[Federal Register Volume 62, Number 12 (Friday, January 17, 1997)]
[Notices]
[Pages 2704-2706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1220]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38158; File No. SR-NYSE-96-34]

Self-Regulatory Organizations; Notice of Filing and Order 
Granting Partial Accelerated Approval of a Proposed Rule Change by the 
New York Stock Exchange, Inc. to Make Permanent the Near Neighbor, 
Capital Utilization and Rule 103A Pilot Programs for Measuring 
Specialist Performance and Adopt a New Specialist Performance Measure
January 10, 1997.
    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 December 3, 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 and 
II 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 to 
grant accelerated approval to the portion of the proposal to make 
permanent the Near Neighbor, Capital Utilization, and Rule 103A pilot 
programs for measuring specialist performance.\3\
    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In partially approving the NYSE proposal, the Commission is 
not approving, at this time, the portion of the proposal relating to 
implementing a new specialist performance measure, the ``adjusted 
stabilization'' rate. That portion of the proposal is being 
published for comment in this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change
    The proposed rule change consists of making permanent certain pilot 
programs for measuring specialist performance and adopting a new 
specialist performance measure. The three pilots are the Near Neighbor 
pilot, the Capital Utilization Data pilot, and the Rule 103A pilot.\4\ 
The Exchange also proposes to adopt a new performance measure, the 
``adjusted stabilization'' rate measure.
    \4\ The Commission notes that the capital utilization and near 
neighbor measures currently are only used by the Allocation 
Committee in making specialist allocation decisions. The Commission 
initially approved the capital utilization program on a one-year 
pilot basis in Securities Exchange Act Release No. 33369 (December 
22, 1993), 58 FR 69431 (December 30, 1993). The Commission approved 
a six-month extension of the pilot program in Securities Exchange 
Act Release No. 35175 (December 29, 1994), 60 FR 2167 (January 6, 
1995) (extending pilot through June 30, 1995). The Commission 
approved two subsequent extensions of the pilot so that the Exchange 
and the Commission could evaluate the capital utilization, near 
neighbor, and Rule 103A programs concurrently. See Securities 
Exchange Act Release Nos. 35926 (June 30, 1995), 60 FR 35760 (July 
11, 1995) (extending pilot through September 10, 1996) and 37668 
(September 11, 1996), 61 FR 49371 (September 19, 1996) (extending 
pilot through January 10, 1997). The Commission approved the near 
neighbor program on a pilot basis in Securities Exchange Act Release 
No. 35927 (June 30, 1995), 60 FR 35927 (July 11, 1995) (pilot 
approved through September 10, 1996). The Commission approved an 
extension of the near neighbor pilot program, until January 10, 
1997, in Securities Exchange Act Release No. 37668 (September 11, 
1996), 61 FR 49371 (September 19, 1996). The Rule 103A pilot program 
was initially adopted in 1979. See Securities Exchange Act Release 
Nos. 15827 (May 15, 1979), 44 FR 100 (May 22, 1979). Since then, the 
program has been extended many times. The most recent extension 
continues the pilot until January 10, 1997. See Securities Exchange 
Act Release No. 37667 (September 11, 1996), 61 FR 49185 (September 
18, 1996).

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[[Page 2705]]

