[Federal Register Volume 60, Number 208 (Friday, October 27, 1995)]
[Notices]
[Pages 55071-55073]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-26701]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36404; File No. SR-NYSE-95-28]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the New York
Stock Exchange, Inc. Relating to a One-Year Extension of the Pilot for
Auxiliary Closing Procedures for Expiration Days
October 20, 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 September 14, 1995, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change, and on October 13, 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 Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
While the NYSE has not requested accelerated approval of the proposal,
the Commission is issuing this order on an accelerated basis because
the auxiliary closing procedures are scheduled to expire on October
1995.
\1\15 U.S.C. Sec. 78s(b)(1).
\2\17 CFR 240.19b-4.
\3\See Letter from Brian McNamara, Vice President, NYSE to Glen
Barrentine, Team Leader, Division of Market Regulation, SEC, dated
October 13, 1995.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to extend the pilot for auxiliary closing
procedures for market-at-the-close (``MOC'') orders\4\ utilized on
expiration Fridays\5\ and quarterly expiration days\6\ through October
31, 1996.
\4\A MOC order is a market order to be executed in its entirety
at the closing price on the Exchange. See NYSE Rule 13.
\5\The term ``expiration Friday'' refers to the trading day,
usually the third Friday of the month, when various stock index
futures, stock index options and options on stock index futures
expire or settle concurrently.
\6\The term ``quarterly expiration day'' refers to the last
trading day of each quarter on which end of calendar quarter index
options expire.
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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 Exchange 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 IV 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
Special procedures regarding the entry of MOC orders on expiration
Fridays were originally adopted in 1986 for assisting in handling the
order flow associated with the concurrent quarterly expiration of stock
index futures, stock index options, and options on stock index futures
on expiration Fridays.\7\ Since November 1988, auxiliary closing
procedures\8\ for MOC orders have been used, on a pilot basis, for each
monthly expiration and have been applied to the so-called ``pilot
stocks.''\9\ In April 1992, the Exchange modified the pilot procedures
and included additional special procedures for handling MOC orders in
all stocks on expiration Fridays.\10\ In March 1993, the Exchange
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extended its application of the expiration Friday auxiliary closing
procedures\11\ to days on which Quarterly Index Expiration options
expire.\12\ In September 1993, the Exchange again modified the pilot
procedures by changing the cut-off time for entry, cancellation, and
reduction of MOC orders to 3:40 p.m.\13\ In June 1995, the Exchange put
into effect modified MOC procedures for expiration days by setting a
3:40 p.m. deadline for the entry of all MOC orders in all stocks,
except to offset imbalances in pilot stocks that are published on the
tape.\14\
\7\See Securities Exchange Act Release No. 24926 (September 17,
1987), 52 FR 24926 (approving File No. SR-NYSE-87-32 and noting that
the MOC procedures described therein had been utilized on a
quarterly basis since September 1986).
\8\The NYSE auxiliary closing procedures for expiration Fridays
were initially approved by the Commission on a pilot basis for a
one-year period beginning in November 1988 and extending through
October 1989. The pilot has since been extended each year on a one-
year pilot basis. See Securities Exchange Act Release Nos. 26293
(November 17, 1988), 53 FR 47599; 26408 (December 29, 1988), 54 FR
343 (approving File No. SR-NYSE-88-37); 27448 (November 16, 1989),
54 FR 48343 (approving File No. SR-NYSE-89-38); 28564 (October 22,
1990), 55 FR 43427 (approving File No. SR-NYSE-90-49); 29871
(October 28, 1991), 56 FR 30004 (approving File No. SR-NYSE-91-31);
31386 (October 30, 1992), 57 FR 52814 (approving File No. SR-NYSE-
92-30); 32868 (September 10, 1993), 58 FR 48687 (approving File No.
SR-NYSE-93-33); and 34916 (October 31, 1994), 59 FR 55507 (approving
File No. SR-NYSE-94-32).
\9\The expiration Friday pilot stocks consist of the 50 most
highly capitalized Standard & Poor's (``S&P'') 500 stocks and any
component stocks of the Major Market Index (``MMI'') not included
therein.
\10\In April 1992, the Commission approved the Exchange's
modified pilot MOC procedures on an accelerated temporary basis for
the April 1992 expiration Friday. See Securities Exchange Act
Release No. 30570 (April 10, 1992), 57 FR 13399 (notice of filing
and order granting partial accelerated approval of File No. SR-NYSE-
92-09). Thereafter, the Commission approved those modifications for
all expiration Fridays during the pilot period. See Securities
Exchange Act Release No. 30680 (May 8, 1992), 57 FR 20720 (order
approving File No. SR-NYSE-92-09).
