[Federal Register Volume 59, Number 92 (Friday, May 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11701]


[[Page Unknown]]

[Federal Register: May 13, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34022; File No. SR-NYSE-94-7]

 

Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by New York Stock 
Exchange, Inc., Relating to the Extension of Rule 103A--Specialist 
Stock Reallocation--Until May 9, 1995

May 6, 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 
10, 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. At the same time, the 
Commission is granting temporary accelerated approval to the proposal 
pursuant to Section 19(b)(2) of the Act.\1\
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    \1\15 U.S.C. 78s(b)(2) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to extend the effectiveness of Rule 103A 
(Specialist Stock Reallocation) for an additional year until May 9, 
1995.

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 intent of Rule 103A is to encourage a high level of market 
quality and performance in Exchange listed securities. Rule 103A grants 
authority to the Exchange's Market Performance Committee (``MPC'') to 
develop and administer systems and procedures, including the 
determination of appropriate standards and measurements of performance, 
designed to measure specialist performance and market quality on a 
periodic basis to determine whether or not particular specialist units 
need to take actions to improve their performance.\2\ Based on such 
determinations, the MPC is authorized to conduct a formal Performance 
Improvement Action in an appropriate case.
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    \2\The Commission originally approved the implementation of the 
Rule 103A pilot program in Securities Exchange Act Release No. 25681 
(May 9, 1988), 53 FR 17287 (May 16, 1988) (order approving File No. 
SR-NYSE-87-25) and subsequently extended the effectiveness of Rule 
103A in Release Nos. 28215 (July 17, 1990) (``July 1990 Order''), 55 
FR 30060 (July 24, 1990) (order approving File No. SR-NYSE-90-24); 
29180 (May 8, 1991), 56 FR 22498 (order approving File No. SR-NYSE-
91-14) and 32285 (May 10, 1993), 58 FR 28905 (May 17, 1993) (``May 
10 Order''). The July 1990 Order also approved various substantive 
revisions to Rule 103A including, among other things, enhancing the 
performance criteria for administrative messages received through 
the Designated Order Turnaround (``DOT'') system, and, at the same 
time, extended the effectiveness of the revised Rule 103A until May 
9, 1991 [see Securities Exchange Act Release No. 28215]. 
Subsequently, on February 27, 1991, the Commission approved the 
NYSE's proposal to adopt relative performance standards into the 
Rule 103A program [see Securities Exchange Act Release No. 28923 
(February 27, 1991), 56 FR 9993 (order approving File No. SR-NYSE-
90-44)].
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    On May 10, 1993, the SEC extended the effectiveness of Rule 103A 
until May 9, 1994.\3\ In this order, the Commission stated its belief 
that the Exchange should develop objective performance standards to 
measure specialist performance.\4\ In this regard, the Commission 
recently approved, on a one-year pilot basis, an objective measure of 
specialist performance dealing with specialist utilization of capital 
for market-making.\5\ This measure of performance focuses on a 
specialist unit's use of its own capital in relation to the total 
dollar value of trading activity in the unit's stocks. Tiered rankings 
based on a unit's capital utilization are provided to the Exchange's 
Allocation Committee as one of the objective measures it considers in 
allocating stocks to specialist units under its Allocation Policy and 
Procedures.
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    \3\See Securities Exchange Act Release No. 32285, supra note 2.
    \4\The Commission notes that the Exchange's current evaluation 
criteria under Rule 103A.10 include objective standards that measure 
specialist performance at the opening (both regular and delayed), 
systematized order turnaround, and the timeliness of a unit's 
response to status requests. Specialist performance also is measured 
by the Exchange's Specialist Performance Evaluation Questionnaire. 
However, objective market making measures currently are not included 
in the Rule 103A program.
    \5\See Securities Exchange Act Release No. 33369 (December 22, 
1993), 58 FR 69431 (December 30, 1993). This measure of performance 
has not to date been incorporated into the Rule 103A evaluation 
program. See note 17, infra.
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    The Exchange, with the assistance of outside consultants, continues 
to work to develop additional objective measures of specialist 
performance. As Rule 103A is working well, the Exchange requests that 
its effectiveness be extended for an additional year, until May 9, 
1995.
2. Statutory Basis
    The statutory basis under the Act for this 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 a national market system and, in general, to protect 
investors and the public interest. The proposed extension of Rule 103A 
is consistent with these objectives in that it will allow the Exchange 
to continue to administer the rule on an uninterrupted basis ensuring 
quality specialist performance.

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 Room, 450 Fifth Street NW., Washington, 
DC 20549. Copies of the 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-94-7 and should be submitted by June 3, 1994.

