[Federal Register Volume 61, Number 151 (Monday, August 5, 1996)]
[Notices]
[Pages 40699-40701]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19835]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37495; File No. SR-NYSE-96-16]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc.; Relating to Amendments to 
Percentage Order Rules 13 and 123A.30

July 30, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on June 28, 
1996, the New York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III 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.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change consists of amendments to Exchange Rules 
13 and 123A.30, respectively. The filing proposes to amend Rule 13 to 
provide that if the percentage order is marked ``last sale-cumulative 
volume,'' then the initial elected portion of the percentage order may 
be re-entered on the specialist's book at the prices of subsequent 
sales, within the overall limit on the order. The filing also

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proposes to amend Rule 123A.30 to provide that a converted percentage 
order retains its status on the specialist's book unless the 
transaction is effected on a higher bid, or a new higher bid is made, 
or the percentage order was not converted at its maximum limit price.

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 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
    A percentage order is a limited price order to buy or sell fifty 
percent of the volume of a specified stock after its entry. A 
percentage order is essentially a memorandum entry left with a 
specialist which becomes a ``live'' order capable of execution in one 
of two ways: (i) all or part of the order can be ``elected'' as a limit 
order on the specialist's book based on trades in the market; or (ii) 
all or part of the order can be ``converted'' into a limit order to 
make a bid or offer or to participate directly in a trade. Percentage 
orders were first adopted in 1972 to permit large size orders to trade 
along with the trend of the market.
    The election process. Under the election process, as trades occur 
at the percentage order's limit price or better, an equal number of 
shares of the percentage order are ``elected'' and become a limit order 
on the specialist's book at the price of the electing sale. Most 
percentage orders are entered as ``last sale percentage orders,'' 
meaning that they may be executed at the price at which they were 
elected, or at a better price. These orders may not, however, be 
executed at an inferior price to the electing sale even if that 
inferior price is still within the limit price on the order.
    For example, assume that the specialist receives a last sale 
percentage order to purchase 5,000 shares with a limit price of 30. If 
a trade of 500 shares takes place at 29\1/2\, 500 shares of the 
percentage order would be placed on the specialist's book as a limit 
order at 29\1/2\. This order could be executed at a price of 29\1/2\ or 
lower, but could not be executed at a higher price, even though the 
limit price on the percentage order was 30.
    Proposed change to the election process. The Exchange is proposing 
to amend the definition of last sale percentage order, after their 
initial election, in Rule 13 to provide that such orders may be re-
entered on the specialist's book at the price of subsequent 
transactions, within the limit price on the percentage order, if the 
order is marked ``last sale-cumulative volume.'' Thus, in the example 
above, if there was a subsequent trade of 500 shares at 29\5/8\, 500 
shares of a percentage order marked ``last cumulative volume'' would be 
elected on to the specialist's book at 29\5/8\, and the 500 shares 
previously entered on to the book at 29\1/2\ would be canceled and 
reentered at 29\5/8\, for a total of 1,000 shares of the percentage 
order on the book at 28\5/8\. If the order were simply marked ``last 
sale,'' it would be handled as today under the current rule.
    The conversion process. The second way that a percentage order can 
be activated into a limit order is through the conversion process. Most 
percentage orders contain the additional instruction ``CAP-D.'' ``CAP'' 
is an acronym meaning ``convert and parity,'' which instructs the 
specialist that he or she may convert all or a portion of the order 
into a limit order, either to make a bid or offer or to participate 
directly in a trade. ``D'' instructs the specialist that the order may 
be converted to participate in destabilizing transactions as well as 
stabilizing transactions. As a practical matter, CAP-D orders are 
viewed as a necessary adjunct to the standard election procedure 
because they allow the specialist greater flexibility to match the 
order with other buying and selling interest in the market. CAP-D 
orders are subject to a number of restrictions intended to minimize the 
specialist's discretion in handling such orders.\1\
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    \1\ See NYSE Rule 123A.30; Securities Exchange Act Release No. 
24505 (May 22, 1987), 52 FR 20484 (June 1, 1987) (order approving 
amendment to Rule 123A.30 permitting conversion of percentage orders 
on destabilizing ticks under certain restrictions).
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    One such restriction codified in Rule 123A.30 provides that a 
percentage order may be converted to make a bid or offer, but if a 
higher bid (lower offer) is subsequently made, the converted percentage 
order bid or offer is treated as cancelled, subject to further 
conversion of the order. This means that the bid or offer loses 
whatever priority it had with respect to other limit orders on the 
specialist's book.
    For example, assume that the market is quoted 20 bid, offered at 
20\1/4\, 10,000 by 10,000, with the bid at 20 representing 10,000 
shares of a converted percentage order. Under the current rule, if the 
specialist then receives an order to buy 5,000 shares at 20, and an 
order to buy 200 shares at 20\1/8\, when the specialist changes the 
quotation to 20\1/8\-20\1/4\, 200 by 10,000, the converted percentage 
order bid of 20 for 10,000 is cancelled, and the 5,000 share order now 
has priority on the specialist's book at 20. If a transaction took 
place at 20\1/8\, and the quotation reverted to 20 bid, offered at 
20\1/4\, the percentage order, although it can be re-converted to make 
a bid at 20, would have lost its priority on the book.
    Proposed change to the conversion process. The Exchange is 
proposing to amend Rule 123A.30 to allow the converted percentage order 
to retain its priority on the book when a higher bid (lower offer) is 
made. However, if a transaction is effected at that higher bid (lower 
offer), and a bid or offer is made that is higher (lower) than the 
price of such transaction, the converted percentage order would be 
cancelled, subject to re-conversion. The order would not be cancelled, 
however, regardless of subsequent trades in the market, if it was 
converted at its maximum limit price.\2\
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    \2\ The Exchange is also proposing to amend Rule 123A.30 to 
include a provision that a specialist must document the status of a 
converted percentage order on the specialist's book as a limit order 
at the price it was converted.
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    The Exchange believes that these amendments will facilitate the 
ability of specialists to ensure that the elected and converted 
portions of percentage orders are executed along with the trend of the 
market.
2. Statutory Basis
    The basis under the Act for the proposed rule change is the 
requirement under Section 6(b)(5) \3\ 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. 
This proposed rule change will remove impediments to and perfect the 
mechanism of a free and open market by increasing opportunities for 
percentage orders' participation in the Exchange's auction wherein the 
elected and converted portions of percentage orders

[[Page 40701]]

are executable along with the trend of the market.
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    \3\ 15 U.S.C. 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 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date of its finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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, N.W., 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, N.W., 
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-96-16 and should be 
submitted by August 26, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19835 Filed 8-2-96; 8:45 am]
BILLING CODE 8010-01-M