[Federal Register Volume 59, Number 88 (Monday, May 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11029]


[[Page Unknown]]

[Federal Register: May 9, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33992; File No. SR-NYSE-93-50]

 

Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the New York Stock Exchange, Inc. Relating to the Off-Hours 
Trading Facility.

May 2, 1994.

I. Introduction

    On December 23, 1993, the New York Stock Exchange, Inc. (``NYSE'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission'' or ``SEC''), 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 request permanent approval of 
the Exchange's Off-Hours Trading facility.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 33803 (March 22, 1994), 59 FR 14694 (March 29, 
1994). No comments were received on the proposal. This order approves 
the proposed rule change.

II. Description of the Proposal

    The NYSE requests permanent approval of its Off-Hours Trading 
(``OHT'') facility.\3\ During the pilot, the NYSE submitted monitoring 
reports.\4\ The Commission's order approving the Exchange's Off-Hours 
Trading facility contained a two-year ``sunset'' provision.\5\ The 
Commission several times extended the ``sunset'' date for the Crossing 
Sessions I and II, most recently until April 30, 1994.\6\
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    \3\The NYSE also requested permanent approval of its pilot 
program for procedures regulating matched market-on-close orders 
(``MOC''). The Exchange subsequently withdrew the request for 
permanent approval of the matched MOC procedures. As a result, the 
matched MOC pilot expired on April 30, 1994. See letter from James 
E. Buck, Senior Vice President and Secretary, NYSE, to Brandon 
Becker, Director, Division of Market Regulation, Commission, dated 
April 29, 1994.
    \4\See letters from Catherine R. Kinney, Executive Vice 
President, Equities/Audit, NYSE, to Brandon Becker, Director, 
Division of Market Regulation, Commission, dated September 30, 1993 
and March 15, 1994.
    \5\See Securities Exchange Act Release No. 29237 (May 31, 1991), 
56 FR 24853 (June 3, 1991) (File Nos. SR-NYSE-90-52 and SR-NYSE-90-
53) (``OHT Approval Order'').
    \6\See Securities Exchange Act Release Nos. 33563 (February 1, 
1994), 59 FR 5795 (February 8, 1994), and 32362 (May 25, 1993), 58 
FR 31565 (June 3, 1993).
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    The Exchange's OHT facility, consisting of Crossing Sessions I and 
II, extends the NYSE's trading hours beyond the 9:30 a.m. to 4 p.m. 
trading session (``regular trading session''). Crossing Session I 
permits the execution of single-stock, single-sided closing-price 
orders and crosses of single-stock, closing-price buy and sell orders. 
Crossing Session II allows the execution of crosses of multiple-stock 
(portfolios of 15 or more securities) aggregate price buy and sell 
orders.
    Crossing Session I accepts orders in a particular stock for 
execution at the last price at which the stock traded on the NYSE 
during the 9:30 to 4 session. Two different types of closing-price 
orders could be entered into, and executed in, Crossing Session I: (1) 
Single-stock, single-sided orders (``closing-price single-sided 
orders'') in round lots of up to 99,900 shares only, including certain 
limit orders from the regular trading session; and (2) coupled single-
stock orders (odd lots and partial round lots permitted), so long as 
both sides of such orders are not proprietary to members (``closing-
price coupled orders'').
    Crossing Session I, which operates on each day that the Exchange is 
open, commences following the close of the regular trading session and 
ends at 5 p.m. Orders are executed at 5 p.m. Closing-price single-sided 
and coupled orders can be entered into the OHT facility only through 
the NYSE's Designated Order Turnaround System (``SuperDOT''), the 
Exchange's network of electronic order processing and post-trade 
systems. In addition, only NYSE-listed equity securities that have been 
designated by the Exchange and are not subject to a trading halt as of 
the close of the regular trading session may be entered into Crossing 
Session I.\7\
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    \7\The Exchange has stated that any SuperDOT-eligible issue, 
including rights, warrants, and American Depositary Receipts, may be 
entered into the OHT facility.
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    In addition to closing-price single-sided and coupled orders that 
are entered into the OHT facility after 4 p.m., certain limit orders 
that have migrated from the regular trading session would be able to 
participate in Crossing Session I. Members may designate unconditional 
round-lot limit orders entered during the regular trading session as 
``GTX'' (``good 'til cancelled,\8\ executable through crossing 
session'') to enable the orders to be executed against closing-price 
single-sided orders during Crossing Session I.\9\ When the NYSE closing 
price of a security is known, SuperDOT ``sweeps'' the specialists' 
limit order books for GTX orders that are at or better than the closing 
price and enters those orders into the OHT facility.\10\
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    \8\NYSE Rule 13 states that a good 'til cancelled (or ``GTC'') 
order to buy or sell remains in effect until it is either executed 
or cancelled.
    \9\Orders for an account in which the specialist, the 
specialist's member organization, or any associated party has an 
interest may not migrate to the OHT facility. If GTX is appended to 
(i) any market, stop, or stop limit order; (ii) any odd-lot order; 
or (iii) any order entered during the OHT session, the system would 
