[Federal Register Volume 63, Number 35 (Monday, February 23, 1998)]
[Notices]
[Pages 9034-9035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4401]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39666; File No. SR-NYSE-98-06]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc. To Amend Exchange Rule 80B 
(``Trading Halts Due to Extraordinary Market Volatility'')

February 13, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on February 10, 1998, the New York Stock Exchange, 
Inc. (``NYSE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change 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.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 amendments to Exchange Rule 
80B (``Trading Halts Due to Extraordinary Market Volatility'').

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 test 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.
    Rule 80B provides, in part, that if the Dow Jones Industrial 
Average sm (``DJIA'') \3\ falls 350 or more points below its 
previous trading day's closing value, trading in all stocks on the 
Exchange will halt for one half-hour, except that if the 350 or more 
point decline is reached at or after 3:00 p.m., there will be no halt 
in trading. It further provides that if on the same day the DJIA drops 
550 or more points from its previous trading day's close, trading on 
the Exchange will halt for one hour, except that if the 550 point 
decline occurs after 2:00 p.m., but before 3:00 p.m., the halt will be 
one half-hour instead of one hour. But if the 550 point drop occurs in 
the last hour of trading (at or after 3:00 p.m.), the Exchange will 
close for the rest of the day. These provisions are in effect on a 
pilot basis through April 30, 1998.
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    \3\ ``Dow Jones Industrial Average'' is a service mark of Dow 
Jones & Company, Inc.
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    Some believe that the current trigger levels are too low given the 
current DJIA level of approximately 8000. Others believe that static 
point values are unresponsive to dynamic market conditions, and prefer 
triggers based on a percentage of the DJIA, so that the triggers will 
move with the market. The Exchange is now proposing revisions to the 
trigger levels that address these concerns.
    a. The Proposal. The Exchange proposes to set the triggers at 10%, 
20% and 30% of the DJIA, calculated at the beginning of each calendar 
quarter, using the average closing value of the DJIA for the prior 
month, thereby establishing specific point values for the quarter. Each 
trigger will be rounded to the nearest 50 points.
    Generally, the halt for a 10% decline will be one hour. If the 10% 
trigger value is reached at or after 2:00 p.m., but before 2:30 p.m., 
the halt would be one half hour; at or after 2:30 p.m. the market would 
continue trading, unless a 20% decline occurred, in which case the 
market would close for the remainder of the day. Generally, the halt 
for a 20% decline will be two hours. If the 20% trigger value is 
reached at or after 1:00 p.m. but before 2:00 p.m. the halt would be 
one hour; at or after 2:00 p.m., trading would halt for the rest of the 
day. If the market declines by 30%, at any time, trading will be halted 
for the remainder of the day.
    The Exchange has expanded the duration of the halts early in the 
day to address concerns that shorter periods were too compressed to 
respond adequately to extreme declines in the market. The Exchange 
believes that by varying the duration of the halt periods depending on 
the severity of the decline and the time of day it occurs, Rule 80B 
strikes a balance between the desire to reopen after a market-wide 
trading halt due to extraordinary volatility, and the need for there to 
be sufficient time before the scheduled close to allow for an orderly 
reopening.
    The Exchange has filed a petition \4\ with the Commission to amend 
Rule 10b-18\5\ under the Exchange Act to extend the ``safe harbor'' 
provisions of the Rule. The Exchange wishes to reiterate its position, 
expressed in the petition, particularly in view of the amendments to 
Rule 80B proposed herein, that an expansion of the safe harbor 
provisions of Rule 10b-18 following a market-wide trading halt would 
benefit the market by providing additional liquidity during times of 
market stress. The Exchange requests that the Commission address the 
Exchange's concerns and amend Rule 10b-18 as proposed in the petition.
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    \4\ See letter to Jonathan Katz, Secretary, Commission, from 
James E. Buck, Senior Vice President and Secretary, NYSE, dated 
January 8, 1998.
    \5\ 17 CFR 240.10b-18.
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    b. Price indications. The Exchange also proposes to amend Rule 80B 
to require that price indications be made during an intra-day Rule 80B 
trading halt for the stocks comprising the DJIA. This is designed to 
supply information to market participants on expected pricing levels 
for these highly capitalized stocks, and, thereby, the Index. 
Specialists in these stocks will have the responsibility to disseminate 
these price indications. Indications may

