[Federal Register Volume 60, Number 121 (Friday, June 23, 1995)]
[Notices]
[Pages 32723-32725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-15422]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35854; File No. SR-NYSE-95-09]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Amendment No. 1 to 
Proposed Rule Change Relating to Entry of Limit-at-the-Close Orders

June 16, 1995.

I. Introduction

    On March 3, 1995, 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 and Exchange Commission of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to replace its current pilot \3\ 
for the entry of limit-at-the-close (``LOC'') orders \4\ to offset a 
published market-at-the-close (``MOC'') order \5\ imbalance of 50,000 
shares or more in stocks selected from expiration day \6\ pilot stocks 
with a pilot including all stocks for which MOC order imbalances are 
published. On April 18, 1995, the NYSE submitted Amendment No. 1 to the 
proposed rule change.\7\ 

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 33706 (March3, 
1994), 59 FR 11093.
    \4\ A LOC order is a limited price order entered for execution 
at the closing price if the closing price is within the limit 
specified. See NYSE Rule 13.
    \5\ A MOC order is a market order to be executed in its entirety 
at the closing price on the Exchange. Id.
    \6\ See infra note 11.
    \7\ See Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Glen Barrentine, Team Leader, SEC dated April 
17, 1995.
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    The proposed rule change, including Amendment No. 1, was published 
for comment in Securities Exchange Act Release No. 35653 (April 27, 
1995), 60 FR 21839. No comments were received on the proposal.

II. Description of the Proposal

    The proposed rule change proposes to expand the universe of stocks 
in which LOC orders may be entered to all stocks for which MOC 
imbalances are published pursuant to such procedures regarding time of 
order entry and order cancellation as the Exchange may establish from 
time to time.
    Currently, the NYSE allows entry of LOC orders to offset published 
imbalances of MOC orders of 50,000 shares or more in five of the so-
called ``pilot stocks.'' \8\ The Commission approved the current LOC 
order entry procedures on a 15-month pilot basis through July 15, 
1995.\9\ Thus far, LOC orders been entered rarely. Members cite the 
limited number of stocks for which LOC orders may be entered as a 
primary reason for not committing resources to effect system program 
changes necessary to support the pilot program.

    \8\ For purposes of LOC order entry, the term ``pilot stocks'' 
refers to the Expiration Friday pilot stocks plus any additional QIX 
Expiration Day pilot stocks. Specifically, 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.
    \9\ See Release No. 33706, supra, note 3.
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    The Exchange believes that by expanding the universe of eligible 
LOC stocks, it will make it more feasible for member firms to effect 
the systems changes required to use LOC orders.\10\ The Exchange is 
therefore proposing to replace the current pilot to permit the entry of 
LOC orders to offset a MOC order imbalance of 50,000 shares or more in 
all stocks for which MOC order imbalances are published.\11\ The 
[[Page 32724]] Exchange intends to keep the 3:55 p.m. cutoff time for 
the entry of LOC orders, except to correct a bonafide error. On 
expiration days, LOC orders will continue to be irrevocable after 3:40 
p.m., except to correct a bonafide error. For non-expiration days, 
cancellation of LOC orders would be prohibited after 3:55 p.m., except 
to correct errors.\12\ 

    \10\ The NYSE has represented that, before initiating the 
expanded pilot program, it will submit to the Commission a letter 
(1) stating that the NYSE is operationally ready to accept LOC 
orders and (2) informing the Commission of the start-up date for 
this pilot. Telephone conversation between Donald Siemer, Director 
of Market Surveillance, NYSE, to Elisa Metzger, Senior Counsel, SEC, 
on June 7, 1995.
    \11\ Currently, MOC imbalances are published for pilot stocks on 
expiration days and non-expiration days. 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'').
    In addition, on non-expiration days, MOC imbalances are 
published for stocks that are being added to or dropped from an 
index and, upon the request of a specialist, any other stock with 
the approval of a Floor Official. See Securities Exchange Act 
Release No. 35589 (April 10, 1995), 60 FR 19313.
    \12\ The NYSE modified its electronic display book, such that 
LOC orders are prioritized relative to other LOC orders by time of 
entry, but are required to yield priority to all conventional limit 
orders on the specialist's book at the same price. Telephone 
conversation between Donald Siemer, Director of Market Surveillance, 
NYSE, to Elisa Metzger, Senior Counsel, SEC, on June 16, 1995.
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    The Exchange believes that LOC orders may be a useful means to help 
address the prospect of excess market volatility that may be associated 
with an imbalance of MOC orders at the close. Therefore, the Exchange 
believes it is appropriate to replace the current pilot for LOC orders 
to a pilot including all stocks for which MOC imbalances are published 
that will last for one year from the date of approval of this proposed 
rule change.

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 Sections 6(b).\13\ 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.