reject it. Under the proposal, NYSE members would not have access to 
the closing-price order file nor would NYSE systems indicate to 
specialists whether limit orders would be eligible for Crossing 
Session I.
    \10\Although the system would begin as soon as possible after 
the NYSE close by sweeping the limit order book for eligible GTX 
orders, as a practical matter, closing-price single-sided and 
coupled orders cannot be entered into the OHT facility until 4:15 
p.m. in order to allow Exchange computer systems sufficient time to 
perform the mechanics necessary for commencement of the OHT 
facility.
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    Migrated GTX orders would retain the same priority among themselves 
as existed on the specialist's book, and would have priority over all 
closing-price single-sided orders. Closing-price single-sided orders 
would have priority based on the time of entry into the OHT facility. 
Traditional rules of priority or precedence based on price or size 
would not apply to transactions effected in Session I. Closing-price 
coupled orders would be executed without regard to the priority of 
other orders entered into the OHT facility and would not interact with 
the single-sided orders.
    Trading halts occurring during the regular trading session would 
affect trading in Crossing Session I. For instance, if a particular 
security is the subject of a trading halt at the end of the regular 
trading session, then Crossing Session I would not be available for 
that security that day. In addition, during the operation of Crossing 
Session I, the Exchange may announce that, as the result of news of a 
corporate development with respect to a particular security, it has 
determined to: (i) Return unexecuted GTX orders to the specialist's 
book, maintaining their priority; (ii) cancel all unexecuted single-
sided or coupled orders in that stock; and (iii) preclude the entry of 
new closing-price orders into the OHT facility. Similarly, trading in 
Crossing Session I would not commence if market activity during the 
regular trading session were to trigger a market wide trading halt 
pursuant to NYSE Rule 80B, the circuit breaker rule,\11\ and the 
trading halt was in effect at the close of the regular trading session.
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    \11\NYSE Rule 80B provides procedures for a one-hour trading 
halt in the trading of all securities after a 250-point decline in 
the Dow Jones Industrial Average (``DJIA'') and a two-hour trading 
halt after a 400-point decline.
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    At 5 p.m., both closing-price single-sided orders (including GTX 
orders) and closing-price coupled orders would be executed. Members may 
enter and cancel closing-price orders and GTX orders up until this 
time. Any closing-price single-sided orders not executed during 
Crossing Session I would expire; they would have to be re-entered to 
participate in the next day's opening. Unexecuted GTX orders would be 
returned to the book, maintaining their priority; therefore, they would 
participate in the next day's opening, unless cancelled prior to the 
opening by the entering broker. Closing-price coupled orders, which 
would be entered without the possibility of break-up, would be executed 
in full.
    The NYSE implements trade reporting for Crossing Session I by 
reporting executions of closing-price single-sided orders and closing-
price coupled orders at 5 p.m. over the high speed facility of the 
Consolidated Tape Association (``CTA'') Plan and the low speed line as 
two transactions per stock--one for closing-price single-sided orders 
(and GTX orders) and one for closing-price coupled orders. Each print 
would include the closing price and aggregate volume for each stock. 
Closing-price coupled orders are printed as ``sold'' sales.
    Crossing Session II, which occurs from 4 p.m. to 5:15 p.m., is an 
aggregate-price session that enables members to enter crosses of buy 
and sell program orders that include at least 15 NYSE-listed stocks 
having a total market value of $1,000,000 or more (``aggregate-price 
coupled orders''), and to effect their execution at an aggregate price.
    Like closing-price single-sided orders and closing-price coupled 
orders, aggregate-price coupled orders could not be entered until after 
the close of the regular trading session. To participate in Crossing 
Session II, members transmit data regarding aggregate-price coupled 
orders to the Exchange via facsimile. Each side of the aggregate-price 
order entered on a coupled basis is executed against the other side 
without regard to the priority of other orders entered into the OHT 
facility. The facsimiles are time-stamped immediately and confirmed 
back to the entering brokers, thereby effecting continuous executions 
of aggregate-price coupled orders upon entry into the OHT facility.
    The NYSE proposes to implement trade reporting for the aggregate-
price session by reporting the total number of shares and the total 
market value of the aggregate-price trades. After 5:15 p.m., the NYSE 
would transmit the report over the high speed line as an administrative 
message.
    A trading halt occurring during the regular trading session in one 
or more individual stocks would not affect the execution of aggregate-
price coupled orders. Moreover, the unavailability of the OHT facility 
to one or more individual stocks due to post-4 p.m. corporate news 
would not affect the execution of aggregate-price coupled orders. NYSE 
Rule 80B, however, would have the same effect on Crossing Session II as 
it would have on Crossing Session I: a market-wide halt pursuant to 
Rule 80B that is still in effect at 4 p.m. would halt aggregate-price 
crossing.

