[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 

[[Page 55072]]
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