[Federal Register Volume 63, Number 246 (Wednesday, December 23, 1998)]
[Notices]
[Pages 71176-71179]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33910]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40797; File No. SR-NYSE-98-45]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc. Relating to Amendments to 
Rule 80A

December 15, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''), notice is hereby given that on December 8, 1998, 
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 self-regulatory organization. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend the NYSE's Rule 80A. Below is the 
current text of Rule 80A which would be deleted under the proposed rule 
change and the proposed text of Rule 80A as it would read under the 
proposed rule change. Deletions are in brackets and additions are in 
italics.
    [(a)(i) If, during any trading day, the price of the primary 
Standard and Poor's 500 Stock Price Index futures contract traded on 
the Chicago Mercantile Exchange (``S&P 500 futures'')* reaches a value 
12 points below the S&P 500 future's closing value on the previous 
trading day (the ``trigger value''), for the next five minutes market 
orders involving program trading in each of the stocks underlying the 
S&P 500 futures entered into the Exchange's automated order-routing 
facilities shall be routed to a separate file for each such stock. Buy 
and sell orders for each stock will be paired in the file to determine 
the extent of the order imbalance, if any.
    (ii) Five minutes after the price of the S&P 500 futures reaches 
the trigger value, the orders in the program trading file for each 
stock, and the order imbalance, if any, shall be reported to the 
specialist in the stock and the orders shall be eligible for execution; 
provided, however, that trading in a stock on the Exchange shall halt 
if there is not sufficient trading interest on the Exchange to allow 
for an orderly execution of a transaction in the stock.
    (b) Whenever the price of the S&P 500 futures reaches the trigger 
value, no member or member organization shall enter any stop order or 
stop limit order for the remainder of the trading day except that a 
member or member organization may enter a stop order or a stop limit 
order of 2,099 shares or less for the account of an individual investor 
pursuant to instructions received directly from the individual 
investor.
    (c) On any day when the Dow Jones Industrial Average** has advanced 
by 50 points or more from its closing value on the previous trading 
day, all index arbitrage orders to buy any component stock of the S&P 
500 Stock Price Index must be entered with the instruction ``buy 
minus.'' If, on that day, the Dow Jones Industrial Average subsequently 
reaches a value that is 25 points or less above the closing value on 
the previous trading day, this requirement shall not apply. This 
principle shall govern the imposition and removal of the buy minus 
requirement as to all subsequent movements in the Dow Jones Industrial 
Average on that day. On any day when the Dow Jones Industrial Average 
has declined by 50 points or more from its closing value on the 
previous day, all index arbitrage orders to sell must be entered with 
the instruction ``sell plus.'' If, on that day, the Dow Jones 
Industrial Average subsequently reaches a value that is 25 points or 
less below the closing value on the previous trading day, this 
requirement shall not apply. This principle shall govern the imposition 
and removal of the sell plus requirement as to all subsequent movements 
in the Dow Jones Industrial

[[Page 71177]]

Average on that day. All orders containing the instruction buy minus or 
sell plus shall be executed as provided in Rule 13.
    (d) On any day when the Dow Jones Industrial Average has advanced 
by 50 points or more from its closing value on the previous trading 
day, no transaction to buy a basket of stocks may be effected at a 
price which is equal to or greater than the aggregate Tier 1 offer (as 
defined in Rule 803(e)) or the cash equivalent. If, on that day, the 
Dow Jones Industrial Average subsequently reaches a value that is 25 
points or less above the closing value on the previous trading day, 
this restriction regarding the purchase of a basket of stocks shall not 
apply. This principle shall govern the imposition and removal of the 
restriction regarding the purchase of a basket of stocks as to all 
subsequent movements in the Dow Jones Industrial Average on that day. 
On any day when the Dow Jones Industrial Average has declined by 50 
points or more from its closing value on the previous trading day, no 
transaction to sell a basket of stocks may be affected at a price which 
is equal to or less than the aggregate Tier 1 bid (as defined in Rule 
803(e)) or the cash equivalent. If, on that day, the Dow Jones 
Industrial Average subsequently reaches a value that is 25 points or 
less below the closing value on the previous trading day, this 
restriction regarding the sale of a basket of stocks shall not apply. 
This principle shall govern the imposition and removal of the 
restriction regarding the sale of a basket of stocks as to all 
subsequent movements in the Dow Jones Industrial Average on that day. 
For purposes of this paragraph (d), the term ``basket'' shall have the 
definition contained in Rule 800(b)(iii).
    (e) For the purposes of this Rule 80A,
    (i) ``program trading'' means either (A) index arbitrage or (B) any 
trading strategy involving the related purchase or sale of a ``basket'' 
or group of 15 or more stocks having a total market value of $1 million 
or more. Program trading includes the purchases or sales of stocks that 
are part of a coordinated trading strategy, even if the purchases or 
sales are neither entered or executed contemporaneously, nor part of a 
trading strategy involving options or futures contracts on an index 
stock group, or options on any such futures contracts, or otherwise 
relating to a stock market index;
    (ii) ``index arbitrage'' means an arbitrage trading strategy 
involving the purchase or sale of a ``basket'' or group of stocks in 
conjunction with the purchase or sale, or intended purchase or sale, of 
one or more cash-settled options or futures contracts on index stock 
groups, or options on any such futures contracts (collectively, 
``derivative index products'') in an attempt to profit by the price 
difference between the ``basket'' or group of stocks and the derivative 
index products. While the purchase or sale of the stocks must be in 
conjunction with the purchase or sale of derivative index products, the 
transactions need not be executed contemporaneously to be considered 
index arbitrage; and
    (iii) ``account of an individual investor'' means an account 
covered by Section 11(a)(1)(E) of the Securities Exchange Act of 1934.
    (f) The provisions of paragraphs (a) and (b) of Rule 80A shall not 
apply during the last 35 minutes of a trading day.
    (g) The provisions of paragraphs (c) and (d) of Rule 80A shall not 
apply to index arbitrage ``market-at-the-close'' orders in liquidation 
of previously established stock positions against derivative index 
products entered on the last business day prior to the expiration or 
settlement of such derivative index products. Such orders shall be 
entered pursuant to such procedures as the Exchange may from time to 
time prescribe.

