[Federal Register Volume 59, Number 46 (Wednesday, March 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5396]


[[Page Unknown]]

[Federal Register: March 9, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33706; File No. SR-NYSE-92-37]

 

Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Amendment No. 1 and No. 2 to 
Proposed Rule Change Relating to Entry of Limit at the Close Orders

March 3, 1994.

I. Introduction

    On December 23, 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 
thereunder,\2\ a proposed rule change to amend NYSE Rule 13 to permit 
the entry of limit at the close (``LOC'') orders to offset published 
imbalances of market at the close (``MOC'') orders. On September 8, 
1993, the NYSE submitted Amendment No. 1 to the proposed rule change in 
order to conform the filing with the recent amendments to the 
Exchange's auxiliary closing procedures.\3\ On September 29, 1993, the 
NYSE submitted Amendment No. 2 to the proposed rule change in order to 
clarify certain terms used in the original filing.\4\
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
    \3\See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Diana Luka-Hopson, Branch Chief, Division of 
Market Regulation, SEC, dated September 3, 1993 (``Amendment No. 
1'').
    \4\See letter from Donald Siemer, Director, Market Surveillance, 
NYSE, to Diana Luka-Hopson, Branch Chief, Division of Market 
Regulation, SEC, dated September 29, 1993 (``Amendment No. 2'').
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    The proposed rule change, together with Amendments No. 1 and No. 2, 
was published for comment in Securities Exchange Act Release No. 32994 
(September 30, 1993), 58 FR 52126 (October 6, 1993). No comments were 
received on the proposal. This order approves the proposed rule change, 
including both amendments, contingent upon the NYSE submitting to the 
Commission a satisfactory Information Memorandum.

