[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: 94-13737]


[[Page Unknown]]

[Federal Register: June 7, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34136; File No. SR-NYSE-89-17]

 

Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Notice of Filing 
and Order Granting Accelerated Approval to Amendment No. 1 to Proposed 
Rule Change Relating to Trades One or Two Points Away From the Last 
Sale and To Stop Orders

May 31, 1994.

I. Introduction

    On July 12, 1989, 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 Rules 79A.30 and 
123A.40. On March 15, 1993, the NYSE submitted Amendment No. 1 to the 
rule filing.\3\
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
    \3\Amendment No. 1 limited the proposed rule change to NYSE Rule 
79A.30 to securities trading at $100 or over.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 28202 (July 13, 1990), 55 FR 29696 (July 20, 
1990). No comments were received on the proposal.

II. Description of the Proposal

    Currently, all transactions made at one point or more away from the 
last previous sale when such previous sale is under $20 per share, or 
at two points or more away from the last previous sale when such 
previous sale is at $20 per share or over, may not be published on the 
tape without the prior approval of a Floor Official.\4\ The rule change 
to NYSE Rule 79A.30 will permit a Floor Governor, during unusual market 
conditions, to change the two point parameter requiring Floor Official 
approval for a particular security when the last previous sale for such 
security occurs at $100 per share or more. The special price parameter 
will apply only for the trading day it was approved, but may be re-
confirmed by the Floor Governor for subsequent trading sessions for the 
particular security on a day-by-day basis. Once a Floor Governor has 
established a special price parameter, a Floor Official must approve 
the publication on the tape of any trade that exceeds such parameter, 
except when Floor Governor approval is required under Rule 123A.40, as 
discussed below. Changes to the two point parameter must be reported to 
the Exchange's Market Surveillance Division by the Floor Governor.
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    \4\See NYSE Rule 79A.30.
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    NYSE Rule 123A.40 prohibits a specialist from trading for his own 
account in a stock in which he is registered if the trade would result 
in electing any stop order on his book, unless (i) his bid or offer has 
the effect of bettering the market, (ii) a Floor Official approves the 
transaction, and (iii) the stop order is guaranteed to be executed at 
the same price as the electing sale.\5\ While the above requirements 
would remain for transactions where the specialist's bid or offer 
results in the election of a stop order, under the proposal a 
specialist would be permitted to participate in a trade solely for the 
purpose of facilitating the completion of an order at a single price 
where the depth of the current public bid or offer (which would not be 
the specialist's bid or offer) is not sufficient to do so, without 
guaranteeing the execution price of any stop orders elected by the 
transaction and without obtaining Floor Official approval for each 
transaction. The proposal, however, requires a specialist to obtain the 
approval of a Floor Governor rather than a floor official as currently 
required, prior to engaging in a transaction for his own account at the 
electing sale price if a stop order will be elected (pursuant to the 
rule's conditions) and executed at a price outside the price parameters 
provided in NYSE Rule 79A.40.\6\
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    \5\Stop orders are orders which become executable market or 
limit orders once the price specified on the order is reached in the 
market. if the order is an executable market order, it will be 
executed at the next best market price, which may not be the stop 
order (``electing'') price.
    \6\See supra note 4 and accompanying text. Should the two point 
price parameter provided in Rule 79A.30 be change for securities 
traded at $100 or over pursuant to the change to Rule 79A.30 being 
approved herein, that temporary price parameter will be the 
determining point for floor Governor approval pursuant to Rule 
123A.40.
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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) of the Act.\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.
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    \7\15 U.S.C. 78f(b) (1988).
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    The Commission believes that the rule change to NYSE Rule 79A.30 to 
permit a Floor Governor to change the two point parameter for 
transactions in securities trading at $100 or over, is consistent with 
Section 6(b)(5) of the Act in that it will facilitate trading during 
unusual market conditions. The Commission believes that the rule change 
may help to minimize the possibility of delays in reporting trades to 
the Tape during highly volatile trading days by eliminating the need to 
obtain Floor Official approval for certain trades of higher priced 
securities.
    Furthermore, because Floor Official approval is required for each 
transaction to be executed outside of the price parameters once a Floor 
Governor approves a change, the Commission believes that the rule 
change provides appropriate Exchange oversight of trades away from the 
last sale of a security, which will help to ensure that specialists 
satisfy their market making responsibilities during unusual market 
conditions.\8\ In addition, all changes in the two point parameter will 
be reported to the exchange's Market Surveillance Division by the Floor 
Governor, thereby providing Exchange oversight of the Floor Governor's 
decision. The Commission further believes requiring that the decision 
to change the two point price parameter be made by a Floor Governor on 
a day-by-day basis will emphasize the intent that the two point 
parameter be changed only in unusual circumstances.\9\
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    \8\Under Section 11 of the Act, 15 U.S.C. 78k, specialists have 
the responsibility to act as dealers to the extent necessary to 
maintain fair and orderly markets, which includes tempering sudden 
price movements and keeping any general price movements orderly. See 
Division of Market Regulation, October 1987 Market Break Report, at 
