[Federal Register Volume 60, Number 132 (Tuesday, July 11, 1995)]
[Notices]
[Pages 35760-35763]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16917]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35926; File No. SR-NYSE-95-24]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Notice of Filing and Order Granting Accelerated Approval of a Proposed
Rule Change Relating to an Extension of the Pilot for the Capital
Utilization Measure of Specialist Performance
June 30, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934, (``Act'') \1\ and Rule 19b-4 thereunder,\2\
[[Page 35761]]
notice is hereby given that on June 22, 1995, the New York Stock
Exchange, Inc. (``NYSE'' 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. 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) (1988).
\2\ 17 CFR 240.19b-4 (1994).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change consists of extending the capital
utilization pilot through September 10, 1996. The capital utilization
measure focuses on a specialist unit's use of its own capital in
relation to the total dollar volume of trading activity in the unit's
stocks. This capital utilization measure would continue to be used by
the Allocation Committee (``Committee'') in allocating newly-listed
stocks.\3\
\3\ The Exchange's Allocation Policy and Procedures governs the
allocation of equity securities to NYSE specialist units. The
Allocation Committee has sole responsibility for the allocation of
securities to specialist units pursuant to Board-delegated
authority, and is overseen by the Quality of Markets Committee of
the Board of Directors. The Allocation Committee renders decisions
based upon the allocation criteria specified in the Allocation
Policy. The Allocation Policy emphasizes that the most significant
allocation criterion is specialist performance. In this regard, the
Allocation Policy states that the Allocation Committee will base its
allocation decisions on the Specialist Performance Evaluation
Questionnaire (``SPEQ''), objective performance measures, and the
Committee's expert professional judgment. See also note 17, infra.
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The Exchange requests the Commission to find good cause, pursuant
to Section 19(b)(2) of the Act, for approving the proposed rule change
prior to the thirtieth day after publication in the Federal Register.
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 NYSE 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 and is set forth in Sections A, B and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In recognition of the importance of dealer participation,
particularly in volatile markets when such participation is viewed as
providing ``value added'' in maintaining fair and orderly markets, the
Exchange has developed a measure of specialist performance dealing with
utilization of capital for marketmaking. This measure of performance
focuses on a specialist unit's use of its own capital in relation to
the total dollar value of trading activity in the unit's stocks.
Under the pilot, a capital utilization percentage is derived for
each eligible stock \4\ and the specialist unit overall 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. This percentage is calculated both for stabilizing
trades only and stabilizing plus reliquefying trades. (A reliquefying
transaction is one in which the specialist reduces a position in a
specialty stock by selling part of a long position on a zero-minus
tick, or purchasing to cover part of a short position on a zero-plus
tick.) These percentages are provided for base periods (i.e., non-
volatile periods) and volatile periods (days when there is a change of
one percent or more in the S&P 500 Stock Price Index),\5\ and each
stock's ten percent most volatile days,\6\ so that performance of a
unit relative to other units can be compared as to volatile and non-
volatile market conditions.
\4\ The following are not included in any grouping of eligible
stocks: foreign stocks, preferred stocks, warrants, when-issued
stocks, IPOs (for the first 60 days), closed-end funds, stocks
selling for $5 and under, and stocks with less than 2000 shares
average daily trading volume. In Securities Exchange Act Release No.
35927 (June 30, 1995) the Commission approved an amendment to the
capital utilization pilot that also excludes stocks with two classes
of shares (e.g., Class A and 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. In addition, the amendment to the pilot reduced the review
period in which capital utilization is measured from a rolling 12
months to a rolling three months.
\5\ ``S&P 500 Stock Price Index'' is a service mark of Standard
and Poor's Corporation.
The base period calculation includes the total average daily
dollar value for the trading days within the three month period
excluding those days during which there was a change of 1% or more
in the S&P 500 Price Index. The volatile period calculation includes
the total average daily dollar value for the trading days within the
three month period during which there was a change of 1% or more in
the S&P 500 Price Index.
\6\ The base period calculation includes the total average daily
dollar value for the days within the three month trading period that
were not among the 10% most volatile. The volatile period
calculation includes the average daily dollar value for the days
within the three month period that were the 10% most volatile.
