LOC orders may be entered only to offset a published imbalance. No
MOC and LOC orders may be entered if there is no imbalance publication.
On expiration days, the entry of MOC or LOC 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.
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\11\ The pilot stocks consisted of the 50 most highly
capitalized Standard & Poor's (``S&P'') 500 stocks and any component
stocks of the Major Market Index (``MMI'') not included in the S&P
stock group.
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New Procedures
In July of 1997, the NYSE's Market Performance Committee appointed
a subcommittee to review MOC procedures. The subcommittee recommended
that the Exchange implement several changes to increase the
effectiveness of the procedures. These changes, which the Exchange is
proposing to implement, are:
The Exchange is proposing a 3:40 p.m. deadline for entry
of MOC and LOC orders and indication of MOC interest to specialists by
Floor brokers representing any MOC orders, every day. This earlier
deadline (from 3:50 p.m. to 3:40 p.m.) on non-expiration days would
provide additional time to attract contra-side interest.
The Exchange is also proposing mandatory publication of
all MOC/LOC imbalances of 50,000 shares or more in all stocks and any
trading day as soon as practicable after 3:40 p.m.\12\ Publication of
an imbalance of less than 50,000 shares may be made at that time with
the approval of a Floor Official. This proposed new provision would
permit, but not require, the publication of an imbalance which,
although less than 50,000 shares, may be significantly greater than
average daily volume in a stock.
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\12\ As discussed above, currently, the Exchange requires
mandatory publication of imbalances of 50,000 shares or more only in
stocks on the Exchange's special stock list and stocks being added
to or dropped from an index on expiration days as soon as
practicable after 3:40 p.m. (or 3:50 p.m. for non-expiration days).
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The Exchange is also proposing to include both MOC and
marketable LOC orders in the imbalance publication.\13\ The
determination of whether an LOC order is ``marketable'' would be based
upon the last sale price at 3:40 or 3:50 p.m., depending on the time of
the order imbalance publication. This means that LOC orders to buy at a
higher price would be included with the buy MOC orders; LOC orders to
sell at a lower price would be included with the sell MOC orders. LOC
orders with a limit equal to the last sale price would not be included
in the imbalance calculation.
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\13\ Currently, imbalance publications indicate MOC interest but
not LOC interest. See Amendment No. 1, supra note 3.
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The Exchange is also proposing a new procedure to permit
non-mandatory publication of MOC/LOC imbalances of any size between
3:00 and 3:40 p.m., with Floor Official approval; these publications
would be informational only, with no effect on MOC/LOC order entry.
Imbalance information would be required to be updated at 3:40 p.m. for
all stocks on all days, regardless of size, to provide timely imbalance
information to market participants.
An additional imbalance publication on both expiration and
non-expiration days, must be made at 3:50 p.m. for any stock that had
an imbalance
[[Page 33977]]
publication at 3:40 p.m.\14\ If the imbalance at 3:50 p.m. is less than
50,000 shares, a ``no imbalance'' status must be published, except that
an imbalance of less than 50,000 shares may be published with Floor
Official approval, provided there had been an imbalance publication at
3:40 p.m. Except under two limited circumstances,\15\ if there were no
imbalance publication at 3:40 p.m., there would not be a publication at
3:50 p.m., since MOC and LOC orders could not be entered during the
interim to change the imbalance. If the 3:50 p.m. imbalance publication
reversed the first imbalance publication, only MOC and LOC orders which
offset the 3:50 p.m. imbalance would be permitted to be entered
thereafter.
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\14\ Currently, the Exchange requires only a single imbalance
publication at 3:40 p.m. on expiration days and at 3:50 p.m. on non-
expiration days. See Amendment No. 1, supra note 3.
\15\ See Amendment No. 2, supra note 4.
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MOC/LOC order entry is precluded after 3:40 p.m. in all
stocks on all days, unless an imbalance is published, in which case
entry of MOC/LOC orders would be permitted only on the contra side of
the published imbalance.
III. Comment Summary
As noted above, the Commission received one comment on the
proposal.\16\ The commenter agreed that order imbalance dissemination
reduces volatility at the close and favors expanding imbalance
indications to all listed issues. In addition, the commenter noted that
neither the NYSE nor the American Stock Exchange (``Amex'') provide
members with information regarding order imbalances at the close in
electronic form. The commenter believes that if the NYSE and Amex were
required to disseminate order imbalances through the Securities
Industry Automation Corporation (``SIAC''),\17\ customers would receive
better information and therefore, better executions.
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\16\ See BNP Letter, supra note 6.
\17\ SIAC processes last sale information and quotation
information reported to it by its participants (eight national
securities exchanges and the National Association of Securities
Dealers, Inc.) for consolidation and dissemination to vendors and
others.
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IV. Discussion
The Commission finds that the proposed rule change is consistent
with Section 6 \18\ of the Act and the rules and regulations
thereunder. In particular, the Commission believes that the proposal is
consistent with the Section 6(b)(5) \19\ requirements that the rules of
an Exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, 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.\20\
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\18\ 15 U.S.C. 78f.
\19\ 15 U.S.C. 78f(b)(5).
\20\ In approving the proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78f(b).
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Over the past several years, the Exchange and other self-regulatory
organizations have been developing procedures to minimize excess market
volatility that may arise from the liquidation of stock positions on
expiration days.\21\ Special procedures regarding the entry of MOC
orders on Expiration Fridays were first used in 1986 for assisting in
handling the order flow associated with the concurrent quarterly
expiration of stock index futures, stock index options and options on
stock index futures on Expiration Fridays.\22\ On April 10, 1995, the
Commission approved a proposed rule change to institute similar
auxiliary closing procedures on non-expiration days.\23\ Finally, on
March 3, 1994, the Exchange, as an additional means of attracting
contra-side interest to help alleviate MOC order imbalances, initiated
a pilot program relating to the entry of LOC orders on both expiration
and non-expiration days.\24\ These procedures allow NYSE specialists to
obtain an indication of the buying and selling interest in MOC/LOC
orders at the end of the day. If there is a substantial imbalance on
one side of the market, the procedures provide the investing public
with timely and reliable notice of that imbalance and with an
opportunity to make appropriate investment decisions in response.