III. Discussion

    For the reasons discussed below, the Commission finds that 
permanent approval of the NYSE's OHT facility is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange,\12\ and in particular, 
with the requirements of sections 6(b)(5) and 11A.\13\ The Commission 
is approving the NYSE's OHT facility on a permanent basis because the 
Commission believes that the NYSE's OHT facility, comprised of Crossing 
Sessions I and II, is reasonably designed to promote just and equitable 
principles of trade, prevent fraudulent and manipulative acts and 
practices, and remove impediments to and perfect the mechanism of a 
free and open market and a national market system.\14\
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    \12\See OHT Approval Order, supra note 5 for a complete 
description of the NYSE OHT facility and the Commission's rationale 
for approving the proposal on a pilot basis. The discussions in 
those orders are incorporated by reference into this order.
    \13\15 U.S.C. 78f(b)(5) and 78k-1 (1988).
    \14\As previously noted, the NYSE also requested permanent 
approval of the Exchange's market-on-close (``MOC'') pilot program. 
The NYSE withdrew this request on April 29, 1994. Accordingly, the 
matched MOC pilot expired on April 30, 1994. See supra note 3.
    Concurrently with this order, the Commission is also permanently 
approving similar proposals submitted by the Chicago Stock Exchange, 
Inc., the American Stock Exchange Inc., the Philadelphia Stock 
Exchange, Inc., the Boston Stock Exchange, Inc., and the Pacific 
Stock Exchange, Inc. See File Nos. SR-CHX-93-23; BSE-93-24; SR-Amex-
93-15; SR-Phlx-94-8; and SR-PSE-94-2.
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    There has been an increasing trend toward the internationalization 
of the securities markets and the development of 24 hour markets in 
which world class securities can be traded around the globe.\15\ This 
has been accompanied by an increased desire among institutional 
investors to be able to trade U.S. stocks outside of regular trading 
hours. The NYSE has offered the OHT sessions in an effort to attract 
back to the U.S. order flow in NYSE listed securities that is being 
executed offshore.
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    \15\See Division of Market Regulation, SEC, The October 1987 
Market Break, at 11-1 to 11-2 (February 1988); Report of the 
Presidential Task Force on Market Mechanisms, at I-1 (January 1988). 
See also U.S. Congress, Office of Technology Assessment (``OTA''), 
Trading Around the Clock: Global Securities Markets and Information 
Technology-Background Paper, OTA-BP-CIT-66, (July 1990); U.S. 
Congress, OTA, Electronic Bulls and Bears: U.S. Securities Markets 
and Information Technology, OTA-CIT-469 (September 1990); and 
Division of Market Regulation, SEC, Market 2000: An Examination of 
Current Equity Market Developments, at 29 (January 1994).
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    In the Commission's order temporarily approving the NYSE's OHT 
facility, the Commission noted the benefits that would accrue to 
investors through the development of an after-hours trading 
session.\16\ The Commission stated its belief that Crossing Session I 
would provide investors whose orders were not executed during the 
regular trading session with another opportunity to have their orders 
executed at the NYSE closing price. Crossing Session I also would 
provide investors the flexibility to decide whether they want a 
particular order to participate in this Session. With respect to good 
til cancelled (``GTC'') orders entered for execution during the 9:30 
a.m. to 4 p.m. trading session, a customer would have the option of 
deciding whether to designate that order as a GTX (good til cancelled, 
executable through crossing session) order, thus allowing the order to 
migrate to Crossing Session I for possible execution. In addition, a 
customer would have the option of cancelling any order entered into 
Crossing Session I at any time prior to its execution at 5 p.m. The 
benefits of Crossing Session I would accrue to both individual and 
institutional investors. Moreover, the Commission stated its belief 
that Crossing Session I may help recapture overseas order flow by 
enabling firms wishing to facilitate portfolio trading strategies 
involving small programs of stocks that are not eligible for Crossing 
Session II to achieve executions at the NYSE closing price.
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    \16\See OHT Approval Order, supra note 5.
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    Similarly, the Commission stated its belief that Crossing Session 
II would benefit the investing public by offering members the 
opportunity to enter aggregate-price crossing portfolio orders with 
their customers after-hours to be executed against each other. The 
Commission recognized that Crossing Session II could help to recapture 
overseas trade of U.S. stocks by providing a mechanism by which 
portfolio trades arranged off the floor can be effected in an exchange 
trading system.
    The OHT facility has proved to be successful during the pilot 
period. In its filing, the NYSE noted that in 1993, Crossing Session I 
averaged 175,000 shares per day and has averaged nearly 260,000 shares 
per day thus far in the fourth quarter of 1993. Members use Crossing 
