[Federal Register Volume 59, Number 108 (Tuesday, June 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13736]


[[Page Unknown]]

[Federal Register: June 7, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34135; File No. SR-NYSE-93-17]

 

Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change To Amend Exchange Rule 96 to 
Permit Floor Professionals Who Have a Listed Option Position in a Stock 
To Initiate an On-Floor Proprietary Trade in That Stock

May 31, 1994.
    On March 15, 1993, 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 Exchange Rule 96 to 
permit NYSE Floor professionals who have a listed option position in a 
stock to initiate an on-Floor proprietary trade in that stock.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 33642 (February 18, 1994), 59 FR 9506 
(February 28, 1994). No comments were received on the proposal. This 
order approves the proposed rule change.
    Exchange Rule 96 currently prohibits a member registered as a 
Competitive Trader\3\ or Registered Competitive Market Maker 
(``RCMM'')\4\ from initiating, while on the Floor of the Exchange, the 
purchase or sale, for his own account or his member organization's 
account, of any stock in which he has an option position or in which he 
knows that his member organization has an option position. Competitive 
Traders and RCMMs are not subject to any direct limitation on their 
trading of options; however, once an NYSE Floor professional acquires 
an option position, he must effect subsequent proprietary transactions 
in the underlying stock pursuant to an off-Floor order.\5\ At present, 
Rule 96 applies to all options, including those traded on a national 
securities exchange (``listed options'') and those traded over-the-
counter (``OTC options'').\6\
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    \3\A Competitive Trader is an NYSE member who is authorized to 
initiate proprietary transactions on the Floor of the Exchange but 
who is not registered as a specialist, odd-lot dealer or Registered 
Competitive Market Maker. See NYSE rules 111 & 112(e). Competitive 
Traders exist pursuant to, and must comply with the requirements of, 
Section 11(a)(1)(G) of the Act. See also SEC Rule 11a1-1(T). In 
addition, the NYSE requires that 75 percent of a Competitive 
Trader's monthly transactions must be stabilizing transactions under 
the tick-test. See NYSE Rule 112(d).
    \4\A RCMM is an NYSE member who is authorized to initiate 
proprietary transactions on the Floor of the Exchange. See NYSE Rule 
107. See also SEC Rule 11a1-5. RCMMs are not subject to the same 
tick-test as Competitive Traders; however, they must comply with a 
complex series of rules about the price at which they can trade and 
the size of those trades. See NYSE Rule 107. Unlike Competitive 
Traders, RCMMs have an affirmative obligation to maintain a fair and 
orderly market. See NYSE Rule 107(B)(4).
    \5\The terms ``on-Floor'' and ``off-Floor'' are defined in NYSE 
Rule 112.20.
    \6\As used herein, the term ``OTC option'' means ``conventional 
option.'' Art. III, Rule 33(gg) of the National Association of 
Securities Dealers' Rules of Fair Practice defines a conventional 
option as any option contract not issued, or subject to issuance, by 
the Options Clearing Corporation.
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    The NYSE proposes to remove the prohibition in Rule 96 as to listed 
options. As a result, a Competitive Trader or RCMM with a listed option 
position in a stock will be permitted to initiate an on-Floor 
proprietary trade in that stock. In contrast, an NYSE Floor 
professional with an OTC option position in the same stock will 
continue to be subject to Rule 96's restrictions.
    The Exchange states that the statutory bases for the proposed rule 
change are Sections 6(b)(5), 6(b)(8) and 11A(a)(1)(c)(ii) of the Act. 
According to the NYSE, by removing the prohibition on Competitive 
Traders and RCMMs initiating proprietary transactions on the Floor in a 
stock where they have a listed option position in such stock, and 
thereby permitting such members to add to the depth and liquidity of 
the Exchange market in situations where they may not currently do so, 
the proposed rule change will have the effect of ``facilitating 
transactions in securities'' and will ``perfect the mechanism of a free 
and open market,'' as called for in Section 6(b)(5).
    The NYSE also believes that, to the extent that the proposed rule 
change permits Floor professionals to initiate transactions on a more 
equal regulatory footing with other securities professionals, the 
proposed rule change is designed to eliminate unfair discrimination 
between brokers or dealers, as called for in Section 6(b)(5); to remove 
a burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act, as called for in Section 6(b)(8); and to 
promote fair competition among brokers and dealers, as called for in 
Section 11A(a)(1)(C)(ii).
    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 Sections 6(b).\7\ 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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    \7\15 U.S.C. 78f(b) (1988).
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    In light of the changes in market structure that have taken place 
since Rule 96 was adopted, the Commission believes that the benefits of 
the NYSE proposal outweigh any burdens it may impose. Specifically, the 
Commission has concluded that the proposed rule change should enhance 
the quality of the NYSE market. The NYSE established the membership 
categories of Competitive Trader and RCMM to provide a means by which 
NYSE members could, under certain conditions, add depth and liquidity 
to the market by initiating proprietary transactions on the Floor of 
the Exchange.\8\ The Commission, however, notes that Rule 96 may 
frustrate that purpose,\9\ to the extent it may be unnecessarily 
restrictive given the risks posed by Competitive Traders' and RCMMs' 
dealings in stocks in which they (or their member organization) have an 
option position.\10\
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    \8\For further discussion of the conditions for Competitive 
Trader and RCMM participation, see supra, notes 3-4.
    \9\The NYSE argues that the ability of a Competitive Trader or 
