[Federal Register Volume 61, Number 152 (Tuesday, August 6, 1996)]
[Notices]
[Pages 40871-40873]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19939]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37507; File No. SR-NYSE-96-18]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the New York 
Stock Exchange, Inc. Relating to the Pilot for Entry of Limit-at-the-
Close Orders

July 31, 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 1, 1996, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change and on July 31, 
1996, filed Amendment No. 1 to the proposed rule change,\3\ 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, and simultaneously publishing an order granting accelerated 
approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE to Michael Walinskas, Senior Special Counsel, SEC, 
dated July 30, 1996.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change would extend the current pilot \4\ for the 
entry of limit-at-the-close (``LOC'') orders to offset a published 
market-at-the-close (``MOC'') order imbalance of 50,000

[[Page 40872]]

shares or more in all stocks for which MOC order imbalances are 
published.
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    \4\ See Securities Exchange Act Release No. 35854 (June 16, 
1995), 60 FR 32723.
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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 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 and is set forth in Sections A, 
B, and C below.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    A LOC order is one that is entered for execution at the closing 
price, provided that the closing price is at or within the limit 
specified. Currently, LOC orders may be entered only to offset 
published imbalances of market-on-close (``MOC'') orders.\5\ On 
expiration days,\6\ MOC imbalances of 50,000 shares or more: (1) In the 
so-called ``pilot'' stocks; \7\ (2) in stocks being added to or dropped 
from an index; and (3) in any other stock with the approval of a Floor 
Official must be published on the tape as soon as practicable after 
3:40 p.m.\8\ On non-expiration days, the same listed types of 
imbalances must be published as soon as practicable after 3:50 p.m. LOC 
orders must be entered between 3:40 and 3:55 p.m. on expiration days 
and between 3:50 and 3:55 p.m. on non-expiration days. On expiration 
days, LOC orders are irrevocable once entered, except in the case of 
legitimate error.\9\ On non-expiration days LOC orders are irrevocable 
after 3:55 p.m., except in the case of legitimate error.\10\
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    \5\ A MOC order is a market order to be executed in its entirety 
at the closing price on the Exchange. See NYSE Rule 13.
    \6\ 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'').
    \7\ The term ``pilot stocks'' refers to the Expiration Friday 
pilot stocks plus any additional QIX Expiration Day pilot stocks. 
Specifically, the Expiration Friday pilot stocks consist 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.
    \8\ In Securities Exchange Act Release No. 36404 (October 20, 
1995), 60 FR 55071, the Commission approved an amendment to the 
pilot program relating to MOC orders to allow imbalance publications 
of 50,000 shares or more to be made not only in the pilot stocks, 
but also in stocks being added to or dropped from an index, and in 
any other stock with the approval of a Floor Official. Telephone 
conversation between Donald Siemer, Director of Market Surveillance, 
NYSE, and Elisa Metzger, Special Counsel, SEC, on July 29, 1996.
    \9\ Telephone conversation between Donald Siemer, Director of 
Market Surveillance, NYSE, and Elisa Metzger, Special Counsel, SEC, 
on July 29, 1996.
    \10\ Id.
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    In June 1995, the permitted use of LOCs was expanded from five 
stocks to all stocks that have published MOC order imbalances of 50,000 
shares or more in the hope that this would stimulate use of this order 
type.\11\ LOCs were approved by the SEC on a pilot basis, and the pilot 
is scheduled to expire at the end of July. To date, the use of LOCs has 
remained limited. LOCs are restricted by time of entry and by the fact 
that they must offset published MOC imbalances. The Exchange is 
proposing to extend the LOC pilot for an additional year.\12\ The 
Exchange continues to believe that the LOC order type may prove to be a 
useful means to help address the prospect of excess market volatility 
that may be associated with an imbalance of MOC orders at the 
close.\13\
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    \11\ Telephone conversation between Betsy Minkin, Regulatory 
Development Project Manager, NYSE, and Elisa Metzger, Special 
Counsel, SEC, on July 31, 1996.
    \12\ Amendment No. 1 withdrew a proposed amendment to the LOC 
pilot which would permit the entry of LOC orders at any time during 
the trading day up to 3:40 p.m. on expiration days, and 3:50 p.m. on 
non-expiration days.
    \13\ The NYSE modified its electronic display book, such that 
LOC orders are prioritized relative to other LOC orders by time of 
entry, but are required to yield priority to all conventional limit 
orders on the specialist's book at the same price. Telephone 
conversation between Donald Siemer, Director of Market Surveillance, 
NYSE, to Elisa Metzger, Special Counsel, SEC, on July 29, 1995.
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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.