Session I primarily for the execution of small, two-sided baskets which 
are ineligible for Crossing Session II and, most recently, for index 
rebalancing. Over 200 firms have received executions in Crossing 
Session I.
    In addition, Crossing Session II has averaged approximately 3.9 
million shares per day in 1993. To date, there have been 11 days where 
volume has exceeded 15 million shares, with the record being 57 million 
shares. The NYSE believes that Crossing Session II has successfully 
repatriated business from foreign after-hours markets; the Exchange's 
member firms have executed approximately 50 percent of all post-4 p.m. 
program trades in Crossing Session II.
    Finally, data submitted by the NYSE in the monitoring reports does 
not indicate that trading in the OHT sessions has had any impact on 
volatility, spreads or block transactions during the last hour of the 
regular trading session.
    Based on the above, the Commission believes that the NYSE's OHT 
facility has provided benefits to the marketplace. While the Commission 
recognizes that Crossing Session I is not a full auction market, the 
Commission believes it to be consistent with the maintenance of fair 
and orderly markets because it is a limited purpose facility designed 
to bring buyers and sellers together with the benefits associated with 
exchange trading. While it is not an auction market in terms of price 
discovery, the Commission notes that the NYSE closing price would not 
represent an artificial price, but rather a price that has been 
determined by auction market trading during the 9:30 a.m. to 4 p.m. 
trading session. Moreover, Crossing Session I also retains certain 
other characteristics of an auction market, such as maintaining auction 
priority rules for migrated limit orders. In addition, although 
Crossing Session II does not provide a traditional auction market for 
portfolio trades, the reality of the marketplace is that these 
portfolio trades currently are being effected off-exchange and, 
frequently, overseas. By bringing institutional trades that currently 
are being exported overseas within the purview of U.S. regulatory 
bodies, the marketplace generally benefits, for example, through 
Commission and Exchange oversight, trade reporting, and consolidated 
surveillance.\17\
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    \17\The Commission continues to believe that the issue of 
linkages between markets remains open, and that should multiple, 
comparable after hours trading sessions develop, the resolution of 
intermarket issues would fall equally upon all marketplaces offering 
such sessions.
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    In the original Approval Order the commission noted concerns about 
transaction reporting. The NYSE requested exemptive relief from the 
requirement of Rule 11Aa3-1(b)(2)(iv) under the Act that the NYSE 
disseminate on a consolidated basis trading volume for each of the 
component stocks traded in Crossing Session II. The Commission approved 
the exemption on a temporary basis but requested that the NYSE consider 
how to disseminate data on the volume of the individual stocks in the 
aggregate-price orders executed in Crossing Session II before the next 
day's opening. The NYSE has developed a plan under which the Exchange 
would collect the required trade detail information by T+3 and would 
publish this information on an aggregate stock basis in the Daily Sales 
Report on T+4. The Commission acknowledges that this plan would provide 
more information to market participants.\18\ Nevertheless, the 
Commission believes the NYSE should continue to examine ways to report 
such information earlier.\19\
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    \18\See letter from Katherine A. England, Assistant Director, 
Commission, to Catherine Kinney, Executive Vice President, NYSE, 
dated May 2, 1994.
    \19\The NYSE also requested and received an exemption from Rule 
10a-1 under the Act to permit, subject to certain conditions, short 
sales of certain orders during the OHT sessions without complying 
with the ``tick'' provisions of the Rule; and interpretive advice 
under Rule 10b-18 under the Act to permit issuers to purchase their 
securities in the OHT Sessions. See letter from Larry E. Bergmann, 
Associate Director, Division of Market Regulation, Commission, to 
Catherine R. Kinney, Senior Vice President, NYSE, dated June 13, 
1991.
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    The Commission continues to expect the Exchange, through use of its 
surveillance procedures, to monitor for, and report to the Commission, 
any patterns of manipulation or trading abuses or unusual trading 
activity resulting from these programs. In addition, the Commission 
continues to request that the Exchange keep the Commission apprised of 
any technical problems which may arise regarding the operation of the 
programs.

IV. Conclusion

    Based on the foregoing, the Commission finds that permanent 
approval of the OHT facility is consistent with the Act.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act\20\ that the proposed rule change (SR-NYSE-93-50) is hereby 
approved.

    \20\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.\21\
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    \21\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-11029 Filed 5-6-94; 8:45 am]
BILLING CODE 8010-01-M