4-3.
    \9\This rule change is intended to apply only to intra-day 
trading, and will not affect opening transactions. See Letter from 
James E. Buck, Senior Vice President and Secretary, NYSE, to Howard 
Kramer, Assistant Director, Division of Market Regulation, dated 
June 12, 1990. The Exchange states that it has a ``a long-standing 
policy of requiring Floor Official approval for the opening trades 
in any stock transaction that will result in a price change of * * * 
two points or more away from a last sale of $20 or more.'' Id.
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    The Commission believes the rule change to NYSE Rule 123A.40 to 
permit specialists to participate in transactions which result in the 
election of stop orders without guaranteeing the execution price of the 
stop orders is consistent with Section 6(b)(5) of the Act in that it 
will benefit investors by facilitating single-price executions of 
orders. Currently, when a market order arrives at a specialist's post 
and the depth of the current bid or offer is not sufficient to provide 
a single-price execution of the order, the specialist cannot 
participate in the transaction if a stop order would be elected without 
guaranteeing the price of the stop order and obtaining Floor Official 
approval. When the specialist does not participate, the market order is 
partially executed against the best bid or offer, and partially 
executed against any elected stop orders and limit orders on the 
specialist's book, usually at different prices. The rule change allows 
the specialist to participate in such transactions without guaranteeing 
the price of any elected stop orders or obtaining Floor Official 
approval, and thereby makes it more likely that specialists will 
provide investors with single-price execution of their orders.
    While the Commission views the prohibition on specialist 
participation in the election of stop orders as helpful in guarding 
against the potential for abuse,\10\ we recognize that certain benefits 
can accrue from permitting limited specialist participation under the 
conditions set forth in the rule to facilitate single price executions. 
Specifically, unlike the situation where the specialist enters his own 
bid or offer, when a specialist participates in the execution of a 
customer's market order under the proposed rule, he will not be setting 
the price of the transaction that elects the stop orders. Rather, the 
price will be determined by another market participant, independent of 
any price-setting determination by the specialist. The Commission 
therefore believes that allowing specialists to facilitate single-price 
execution of market orders through passive participation will not 
negatively affect the execution of stop orders elected by the 
transactions, and does not present the opportunity for abuses that may 
be present were the specialist is actively setting the price through 
his own proprietary bids or offers.\11\
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    \10\The provision of Rule 123A.40 that requires specialists to 
guarantee the price of elected stop orders and requires floor 
official approval when a specialist elects stop orders through his 
own bid or offer are intended to address, in part, the situation 
where a specialist has an accumulation of stop orders and desires to 
``clean up the book.'' This can be accomplished by the specialist 
entering a bid, for example, that elects all of the stop sell orders 
at the lowest stop order price, or by electing stop sell orders in a 
series of descending prices until the lowest order is reached. The 
specialist could use these stop order election processes to drive 
the share price down to an artificially low level in order to obtain 
cheap stock at the expense of the public customers. The potential 
for this type of abuse is not present, however, where a customer 
market order sets the trading price and incidentally elects stop 
orders of which the customer was unaware.
    \11\See id.
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    The Commission further believes that the rule change requiring 
Floor Governor approval for any transactions which will result in the 
execution of an elected stop order outside the one or two point 
parameters contained in NYSE Rule 79A.30, or any temporary parameters 
established by a Floor Governor during unusual market conditions 
pursuant thereto, will provide increased scrutiny of gap-executions of 
stop orders and thereby benefit investors consistent with section 
6(b)(5) of the Act. The Commission notes that under Rule 79A.30, Floor 
Official approval is needed for transactions effected outside the price 
parameters contained therein, but that under Rule 123A.40, Floor 
Governor approval is necessary for the execution of stop orders outside 
the price parameters of Rule, 79A.30 when the stop orders are elected 
by a transaction in which a specialist participated. The Commission 
believes this increased Exchange oversight of specialists' proprietary 
activity will provide investors with additional protection against 
potential trading abuses related to the execution of stop orders.
    The Commission finds good cause for approving Amendment No. 1 to 
the rule change prior to the thirtieth day after publication of notice 
of filing thereof. Amendment No. 1 added language to the rule change 
that limits Floor Governor changes to the price parameters provide in 
NYSE Rule 97A.30 to securities traded at $100 per share or over.\12\ 
The NYSE's proposed rule change was published in the Federal Register 
for the full statutory period and no comments were received.\13\
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    \12\As originally filed, the proposed rule change would have 
allowed Floor Governors to change the price parameters in NYSE Rule 
79A.30 for all securities.
    \13\See Securities Exchange Act Release No. 28202 (July 13, 
1990), 55 FR 29696 (July 20, 1990).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1. 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 inspecting 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-89-17 and should be 
submitted by June 28, 1994.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-NYSE-89-17) is approved.

    \14\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.\15\
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    \15\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-13737 Filed 6-6-94; 8:45 am]
BILLING CODE 8010-01-M