[Federal Register Volume 63, Number 32 (Wednesday, February 18, 1998)]
[Notices]
[Pages 8244-8246]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3930]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39634; File No. SR-NYSE-94-34]


Self-Regulatory Organizations; Notice of Filing of Amendment No. 
4 to Proposed Rule Change by the New York Stock Exchange, Inc. Relating 
to Exchange Rule 92, ``Limitations on Members' Trading Because of 
Customers' Orders''

February 9, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 15, 1997, 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 Exchange. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    In its original form, the proposed rule change extended the 
applicability of Exchange Rule 92 to trades by a member or member 
organization on any market center and provided a limited exemption to 
permit member organizations to trade along with their customers when 
liquidating a block facilitation position or engaging in bona fide or 
risk arbitrage. Amendment No. 4 provides an additional limited 
exemption for hedging a facilitation position, as well as explanations 
of the manner in which the amended rule will operate.
    The following is the text of the proposed rule change marked to 
reflect all of the proposed changes.\2\ Additions to the current text 
of Exchange Rule 92 appear in italics while deletions appear in 
brackets.
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    \2\ The text of the proposed rule change incorporates all of the 
proposed changes made to the original rule proposal by Amendment 
Nos. 1, 2, 3, and 4. See Securities Exchange Act Release Nos. 35139 
(Dec. 22, 1994), 60 FR 156 (Jan. 3, 1995) (notice of filing of 
proposed rule change, including Amendment No. 1); 36015 (July 21, 
1995), 60 FR 38875 (July 28, 1995) (notice of filing of Amendment 
No. 2); 37428 (July 11, 1996), 61 FR 37523 (July 18, 1996) (notice 
of filing of Amendment No. 3). On January 20, 1998, the Exchange 
submitted a technical correction to Amendment No. 4 to better 
identify the cumulative proposed changes to Exchange Rule 92. See 
Letter from Betsy Lampert Minkin, Regulatory Development Project 
Manager, Exchange, to Michael Loftus, Attorney, Division of Market 
Regulation, Commission, dated January 12, 1998.
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Rule 92: Limitations on Members' Trading Because of Customers' 
Orders

    [(a) No member shall (1) personally buy or initiate the purchase of 
any security on the Exchange for his own account or for any account in 
which he, his member organization or any other member, allied member or 
approved person, in such organization or officer thereof, is directly 
or indirectly interested, while such member personally holds or has 
knowledge that his member organization holds an unexecuted market order 
to buy such security in the unit of trading for a customer, or (2) 
personally sell or initiate the sale of any security on the Exchange 
for any such account, while he personally holds or has knowledge that 
his member organization holds an unexecuted market order to sell such 
security in the unit of trading for a customer.
    (b) No member shall (1) personally buy or initiate the purchase of 
any security on the Exchange for any such account, at or below the 
price at which he personally holds or has knowledge that his member 
organization holds an unexecuted limited price order to buy such 
security in the unit of trading for a customer, or (2) personally sell 
or initiate the sale of any security on the Exchange for any such 
account at or above the price at which he personally holds or has 
knowledge that his member organization holds an unexecuted limited 
price order to sell such security in the unit of trading for a 
customer.]
    (a) Except as provided in this Rule, no member or member 
organization shall cause the entry of an order to buy (sell) any 
Exchange-listed security on the Exchange or any other market center for 
any account in which such member or member organization or any approved 
person thereof is directly or indirectly interested (a ``proprietary 
order''), if the person responsible for the entry of such order has 
knowledge of any particular unexecuted customer's order to buy (sell) 
such security which could be executed at the same price.
    (b) A member or member organization may enter an proprietary order 
while representing a customer order which could be executed at the same 
price, provided the customer's order is not for the account of an 
individual investor, and the customer has given express permission, 
including and understanding of the relative price and sized of 
allocated execution reports, under the following conditions:
    (1) the member or member organization is liquidating a position 
held in a proprietary facilitation account, and the customer's order is 
for 10,000 shares or more; or
    (2) the member or member organization is creating a bona fide hedge 
and (i) the risk to be hedged is the result of a previously-established 
position, recorded as acquired in the course of facilitating a 
customer's order; (ii) the size of the offsetting hedging order is 
commensurate with such risk; and (iii) the customer's order is for 
10,000 shares or more; or
    (3) the member or member organization is engaging in bona fide 
arbitrage or risk arbitrage transactions, and recording such 
transactions in an account used solely to record arbitrage transactions 
(an ``arbitrage account'').
    (c) The provisions of this Rule shall not apply to:

[[Page 8245]]

    (1) [to] any purchase or sale of any security in an amount of less 
than the unit of trading made by an odd-lot dealer to offset odd-lot 
orders for customers; [or]
    (2) [to] any purchase or sale of any security upon terms for 
delivery other than those specified in such unexecuted market or 
limited price order[.];
    (3) transactions by a member or member organization acting in the 
capacity of a market maker pursuant to Securities and Exchange 
Commission Rule 19c-3 in a security listed on the Exchange; and
    (4) transactions by a member or member organization acting in the 
capacity of a specialist or market maker on another national securities 
exchange.