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
    The Exchange currently uses several programs to measure specialist 
performance, including specialist capital utilization, the ``near 
neighbor'' approach, and the standards of acceptable performance 
specified in Rule 103A. Information on these measures is supplied to 
the Allocation Committee for its use in determining allocation of 
listing companies.\5\ The ``near neighbor'' measure compares certain 
performance measures of a stock (price continuity, depth, quotation 
spread, and capital utilization) to those stocks with similar trading 
characteristics; the comparison is made over ``rolling'' three-month 
periods.\6\ The ``near neighbor'' measure has been in use on a pilot 
basis since August 1995. Capital utilization focuses on a specialist 
unit's use of its own capital in relation to the total dollar volume of 
trading activity in the unit's stocks.\7\ It has been utilized as a 
pilot since February 1994. These measures are presented to the 
Allocation Committee in summary form for each unit applying for a new 
listing and are a factor in allocating newly-listed stock.
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    \5\ The Exchange's Allocation Policy and Procedures govern the 
allocation of equity securities to NYSE specialist units. The 
Allocation Committee has sole responsibility for the allocation of 
securities to specialist units pursuant to Board-delegated 
authority, and is overseen by the Quality of Markets Committee of 
the Board of Directors. The Allocation Committee renders decisions 
based upon the allocation criteria specified in the Allocation 
Policy. The Allocation Policy emphasizes that the most significant 
allocation criterion is specialist performance. In this regard, the 
Allocation Policy states that the Allocation Committee will base its 
allocation decisions on the Specialist Performance Evaluation 
Questionnaire (``SPEQ''), objective performance measures, and the 
Committee's expert professional judgment. See Securities Exchange 
Act Release No. 34906 (October 27, 1994), 59 FR 55142 (November 3, 
1994) (order approving revisions to the NYSE's Allocation Policy).
    The weight given in the allocation decision making process to 
the SPEQ was reduced from 1/3 to 1/4 in recognition of the 
Exchange's adoption for allocation decision purposes of the near 
neighbor and capital utilization objective measures. See Securities 
Exchange Act Release No. 35932 (June 30, 1995), 60 FR 35763 (June 
30, 1995).
    \6\ For a more detailed description of the near neighbor 
measure, see Securities Exchange Act Release No. 35927, supra note. 
1.
    \7\ For a comprehensive description of the capital utilization 
measure of specialist performance, see Securities Exchange Act 
Release No. 35926, supra note 1.
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    Rule 103A, adopted in 1979, codifies standards based on the 
Specialist Performance Evaluation Questionnaire (``SPEQ'') and 
specialist performance with respect to openings of stocks and 
turnaround of order reports and administrative messages received. Data 
with respect to these standards is also provided to the Allocation 
Committee. In addition, the Market Performance Committee uses the Rule 
103A information to initiate performance improvement actions for 
specialist units that fall below the criteria detailed in the Rule. A 
unit's continued inability to raise its performance level can lead to a 
reallocation of one or more of its stocks.
    Commission staff have indicated to the NYSE staff the position that 
sufficient experience has been gained through extended operation of 
these pilot programs in order for the NYSE to determine whether each 
should be approved on a permanent basis. Permanent approval will not 
mean that the programs cannot be periodically revised and amended to 
improve their effectiveness. For example, the Exchange is currently 
working with consultants from the Massachusetts Institute of Technology 
to refine the near neighbor and capital utilization data to increase 
its usefulness. The NYSE notes that these efforts are ongoing and may 
lead to enhancements in the future.
    In addition to making the three pilot programs permanent, the 
Exchange proposes to add, as a new measure of specialist performance, 
``adjusted stabilization'' rates. Specialists are expected to stabilize 
stock price movements by buying and selling from their own account 
against the prevailing trend of the market. ``Stabilization'' refers to 
those instances where a stock dealer purchases on minus and zero minus 
ticks, and sells on plus and zero plus ticks. For purposes of the 
proposed specialist performance measure, ``adjusted stabilization'' 
would consist of proprietary purchases by specialists on minus and zero 
minus ticks, as well as zero plus tick purchases on the current bid 
(provided the current bid is below the offer of the immediately 
preceding trade); and proprietary sales on plus and zero plus ticks, as 
well as zero minus tick sales on the current offer (provided the 
current offer is above the bid of the immediately preceding trade). The 
Exchange believes that ``adjusted stabilization'' is a useful concept 
in that it reflects liquidity added to the market by specialists, and 
is consistent with the specialist's overall obligation to stabilize the 
market in that the specialist is not initiating either a transaction or 
a price change, but is rather adding depth to the market at prices at 
which transactions have already occurred.
    Adjusted stabilization rate information would be provided to the 
Allocation Committee to assist the Committee in assessing the value 
added by specialists to the depth and liquidity of stocks they 
currently trade.
2. Statutory Basis
    The basis under the Act for the proposed rule change is the 
requirement under Section 6(b)(5) \8\ 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. 
The Exchange believes that the proposed rule change is consistent with 
these requirements in that continuing to develop objective measures of 
specialist performance would help perfect the mechanism of a free and 
open market and protect investors and the public interest.
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    \8\ 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.

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

    No written comments either solicited or received.

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 if it 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:

[[Page 2706]]

    (A) by order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The Exchange has requested that the Commission find good cause, 
pursuant to Section 19(b)(2) of the Act, for approving the portion of 
the proposed rule change relating to making permanent the three pilot 
programs on an accelerated basis prior to the thirtieth day after 
publication in the Federal Register.

