[Federal Register Volume 63, Number 119 (Monday, June 22, 1998)]
[Notices]
[Pages 33975-33978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-16510]


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SECURITIES AND EXCHANGE COMMISSION

[Docket No. 34-40094; File No. SR-NYSE-97-36]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval to Amendment No. 2 Thereto To Revise 
Exchange Policy for Entry of MOC/LOC Orders and Publication of 
Imbalances

June 15, 1998.

I. Introduction

    On December 29, 1997, the New York Stock Exchange, Inc. (``NYSE'' 
or ``Exchange'') filed with 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

[[Page 33976]]

thereunder,\2\ a proposed rule change to revise the Exchange's policy 
for entry of market-on-close (``MOC'') and limit-at-the-close (``LOC'') 
orders and publication of order imbalances for both expiration and non-
expiration days. On March 18, and June 4, 1998, respectively, the 
Exchange submitted Amendments No. 1\3\ and No. 2\4\ to the proposed 
rule change to the Commission.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Donald Siemer, Director, Market 
Surveillance, NYSE to Richard Strasser, Assistant Director, Division 
of Market Regulation (``Division''), Commission dated March 13, 1998 
(``Amendment No. 1'').
    \4\ See Letter from Agnes M. Gautier, Vice President, Market 
Surveillance, NYSE to David Sieradzki, Attorney, Division, 
Commission dated June 1, 1998 (``Amendment No. 2''). In Amendment 
No. 2, the Exchange clarifies the proposal to indicate that, where a 
bona fide error has been made, causing the cancellation of an order, 
or an order was improperly entered when there was no imbalance, 
resulting in an imbalance of 50,000 shares or more at 3:50 p.m., the 
Exchange would publish the imbalance even though there had been no 
3:40 p.m. publication.
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    The proposed rule change, including Amendment No. 1, was published 
for comment in the Federal Register on March 26, 1998.\5\ One comment 
was received on the proposal.\6\ This order approves the proposal as 
amended.
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    \5\ Securities Exchange Act Release No. 39770 (Mar. 18, 1998), 
63 FR 14747 (Mar. 26, 1998).
    \6\ See Letter from Terry McCloskey, Vice President, BNP 
Securities, Inc. to Jonathan G. Katz, Secretary, Commission dated 
April 15, 1998 (``BNP Letter'').
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II. Description of the Proposal

    Special procedures regarding the entry of MOC and LOC orders \7\ 
have been in place on the Exchange for more than ten years.\8\ These 
procedures are designed to alleviate excess volatility at the close by 
providing MOC and LOC imbalance information to market participants in a 
timely manner to attract contra-side interest. The procedures have been 
refined over the years based on the Exchange's experience and input 
from constitutes.\9\ The Exchange is now proposing additional 
refinements to the procedures to enhance their usefulness.
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    \7\ A MOC order is a market order to be executed in its entirely 
at the closing price on the Exchange. A LOC order is a limit order 
entered for execution at the closing price, provided that the 
closing price is at or within the limit specified. See NYSE Rule 13.
    \8\ The Exchange's pilot program for expiration day auxiliary 
closing procedures was permanently approved by the Commission on 
October 30, 1996. See Securities Exchange Act Release No. 37894 
(Oct. 30, 1996), 61 FR 56987 (Nov. 5, 1996) (order approving SR-
NYSE-96-31).
    \9\ The Exchange's LOC pilot program will expire on July 31, 
1998. The Exchange has requested that the Commission permanently 
approve the program (SR-NYSE-98-15).
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Current Procedures

