[Federal Register Volume 60, Number 132 (Tuesday, July 11, 1995)]
[Notices]
[Pages 35763-35764]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16918]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35932; File No. SR-NYSE-95-06]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to Amendment 
of the Exchange's Allocation Policy and Procedures

June 30, 1995.
    On February 28, 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 Exchange Act of 1934 (``Act'')\1\  and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend the Exchange's 
Allocation Policy and Procedures (``Allocation Policy'').

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 35662 (May 2, 1995), 60 FR 22596 (May 8, 
1995). No comments were received on the proposal.
    The NYSE Allocation Policy governs the allocation of equity 
securities to NYSE specialist units.\3\ The intent of the Allocation 
Policy is to ensure that each equity security listed on the Exchange is 
allocated in the fairest manner possible to the best specialist unit 
for that security. In October 1994, the Commission permanently approved 
amendments to the Allocation Policy that revised, among other things, 
the allocation criteria, the composition of the Allocation Committee 
\4\ and Allocation Panel,\5\ and the Committee's disclosure policy.

    \3\ The NYSE Allocation Policy applies to the allocation of 
equity securities under the following circumstances: (1) when an 
equity security is to be initially listed on the NYSE; (2) when an 
equity security is to be reallocated as a result of disciplinary or 
other proceedings under NYSE Rules 103A, 475, or 476; or (3) when a 
specialist unit voluntarily surrenders its registration in a 
security as a result of possible disciplinary or performance 
improvement actions.
    \4\ Under the Allocation Policy, the NYSE 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.
    \5\ The composition of the Allocation Panel reflects the 
Committee structure and includes floor brokers, allied members, and 
floor broker Governors. The Panel comprises the pool of individuals 
from which the Committee is formed. The Panel members are selected 
through an annual appointment process that utilizes input from the 
membership. Panel members are appointed to serve a one-year term; 
Governors, however, remain on the Panel for as long as they are 
Governors. The Exchange has proposed to amend the structure of the 
Allocation Panel to include Senior Floor Officials. See Securities 
Exchange Act Release No. 35776 (May 30, 1995), 60 FR 30135 (June 7, 
1995).
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    The Allocation Policy emphasizes that the most significant 
allocation criterion is specialist performance. In this regard, the 
Allocation Policy specifies that the Committee will base its allocation 
decisions on the Specialist Performance Evaluation Questionnaire 
(``SPEQ),\6\ objective performance measures, and the Committee's expert 
professional judgment in considering the SPEQ, objective measures, and 
other criteria.\7\ The NYSE's current objective performance measures 
include: timeliness of regular openings, promptness in seeking floor 
official approval of a non-regulatory delayed opening, timeliness of 
DOT turnaround and response to administrative messages, a specialist's 
TTV \8\ and stabilization rates,\9\ and such other measures as may be 
adopted (and which are approved by the Commission pursuant to Section 
19(b) of the Act). In addition, the NYSE has adopted two pilot 
programs, the capital utilization \10\ 

[[Page 35764]]
and near neighbor \11\ objective measures of specialist performance.

    \6\ The SPEQ is a quarterly survey on specialist performance 
completed by eligible floor brokers (i.e., any floor broker with at 
least one year of experience). The SPEQ consists of 21 questions and 
requires floor brokers to rate, and provide written comments on, the 
performance of specialist units with whom they deal frequently.
    \7\ The Allocation Policy specifies that the other criteria that 
the Allocation Committee may consider in exercising its professional 
judgment are: listing company input, allocations received by the 
unit, capital available for market making, listing company input, 
disciplinary actions and justifiable complaints against the 
specialist unit, and foreign listing considerations.
    \8\ TTV percentage is computed by totaling all purchases and 
sales by the specialist and determining what percentage this share 
volume is of the security's twice total volume.
    \9\ The stabilization rate represents the percentage of 
specialist transactions which were stabilizing (buying as the price 
declined and selling as it rose).
    \10\ The specialist capital utilization program measures the 
dollar value of a specialist's proprietary trading in relation to 
the total dollar value of shares traded in the specialist's stocks. 
The Commission approved the capital utilization measure 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). The 
Commission has extended the capital utilization program pilot so 
that the Exchange and the Commission may evaluate the capital 
utilization and near neighbor programs concurrently. See Securities 
Exchange Act Release No. 35926 (June 30, 1995) (extending pilot 
through September 10, 1996).
    \11\ 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. The Commission approved the near neighbor program 
on a pilot basis in Securities Exchange Act Release No. 35927 (June 
30, 1995).
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    The Exchange proposes to amend the Allocation Policy to limit the 
weight that the SPEQ may be given in the allocation decision making 
process to no more than 25%. Currently, the Policy permits the 
Allocation Committee to grant up to one-third weight to SPEQ results in 
its allocation decisions.
    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.\12\ 
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 \13\ and Rule 11b-1 
thereunder,\14\ which allow exchanges to promulgate rules relating to 
specialists to ensure fair and orderly markets. For the reasons set 
forth below, the Commission believes that limiting the weight given the 
SPEQ should enhance the Exchange's allocation process and encourage 
improved specialist performance, consistent with the protection of 
investors and the public interest.

    \12\ 15 U.S.C. 78f(b)(5) (1988).
    \13\ 15 U.S.C. 78k(b) (1988).
    \14\ 17 CFR 240.11b-1 (1994).
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    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 the rules 
thereunder, is the maintenance of fair and orderly markets in their 
designated securities.\15\ To ensure that specialists fulfill these 
obligations, it is important that the Exchange develop and maintain 
stock allocation procedures and policies that provide specialists with 
an initiative to strive for optimal performance.

    \15\ See 17 CFR 240.11b-1 (1994); NYSE Rule 104.
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    Although the SPEQ remains a useful tool to measure performance, the 
Commission has long believed that objective indications of performance 
should play an important role in allocation decisions. In particular, 
the Commission believes that objective performance measures can 
identify poor market making performance that otherwise may not be 
reflected in a unit's SPEQ survey results. In this regard, the 
Commission notes that the Exchange has initiated, on a pilot basis, the 
capital utilization and near neighbor programs. In light of these 
additional objective measures of specialist performance, the Commission 
believes that it is appropriate to limit the weight that the SPEQ may 
be given in allocation decisions to one quarter, thereby increasing the 
emphasis given to objective measures of performance. In addition, the 
Commission notes that a reduction in the weight given the SPEQ from 
one-third to 25% is relatively minor, especially given the additional 
objective measures to be consider by the Allocation Committee. 
Nevertheless, to the extent that the near neighbor and capital 
utilization measures are only adopted on a pilot basis, if those 
measure are not extended or permanently approved, the Commission would 
expect the NYSE to re-evaluate the Allocation Policy to ensure there 
are adequate indicia of performance being considered by the Allocation 
Committee.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-NYSE-95-06) is approved.

    \16\ 15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\

    \17\ 17 CFR 200.30-3(a)(2) (1984).
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Jonathan G. Katz,
Secretary.
[FR Doc. 95-16918 Filed 7-10-95; 8:45 am]
BILLING CODE 8010-01-M