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 Room. 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-96-34 and 
should be submitted by [insert date 21 days from date of publication].

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

    The Commission finds that the portion of the proposed rule change 
making permanent the specialist performance measure pilot programs 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)(5) of the 
Act.\9\ Section 6(b)(5) requires, among other things, that the 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. Further, the Commission finds that the portion of the 
proposal to make permanent the pilot programs is consistent with 
Section 11(b) of the Act \10\ and Rule 11b-1 thereunder,\11\ which 
allow exchanges to promulgate rules relating to specialists to ensure 
fair and orderly markets. For the reasons set forth below, the 
Commission continues to believe that the consideration of specialist 
near neighbor and capital utilization analysis and the Rule 103A 
performance evaluation process by the Allocation Committee will enhance 
the Exchange's allocation process and encourage improved specialist 
performance, consistent with helping to perfect the mechanism of a free 
and open market and to protect investors and the public interest.
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    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78k(b).
    \11\ 17 CFR 240.11b-1.
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    Specialists play a crucial role in providing stability, liquidity 
and continuity to the trading of securities. Among the obligations 
imposed upon specialists by the Exchange, and by the Act and rules 
thereunder, is the maintenance of fair and orderly markets in 
designated securities.\12\ To ensure that specialists fulfill these 
obligations, it is important that the Exchange implement objective 
measures of specialist performance and prescribe stock allocation 
procedures and policies that encourage specialists to strive for 
optimal performance. The Commission supports NYSE's ongoing efforts to 
develop objective measures of specialist capital utilization and near 
neighbor analysis for use in the allocation process to encourage 
improved specialist performance and market quality. In addition, 
effective oversight, including periodic evaluation of the specialist's 
performance, is important to the maintenance of a fair and efficient 
marketplace. The Commission believes that the NYSE's Rule 103A 
performance evaluation is critical to this oversight in that it 
provides the Exchange with the means to identify and correct poor 
specialist performance, to ascertain whether specialists are 
maintaining fair and orderly markets in their assigned securities, and 
to bring performance evaluation actions as a result of the evaluation 
process.
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    \12\ See, e.g., 17 CFR 240.11b-1; NYSE Rule 104.
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    The Commission also believes that making permanent the pilot 
programs for these three measures is appropriate because the Exchange 
indicates that it has found these measures useful in providing the NYSE 
Allocation Committee with measures of specialist performance. The 
NYSE's Allocation Policy emphasizes that the most significant 
allocation criterion is specialist performance.\13\ In the Commission's 
view, performance based stock allocations not only help to ensure that 
stocks are allocated to specialists who will make the best markets, but 
will provide an incentive for specialists to improve their performance 
or maintain superior performance.\14\
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    \13\ See e.g., Securities Exchange Act Release No. 34906, supra 
note 4.
    \14\ The Commission notes that it would still like the near 
neighbor and capital utilization measures to be incorporated into 
the Rule 103A evaluation process.
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    The Commission finds good cause for approving the portion of the 
proposed rule change relating to making permanent the pilot programs 
prior to the thirtieth day after the date of publication of notice of 
filing thereof in the Federal Register. The Commission believes that 
accelerated approval of that portion of the proposal is appropriate 
because it will enable the Exchange to continue to make use of the 
capital utilization, near neighbor, and Rule 103A evaluation measures 
of specialist performance on an uninterrupted basis and will ensure 
continuity and consistency in the stock allocation deliberation 
process. Further, the initial proposals to adopt the capital 
utilization pilot and the near neighbor pilot were noticed previously 
in the Federal Register for the full statutory period and the 
Commission did not receive any comments on these proposals.\15\ In 
addition, 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.\16\
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    \15\ See supra Securities Exchange Act Release Nos. 33369 and 
35927, note 2.
    \16\ See Securities Exchange Act Release Nos. 24919 (September 
15, 1987), 52 FR 35821 (September 23, 1987); 25681 (May 9, 1988), 53 
FR 17287 (May 16, 1988).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\17\ that the portion of the proposed rule change (File No. SR-NYSE-96-
34) relating to making permanent the pilot programs is hereby approved 
on an accelerated basis.

    \17\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
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. 97-1220 Filed 1-16-97; 8:45 am]
BILLING CODE 8010-01-M