[Federal Register Volume 59, Number 26 (Tuesday, February 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2772]
[[Page Unknown]]
[Federal Register: February 8, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33563; File No. SR-NYSE-93-51]
Self-Regulatory Organizations; Filing and Order Granting
Accelerated Approval of Proposed Rule Change by the New York Stock
Exchange, Inc. Relating to the Off-Hours Trading Facility and Matched
MOC Order Procedures
February 1, 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 December 23, 1993, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the self-
regulatory organization. The Exchange has requested accelerated
approval of the proposal. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1991).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Commission's order approving the Exchange's Off-Hours Trading
(``OHT'') facility contained a two-year ``sunset'' provision.\3\ The
Commission later extended the ``sunset'' date until January 31,
1994.\4\ The proposed rule change seeks to extend (i) that ``sunset,''
and (ii) the concurrent end of the pilot program for procedures
regulating matched market-on-close (``MOC'') orders, to April 30,
1994.\5\
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\3\See Securities Exchange Act Release No. 29237 (May 31, 1991),
56 FR 24853 (June 3, 1991) (File Nos. SR-NYSE-90-52 and SR-NYSE-90-
53 (``OHT Approval Order'').
\4\See Securities Exchange Act Release No. 32362 (May 25, 1993),
58 FR 31565 (June 3, 1993) (order granting accelerated approval to
File No. SR-NYSE-93-23).
\5\The Commission initially approved the matched MOC order
procedures on a pilot basis in June, 1990. In that order, the
Commission also granted an exemption from its short sale rule, Rule
10a-1, for matched MOC orders that are part of a program trading
strategy. See Securities Exchange Act Release No. 28167 (June 29,
1990), 55 FR 28117 (order granting temporary approval to File No.
SR-NYSE-89-10) and letter from Richard G. Ketchum, Director,
Division of Market Regulation, SEC, to James E. Buck, Senior Vice
President and Secretary, NYSE, dated July 2, 1990. The original one-
year pilot program was temporarily extended by the Commission for an
additional six months, until September 30, 1991, in order to give
the Exchange the opportunity to contrast the use of matched MOC
orders with certain program trading transactions effected in the
Exchange's then recently implemented Crossing Session II. See
Securities Exchange Act Release No. 29393 (July 1, 1991), 56 FR
30954 (order granting temporary accelerated approval to File No. SR-
NYSE-91-22). Subsequently, the Commission granted accelerated
approval to an Exchange proposal to extend the pilot period until
November 30, 1991. See Securities Exchange Act Release No. 29761
(September 30, 1991), 56 FR 50743 (order granting temporary
accelerated approval to File No. SR-NYSE-91-34). Thereafter, the
Commission extended the matched MOC order pilot program through May
24, 1993. See Securities Exchange Act Release No. 30004 (November
27, 1991), 56 FR 63533 (order granting temporary approval to File
No. SR-NYSE-91-35). On May 25, 1993, the Commission approved
extensions of the NYSE pilots until January 31, 1994. See Securities
Exchange Act Release No. 32362 (May 25, 1993), 58 FR 31565 (June 3,
1993).
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The Exchange requests accelerated approval of the proposed rule
change. Accelerated approval would enable the Exchange to continue
Crossing Session I and Crossing Session II, and the matched MOC pilot
program, as described below, on an uninterrupted basis.
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
(a) OHT facility. By order dated May 24, 1991,\6\ the Commission
approved for a two-year temporary period the OHT facility by which the
Exchange offers its two off-hours trading sessions. ``Crossing Session
I'' permits the execution of single-stock, single-sided closing-price
orders and crosses of single-stock, closing-price buy and sell orders.
``Crossing Session II'' allows the execution of crosses of multiple-
stock (portfolios of 15 or more securities) aggregate price buy and
sell orders.
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\6\See OHT Approval Order, supra note 3.
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The Exchange began offering the two sessions on June 13, 1991. On
May 25, 1993, the Commission approved an extension of the Pilot until
January 31, 1994 (``Extension Order'').\7\ The proposed rule change
seeks to extend approval of the pilot until April 30, 1994. The
Exchange has submitted to the Commission contemporaneously with this
proposed rule change a second proposed rule pursuant to which the
Exchange has requested permanent approval of both Crossing Session I
and Crossing Session II (``Permanent Approval Filing'').\8\ The
Exchange therefore requests this extension until April 30, 1994, to
provide for the continuity of the crossing sessions, pending Commission
action on the Permanent Approval Filing.
