[Federal Register Volume 59, Number 38 (Friday, February 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4338]


[[Page Unknown]]

[Federal Register: February 25, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33639; File No. SR-BSE-93-04]

 

Self-Regulatory Organizations; Notice of Filing and Order 
Granting Temporary Accelerated Approval to Proposed Rule Change by the 
Boston Stock Exchange, Inc. Relating to Procedures for the Handling of 
Market-On-Close Orders on Expiration Fridays and Quarterly Index 
Expiration Days

February 17, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 9, 
1993, the Boston Stock Exchange, Inc. (``BSE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I and II below, which 
Items have been prepared by the self-regulatory organization. On May 3, 
1993, the BSE submitted to the Commission Amendment No. 1 to the 
proposed rule change to clarify the scope of this filing, to agree to 
its framing as a pilot program and to request accelerated approval 
thereof.\1\ On September 17, 1993, the BSE submitted Amendment No. 2 to 
the proposed rule change in order to conform its proposal with recent 
amendments to comparable procedures on another exchange.\2\ On February 
3, 1994, the BSE submitted to the Commission Amendment No. 3 to the 
proposed rule change regarding the dissemination of order 
imbalances.\3\ On February 10, 1994, the BSE submitted Amendment No. 4 
to the proposed rule change in order to define certain terms used in 
the filing and to correct certain typographical errors.\4\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\See letter from Karen A. Aluise, Staff Attorney, BSE, to 
Diana Luke-Hopson, Branch Chief, Division of Market Regulation, SEC, 
dated April 29, 1993 (``Amendment No. 1'').
    \2\See letter from Karen A. Aluise, Assistant Vice President, 
BSE, to Diana Luke-Hopson, Branch Chief, Division of Market 
Regulation, SEC, dated September 15, 1993 (``Amendment No. 2'').
    \3\See letter from Karen A. Aluise, Assistant Vice President, 
BSE, to Sandra Sciole, Acting Branch Chief, Division of Market 
Regulation, SEC, dated January 31, 1994 (``Amendment No. 3'').
    \4\See letter from Karen A. Aluise, Assistant Vice President, 
BSE, to Sandra Sciole, Acting Branch Chief, Division of Market 
Regulation, SEC, dated February 3, 1993 (``Amendment No. 4'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The purpose of the proposed rule change is to establish a set of 
procedures for the handling of Market-on-Close (``MOC'') orders\5\ on 
Expiration Fridays\6\ and Quarterly Index Expiration days\7\ which 
mirror the procedures in place on the New York Stock Exchange 
(``NYSE'')\8\ in order to ensure equal treatment of orders in both 
markets.\9\
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    \5\The BSE defines an ``at the close order'' as a market order 
which is to be executed at or as near to the close as practicable. 
See Ch. I, Sec. 3 of the BSE Rules.
    \6\The term ``Expiration Friday'' refers to 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.
    \7\The term ``Quarterly Index Expiration day'' refers to the 
trading day, currently the last trading day of each calendar 
quarter, on which Quarterly Index Expiration (``QIX'') options 
expire. Amendment No. 1, see supra note 1, expanded the scope of 
this proposal to include Quarterly Index Expiration days as well as 
Expiration Fridays.
    \8\The Commission recently approved modifications to the NYSE's 
auxiliary closing procedures for Expiration Fridays and Quarterly 
Index Expiration days (collectively, ``expiration days''), and 
extended the effectiveness of the NYSE pilot program until October 
