[Federal Register Volume 61, Number 149 (Thursday, August 1, 1996)]
[Notices]
[Pages 40268-40270]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19530]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37478; File No. SR-BSE-96-8]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Boston 
Stock Exchange, Inc. Relating to Resumption of the Pilot Program 
Regarding Certain Procedures for the Handling of Market-On-Close Orders

July 25, 1996.
    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 July 8, 1996, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change, and on July 22, 
1996, 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 BSE has requested accelerated 
approval of the proposal. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Karen A. Aluise, Assistant Vice President, 
BSE To Elisa Metzger, Special Counsel, SEC, dated July 17, 1996.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks to resume the pilot program for handling market-
on-close orders and amend the procedures for the handling of such 
orders. These procedures mirror the procedures in place on the primary 
markets in order to ensure equal treatment of orders in both markets.

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 self-regulatory organization 
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 III 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
    The purpose of the proposed rule is to resume the pilot program for 
procedures relating to handling market-on-close (``MOC'') orders on 
expiration days, non-expiration days and in market conditions where New 
York Stock Exchange, Inc. (``NYSE'') Rule 80A is in effect. The 
proposal also amends certain procedures to mirror those of the primary 
markets, for the handling of MOC orders on expiration days \4\ so that 
the BSE does not become a haven for MOC orders that are prohibited on 
the primary markets.\5\ In this way, all orders sent to the Exchange 
will receive equal treatment to orders sent to the primary markets.
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    \4\ The term ``expiration days'' refers to both (1) the trading 
day, usually the third Friday of the month, when some stock index 
options, stock index futures and options on stock index futures 
expire or settle concurrently (``Expiration Fridays'') and (2) the 
trading day on which end of calendar quarter index options expire 
(``QIX Expiration Days'').
    \5\ The BSE's auxiliary closing procedures for expiration days 
had been approved on a pilot basis until October 31, 1995. See 
Securities Exchange Act Release No. 34918 (October 31, 1994), 59 FR 
55504 (``1994 Pilot Approval Order''). The BSE did not request an 
extension of the pilot program after that date.
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    The procedures for handling MOC orders on expiration days under the 
pilot program, include: (a) providing a 3:40 p.m. deadline for the 
entry of all MOC orders in all stocks, (b) prohibiting the cancellation 
or reduction of any MOC order in any stock after 3:40 p.m., (c) 
prohibiting order imbalances of 50,000 shares or more as soon as 
practicable after 3:40 p.m. in the pilot stocks and (d) limiting the 
entry of MOC orders after 3:40 p.m. to offsetting published imbalances. 
With respect to item (b) above, the Exchange will permit cancellations 
of MOC orders after 3:40 p.m. in those instances where a legitimate 
error has been made. The term ``pilot stocks'' refers to the list of 
stocks designated by the NYSE as pilot stocks for purposes of its 
auxiliary closing procedures.\6\ Pursuant to

[[Page 40269]]

