[Federal Register Volume 63, Number 177 (Monday, September 14, 1998)]
[Notices]
[Pages 49145-49147]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-24525]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40404; File No. SR-NYSE-98-11]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change To Amend NYSE Rule 97, 
``Limitation on Members' Trading Because of Block Positioning,'' To 
Except Transactions To Facilitate Certain Customer Stock Transactions 
or to Rebalance a Member's Index Portfolio

September 4, 1998.

I. Introduction

    On March 30, 1998, the New York Stock Exchange, Inc. (``Exchange'' 
or ``NYSE'') submitted to the Securities and Exchange Commission 
(``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 that would amend Exchange Rule 97 to except 
transactions made to facilitate certain customer stock transactions or 
to rebalance a member firm's index portfolio. The proposed rule change 
was published for comment in the Federal Register on May 19, 1998.\3\ 
The Commission received one comment on the proposal.\4\ This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 39981 (May 11, 1998), 63 
FR 27609 (May 19, 1998).
    \4\ See Letter from Julius R. Leiman-Carbia, Goldman Sachs & 
Co., to Jonathan G. Katz, Secretary, Commission, dated June 5, 1998 
(``Goldman Letter'').
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II. Description of the Proposal

    The proposed rule change would amend Exchange Rule 97, ``Limitation 
on Members' Trading Because of Block Positioning,'' to except 
transactions that facilitate certain customer transactions in: (i) 
specific stocks within a basket of stocks; (ii) blocks of stock; and 
(iii) index component stocks. The proposal also would except a member 
firm's proprietary transactions made to rebalance the member firm's 
index portfolio.
    Exchange Rule 97 currently prohibits a member firm that holds any 
part of a long stock position in its trading account, which position 
resulted from a block transaction it effected with a customer, from 
purchasing for an account in which the block positioning member firm 
has a direct or indirect interest, additional shares of such stock on a 
``plus'' or ``zero plus'' tick under certain conditions for the 
remainder of the trading day on which the member firm acquired the long 
position. In particular, the member holding the long position cannot 
purchase on a ``plus tick'' if the purchase: (1) would result in a new 
daily high; (2) is within one half hour of the close; or (3) is at a 
price higher than the lowest price at which any block was acquired in a 
previous transaction on that day. Moreover, Exchange Rule 97 precludes 
the member holding the long position from acquiring a position if it 
entails a purchase on a zero plus tick of more than 50% of the stock 
offered at a price higher than the lowest price at which any block was 
acquired in a previous transaction on that day. Under Exchange Rule 97, 
the term ``block'' is defined as a quantity of stock having a market 
value of $500,000 or more that was acquired in a single transaction. 
Exchange Rule 97 was adopted to address concerns that a member firm 
might engage in manipulative practices by attempting to ``mark-up'' the 
price of a stock to enable the position acquired in the course of block 
positioning to be liquidated at a profit, or to maintain the market at 
the price at which the position was acquired.
    The restrictions in Exchange Rule 97 presently do not apply to 
transactions that: (i) involve bona fide arbitrage or the purchase and 
sale (or sale and purchase) of securities of companies involved in a 
publicly announced merger, acquisition, consolidation or tender offer; 
(ii) offset transactions made in error; (iii) facilitate the conversion 
of options; (iv) are engaged in by specialists in their specialty 
stocks; or (v) facilitate the sale of a block of stock by a customer. 
The current exceptions under Exchange Rule 97 permit certain types of 
purchases that are effected for a permitted purpose, but do not include 
transactions solely effected to increase the block positioner's 
position.
    The proposed rule change would provide additional exceptions that 
would apply to purchases made by a block positioning member firm that 
increase a position to facilitate: (i) the sale of a basket of stocks 
by a customer; \5\ or (ii) an existing customer's order \6\ for the 
purchase of a block of stock, a specific stock within a basket of 
stocks, or a stock being added to or reweighted in an index, at or 
after the close of trading on the Exchange. This second proposed 
provision (Exchange Rule 97(b)(6)) will permit a member organization to 
position stock to effect a cross with a customer at or after the close. 
The facilitating transactions effected under proposed Exchange Rule 
97(b)(6) must be recorded as such and the transactions in the aggregate 
may not exceed the number of shares required to facilitate the 
customer's order for such stock. Finally, the proposal would except 
proprietary transactions made by a member firm due to a stock's 
addition to an index or an increase in a stock's weight in an index, 
provided that the transactions in the aggregate do not exceed the 
number of shares required to rebalance the member firm's index 
portfolio.\7\
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    \5\ This provision would extend the current exception that 
applies to a subsequent facilitation trade of block size (Exchange 
Rule 97(b)(5)) to a facilitation trade of less than block size 
provided that the stock was part of a basket of stocks being sold by 
a customer.
    \6\ The term ``existing customer's order'' refers to an already 
existing order of a customer. Thus, the proposal does not provide an 
exception for anticipatory hedging. Telephone conversation between 
Agnes Gautier, Vice President, Market Surveillance, Exchange; 
Richard Strasser, Assistant Director; and Michael Loftus, Attorney, 
Division of Market Regulation, Commission (June 25, 1998).
    \7\ Proposed Exchange Rule 97(b)(7).
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    The Exchange has represented that a member firm's purchases 
exempted under proposed Exchange Rule 97(b)(6) would remain subject to 
the limitations on positioning to facilitate customer orders as 
discussed in Exchange Information Memorandum No. 95-28, ``Positioning 
to Facilitate Customer Orders.'' \8\ These limitations generally 
preclude a block positioner that has committed to sell securities after 
the