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\7\See Securities Exchange Act Release No. 32362, supra note 4.
\8\See File No. SR-NYSE-93-50, filed with the Commission on
December 23, 1993.
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(b) Matched MOC Orders. In File No SR-NYSE-91-35, the Exchange
requested that procedures for using matched MOC orders and the
exemption from SEC Rule 10a-1 (relating to short sales of
securities)\9\ for such orders (which had originally been filed as part
of the pilot extending expiration Friday pricing procedures for MOC
orders for every trading day) run concurrently with the temporary
period for the Exchange's OHT facility. In its order approving this
filling, the Commission stated that ``it is appropriate to allow the
Exchange additional time to compare and contrast the matched MOC
procedures with Crossing Session II.''\10\ On May 25, 1993, the
Crossing Session II approved an Exchange request to extend the pilot
program for matched MOC procedures until January 31, 1994.\11\
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\9\Pursuant to Rule 10a-1 under the Act, 17 CFR 240.10a-1
(1991), and Exchange Rule 440B, a short sale on the Exchange may not
be effected at a price either (1) below the last reported price or
(2) at the last reported price unless that price is higher than the
last reported price.
\10\See Securities Exchange Act Release No. 30004, supra note 5.
\11\See supra note 5.
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The Exchange has reviewed program trading activity by its member
firms through December 17, 1993, but has not found any instances of
firms entering matched MOC orders up to that point. As with Crossing
Session I and II, the Exchange has included in the Permanent Approval
Filing a request for permanent approval of the matched MOC order
procedures.\12\ The Exchange requests an extension until April 30,
1994, so as to provide for the continuity of those procedures, pending
Commission action on the Permanent Approval Filing.
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\12\See File No. SR-NYSE-93-50, supra note 8.
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2. Statutory Basis
The basis under the Act for the Exchange's OHT facility and the
matched MOC order procedures, and for this extension of approval of the
facility and those procedures, is the requirement under section 6(b)(5)
that an exchange have rules that are 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.
B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not 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 not solicited, and does not intend to solicit,
comments on the proposed rule change. The Exchange has not received any
unsolicited written comments from members or other interested parties.
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 at the
Commission's Public Reference Room, 450 Fifth Street NW., Washington,
DC 20549. Copies of the 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-93-51 and should be submitted by March 1,
1994.
IV. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
For the reasons discussed below, the Commission finds that the
NYSE's proposal to extend, through April 30, 1994, the pilot program
providing for the Exchange's OHT facility and the pilot program for
procedures regulating matched MOC orders is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange,\13\ and in particular,
with the requirements of section 6(b)(5).\14\ The Commission believes
that the NYSE's proposal to extend the OHT facility pilot, comprised of
Crossing Sessions I and II, is reasonably designed to promote just and
equitable principles of trade, prevent fraudulent and manipulative acts
and practices, and remove impediments to and perfect the mechanism of a
free and open market and a national market system. For the reasons
discussed below, the Commission is also approving a three-month
extension for matched MOC orders.
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\13\See OHT Approval Order, supra note 3, and Securities
Exchange Act Release Nos. 28167, 29393, 29761, and 30004, supra note
5, for a complete description of the NYSE OHT facility, the NYSE
matched MOC order procedures, and the Commission's rationale for
approving the proposals on a pilot basis. The discussions in those
orders are incorporated by reference into this order.
\14\15 U.S.C. 78f(b)(5) (1988).
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(1) OHT Procedures for Crossing Sessions I and II
In the Commission's order approving the NYSE's OHT facility, the
Commission noted the benefits that would accrue to investors through
the development of an after-hours trading session.\15\ The Commission
stated its belief that Crossing Session I would provide investors whose
orders were not executed during the 9:30 a.m. to 4 p.m. session with
another opportunity to have their orders executed at the NYSE closing
price. Crossing Session I also would provide investors the flexibility
to decide whether they want a particular order to participate in this
Session. With respect to good til cancelled (``GTC'') orders entered
for execution during the 9:30 a.m. to 4 p.m. trading session, a
customer would have the option of deciding whether to designate that
order as a GTX (good til cancelled, executable through crossing
session) order, thus allowing the order to migrate to Crossing Session
I for possible execution. In addition, a customer would have the option
of cancelling any order entered into Crossing Session I at any time
prior to its execution at 5 p.m. These benefits would accrue to both
individual and institutional investors. Moreover, the Commission stated
its belief that Crossing Session I may help recapture overseas order
flow by enabling firms to facilitate a number of portfolio trading
strategies involving small programs of stocks to achieve executions at
the NYSE closing price.