Supplementary Material

    .10 When determining the priority of bids and offers pursuant to 
Rule 72, the orders in the program trading file reported to the 
specialist pursuant to paragraph (c) shall be considered as entered on 
the Exchange at the time the orders are reported to the specialist.
    .20 The reopening of trading following a trading halt shall be 
conducted pursuant to procedures adopted by the Exchange and 
communicated by notice to its members and member organizations.
    .30 Nothing in this Rule 80A shall be construed to limit the 
ability of the Exchange to otherwise halt or suspend the trading in any 
stock or stocks pursuant to any other Exchange rule or policy.
    * ``Standard & Poor's 500 Stock Price Index'' and ``S&P 500'' are 
service marks of Standard & Poor's Corporation.
    ** ``Dow Jones Industrial Average'' is a service mark of Dow Jones 
& Company, Inc.]
    (a) All index arbitrage orders to sell any component stock of the 
S&P 500 Stock Price Index SM* must be entered with the 
instruction ``sell plus'' on any trading day when the Dow Jones 
Industrial Average SM** (``DJIA'') declines below its 
closing value on the previous trading day by at least the ``two-percent 
value'' as calculated below. This index arbitrage order entry 
requirement shall remain in effect for the remainder of the trading 
day. However, the index arbitrage order entry requirement pursuant to 
this paragraph (a) shall be removed if the DJIA subsequently reaches a 
value below its closing value on the previous trading day that is a 
decline equal to the ``one-percent value'' or less as calculated below.
    (b) All index arbitrage orders to buy any component stock of the 
S&P 500 Stock Price Index must be entered with the instruction ``buy 
minus'' on any trading day when the DJIA advances above its closing 
value on the previous trading day by at least the ``two-percent value'' 
as calculated below. This index arbitrage order entry requirement shall 
remain in effect for the remainder of the trading day. However, the 
index arbitrage order entry requirement pursuant to this paragraph (b) 
shall be removed if the DJIA subsequently reaches a value above its 
closing value on the previous trading day that is an advance equal to 
the ``one-percent value'' or less as calculated below.
    (c) The principles in paragraphs (a) and (b) shall govern the 
imposition and removal of the index arbitrage order entry requirements 
as to all subsequent movements in the DJIA on that day. Supplementary 
Material:
    .10 The ``two-percent value'' shall be calculated at the beginning 
of each calendar quarter and shall be two-percent (2.0%), rounded down 
to the nearest ten points, of the average closing value of the DJIA for 
the last month of the previous quarter. The ``one-percent value'' shall 
be one-half, rounded down to the nearest ten points, of the ``two-
percent value''.
    .20 The index arbitrage order entry restrictions shall not apply to 
index arbitrage market-at-the-close orders in liquidation of previously 
established stock positions against derivative index products entered 
on the last business day prior to the expiration or settlement of such 
derivative index products. Such orders shall be entered pursuant to 
each procedures as the Exchange may from time to time prescribe.
    .30 All orders containing the instruction ``buy minus'' or ``sell 
plus'' shall be executed as provided in Rule 13.
    .40 Definitions. (a) For purposes of this Rule 80A, ``index 
arbitrage'' means a trading strategy in which pricing is based on 
discrepancies between a ``basket'' or group of stocks and the 
derivative index product (i.e., a basis trade) involving the purchase 
or sale of a ``basket'' or group of stocks in conjunction with the 
purchase or sale,