    The current procedures require that MOC and LOC orders in any stock 
be entered by 3:40 p.m. on expiration days, and by 3:50 p.m. on non-
expiration days.\10\ A member may not cancel or reduce a MOC or LOC 
order in any stock after 3:40 p.m. on expiration days or 3:50 p.m. on 
non-expiration days, (except in a case of legitimate error or to comply 
with the provisions of Exchange Rule 80A). In addition, Floor brokers 
representing any MOC orders must indicate their MOC interest to the 
specialist by 3:40 p.m. or 3:50 p.m., for expiration and non-expiration 
days, respectively.
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    \10\ 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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    For the selected stocks identified by the Exchange (formerly known 
as ``pilot stocks'') \11\ and published in its ``special stock list,'' 
a single publication of imbalances of 50,000 shares or more must be 
made as soon as practicable after 3:40 p.m. on expiration days or 3:50 
p.m. on non-expiration days. On expiration days, stocks on the special 
stock list that do not have an imbalance of 50,000 shares or more at 
3:40 p.m. must publish a ``no imbalance'' status. Imbalances of 50,000 
shares or more must also be published for stocks going into or out of 
an index. For all other stocks (i.e., those that are not on the 
``special stock list'' and those not going into or out of an index), an 
imbalance of 50,000 shares or more may be (but is not required to be) 
published at the request of the specialist, with Floor Official 
approval. After the 3:40 p.m. or 3:50 p.m. imbalance publication, MOC 
and LOC orders may be entered only to offset a published imbalance. No 
MOC and LOC orders may be entered if there is no imbalance publication. 
On expiration days, the entry of MOC or LOC orders after 3:40 p.m. to 
establish or liquidate positions related to a strategy involving 
derivative instruments is not permitted, even if such orders might 
offset published imbalances.
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    \11\ The pilot stocks consisted of the 50 most highly 
capitalized Standard & Poor's (``S&P'') 500 stocks and any component 
stocks of the Major Market Index (``MMI'') not included in the S&P 
stock group.
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New Procedures

    In July of 1997, the NYSE's Market Performance Committee appointed 
a subcommittee to review MOC procedures. The subcommittee recommended 
that the Exchange implement several changes to increase the 
effectiveness of the procedures. These changes, which the Exchange is 
proposing to implement, are:
     The Exchange is proposing a 3:40 p.m. deadline for entry 
of MOC and LOC orders and indication of MOC interest to specialists by 
Floor brokers representing any MOC orders, every day. This earlier 
deadline (from 3:50 p.m. to 3:40 p.m.) on non-expiration days would 
provide additional time to attract contra-side interest.
     The Exchange is also proposing mandatory publication of 
all MOC/LOC imbalances of 50,000 shares or more in all stocks and any 
trading day as soon as practicable after 3:40 p.m.\12\ Publication of 
an imbalance of less than 50,000 shares may be made at that time with 
the approval of a Floor Official. This proposed new provision would 
permit, but not require, the publication of an imbalance which, 
although less than 50,000 shares, may be significantly greater than 
average daily volume in a stock.
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    \12\ As discussed above, currently, the Exchange requires 
mandatory publication of imbalances of 50,000 shares or more only in 
stocks on the Exchange's special stock list and stocks being added 
to or dropped from an index on expiration days as soon as 
practicable after 3:40 p.m. (or 3:50 p.m. for non-expiration days).
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     The Exchange is also proposing to include both MOC and 
marketable LOC orders in the imbalance publication.\13\ The 
determination of whether an LOC order is ``marketable'' would be based 
upon the last sale price at 3:40 or 3:50 p.m., depending on the time of 
the order imbalance publication. This means that LOC orders to buy at a 
higher price would be included with the buy MOC orders; LOC orders to 
sell at a lower price would be included with the sell MOC orders. LOC 
orders with a limit equal to the last sale price would not be included 
in the imbalance calculation.
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    \13\ Currently, imbalance publications indicate MOC interest but 
not LOC interest. See Amendment No. 1, supra note 3.
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     The Exchange is also proposing a new procedure to permit 
non-mandatory publication of MOC/LOC imbalances of any size between 
3:00 and 3:40 p.m., with Floor Official approval; these publications 
would be informational only, with no effect on MOC/LOC order entry. 
Imbalance information would be required to be updated at 3:40 p.m. for 
all stocks on all days, regardless of size, to provide timely imbalance 
information to market participants.
     An additional imbalance publication on both expiration and 
non-expiration days, must be made at 3:50 p.m. for any stock that had 
an imbalance

[[Page 33977]]

publication at 3:40 p.m.\14\ If the imbalance at 3:50 p.m. is less than 
50,000 shares, a ``no imbalance'' status must be published, except that 
an imbalance of less than 50,000 shares may be published with Floor 
Official approval, provided there had been an imbalance publication at 
3:40 p.m. Except under two limited circumstances,\15\ if there were no 
imbalance publication at 3:40 p.m., there would not be a publication at 
3:50 p.m., since MOC and LOC orders could not be entered during the 
interim to change the imbalance. If the 3:50 p.m. imbalance publication 
reversed the first imbalance publication, only MOC and LOC orders which 
offset the 3:50 p.m. imbalance would be permitted to be entered 
thereafter.
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    \14\ Currently, the Exchange requires only a single imbalance 
publication at 3:40 p.m. on expiration days and at 3:50 p.m. on non-
expiration days. See Amendment No. 1, supra note 3.
    \15\ See Amendment No. 2, supra note 4.
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     MOC/LOC order entry is precluded after 3:40 p.m. in all 
stocks on all days, unless an imbalance is published, in which case 
entry of MOC/LOC orders would be permitted only on the contra side of 
the published imbalance.