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\15\See OHT Approval Order, supra note 3.
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Similarly, the Commission stated its belief that Crossing Session
II would benefit the investing public by offering members the
opportunity to enter aggregate-price crossing portfolio orders with
their customers after-hours to be executed against each other. The
Commission recognized that Crossing Session II could help to recapture
overseas trades of U.S. stocks by providing a mechanism by which
portfolio trades arranged off the floor can be effected in an exchange
trading system. While the Commission recognizes that Crossing Session
II does not provide an auction market for portfolio trades, the reality
of the marketplace is that these portfolio trades currently are being
effected off-exchange and, frequently, overseas. Bringing institutional
trades that currently are being exported overseas for execution within
the purview of U.S. regulatory bodies should benefit the marketplace
overall, as well as help to protect the investing public.
Although the Commission discussed these prospective benefits of the
OHT program in its order approving the pilot program procedures, the
Commission also voiced concern regarding certain issues concerning the
NYSE OHT facility, particularly with regard to Crossing Session II and
certain National Market System (``NMS'') concerns. In order to address
these concerns, the Commission approved the OHT facility on a pilot
basis, and requested that the Exchange submit a report concerning
various aspects of the pilot, including information regarding the
ability of customers to cancel orders entered into the OHT
facility.\16\
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\16\Specifically, the Commission requested that the Exchange
provide the following information, broken down by month: trading
volume (trade, share and dollar value) in both Crossing Session I
and Crossing Session II; the number, if any, of: (1) Single-stock
single-sided orders; (2) single-stock paired buy and sell orders;
and (3) GTX orders executed in Crossing Session I; the number, if
any, of: (1) single-sided orders; and (2) single-sided GTX orders
that remained unexecuted at the end of Crossing Session I; the
number and percentage of GTC orders on the book that were designated
``GTX'' and thus migrated to Crossing Session I; the number of
member firms participating in Crossing Session I and those
participating in Crossing Session II; whether the NYSE marketplace
has experienced any increased volatility during the last hour of the
9:30 a.m. to 4 p.m. trading session after the initiation of the OHT
facility; whether there were greater (wider) quote spreads during
the last hour of the 9:30 a.m. to 4 p.m. trading session after the
initiation of the OHT facility; whether there was a diminution in
the number of block transactions during the last hour after the
initiation of the OHT facility; and the degree to which transactions
were entered in Crossing Session II to avoid the restrictions of the
short sale rule in the 9:30 a.m. to 4 p.m. trading session. The
Commission also requested that, because at the time of the
Commission's approval of the OHT facility, at least one other
marketplace had proposed a system comparable to the NYSE's OHT
facility, the NYSE's report should indicate: (1) How its OHT
facility could link with any other systems approved during the 18-
month pilot period; (2) how orders entered on the other marketplaces
could interact with orders in the OHT; and (3) how the intermarket
issues discussed in the Commission's order approving the OHT pilot
would be addressed (the Commission emphasized that the resolution of
intermarket issues would not be solely a responsibility of the NYSE,
but would fall equally upon the regional exchanges or the National
Association of Securities Dealers proposing an after-hours system).
In addition to the above information, the Commission further
expected the NYSE to monitor carefully the composition of aggregate-
price orders in Crossing Session II to ensure that firms do not
enter aggregate-price orders where one stock dominates the basket.
In addition, the Commission expected the NYSE, through use of its
surveillance procedures, to monitor for, and report to the
Commission, any patterns of manipulation or trading abuses or
unusual trading activity in the two crossing sessions. Finally, the
Commission expected the NYSE to keep the Commission apprised of any
technical problems which may arise regarding the operation of the
OHT, such as difficulties in order execution or order cancellation.
