[Federal Register Volume 60, Number 111 (Friday, June 9, 1995)]
[Notices]
[Pages 30616-30618]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14190]



[[Page 30616]]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35800; File No. SR-BSE-95-10]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Boston 
Stock Exchange, Inc., Relating to Amendments to the Pilot Program 
Regarding Certain Procedures for the Handling of Market-on-Close Orders 
on Non-Expiration Days

June 1, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 19, 1995, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change, and on May 31, 
1995, filed Amendment No. 1 to the proposed rule change,\3\ as 
described in Items I and II below, which Items have been prepared by 
the self-regulatory organization. The BSE has requested accelerated 
approval of the proposal. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Karen A. Aluise, Assistant Vice President, 
BSE to Elisa Metzger, Senior Counsel, SEC, dated May 31, 1995.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks to adopt procedures for the handling of market-
on-close orders on expiration days, non-expiration days and in market 
conditions where New York Stock Exchange, Inc. (``NYSE'') Rule 80A is 
in effect. These procedures mirror the procedures in place on the 
primary markets in order to ensure equal treatment of orders in both 
markets.

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 is to adopt certain procedures to 
mirror those of the primary markets for the handling of market-on-close 
(``MOC'') orders on expiration days \4\ and non-expiration days so that 
the BSE does not become a haven for MOC orders that are prohibited on 
the primary markets.\5\ In this way, all orders sent to the Exchange 
will receive equal treatment to orders sent to the primary markets. The 
proposed rule change proposes that on expiration days, all MOC orders 
in all stocks will be prohibited after 3:40 p.m., eliminating the 
limitation related to a strategy including stock index futures, stock 
index options or options on stock index futures in expiring contracts. 
The proposed procedures also include procedures applicable on non-
expiration days, such as: (a) Providing a 3:50 p.m. deadline for the 
entry of all MOC orders in all stocks, (b) prohibiting the cancellation 
or reduction of any MOC order in any stock after 3:50 p.m., (c) 
publishing order imbalances of 50,000 shares or more as soon as 
practicable after 3:50 p.m. in the pilot stocks, stocks being added to 
or dropped from an index, and in any other stock with the approval of a 
Floor Official and (d) limiting the entry of MOC orders after 3:50 p.m. 
to offset published imbalances. With respect to item (b) above, the 
Exchange will permit cancellations of MOC orders after 3:50 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.\6\

    \4\ The term ``expiration days'' refers to both (1) 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 (``Expiration Fridays'') and (2) the 
trading day on which end of calendar quarter index options expire 
(``QIX Expiration Days'').
    \5\ The BSE's auxiliary closing procedures for expiration days 
have been approved on a pilot basis until October 31, 1995. See 
Securities Exchange Act Release No. 34918 (October 31, 1994), 59 FR 
55504 (``1994 Pilot Approval Order'').
    \6\ 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. The QIX 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.
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    The proposed rule change also proposes certain procedures for the 
handling of MOC orders in market conditions where the NYSE's Rule 80A 
is in effect. On non-expiration days, if an MOC index arbitrage order 
to buy (sell) to establish or increase a position is entered, and Rule 
80A subsequently goes into effect because of significant upward 
(downward) market movement, the MOC order must be canceled, regardless 
of the time Rule 80A goes into effect. If Rule 80A goes into effect 
prior to 3:50 p.m., the MOC order may be re-entered with the 
instruction ``buy minus'' (``sell plus''). If Rule 80A goes into effect 
after 3:50 p.m. and there is a published imbalance in the subject stock 
the MOC order may be re-entered with the instruction ``buy minus'' 
(``sell plus'') to offset the imbalance.
    On expiration days, if an MOC index arbitrage order to buy (sell) 
to establish or increase a position is entered, and Rule 80A 
subsequently goes into effect because of significant upward (downward) 
market movement, the MOC order must be canceled, regardless of the time 
Rule 80A goes into effect. If Rule 80A goes into effect prior to 3:40 
p.m., the MOC order may be re-entered with the instruction ``buy 
minus'' (``sell plus''). If Rule 80A goes into effect after 3:40 p.m. 
and there is a published imbalance in the subject stock, the MOC order 
may be re-entered with the instruction ``buy minus'' (``sell plus'') to 
offset the imbalance.
2. Statutory Basis
    The statutory basis for the proposed rule is Section 6(b)(5) of the 
Exchange 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.

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. [[Page 30617]] 

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, 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 NW., 
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-95-10 and should be 
submitted by [insert date 21 days from date of publication],

IV. Commission's Findings and Order Granting 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 \7\ of the Act. In 
particular, the proposal is consistent with the Section 6(b)(5) \8\ 
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.

    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(5).
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    In recent years, the self-regulatory organizations have instituted 
certain safeguards to minimize excess market volatility that may arise 
from the liquidation of stock positions related to trading strategies 
involving index derivative products. For instance, since 1986, the NYSE 
has utilized auxiliary closing procedures on expiration days. These 
procedures allow NYSE specialists to obtain an indication 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 and with an 
opportunity to make appropriate investment decisions in response. Based 
on the NYSE's experience,\9\ the Commission believes that the MOC order 
handling requirements work relatively well and may result in more 
orderly markets at the close on expiration days.