Amendment No. 1, the BSE has proposed an amendment of the above 
procedures to allow for imbalance publications of 50,000 shares or more 
to be made not only in the 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.
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    \6\ The Expiration Friday pilot stocks consists of the 50 most 
highly capitalized Standard & Poors (``S&P'') 500 stocks and any 
component stocks of the Major Market Index (``MMI'') not included 
therein. The QIX Expiration Day pilot stocks consist of the 50 most 
highly capitalized S&P 500 stocks, any component stocks of the MMI 
not included therein and the 10 highest weighted S&P Midcap 400 
stocks.
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    The procedures for handling MOC orders on nonexpiration days would 
remain unchanged. These procedures include: (a) providing a 3:50 p.m. 
deadline for the entry of all MOC orders in all stocks, (b) prohibiting 
the cancellation or reduction of any MOC order in any stock after 3:50 
p.m., (c) publishing order imbalances of 50,000 shares or more as soon 
as practicable after 3:50 p.m. in the pilot stocks, stocks being added 
to or dropped from an index, and in any other stock with the approval 
of a Floor Official and (d) limiting the entry of MOC orders after 3:50 
p.m. to offset published imbalances. With respect to item (b) above, 
the Exchange will permit cancellations of MOC orders after 3:50 p.m. in 
those instances where a legitimate error has been made.
    The pilot program also includes procedures for the handling of MOC 
orders in market conditions where the NYSE's Rule 80A is in effect. 
Under the pilot program, on expiration days, if an MOC index arbitrage 
order to buy (sell), to establish or increase a position is entered, 
and Rule 80A subsequently goes into effect because of significant 
upward (downward) market movement, the MOC order must be cancelled, 
regardless of the time Rule 80A goes into effect. If Rule 80A went into 
effect prior to 3:40 p.m., the MOC order may be re-entered with the 
instruction ``buy minus'' (``sell plus''). If Rule 80A goes into effect 
after 3:40 p.m. and there is a published imbalance in the subject 
stock, the MOC order may be re-entered with the instruction ``buy 
minus'' (``sell plus'') to offset the imbalance.
    Similarly, on nonexpiration days, if an MOC index arbitrage order 
to buy (sell), to establish or increase a position is entered, and Rule 
80A subsequently goes into effect because of significant upward 
(downward) market movement, the MOC order must be cancelled, regardless 
of the time Rule 80A goes into effect. If Rule 80A goes into effect 
prior to 3:50 p.m., the MOC order may be re-entered with the 
instruction ``buy minus'' (``sell plus''). If Rule 80A goes into effect 
after 3:50 p.m. and there is a published imbalance in the subject stock 
the MOC order may be re-entered with the instruction ``buy minus'' 
(``sell plus'') to offset the imbalance.
2. Statutory Basis
    The statutory basis for the proposed rule is Section 6(b)(5) of the 
Act in that it is designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, 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; and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. 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. 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 BSE. All 
submissions should refer to File No. SR-BSE-96-8 and should be 
submitted by August 22, 1996.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    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 \7\ of the Act. In 
particular, the proposal is consistent with the Section 6(b)(5) \8\ 
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.
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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(5).
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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 related to trading strategies 
involving index derivative products. For instance, since 1986, the NYSE 
has utilized auxiliary closing procedures on expiration days. 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. Based 
on the NYSE's experience,\9\ 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.
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    \9\ The NYSE has submitted to the Commission several monitoring 
reports describing its experience with the auxiliary closing 
procedures. The most recent report was submitted to the SEC by the 
NYSE on July 28, 1995. See Securities Exchange Act Release No. 36404 
(October 20, 1995), 60 FR 55071.
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    In today's highly competitive market environment, however, it is 
possible that a regional exchange, which trades NYSE-listed stocks but 
does not have comparable closing procedures, could be utilized by 
market participants to enter MOC orders prohibited on the NYSE. 
Although the Commission has no reason to believe that the BSE market 
has become a significant alternative market to enter otherwise 
prohibited MOC orders, the Commission agrees with the BSE that, if this 
possibility were realized, it could have a negative impact on the 
fairness and orderliness of the national market system.\10\

[[Page 40270]]

