[Federal Register Volume 61, Number 182 (Wednesday, September 18, 1996)]
[Notices]
[Pages 49185-49186]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23899]



[[Page 49185]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37667; File No. SR-NYSE-96-22]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval of a Proposed Rule Change by the New York Stock Exchange, 
Inc., Relating to the Extension of Rule 103A (Specialist Stock 
Reallocation)

September 11, 1996.

I. Introduction

    On August 6, 1996, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ 
proposed rule change (File No. SR-NYSE-96-22) to extend the 
effectiveness of NYSE Rule 103A, Specialist Stock Reallocation, until 
September 10, 1997. The proposed rule change was published for comment 
in theFederal Register on August 21, 1996.\3\ No. comments were 
received on the proposal. On September 10, 1996, the Exchange amended 
the filing (``Amendment No. 1'') to shorten the length of the 
effectiveness of NYSE Rule 103A until January 10, 1997.\4\ For the 
reasons set forth below, the Commission is approving the extension of 
NYSE Rule 103A until January 10, 1997, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR Sec. 240.19b-4 (1994).
    \3\ Securities Exchange Act Release No. 35764 (August 14, 1996), 
61 FR 43284.
    \4\ Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Sharon Lawson, Assistant Director, Division of 
Market Regulation, Commission (September 10, 1996.
---------------------------------------------------------------------------

II. Description of the Proposal

    The NYSE seeks to extend the effectiveness of Rule 103A, Specialist 
Stock Reallocation, until January 10, 1997. NYSE Rule 103A grants 
authority to the Exchange's Market Performance Committee to develop and 
administer systems and procedures, including the determination of 
appropriate standards and measurements of performance, designed to 
measure specialist performance and market quality on a periodic basis 
to determine whether or not particular specialist units need to take 
actions to improve their performance. Based on such determinations, the 
Market Performance Committee is authorized to conduct a formal 
Performance Improvement Action in appropriate cases. The intent of Rule 
103A is to encourage a high level of market quality and performance in 
Exchange listed Securities.
    The Exchange originally proposed the adoption of Rule 103A in 
1979.\5\ Since that time, the pilot program has been extended numerous 
times. Most recently, on May 10, 1995, the SEC extended the 
effectiveness of the rule until September 10, 1996.\6\ In its approval 
order, the Commission stated its continued belief that the Exchange 
should develop objective performance standards to measure specialist 
performance.\7\
---------------------------------------------------------------------------

    \5\ Securities Exchange Act Release No. 15827 (May 15, 1979), 44 
FR 100 (May 22, 1979) [File No. SR-NYSE-77-24]
    \6\ See Securities Exchange Act Release No. 35704 (May 10, 
1995), 60 FR 26060 (May 16, 1995) [File No. SR-NYSE-95-18].
    \7\ See id. The Commission notes that the Exchange's current 
evaluation criteria under Rule 103A.10 include objective standards 
that measure specialist performance at the opening (both regular and 
delayed), systematized order turnaround, and the timeliness of a 
unit's response to status requests. Specialist performance also is 
measured by the Exchange's Specialist performance Evaluation 
Questionnaire.
---------------------------------------------------------------------------

    Currently, the Exchange has in place two objective measures of 
specialist performance. It should be noted, however, that these 
measures are not currently included in the Rule 103A program. The first 
objective measure of performance pertains to specialist capital 
utilization. Adopted in December 1993 on a pilot basis, the capital 
utilization measure of specialist performance focuses on a specialist 
unit's use of its own capital in relation to the total dollar value of 
trading activity in the unit's stocks.\8\ The capital utilization 
measure pilot has been extended until September 10, 1996.\9\ The 
Exchange's Allocation Committee is being provided with specialist 
capital utilization information for its use in allocation decisions.
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 33369 (December 23, 
1993), 58 FR 69431 (December 30, 1993) [File No. SR-NYSE-93-30].
    \9\ See Securities Exchange Act Release No. 35926 (June 30, 
1995), 60 FR 35760 (July 11, 1995) [File No. SR-NYSE-95-24].
---------------------------------------------------------------------------

    The second objective measure of performance, which was recently 
developed, pertains to ``near neighbors.'' On June 30, 1995, the 
Commission approved this filing on a fifteen month pilot basis through 
September 10, 1996.\10\ The ``near neighbors'' measure compares certain 
performance measures of a given stock (price continuity, depth, 
quotation spread and capital utilization) to those of its ``near 
neighbors'' (i.e., stocks that have certain similar characteristics). 
The Exchange would provide ``near neighbor'' information to the 
Allocation Committee for its use in allocating newly-listed stocks.\11\ 
On July 1, 1996, the Exchange filed to extend the pilot programs for 
both the near neighbor and capital utilization measure of specialist 
performance.\12\ The Commission has approved the extension of both 
pilots until January 10, 1997. The Exchange has also indicated its 
intention to work with outside consultants and appropriate constituent 
groups to develop performance standards applicable to these objective 
measures for incorporation into Rule 103A.
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 35927 (June 30, 
1995), 60 FR 35764 (July 11, 1995) [File No. SR-NYSE-95-05].
    \11\ The near neighbor measure would provide the Allocation 
Committee with performance data.
    \12\ File No. SR-NYSE-96-17.
---------------------------------------------------------------------------

