[Federal Register Volume 59, Number 214 (Monday, November 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27442]


[[Page Unknown]]

[Federal Register: November 7, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34918; File No. SR-BSE-94-13]

 

Self-Regulatory Organizations; Notice of Filing and Order 
Granting Temporary Accelerated Approval to Proposed Rule Change by the 
Boston Stock Exchange, Inc., Relating to Procedures for the Handling of 
Market-on-Close Orders on Expiration Fridays and Quarterly Index 
Expiration Days

October 31, 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 October 
12, 1994, the Boston Stock Exchange, Inc. (``BSE'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. On October 14, 1994, the Exchange submitted to the 
Commission Amendment No. 1 to the proposed rule change in order to 
correct certain typographical errors and to specify the duration of the 
pilot extension.\1\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\See letter from Karen A. Aluise, Assistant Vice President, 
BSE, to Beth A. Stekler, Attorney, Division of Market Regulation, 
SEC, dated October 12, 1994 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The purpose of the proposed rule change is to extend the pilot 
program which provides a set of procedures for the handling of Market-
on-Close (``MOC'') orders\2\ on Expiration Fridays\3\ and Quarterly 
Index Expiration Days.\4\ These procedures mirror the procedures in 
place on the New York Stock Exchange (``NYSE'')\5\ in order to ensure 
equal treatment of orders in both markets.
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    \2\The BSE defines an ``at the close order'' as a market order 
which is to be executed at or as near to the close as practicable. 
See Ch. I, Sec. 3 of the BSE Rules.
    \3\The term ``Expiration Friday'' refers to the trading day, 
usually the third Friday of the month, when some stock index 
options, stock index futures and options on stock index futures 
expire or settle concurrently.
    \4\The term ``Quarterly Index Expiration Day'' refers to the 
trading day, currently the last trading day of each calendar 
quarter, on which Quarterly Index Expiration (``QIX'') options 
expire.
    \5\The Commission approved the NYSE's current auxiliary closing 
procedures for Expiration Fridays and Quarterly Index Expiration 
Days (collectively, ``expiration days'') on a pilot basis in 
Securities Exchange Act Release No. 32868 (September 10, 1993), 58 
FR 48687 (September 17, 1993) (File No. SR-NYSE-93-33) (``1993 
Auxiliary Closing Procedures Approval Order''). The NYSE procedures 
establish, for all stocks, a 3:40 p.m. deadline for (1) the entry of 
MOC orders related to a strategy including any expiring stock index 
options, stock index futures or options on stock index futures and 
(2) the cancellation or reduction of any MOC order. In addition, for 
the pilot stocks (as defined below, see infra note 7), the NYSE 
specialist must, as soon as practicable after 3:40 p.m., disseminate 
any MOC order imbalance of 50,000 shares or more; thereafter, MOC 
orders in the pilot stocks may be entered only to offset a published 
imbalance.
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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 purpose of the proposed rule change is to extend the pilot 
program under which the BSE has adopted certain procedures to mirror 
those of the primary market for the handling of MOC orders on 
Expiration Fridays and Quarterly Index Expiration Days so that the BSE 
does not become a haven for MOC orders that are prohibited on the 
NYSE.\6\ In this way, all orders sent to the Exchange will receive 
equal treatment with orders sent to the NYSE. The proposed procedures 
include (a) prohibiting the cancellation or reduction of any MOC order 
in any NYSE stock after 3:40 p.m. on Expiration Fridays and Quarterly 
Index Expiration Days, (b) providing a 3:40 p.m. deadline for the entry 
of MOC orders, in all NYSE stocks, related to a strategy involving any 
stock index future, stock index option or option on stock index futures 
in expiring contracts, (c) publication of MOC order imbalances of 
50,000 shares or more in the pilot stocks as soon as practicable after 
3:40 p.m. and (d) providing for the entry of MOC orders after 3:40 p.m. 
in the pilot stocks only to offset published imbalances. With respect 
to item (a) above, the Exchange will permit cancellations of MOC orders 
after 3:40 p.m. in those instances where a legitimate error has been 
made. The term ``pilot stocks'' refers to the list of stocks designated 
by the NYSE as pilot stocks for purposes of its auxiliary closing 
procedures.\7\ The Exchange is seeking a one-year extension of the 
current pilot program to expire on October 31, 1995.
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    \6\Commission approval of the BSE's MOC order procedures expires 
on October 31, 1994. See Securities Exchange Act Release No. 33639 
(February 17, 1994), 59 FR 9295 (February 25, 1994) (File No. SR-
BSE-93-04) (``BSE Pilot Approval Order''). The Exchange has 
requested a one-year extension of the pilot program to expire on 
October 31, 1995. See Amendment No. 1, supra, note 1. The Exchange 
also has requested accelerated approval of the proposed rule change 
in order to allow the pilot program to continue without 
interruption.
    \7\As designated by the NYSE, the Expiration Friday pilot stocks 
consist of the 50 most highly capitalized Standard & Poors (``S&P'') 
500 stocks and any component stocks of the Major Market Index 
(``MMI'') not included therein. See 1993 Auxiliary Closing 
Procedures Approval Order, supra, note 5. The Quarterly Index 
Expiration Day pilot stocks consist of the 50 most highly 
capitalized S&P 500 stocks, any component stocks of the MMI not 
included therein and the 10 highest weighted S&P Midcap 400 stocks. 
Id.
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2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Act in that it is designed to prevent fraudulent and 
manipulative acts and practices, 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; and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. The BSE believes that, if investors, whose orders 
are banned on the NYSE because of current market conditions, are able 
to reroute those orders to the Exchange for execution on the BSE 
without regard to current market conditions, there could be a negative 
impact on the overall market as a result of the execution of those 
orders.

