[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