[Federal Register Volume 63, Number 200 (Friday, October 16, 1998)]
[Notices]
[Pages 55661-55664]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-27822]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40538; File No. SR-BSE-98-06]


Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval to Proposed 
Rule Change and Amendment No. 1 to the Proposed Rule Change Seeking 
Permanent Approval of the Exchange's Market-On-Close Order Handling 
Requirements Pilot Program

October 9, 1998.
    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 August 13, 1998, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the BSE. On 
September 17, 1998, the Exchange submitted Amendment No. 1 to the 
proposal.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons and to 
grant accelerated approval to the proposal, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Karen A. Aluise, Vice President, BSE to 
Richard Strasser, Assistant Director, Division of Market Regulation, 
Commission dated September 15, 1998 (``Amendment No. 1''). In 
Amendment No. 1, the Exchange requests permanent approval of the 
pilot program relating to market on-close orders.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange seeks to amend its current pilot program regarding 
procedures for market-on-close (``MOC'') orders\4\ to mirror changes 
recently made to the comparable New York Stock Exchange (``NYSE'') and 
American Stock Exchange (``Amex'') rules. Also, the Exchange seeks 
permanent approval of its MOC pilot procedures as amended by this 
proposal.
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    \4\ A MOC order is a market order to be executed in its entirety 
at the closing price on the Exchange.
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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 BSE 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 BSE 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 purpose of the proposed rule change is to amend the current 
pilot program for the handling of MOC orders\5\ to mirror recent 
changes made by the NYSE\6\ and the Amex\7\ and to seek permanent 
approval of the pilot program. The Exchange's current rules provide for 
different treatment of MOC orders on Expiration Fridays and Quarterly 
Index Expiration Days\8\ than on non-expiration days.\9\ In addition,

[[Page 55662]]