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 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, N.W., Washington, D.C. 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, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the BSE. All 
submissions should refer to File No. SR-BSE-94-13 and should be 
submitted by November 28, 1994.

IV. Commission's Findings and Order Granting Temporary 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 the requirements of Section 6(b). 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.
    In recent years, the self-regulatory organizations, with the 
support of the Commission, have instituted certain safeguards to 
minimize excess market volatility that may arise from the liquidation 
of stock positions related to trading strategies involving expiring 
index derivative products. For instance, on expiration days, the NYSE 
utilizes auxiliary closing procedures\8\ designed to help the 
specialist attract any contraside interest necessary to alleviate MOC 
order imbalances and dampen their effect on the closing price. Based on 
the NYSE's experience,\9\ the Commission believes that these procedures 
work relatively well and may result in more orderly markets at the 
close on expiration days.
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    \8\See supra, note 5.
    \9\The NYSE has submitted to the Commission several monitoring 
reports describing its experience with the auxiliary closing 
procedures. For further discussion of the NYSE's results, see 1993 
Auxiliary Closing Procedures Approval Order, supra, note 5.
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    In today's highly competitive market environment, however, it is 
possible that a regional exchange, which trades NYSE-listed stocks but 
does not have comparable closing procedures, could be utilized by 
market participants to enter MOC orders prohibited on the NYSE. 
Although the Commission has no reason to believe that the BSE market 
has become a significant alternative market to enter otherwise 
prohibited MOC orders, the Commission agrees with the BSE that, if this 
possibility were realized, it could have a negative impact on the 
fairness and orderliness of the national market system.\10\ 
Accordingly, in its order initially approving the Exchange's pilot 
program,\11\ the Commission concluded that it is reasonable for the BSE 
to adopt procedures for the handling of MOC orders that mirror the 
NYSE's, thereby ensuring the equal treatment of orders in both markets 
and, in the event of unusual market conditions, offering the BSE the 
same benefits in terms of potentially reducing volatility.
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    \10\For example, if MOC orders prohibited on the NYSE were 
entered instead on the BSE, unusually large MOC order imbalances on 
the regional exchange could contribute to overall market volatility.
    \11\See BSE Pilot Approval Order, supra, note 6.
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    In its approval order, the Commission asked the BSE to study the 
effectiveness of its MOC order procedures. Specifically, the Commission 
requested the following information: (1) For all pilot stocks, the size 
of the MOC order imbalance on the BSE at 3:40 p.m. and at 4:00 p.m.; 
(2) for all pilot stocks, the price and time of the last regular-way 
trade on the BSE and the closing price; and (3) for each pilot stock 
with a MOC order imbalance of 50,000 shares or more at 3:40 p.m., an 
appropriate measure of volatility at the close on the BSE.
    On October 5, 1994, the Exchange submitted to the Commission its 
first monitoring report on its MOC order pilot program. The Commission 
finds that, although this monitoring report provides certain useful 
information concerning the operation of the pilot program, the BSE must 
provide further data before the Commission can fairly and 
comprehensively evaluate the BSE's use of its auxiliary closing 
procedures. To allow such additional information to be gathered and 
reviewed, without compromising the benefits that market participants 
might receive, the Commission finds that it is reasonable to extend the 
pilot program until October 31, 1995.
    In this regard, the Commission continues to believe that the pilot 
procedures should allow the BSE to obtain an accurate view of the 
buying and selling interest in MOC orders at expiration and, if there 
is a substantial imbalance on one side of the market, to provide the 
investing public with timely and reliable notice thereof. The BSE pilot 
program establishes a simultaneous 3:40 p.m. deadline for the entry of 