    Regarding the Intermarket Trading System (``ITS''), the Commission 
has stated its belief that the mature status of the ITS as a market 
structure facility warrants the incorporation of ITS turnaround and 
``trade-through'' concerns into the NYSE's Rule 103A performance 
standards. The Exchange continues to believe that ITS matters are more 
appropriately addressed by means of the Exchange's regulatory process 
rather than through its performance measurement system, but will 
continue to study the matter.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
changes are 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 Sections 6(b)(5) 
and 11(b) of the Act.13 Section 6(b)(5) requires, among other 
things, that the rules of an exchange be designed 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. Section 11(b) 
of the Act, and Rule 11b-1 thereunder,14 allow securities 
exchanges to promulgate rules relating to specialists consistent with 
the maintenance of fair and orderly markets.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. Sec. 78f(b)(5) and 78k(b) (1988).
    \14\ 17 CFR 240.11b-1 (1994).
---------------------------------------------------------------------------

    Specifically, because specialist units play a crucial role in 
providing stability, liquidity, and continuity to the trading of stocks 
on the Exchange, the Commission believes that effective oversight, 
including periodic evaluation of the specialists' performance, is 
important to the maintenance of a fair and efficient marketplace. The 
Commission believes that the NYSE's Rule 103A performance evaluation

[[Page 49186]]

process is critical to this oversight in that it provides the Exchange 
with the means to identify and correct poor specialist performance and 
to ascertain whether specialists are maintaining fair and orderly 
markets in their assigned securities, as required pursuant to Exchange 
rules and the Act, and the rules thereunder.15 Moreover, the 
possibility of a performance improvement action as a result of the 
evaluation process, in addition to the use of the evaluation results in 
stock allocation decisions, should help motivate and provide incentives 
for specialists to maintain and improve their market making performance 
for the benefit of investors.
---------------------------------------------------------------------------

    \15\ See generally NYSE Rule 104 (Dealings By Specialists); and 
Commission Rule 11b-1 under the Act, 17 CFR 240.11b-1 (1994).
---------------------------------------------------------------------------

    In previous orders extending the Rule 103A pilot,16 the 
Commission emphasized its desire for the Exchange to develop objective 
measures of market making performance and incorporate such measures 
into the Rule 103A pilot.17 In addition, the Commission previously 
stated that it believes the mature status of the Intermarket Trading 
System, as a market structure facility, warrants the incorporation of 
ITS turnaround and trade-through concerns into the NYSE's Rule 103A 
performance standards. As discussed fully in a previous extension 
order,18 the Commission believes that objective measures of 
specialist performance with regards to these concerns should be 
incorporated into the evaluation process.
---------------------------------------------------------------------------

    \16\ See Securities Exchange Act Release Nos. 34022 (May 6, 
1994), 59 FR 25143 (May 13, 1994); 32285 (May 10, 1993), 58 FR 28905 
(May 17, 1993); 29180 (May 8, 1991), 56 FR 22489 (May 15, 1991); and 
28215 (July 17, 1990), 55 FR 30060 (July 24, 1990).
    \17\ See supra. Although the Exchange has developed the capital 
utilization and near neighbor measures of market making performance 
for use by the Allocation Committee, it has not yet proposed to 
include these objective measures in its Rule 103A program.
    \18\ See Security Exchange Act Release No. 34022 (May 6, 1994), 
59 FR 25143 (May 13, 1994).
---------------------------------------------------------------------------

    Even though the proposal lacks objective market making performance 
standards, the Commission has determined to approve the proposal to 
extend the effectiveness of Rule 103A for an additional four months. In 
Amendment No. 1, the Exchange indicated that at the end of the four 
month extension it will seek permanent approval of the proposal from 
its Board of Directors, and subsequently file such request with the 
Commission.\19\
---------------------------------------------------------------------------

    \19\ In this regard, the Commission expects the NYSE to submit 
to the Division of Market Regulation, no later than November 15, 
1996, a proposed rule change pursuant to Rule 19b-4 under the Act, 
17 CFR 240.19b-4, to request permanent approval of Rule 103A.
---------------------------------------------------------------------------

    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. The Commission believes it is 
appropriate to approve the proposed rule change on an accelerated basis 
so that the Exchange can continue to administer, on an uninterrupted 
basis, its Rule 103A evaluation process. A substantial portion of 
current Rule 103A was noticed for the full statutory period in 1987, 
and the Commission did not receive any adverse commentary on the 
revised Rule 103A program.\20\ Further, interested persons were invited 
to comment on this proposal and the Commission received no comments. 
The Commission believes, therefore, that granting accelerated approval 
of the proposed rule change is appropriate and consistent with Sections 
6 and 11 of the Act.
---------------------------------------------------------------------------

    \20\ See Securities Exchange Act Release Nos. 24919 (September 
15, 1987), 52 FR 35821 (September 23, 1987); and 25681 (May 9, 
1988), 53 FR 17287 (May 16, 1987).
---------------------------------------------------------------------------

    It is therefore, ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change is hereby approved on an 
accelerated basis until January 10, 1997.

    \21\ 15 U.S.C. Sec. 78s(b)(2) (1988).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12) (1996).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23899 Filed 9-17-96; 8:45 am]
BILLING CODE 8010-01-M