the current rules provide for the publication of order imbalances of 
50,000 shares or more only in the pilot stocks,\10\ stocks being added 
to or dropped from an index, and upon the request of a specialist, any 
other stock with the approval of a floor official.\11\
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    \5\ The Exchanges' current pilot program will expire on October 
31, 1998. See Securities Exchange Act Release No. 39327 (November 
14, 1997), 62 FR 62381 (November 21, 1997).
    \6\ See Securities Exchange Act Release No. 40094 (June 15, 
1998), 63 FR 33975 (June 22, 1998) (NYSE MOC Approval Order).
    \7\ See Securities Exchange Act Release No. 40123 (June 24, 
1998), 63 FR 36280 (July 2, 1998) (Amex MOC Approval Order). In the 
Amex MOC approval order, the Amex also adopted a rule allowing the 
Amex to accept limit-at-the-close (``LOC'') orders. Id. At this 
time, the BSE does not accept LOC orders.
    \8\ 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'').
    \9\ See BSE Rules Secs. 22(A) and 22(B).
    \10\ The pilot stocks consist 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 500 groups 
of stocks.
    \11\ See BSE Rules Secs. 22(A)(c) and 22(B)(c).
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    While the deadline for entry of indications of interest by floor 
brokers to the specialist and the cancellation of MOC orders on 
Expiration Fridays and Quarterly Index Expiration Days is currently set 
at 3:40 p.m., the deadline on non-expiration days is currently set at 
3:50 p.m.\12\ The Exchange seeks to adopt the same time frame as the 
primary markets, which recently amended their respective procedures to 
set the deadline at 3:40 p.m. in all stocks on all trading days.\13\
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    \12\ See BSE Rules Secs. 22(A)(a) and 22(B)(a).
    \13\ See Amex MOC Approval Order, supra note 7 and NYSE MOC 
Approval Order, supra note 6.
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    The current rules also address the publication of order imbalances 
of 50,000 shares or more on Expiration Fridays and Quarterly Index 
Expiration Days. Currently, publication is required as soon as 
practicable after 3:40 p.m. on expiration days, and as soon as 
practicable after 3:50 p.m. on nonexpiration days. The Exchange seeks 
to provide that publication of order imbalances of 50,000 shares or 
more in NYSE-listed securities (and 25,000 shares or more in Amex-
listed securities) shall occur as soon as practicable after 3:40 p.m. 
on all trading days, bringing the BSE rule into conformity with its 
primary market counterparts.
    An additional publication shall be required at 3:50 p.m. on all 
trading days for any NYSE-listed security that had an imbalance 
publication at 3:40 p.m. If the imbalance at 3:50 p.m. is less than 
50,000 shares, a ``no imbalance'' status must be published, although 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. If the 3:50 p.m. imbalance publication reversed the first 
imbalance publication, only MOC orders that offset the 3:50 p.m. 
imbalance would be permitted to be entered thereafter. This requirement 
is intended to present market participants with a more timely and 
accurate picture of imbalances before the close.
    In addition, the current rules provide for the publication of order 
imbalances (on both Expiration Fridays/Quarterly Index Expiration Days 
and non-expiration days) in the pilot stocks, stocks being added to or 
dropped from an index, and upon the request of a specialist, any other 
stock with the approval of a floor official. The Exchange seeks to 
publish order imbalances in all stocks on all trading days, also in 
conformity with the primary market rules.\14\
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    \14\ See NYSE MOC Approval Order, supra note 6.
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    The Exchange proposes to adopt language that will permit, but not 
require, the publication of order imbalances of less than 50,000 shares 
in NYSE-listed securities (and less than 25,000 shares in Amex-listed 
securities) as soon as practicable after 3:40 p.m. in any stock with 
the approval of a floor official, thereby permitting the publication of 
an imbalance which, although less than 50,000 (25,000) shares, may be 
significantly greater than the average daily volume in a stock.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with Section 6 of the Act \15\ and the rules and regulations 
thereunder. In particular, the Commission believes that the proposal is 
consistent with the Section 6(b)(5) \16\ 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.\17\
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    \15\ 15 U.S.C. 78f.
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ 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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    In recent years, the Exchange and other self-regulatory 
organizations have instituted certain safeguards to minimize excess 
market volatility that may arise from the liquidation of stock 
positions at the end of the trading day. Special procedures regarding 
the entry of MOC orders on Expiration Fridays were first used by the 
NYSE 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.\18\
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    \18\ See Securities Exchange Act Release No. 24926 (September 
17, 1987), 52 FR 24926 (approving File No. SR-NYSE-87-32 and noting 
that the MOC procedures described therein had been utilized on a 
quarterly basis since September 1986).

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[[Page 55663]]

