[Federal Register Volume 60, Number 88 (Monday, May 8, 1995)]
[Notices]
[Pages 22593-22595]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11230]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35661; File No. SR-NYSE-95-05]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by New York Stock Exchange, Inc., Relating to Near Neighbor 
Approach to Measuring Specialist Performance

May 2, 1995.
    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 
February 28, 1995, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to 
[[Page 22594]] solicit comments on the proposed rule change from 
interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change, to be implemented on a fifteen month 
pilot basis,\1\ consists of adopting a new approach to measuring 
specialist performance that would compare certain performance measures 
of a given stock (price continuity, depth, quotation spread and capital 
utilization) to those of its ``near neighbors,'' i.e., stocks that have 
certain similar characteristics.

    \1\See letter from James Buck, NYSE, to Katherine Simmons, SEC, 
dated March 7, 1995.
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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 IV 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
    In recent years, the Exchange has sought to create objective 
measures of market quality and specialist performance. The Securities 
and Exchange Commission has also encouraged the Exchange ``to develop 
relative, objective standards of performance for evaluating 
specialists.''\2\ The Exchange has responded, in part, by implementing 
on a pilot basis the capital utilization measure of specialist 
performance, which measures the dollar value of a specialist's 
proprietary trading\3\ in relation to the total dollar value of shares 
traded in the specialist's stocks.\4\

    \2\See Division of Market Regulation, 088SEC, The October 1987 
Market Break (February 1988), at p. xvii.
    \3\See infra note 8.
    \4\The Commission approved the capital utilization measure of 
specialist performance on a one-year pilot basis in Securities 
Exchange Act Release No. 33369 (December 23, 1993), 58 FR 69431 
(December 30, 1993). The Commission approved a six-month extension 
to the pilot program in Securities Exchange Act Release No. 35175 
(December 29, 1994), 60 FR 2167 (January 6, 1995) (extending pilot 
through June 30, 1995).
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    The Exchange has continued its efforts to develop additional 
objective measures of specialist performance over the past several 
years, and has retained consultants from the Massachusetts Institute of 
Technology to assist in this endeavor. Working with the consultants, 
the Exchange has developed a new approach to evaluating specialist 
performance that compares the performance in a stock over ``rolling'' 
three-month periods to the performance of stocks with similar trading 
characteristics (``near neighbors''). The market quality measures are 
price continuity,\5\ market depth,\6\ quotation spread,\7\ and 
specialist capital utilization.\8\

    \5\Continuity, the change in price from trade to trade, is 
measured by the percentage of trades with a change of \1/8\ point or 
less from the previous trade.
    \6\Depth, the maximum price change over a 3,000-share sequence 
of trades, is measured by the percentage of depth sequences with a 
high/low range of \1/8\ point or less.
    \7\Spread, the difference between the bid price and the ask 
price, is measured by the percentage of reported quotations with a 
spread of \1/4\ point or less.
    \8\A capital utilization percentage is derived for each 
specialist unit by dividing the average daily dollar value of the 
unit's stabilizing purchases and sales by the average daily total 
dollar value of shares traded in the unit's stocks. Capital 
utilization is measured two ways: (1) using stabilizing dealer 
volume; and (2) using stabilizing plus reliquifying dealer volume.
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    As with the capital utilization measure, stocks would continue to 
be separated into three broad stock categories: (1) stocks in the top 
200 stocks in the S&P 500 Stock Index and other stocks that are as 
active; (2) the remaining component stocks of the S&P 500 Index and 
stocks among the 500 most active stocks on the Exchange; and (3) all 
other stocks. A number of securities are excluded, as with the capital 
utilization measure.\9\

    \9\The following stocks are excluded from the current capital 
utilization measure and the near neighbor analysis: foreign stocks, 
preferred stocks, warrants, when issued stocks, IPOs (for the first 
60 days), closed-end funds, stocks selling for $5 and under, stocks 
with less than 2,000 shares average daily trading volume, and stocks 
that have been delisted for more than six months. The following 
stocks are excluded from near neighbor analysis and as discussed 
below are being proposed to be excluded from the capital utilization 
measure in this rule filing: stocks with two classes of shares, 
merger/acquisition stocks if there was a significant impact on the 
price or volume, and stocks which have been delisted for more than 
half of the examination period. See infra note 13.
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    Each month, each of the specialist unit's eligible stocks is 
classified as belonging to one of the three broad categories noted 
above. A determination is then made for each individual stock (the 
``target stock'') as to which other stocks are statistically similar to 
it (its ``near neighbors''), based on certain market characteristics. 
The characteristics that are used in this determination are price, non-
block volume, daily high low range, and the dollar value of the stock's 
``float'' (i.e., shares that are available for trading that are not 
closely held).\10\ A statistical formula is applied to each stock's 
four market characteristics to determine its statistical ``distance'' 
from the target stock. Stocks with distances of 1.000 or less are 
considered to be ``near neighbors'' of the target stock. Stocks with 
distances greater than 1.000 are considered to be too different to be 
considered ``near neighbors'' of the target stock.\11\

    \10\A stock will be considered ``similar'' to a target stock if: 
(1) the median average daily price is within 30% of a target stock 
under $20, or within $6 of a target stock between $20 and $60, or 
within 10% of a target stock above $60; (2) the median daily non-
block volume (i.e., trades under 25,000 shares) is within 30% of the 
target stock; (3) the median daily high-low range equals the median 
high-low range of the target stock +/- 7.5% of:
    i. 30% of the price for a target stock under $20
    ii. $6 for a target stock between $20 and $60,
    iii. 10% of the price for a target stock above $60 and (4) the 
market value of the float is within 30% of the target stock.
    \11\if there are more than 20 stocks with distances of 1.000 or 
less, only the 20 stocks that are closest to the target stock are 
used in the analysis.
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    For all stocks with three or more near neighbors, a single 
weighted\12\ average performance percentage combining the results for 
all the near neighbors is calculated for each market quality measure. 
Then, using statistical techniques involving standard deviations, each 
target stocks' actual performance in the market quality measures listed 
above is compared to the combined performance of its near neighbors.

