[Federal Register Volume 59, Number 59 (Monday, March 28, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7166]


[Federal Register: March 28, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33792; File No. SR-NYSE-94-06]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Temporary Accelerated Approval to Proposed Rule Change by New 
York Stock Exchange, Inc., Relating to an Extension of Its Pilot 
Program for Stopping Stock Under Amendments to Rule 116.30.

March 21, 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, 1994, 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 and II 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

    The proposed rule change consists of extending the pilot for 
amendments to Rule 116.30 for an additional year until March 21, 
1995.\1\ The amendments permit a specialist, upon request, to grant a 
stop in a minimum variation market for any order of 2,000 shares or 
less, up to a total of 5,000 shares for all stopped orders.
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    \1\The NYSE received approval to amend Rule 116.30, on a pilot 
basis, in Securities Exchange Act Release No. 28999 (March 21, 
1991), 56 FR 12964 (March 28, 1991) (File No. SR-NYSE-90-48) (``1991 
Approval Order''). The Commission subsequently extended the NYSE's 
pilot program in Securities Exchange Act Release Nos. 30482 (March 
16, 1992), 57 FR 10198 (March 24, 1992) (File No. SR-NYSE-92-02) 
(``1992 Approval Order''); and 32031 (March 22, 1993), 58 FR 16563 
(March 29, 1993) (File No. SR-NYSE-93-18) (``1993 Approval Order''). 
Commission approval of these amendments to Rule 116.30 expires on 
March 21, 1994. The Exchange seeks accelerated approval of the 
proposed rule change in order to allow the pilot program to continue 
without interruption.
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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 III 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
    The practice of ``stopping'' stock by specialists on the Exchange 
refers to a guarantee by the specialist that an order the specialist 
receives will be executed at no worse a price than the contra side 
price in the market when the specialist receives the order, with the 
understanding that the order may in fact receive a better price.
    Formerly, Exchange Rule 116.30 permitted a specialist to stop stock 
only when the quotation spread was at least twice the minimum variation 
(i.e., for most stocks, at least a \1/4\ point), with the specialist 
then being required to narrow the quotation spread by making a bid or 
offer, as appropriate, on behalf of the order that is being stopped.
    For three years, on March 21, 1991, March 16, 1992, and March 22, 
1993, the Commission approved, on a one-year pilot basis each time, 
amendments to the rule which permit a specialist to stop stock in a 
minimum variation market (generally referred to as an ``\1/8\th point 
market'').\2\ The Exchange sought these amendments on the grounds that 
many orders would receive an improved price if stopping stock in \1/
8\th point markets were permitted. The amendments to Rule 116.30 permit 
a specialist, upon request, to stop individual orders of 2,000 shares 
or less, up to an aggregate of 5,000 shares when multiple orders are 
stopped, in an \1/8\th point market. A specialist may stop an order 
pursuant to a specified larger order size threshold, or a specified 
larger aggregate share threshold, after obtaining Floor Official 
approval.
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    \2\See 1991, 1992 and 1993 Approval Orders, supra, note 1.
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    On February 12, 1993, the Exchange requested that the Commission 
grant permanent approval to the amendments to Rule 116.30.\3\ At that 
time, the Commission staff requested that the Exchange extend the pilot 
for an additional year to allow the Commission more time to consider 
the Exchange's request to make the amendments to Rule 116.30 permanent. 
The Commission staff has again requested that the Exchange extend the 
pilot for the same reason. Therefore, the Exchange is now proposing to 
extend the effectiveness of the amendments to Rule 116.30 for an 
additional year through March 21, 1995.
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    \3\See File No. SR-NYSE-93-11.
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2. Statutory Basis
    The basis under the Act for the proposed rule change is the 
requirement under section 6(b)(5) that an Exchange have rules that are 
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. The 
Exchange's proposal to extend amendments to Rule 116.30 is consistent 
with these objectives in that it permits the Exchange to better serve 
its customers by enabling specialists to execute customer orders at 
improved prices.

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.