These procedures allow specialists to determine the burying and selling 
interest in MOC orders and, if there is a substantial imbalance on one 
side of the market, to provide the investing public with timely and 
reliable notice of the imbalance and with an opportunity to make 
appropriate investment decisions in response. Based on the NYSE's 
experience,\19\ the Commission believes that the MOC order handling 
requirements work relatively well and may result in more orderly 
markets at the close on expiration days.
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    \19\ The NYSE has submitted to the Commission several monitoring 
reports describing its experience with the auxiliary closing 
procedures. For further discussion of the reports filed by the NYSE, 
see Securities Exchange Act Release No. 36404 (October 20, 1995), 60 
FR 55071 (approving File No. SR-NYSE-95-28). The most recent report 
filed by the NYSE was received on May 14, 1998.
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    In today's highly competitive market environment, however, it is 
possible that a regional exchange, which trades NYSE-and Amex-listed 
stocks but does not have comparable closing procedures, could be 
utilized by market participants to enter MOC orders prohibited on the 
primary markets. Although the Commission has no reason to believe that 
the BSE market has become a significant alternative market to enter 
otherwise prohibited MOC orders, the Commission agrees with the BSE 
that, if this possibility were realized, it could have a negative 
impact on the fairness and orderliness of the national market 
system.\20\ Accordingly, the Commission believes that it is reasonable 
for the BSE to adopt procedures for the handling of MOC orders that 
mirror those of the NYSE and Amex, thereby ensuring the equal treatment 
of orders in those markets and, in the event of unusual market 
conditions, offering the BSE the same benefits in terms of potentially 
reducing volatility.
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    \20\ For example, if MOC orders prohibited on the NYSE and Amex 
were entered instead on the BSE, unusually large MOC order 
imbalances on the regional exchange could contribute to overall 
market volatility.
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    In this regard, the Commission notes that the proposed rule change 
will standardize the BSE's closing procedures on expiration and non-
expiration days with those on the NYSE and Annex.\21\ The proposal will 
impose a deadline of 3:40 p.m. for entry of all MOC orders on both 
expiration and on-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 order after 3:40 p.m., the Commission believes that 
these requirements should allow the specialist to make a timely and 
reliable assessment, on expiration and non-expiration days alike, of 
MOC order flow and its potential impact on closing prices.
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    \21\ See Amex MOC Approval Order, supra note 7, and NYSE MOC 
Approval Order, supra note 6.
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    The proposal will also provide that publication of order imbalances 
of 50,000 shares or more in all NYSE-listed securities (and 25,000 
shares or more in all Amex-listed securities) shall occur as soon as 
practicable after 3:40 p.m. on all trading days. An additional 
publication shall be required at 3:50 p.m. on all trading days for any 
NYSE-listed security which had an imbalance publication at 3:40 p.m. If 
the imbalance at 3:50 p.m. is less than 50,000 shares, a ``no 
imbalance'' status must be published, although 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. If the 
3:50 p.m. imbalance publication reversed the first imbalance 
publication, only MOC orders which offset the 3:50 p.m. imbalance would 
be permitted to be entered thereafter.
    Finally, the proposal permits, but does not require, the 
publication of order imbalances of less than 50,000shares in NYSE-
listed securities (and less than 25,000 shares in Amex-listed 
securities) as soon as practicable after 3:40 p.m. in any stock with 
the approval of a floor official, thereby permitting the publication of 
an imbalance which, although less than 50,000 (25,000) shares, may be 
significantly greater than the average daily volume in a stock.
    The Commission believes that the enhanced publication requirements 
described above are appropriate and consistent with the Act. Requiring 
an additional order imbalance publication at 3:50 p.m. for all NYSE-
listed securities having a published imbalance as of 3:40 p.m. is 
consistent with the current practice on the NYSE and may help ease 
market volatility at the close by attracting additional offsetting MOC 
orders for stocks that have a significant order imbalance as of 3:50 
p.m. In addition, the Commission believes that allowing the publication 
of imbalances of less than 50,000 (25,000) shares in all stocks with 
the approval of a floor official is consistent with the practice on the 
NYSE and Amex and may assist in easing volatility at the close. With 
respect to changing the deadline for entering MOC orders on non-
expiration days, the Commission believes that, by giving market 
participants more time to

[[Page 55664]]

react to published MOC order imbalances, the proposal may contribute to 
reducing volatility at the close. Finally, the proposal requests that 
the Commission permanently approve the Exchange's MOC pilot program. As 
noted above, these auxiliary closing procedures have been used by the 
NYSE since 1986 without significant difficulty. Therefore, the 
Commission believes that it is appropriate at this time to approve the 
Exchange's pilot program on a permanent basis.
    The Commission finds good cause for approving the proposed rule 
change and Amendment No. 1 to the proposed rule change prior to the 
thirtieth day after the date of publication of notice of filing of this 
proposal in the Federal Register. As discussed in more detail above, 
the changes made in this proposal are identical to changes made by the 
NYSE and the Amex.\22\ As a result, the Commission does not believe 
that the proposal raises any new regulatory issues. Further, the 
Commission notes that the Amex and NYSE proposals were published for 
the full 21-day comment period during which no comment letters against 
either proposal were received by the Commission. Accordingly, the 
Commission believes there is good cause, consistent with Sections 
6(b)(5) and 19(b) \23\ of the Act, to approve the Exchange's proposal 
and Amendment No. 1 to the Exchange's proposal on an accelerated basis.
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    \22\ Id.
    \23\ 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78s(b).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the proposed rule change and Amendment No. 1, 
including whether it 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 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 BSE. All submissions should refer to File No. 
SR-BSE-98-06 and should be submitted by November 6, 1998.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-BSE-98-06) is approved.

    \24\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-27822 Filed 10-15-98; 8:45 am]
BILLING CODE 8010-01-M