    \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 
Securities Exchange Act Release No. 34916 (October 31, 1994), 59 FR 
55507.
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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, the Commission believes 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.

    \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.
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    In this regard, the Commission notes that the proposed rule change 
will standardize the BSE's closing procedures on expiration days with 
those on the NYSE.\11\ Specifically, on expiration days, the BSE 
proposal will impose a 3:40 p.m. deadline for entry of all MOC orders. 
In conjunction with the prohibition on cancellation or reduction of any 
MOC order after 3:40 p.m., this requirement should allow the specialist 
to make a timely and reliable assessment, for every stock, of MOC order 
flow and its potential impact on the closing price. While the 
Commission recognizes that 3:40 p.m. is relatively near the close, the 
Commission previously has determined that such a deadline strikes a 
reasonable balance between the need to effectuate an orderly closing 
and the need to avoid unduly infringing upon legitimate trading 
strategies.\12\

    \11\ See Securities Exchange Act Release No. 35589 (April 10, 
1995), 60 FR 19313.
    \12\ See, e.g., Securities Exchange Act Release No. 33639 
(February 17, 1994), 59 FR 9295.
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    The amended procedures for expiration days will continue to require 
that, as soon as practicable after 3:40 p.m., BSE specialists 
disseminate substantial imbalances in the pilot stocks. Thereafter, no 
MOC orders may be entered except to offset a published imbalance in a 
pilot stock. In this regard, the BSE pilot program combines early 
submission of MOC orders with prompt dissemination of imbalances that 
reflect actual investor interest. As noted in prior Commission orders 
approving these procedures,\13\ the BSE should have sufficient 
opportunity to attract any contra-side interest necessary to alleviate 
substantial MOC order imbalances in the pilot stocks and to dampen 
their effect on the closing price.

    \13\ See 1994 Pilot Approval Order, supra, note 5.
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    In addition, under the proposed rule change, the BSE will adopt MOC 
order handling requirements for non-expiration days that are 
substantially similar to those in place for expiration days. This will 
allow members and member organizations to follow comparable procedures 
at the close on all trading days. Although there is less likelihood of 
an influx of MOC orders at the close of non-expiration days, certain 
trading and asset allocation strategies could employ MOC orders. The 
3:50 p.m. deadline for MOC order entry and cancellation, as well as the 
requirement to disseminate MOC orders consisting of 50,000 shares or 
more as soon as practicable after 3:50 p.m., on non-expiration days 
should help the specialist make a timely and reliable assessment of MOC 
order flow and its potential impact on the closing price and also 
should ensure that any imbalance publications reflect actual investor 
interest. In the Commission's opinion, a 3:50 p.m. deadline strikes a 
more appropriate balance for non-expiration days (as opposed to the 
3:40 p.m. deadline for expiration days) given the reduced likelihood of 
substantial MOC order imbalances due to derivatives-related trading 
strategies.
    In the event of unusual market conditions, the Commission believes 
that the amended procedures for non-expiration days will offer benefits 
in terms of assessing volatility at the close of trading in the same 
manner as the BSE's procedures for expiration days. Additionally, the 
Commission notes that, by permitting a Floor Official to authorize the 
publication of substantial MOC order imbalances on non-expiration days 
in any stock, the proposal should increase the information available to 
market participants and provide BSE specialists [[Page 30618]] with a 
mechanism, if necessary, to attract contra-side interest in any stock.
    The Commission finds it appropriate for the BSE to provide for 
procedures for the handling of MOC orders in market conditions when the 
NYSE's Rule 80A is in effect. The Commission believes that the rule 
change clearly informs market participants of the manner in which MOC 
order can be placed when the NYSE's Rule 80A is in effect. The 
Commission continues to believe that the provisions of NYSE Rule 80A 
provide a useful means of addressing market volatility.\14\

    \14\ See Securities Exchange Act Release No. 29854 (October 24, 
1991), 56 FR 55963.
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    The Commission is approving the amendments to the BSE's auxiliary 
closing procedures for expiration days and non-expiration days as part 
of the existing pilot program that expires on October 31, 1995.
    The Commission finds good cause for approving the proposed rule 
change prior the thirtieth day after the date of publication of notice 
of filing thereof in the Federal Register. This will permit the 
proposed amendments to be effective simultaneously with the NYSE's 
amendments to the procedures for handling MOC orders.\15\ In addition, 
the procedures the BSE proposes to use are identical to NYSE procedures 
that were published in the Federal Register for the full comment period 
and were approved by the Commission.\16\

    \15\ See Release No. 35589, supra note 11.
    \16\ No comments were received in connection with the most 
recent proposed rule change which modified the NYSE procedures. See 
Release No. 35589, supra note 11.
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    It is therefore ordered, pursuant to Section 19(b)(2) \17\ that the 
proposed rule change is hereby approved.

    \17\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\

    \18\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 95-14190 Filed 6-8-95; 8:45 am]
BILLING CODE 8010-01-M