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. 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-94-06 and should be 
submitted by April 18, 1994.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    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 section 6(b)(5)\4\ and section 11(b)\5\ of the Act. 
The Commission believes that the amendments to Rule 116.30 should 
further the objectives of section 6(b)(5) and section 11(b) through 
pilot program procedures designed to allow stops, in minimum variation 
markets, under limited circumstances that provide the possibility of 
price improvement to customers whose orders are granted stops.\6\
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    \4\15 U.S.C. 78f (1988).
    \5\15 U.S.C. 78k (1988).
    \6\For a description of NYSE procedures for stopping stock in 
minimum variation markets, and of the Commission's rationale for 
approving those procedures on a pilot basis, see 1991 Approval 
Order, supra, note 1. The discussion in the aforementioned order is 
incorporated by reference into this order.
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    In its orders approving the pilot procedures,\7\ the Commission 
asked the NYSE to study the effects of stopping stock in a minimum 
variation market. Specifically, the Commission requested information on 
(1) the percentage of stopped orders executed at the stop price, versus 
the percentage of such orders receiving a better price; (2) market 
depth, including a comparison of the size of stopped orders to the size 
of the opposite side of the quote and to any quote size imbalance, and 
including an analysis of the ratio of the size of the bid to the size 
of the offer; (3) whether limit orders on the specialist's book were 
being bypassed due to the execution of stopped orders at a better price 
(and, to this end, the Commission requested that the NYSE conduct a 
one-day review of all book orders in the ten stocks receiving the 
greatest number of stops); and (4) specialist compliance with the pilot 
program's procedures.
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    \7\See supra, note 1.
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    On February 13, 1992, November 5, 1992, and October 15, 1993, the 
Exchange submitted to the Commission monitoring reports regarding the 
amendments to Rule 116.30. The Commission believes that, although these 
monitoring reports provide certain useful information concerning the 
operation of the pilot program, the NYSE must provide further data, 
particularly about Rule 116.30's impact on limit orders on the 
specialist's book, before the Commission can fairly and comprehensively 
evaluate the NYSE's use of the pilot procedures. To allow such 
additional information to be gathered and reviewed, without 
compromising the benefit that investors might receive under Rule 
116.30, as amended, the Commission believes that it is reasonable to 
extend the pilot program until March 21, 1995. During this extension, 
the Commission expects the NYSE to respond fully to the concerns set 
forth below.
    First, the October monitoring report indicates that approximately 
half of eligible orders (i.e., orders for 2,000 shares or less) stopped 
in minimum variation markets received price improvement. The 
Commission, therefore, believes that the pilot procedures provide a 
benefit to investors by offering the possibility of price improvement 
to customers whose orders are granted stops in minimum variation 
markets. According to the latest NYSE report, moreover, virtually all 
stopped orders were for 2,000 shares or less. In this respect, the 
amendments to Rule 116.30 should mainly affect small public customer 
orders, which the Commission envisioned could most benefit from 
professional handling by the specialist. During the pilot extension, 
the Commission requests that the NYSE continue to monitor the 
percentage of stopped orders that are for 2,000 shares or less.
    Second, in terms of market depth, the NYSE's October monitoring 
report suggests that stock tends to be stopped in minimum variation 
markets where there is a significant disparity (in both absolute and 
relative terms) between the number of shares bid for and the number 
offered.\8\ That report also suggests that, given the depth of the 
opposite side of the market, orders affected by the Rule 116.30 pilot 
tend to be relatively small.\9\ For a substantial majority of stops 
granted, the size of the stopped order was less than, or equal to, 25% 
of the size of the opposite side quote. Based on such data, the NYSE 
concludes that the imbalances on the opposite side of the market from 
the orders stopped were of sufficient size to suggest the likelihood of 
price improvement to customers.\10\
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    \8\As part of its initial proposed rule change, the NYSE 
provided the following example illustrating the relationship between 
quote size imbalance and the likelihood of price improvement: Assume 
that the market for a given stock is quoted 30 to 30\1/8\, with 
1,000 shares bid for and 20,000 shares offered. The large imbalance 
on the offer side of the market suggests that subsequent 
transactions will be on the bid side. Accordingly, the NYSE states 
that it might be appropriate to stop a market order to buy, since 
the delay might allow the specialist to execute the buyer's order at 
a lower price. After granting such a stop, the specialist would be 
required to increase his quote by the size of the stopped buy order, 
thereby adding depth to the bid side of the market.