III. Comment Summary

    As noted above, the Commission received one comment on the 
proposal.\16\ The commenter agreed that order imbalance dissemination 
reduces volatility at the close and favors expanding imbalance 
indications to all listed issues. In addition, the commenter noted that 
neither the NYSE nor the American Stock Exchange (``Amex'') provide 
members with information regarding order imbalances at the close in 
electronic form. The commenter believes that if the NYSE and Amex were 
required to disseminate order imbalances through the Securities 
Industry Automation Corporation (``SIAC''),\17\ customers would receive 
better information and therefore, better executions.
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    \16\ See BNP Letter, supra note 6.
    \17\ SIAC processes last sale information and quotation 
information reported to it by its participants (eight national 
securities exchanges and the National Association of Securities 
Dealers, Inc.) for consolidation and dissemination to vendors and 
others.
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IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with Section 6 \18\ of the Act and the rules and regulations 
thereunder. In particular, the Commission believes that the proposal is 
consistent with the Section 6(b)(5) \19\ requirements that the rules of 
an Exchange be designed to prevent fraudulent and manipulative acts and 
practices, 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.\20\
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    \18\ 15 U.S.C. 78f.
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ In approving the proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78f(b).
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    Over the past several years, the Exchange and other self-regulatory 
organizations have been developing procedures to minimize excess market 
volatility that may arise from the liquidation of stock positions on 
expiration days.\21\ Special procedures regarding the entry of MOC 
orders on Expiration Fridays were first used in 1986 for assisting in 
handling the order flow associated with the concurrent quarterly 
expiration of stock index futures, stock index options and options on 
stock index futures on Expiration Fridays.\22\ On April 10, 1995, the 
Commission approved a proposed rule change to institute similar 
auxiliary closing procedures on non-expiration days.\23\ Finally, on 
March 3, 1994, the Exchange, as an additional means of attracting 
contra-side interest to help alleviate MOC order imbalances, initiated 
a pilot program relating to the entry of LOC orders on both expiration 
and non-expiration days.\24\ These procedures allow NYSE specialists to 
obtain an indication of the buying and selling interest in MOC/LOC 
orders at the end of the day. If there is a substantial imbalance on 
one side of the market, the procedures provide the investing public 
with timely and reliable notice of that imbalance and with an 
opportunity to make appropriate investment decisions in response.
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    \21\ See supra note 8.
    \22\ See supra note 10.
    \23\ See Securities Exchange Act Release No. 35589 (April 10, 
1995), 60 FR 19313 (April 17, 1995) (order approving SR-NYSE-94-44).
    \24\ See supra note 9.
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    Generally, the NYSE auxiliary closing procedures have worked well 
and may have resulted in more orderly markets on both expiration and 
non-expiration days. Nevertheless, both the Commission and the NYSE 
remain concerned about the potential for excess market volatility, 
particularly at the close on expiration days. Although, to date, the 
NYSE has been able to attract sufficient contra-side interest to 
effectuate an orderly closing, adverse market conditions could create a 
situation in which member firms and their customers would be unwilling 
to acquire significant positions.
    In this regard, the Commission notes that the proposed rule change 
may increase public awareness of MOC/LOC order imbalances and provide 
the market participants with more of an opportunity to make appropriate 
investment decisions. Specifically, the proposal will impose a deadline 
of 3:40 p.m. for entry of all MOC/LOC orders on both expiration and 
non-expiration days. Floor brokers representing MOC orders also must 
indicate their MOC interest to the specialist by 3:40 p.m. every day. 
In conjunction with the prohibition on canceling or reducing any MOC/
LOC order after 3:40 p.m., these requirements should allow the 
specialist to make a timely and reliable assessment, for every NYSE-
listed stock, on expiration and non-expiration days alike, of MOC/LOC 
order flow and its potential impact on closing prices.
    The proposal would also make several changes to imbalance 
publication procedures, which are designed to get more information to 
the public earlier in the day. First, the proposal would integrate 
marketable LOC orders into the current MOC order imbalance publication. 
Second, the proposal would require publication of MOC/LOC imbalances of 
50,000 shares or more in all securities on any trading day as soon as 
practicable after 3:40 p.m. The proposal also requires an additional 
publication of MOC/LOC imbalances of 50,000 shares or more at 3:50 p.m. 
for stocks that reported an imbalance at 3:40 p.m. If the order 
imbalance for a stock publishing an imbalance at 3:40 p.m. has fallen 
below 50,000 shares by 3:50 p.m. then, a ``no imbalance'' message must 
be posted unless Floor Official approval is sought to publish an 
imbalance of less than 50,000 shares.
    The Commission believes that the enhanced publication requirements 
described above are appropriate and consistent with the Act. 
Integrating marketable LOC orders into the order imbalance publication 
should serve to better reflect actual investor interest. Also, 
requiring an additional order imbalance publication at 3:50 p.m. for 
securities having a published imbalance as of 3:40 p.m. may help ease 
market volatility at the close by attracting additional offsetting MOC/
LOC orders for stocks that have a significant order imbalance as of 
3:50 p.m. With respect to changing the deadline for entering MOC/LOC 
orders on non-expiration days, the Commission believes that, by giving 
market participants more time to react to published MOC/LOC order 
imbalances, the proposal may contribute to reducing volatility at the 
close.