31, 1994. See Securities Exchange Act Release No. 32868 (September 
10, 1993), 58 FR 48687 (September 17,1993) (File No. SR-NYSE-93-33) 
(``1993 Auxiliary Closing Procedures Approval Order''). As modified, 
the NYSE procedures establish, for all stocks, a 3:40 p.m. deadline 
for (1) the entry of MOC orders related to a strategy including any 
expiring stock index options, stock index futures or options on 
stock index futures and (2) the cancellation or reduction of any MOC 
order. In addition, for the pilot stocks (as defined below, see 
infra note 10), the NYSE specialist must, as soon as practicable 
after 3:40 p.m. disseminate any MOC order imbalance of 50,000 shares 
or more; thereafter, MOC orders in the pilot stocks may be entered 
only to offset a published imbalance.
    \9\The BSA proposes to implement its MOC order procedures on a 
pilot basis expiring October 31, 1994. See Amendment No. 1, supra, 
note 1. The BSE also requests accelerated approval to enable the 
pilot program to take effect on the next expiration day. See 
Amendment No. 3, supra, note 3.
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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 II 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
    The purpose of the proposed rule change is to adopt certain 
procedures to mirror those of the primary market for the handling of 
MOC orders on Expiration Fridays and Quarterly Index Expiration days so 
that the BSE does not become a haven for MOC orders that are prohibited 
on the NYSE. In this way, all orders sent to the Exchange will receive 
equal treatment to orders sent to the NYSE. The proposed procedures 
include (a) prohibiting the cancellation or reduction of any MOC order 
in any NYSE stock after 3:40 p.m. on Expiration Fridays and Quarterly 
Index Expiration days, (b) providing a 3:40 p.m. deadline for the entry 
of MOC orders, in all NYSE stocks, related to a strategy involving any 
stock index future, stock index option or option on stock index futures 
in expiring contracts, (c) publishing imbalances of 50,000 shares or 
more in the pilot stocks, and (d) limiting the entry of MOC orders 
after 3:40 p.m. in the pilot stocks to offsetting published imbalances. 
With respect to item (a) above, the Exchange will permit cancellations 
of MOC orders after 3:40 p.m. in those instances where a legitimate 
error has been made. The term ``pilot stocks'' refers to the list of 
stocks designated by the NYSE as pilot stocks for purposes of its 
auxiliary closing procedures.\10\
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    \10\As designated by the NYSE, the Expiration Friday pilot 
stocks consist of the 50 most highly capitalized Standard & Poors 
(``S&P'') 500 stocks and any component stocks of the Major Market 
Index (``MMI'') not included therein. See 1993 Auxiliary Closing 
Procedures Approval Order, supra, note 8. The Quarterly Index 
Expiration day pilot stocks consist of the 50 most highly 
capitalized S&P 500 stocks, any component stocks of the MMI not 
included therein and the 10 highest weighted S&P Midcap 400 stocks. 
Id.
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2. Statutory Basis
    The statutory basis for the proposed rule change is section 6(b)(5) 
of the Act in that it is 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; and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. The BSE believes that, if investors, whose orders 
are banned on the NYSE because of current market conditions, are able 
to reroute those orders to the Exchange for execution on the BSE 
without regard to current market conditions, there could be a negative 
impact on the overall market as a result of the execution of those 
orders.

