[Federal Register Volume 64, Number 61 (Wednesday, March 31, 1999)]
[Notices]
[Pages 15384-15386]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-7807]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41200; File No. SR-BSE-99-3]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Boston
Stock Exchange, Inc. Relating to Limitations on Trading During
Significant Market Moves
March 22, 1999.
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 February 22, 1999, the Boston Stock Exchange, Inc. (``BSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons and to approve the
proposal on an accelerated basis.
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\1\ 15 U.S.C. 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 Exchange seeks to amend its market volatility rules to
correspond with recent changes implemented by the New York Stock
Exchange (``NYSE'').
The text of the proposed rule change is below. Proposed new
language is italicized and proposed deletions are in brackets.
* * * * *
CHAPTER II
Dealings on the Exchange
Limitations on Trading During Significant Market Moves
[Sec. 34B. On any day when the DJIA 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 \2\ must be entered with the instruction ``buy minus''.
If, on that day, the DJIA 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 principal shall govern the
imposition and removal of the buy minus requirement as to all
subsequent movements in the DJIA on that day. On any day when the
DJIA has declined by 50 points or more from its closing value on the
previous trading day, all index arbitrage orders to sell must be
entered with the instruction ``sell plus''. If, on that day, the
DJIA subsequently reaches a value that is 25 points or less below
the closing value on the previous, 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 DJIA on that
day. All orders containing the instruction buy minus or sell plus
shall be executed as provided in Chapter I, Section 3.
\2\ ``Standard & Poor's 500 Stock Price Index'' is a service
mark of Standards & Poor's Corporation.]
[Supplemental Material
.01 ``Index arbitrage'' means an arbitrage trading strategy
involving the purchase or sale of a 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 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 the derivative index products, the transactions
need not be executed contemporaneously to be considered index
arbitrage.]
Sec. 34B. (a) All index arbitrage orders to sell any component
stock of the S&P 500 Stock Price Index \2\ must be entered with the
instruction ``sell plus'' on any trading day when the Dow Jones
Industrial Average 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.
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2``Standard & Poor's 500 Stock Price Index'' is a service mark
of Standards & Poor's Corporation.]
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(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 with 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 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
[[Page 15385]]
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 Chapter I, Section 3.
.40 Definitions. (a) For purpose of this Rule, ``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 of sale, 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 of 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 on an individual investor'' means an account
covered by Section 11(a)(1)(E) of the Securities Exchange Act of
1934.
Stop Order Bans
Sec. 35(a). Whenever the primary market for a stock admitted to
dealings on the Boston Stock Exchange institutes a stop and stop
limit order ban, the Exchange will also ban such orders in the stock
until such time as the ban in the primary market is lifted.
[(b) Whenever the New York Stock Exchange (NYSE) institutes a
stop and stop limit order ban pursuant to NYSE Rule 80A, the BASE
will also ban stop and stop limit orders for the remainder of the
trading day, except that a member or member organization may enter a
stop or 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.
(i) An ``account of the individual investor'' means an account
covered by Section 11(a)(1)(E) of the Securities Exchange Act of
1934.]
Supplementary Material:
Stop Order Ban Procedures
[.01. Whenever the New York Stock Exchange (``NYSE'') implements
a stop order ban pursuant to NYSE Rule 80A, the Boston Stock
Exchange (``BSE'') will also ban such orders as follows:
(i) Upon notice from the NYSE by announcement over the ``hoot
and holler system'' that all new stop and stop limit orders in all
stocks are banned for the remainder of the day (except for orders up
to 2099 shares for the account of an individual investor), the BSE
will announce to its floor and BEACON subscribers that a stop order
ban in all stocks is in effect for the remainder of the day, except
for orders up to 2099 shares for the accounts of individual
investors.
(ii) The entry of stop and stop limit orders (other than orders
up to 2099 shares for the accounts of individual investors) will be
banned on the BSE for the remainder of the day. Any stop or stop
limit orders received in the BEACON system will be rejected and the
message ``stop not accepted--ban in effect'' will be sent back to
the entering firm.
(iii) Any stop and stop limit orders residing on the
specialists' books at the time the ban goes into effect will remain
eligible for execution.]
[.02] .01. Whenever the primary market implements a stop order
ban in an individual stock due to an unusually large accumulation of
stop and stop limit orders, the BSE will also ban such orders as
follows:
(i) Upon notice from the primary market by indication over the
consolidated tape that stop and stop limit orders are banned in an
individual stock, the Boston Stock Exchange will announce to its
floor and BEACON subscribers that a stop order ban is in effect in
the individual stock.