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\21\ See supra note 8.
\22\ See supra note 10.
\23\ See Securities Exchange Act Release No. 35589 (April 10,
1995), 60 FR 19313 (April 17, 1995) (order approving SR-NYSE-94-44).
\24\ See supra note 9.
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Generally, the NYSE auxiliary closing procedures have worked well
and may have resulted in more orderly markets on both expiration and
non-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 create a
situation in which member firms and their customers would be unwilling
to acquire significant positions.
In this regard, the Commission notes that the proposed rule change
may increase public awareness of MOC/LOC order imbalances and provide
the market participants with more of an opportunity to make appropriate
investment decisions. Specifically, the proposal will impose a deadline
of 3:40 p.m. for entry of all MOC/LOC orders on both expiration and
non-expiration days. Floor brokers representing MOC orders also must
indicate their MOC interest to the specialist by 3:40 p.m. every day.
In conjunction with the prohibition on canceling or reducing any MOC/
LOC order after 3:40 p.m., these requirements should allow the
specialist to make a timely and reliable assessment, for every NYSE-
listed stock, on expiration and non-expiration days alike, of MOC/LOC
order flow and its potential impact on closing prices.
The proposal would also make several changes to imbalance
publication procedures, which are designed to get more information to
the public earlier in the day. First, the proposal would integrate
marketable LOC orders into the current MOC order imbalance publication.
Second, the proposal would require publication of MOC/LOC imbalances of
50,000 shares or more in all securities on any trading day as soon as
practicable after 3:40 p.m. The proposal also requires an additional
publication of MOC/LOC imbalances of 50,000 shares or more at 3:50 p.m.
for stocks that reported an imbalance at 3:40 p.m. If the order
imbalance for a stock publishing an imbalance at 3:40 p.m. has fallen
below 50,000 shares by 3:50 p.m. then, a ``no imbalance'' message must
be posted unless Floor Official approval is sought to publish an
imbalance of less than 50,000 shares.
The Commission believes that the enhanced publication requirements
described above are appropriate and consistent with the Act.
Integrating marketable LOC orders into the order imbalance publication
should serve to better reflect actual investor interest. Also,
requiring an additional order imbalance publication at 3:50 p.m. for
securities having a published imbalance as of 3:40 p.m. may help ease
market volatility at the close by attracting additional offsetting MOC/
LOC orders for stocks that have a significant order imbalance as of
3:50 p.m. With respect to changing the deadline for entering MOC/LOC
orders on non-expiration days, the Commission believes that, by giving
market participants more time to react to published MOC/LOC order
imbalances, the proposal may contribute to reducing volatility at the
close.
[[Page 33978]]
Finally, the Exchange proposes to permit dissemination of MOC/LOC
order imbalances of any size between 3:00 p.m. and 3:40 p.m. with Floor
Official approval. These optional publications would be informational
only and would be required to be updated at 3:40 p.m., regardless of
size. The Commission believes that this optional publication of MOC/LOC
order imbalances is consistent with the Act in that it should increase
the amount of accurate market information available to the public.\25\
The Commission believes that this dissemination of MOC/LOC order
imbalances prior to 3:40 p.m. could help reduce volatility at the close
by giving market participants more time to react to reported order
imbalances.
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\25\ In approving this proposed rule change, the Commission is
aware of the possibility that the publication of order imbalances on
a more frequent basis may allow market participants to enter orders
without the good faith intention that the order be executed, but
instead with the intention of canceling the order and profiting in
some way from a market reaction to the publication of the order. The
Commission expects that the Exchange will be mindful of any
potential formarket manipulation or other abuse that the amended
procedures may create and that the Exchange will be vigilant in its
surveillance efforts to ensure that the MOC/LOC procedures are
executed in a manner consistent with the Act and the rules
thereunder and the rules of the Exchange.
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The Commission finds good cause for approving Amendment No. 2 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register.
Amendment No. 2 clarifies the proposal to indicate that, under certain
circumstances, the Exchange may publish an order imbalance at 3:50 p.m.
where an imbalance was not published at 3:40 p.m.\26\ The Exchange has
represented that, under certain limited circumstances described in
Amendment No. 2 (i.e., where a bona fide error was made causing an
order to be cancelled or an order was improperly entered when there was
no imbalance, resulting in an imbalance of 50,000 shares or more at
3:50 p.m.) the Exchange would publish an order imbalance at 3:50 p.m.
even if an imbalance had not been published at 3:40 p.m. As a result,
the Commission does not believe that Amendment No. 2 raises any new
regulatory issues. Further, the Commission notes that the original
proposal was published for the full 21-day comment period during which
one comment, generally supporting the proposal, was received by the
Commission. Accordingly, the Commission believes there is good cause,
consistent with Sections 6(b)(5) and 19(b) \27\ of the Act, to approve
Amendment No. 2 to the Exchange's proposal on an accelerated basis.
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\26\ See Amendment No. 2, supra note 4.
\27\ 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78s(b).
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V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 2, including whether that amendment
is consistent with the Act. 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 at the Commission's
Public Reference Room. 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-97-36 and should be
submitted by July 13, 1998.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\28\ that the proposed rule change (SR-NYSE-97-36) is approved as
amended.
\28\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-16510 Filed 6-19-98; 8:45 am]
BILLING CODE 8010-01-M