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

    The rules of the Exchange, in addition to the rules set forth under 
the Act, impose certain obligations upon the specialist unit, 
including, but not limited to, the maintenance of fair and orderly 
markets.\6\ Because specialist units play a crucial role in providing 
stability, liquidity and continuity to the trading of stocks on the 
Exchange, the Commission believes that effective oversight, including 
periodic evaluation of the specialists' performance, is important to 
the maintenance of a fair and efficient marketplace. Critical to this 
oversight is the specialist performance evualation process embodied in 
Rule 103A.
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    \6\See generally NYSE Rule 104; Rule 11b-1 under the Act, 17 CFR 
240.11b-1 (1993).
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    In the May 10 Order, the Commission reiterated its desire for the 
Exchange to develop objective measures of market making performance and 
incorporate such measures into the proposed rule change to extend the 
Rule 103A pilot.\7\ The Commission's request was consistent with its 
previous orders approving the extension of the Rule 103A pilot program. 
In fact, the Exchange informed the Commission that it had employed the 
services of an outside expert to study the feasibility of adopting such 
objective measures of specialist performance.\8\ To date, however, the 
Exchange has not finished its development of objective measures of 
market making performance. Indeed, in the proposed rule change, the 
Exchange states that it continues to work to develop additional 
objective performance standards. The Exchange requests that the 
Commission extend the effectiveness of the rule for an additional year 
because the rule is working well. However, the proposal herein to 
extend Rule 103A until May 9, 1995, does not include objective measures 
of market making performance as the Commission originally and 
requested.
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    \7\See Securities Exchange Act Release No. 32285, supra note 2.
    \8\See Securities Exchange Act Release No. 28215, supra note 2 
and letter from Robert J. McSweeney, Senior Vice President, Market 
Surveillance, NYSE, to Sharon Lawson, Assistant Director, 
Commission, dated August 31, 1992 (``August 1992 letter'').
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    Even though the proposal lacks objective market marking performance 
standards, the Commission has determined to approve the proposal to 
extend the effectiveness of Rule 103A for an additional year in light 
of the significant enhancements the NYSE has made to the Rule 103A 
program thus far, and the substantial time and resources the Exchange 
already has dedicated to the development of objective criteria. The 
revision to Rule 103A, adopted in July, 1990\9\, the subsequent 
adoption of relative performance standards\10\, and the refinement of 
existing standards\11\ have augmented the Exchange's ability to 
evaluate specialist performance. In this regard, the Commission also 
notes that the Exchange has developed a new measure of capital 
utilization by specialists, even though that measure has not yet been 
incorporated in to the Rule 103A evaluation criteria.\12\
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    \9\See Securities Exchange Act Release No. 30676 (May 7, 1992), 
57 FR 20544 (May 13, 1992).
    \10\Id.
    \11\See Securities Exchange Act Release No. 32045 (March 24, 
1993), 58 FR 16896 (March 31, 1993).
    \12\See supra note 5.
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    As noted in previous orders,\13\ the Commission stated that the 
mature status of the Intermarket Trading System (``ITS''), as a market 
structure facility, warrants the incorporation of ITS turnaround and 
trade-through concerns\14\ into the NYSE's Rule 103A performance 
standards. The NYSE has responded to the Commission's request that it 
incorporate ITS turnaround and trade-through concerns into Rule 
103A.\15\ In this regard, the Exchange stated that ITS matters are more 
appropriately addressed by means of the Exchange's regulatory processes 
rather than by its performance measurement system. According to the 
Exchange, it has emphasized to speciality that all ITS commitments to 
trade are expected to be executed, and will take appropriate regulatory 
action if specialists are deficient in this matter. Moreover, the 
Exchange states that trade-throughs are not always the responsibility 
of the specialist and, therefore, would not appear to be an appropriate 
measure of specialist performance. In the Exchange's view, the current 
ITS trade-through resolution process works well, and is the 
appropriated means for addressing ITS trade-through concerns.\16\ 
Despite the contentions of the Exchange, the Commission believes that 
evaluating the ITS turnaround and trade-through concerns can be a valid 
measurement of specialist performance and should be incorporated into 
the evaluation process. For example, the NYSE should measure how many 
times NYSE specialists trade-through other markets and how often 
specialists' ITS commitments expire. Although we agree with the NYSE 
that these factors should be addressed, where appropriate, by 
regulatory action, we also believe these factors can be a valid 
indication of specialist performance in the current trading 
environment.
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    \13\See Securities Exchange Act Release Nos. 30676, 29180, 
28215, and 25681 supra note 2.
    \14\ITS Plan, Section 8(d)(i) and (ii), (as last amended March 
9, 1993).
    \15\See August 1992 letter supra note 9.
    \16\Id.
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    The Commission continues to believe that the Exchange should 
develop objective performance standards that would measure accurately 
the traditional indicia of specialist performance, namely, market 
depth, price continuity and dealer participation and stabilization. The 
Commission continues to encourage the NYSE to incorporate objective 