RCMM with an option position to trade the underlying stock pursuant 
to an off-Floor order may not be meaningful, given how these Floor 
professionals routinely conduct their business. If so, there could 
be a disincentive for any NYSE member who participates in the 
options market (or who is associated with a member organization that 
participates in the options market) to be active as a Competitive 
Trader or RCMM.
    \10\For further discussion of the risks of such activity and the 
safeguards contained in the NYSE proposal, see infra, notes 12-15 
and accompanying text.
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    After careful review, the Commission believes that the NYSE 
proposal may reduce the current disincentive for members, especially 
options market participants and their associated persons, to act as a 
Competitive Trader or RCMM given Rule 96's restrictions.\11\ For 
instance, NYSE members currently serving as Competitive Traders and 
RCMMs could initiate proprietary Floor Trades in situations where they 
presently cannot do so; moreover, other members might be encouraged to 
serve in that capacity. In the Commission's view, an increase in the 
capital committed to such supplemental market making activities could 
improve the depth and liquidity of the NYSE market, particularly in 
times of market stress.
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    \11\See supra, note 9 and accompanying text.
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    Furthermore, the Commission is satisfied that the NYSE proposal 
contains adequate safeguards to protect investors in the securities 
markets. In this respect, the Commission notes that a comprehensive 
regulatory framework has been developed for the trading of listed 
securities, including listed options.\12\ For example, in 1983, an 
Intermarket Surveillance Group (``ISG'') was formed to coordinate more 
effectively surveillance and information sharing arrangements between 
the stock and options markets.\13\ Using procedures developed in that 
forum, among other things, the national securities exchanges identify 
and investigate stock and/or options transactions that, used on certain 
parameters, raise manipulative concerns. The Commission believes that 
this regulatory scheme, including NYSE monitoring and surveillance of 
amended Rule 96, should be sufficient to detect and deter intermarket 
manipulation and other fraudulent or abusive practices.
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    \12\Listed options are standardized contracts traded in an open 
auction market environment. Exchange-traded options are subject, 
among other things, to real-time quotation and last-sale reporting; 
anti-fraud provisions; and minimum criteria for initial and 
continued listing. Transactions in listed options become part of the 
integrated audit trail. In contrast, OTC options are individualized 
contracts that are negotiated between the counterparties. There is 
minimal, if any, public disclosure and a relatively illiquid 
secondary trading market.
    \13\The full members of the ISG are the American Stock Exchange; 
the Boston Stock Exchange; the Chicago Board Options Exchange; the 
Chicago Stock Exchange; the National Association of Securities 
Dealers; the NYSE; the Pacific Stock Exchange; and the Philadelphia 
Stock Exchange.
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    Specifically, the NYSE has informed the Commission that the 
Exchange will increase the frequency of its examination of the trading 
activity of Competitive Traders and RCMMs. The Commission expects that 
NYSE staff will utilize such information as part of its on-going 
efforts to ensure compliance with the Act, the rules and regulations 
thereunder and Exchange rules. In this respect, the Exchange has 
assured the Commission that, if a transaction raises concerns about 
intermarket manipulation, NYSE staff, with the cooperation of the 
options exchanges where appropriate, will conduct a thorough 
examination of all the relevant facts. Accordingly, the Commission 
believes that the NYSE's monitoring and surveillance of Rule 96, as 
amended, will aid the Exchange in detecting any trading abuses.
    More generally, the Commission agrees with the Exchange that, 
independent of Rule 96, other NYSE rules, which the NYSE will continue 
to monitor for compliance, should help to keep Floor professionals from 
being in a position where they can engage in trading abuses. As 
examples, the NYSE cites the yielding requirement imposed on certain 
on-Floor orders for a member's own account,\14\ and the conditions 
placed on when a Competitive Trader or RCMM can initiate a proprietary 
Floor trade.\15\ Further, Competitive Traders and RCMMs, like other 
NYSE members, are subject to the prohibition on frontrunning of block 
transactions.\16\
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    \14\Under NYSE Rule 108, an on-Floor order placed by a member to 
establish or increase a position in the member's proprietary account 
is not entitled to priority, or precedence based on size, over an 
off-Floor order placed by a public customer.
    \15\See supra, notes 3-4.
    \16\See NYSE Rule 122.20(d) and Information Memorandum 89-53 
(November 27, 1989).
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    Finally, the Commission notes that, Competitive Traders and RCMMs 
currently are not prohibited from trading in stocks in which they have 
an existing option position. Such transactions, however, must be 
initiated off-Floor. To the extent that the amended rule will permit 
such transactions to be initiated on-Floor, NYSE surveillance should 
detect and deter any trading abuses derived from informational 
advantages. In sum, the Commission believes that the proposed rule 
change should not materially affect the NYSE's ability to address the 
regulatory concerns raised by Floor professionals' intermarket trading 
activity.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-NYSE-93-17) is approved.

    \17\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.\18\
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    \18\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-13736 Filed 6-6-94; 8:45 am]
BILLING CODE 8010-01-M