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The capital utilization measure separates stocks into three broad
groupings including:
Stocks included in the top 200 stocks in the S&P 500 Stock
Price Index and other stocks that are at least as active (based on
average daily dollar value of shares traded)
The remainder of the S&P 500 and any stocks among the 500
most active on the Exchange
All other stocks
Specialist units are placed alphabetically into three tiers based
on their base day and volatile day capital utilization percentages for
each of the three groupings of stocks. Within each grouping, a Floor-
wide mean capital utilization percentage is calculated. A unit will be
in Tier 1 if its capital utilization percentage is more than 1.1
standard deviations above the mean. (A standard deviation is a
statistical measure of the distance from the mean.) A unit will be in
Tier 2 if its capital utilization percentage is within 1.1 standard
deviations above or below the mean. A unit will be in Tier 3 if its
capital utilization percentage is more than 1.1 standard deviations
below the mean.
During the past year, the Allocation Committee has received
specialist capital utilization information on a ``rolling'' 12-month
basis.\7\ The Allocation Committee has been given information as to a
unit's tier in each stock grouping, with the tier data being included
with other objective data, such as DOT turnaround performance,
stabilization rates and TTV percentages. The specialist units
themselves have been given, on a monthly basis for the prior 12 months,
their actual capital utilization percentages for each stock.\8\
\7\ This has been changed to a rolling three months. See supra
note 4.
\8\ The specialist capital utilization measure is not being
added as a basis for initiating a Performance Improvement Action
under NYSE Rule 103A. See infra note 11. During the pilot period,
the Market Performance Committee will receive quarterly reports on
the initiative, with a view toward their recommending such
enhancements or modifications as may seem appropriate based on
actual experience with this measure. Any modifications or
enhancements would be filed with the Commission, and would be
implemented only with the Commission's approval.
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The Commission previously approved the Exchange's proposed rule
change to adopt capital utilization as an additional measure of
specialist performance to be considered by the Allocation Committee,
first on a one-year pilot
[[Page 35762]]
basis \9\ and then for an additional six months through June 30,
1995.\10\ In its July 25, 1994, report on the Allocation and Capital
Utilization pilots, the Exchange reviewed the Committee's use of the
capital utilization measure in allocation decisions. The measure
appears to be a useful addition to the other measures of specialist
performance referred to by the Committee. The Exchange is now seeking
to extend that pilot to run concurrently with the pilot for Rule
103A\11\ and the pilot for the ``near neighbor'' technique of measuring
specialist performance.\12\
\9\ See Securities Exchange Act Release No. 33369 (December 22,
1993), 58 FR 69431 (December 30, 1993).
\10\ See Securities Exchange Act Release No. 35175 (December 29,
1994), 60 FR 2167 (January 6, 1995).
\11\ See Securities Exchange Act Release No. 35704 (May 10,
1995), 60 FR 26060 (May 16, 1995). Rule 103A grants authority to the
Exchange's Market Performance Committee to develop and administer
systems and procedures, including the determination of appropriate
standards and measurements of performance, designed to measure
specialist performance and market quality on a periodic basis to
determine whether or not particular specialist units need to take
actions to improve their performance. The Commission emphasized in
the extension order its belief that objective measures of specialist
performance should be incorporated into the evaluation process. The
Commission believes that the Exchange should have sufficient
experience with the capital utilization and near neighbor measures
of specialist performance at the end of the pilot period to judge
whether these objective measures should be incorporated into the
Rule 103A evaluation criteria.
\12\ The near neighbor approach to evaluating specialist
performance compares the performance in a stock over rolling three-
month periods to the performance of stocks with similar trading
characteristics. This objective measure of specialist performance
will only be used, at this time, by the Allocation Committee in its
decision making process. See supra note 3. The Commission approved
the near neighbor pilot in Securities Exchange Act Release No. 35927
(June 30, 1995).
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2. Statutory Basis
The basis under the Act for the proposed rule change is the
requirement under Section 6(b)(5) 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, in general, to protect investors and the public interest.
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.
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, 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 other 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 in the Commission's Public Reference Section, 450 Fifth Street
NW., Washington, DC.
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-95-24, and should be submitted by August 1,
1995.
IV. Commission's Findings and Order Granting 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)(5) of the Act.\13\
Section 6(b)(5) requires 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. Further, the Commission finds that the proposal is
consistent with Section 11(b) of the Act \14\ and Rule 11b-1
thereunder,\15\ which allow exchanges to promulgate rules relating to
specialists to ensure fair and orderly markets. For the reasons set
forth below, the Commission continues to believe that the consideration
of specialist capital utilization by the Allocation Committee should
enhance the Exchange's allocation process and encourage improved
specialist performance, consistent with the protection of investors and
the public interest.
\13\ 15 U.S.C. 78f(b)(5) (1988).
