[Federal Register Volume 59, Number 39 (Monday, February 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4474]


[Federal Register: February 28, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33642; File No. SR-NYSE-93-17]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by New York Stock Exchange, Inc. Relating To Initiation of On-
Floor Orders in a Stock by Floor Professionals Who Have a Listed Option 
Position in That Stock

February 18, 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 
14, 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, II and III 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Exchange Rule 96 currently prohibits a member registered as a 
Competitive Trader\1\ or Registered Competitive Market Maker 
(``RCMM'')\2\ from initiating, while on the Floor of the Exchange, the 
purchase or sale, for his own account or his member organization's 
account, of any stock in which he has an option position, or in which 
he knows his firm has an option position. Rule 96 currently applies to 
all options, including those traded on a national securities exchange 
(``listed options''). The proposed rule change would remove the 
prohibition in Rule 96 as to listed options.
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    \1\A Competitive Trader is a NYSE member who is authorized to 
initiate proprietary transactions on the Floor of the Exchange but 
who is not registered as a specialist, odd-lot dealer or Registered 
Competitive Market Maker. See NYSE Rules 111 & 112(e). Competitive 
Traders exist pursuant to, and must comply with the requirements of, 
Section 11(a)(1)(G) of the Act. See also SEC Rule 11a1-1(T). In 
addition, the NYSE requires that 75 percent of a Competitive 
Trader's monthly transactions must be stabilizing transactions under 
the tick-test. See NYSE Rule 112(d).
    \2\A RCMM is a NYSE member who is authorized to initiate 
proprietary transactions on the Floor of the Exchange. See NYSE Rule 
107. RCMMs are not subject to the same tick-test as Competitive 
Traders; however, they must comply with a complex series of rules 
about the price at which they can trade and the size of those 
trades. Id. Unlike Competitive Traders, RCMMs have an affirmative 
obligation to maintain a fair and orderly market. See NYSE Rule 
109(B)(4).
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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 IV 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
    Rule 96 was adopted in the mid-1930's after extensive 
investigations and public hearings by the Commission concerning 
manipulative practices and ``pool'' operations involving the use of 
options. At present, Rule 96 prohibits a member registered as a 
Competitive Trader or RCMM from initiating, while on the Floor, the 
purchase or sale, for his own account or his member organization's 
account, of any stock in which he has an option position, or in which 
he knows his firm has an option position. Rule 96 does not prohibit a 
Competitive Trader or RCMM from trading in options; rather, the rule 
simply provides that such members may not initiate a proprietary trade 
in a stock on the Floor where they have an option position in the 
stock. Rule 96 currently applies to all options, including those traded 
over-the-counter (``OTC options``) and listed options.
    The purpose of the proposed rule change is to remove the 
prohibition in Rule 96 as to listed options. Thus, under the proposed 
rule change, a Competitive Trader or RCMM would be permitted to 
initiate a proprietary purchase or sale of stock on the Floor where he 
has a listed option position in that stock, but not where he has an OTC 
option position in that stock.
    The Exchange believes that the proposed rule change is appropriate 
for three reasons:
    (1) By removing a restraint on members' initiating transactions on 
the Floor, the proposed rule change can be expected to add to the depth 
and liquidity of the Exchange market.
    (2) Listed options are substantially different from the OTC options 
which Rule 96 was originally intended to regulate, and any regulatory 
concerns that might arise as to listed options can be addressed by 
monitoring and surveillance of revised Rule 96.
    (3) The proposed rule change will remove a competitive barrier to 
fair competition, since no other professionals are subject to 
comparable restrictions.