[[Page 33978]]

    Finally, the Exchange proposes to permit dissemination of MOC/LOC 
order imbalances of any size between 3:00 p.m. and 3:40 p.m. with Floor 
Official approval. These optional publications would be informational 
only and would be required to be updated at 3:40 p.m., regardless of 
size. The Commission believes that this optional publication of MOC/LOC 
order imbalances is consistent with the Act in that it should increase 
the amount of accurate market information available to the public.\25\ 
The Commission believes that this dissemination of MOC/LOC order 
imbalances prior to 3:40 p.m. could help reduce volatility at the close 
by giving market participants more time to react to reported order 
imbalances.
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    \25\ In approving this proposed rule change, the Commission is 
aware of the possibility that the publication of order imbalances on 
a more frequent basis may allow market participants to enter orders 
without the good faith intention that the order be executed, but 
instead with the intention of canceling the order and profiting in 
some way from a market reaction to the publication of the order. The 
Commission expects that the Exchange will be mindful of any 
potential formarket manipulation or other abuse that the amended 
procedures may create and that the Exchange will be vigilant in its 
surveillance efforts to ensure that the MOC/LOC procedures are 
executed in a manner consistent with the Act and the rules 
thereunder and the rules of the Exchange.
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    The Commission finds good cause for approving Amendment No. 2 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Amendment No. 2 clarifies the proposal to indicate that, under certain 
circumstances, the Exchange may publish an order imbalance at 3:50 p.m. 
where an imbalance was not published at 3:40 p.m.\26\ The Exchange has 
represented that, under certain limited circumstances described in 
Amendment No. 2 (i.e., where a bona fide error was made causing an 
order to be cancelled or an order was improperly entered when there was 
no imbalance, resulting in an imbalance of 50,000 shares or more at 
3:50 p.m.) the Exchange would publish an order imbalance at 3:50 p.m. 
even if an imbalance had not been published at 3:40 p.m. As a result, 
the Commission does not believe that Amendment No. 2 raises any new 
regulatory issues. Further, the Commission notes that the original 
proposal was published for the full 21-day comment period during which 
one comment, generally supporting the proposal, was received by the 
Commission. Accordingly, the Commission believes there is good cause, 
consistent with Sections 6(b)(5) and 19(b) \27\ of the Act, to approve 
Amendment No. 2 to the Exchange's proposal on an accelerated basis.
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    \26\ See Amendment No. 2, supra note 4.
    \27\ 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78s(b).
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2, including whether that amendment 
is consistent with the Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW, Washington, DC 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 NYSE. All 
submissions should refer to File No. SR-NYSE-97-36 and should be 
submitted by July 13, 1998.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change (SR-NYSE-97-36) is approved as 
amended.

    \28\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-16510 Filed 6-19-98; 8:45 am]
BILLING CODE 8010-01-M