[Federal Register Volume 61, Number 231 (Friday, November 29, 1996)]
[Notices]
[Pages 60735-60736]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30399]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37969; File No. SR-NYSE-96-21]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to the Entry 
of Limit-at-the-Close Orders

November 20, 1996.
    On July 31, 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 permit limit-at-the-close 
(``LOC'') orders to be entered in any stock at any time during the 
trading day up to 3:40 p.m. on expiration days and 3:50 on non-
expiration days. On October 2, 1996, the Exchange submitted Amendment 
No. 1 to the proposed rule change.\3\
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter and Form 19b-4 from James E. Buck, Senior Vice 
President and Secretary, NYSE, to Ivette Lopex, Assistant Director, 
Division of Market Regulation, SEC, dated September 27, 1996. 
Amendment No. 1 expanded the purpose section of the filing to 
provide a more detailed explanation of the reasons the Exchange is 
seeking to permit limit-at-the-close (``LOC'') orders to be entered 
in any stock 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. Thereafter, as 
with market-on-close (``MOC'') orders, LOC orders could be entered 
only to offset published imbalances. This proposed revision of the 
LOC pilot would subject LOC orders to the same type of order entry 
and cancellation restrictions currently imposed on MOC orders.
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    The proposed rule change, including Amendment No. 1, was published 
for comment in Securities Exchange Act Release No. 37786 (Oct. 4, 
1996), 61 FR 53473 (Oct. 10, 1996). No comments were received on the 
proposal.
    In 1994, the Commission approved, on a pilot basis, NYSE's proposed 
rule change to permit entry of LOC orders to offset published 
imbalances of market-on-close (``MOC'') \4\ orders in certain 
stocks.\5\ 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. LOC orders are executed behind limit orders at the 
same price and behind MOC orders.
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    \4\ A MOC order is a market order to be executed in its entirety 
at the closing price on the Exchange. See NYSEW Rule 13.
    \5\ See Securities Exchange Act Release No. 33706 (Mar. 3, 
1994), 59 FR 11093 (Mar. 9, 1994) (approving the original LOC pilot 
program). The latest pilot program for LOC orders expires on July 
31, 1997. See Securities Exchange Act Release No. 37507 (July 31, 
1996) (File No. SR-NYSE-96-18 and Amendment No. 1 thereto).
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    Currently, LOC orders may be entered only to offset published 
imbalances of MOC orders. MOC imbalances of 50,000 shares or more in 
(1) the so-called ``pilot'' stocks,\6\ (2) stocks being added to or 
dropped from an index, and (3) 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. for expiration days \7\and after 3:50 p.m. on non-
expiration days. LOC orders currently must be entered only 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 case of legitimate error. On non-expiration days, LOC 
orders are irrevocable after 3:55 p.m. except in case of legitimate 
error.
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    \6\ 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.
    \7\ 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'').
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    In 1995, the pilot program for LOC orders was expanded from five 
stocks to all stocks that have published MOC order imbalances of 50,000 
shares or more in order to help stimulate use of this order type. At 
the present time, the NYSE proposes to expand further the use of LOC 
orders by allowing these orders to be entered in any stock at any time 
during the trading day up to 3:40 p.m. on expiration days and up to 
3:50 p.m. on non-expiration days. Thereafter, consistent with current 
policy, LOC orders could be entered only to offset published MOC 
imbalances. Under the proposed rule change, LOC orders would be subject 
to the same type of order entry and cancellation restrictions currently 
imposed on MOC orders.\8\
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    \8\ On expiration days, there is a 3:40 p.m. deadline for the 
entry, reduction, or cancellation of any MOC order. On non-
expiration days, there is a 3:50 p.m. deadline for the entry, 
reduction, or cancellation of any MOC order. Currently, LOC orders 
can be canceled until 3:55 p.m. on non-expiration days. Under the 
proposed rule change, LOC orders will be irrevocable on non-
expiration days, except in the case of legitimate error, after 3:50 
p.m. Telephone conversation between Donald Siemer, Director of 
Market Surveillance, NYSE, and Elisa Metzger, Special Counsel, SEC, 
on November 19, 1996.
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    According to the NYSE, the use of LOC orders has remained limited: 
The narrow order entry window, along with the requirement that LOC 
orders must offset published MOC imbalances, makes the opportunities 
for their entry too limited to justify for many member firms the 
programming necessary to support their use. The Exchange believes that 
the expansion of the LOC pilot to allow for such orders to be entered 
throughout the day (up until the cut-off time) would allow investors 
the possibility of using LOC orders in conjunction with other 
investment strategies. The Exchange therefore believes that this could 
attract additional LOC orders, thereby increasing liquidity and 
potentially reducing volatility at the close. According to the 
Exchange, increased use of LOC orders 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.
    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(b).\9\ Specifically, the 
Commission believes the proposal is consistent with the Section 6(b)(5) 
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.\10\
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    \9\ 15 U.S.C. Sec. 78f(b).
    \10\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. Sec. 78c(f).