\14\ 15 U.S.C. 78k(b) (1988).
\15\ 17 CFR 240.11b-1 (1994).
Specialists play a crucial role in providing stability, liquidity
and continuity to the trading of securities. Among the obligations
imposed upon specialists by the Exchange, and by the Act and rules
thereunder, is the maintenance of fair and orderly markets in
designated securities.\16\ To ensure that specialists fulfill these
obligations, it is important that the Exchange develop objective
measures of specialist performance and prescribe stock allocation
procedures and policies that encourage specialists to strive for
optimal performance. The Commission supports the NYSE's effort to
develop an objective measure of specialist capital utilization to
encourage improved specialist performance and market quality.\17\
\16\ See, e.g., 17 CFR 240.11b-1 (1994); NYSE Rule 104.
\17\ The Commission also has approved an NYSE proposal to reduce
the weight given in the allocation decision making process to the
Specialist Performance Evaluation Questionnaire from \1/3\ to \1/4\
in recognition of the Exchange's adoption of the near neighbor and
capital utilization objective measures of special performance. See
Securities Exchange Act Release No. 35932 (June 30, 1995).
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The Commission believes that extending the pilot period for the
specialist capital utilization is appropriate because the Exchange
indicates that it has found the measure useful in providing the NYSE
Allocation Committee with an objective measure of specialist
performance. The NYSE's Allocation Policy emphasizes that the most
significant allocation criterion is specialist performance.\18\ In the
Commission's view, performance based stock allocations not only help to
ensure that stocks are allocated to specialists who will make the best
markets, but will provide an incentive for specialists to improve their
performance or maintain superior performance.
\18\ See, e.g., Commission's order approving revisions to the
NYSE's Allocation Policy and Procedures, Securities Exchange Act
Release No. 34906 (October 27, 1994), 59 FR 55142.
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For these reasons and for the other reasons discussed in Release
No. 33369,\19\ the Commission has determined to extend the pilot period
for this measure through September 10, 1996. The Commission believes
that extending the pilot period is appropriate because it will provide
the Exchange and the Commission with an opportunity to further study
the effects of the use of the measure on the NYSE's allocation process
and will permit the
[[Page 35763]]
measure to run concurrently with the Rule 103A and near neighbor
pilots. During the pilot period, the Commission continues to expect the
NYSE to monitor carefully the effects of the near neighbor and capital
utilization programs and report its findings to the Commission.
Specifically, the Commission requests that the NYSE report the near
neighbor and capital utilization data as presented to the Allocation
Committee. In addition, the Exchange should, for a three month sample
period,\20\ submit a report that identifies the specialist units, the
securities for which they applied, the stocks that were allocated to
them, and the specialist units' SPEQ ratings as presented to the
Allocation Committee.\21\ In the report, the Exchange should identify
allocations that were made to specialist units with relatively poor
tier ratings in the objective measures and discuss the reasons the
Allocation Committee made such allocations.\22\
\19\ See supra note 9.
\20\ This sample period shall be January 1, 1996, through March
31, 1996.
\21\ The Commission believes that this information will allow it
to evaluate the extent to which the Allocation Committee's decisions
appear consistent with the relative performance of specialist units
according to the objective measures. In this regard, however, the
Commission recognizes that the Allocation Committee also considers
the SPEQ results and may use its professional judgment in making
allocation decisions. See supra notes 3 and 17.
\22\ The Exchange may submit one report for both the near
neighbor and capital utilization pilots. This report should be
submitted to the Commission by May 15, 1996, along with the
Exchange's request for permanent approval or extension of the pilot
programs.
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The Commission finds good cause pursuant to Section 19(b)(2) of the
Act for approving the proposed rule change prior to the thirtieth day
after publication of the proposed rule change in the Federal Register.
Accelerated approval will enable the Exchange to continue to make use
of the capital utilization measure of specialist performance on an
uninterrupted basis and will ensure continuity and consistency in the
stock allocation deliberation process. In addition, interested persons
were invited to comment on the past proposal to extend the
effectiveness of the measure.\23\ The Commission received no comments
on this proposal.
\23\ See Release No. 35175, supra note 10.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change (File No. SR-NYSE-95-24) be
approved through September 10, 1996.
\24\ 15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\25\
\25\ 17 CFR 200.30-3(a)(12) (1994).
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Jonathan G. Katz,
Secretary.
[FR Doc. 95-16917 Filed 7-10-95; 8:45 am]
BILLING CODE 8010-01-M