standards into the Rule 103A program prior to or simultaneous with the 
NYSE's future proposal to extend the effectiveness of Rule 103A or 
adopt the Rule on a permanent basis.\17\
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    \17\In this regard, the Commission expects the NYSE to submit to 
the Division of Market Regulation, by February 28, 1995, a proposed 
rule change pursuant to Rule 19b-4 under the Act, 17 CFR 240.19b-4, 
to extend the Rule 103A pilot or make the Rule permanent. As 
emphasized above, this proposed rule change should include objective 
measures of market making performance that have been developed by 
the outside experts retained by the Exchange.
    In this regard, as of December 1994, the NYSE should have a full 
year's experience with the new capital utilization measure. Assuming 
that the experience with the capital utilization measure is good, 
the NYSE should incorporate the new measure in the Rule 103A 
evaluation prior to the Exchange's next request for an extension or 
permanent approval.
    The Commission also expects the Exchange to submit to the 
Division, by February 28, 1995, a status report on the 
implementation of Rule 103A. The report should contain data, for 
each quarter of 1994, on (1) the number of specialists that fell 
below acceptance levels of performance for each category; (2) the 
number of performance improvement actions commenced; (3) the number 
of units subjected to informal counseling to improve performance; 
and (4) a list of stocks reallocated due to substandard performance 
under the Rule and the Particular unit involved.
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    The Commission has reviewed carefully the NYSE's proposed rule 
change and, for the above reasons, believes that the proposal is 
consistent with the requirements of sections 6 and 11 of the Act\18\ 
and the rules and regulations thereunder applicable to a national 
securities exchange. In particular, the Commission believes that the 
proposal is consistent with the section 6(b)(5) requirement that the 
rules of the Exchange be designed to promote just and equitable 
principles of trade, perfect the mechanism of a free and open national 
market system, and, in general, further investor protection and the 
public interest. Further, the Commission finds that the proposal is 
consistent with section 11(b) of the Act,\19\ and Rule 11b-1 
thereunder,\20\ which allow securities exchanges to promulgate rules 
relating to specialists consistent with the maintenance of fair and 
orderly markets.
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    \18\15 U.S.C. 78f and 78k (1988).
    \19\15 U.S.C. 78k(b) (1988).
    \20\17 CFR 240.11b-1 (1993).
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    Specifically, the Commission believes that the NYSE's Rule 103A 
performance evaluation process provides the Exchange with the means to 
identify and correct poor specialist performance. Accordingly, the 
evaluation process is critical to the NYSE's duty to ascertain whether 
specialists are maintaining fair and orderly markets in their assigned 
securities, as required pursuant to Exchange rules and the Act, and the 
rules and regulations thereunder. Moreover, the possibility of a 
performance improvement action as a result of the evaluation process, 
in addition to the use of the evaluation results in stock allocation 
decisions, should help motivate and provide incentives for specialists 
to maintain and improve their market making performance for the benefit 
of investors. In summary, extension of Rule 103A's effectiveness until 
May 9, 1995 will provide the Exchange with the ability to continue 
evaluating specialist performance on an uninterrupted basis, which 
should enhance market quality and performance in Exchange listed 
securities. During the pilot, the Exchange should continue to consider 
and develop objective measures which evaluate both ITS matters and 
market making performance.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. The Commission believes it is 
appropriate to approve the proposed rule change on an accelerated basis 
so that the Exchange can continue to administer, on an uninterrupted 
basis, its Rule 103A evaluation process. During the one year extension 
of the Rule, the Commission expects the NYSE to continue its 
examination of the efficacy of its current specialist evaluation 
procedures, as well as determine whether to extend the pilot for a 
further period or, in the alternative, approve Rule 103A on a permanent 
basis. Finally, a substantial portion of current Rule 103A was noticed 
for the full statutory period in 1987, and the Commission did not 
receive any adverse commentary on the revised Rule 103A program.\21\ 
Further, interested persons were invited to comment on the past 
proposals to extend the effectiveness of Rule 103A, the most recent of 
such proposals being the extension of Rule 103A until May 9, 1994. The 
Commission received no comments on these proposals. The Commission 
believes, therefore, that granting accelerated approval of the proposed 
rule change is appropriate and consistent with section 6 of the 
Act.\22\
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    \21\See Securities Exchange Act Release Nos. 24919 (September 
15, 1987), 52 FR 35821 (notice of filing of File No. SR-NYSE-87-25); 
and 25681 (May 9, 1988), 53 FR 17287 (order approving File No. SR-
NYSE-87-25).
    \22\15 U.S.C. 78f (1988).
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V. Conclusion

    For the reasons set forth above, the Commission finds that the 
proposed rule change is consistent with sections 6(b)(5) and 11(b) 
under the Act, and Rule 11b-1 thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act\23\ that the proposed rule change (SR-NYSE-94-7) is approved for 
the period ending May 9, 1995.

    \23\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.\24\
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    \24\17 CFR 200.30-3(a)(12) (1993).
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[FR Doc. 94-11701 Filed 5-12-94; 8:45 am]
BILLING CODE 8010-01-M