\11\See Securities Exchange Act Release No. 32066 (March 30,
1993), 58 FR 17630 (approving File No. SR-NYSE-93-16).
\12\On quarterly expiration days, the ``pilot stocks'' include
the ten highest weighted stocks of the S&P Midcap 400 Index (in
addition to the 50 highest weighted stocks underlying the S&P 500
Index and any component stocks of the Major Market Index not
included in that group).
\13\See Securities Exchange Act Release No. 32868 (September 10,
1993), 58 FR 48687 (order approving File No. SR-NYSE-93-33).
\14\See Securities Exchange Act Release No. 35589 (April 10,
1995), 60 FR 19313 (April 17, 1995) (order approving File No. SR-
NYSE-94-44). Although approved by the SEC in April, the Exchange did
not put these procedures into effect until June 1995. Prior to April
1995, only MOC orders related to a strategy involving derivative
index products were required to be entered for execution by 3:40
p.m. on expiration days. See Securities Exchange Act Release No.
34916 (October 31, 1994), 59 FR 55507 (November 7, 1994) (order
approving File No. SR-NYSE-94-32).
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The current procedures for expiration days require that MOC orders
in any stock, except those used to offset a published imbalance, be
entered for execution by 3:40 p.m. and that no cancellation or
reduction of any MOC order in any stock take place after 3:40 p.m.
(except in case of legitimate error). This applies to MOC orders in all
stocks regardless of whether such orders relate to a strategy involving
stock index futures, stock index options, or options on stock index
futures. In addition, Floor brokers representing any MOC orders must
indicate their MOC interest to the specialist by 3:40 p.m.
For the pilot stocks, a single publication of imbalances of 50,000
shares or more is made as soon as practicable after 3:40 p.m. After the
imbalance publication, MOC orders in pilot stocks may be entered only
to offset a published imbalance. The entry of MOC orders after 3:40
p.m. to establish or liquidate positions related to a strategy
involving derivative instruments is not permitted even if such orders
might offset published imbalances.
Pursuant to Amendment No. 1, the Exchange has proposed an amendment
of the above pilot for auxiliary closing procedures for MOC orders to
allow for imbalance publications of 50,000 shares or more to be made
not only in the so-called pilot stocks, but also in stocks added to or
dropped from an index, and in any other stock if requested by a
specialist and approved by a Floor Official.
The auxiliary procedures utilized for expiration days have been
approved as a pilot on a yearly basis and are due to expire on October
31, 1995. These procedures have been effective in minimizing excess
volatility on the close on expiration days. The Exchange requests that
the procedures described above be extended to October 31, 1996.
The Exchange continues to believe, however, that concerns about
excess market volatility that may be associated with the expiration or
settlement of derivative index products would be most appropriately
addressed if the expiration or settlement value of all such products
were based on the NYSE opening rather than the closing price on the
last business day prior to the expiration or settlement of the product.
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.\15\ The
auxiliary closing procedures protect investors and the public interest
by alleviating excess volatility at the close on expiration days.
\15\15 U.S.C. Sec. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the NYSE's proposal to extend the pilot
for closing procedures on expiration days and to allow for imbalance
publications of 50,000 shares or more to be made not only in the so-
called pilot stocks, but also in stocks added to or dropped from an
index, and in any other stock if requested by a specialist and approved
by a Floor Official, through October 1996, 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) of the Act.\16\ In particular, the
Commission believes that the proposal, as amended, 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 interest. For the reasons set forth below, the
Commission believes that NYSE's proposal furthers the objectives of
Section 6(b)(5) of the Act.
\16\U.S.C. Sec. 78f(b).
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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 on expiration and non-
expiration days. Special procedures regarding the entry of MOC orders
on expiration Fridays were first used in 1986 for assisting in handling
the order flow associated with the concurrent quarterly expiration of
stock index futures, stock index options and options on stock index
futures on expiration Fridays. Since November 1988, on a pilot basis,
the NYSE has utilized auxiliary closing procedures for MOC orders for
each monthly expiration Friday. In March 1993, the Exchange extended
the expiration Friday closing procedures to days on which Quarterly
Index Expiration options expire. The closing procedures for expiration
Fridays and quarterly expiration days (cumulatively, ``expiration
days'') require that all MOC orders be entered, reduced or cancelled no
later than 3:40 p.m. As soon as practicable after 3:40 p.m., the
specialist must disseminate any MOC order imbalance of 50,000 shares or
more in pilot stocks. AFter 3:40 p.m. MOC orders may be entered in the
pilot stocks, but only to offset the published imbalance. That is, once
an imbalance in a pilot stock has been published, any MOC orders
[[Page 55073]]
subsequently entered in such pilot stock will be accepted only to trade
on the opposite side of the market in relation to such published
imbalance. 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 thereto.