Enhancement to the Exchange Market

    The Exchange established the membership categories of Competitive 
Trader and RCMM to provide a means whereby members, subject to certain 
conditions, could add to the quality of the Exchange market by 
initiating proprietary transactions on the Floor. The current 
restriction in Rule 96 defeats this purpose in some instances by 
precluding Floor professionals from initiating such Floor transactions 
in any stock where they have an option position overlying such stock 
(or where they know their member organization has such an option 
position).
    The Exchange believes the proposed rule change will further the 
purposes of Rule 107 by facilitating RCMM participation as dealers on 
the Exchange. Currently, the prohibition in Rule 96 conflicts with the 
purposes of Rule 107 by effectively precluding RCMMs from participating 
as dealers in any stock where they have an option positin in that 
stock. By deleting the prohibition in Rule 96 as to listed options, the 
proposed rule change will eliminate this barrier to RCMM dealer 
participation, thereby permitting RCMMs to add to the depth and 
liquidity of the Exchange market in situation where they currently may 
not do so.
    In a similar vein, the proposed rule change will facilitate 
transactions by Competitive Traders on the Floor by permitting them to 
initiate such transactions in a stock where they have an option 
position in such stock. This enhanced ability to initiate transactions 
on the Floor will, as with RCMMs, add to the depth and liquidity of the 
Exchange market.

Regulatory Concerns

    Rule 96 was adopted in the mid-1930's to regulate trading where 
members have a position in OTC options, not listed options, and the 
trading abuses in the OTC market that gave rise to Rule 96 are simply 
not present with respect to today's closely surveilled trading in 
listed options. The Exchange believes that regulatory concerns as to 
listed option trading can be addressed by monitoring and surveillance 
of revised Rule 96.
    The Exchange notes that if the prohibition in Rule 96 were to be 
removed as to listed options, RCMMs and Competitive Traders would 
remain subject to the restrictions on members' on-Floor proprietary 
transactions stated in Rules 108 and 112,\3\ and thus would not be in 
any greater position to exploit their alleged time and place advantage 
over public investors.
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    \3\Under Rule 108, an on-Floor order placed by a member to 
establish or increase a position in the member's proprietary account 
is not entitled to priority, or precedence based on size, over an 
off-Floor order placed by a public customer. On-Floor and off-floor 
are defined in rule 112; that rule also prohibits frontrunning of 
block transactions.
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Removal of Barrier to Fair Competition

    The Exchange notes that off-Floor professionals (including 
specialists and market makers on regional exchanges) are not subject to 
any restrictions in effacing off-Floor proprietary trades in a stock 
where they have an option position (whether a listed or OTC option) in 
that stock. Thus, off-Floor professional can be said to enjoy a 
significant competitive advantage over Floor professionals on the 
Exchange, who are restricted in their on-Floor proprietary transactions 
in a stock where they have an option position in that stock.
    The Exchange acknowledges that a floor professional my initiate an 
off-Floor order in a stock where he has an option position in that 
stock. However, a significant reason why Competitive Traders and RCMMs 
become registered as such is to be able, in the routine conduct of 
their business, to initiate proprietary trades on the Floor rather than 
``upstairs.'' Thus, the ability of Floor professionals to initiate off-
Floor orders in a stock in which they have an option position is 
largely meaningless when viewed in the context of the way such 
professionals routinely conduct their business. The Exchange does not 
believe that any viewed in the context of the way such professionals 
routinely conduct their business, when off-Floor professionals are not 
subject to comparable restrictions in the routine conduct of their 
business.