expiration-related MOC orders and for the cancellation or reduction of 
any MOC order. Substantial MOC order imbalances in the pilot stocks are 
required to be disseminated promptly thereafter.\12\ Based on the 
Exchange's monitoring report, the pilot procedures, specifically the 
requirement that MOC orders included in imbalances be irrevocable and 
the restrictions on further MOC order entry, appear to have operated 
effectively on all expiration days covered by the report. Accordingly, 
the Commission is satisfied that any BSE imbalance publications should 
reflect actual investor interest.
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    \12\The BSE has indicated that it would disseminate imbalances 
to its floor, its member firms and the investing public in a manner 
which is substantially similar to that utilized by the NYSE. 
Telephone conversation between Karen A. Aluise, Assistant Vice 
President, BSE, and Beth Stekler, Attorney, Division of Market 
Regulation, SEC, on February 10, 1994.
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    In addition, although the BSE's monitoring report does not reveal 
any unusual market conditions, the Commission continues to believe 
that, in the event of such conditions, the BSE should have sufficient 
time to attract contra-side interest to help alleviate imbalances 
created by the unwinding of index derivative related positions. As 
noted above, the pilot procedures require both the early submission of 
expiration-related MOC orders and, for the pilot stocks, prompt 
dissemination of substantial MOC order imbalances. While the Commission 
recognizes that 3:40 p.m. is relatively near the close, the Commission 
believes that deadline strikes a reasonable balance between the need to 
provide the investing public with timely and reliable notice of 
expiration-related order flow and the need to avoid unduly infringing 
upon legitimate trading strategies.
    The Commission is approving the proposed rule change on a pilot 
basis until October 31, 1995. As long as some index derivative products 
continue to expire based on the closing stock prices on expiration 
days, the Commission agrees with those self-regulatory organizations 
that argue that such procedures are necessary to provide a mechanism to 
handle the potentially large stock imbalances engendered by the 
unwinding of index derivative related positions. During this pilot 
program, the Commission expects the BSE to monitor the effectiveness of 
its MOC order procedures.
    The Commission therefore requests that the BSE submit a report to 
the Commission, by August 31, 1995, describing its experience with the 
pilot program. At a minimum, this report should contain, for each 
Expiration Friday and Quarterly Index Expiration Day, the following 
data: (1) for each pilot stock that had a MOC order imbalance on the 
BSE, the size of that imbalance at 3:40 p.m. and at 4:00 p.m.; (2) for 
each pilot stock listed in (1) above, the consolidated closing price 
and the number of shares of MOC orders printed on the BSE; and (3) for 
each pilot stock that had a MOC order imbalance of 50,000 shares or 
more at 3:40 p.m., an appropriate measure of volatility at the close 
for the BSE (for example, the change in price of the closing 
transaction, measured as a percentage, from the last trade and/or the 
change in the specialist's position) and a description of how the pilot 
procedures influenced market conditions. Any request to modify this 
pilot program, to extend its effectiveness or to seek permanent 
approval of the pilot procedures also should be submitted to the 
Commission, by August 31, 1995, as a proposed rule change pursuant to 
Section 19(b) of the Act.
    The Commission finds good 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 without interruption. In addition, the procedures the Exchange 
proposes to continue using are identical to the procedures that were 
published in the Federal Register for the full comment period and were 
approved by the Commission.\13\
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    \13\No comments were received in connection with the proposed 
rule change which initiated the BSE's MOC order pilot program. See 
BSE Pilot Approval Order, supra, note 6.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act\14\ that the proposed rule change (SR-BSE-94-13) is hereby approved 
on a pilot basis until October 31, 1995.

    \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) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-27442 Filed 11-4-94; 8:45 am]
BILLING CODE 8010-01-M