[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