SEC Staff Comments on SR-NYSE-76-54

    In response to proposed changes to Rules 96, 102, and 105 that were 
submitted in file No. SR-NYSE-76-54, the SEC staff suggested that the 
Exchange's proposals be revised so that Floor professionals would be 
permitted to use listed options only for hedging purposes.\4\ Most of 
the SEC staff's comments were directed specifically at specialists' 
trading of specialty stock options pursuant to Rule 105.
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    \4\The NYSE submitted File No. SR-NYSE-76-54 to the Commission 
on October 22, 1976. The proposed rule change was noticed for 
comment in Securities Exchange Act Release 12924 (October 27, 1976), 
41 FR 48430 (November 3, 1976). The file, like other options 
proposals that raised significant regulatory issues, became dormant 
during the ``options moratorium'' in order to allow the Commission 
to complete its Special Study of the Options Markets. Shortly 
thereafter, the NYSE refiled its proposals to amend Rule 96 (File 
No. SR-NYSE-82-19) and Rules 102 and 105 (File No. SR-NYSE-82-20). 
In early 1985, the Commission approved the latter rule filing, 
thereby permitting NYSE specialists to trade options on their 
specialty stock but, consistent with the staff's earlier comments, 
only for hedging purposes. See Securities Exchange Act Release No. 
21710 (February 4, 1985), 50 FR 5708 (February 11, 1985). The 
amendments to Rule 96, however, were noticed but never received 
Commission approval. See Securities Exchange Act Release No. 20006 
(July 26, 1983), 48 FR 35217 (August 3, 1983). On March 15, 1993, 
the NYSE withdrew File No. SR-NYSE-82-19 and resubmitted the 
substance of that proposal as this File No. SR-NYSE-93-17.
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    While Rule 105 permits specialists to use listed options to offset 
the risks of making markets in stocks in which they are registered, the 
Exchange does not believe that it would be appropriate to re-structure 
Rule 96 along the lines of Rule 105. A ``hedging limitation'' in such a 
re-structured version of Rule 96 would have the effect of requiring 
Competitive Traders and RCMMs to use listed options only to offset the 
risk of loss in stock positions which they acquired as a result of 
orders in such stocks that were initiated on the Floor. In practice, 
such a limitation would be even more restrictive than the current 
regulation, which, as noted above, permits Floor professionals to trade 
in listed options, but simply precludes them from initiating an order 
on the Floor in a stock which underlies such option position. The 
Exchange does not believe that making Rule 96 even more stringent than 
it is today would serve any valid regulatory purpose.
    As noted above, Rule 96 does not prohibit a Competitive Trader or 
RCMM from trading in options, but provides only that he may not 
initiate a proprietary order on the Floor in any stock where he has an 
option position in that stock. The Exchange does not believe that any 
sort of ``reverse hedging limitation'' in Rule 96 would make sense 
because it would mean, in effect, that a Competitive Trader or RCMM 
could initiate a proprietary trade on the Floor if necessary to hedge 
an option position. However, the primary dealings of RCMMs and 
Competitive Traders are in stocks, not the overlying options. In the 
Exchange's view, a ``reverse hedging limitation'' in Rule 96 would bear 
no relation to the practical business dealings of RCMMs and Competitive 
Traders, and would constitute an unnecessary burden of over-regulation 
given the minimal potential for trading abuse.
2. Statutory Basis
    The statutory bases for the proposed rule change are sections 
6(b)(5), 6(b)(8) and 11A(a)(1)(c)(ii) of the Act. By removing the 
prohibition on Competitive Traders and RCMMs initiating proprietary 
transactions on the Floor in a stock where they have a listed option 
position in such stock, and thereby permitting such members to add to 
the depth and liquidity of the Exchange market in situations where they 
may not currently do so, the proposed rule change will have the effect 
of ``facilitating transactions in securities'' and will ``perfect the 
mechanism of a free and open market,'' as called for in section 
6(b)(5).
    To the extent that the proposed rule change permits Floor 
professionals to initiate transactions on a more equal regulatory 
footing with other securities professionals, the proposed rule change 
is designed to eliminate unfair discrimination between brokers or 
dealers, as called for in section 6(b)(5); to remove a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act, as called for in section 6(b)(8); and to promote fair 
competition among brokers and dealers, as called for in section 
11A(a)(1)(C)(ii).

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. In fact, the proposed rule 
change will enhance competition by permitting Floor professionals to 
initiate proprietary transactions on a more equal regulatory plane with 
all other securities professionals.

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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such other period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. 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 NYSE. All 
submissions should refer to File No. SR-NYSE-93-17 and should be 
submitted by March 21, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4474 Filed 2-25-94; 8:45 am]
BILLING CODE 8010-01-M