    \13\ 15 U.S.C. 78f(b).
    As noted in approving the current pilot, 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.
    The NYSE auxiliary closing procedures have worked relatively well 
and may have resulted in more orderly markets on expiration days. 
Nevertheless, both the Commission and the NYSE remain concerned about 
the potential for excess market volatility, particularly at the close 
on expiration days. Although, to date, the NYSE has been able to 
attract sufficient contra-side interest to effectuate an orderly 
closing, adverse market conditions could converge on an expiration day 
to create a market dislocation which could make member firms and their 
customers unwilling to acquire significant positions.
    The NYSE recently adopted auxiliary closing procedures for MOC 
orders on non-expiration days that are substantially similar to those 
in place for expiration days.\14\ This allows 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 on non-expiration days, certain trading and asset 
allocation strategies use NYSE closing prices and, accordingly, could 
employ MOC orders. In the event of unusual market conditions, the 
Commission believes that the MOC procedures for non-expiration days 
offer benefits in terms of assessing volatility at the close of trading 
in the same manner as the NYSE's procedures for expiration days.

    \14\ See supra note 11.
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    The Commission continues to believe preliminarily that LOC orders 
should provided the NYSE with an additional means of attracting contra-
side interest to help alleviate MOC order imbalances both on expiration 
and non-expiration days. As a practical matter, the Commission believes 
that LOC orders will appeal to certain market participants who other 
wise might be reluctant to commit capital at the close. Specifically, 
unlike a MOC order, which results in significant exposure to adverse 
price movements, a LOC order will allow each investor to determine the 
maximum/minimum price at which he or she is willing to buy/sell. To the 
extent that such risk management benefits encourage NYSE member firms 
and their customers to enter orders to offset MOC order imbalances of 
50,000 shares or more, thereby adding liquidity to the market, the 
Commission agrees with the NYSE that LOC orders could become a useful 
investment vehicle for curbing excess price volatility at the 
close.\15\

    \15\ Furthermore, the Commission notes that LOC orders could 
allow the NYSE to accomplish this goal without diminishing any 
benefit to investors from trading strategies that rely on MOC orders 
to guarantee a fill at the closing price.
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    The Commission also finds that the NYSE has established appropriate 
procedures for the handling of LOC orders and that the NYSE's existing 
surveillance should be adequate to monitor compliance with those 
procedures. Because LOC orders will be required to yield priority to 
conventional limit orders at the same price, the Commission is 
satisfied that public customer orders on the specialist's book will not 
be disadvantaged by this proposal. In addition, the Commission believes 
that the proposed 3:55 p.m. deadline for LOC order entry strikes a 
reasonable balance between the need to effectuate an orderly closing 
and the need to avoid unduly infringing upon legitimate trading 
strategies. Similarly, in the Commission's opinion, the prohibition on 
cancelling LOC orders is consistent with the Exchange's auxiliary 
closing procedures and, like those procedures, should allow specialists 
to make a timely and reliable assessment of order flow and its 
potential impact on the closing price.
    The Commission is approving LOC order entry for all stocks for 
which MOC order imbalances are published on a pilot basis contingent on 
the extension or permanent approval of the MOC procedures.\16\ During 
the pilot program, the Commission expects the NYSE to monitor the 
effectiveness of its LOC order procedures.

    \16\ The pilot program for MOC procedures expires on October 31, 
1995. See Securities Exchange Act Release No. 34916 (October 31, 
1994), 59 FR 55507.
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    The Commission therefore requests that the NYSE submit a report to 
the Commission, by May 31, 1996, describing its experience with the 
expanded pilot program. At a minimum, this report should contain the 
following data for each expiration day during the 10-month period after 
the start-up date for LOC order entry for all stocks: (1) For all 
stocks which had a MOC order imbalance of 50,000 shares or more at 3:40 
p.m., the names of those stocks and the size of the imbalance; (2) for 
each stock listed in (1) above, the size of the MOC order imbalance at 
4:00 p.m. and an appropriate measure of the size of conventional limit 
order and LOC order interest, on the opposite side of the market from 
the imbalance, at 4:00 p.m.; (3) for each stock listed in (1) above, 
(i) the price of the transaction effected closest in time to 3:40 p.m., 
the price of the last regular way trade and the closing price, (ii) the 
change in price of the closing transaction, measured as a percentage, 
from the last regular way [[Page 32725]] trade and from the transaction 
effected closest in time to 3:40 p.m., (iii) historical data analyzing 
price volatility for the same stock on expiration days prior to the 
implementation of this pilot program; and (4) the average price 
volatility for all stocks listed in (1) above. The NYSE report also 
should contain, for one week per calendar quarter (including at least 
one week with no expiration days) the data described herein, as 
modified to reflect the MOC procedures for non-expiration days. Any 
requests to modify this pilot program, to extend its effectiveness or 
to seek permanent approval for the pilot procedures also should be 
submitted to the Commission, by May 31, 1996, as a proposed rule change 
pursuant to Section 19(b) of the Act.

IV. Conclusion

    It is therefore ordered, pursaunt to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-NYSE-95-09) is approved on a 
pilot basis to expire on July 31, 1996.

    \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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-15422 Filed 6-22-95; 8:45 am]
BILLING CODE 8010-01-M