(ii) The entry of stop and stop limit orders will be banned
until such time as the ban is lifted in the primary market and that
information is disseminated on the consolidated tape. Any orders
received in the BEACON system will be rejected and the message
``stop not accepted--ban in effect'' will be sent back to the
entering firm.
(iii) Any stop and stop limit orders residing on the
specialist's book at the time the ban goes into effect will be
canceled by the Exchange. The cancellation message ``U R Out'' will
be sent back to the entering firm.
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 Exchange 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 Exchange 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 two BSE rules
that limit certain types of trading during significant market moves.
Chapter II, Section 34B of the BSE's rules states that on any day
where the Dow Jones Industrial Average (``DJIA'') advances by more than
50 points 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.'' Declines of
50 points from the previous trading day's closing value require that
all index arbitrage orders to sell be entered with the instruction
``sell plus.'' The stabilizing requirements associated with that 50
point ``collar'' are removed if the DJIA moves back to or within 25
points of the previous day's close. Until recently, the NYSE similarly
restricted index arbitrage using a 50 point collar.
Chapter II, Section 35(b) and Supplementary Material .01 of the
BSE's rules states that whenever the NYSE implements a stop order ban
pursuant to NYSE Rule 80A, the BSE will also ban stop and stop limit
orders for the remainder of the day, except for orders of 2099 shares
or less for the account of an individual investor pursuant to
instructions from that investor. Until recently, NYSE Rule 80A
contained ``sidecar'' provisions that would be triggered if the primary
S&P 500 futures contract declined by 12 points from the previous close.
When a market decline triggered those sidecar procedures, the NYSE
would divert program trading orders to a separate file for five minutes
and would restrict the entry of stop orders or stop limit orders.
The Commission recently approved a proposed NYSE rule change that
widened the 50 point collars and eliminated the sidecar provisions.\3\
In lieu of the 50 point collars methodology for advances or declines,
collars will now be based on a percentage of the average closing value
of the DJIA. In particular, 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
[[Page 15386]]
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). 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.
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\3\ Securities Exchange Act Release No. 41041 (February 11,
1999), 64 FR 8424 (February 19, 1999).
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The BSE proposed to modify Section 34B to reflect the NYSE rule
change, by replacing the 50 point collar with a level based on two
percent of the DJIA. When the DJIA declines by the ``collar value,''
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.
In addition, the BSE is proposing to delete the stop and stop limit
order restrictions found in Section 35(b) and Supplementary Material
.01, in response to the NYSE's elimination of the sidecar provisions of
NYSE Rule 80A.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the Act
in general,\4\ and furthers the objectives of Section 6(b)(5) in
particular,\5\ 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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\4\ 15 U.S.C. 78f(b).
\5\ 15 U.S.C. 78f(b)(5).
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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 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. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
After careful consideration, the Commission has concluded, for the
reasons set forth below, that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder. Both BSE rules in question--the 50 point collar provision
of Chapter II, Section 34B, and the ``sidecar'' stop and stop limit
order restrictions of Chapter II, Section 35(b) and Supplementary
Material .01--are substantially similar to recently changed NYSE rules.
Modifying the BSE rules to conform to the counterpart NYSE rules will
eliminate a needless disparity between the practices of the two
exchanges. Moreover, the Commission noted in its order approving the
proposed NYSE rule changes that the sidecar provisions appeared
unnecessary and that eliminating them was in the public interest. The
Commission also noted that widening the collar provisions represented
an improvement over the earlier trading restrictions, and the
Commission recommended that the NYSE periodically evaluate the
continuing need for those restrictions on index arbitrage. The
Commission believes that the same principles apply to the BSE.
The BSE has requested that the Commission grant accelerated
approval of the proposed rule change to correspond with the NYSE's
recent rule changes. The Commission finds good cause for approving the
proposed rule change prior to the 30th day after the date of
publication of notice of filing in the Federal Register. The Commission
has already approved an equivalent rule change for the NYSE after
careful analysis of public comments. Moreover, maintaining the existing
trading restrictions on the BSE, even after they have been relaxed on
the NYSE, may affect broker-dealer order routing decisions in a way
that is contrary to the competitive intent behind the National Market
System.
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 copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609.
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
Exchange. All submissions should refer to File No. SR-BSE-98-3 and
should be submitted by April 21, 1999.
V. Conclusion
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act
\6\ that the proposed rule change (SR-BSE-99-3) is hereby approved on
an accelerated basis.\7\
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\6\ 15 U.S.C. 78s(b)(2).
\7\ In approving the proposal, the Commission has considered the
rule's impact on efficiency, competition and capital formation. 15
U.S.C. 78c(f).
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. 99-7807 Filed 3-30-99; 8:45 am]
BILLING CODE 8010-01-M