Accordingly, the Commission believes that it is reasonable for the BSE 
to adopt procedures for the handling of MOC orders that mirror the 
NYSE's, thereby ensuring the equal treatment of orders in both markets 
and, in the event of unusual market conditions, offering the BSE the 
same benefits in terms of potentially reducing volatility.
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    \10\ For example, if MOC orders prohibited on the NYSE were 
entered instead on the BSE, unusually large MOC order imbalances on 
the regional exchange could contribute to overall market volatility.
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    In this regard, the Commission notes that the proposed rule change 
will standardize the BSE's closing procedures on expiration days with 
those on the NYSE.\11\ On expiration days, the BSE proposal will impose 
a 3:40 p.m. deadline for entry of all MOC orders. In conjunction with 
the prohibition on cancellation or reduction of any MOC order after 
3:40 p.m., this requirement should allow the specialist to make a 
timely and reliable assessment, for every stock, of MOC order flow and 
its potential impact on the closing price. While the Commission 
recognizes that 3:40 p.m. is relatively near the close, the Commission 
previously has determined that such a deadline strikes a reasonable 
balance between the need to effectuate an orderly closing and the need 
to avoid unduly infringing upon legitimate trading strategies.\12\
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    \11\ See Release No. 34-36404, supra note 9.
    \12\ See, e.g., Securities Exchange Act Release No. 33639 
(February 17, 1994), 59 FR 9295.
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    The amended procedures for expiration days will require that, as 
soon as practicable after 3:40 p.m., BSE specialists disseminate 
substantial imbalances in the pilot stocks, in stocks being added to or 
dropped from an index, and in any other stock if approved by a Floor 
Official. In this regard, the BSE pilot program combines early 
submission of MOC orders with prompt dissemination of imbalances that 
reflect actual investor interest. As noted in prior Commission orders 
approving these procedures for pilot stocks,\13\ the BSE should have 
sufficient opportunity to attract any contra-side interest necessary to 
alleviate substantial MOC order imbalances in any stock and to dampen 
their effect on the closing price.
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    \13\ See 1994 Pilot Approval Order, supra, note 5.
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    In addition, the BSE will require order handling procedures for 
non-expiration days that are substantially similar to those in place 
for expiration days. This will allow members and member organizations 
to follow comparable procedures at the close on all trading days. 
Although there is less likelihood of an influx of MOC orders at the 
close on non-expiration days, certain trading and asset allocation 
strategies could employ MOC orders. The 3:50 p.m. deadline for MOC 
order entry and cancellation, as well as the requirement to disseminate 
MOC orders consisting of 50,000 shares or more as soon as practicable 
after 3:50 p.m., on non-expiration days should help the specialist make 
a timely and reliable assessment of MOC order flow and its potential 
impact on the closing price and also should ensure that any imbalance 
publications reflect actual investor interest. In the Commission's 
opinion, a 3:50 p.m. deadline strikes a more appropriate balance for 
non-expiration days (as opposed to the 3:40 p.m. deadline for 
expiration days) given the reduced likelihood of substantial MOC order 
imbalances due to derivatives-related trading strategies.
    The Commission finds it appropriate for the BSE to provide for 
procedures for the handling of MOC orders in market conditions when the 
NYSE's Rule 80A is in effect.\14\ The Commission believes that the 
procedures clearly inform market participants of the manner in which 
MOC order can be placed on the BSE when the NYSE's Rule 80A is in 
effect.
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    \14\ The Commission continues to believe that the provisions of 
NYSE Rule 80A provides a useful means of addressing market 
volatility. See Securities Exchange Act Release No. 29854 (October 
24, 1991), 56 FR 55963.
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    For the reasons discussed above, the Commission is approving the 
resumption of the pilot program, and Amendment No. 1, through October 
31, 1997. The Commission finds good cause for approving the proposed 
rule change prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. This will permit the 
proposed amendments to be effective simultaneously with the NYSE's 
amendments to the procedures for handling MOC orders.\15\ In addition, 
the procedures the BSE proposes to use are identical to NYSE procedures 
that were published in the Federal Register for the full comment period 
and were approved by the Commission.\16\
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    \15\ See Release No. 34-36404, supra note 9.
    \16\ No comments were received in connection with the most 
recent proposed rule change which modified the NYSE procedures. See 
Release No. 34-36404, supra note 9.
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    It is therefore ordered, pursuant to Section 19(b)(2) \17\ that the 
proposed rule change is hereby approved on a pilot basis through 
October 31, 1997.

    \17\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19530 Filed 7-31-96; 8:45 am]
BILLING CODE 8010-01-M