[[Page 49146]]

close to a customer at the closing price from being in the market on a 
proprietary basis after 3:40 P.M. when it has left a portion of its 
positioning to be executed at the close, and such at-the-close 
proprietary order can be reasonably expected to impact the closing 
price.
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    \8\ See Securities Exchange Act Release No. 35837 (June 12, 
1995), 60 FR 31749 (June 16, 1995).
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    The Exchange believes the proposed exceptions to facilitate certain 
customer transactions are appropriate because these types of 
transactions are effected to accommodate a customer. The Exchange 
further believes the proposed exception for member firm proprietary 
transactions related to a stock's addition to, or increased weight in, 
an index is appropriate because such purchases are usually made at the 
close of trading to obtain the closing price of the index and therefore 
are indifferent to the price level so long as it represents the closing 
valuation.
    The proposal also would expand the Rule's Supplementary Material, 
Section .10, ``Definitions,'' to provide definitions for ``basket'' and 
``index.'' The term ``basket'' would be defined as a group of 15 or 
more stocks having a total market value of $1 million or more.
    The Exchange represented that this definition is consistent with 
the use of ``basket'' in the definition of program trading that appears 
in Exchange Rule 80A. The proposal would define ``index'' as a publicly 
disseminated statistical composite measure based on the price or market 
value of the component stocks in a group of stocks. The Exchange 
believes this definition would preclude the possibility of a firm 
creating an ``index'' for the purpose of circumventing the restrictions 
of the Rule.

III. Summary of Comments

    The Commission received one comment letter on the proposed rule 
change.\9\ The commenter supported the proposal. The commenter argued 
that the current restrictions prevent NYSE members from effectively 
accumulating principal positions necessary to facilitate a customer's 
buying interest in basket and index transactions. The commenter 
concluded that the proposal would enhance the ability of NYSE members 
to facilitate customers' basket and index transactions.
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    \9\ See Goldman Letter, supra note 3.
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IV. Discussion