[[Page 71178]]

or intended purchase or sale, of one or more derivative index products 
in an attempt to profit by the price difference between the ``basket'' 
or group of stocks and the derivative index products. While the 
purchase or sale of the stocks must be in conjunction with the purchase 
or sale of derivative index products, the transactions need not be 
executed contemporaneously to be considered index arbitrage. The 
term``derivative index products'' refers to cash-settled options or 
futures contracts on index stock groups, and options on any such 
futures contracts.
    (b) ``Program trading'' means either (A) index arbitrage or (B) any 
trading strategy involving the related purchase or sale of a ``basket'' 
or group of 15 or more stocks having a total market value of $1 million 
or more. Program trading includes the purchases or sales of stocks that 
are part of a coordinated trading strategy, even if the purchases or 
sales are neither entered or executed contemporaneously, nor part of a 
trading strategy involving options or futures contracts on an index 
stock group, or options on any such futures contracts, or otherwise 
relating to a stock market index.
    (c) ``Account of an individual investor'' means an account covered 
by Section 11(a)(1)(E) of the Securities Exchange Act of 1934.
    *``Standard & Poor's 500 Stock Price Index'' is a service market of 
Standard & Poor's Corporation
    **``Dow Jones Industrial Average'' is a service mark of Dow Jones & 
Company, Inc.

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 text of these statements may be examined at 
the places specified in Item IV below and is set forth in Sections A, 
B, and C below.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Current Rule. Rule 80A provides, among other things, for 
limitations on index arbitrage trading in any component stock of the 
S&P 500 Stock Price Index whenever the Dow Jones Industrial Average \1\ 
(``DJIA'') is up or down 50 points from its previous close. If the 
market advances by 50 points or more, all index arbitrage orders to buy 
must be stabilizing (buy minus); similarly, if the market declines, all 
index arbitrage orders to sell must be stabilizing (sell plus). The 
stabilizing requirements are removed if the DJIA moves back to or 
within 25 points of the previous day's close. In addition, ``sidecar'' 
provisions, as discussed below, which temporarily divert program 
trading orders and impose limitations on the entry of stop orders, go 
into effect when the primary S&P 500 futures contract declines by 12 
points from its previous close.
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    \1\ ``Dow Jones Industrial Average'' is a service mark of Dow 
Jones & Company, Inc.
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    Proposed Amendments. The stock market has risen dramatically over 
the years since the 50-point ``collar,'' as discussed below, of Rule 
80A was adopted in 1990.\2\ The Exchange is proposing to amend the Rule 
to base the collars on a percentage of the average closing value of the 
DJIA. In addition, the Exchange is proposing to eliminate the 
``sidecar'' provisions of Rule 80A in their entirety. The Exchange is 
also proposing to delete the provisions, contained in paragraph (d), 
relating to purchases and sales of a ``basket'' (as that term is 
defined in Rule 800(b)(iii)), as the ``basket'' product is no longer 
traded on the Exchange. The definition of index arbitrage contained in 
the rule is also proposed to be modified, as discussed below.
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    \2\ The DJIA was at 2905 when the 50-point collar first went 
into effect on July 31, 1990. The DJIA closed at 8915 on November 5, 
1998, the day the Board adopted this amendment.
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    Collars. The proposed collars are to be calculated quarterly based 
on the average closing value of the DJIA for the last month of the 
previous calendar quarter. This methodology is similar to that used for 
the calculation of the circuit breakers in the recent amendments to 
Rule 80B. The collars would be imposed when the DJIA declines or 
advances from the prior day's close by an amount equal to two percent, 
rounded down to the nearest ten points, of the average closing value. 
The collars would be removed when the DJIA comes back or retreats to a 
value which represents a decline or advance from the prior day's close 
by an amount equal to one half of the ``two-percent value,'' rounded 
down to the nearest ten points.
    Under the proposed rule change, when the collar is imposed based 
upon a decline in the DJIA, all index arbitrage orders to sell any 
component stock of the S&P 500 must be marked ``sell plus'' for the 
remainder of the day. If the DJIA advances by the ``collar value'', all 
index arbitrage orders to buy any component stock of the S&P 500 must 
be marked ``buy minus'' for the remainder of the trading day.
    For example, if the average closing value of the DJIA for the last 
month of the previous quarter is 8915, the ``two-percent value'' will 
be 170, and one half the ``two-percent value'' will be 80 (85 rounded 
down to the nearest ten points). Thus, the stabilizing requirement 
would be imposed when the DJIA is down or up 170 points or more and 
removed when the DJIA is down or up 80 points or less from the previous 
close. The index arbitrage order entry restrictions would be re-imposed 
each time the DJIA advances or declines from the prior day's close by 
the amount calculated pursuant to the rule.
    Sidecar. The sidecar provisions, contained in paragraphs (a) and 
(b) of the current rule, are triggered by a 12-point decline from the 
previous close in the primary S&P 500 futures contract. The sidecar 
diverts program trading orders to a separate file for five minutes and 
also bans the entry of stop orders or stop limit orders for the rest of 
the day (except when such orders are 2099 shares or less and are for 
the account of an individual investor). The Exchange is proposing to 
delete the sidecar provisions in their entirety.
    The Exchange represents that experience has shown that program 
trading orders have not been entered in significant numbers while 
sidecar is in effect and thus this additional restriction is not 
necessary. The Exchange believes that the collars contained in Rule 
80A, along with the Exchange's trading halt policy and the circuit 
breakers contained in Rule 80B, obviate the need for a sidecar.
    Definitions. The revised version of Rule 80A would retain the 
definitions of program trading and individual investor contained in the 
current rule, but would move them into the supplementary material. The 
definition of index arbitrage is being amended to codify the Exchange's 
1992 interpretation \3\ that includes ``basis trading'' \4\ as index 
arbitrage. The Exchange represents that the Rule language is being made 
explicit