    \9\A relatively large order might begin to counteract the 
pressure the imbalance on the opposite side of the market is putting 
on the stock's price. Accordingly, it might not be as appropriate to 
stop such an order.
    \10\The NYSE has stated, both to the Commission and to its 
members, that specialists should only stop stock in a minimum 
variation market when an imbalance exists on the opposite side of 
the market and such imbalance is of sufficient size to suggest the 
likelihood of price improvement. See e.g., letter from James E. 
Buck, Senior Vice President and Secretary, NYSE, to Mary N. Revell, 
Branch Chief, Division of Market Regulation, SEC, dated December 27, 
1990; NYSE information memo #1809, dated September 12, 1991.
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    The Commission believes that the requirement of a sufficient market 
imbalance is a critical aspect of the pilot program.\11\ Such a 
requirement is necessary to ensure that stops are only granted, in a 
minimum variation market, when the benefit (i.e., price improvement) to 
orders being stopped far exceeds the potential for harm to orders on 
the specialist's book.\12\ To evaluate how this standard is being 
applied in practice, the Commission requests that the NYSE conduct 
another comprehensive quantitative analysis of market depth. In its 
next monitoring report, the NYSE should provide, in chart form, a 
comparison of the size of the stopped order to any quote size 
imbalance.\13\ The chart also should include the ratio of the size of 
the bid to the size of the offer.\14\ The NYSE should concentrate on 
orders for 2,000 shares or less, and should provide the requested 
information in the form of an average for all buy orders stopped, and 
then for all sell orders stopped, in that size range.
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    \11\For a discussion of the relationship between quote size 
imbalance and the likelihood of price improvement, see supra, note 
8.
    In extending a comparable pilot program by the American Stock 
Exchange, the Commission placed similar emphasis on the critical 
nature of the sufficient size standard when stopping stock in 
minimum variation markets. See Securities Exchange Act Release No. 
32664 (July 21, 1993), 58 FR 40171 (July 27, 1993) (File No. SR-
Amex-93-22).
    \12\See infra, text accompanying notes 15-20.
    \13\Every time a specialist stops an order to buy, the NYSE 
should calculate the size of that stopped order as a percentage of 
the quote size imbalance, i.e., the difference between the size of 
the offer and the size of the bid.
    Every time a specialist stops an order to sell, the NYSE should 
calculate the size of that stopped order as a percentage of the 
quote size imbalance, i.e., the difference between the size of the 
bid and the size of the offer.
    \14\Every time a specialist stops an order to buy, the NYSE 
should calculate the size of the bid as a percentage of the size of 
the offer.
    Every time a specialist stops an order to sell, the NYSE should 
calculate the size of the offer as a percentage of the size of the 
bid.
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    Third, the NYSE does not believe that the amendments to Rule 116.30 
significantly disadvantage customer limit orders existing on the 
specialist's book.\15\ This conclusion is based on the Exchange's 
review of limit orders against which orders receiving price improvement 
were stopped pursuant to this pilot program. As part of its review, the 
NYSE determined how often such book orders were executed at their limit 
price by the close of the day's trading. The Commission does not 
consider that data to be conclusive, because it does not reflect the 
disposition of book orders in those circumstances (approximately half 
of all stops granted) where the stopped order did not receive price 
improvement.\16\
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    \15\When stock is stopped, book orders on the opposite side of 
the market that are entitled to immediate execution lose their 
priority. If the stopped order then receives an improved price, 
limit orders at the stop price are bypassed and, if the market turns 
away from that limit, may never be executed.