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[[Page 60736]]

    As part of an effort by the Exchange to institute certain 
safeguards to minimize excess market volatility that may arise from 
liquidation of stock positions related to trading strategies involving 
index derivative products, the Exchange proposed and the Commission 
approved, on a pilot basis, the use of LOC orders under limited 
circumstances. Now, the NYSE proposes to expand the use of LOC orders 
by allowing such orders to be entered throughout the day up until the 
cut-off time and removing the restriction that they be entered only to 
offset published MOC imbalances. The Exchange believes that allowing 
the entry of LOC orders throughout the day would encourage the use of 
LOC orders, which in turn may alleviate excess market volatility 
through the expected increase in market liquidity.
    The Commission believes that the NYSE's proposed rule change is 
consistent with the purposes of the Act. Although the NYSE, in effect, 
is proposing the use of a new order type throughout the day, the 
Commission does not believe that allowing entry of LOC orders would 
have harmful effects on other orders or on the market in general. For 
example, the LOC orders would continue to be executed behind 
conventional limit orders at the same price and behind MOC orders.
    Under the amended pilot, LOC orders may be entered throughout the 
day for possible execution at the closing price. LOC orders, however, 
will continue to be executed in the same manner as in the current 
pilot: LOC orders at a better price than the closing price will be 
treated as market orders and executed against each other, limit orders 
on the book, or the specialist's own account. Moreover, as in the 
current pilot program, the LOC orders at the closing price will not be 
guaranteed an execution. Finally, as previously, after the cut-off 
periods of 3:40 p.m. for expiration days and 3:50 p.m. for non-
expiration days, LOC orders may be entered only to offset published 
imbalances.
    To the extent that the proposal would encourage entry of LOC 
orders, which may potentially offset imbalances of MOC orders at the 
close, the Commission believes that LOC orders will continue to be a 
useful investment vehicle for curbing excess price volatility at the 
close. With respect to the use of LOC orders as another order type, the 
Commission believes that the appropriate procedures for handling LOC 
orders provided by the NYSE in the proposal will ensure that market, 
limit and MOC orders will not be disadvantaged by the expanded use of 
LOC orders.
    Finally, the Commission notes that the LOC orders have been on a 
pilot program since 1994 and the NYSE has submitted detailed reports 
describing its experience with the pilot program. The Commission, 
therefore, believes that the Exchange appears to have had sufficient 
experience with the program to determine its effectiveness. The 
Commission encourages the Exchange to seek permanent approval of the 
procedures or to determine to discontinue the program after the 
Exchange analyzes the data for the report due on May 31, 1997. If the 
Exchange decides to seek permanent approval of the pilot procedures, 
any such request should also be submitted to the Commission by May 31, 
1997, as a proposed rule change pursuant to Section 19(b) of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-NYSE-96-21) is approved.

    \11\ 15 U.S.C. Sec. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-30399 Filed 11-27-96; 8:45 am]
BILLING CODE 8010-01-M