[[Page 71179]]

because certain traders may not have considered some strategies that 
are effected to capture differences between the cash and futures 
market, such as liquidating or establishing exchanges for physicals,\5\ 
to be index arbitrage.
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    \3\ See NYSE Information Memo No. 92-23, dated August 28, 1992.
    \4\ The NYSE considers basis trading to be a trading strategy of 
making orders to purchase or sell a basket of stocks in conjunction 
with the purchase or sale, or intended purchase or sale, or 
derivative index products, in order to take advantage of pricing 
discrepancies between the basket and the derivative index product. 
See NYSE Information Memo No. 92-23, dated August 28, 1992.
    \5\ In the context of program trading, the term ``exchange-for-
physicals'' or ``EFP'' refers to a practice whereby an entity, such 
as a broker-dealer or an institution, uses an off-exchange 
transaction to acquire or liquidate a hedged position in a stock 
basket and stock index futures or options. For example, an 
institution wishing to liquidate a large long-stock/short-futures 
hedged position might negotiate with a broker-dealer to conduct an 
EFP outside of regular U.S. trading hours in London. In the EFP, the 
institution would sell the stock basket to the broker-dealer and the 
broker-dealer would sell the equivalent amount of stock index 
futures to the institution. The difference in the prices for the 
stock and futures trades is the negotiated price for the 
transaction, and is usually denominated in hundredths of a 
percentage point (``basis points'') of the value of the portfolio. 
Once the EFP is completed, the broker-dealer has acquired the long-
stock/short-futures hedged position. The broker-dealer may 
subsequently ``unwind'' this position through trades on U.S. 
exchanges when profitable arbitrage spreads arise. In the example 
cited above, if futures are trading at a ``discount'' to underlying 
stocks, the broker-dealer could use program orders to sell the 
higher priced stocks on the NYSE while buying the lower priced 
futures. Such a transaction would be the functional equivalent of 
index arbitrage for purposes of NYSE Rule 80A(c).
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    Conclusion. The Exchange believes that the proposed amendments to 
Rule 80A will allow the collars to move with the market in a similar 
fashion to the triggers in Rule 80B. Thus, trading curbs would remain 
at an appropriate level as the market changes, i.e., closer to the 1.7% 
move that the 50 point collar represented when implemented in 1990 as 
opposed to 0.56% currently.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \6\ of the 
Act in general and furthers the objectives of Section 6(b)(5) \7\ in 
particular in that it is designed to promote just and equitable 
principles of trade, to remove impediments to, and perfect the 
mechanisms of a free and open market and, in general, to protect 
investors and the public interest.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change will impose no 
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 has neither solicited nor received written comments on 
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 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 Exchange 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 in the Commission's Public Reference Room in 450 Fifth Street, 
N.W., Washington, D.C. 20549. Also, copies of such filing will also be 
available for inspection and copying at the principal office of the 
above-mentioned self-regulatory organization. All submissions should 
refer to File No. SR-NYSE-98-45 and should be submitted by January 13, 
1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-33910 Filed 12-22-98; 8:45 am]
BILLING CODE 8010-01-M