[Federal Register Volume 61, Number 145 (Friday, July 26, 1996)]
[Notices]
[Pages 39176-39178]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19035]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37457; File No. SR-NYSE-96-09]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change and Notice of Filing
and Order Granting Accelerated Approval to Amendment No. 1 to Proposed
Rule Change Relating to Amendments to Rule 80B (Trading Halts Due to
Extraordinary Market Volatility)
July 19, 1996.
I. Introduction
On April 11, 1996, 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 its circuit breaker
rules.
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 37145 (Apr. 26, 1996), 61 FR 19651 (May 2,
1996). On July 9, 1996, the Exchange submitted to the Commission
Amendment No. 1 to the proposed rule change.\3\ This order approves the
proposed rule change, including Amendment No. 1 on an accelerated
basis.
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\3\ See letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Ivette Lopez, Assistant Director, Division of
Market Regulation, SEC, dated July 3, 1996 (``Amendment No. 1'').
For a description of Amendment No. 1, see infra note 8 and
accompanying text.
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II. Description of Proposal
Currently, NYSE Rule 80B provides that if the Dow Jones Industrial
Average (``DJIA'') \4\ falls 250 or more points below its previous
trading day's closing value, trading in all stocks on the Exchange will
halt for one hour. It further provides that, if on the same day the
DJIA drops 400 or more points from its previous trading day's close,
trading on the exchange will halt for two hours.
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\4\ ``Dow Jones Industrial Average'' is a service mark of Dow
Jones & Company, Inc.
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Moreover, under the current Supplementary Material .30 to NYSE Rule
80B, if the 250-point trigger is reached during the last hour, but
before the last half-hour, of trading, or if the 400-point trigger is
reached during the last two hours, but before the last hour, of
trading, the Exchange may use abbreviated reopening procedures either
to permit trading to reopen before 4:00 p.m. or to establish closing
prices. The current provision further provides that if the 250-point
trigger is reached during the last half-hour, or if the 400-point
trigger is reached during the last hour, the Exchange shall not reopen
for trading on that day.\5\
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\5\ See Securities Exchange Act Release No. 26198 (Oct. 19,
1988), 53 FR 41637 (Oct. 24, 1988). Since the initial approval of
the circuit breaker rules on a pilot basis, the Commission has
extended the pilot program each year. The most recent extension of
the pilot program was approved on October 25, 1995, and is scheduled
to expire on October 31, 1996. See Securities Exchange Act Release
No. 36414 (Oct. 25, 1995), 60 FR 55630 (Nov. 1, 1995).
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With the proposed rule change, the Exchange proposes to shorten the
time periods for halting trading when the 250-point or 400-point level
is triggered from one hour and two hours to one-half hour and one hour,
respectively.\6\ After consulting with its constituents, other markets,
and the Commission, the Exchange believes that it is appropriate to
reduce the time periods during which trading will be halted,
particularly given the current level of automation support for the
trading process. The Exchange believes that these revised time periods
should be sufficient to provide a meaningful ``time out'' for
participants to evaluate changing market conditions, without unduly
constraining trading activity. The Exchange states that it intends to
continue discussions with its constituents as to whether any revisions
to these point parameters might be appropriate.
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\6\ The Exchange has represented to the Commission that it will
use the intermarket telecommunications system known as Information
Network for Futures, Options, and Equities (``INFOE'') system as
well as the Consolidated Tape to announce the precise time when the
circuit breaker thresholds are reached. Telephone conversation
between Brian McNamara, Vice President, Market Surveillance, NYSE,
and Alton Harvey, Office Head, Division of Market Regulation, SEC,
on April 24, 1996.
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With respect to Supplementary Material .30, in its original
proposal, the Exchange proposed to replace the provision with an
amendment, which would provide that if the 250-point trigger is reached
during the last half-hour of trading, or if the 400-point trigger is
reached during the last hour of trading, the Exchange may use
abbreviated reopening procedures to establish new last sale prices.\7\
Subsequently, after discussing the proposed changes to Rule 80B with
constituent groups, the Investment Company Institute, and other self-
regulatory organizations, the Exchange filed Amendment No. 1 to
eliminate the proposed provision for the abbreviated reopening
procedures to establish new last sale prices if trigger values are
reached in the last one-half hour or hour of trading.\8\ Therefore, the
Exchange now proposes to delete the current provision in Supplementary
Material .30 without adding new language.
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\7\ In conjunction with its proposal for abbreviated reopening
procedures, the Exchange proposed to amend Rule 51 to provide that
the 9:30 a.m. to 4:00 p.m. trading session may be extended to permit
closing transactions pursuant to Rule 80B. See Securities Exchange
Act Release No. 37145 (Apr. 26, 1996), 61 FR 19651 (May 2, 1996).