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 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, 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 Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the BSE. All 
submissions should refer to File No. SR-BSE-93-04 and should be 
submitted by March 18, 1994.

IV. Commission's Findings and Order Granting Temporary Accelerated 
Approval of Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange and, in 
particular, with the requirements of section 6(b). In particular, the 
Commission believes the proposal is consistent with the section 6(b)(5) 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts, and, in general, to protect investors and the public 
interest.
    In recent years, the self-regulatory organizations, with the 
support of the Commission, have instituted certain safeguards to 
minimize excess market volatility that may arise from the liquidation 
of stock positions related to trading strategies involving expiring 
index derivative products. For instance, on expiration days, the NYSE 
utilizes auxiliary closing procedures\11\ designed to help the 
specialist attract any contra-side interest necessary to alleviate MOC 
order imbalances and dampen their effect on the closing price. Based on 
the NYSE's experience,\12\ the Commission believes that these 
procedures work relatively well and may result in more orderly markets 
at the close on expiration days.
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    \11\See supra, note 8.
    \12\The NYSE has submitted to the Commission several monitoring 
reports describing its experience with the auxiliary closing 
procedures. For further discussion of the NYSE's results, see 1993 
Auxiliary Closing Procedures Approval Order, supra, note 8.
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    In today's highly competitive market environment, however, it is 
possible that a regional exchange, which trades NYSE-listed stocks but 
does not have comparable closing procedures, could be utilized by 
market participants to enter MOC orders prohibited on the NYSE. 
Although the Commission has no reason to believe that the BSE market 
has become a significant alternative market to enter otherwise 
prohibited MOC orders, the Commission agrees with the BSE that, if this 
possibility were realized, it could have a negative impact on the 
fairness and orderliness of the national market system.\13\ 
Accordingly, the Commission initially believes that it is reasonable 
for the BSE to adopt procedures for the handling of MOC orders that 
mirror the NYSE's, thereby ensuring the equal treatment of orders in 
both markets and, in the event of unusual market conditions, offering 
the BSE the same benefits in terms of potentially reducing volatility.
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    \13\For example, if MOC orders prohibited on the NYSE were 
entered instead on the BSE, unusually large MOC order imbalances on 
the regional exchange could contribute to overall market volatility.
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    Consistent with its rationale for approving the identical NYSE 
procedures,\14\ the Commission preliminarily has concluded that this 
proposal should allow the BSE to obtain an accurate view of the buying 
and selling interest in MOC orders at expiration and, if there is a 
substantial imbalance on one side of the market, to provide the 
investing public with timely and reliable notice thereof. In reaching 
this conclusion, the Commission noted that the proposed rule change 
will establish a simultaneous 3:40 p.m. deadline for the entry of 
expiration-related MOC orders and for the cancellation or reduction of 
any MOC order. Substantial MOC order imbalances in the pilot stocks 
will be disseminated promptly thereafter.\15\ Because the MOC orders 
included in those imbalances will be irrevocable and because of the 
restrictions on further MOC order entry, the Commission is satisfied 
that BSE imbalance publications should reflect actual investor 
interest.
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    \14\See 1993 Auxiliary Closing Procedures Approval Order, supra 
note 8.
    \15\The BSE has indicated that it will disseminate imbalances to 
its floor, its member firms and the investing public in a manner 
which is substantially similar to that utilized by the NYSE. 
Telephone conversation between Karen A. Aluise, Assistant Vice 
President, BSE, and Beth Stekler, Attorney, Division of Market 
Regulation, SEC, on February 10, 1994.
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    In addition, the Commission finds that, in the event of unusual 
market conditions, the BSE should have sufficient time to attract 
contra-side interest to help alleviate imbalances created by the 
unwinding of index derivative related positions. As noted above, the 
proposed rule change will require both the early submission of 
expiration-related MOC orders and, for the pilot stocks, prompt 
dissemination of substantial MOC order imbalances. While the Commission 
recognizes that 3:40 p.m. is relatively near the close, the Commission 
tentatively believes that deadline strikes a reasonable balance between 
the need to provide the investing public with timely and reliable 
notice of expiration-related order flow and the need to avoid unduly 
infringing upon legitimate trading strategies.
    The Commission is approving the proposed rule change on a pilot 
basis until October 31, 1994.\16\ As long as some index derivative 
products continue to expire based on the closing stock prices on 
expiration days, the Commission agrees with those self-regulatory 
organizations which argue that such procedures are necessary to provide 
a mechanism to handle the potentially large stock imbalances engendered 
by the unwinding of index derivative related positions. During this 
pilot program, the Commission expects the BSE to monitor the 
effectiveness of its MOC order procedures.
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    \16\Prior to the initiation of this pilot, the Commission 
requests that the BSE submit to the Commission an Information 
Memorandum substantially similar to the NYSE's.
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    The Commission therefore requests that the BSE submit a report to 
the Commission, by August 31, 1994, describing its experience with the 
pilot program. At a minimum, this report should contain, for each 
Expiration Friday and Quarterly Index Expiration day, the following 
data: (1) For all pilot stocks, the size of the MOC order imbalance on 
the BSE at 3:40 p.m. and at 4:00 p.m.; (2) for all pilot stocks, the 
price (and time) of the last regular way trade on the BSE, the price of 
the last consolidated trade and the closing price; and (3) for each 
pilot stock which had a MOC order imbalance of 50,000 shares or more at 
3:40 p.m., an appropriate measure of volatility at the close for the 
BSE (for example, the change in price of the closing transaction, 
measured as a percentage, from the last trade and/or the change in the 
specialist's position) and a description of how the pilot procedures 
influenced market conditions. Any requests to modify this pilot 
program, to extend its effectiveness or to seek permanent approval of 
the pilot procedures also should be submitted to the Commission, by 
August 31, 1994, as a proposed rule change pursuant to section 19(b) of 
the Act.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of the 
notice of filing thereof. This will permit the pilot program to take 
effect on the next expiration day. In addition, the procedures the 
Exchange proposes to use are identical to NYSE procedures that were 
published in the Federal Register for the full comment period and were 
approved by the Commission.\17\
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    \17\No comments were received in connection with the most recent 
proposed rule change which modified and extended the NYSE 
procedures. See 1993 Auxiliary Closing Procedures Approval Order, 
supra, note 8.
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    It is therefore ordered, Pursuant to section 19(b)(2) of the 
Act\18\ that the proposed rule change (SR-BSE-93-04) is hereby approved 
on a pilot basis until October 31, 1994.

    \18\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4338 Filed 2-24-94; 8:45 am]
BILLING CODE 8010-01-M