[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