The Commission believes that these auxiliary closing procedures
should enable market participants to gain a more accurate picture of
the buying and selling interest in MOC orders at expiration. By
requiring early submission of MOC orders and disseminating significant
imbalances (50,000 shares or more) in all stocks, the NYSE should be
able to attract contra-side interest to help alleviate imbalances
caused by the liquidation of stock positions. Based on the NYSE's
experience,\17\ 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.
\17\The NYSE has submitted to the SEC several monitoring reports
describing its experience with the closing procedures. The most
recent report was submitted to the SEC by the NYSE on July 28, 1995.
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Moreover, the Commission believes that approval of Amendment No. 1
should contribute to the overall effectiveness of these auxiliary
closing procedures. Currently, on expiration days, specialists may
disseminate notices of MOC order imbalances only in the pilot stocks.
That is, the expiration day MOC procedures do not allow for the
dissemination of notices of MOC order imbalances in any stocks other
than the pilot stocks. As a result, on expiration days, the MOC
procedures completely prohibit the entry of MOC orders after 3:40 p.m.
in all non-pilot stocks. In contrast, the procedures used on non-
expiration days allow for the dissemination of notices of MOC order
imbalances in all stocks and, therefore, allow for the entry of MOC
orders after the 3:50 p.m. cut-off time in all stocks.\18\ Approval of
Amendment No. 1, which was submitted in response to the Commission's
suggestion,\19\ will conform more closely the auxiliary closing
procedures used on expiration days with those already permanently
approved for non-expiration days. Approval also will ensure that the
potentially beneficial effect of the pilot's auxiliary closing
procedures will be available to all stocks rather than just the pilot
stocks.
\18\The closing procedures for non-expiration days require that
all MOC orders be entered, reduced or cancelled no later than 3:50
p.m. As soon as practicable after 3:50, the specialist must
disseminate any MOC order imbalance of 50,000 shares or more in
pilot stocks, stocks 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. After 3:50 p.m., MOC orders may be entered in
any stock in which there is a published imbalance, but only to
offset the imbalance. See Release No. 35589, supra note 14.
\19\See Release No. 35589, supra note 14, n.16.
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The Commission is approving an extension of the pilot program,
along with Amendment No. 1, through October 1996. During the pilot
extension, the Commission expects the NYSE to continue to monitor
closely the effectiveness of the procedures, and to submit a report
with all of the same data previously requested for prior periods. The
report should cover all expirations through June 1996 and must be
submitted to the Commission no later than July 31, 1996\20\ along with
a proposed rule change that should either request an additional
extension of the pilot program or permanent approval of the pilot
procedures.
\20\The Commission requires that the NYSE also include in the
report any additional data and analysis that may be useful in
assessing the effectiveness of the procedures currently being used
to reduce excess market volatility on expiration Fridays.
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The Commission finds good cause for approving the proposed rule
change and Amendment No. 1 prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register. This
rule change will permit the procedures to continue on an uninterrupted
basis. In addition, and as previously discussed, Amendment No. 1 will
put into place auxiliary closing procedures for expiration days that
closely mirror those used on non-expiration days. These non-expiration
day procedures were approved on a permanent basis in October 1992
following a full notice period during which no comments were
received.\21\ Since that time, the Commission has not been made aware
of any concerns regarding the non-expiration day procedures and,
therefore, believes that it is appropriate to approve the procedures
provided for by Amendment No. 1 on an accelerated basis.
\21\See Securities Exchange Act Release No. 31291 (October 6,
1992), 57 FR 47149 (File No. SR-NYSE-92-12).
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IV. 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 person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the Exchange. All
submissions should refer to File No. SR-NYSE-95-28 and should be
submitted by November 17, 1995.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\22\ that the proposed rule change is hereby approved on a pilot
basis through October 31, 1996.
\22\15 U.S.C. Sec. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
\23\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-26701 Filed 10-26-95; 8:45 am]
BILLING CODE 8010-01-M