[Federal Register Volume 59, Number 43 (Friday, March 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4999]


[[Page Unknown]]

[Federal Register: March 4, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33686; File No. SR-NYSE-88-14]

 

Self-Regulatory Organizations; New York Exchange, Inc.; Order 
Granting Approval to Proposed Rule Change Relating to Specialist Post 
Wires

February 25, 1994.

I. Introduction

    On April 25, 1988, 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 
thereunder,\2\ a proposed rule change to permit a specialist unit, with 
Exchange approval, to use the telephone line at its trading post 
location to enter options or futures hedging orders through a member on 
the floor of an options or futures exchange. The proposed rule change 
was published for comment in Securities Exchange Act Release No. 25694 
(May 12, 1988), 53 FR 17812 (May 18, 1988). No comments were received 
on the proposal.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
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II. Description of the Proposal

    The Exchange proposes to amend NYSE Rule 36.30 which currently 
permits a specialist unit, subject to Exchange approval, to maintain a 
telephone line at its trading post location on the Floor to enable the 
unit to communicate with its off-Floor office or clearing firm. In 
addition the Rule prohibits the use of such telephones for the purpose 
of transmitting to the NYSE Floor orders for the purchase or sale of 
securities, but permits the use of the telephones to enter options or 
futures hedging orders (i.e., orders entered to offset the risk of 
making a market in the underlying speciality stock) through the 
specialist unit's off-Floor office or clearing firm. The proposed 
amendment will add language to the Rule to expand permitted usage of 
telephone lines at the specialist posts to include, with Exchange 
approval, the entry of a specialist unit's options or futures hedging 
orders ``through a member (on the floor) of an options or futures 
exchange.''

III. Discussion

    The adoption by the NYSE of subsection .30 to rule 36, along with 
other amendments to the rule, codified the Exchange's policy concerning 
members' use of telephones on the Floor that can be used to communicate 
with non-members located off-floor.\3\ Such communication is permitted 
with certain specifically enumerated restrictions.\4\
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    \3\See Securities Exchange Act Release No. 25842 (June 23, 
1988), 53 FR 24539 (June 29, 1988). Prior to the adoption of these 
amendments, rule 36 regulated the establishment of communication 
links only between a member or member organization's offices and the 
Exchange Floor.
    \4\These restrictions include a ban on portable phones on the 
Exchange floor. On August 19, 1988, a petition for review of the 
Commission's June 23 Order approving SR-NYSE-87-18 was filed by 
William J. Higgens, a NYSE member, in the United States Court of 
Appeals for the Second Circuit. Petitioner Higgens objected to the 
Second Circuit. Petitioner Higgens objected to the Commission's 
approval of that portion of the NYSE's proposal that prohibits 
members from using portable telephone son the Exchange floor. On 
January 20, 1989, the Court of Appeals issued a decision rejecting 
Higgins' objections and affirming the Commission's June 23 Order. 
See Higgins v. SEC, 866 F.2d 47 (2nd Cir.
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    The instant proposed rule change will amend subsection .30 by 
adding language that will enable a specialist unit to use a telephone 
linkage at the specialist post to enter options or futures hedging 
orders through a member (on the floor) of an options or futures 
exchange. This would be in addition to the current language of 
subsection .30 which permits entry of such orders through a telephone 
linkage to the specialist unit's off-floor offices or its clearing 
firm. The NYSE states that the purpose of this amendment is to provide 
a faster means for specialists to enter options or futures hedging 
orders and to expand a specialist's ability to enter such orders from 
its post location on the Exchange floor directly with a member on the 
floor of an options or futures exchange.
    The Commission, in originally approving the use of options by 
specialists for hedging their specialty stocks, was sensitive to 
concerns over the potential for specialist frontrunning,\5\ tape 
racing, or other abuses arising from the specialist's informational 
advantage.\6\ In order to allay these concerns, the NYSE rule 
permitting options hedging by specialists places restrictions on the 
size, timing and purpose of the options transactions.\7\ The proposal 
being approved does not affect the restrictions currently in place for 
placing options orders. The proposal only provides a more efficient 
means for specialists to relay hedging orders to options and futures 
exchanges. Further, the NYSE has implemented surveillance procedures to 
monitor specialists' use of options to ensure they are consistent with 
these restrictions. For example, specialists are required to submit 
Form 81-O to report their options transactions.\8\ With respect to 
futures hedging orders, the NYSE through an agreement with the Chicago 
Mercantile Exchange, which currently trades futures on the Standard & 
Poor's (``S & P'') 500, Midcap 400 and the Major Market Index, exchange 
information relating to futures transactions on these indexes in 
addition to options on any of the aforementioned index futures and 
stock programs.\9\
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    \5\ With respect to futures, the Commission notes that the NYSE 
has adopted a policy that prohibits intermarket frontrunning between 
the NYSE equities market and any futures exchange. See Securities 
Exchange Act Release No. 27047 (July 19, 1989), 54 FR 31131.
    \6\ See Securities Exchange Act Release No. 21710 (February 4, 
1985), 50 FR 5708 (February 11, 1985).
    \7\ See NYSE Rule 105 and the NYSE's ``Guidelines for 
Specialists Specialty Stock Option Transactions Pursuant to Rule 
105.''
    \8\ See NYSE Rule 104A.50 (requirement that specialists submit 
options data trading reports).
    \9\ We also note that surveillance information is also shared 
through the Intermarket Surveillance Group (``ISG''). ISG was formed 
on July 14, 1983 to, among other things, coordinate more effectively 
surveillance and investigative information sharing arrangements in 
the stock and options markets. See Intermarket Surveillance Group 
Agreement, July 14, 1983. Because of potential opportunities for 
trading abuses involving stock index futures, stock options and the 
underlying stock and the need for greater sharing of surveillance 
information for these potential intermarket trading abuses, the 
major stock index futures exchanges (e.g., CME & CBT) joined the ISG 
as affiliate members in 1990.
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IV. Conclusion

    The Commission has reviewed closely the proposed NYSE rule change 
and believes that it is consistent with the requirements of the Act 
and, accordingly, should be approved. In particular, the Commission 
believes that the proposed rule change is consistent with the 
requirement of section 6(b)(5) of the Act in that it will facilitate 
transactions in securities by providing specialists with the ability to 
hedge their positions more rapidly by enabling them to communicate 
directly with a member on the floor of an option or futures exchange. 
The current process, which forces the specialist to route a hedging 
order through an off-floor office or clearing firm, can make the 
execution of the hedging order more cumbersome and less timely. By 
improving the process by which specialists can transfer the risk of 
their market making responsibilities, specialists would be better able 
to fulfill these responsibilities.
    Finally, the Commission believes that any potential for 
frontrunning, tape racing, or other abuses by specialists that may be 
created by the proposed rule change is minimal, due in most part to the 
restrictions placed on the specialists' options activity and the NYSE 
surveillance. In addition, as noted above, the NYSE has some access 
through its agreement with the CME, and as an ISG member, to receive 
information on orders entered by the specialist on stock index futures 
and options on stock index futures that should allow it to surveil for 
potential abuses.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-NYSE-88-14) is approved.

    \10\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.\11\
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    \11\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4999 Filed 3-3-94; 8:45 am]
BILLING CODE 8010-01-M