[Federal Register Volume 59, Number 42 (Thursday, March 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4870]


[[Page Unknown]]

[Federal Register: March 3, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33678; File No. SR-NYSE-92-13]

 

Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval and Notice of Filing and Order Granting 
Accelerated Approval to Amendment No. 2 of a Proposed Rule Change 
Regarding an Information Memo on Odd-Lot Trading Practices

February 24, 1994.

I. Introduction

    On May 19, 1992, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') submitted to 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 
therunder,\2\ a proposed rule change regarding the Exchange's odd-lot 
limit order handling procedures. The Exchange addresses several 
potential abuses of the procedures through the issuance of an 
Information Memo to all Members and Member Organizations. On November 
20, 1992, the NYSE submitted to the Commission Amendment No. 1 to the 
proposed rule change.\3\ The proposed rule change was published for 
comment, as amended, in Securities Exchange Act Release No. 31615 
(December 17, 1992), 57 FR 61137 (December 23, 1992). No comments were 
received on the proposal. On January 21, 1994, the NYSE submitted to 
the Commission Amendment No. 2 to the proposed rule change.\4\ For the 
reasons discussed below, this order approves the proposed rule change, 
as amended, including Amendment No. 2 on an accelerated basis.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
    \3\See letter from Brian M. McNamara, Managing Director, Market 
Surveillance, NYSE, to Diana Luka-Hopson, Branch Chief, Commission, 
dated November 16, 1992. Amendment No. 1 clarified the Exchange's 
proposal by providing an example of a pattern of activity that could 
suggest day trading of odd-lot limit orders.
    \4\Amendment No. 2, in addition to other clarifying amendments, 
defined the term ``day trading'' as used in the Information Memo to 
describe prohibited odd-lot limit order activity.
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II. Description of the Proposal

    In February 1991, the Exchange implemented changes to its odd-
lot\5\ order handling procedures.\6\ The changes were intended to 
afford pricing benefits to members and member organizations' customers 
and to provide an inexpensive and efficient order execution system 
compatible with traditional odd-lot investing practices of smaller 
investors.
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    \5\An odd-lot market order is an order of less than a unit of 
trading to buy, sell, or sell short, which carries no further 
qualifying notations. The normal trading unit, or round lot, is 100 
shares.
    \6\See NYSE Rule 124 for a complete description of the NYSE's 
odd-lot order execution system.
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    One change established the use of ``Best Pricing Quote'' for 
pricing odd-lot market orders. This assures that an odd-lot market 
order sent to the Exchange for execution will be priced on the basis of 
the best prevailing national market system quotation for that 
security.\7\ The second change eliminated all differentials on odd-lot 
limit orders entered by member organizations through the Exchange's 
system for odd-lots.\8\
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    \7\See Securities Exchange Act Release No. 28837 (January 29, 
1991), 56 FR 4660 (February 5, 1991).
    \8\See Securities Exchange Act Release No. 28837 (January 29, 
1991), 56 FR 4660 (February 5, 1991).
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    According to the NYSE, however, the efficiencies sought to be 
obtained by eliminating the differential charge on odd-lot limit orders 
would only be achieved if the odd-lot system was used in a manner 
consistent with traditional odd-lot investing practices of smaller 
investors rather than as a professional trading vehicle.
    The Exchange has identified and informed its members about several 
practices that it believes are not consistent with traditional odd-lot 
investing practices and whose use constitutes an abuse of the odd-lot 
system. These practices include unbundling of round-lots for the 
purpose of entering odd-lot limit orders; failure to aggregate odd-lot 
orders into round lots; entry of both buy and sell odd-lot limit orders 
for purposes of capturing the spread in the stock; and order entry 
practices intended to circumvent the round-lot auction market.\9\
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    \9\See NYSE Information memo No. 91-29, July 25, 1991. See also 
Securities Exchange Act Release No. 31048 (August 18, 1992), 57 FR 
38706 (August 26, 1992), Odd-lot limit orders are executed upon the 
occurrence of the first round-lot transaction in the security, which 
is at or better than the specified limit, following receipt of the 
order by the odd-lot system. See NYSE Rule 124.
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    The Exchange's proposal identifies additional types of odd-lot 
limit order trading which the Exchange believes are not consistent with 
traditional odd-lot investment activity and should not be permitted to 
use the odd-lot limit order service. Specifically, the proposal would 
preclude the use of the odd-lot limit order service,\10\ for (1) index 
arbitrage, (2) other types of program trading,\11\ or (3) any pattern 
of activity that would suggest day trading. Examples of this latter 
practice could include among other things, entering multiple off-lot 
limit orders to buy and sell the same security on the same day or odd-
lot limit orders to buy and sell a group of stocks on the same day 
where it appears or is established that the intent is to capture the 
spread in these stocks by buying on the bid and selling on the 
offer.\12\ Upon approval of this proposed rule change, the Exchange 
intends to advise its members and member organizations, through an 
Information Memo, that these types of trading practices may not be 
effectuated by means of the odd-lot limit order service.
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    \10\Such trading would not be precluded from using the odd-lot 
system if odd-lot market orders were utilized. Also, such 
prohibitions do not extend to PRLs (part of round lots) because they 
are executed outside of the odd-lot system.
    \11\The Exchange does permit odd-lot limit orders to be entered 
in conjunction with a program trade where such orders consist in the 
aggregate of a relatively small part of the overall program. The 
term program trading is defined in NYSE Rule 80A as either index 
arbitrage or any trading strategy involving the related purchase or 
sale of a group or basket of 15 or more publicly traded securities 
that have a total fair market value of $1,000,000 or more.
    \12\The Exchange does recognize, however, that some types of 
buying and selling on the same day may be appropriate and cites as 
an example buying stock using an odd-lot limit order and 
subsequently entering a stop loss sell order against that position.
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    In its filing the NYSE stated that the limitations on use of the 
odd-lot limit order system are intended to address specific types of 
trading activity, and are not intended to limit access to, or use of, 
the system by individual market participants or any class of market 
participants for any authorized use of the system.
    Under the proposal member organizations will be expected to 
establish appropriate systems to monitor odd-lot activity to ensure 
that the practices noted in the Information Memo are not engaged in. 
The Information Memo makes clear that the Exchange intends to initiate 
appropriate regulatory action if it finds that member organizations 
have permitted such trading practices, either for proprietary accounts 
or for the accounts of customers.