\8\ The Exchange also withdrew from the proposed rule change
amendments to Rule 51 because the abbreviated reopening procedures
are no longer being proposed in the rule filing. See Amendment No.
1, supra note 3.
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III. Summary of Comments
The Commission received four comment letters on the NYSE's rule
proposal.\9\ Two comment letters were
[[Page 39177]]
generally supportive of the NYSE's proposal to reduce the time periods
for halting trading when the circuit breaker threshold levels are
triggered,\10\ and two comment letters questioned whether trading
should ever be halted on the Exchange.\11\
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\9\ See Letter from William R. Rothe, Chairman, and John L.
Watson III, President, Security Traders Association, to Jonathan G.
Katz, Secretary, SEC, dated May 10, 1996 (``STA Letter''); Letter
from Peter W. Jenkins, Chairman, and Holly A. Stark, Vice Chairman,
Securities Traders Association's Institutional Committee, to
Jonathan G. Katz, Secretary, SEC, dated May 17, 1996 (``STA
Institutional Committee Letter''); Letter from Joseph R. Hardiman,
President, National Association of Securities Dealers, to Jonathan
G. Katz, Secretary, SEC, dated May 23, 1996 (``NASD Letter'');
Letter from Paul Schott Stevens, Senior Vice President and General
Counsel, Investment Company Institute, to Jonathan G. Katz,
Secretary, SEC, dated May 23, 1996 (``ICI Letter'').
\10\ See NASD Letter and ICI Letter, supra note 9.
\11\ See STA Letter and STA Institutional Committee Letter,
supra note 9.
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With respect to the specific features of the NYSE's proposal, three
commenters addressed the NYSE's proposed abbreviated closing
session.\12\ They believed that there should be no reopening after 4:00
p.m. because reopening could confuse investors and disrupt end of the
day procedures such as mutual fund pricing. One commenter expressed
concern that the NYSE provided no details regarding such ``abbreviated
reopening procedures.'' \13\ In response, the NYSE withdrew its
proposal to allow the NYSE to use abbreviated reopening procedures to
establish new last sale prices.\14\
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\12\ See STA Letter, NASD Letter, and ICI Letter, supra note 9.
\13\ See ICI Letter, supra note 9.
\14\ See Amendment No. 1, supra note 3. The Exchange plans to
continue holding discussions as to whether additional procedures may
be appropriate for expiration days.
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Beyond the specific proposals currently before the Commission, all
of the commenters expressed their concerns about circuit breakers in
general. They believed that the circuit breaker thresholds of 250 and
400 points should be increased because these trigger levels no longer
reflect extraordinary market volatility due to the growth in market
values since the initial adoption of the circuit breaker rules. One
commenter urged the Commission not to take any action on the NYSE's
proposal until there has been an opportunity for public comment on
increasing the trading halt trigger levels.\15\ One commenter argued
that the circuit breaker trigger levels should be increased to reflect
a 10% movement in the DJIA.\16\ Another commenter questioned why the
circuit breaker trading halts are based on static numbers instead of
percentage movements in the DJIA.\17\ Finally, two commenters believed
that the DJIA may not be the appropriate index to activate circuit
breaker trading halts because it does not reflect the overall market
and that using a broader-based index may be a better approach.\18\
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\15\ See ICI Letter, supra note 9.
\16\ See STA Letter, supra note 9. Another commenter believed
that the circuit breaker levels should be periodically reset to
reflect percentage movements of 10% to 15%. See NASD Letter, supra
note 9.
\17\ See STA Institutional Committee Letter, supra note 9.
\18\ See STA Institutional Committee Letter and NASD Letter,
supra note 9.
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IV. Discussion
After careful review of the Exchange's proposed amendments to the
circuit breaker rules and the comments thereto and for the reasons
discussed below, the Commission believes 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).\19\
Specifically, the Commission believes the proposal is consistent with
the Section 6(b)(5) requirements that the rules of an exchange be
designed to remove impediments to and perfect the mechanism of a free
and open market and a national market system and, in general, to
protect investors and the public interest.
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\19\ 15 U.S.C. 78f(b).
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In 1988, the Commission approved the Exchange's circuit breaker
proposal, along with those of the other securities exchanges and the
National Association of Securities Dealers (``NASD''), because the
Commission believed that the circuit breaker rules proposed would help
promote stability in the equity and equity-related markets by providing
for an enhanced opportunity for market participants to assess
information during times of extreme market movements.\20\ The
proposals, in part, were in response to the events of October 19, 1987,
when the DJIA declined 22.6%. The Commission believed that the circuit
breaker proposals would provide market participants with an opportunity
during a severe market decline to reestablish an equilibrium between
buying and selling interest in a more orderly fashion. The futures
exchanges also adopted analogous trading halts to provide coordinated
means to address potentially destabilizing market volatility.\21\
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\20\ See Securities Exchange Act Release No. 26198, supra note
5.