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In the order extending the pilot program, the Commission requested
that the Exchange submit another report which discusses all those
elements described above. The Exchange submitted a report to the
Commission on September 30, 1993, which contained an analysis of
trading activity in the OHT facility since its inception.\17\ The
Commission expects the Exchange to submit to the Commission by March
15, 1994, an updated report concerning pilot activity through February
28, 1994.\18\ In addition, the Exchange continues to submit trade and
share volume of OHT activity to the Commission on an on-going, weekly
basis.
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\17\See letter from Catherine R. Kinney, Executive Vice
President, Equities/Audit, NYSE, to Brandon Becker, Director,
Division of Market Regulation, Commission, dated September 30, 1993.
\18\See supra note 16 for the information required to be
provided in the updated reports.
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(2) Matched MOC Orders
In its original order approving the matched MOC pilot program, and
in the subsequent orders which have extended the pilot program through
May 24, 1993 and January 31, 1994, the Commission voiced concern that,
under the pilot procedures, matched MOC orders would be executed
without the opportunity for order exposure or interaction with the
trading crowd. Because these procedures were in contravention of
traditional auction market procedures, the Commission was concerned
that customer orders on the list order book or in the trading crowd
could be by-passed. The Commission, however, initially approved these
procedures for a pilot period, because these procedures could aid in
attracting order flow being executed overseas back to the NYSE which
has the advantage of Commission and Exchange oversight pursuant to the
Act, trade reporting, and consolidated surveillance.
The Commission has extended the pilot program primarily to give the
Exchange the opportunity to contrast the use of matched MOC orders with
certain program trading transactions effected in the Exchange's
Crossing Session II. In the order extending the matched MOC pilot
program through May 24, 1993, the Commission stated that it was
extending the pilot program, not because its original concerns
regarding the possible displacement of customer orders had been
alleviated, but because the Commission found it reasonable to extend
the pilot period in light of the NYSE's desire to contrast its use with
that of the recently instituted after-hours trading system.\19\
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\19\See Securities Exchange Act Release No. 30004, supra note 5.
As previously noted, the Commission granted a limited exemption from
Rule 10a-1 under the Act for a MOC order entered as part of a paired
MOC order. See supra note 5 and note 6 in securities Exchange Act
Release No. 29393 (July 1, 1991), 56 FR 30954. The effectiveness of
this exemption was scheduled to terminate on January 31, 1994,
concurrent with the expiration of the MOC pilot period. Pursuant to
this order, the Commission is granting, until April 30, 1994, an
extension of the relief from Rule 10a-1 regarding a MOC order to
sell short that is entered by a member firm where (1) the member
firm also has entered an MOC order to buy the same amount of stock,
and (2) the MOC order is part of a program trading strategy by the
member firm, and the orders are identified as such. As indicated in
the order approving the MOC procedures for a one-year pilot period
(see note 5, supra), the Commission believes that matched MOC orders
that are part of a program trading strategy do not raise the same
concerns that are applicable to transactions in individual stocks,
and that it is appropriate to exempt such transactions in individual
stocks, and that it is appropriate to exempt such transaction from
the operation of the short sale rule.
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The stock exchanges continually are developing new trading
procedures and products in an attempt to facilitate the trading of
portfolios of securities. The matched MOC order pilot procedures and
the NYSE's OHT facility are but two examples of such developments.
Thus, due to the NYSE's ongoing attempt to understand how trades of
member firms and their customers could be most efficiently facilitated,
the Commission believes that it is appropriate to allow the Exchange
additional time to compare and contrast the matched MOC procedures with
Crossing Session II.
The Commission finds it reasonable to extend the pilot program for
matched MOC orders and the exemption from SEC Rule 10a-1 in order to
give the Commission and Exchange the necessary time to evaluate the
matched MOC order procedures. In addition, the Commission continues to
emphasize that, during the course of the pilot program, the Exchange is
under a continued obligation to inform the Commission of its members'
use, if any, of the matched MOC procedures and to assess the impact of
matched MOC orders on overall market quality and on any possible
displacement of orders on the specialist's book or in the trading
crowd.
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. The Commission
believes that accelerated approval of the proposal is appropriate in
order to allow the OHT and MOC procedures to remain in place on an
uninterrupted basis, which in turn should benefit investors and promote
competition among markets.
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act\20\ that the proposed rule change (SR-NYSE-93-51) is hereby
approved on a pilot basis through April 30, 1994.
\20\25 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2772 Filed 2-7-94; 8:45 am]
BILLING CODE 8010-01-M