II. Description of the Proposal

    NYSE rule 13 currently defines an ``at the close order'' as a 
market order to be executed in its entirety at the closing price. The 
Exchange proposes to amend this rule to provide that an ``at the close 
order'' also will include a limit order for execution at the closing 
price. The NYSE proposal will enable a member firm to enter a LOC 
order, pursuant to such procedures regarding time of order entry and 
cancellation as the NYSE periodically will establish,\5\ only to offset 
a published imbalance of MOC orders in that stock.\6\ The initial LOC 
order entry and cancellation times are set forth below.
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    \5\See infra, note 16.
    \6\Presently, the NYSE utilizes two sets of closing procedures, 
one for expiration days (as defined below) and one for all other 
trading days, pursuant to which specialists may be required to 
disseminate MOC order imbalances of 50,000 shares or more. Amendment 
No. 2, see supra note 4, clarifies that the term ``expiration days'' 
refers to both (1) 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 
(``Expiration Fridays'') and (2) the trading day on which end of 
calendar quarter index options expire (``QIX Expiration Days'').
    On expiration days, the NYSE's auxiliary closing procedures 
establish a 3:40 p.m. deadline for (1) the entry of MOC orders 
related to a trading strategy involving an expiring index derivative 
product and 92) the cancellation or reduction of any MOC order. 
Moreover, in the pilot stocks (as defined below, (see infra note 9), 
the 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. See Securities Exchange Act Release 
No. 32868 (September 10, 1993), 58 FR 48687 (September 17, 1993) 
(File No. SR-NYSE-93-33) (approving modifications to auxiliary 
closing procedures and extending pilot program until October 31, 
1994). Amendment No. 1, see supra note 3, made conforming changes to 
the original LOC order filing.
    On other trading days, the specialist must, as soon as 
practicable after 3:45 p.m., disseminate any MOC order imbalance of 
50,000 shares or more in (1) the pilot stocks and (2) any stock 
being added to or dropped from certain stock indexes (or, with Floor 
Official approval, from other stock indexes). For non-expiration 
days, a published imbalance (or the lack thereof) does not preclude 
the entry or cancellation of any MOC order on either side of the 
market. See Securities Exchange Act Release No. 31291 (October 6, 
1992), 57 FR 47149 (October 14, 1992) (File No. SR-NYSE-92-12).
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    The Exchange will modify its automated order routing system to 
accept the new LOC order type, and anticipates that the necessary 
system changes will be completed in spring 1994.\7\ At that time, the 
NYSE will initiate LOC order entry, on a 15-month pilot basis,\8\ in 
five of the so-called ``pilot stocks.''\9\ According to the NYSE, the 
initial stocks will be selected based on their having a level of market 
activity and trading interest that suggests LOC orders would be a 
useful investment vehicle;\10\ other stocks will be added, during the 
15-month period, as the NYSE gains experience with this pilot 
program.\11\
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    \7\The NYSE has represented that, before initiating LOC order 
entry, it will submit to the Commission a letter (1) stating that 
the modifications to its SuperDot system have been tested and are 
fully operational and (2) informing the Commission of the start-up 
date for this pilot program. Telephone conversation between Donald 
Siemer, Director, Market Surveillance, NYSE, and Beth Stekler, 
Attorney, Division of Market Regulation, SEC, on January 28, 1994.
    \8\See letter from Donald Siemer, Director, Market Surveillance, 
NYSE, to Diana Luka-Hopson, Branch Chief, Division of Market 
Regulation, SEC, dated August 25, 1993.
    \9\For purposes of LOC order entry, the term ``pilot stocks'' 
refers to the Expiration Friday pilot stocks plus any additional QIX 
Expiration Day pilot stocks. Specifically, 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. The QIX 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.
    \10\The NYSE has represented that, before initiating LOC order 
entry, it will submit to the Commission a letter containing the 
names of the five stocks. Telephone conversation between Donald 
Siemer, Director, Market Surveillance, NYSE, and Beth Stekler, 
Attorney, Division of Market Regulation, SEC, on January 28, 1994.
    \11\The NYSE has represented that, at such time as stocks are 
added to this pilot program, it will submit to the Commission a 
letter containing the names of the stocks. Telephone conversation 
between Donald Siemer, Director, Market Surveillance, NYSE, and Beth 
Stekler, Attorney, Division of Market Regulation, SEC, on January 
28, 1994. The Commission notes that the total number of pilot stocks 
(as defined above, see supra note 9), and thus the maximum number of 
stocks which could be selected for LOC order entry, is presently 62.
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    In terms of the procedures for handling LOC orders, the NYSE 
proposes to establish a 3:55 p.m. deadline for their entry. On 
expiration days, LOC orders will be irrevocable after 3:40 p.m. (except 
in the event of a legitimate error); on other trading days, 
cancellation of LOC orders will be prohibited after 3:55 p.m. (except 
in the event of a legitimate error).\12\ In addition, the NYSE will 
notify its electronic display book, such that LOC orders will be 
prioritized relative to other LOC orders by time of entry, but will be 
required to yield priority to all conventional limit orders on the 
specialist's book at the same price. Under these procedures, LOC orders 
at the closing price (as opposed to a better price) will not be 
guaranteed an execution.
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    \12\As noted above, member firms will be able to enter LOC 
orders only to offset a published imbalance of MOC orders in that 
stock. Under the NYSE's closing procedures, see supra note 6, MOC 
order imbalances of 50,000 shares or more must be disseminated as 
soon as practicable after 3:40 p.m. on expiration days and after 
3:45 p.m. on other trading days. LOC order entry will be permitted 
thereafter.
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    The Exchange believes that, with respect to expiration days, the 
pilot to permit the use of LOC orders on a limited basis, as described 
above, should be viewed as an interim measure to help address the 
prospect of excess market volatility that may be associated with an 
imbalance of MOC orders at the close. The NYSE states that the basis 
for the proposed rule change is Section 6(b)(5), which requires that 
the rules of the Exchange be designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and, in general, to protect investors and the 
public interest.