\21\ See Letter from Todd E. Petzel, Vice President, Financial
Research, Chicago Mercantile Exchange (``CME''), to Jean A. Webb,
Secretary, Commodity Futures Trading Commission (``CFTC''), dated
September 1, 1988. See also letters to Jean A. Webb, Secretary,
CFTC, from Paul J. Draths, Vice President and Secretary, Chicago
Board of Trade (``CBT''), dated July 29, 1988; Michael Braude,
President, Kansas City Board of Trade (``KCBT''), dated August 10,
1988; and Milton M. Stein, Vice President, Regulation and
Surveillance, New York Futures Exchange (``NYFE''), dated September
2, 1988.
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Since the implementation of the circuit breakers, the DJIA has
risen significantly. The 250 point and 400 point triggers, which
represented 12% and 19% of the DJIA when implemented, now represent
4.5% and 7% of the DJIA. The Exchange and members of the industry have
continued to study the circuit breaker rules and to consider the
possible effects of triggering the current circuit breakers in light of
the rise in the DJIA since their implementation.
While the Exchange evaluates the need to change the circuit breaker
trigger levels, the Commission believes, in the near term, it is
reasonable for the Exchange to shorten the length of the trading halts.
The Exchange believes and the Commission agrees that, with advances in
technology and increases in the operational capacity of the markets,
the current length of the trading halts may not be necessary for market
participants to become aware of and respond to significant price
movements. The shorter time periods proposed by the Exchange for
halting all trades should be sufficient to allow market participants to
evaluate and act on changing market conditions without unduly
constraining market activities.
Moreover, the Commission believes that shortening the length of the
trading halts does not need to be delayed pending the resolution of
other circuit breaker issues. While an examination of the broader issue
of raising the circuit breaker triggers may be warranted, the trading
halt periods should be shortened irrespective of the level of the
trigger points. Nevertheless, the Commission encourages the Exchange
and members of the industry to continue to evaluate the trigger levels
for the trading halts in light of the changing circumstances of the
markets since 1988.\22\
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\22\ To coordinate trading halts across all securities and
futures markets, the regional and futures exchanges have submitted
amendments to their circuit breaker rules. For more detail on the
specifics of these proposals, see Securities Exchange Act Release
No. 37459 (July 19, 1996); Letter from Norman E. Mains, Senior Vice
President, Chief, Economist, and Director of Research, CME, to Jean
A. Webb, Secretary, Commodity Futures Trading Commission, dated July
5, 1996. The NASD's Policy Statement on Market Closings state that
the NASD will, upon the request of the Commission, act to halt
domestic trading in all securities quoted on the Nasdaq system and
domestic trading in equity or equity-related securities in the over-
the-counter market. The Commission notes that it has a standing
request with the NASD to halt trading as quickly as practicable
whenever the NYSE and other equity markets have suspended trading.
The NYSE's proposed rule change does not affect the Commission's
standing request. See Letter from Richard Ketchum, Chief Operating
Officer and Executive Vice President, NASD, to Howard Kramer,
Associate Director, Division of Market Regulation, SEC, dated July
18, 1996.
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[[Page 39178]]
The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof. The Exchange's original
proposal was published in the Federal Register for the full statutory
period and Amendment No. 1, which deletes the provision in the proposal
that provides for an abbreviated reopening session, was submitted in
response to the comments received. Moreover, the Commission believes
that deleting this provision is appropriate where the details of such a
session were not fully developed and might have created confusion on
the Exchange or among the various equities and futures markets during
times of extreme volatility. Based on the above, the Commission finds
that there is good cause, consistent with section 6(b)(5) of the Act,
to accelerate approval of the amended proposed rule change.
The Commission also believes that the circuit breaker mechanisms
must be coordinated across the U.S. equity, futures and options markets
to be effective in times of extreme market volatility. Therefore, the
new NYSE circuit breaker proposal will become effective on July 22,
1996, which will also be the effective date of the amended rules of the
other markets, so that the circuit breaker trading halts will continue
to be coordinated among the different markets.\23\
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\23\ See Securities Exchange Act Release No. 37145, supra note
7.
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V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
D.C. 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. 552, will be available for inspection and
copying at the Commission's Public Reference Section, 450 Fifth Street,
NW., Washington, D.C. 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-96-09 and
should be submitted by August 16, 1996.
VI. Conclusion
IT IS THEREFORE ORDERED, pursuant to section 19(b)(2) of the
Act,\24\ that the proposed rule change (SR-NYSE-96-09) is approved and
effective on July 22, 1996.
\24\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19035 Filed 7-25-96; 8:45 am]
BILLING CODE 8010-01-M