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 in the 
Commission's Public Reference Room at 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 above-mentioned 
self-regulatory organization. All submissions should refer to File No. 
SR-NYSE-96-18 and should be submitted by August 27, 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, the requirements of Section 6 \14\ and the rules and 
regulations thereunder. Specifically, the Commission finds that the 
proposed rule change is consistent with the Section 6(b)(5) \15\ 
requirements that the rules of an exchange be designed to promote just 
and equitable principals 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.
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    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(5).
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    As noted in the Commission's approval of the current pilot, the 
self-regulatory organizations have instituted certain safeguards to 
minimize excess market volatility that may arise from the

[[Page 40873]]

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.
    The NYSE auxiliary closing procedures have worked relatively well 
and may have resulted in more orderly markets on expiration days. 
Nevertheless, both the Commission and the NYSE remain concerned about 
the potential for excess market volatility, particularly at the close 
on expiration days. Although, to date, the NYSE has been able to 
attract sufficient contra-side interest to effectuate an orderly 
closing, adverse market conditions could converge on an expiration day 
to create a market dislocation which could make member firms and their 
customers unwilling to acquire significant positions.
    The Commission continues to believe preliminarily that LOC orders 
should provide the NYSE with an additional means of attracting contra-
side interest to help alleviate MOC order imbalances both on expiration 
and non-expiration days. As a practical matter, the Commission believes 
that LOC orders will appeal to certain market participants who 
otherwise might be reluctant to commit capital at the close. 
Specifically, unlike a MOC order, which results in significant exposure 
to adverse price movements, a LOC order will allow each investor to 
determine the maximum/minimum price at which he or she is willing to 
buy/sell. To the extent that such risk management benefits encourage 
NYSE member firms and their customers to enter orders to offset MOC 
order imbalances of 50,000 shares or more, thereby adding liquidity to 
the market, the Commission agrees with the NYSE that LOC orders could 
become a useful investment vehicle for curbing excess price volatility 
at the close.\16\
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    \16\ Furthermore, the Commission notes that LOC orders could 
allow the NYSE to accomplish this goal without diminishing any 
benefit to investors from trading strategies that rely on MOC orders 
to guarantee a fill at the closing price.
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    The Commission also finds that the NYSE has established appropriate 
procedures for the handling of LOC orders and that the NYSE's existing 
surveillance should be adequate to monitor compliance with those 
procedures. Because LOC orders will be required to yield priority to 
conventional limit orders at the same price, the Commission is 
satisfied that public customer orders on the specialist's book will not 
be disadvantaged by this proposal. In addition, the Commission believes 
that the proposed 3:55 p.m. deadline for LOC order entry strikes a 
reasonable balance between the need to effectuate an orderly closing 
and the need to avoid unduly infringing upon legitimate trading 
strategies. Similarly, in the Commission's opinion, the prohibition on 
canceling LOC orders is consistent with the Exchange's auxiliary 
closing procedures and, like those procedures, should allow specialists 
to make a timely and reliable assessment of order flow and its 
potential impact on the closing price.
    The Commission is approving LOC order entry for all stocks for 
which MOC order imbalances are published on a pilot basis contingent on 
the extension or permanent approval of the MOC procedures. \17\ During 
the pilot program, the Commission expects the NYSE to monitor the 
effectiveness of its LOC order procedures.
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    \17\ The pilot program for MOC procedures expires on October 31, 
1996. See Securities Exchange Act Release No. 36404 (October 20, 
1995), 60 FR 55071.
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    The Commission therefore requests that the NYSE submit a report to 
the Commission, by May 31, 1997, describing its experience with the 
pilot program. At a minimum, this report should contain the following 
data for each expiration day: (1) for all stocks which had a MOC order 
imbalance of 50,000 shares or more at 3:40 p.m., the names of those 
stocks and the size of the imbalance; (2) for each stock listed in (1) 
above, the size of the MOC order imbalance at 4:00 p.m. and an 
appropriate measure of the size of conventional limit order and LOC 
order interest, on the opposite side of the market from the imbalance, 
at 4:00 p.m., (3) for each stock listed in (1) above, (i) the price of 
the transaction effected closest in time to 3:40 p.m., the price of the 
last regular way trade and the closing price, (ii) the change in price 
of the closing transaction, measured as a percentage, from the last 
regular way trade and from the transaction effected closest in time to 
3:40 p.m., (iii) historical data analyzing price volatility for the 
same stock on expiration days prior to the implementation of this pilot 
program; and (4) the average price volatility for all stocks listed in 
(1) above. The NYSE report also should contain, for one week per 
calendar quarter (including at least one week with no expiration days) 
the data described herein, as modified to reflect the MOC procedures 
for non-expiration days. Any requests to modify this pilot program, to 
extend its effectiveness or to seek permanent approval for the pilot 
procedures also should be submitted to the Commission, by May 31, 1997, 
as a proposed rule change pursuant to Section 19(b) of the Act.

V. Conclusion

    The Commission finds good cause for approving the rule filing prior 
to the thirtieth day after the date of publication of the notice of 
filing thereof in the Federal Register, in that accelerated approval is 
appropriate to extend the pilot program until July 31, 1997 without 
interruption.
    It is therefore ordered, pursuant to Section 19(b)(2) \18\ of the 
Act, the proposed rule change, including Amendment No. 1, extending the 
pilot for the entry of LOC orders until July 31, 1997, be and hereby is 
approved.

    \18\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19939 Filed 8-5-96; 8:45 am]
BILLING CODE 8010-01-M