III. Discussion

    The NYSE's odd-lot order execution system is intended to provide 
efficient execution of odd-lot orders at the best prices available.\13\ 
The Commission agrees with the NYSE that the odd-lot limit order 
trading practices identified in the proposed Information Memo are not 
consistent with traditional odd-lot limit order investing practices. 
Such practices could undermine the integrity of the system and 
contravene the odd-lot order system's purposes.
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    \13\See, Securities Exchange Act Release No. 28837 (January 29, 
1991), 56 FR 5660 (February 5, 1991).
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    In this context, the Commission notes that the NYSE's odd-lot order 
trading system is predicated on the specialists' willingness to provide 
execution and price guarantees to odd-lot orders, the majority of which 
are entered for smaller retail accounts. These transactions are too 
small to be handled efficiently through the regular Exchange auction 
process. These orders generally are used by retail investors to buy or 
sell a small amount of stock and are not used in short term trading 
strategies. As a result, Exchange specialists are able to provide 
execution guarantees to odd-lot limit orders without charging an 
additional handling fee. The use of the system as a day trading vehicle 
or as part of program trades to capture the bid ask spread through odd-
lot limit orders could reduce specialists' willingness to provide cost-
efficient executions of odd-lot limit orders. Accordingly, it is 
reasonable for the NYSE to preclude use of its odd-lot limit order 
system for index arbitrage, program trading, and day trading. Ensuring 
the odd-lot limit order system is only utilized for the types of orders 
it was intended to accommodate will help to ensure the continued 
economic liability of the system which should ultimately benefit all 
investors consistent with section 6(b)(5) of the Act.
    The NYSE has been careful in formulating the Information Memo to 
prohibit only those transactions that would abuse the odd-lot limit 
order execution guarantees. For example, the Information Memo does not 
preclude market participants from entering odd-lot market orders for 
index arbitrage, program trading, or day trading. Because the 
Commission believes the proposal clearly identifies and prohibits 
certain strategies that can result in abuse of the NYSE's odd-lot limit 
order system, yet still allows market participants to have such orders 
executed by entering odd-lot market orders rather than limit orders, 
the Commission believes that the proposal will not unfairly limit 
access to the NYSE's market.
    The Commission finds good cause for accelerated approval of 
Amendment No. 2 to the proposed rule change prior to the thirtieth day 
after publication of notice of filing thereof. Amendment No. 2 modifies 
the proposal to make certain technical and clarifying adjustments to 
the proposed rule change but leaves the overall structure and purpose 
of the proposal unchanged. We also note that no comments were received 
on the proposal as noticed.

IV. Conclusion

    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 sections 11A\14\ and 6(b).\15\ In 
particular, the Commission believes the proposal is consistent with the 
section 11A(a)(1)(C)(i) mandate that it is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure economically efficient execution of 
securities transactions. The Commission further 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, in that the proposal will ensure the 
continued pricing and execution efficiencies provided by the NYSE's 
odd-lot order system by identifying and prohibiting certain odd-lot 
limit order trading strategies that are not consistent with traditional 
odd-lot transactions.
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    \14\ 15 U.S.C. 78k-1 (1988)
    \15\ 15 U.S.C. 78f(b) (1988).
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V. Solicitations of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2. 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-92-13 and should be 
submitted by March 24, 1994.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
\16\ that the proposed rule change, including Amendment No. 2 on an 
accelerated basis, (SR-NYSE-92-13) is approved.
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    \16\ 15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4870 Filed 3-2-94; 8:45 am]
BILLING CODE 8010-01-M