    As for book orders on the same side of the market as the stopped 
stock, the Committee believes that Rule 116.30's requirements make 
it unlikely that these limit orders would not be executed. Under the 
NYSE pilot program, an order can be stopped only if a substantial 
imbalance exists on the opposite side of the market. See supra, 
notes 10-14 and accompanying text. In those circumstances, the stock 
would probably trade away from the large imbalance, resulting in 
execution of orders on the book.
    \16\See infra, note 18.
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    The Commission has historically been concerned that book orders get 
bypassed when stock is stopped, especially in a minimum variation 
market.\17\ Based on the NYSE's experience to date, the Commission 
believes that additional data is necessary before the Commission can 
determine whether there are sufficient grounds to conclude that this 
long-standing concern has been alleviated. Thus to ensure that Rule 
116.30, as amended, does not harm public customers with limit orders on 
the specialist's book, the NYSE should provide detailed facts 
supporting its arguments about the impact of the pilot procedures. The 
Commission therefore requests that the NYSE conduct another review of 
this issue. At a minimum, the NYSE should determine how often limit 
orders against which stock is stopped in a minimum variation market are 
executed by the close of the day's trading.\18\ Further, the NYSE 
should conduct, on a date to be selected by the Commission, another 
one-day review of all book orders in the ten stocks receiving the 
greatest number of stops, and should submit to the Commission both raw 
trade data for,\19\ and a description of the final disposition of,\20\ 
each such order.
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    \17\See, e.g., SEC, Report of the Special Study of the 
Securities Markets of the Securities and Exchange Commission, H.R. 
Doc. No. 95, 88th Cong., 1st Sess. Pt. 2 (1963).
    \18\Specifically, the NYSE would first calculate the total 
number of shares of limit orders against which stock is stopped in 
minimum variation markets (including book orders on the opposite 
side of the market from stopped orders which do not receive price 
improvement). The NYSE would then determine how many of those shares 
actually are executed by the close of the day's trading.
    \19\In this regard, the Commission requests that the NYSE submit 
the documentation the NYSE is relying upon to support its 
conclusions about the final disposition of these limit book orders. 
See Infra, note 20.
    \20\See supra, note 18.
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    Finally, the NYSE report describes its compliance efforts (e.g., 
automated surveillance, review of Floor Official records, information 
memos, continuing education). The Commission believes that these 
programs provide specialists with adequate notice of their 
responsibilities. Similarly, the Exchange has sufficient means to 
determine whether a specialist complied with the amendments' order size 
and aggregate share thresholds and, if not, whether Floor Official 
approval was obtained for larger parameters.
    During the pilot extension, the Commission requests that the NYSE 
will continue to monitor closely specialist compliance with Rule 
116.30's procedures. As before, the NYSE should determine how often 
orders requiring Floor Official approval to be stopped do not receive 
such approval. In so doing, the NYSE should distinguished between 
instances where the specialist did not ask for permission and those 
where it was denied (and, if so, on what grounds). The NYSE should 
gather and report information about the market conditions prevailing at 
the time of each instance of specialist non-compliance with these 
procedures and the action taken by the Exchange in response thereto.
    The Commission requests that the NYSE submit a report describing 
its findings on these matters, specifically (1) the effect of Rule 
116.30, as amended, on limit book orders and (2) specialist compliance 
with the pilot program procedures, by December 31, 1994. In addition, 
if the Exchange determines to request an extension of the pilot program 
beyond March 21, 1995, the Commission requests that the NYSE also 
submit a proposed rule change by December 31, 1994.
    The Commission finds food cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of the 
notice of filing thereof. This will permit the pilot program to 
continue on an uninterrupted basis. In addition, the procedures the 
Exchange proposes to continue using are the identical procedures that 
were published in the Federal Register for the full comment period and 
were approved by the Commission.\21\
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    \21\No comments were received in connection with the proposed 
rule change which implemented these procedures. See 1991 Approval 
Order, supra, note 1.
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-NYSE-94-06) is approved for 
a one year period ending on March 21, 1995.
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    \22\15 U.S.C. 78s(b)(2) (1988).


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-7166 Filed 3-25-94; 8:45 am]
BILLING CODE 8010-01-M