[[Page 9035]]

also be disseminated in other stocks with Floor Official approval.
    Floor Official supervision and approval is mandatory for any 
indication, including stocks in the DJIA, that represents a change from 
the last sale of one point or more for stocks priced under $10, the 
lesser of 10% or three points from a last sale for stocks priced 
between $10 and $99 \15/16\, and five points from the last sale for 
stocks priced at $100 or more. Indications in stocks in the DJIA which 
do not represent such a change do not require Floor Official approval.
    c. Background. Rule 80B was enacted in response to studies of the 
October 1987 Market Break. One such study was the Interim Report of the 
Working Group on Financial Markets issued by the Under Secretary for 
Finance of the Department of the Treasury and the Chairmen of the 
Securities and Exchange Commission, the Commodity Futures Trading 
Commission and the Board of Governors of the Federal Reserve System in 
May, 1988. This ``Working Group'' recommended ``coordinated trading 
halts and reopenings for large, rapid market declines that threaten to 
create panic conditions.'' The ``Working Group'' specifically 
recommended, and the Exchange endorsed, temporary halts in the trading 
of all stocks, stock options, and stock index options as well as the 
trading of stock index futures and options on stock index futures when 
the DJIA reaches certain trigger values. The Presidential Task Force on 
Market Mechanisms (``Brady Commission'') also endorsed the concept of 
coordinated market trading halts.
    Rule 80B was approved by the Commission on a pilot basis on October 
19, 1988, and was extended annually, most recently until April 30, 
1998.\6\ Originally, the halt periods and trigger values were one hour 
for a decline of 250 points in the DJIA (11.7% of the DJIA at that 
time), and two hours for a 400 point decline (18.7% of the DJIA at that 
time). In July 1996, the SEC approved the Exchange's proposal to reduce 
the duration of the halts to 30 minutes and one hour, respectively.\7\ 
In January 1997, the trigger values were increased to the current 
levels of 350 (5.1% of the DJIA at that time) and 550 points (8.1% of 
the DJIA at that time).\8\
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    \6\ See Exchange Act Release No. 39582 (January 26, 1998) 63 FR 
5408 (February 2, 1998).
    \7\ See Exchange Act Release No. 37457 (July 19, 1996) 61 FR 
39176 (July 26, 1996).
    \8\ See Exchange Act Release No. 38221 (January 31, 1997) 62 FR 
5871 (February 7, 1997).
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    The circuit breakers have been triggered just once since their 
adoption. On October 27, 1997, the market closed for 30 minutes at 2:35 
p.m., and after reopening at 3:05 p.m., the Exchange halted trading for 
the remainder of the trading day when the decline reached 550 points. 
Several views on the appropriateness of the levels and the duration and 
timing of the halts were expressed. The Exchange initiated immediate 
discussions with the SEC, other markets and Exchange advisory 
committees on possible refinements to the process.
    d. Constituent input. Exchange committees comprised of trading 
professionals, specialists, brokerage houses and representatives of the 
individual investor community were asked for their views. Other 
marketplaces, including equities, options and financial futures 
markets, were likewise consulted for their views. Indeed, the Exchange 
originally adopted Rule 80B with the understanding that all United 
States stock and option exchanges and the National Association of 
Securities Dealers would adopt rules or procedures substantively 
identical to Rule 80B, and that the futures exchanges would adopt rules 
halting the trading of stock index futures and options on such futures 
contracts under circumstances substantively identical to those 
contained in Rule 80B. The above-described rule change is proposed 
contingent on that same understanding.
2. Statutory Basis
    The Exchange represents that the proposed rule change is consistent 
with Section 6(b)(5) of the Act \9\ in that it is 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 proposed rule change 
accomplishes these ends by balancing the need to halt trading 
temporarily during periods of extraordinary market volatility with the 
need to provide an open marketplace for trading securities.
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    \9\ 15 U.S.C. 78f(b).
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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 inappropriate 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 were 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:
    (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

    Interested 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 copes 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. Sec. 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-98-06 and 
should be submitted by March 16, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-4401 Filed 2-20-98; 8:45 am]
BILLING CODE 8010-01-M