    \12\The weight of a near neighbor stock decreases as its 
distance from the target stock increases. If a stock's distance from 
the target stock is less than 0.500, then its weight is 1.000. If a 
stock's distance from the target stock is greater than 0.500, then 
its weight is less than 1.000.
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    When a comparison with its near neighbors is made, the target stock 
is then placed into one of the three groups: a stock whose performance 
is statistically significantly poorer than the mean performance of the 
near neighbor stocks is classified in the ``Below Mean'' group; a stock 
whose performance is statistically similar to the mean performance is 
classified in the ``Mean'' group; and a stock whose performance is 
statistically significantly better than the mean is classified in the 
``Above Mean'' group. Stocks that have fewer than three near neighbors 
are automatically classified in the ``Mean'' group. An additional 
analysis is performed on the stocks in the ``Mean'' group to highlight 
those stocks that have relatively high performance even though that 
performance is statistically similar [[Page 22595]] to the calculated 
average of their near neighbors. A ``Mean'' group stock will be 
considered to have ``relatively high performance'' if its performance 
percentage is in the top quartile of all stocks in its stock category 
(i.e., top 200, next 300, or other).
    Each specialist unit would receive three reports each month 
containing the results of the near neighbor analyses for the three most 
recent months combined. These would include: (1) A Stock Detail Report 
for each stock that provides market data and performance information 
about the stock and each of the other stocks that were identified as 
its ``near neighbors,'' (2) a Stock Summary Report that lists each 
stock and provides data on the performance of the target stock and the 
average performance of its near neighbors, as well as whether the 
target stock's performance is ``Below Mean,'' ``Mean,'' or ``Above 
Mean,'' for each performance measure, and (3) a Specialist Unit Summary 
Report that shows, for each performance measure and within each stock 
category, the number of stocks that are in each group classification, 
and the percentage of the unit's total stocks that are in each group 
classification. The Unit Summary Report also shows the percentage of 
the unit's ``Mean'' group stocks that had high performance percentages.
    The Allocation Committee would receive only the summary data 
appearing on the Specialist Unit Summary Report, which will be updated 
each month (covering the three most recent months) upon the 
distribution of the reports to the specialist units. The Allocation 
Committee would not receive performance data for individual stocks. The 
Allocation Committee would also receive a list of each unit's stocks 
that had fewer than three near neighbors and were automatically 
classified in the ``Mean'' group. Included with each stock will be its 
percentage of the unit's total dollar value of shares traded.
    The Exchange is proposing that this new approach to measuring 
specialist performance be implemented on a fifteen month pilot basis. 
During the pilot period, the Exchange will continue to study the near 
neighbor methodology with a view toward recommending such enhancements 
or modifications as may be appropriate as experience is gained with 
this approach to evaluating specialist performance.
    The Exchange is also proposing the following modifications to the 
specialist capital utilization performance measure to ensure 
commonality between it and near neighbor: (1) Exclusion of stocks with 
two classes of shares (e.g., Class A & Class B), ``merger/acquisition'' 
stocks if there was a significant impact on the price or volume, and 
stocks that have been delisted for more than half of the examination 
period;\13\ and (2) reduction of the performance review period from a 
``rolling'' 12 months to a rolling three months. With respect to the 
new exclusion for stocks with two classes of shares and stocks subject 
to merger and acquisition activity that significantly impacts the price 
or volume of the subject security, the Exchange believes the stocks' 
trading patterns to be such that they cannot reasonably be compared to 
other stocks that do not trade in the same manner. The performance 
review period is proposed to be reduced to a rolling three month period 
in order to give more prompt feedback of performance changes.

    \13\The rule filing and Amendment No. 1, see supra note 1, 
propose to exclude stocks which have been delisted for more than six 
months based upon the current rolling twelve month performance 
review period. However, because the Exchange is proposing to change 
the review period to a rolling three month period, the Exchange will 
amend the filing to provide that stocks which have been delisted for 
more that half the review period will be excluded. Conversation 
between Don Siemer, NYSE, and Katherine Simmons, SEC, May 1, 1995.
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2. Statutory Basis
    The basis under Act for this proposed rule change is the 
requirement under Section 6(b)(5) of the Act 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 Exchange believes that the 
proposed rule change is consistent with these requirements in that 
developing objective measures of specialist performance using a near 
neighbor approach would help perfect the mechanism of a free and open 
market.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such other period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:

    (A) By order approve the proposed rule change, or

    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. 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. Sec. 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 NYSE. All 
submissions should refer to File No. SR-NYSE-95-05 and should be 
submitted by May 30, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-11230 Filed 5-5-95; 8:45 am]

BILLING CODE 8010-01-M