[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