    For the reasons discussed below, the Commission finds that the 
proposed rule change is consistent with the Act and the rules and 
regulations under the Act applicable to a national securities exchange. 
In particular, the Commission believes the proposed rule change is 
consistent with the Section 6(b)(5) \10\ requirements that the rules of 
an exchange be designed 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.\11\
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    \10\ 15 U.S.C. 78f(b)(5).
    \11\ In approving this proposed rule change, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
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    Exchange Rule 97 is an anti-manipulative rule designed to limit a 
member firm's trading for its own account for the remainder of a 
trading day during which it has positioned a block of stock. As the 
Exchange notes, Exchange Rule 97 was originally intended to prevent 
member firms from marking up the price of a stock to ensure that a 
block of such stock, which the member had acquired that day, could be 
sold at a profit. Exchange Rule 97 also was intended to prevent 
manipulative transactions by member firms designed to maintain the 
market at the price at which a block position was acquired.
    Certain types of transactions were excepted from Exchange Rule 97's 
restrictions. The restrictions on Exchange Rule 97 currently do not 
extend to transactions that: (i) involve bona fide arbitrage or the 
purchase and sale (or sale and purchase) of securities of companies 
involved in a publicly announced merger, acquisition, consolidation or 
tender offer; (ii) offset transactions made in error; (iii) facilitate 
the conversion of options; (iv) are engaged in by specialists in their 
specialty stocks; or (v) facilitate the sale of a block of stock by a 
customer. These exceptions permit market participants to engage in 
legitimate business transactions, without raising concerns of abusive 
market practices that Exchange Rule 97 was intended to address.
    The Commission believes the Exchange's proposed rule change 
likewise excepts certain transactions that will permit legitimate 
business practices without running afoul of the spirit of Exchange Rule 
97. The proposal would except member firm transactions from the 
restrictions of Exchange Rule 97 if they were made to facilitate 
customers' transactions in: (i) specific stocks within a basket of 
stocks; (ii) blocks of stock; and (iii) index component stocks. The 
proposal also would except a member firm's proprietary transactions if 
they were made to rebalance the member firm's index portfolio. However, 
consistent with the current exceptions to Exchange Rule 97, the 
proposal does not include transactions solely effected to increase a 
member firm's position.
    By recognizing the innovative trading strategies employed by member 
firms and the myriad of facilitation services provided to customers, 
the Commission believes the proposal will ensure that Exchange Rule 97 
remains relevant and does not become unnecessarily restrictive. The 
Commission notes that the Exchange previously amended Exchange Rule 97 
in 1991 to revise the definition of ``block''.\12\ Prior to the 
amendment, the term block was applied to any single stock transaction 
valued at more than $200,000. The 1991 amendment revised the dollar 
threshold to $500,000. In approving the amendment, the Commission 
stated that the higher dollar threshold was more relevant and that the 
previous test was unnecessarily restrictive. The Commission believes 
the Exchange's current proposal is similar to the 1991 amendment in 
that it modifies Exchange Rule 97 to maintain its relevancy and prevent 
it from becoming overly restrictive over time while maintaining the 
important protections that the rule provides.
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    \12\See Securities Exchange Act Release No. 29318 (June 17, 
1991), 56 FR 28937 (June 25, 1991).
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    As the Exchange notes, notwithstanding the narrow exceptions to 
Exchange Rule 97 in the proposal, members' facilitation transactions 
continue to be subject to the limitations on positioning to facilitate 
customer orders as discussed in Exchange Information Memorandum No. 95-
28.\13\ In particular, member organizations are required to establish 
and maintain procedures reasonably designed to review facilitation 
activities for compliance with Exchange rules and federal securities 
laws. Moreover, it is incumbent on the Exchange in carrying out its 
regulatory responsibilities with respect to its members to ensure that 
proper procedures are in place and that they are being enforced in a 
manner designed to detect and punish violations of Exchange Rule 97, as 
well as other applicable Exchange rules and the federal securities laws 
generally.
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    \13\ See supra note 8.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-NYSE-98-11) is approved.

    \14\ 15 U.S.C. 78s(b)(2).

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[[Page 49147]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-24525 Filed 9-11-98; 8:45 am]
BILLING CODE 8010-01-M