III. Discussion

    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).\13\ 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.
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    \13\15 U.S.C. Sec. 78f(b) (1988).
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    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 index 
derivative products. For instance, since 1986, the NYSE has utilized 
auxiliary closing procedures on expiration days. As recently 
amended,\14\ these procedures 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. The procedures allow the 
NYSE to obtain an indication 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 and with an opportunity to make appropriate 
investment decisions in response.
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    \14\For further discussion of the NYSE's auxiliary closing 
procedures, see supra, note 6.
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    The NYSE auxiliary closing procedures have worked relatively well 
and may have resulted in more orderly markets on expiration days. 
Nevertheless, both the Commission and the NYSE remain concerned about 
the potential for excess market volatility, particularly at the close 
on expiration days. Although, to date, the NYSE has been able to 
attract sufficient contra-side interest to effectuate an orderly 
closing, adverse market conditions could converge on an expiration day 
to create a market dislocation which could make member firms and their 
customers unwilling to acquire significant positions.
    After careful review, the Commission preliminarily has concluded 
that LOC orders should provide the NYSE with an additional means of 
attracting contra-side interest to help alleviate MOC order imbalances 
arising from the liquidation of index derivative related positions. As 
a practical matter, the Commission believes that the new LOC order type 
will appeal to certain market participants who otherwise might be 
reluctant to commit capital at the close. Specifically, unlike a MOC 
order, which results in significant exposure to adverse price 
movements, a LOC order will allow each investor to determine the 
maximum/minimum price at which he or she is willing to buy/sell. To the 
extent that such risk management benefits encourage NYSE member firms 
and their customers to enter orders to offset MOC order imbalances of 
50,000 shares or more, thereby adding liquidity to the market, the 
Commission agrees with the NYSE that LOC orders could become a useful 
investment vehicle for curbing excess price volatility at the 
close.\15\
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    \15\Furthermore, the Commission notes that LOC orders could 
allow the NYSE to accomplish this goal without diminishing any 
benefit to investors from trading strategies which rely on MOC 
orders to guarantee a fill at the closing price.
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    The Commission also finds that the NYSE has established appropriate 
procedures for the handling of LOC orders and that the NYSE's existing 
surveillance should be adequate to monitor compliance with those 
procedures.\16\ Because LOC orders will be required to yield priority 
to conventional limit orders at the same price, the Commission is 
satisfied that public customer orders on the specialist's book will not 
be disadvantaged by this proposal. In addition, the Commission believes 
that the proposed 3:55 p.m. deadline for LOC order entry strikes a 
reasonable balance between the need to effectuate an orderly closing 
and the need to avoid unduly infringing upon legitimate trading 
strategies. Similarly, in the Commission's opinion, the prohibition on 
cancelling LOC orders on expiration days is consistent with the 
Exchange's auxiliary closing procedures and, like those procedures, 
should allow specialists to make a timely and reliable assessment of 
expiration-related order flow and its potential impact on the closing 
price.
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    \16\While Rule 13, as amended, provides the NYSE with discretion 
in establishing the procedures for LOC order entry and cancellation, 
the Commission expects that any modification to the procedures 
described herein will be submitted to the Commission as a proposed 
rule change pursuant to section 19(b) of the Act.
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    The Commission is approving LOC order entry on a 15-month pilot 
basis, beginning with five of the pilot stocks, contingent upon the 
NYSE submitting to the Commission a satisfactory Information 
Memorandum.\17\ As long as some index derivative products continue to 
expire based on closing stock prices on expiration days, the Commission 
agrees with the NYSE that such procedures are necessary to provide a 
mechanism to handle the potentially large imbalances that can be 
engendered by firms unwinding index derivative related positions. 
During the pilot program, the Commission expects the NYSE to monitor 
the effectiveness of its LOC order procedures.
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    \17\The NYSE has agreed to the Information Memorandum being a 
prerequisite for the implementation of its LOC order pilot program. 
Telephone conversation between Robert McSweeney, Senior Vice 
President, Market Surveillance, NYSE, and Sharon Lawson, Assistant 
Director, Division of Market Regulation, SEC, on February 2, 1994.
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    The Commission therefore requests that the NYSE submit a report to 
the Commission, by the date 12 months after the start-up date for LOC 
order entry, describing its experience with the pilot program. At a 
minimum, this report should contain the following data for each 
expiration day during that 12-month period: (1) The names of all LOC 
pilot stocks as of that expiration day (including both the initial five 
stocks and any pilot stocks added thereafter); (2) for all LOC pilot 
stocks which had a MOC order imbalance of 50,000 shares or more at 3:40 
p.m., the names of those stocks and the size of the imbalance; (3) for 
each stock listed in (2) above, the size of the MOC order imbalance at 
4:00 p.m. and an appropriate measure of the size of conventional limit 
order and LOC order interest, on the opposite side of the market from 
the imbalance, at 4 p.m.; (4) for each stock listed in (2) above, (i) 
the price of the transaction effected closest in time to 3:40 p.m., the 
price of the last regular way trade and the closing price, (ii) the 
change in price of the closing transaction, measured as a percentage, 
from the last regular way trade and from the transaction effected 
closest in time to 3:40 p.m. (iii) historical data analyzing price 
volatility for the same stock on expiration days prior to the 
implementation of this pilot program; and (5) the average price 
volatility for all stocks listed in (2) above as compared to the 
average price volatility for all other pilot stocks. The NYSE report 
also should contain, for one week per calendar quarter (including at 
least one week with no expiration days) the data described herein, as 
modified to reflect the MOC procedures for non-expiration days. 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 the date 12 months after the date for 
the start-up of LOC order entry, as a proposed rule change pursuant to 
section 19(b) of the Act.

IV. Conclusion

    For the reasons set forth above, the Commission finds that the 
proposed rule change is consistent with section 6(b)(5) of the Act.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-NYSE-92-37) is approved on a 
15-month pilot basis, contingent upon the NYSE submitting to the 
Commission a satisfactory Information Memorandum.

    \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. 94-5396 Filed 3-8-94; 8:45 am]
BILLING CODE 8010-01-M