Supplementary Material

    .10  A member or employee of a member or member organization 
responsible for entering proprietary orders shall be presumed to have 
knowledge of a particular customer order unless the member organization 
has implemented a reasonable system of internal policies and procedures 
to prevent the misuse of information about customer orders by those 
responsible for entering such proprietary orders.
    .20  If both the propriety and customer orders which are the 
subject of the transaction under review were executed in another market 
center, the Exchange would refer the trading to that market's 
regulatory staff, unless that market center does not have a 
substantially similar rule relating to ``trading along'' activity 
executed in that market center. If the market does not have a 
substantially similar rule, Exchange Rules would govern the analysis.
    If either the proprietary or customer order was executed on the 
Exchange and the other market center has a rule which is not 
substantially similar, the Exchange would pursue the matter under its 
Rules. However, if the rules are substantially similar, the rule of the 
market center where the proprietary trading occurred would govern the 
analysis of that trading. In any case, all investigations would be 
coordinated through existing Intermarket Surveillance Group procedures.
    To be substantially similar, the difference in application of the 
rules to the transaction must be minor and technical in nature, and not 
materially different such as would be the case if the other rule 
contained an additional broad exemptive clause under which the 
proprietary trading is exempted.
    .30  This Rule shall also apply to a member organization's member 
on the Floor, who may not execute a proprietary order at the same 
price, or at a better price, as an unexecuted customer order that he or 
she is representing, except to the extent the member organization 
itself could do so under this Rule.
    .40  For purpose of paragraph (b) above, the term ``account of an 
individual investor'' shall have the same meaning as the meaning 
ascribed to that term in Exchange Rule 80A. For purposes of paragraph 
(b)(1) above, the term ``proprietary facilitation account'' shall mean 
an account in which a member organization has a direct interest and 
which is used to record transactions whereby the member organization 
acquires positions in the course of facilitating customer orders. Only 
those positions which are recorded in a proprietary facilitation 
account may be liquidated as provided in paragraph (b)(1). For purposes 
of paragraph (b)(3) above, the terms ``bona fide arbitrage'' and ``risk 
arbitrage'' shall have the meaning ascribed to such terms in Securities 
Exchange Act Release 15533, January 26, 1979. All transactions effected 
pursuant to paragraph (b)(3) above must be recorded in an arbitrage 
account.
    [.10].50  A member who issues a commitment or obligation to trade 
from the Exchange through ITS or any other Application of the System 
shall, as a consequence thereof, be deemed to be initiating a purchase 
or a sale of a security on the Exchange as referred to in this Rule.
    [.20].60  See paragraph (c)(i) of Rule 900 (Basket Trading: 
Applicability and Definitions) and Rule 900 (Off-Hours Trading: 
Applicability and Definitions) in respect of the ability to initiate 
basket transactions and transactions through the ``Off-Hours Trading 
Facility'' (as Rule 900 defines that term), respectively, 
notwithstanding the limitations of this Rule.

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 Exchange 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 Exchange 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
    As previously amended, the proposed rule change would extend the 
applicability of Exchange rule 92 to trades by a member or member 
organization in NYSE-listed securities on any market center and provide 
limited exemptions to permit member organizations to trade along with 
their customers when liquidating a block facilitation position or 
engaging in bona fide arbitrage or risk arbitrage. The Exchange seeks 
to further revise the application of Exchange Rule 92 as set forth 
below.
    (a) Hedge Exemption. The Exchange proposes to add to Exchange Rule 
92 and exemption to permit member organizations to trade along with 
their customers when creating a bona fide hedge. The member or member 
organization would be allowed to trade along with a customer order of 
10,000 shares or more where the customer is not an individual investor 
and has given express permission to allow the member organization to 
trade along, provided the hedging activity meets certain conditions. 
The member or member organization must be trading to hedge the risk of 
a previously-established position, recorded as acquired in the course 
of facilitating a customer order, and the size of the offsetting 
hedging order must be commensurate with such risk. this means that a 
member organization's proprietary hedging order that meets the above 
criteria could be represented along with a working order of a customer 
who had granted consent to do so.
    The determination of what constitutes an offset or reduction of 
risk may be made by using any responsible method of calculating the 
size of the risk and type of securities which would appropriately hedge 
that risk.
    (b) Application to Other Market Centers. The previously proposed 
amendments to Exchange Rule 92 contain prohibitions against a member or 
member organization entering an order for its own or a related account 
if the person entering the order has knowledge of a customer order 
capable of execution at the same price. This prohibition is proposed to 
apply whether the trade for the customer or the member or member 
organization in a NYSE-listed security occurs on the Exchange or on 
``any other market center.'' The Exchange now proposes to incorporate 
into paragraph .20 of the proposed rule's Supplementary Material

[[Page 8246]]

the manner in which this provision concerning ``any other market 
center'' would be applied, as described below.
    If both the proprietary and agency trading which are under review 
were executed in another market center, the Exchange would refer the 
matter to that market's regulatory staff, unless that market center 
does not have a substantially similar rule relating to ``trading 
along'' activity executed in that market center. If the market does not 
have a substantially similar rule, Exchange rules would govern the 
analysis.
    If either the proprietary or agency trading were executed on the 
Exchange and the other market center has a rule which is not 
substantially similar, the Exchange would pursue the matter under 
Exchange rules. However, if the rules are substantially similar, the 
rule of the market center where the proprietary trading occurred would 
govern the analysis of that trading. All investigations would be 
coordinated through existing Intermarket Surveillance Groups 
procedures.
    To be ``substantially similar,'' the difference in application of 
the rules to the transaction must be minor and technical in nature, and 
not materially different such as would be the case if the other rule 
contained an additional broad exemptive clause under which the 
proprietary trading is exempted.
2. Statutory Basis
    The statutory basis for the proposed rule change is the requirement 
under Section 6(b)(5) of the Act \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. 
The Exchange believes the proposed rule change will enable member 
organizations to add depth and liquidity to the Exchange's market, 
while continuing to provide customer protection through the requirement 
of customer approval for trading along situations.
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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 did not solicit or receive written comments with 
respect to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of 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 Exchange 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

    Inerested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 submissions, 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 persons, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. Sec. 552, will be available for inspection and copying in 
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-94-34 and should be 
submitted by March 11, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-3930 Filed 2-17-98; 8:45 am]
BILLING CODE 8010-01-M