[Federal Register Volume 64, Number 102 (Thursday, May 27, 1999)]
[Notices]
[Pages 28848-28850]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13466]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41421; File No. SR-NYSE-98-10]


Self-Regulatory Organizations; New York Stock Exchange, Inc,; 
Order Approving Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval of Amendment No. 2 to the Proposed Rule 
Change To Amend Exchange Rule 115 Regarding Disclosure of Specialists' 
Orders

May 18, 1999.

I. Introduction

    On March 17, 1998, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with 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 to amend NYSE Rule 115 regarding disclosure of 
specialists' orders. On June 23, 1998, the NYSE filed Amendment No. 1 
to the proposal.\3\ The proposed rule change and Amendment No. 1 were 
published for comment in the Federal Register on July 8, 1998.\4\ On 
February 25, 1999, the NYSE filed Amendment No. 2 to the proposal.\5\ 
The Commission received two comment letters regarding the proposal. 
This notice and order approves the proposed rule change, as

[[Page 28849]]

amended, and solicits comments from interested persons on Amendment No. 
2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Agnes M. Gautier, Vice President, Market 
Surveillance, NYSE, to Richard Strasser, Assistant Director, Davison 
of Market Regulation (``Division''), Commission, dated June 17, 1998 
(``Amendment No. 1'').
    \4\ Securities Exchange Act Release No. 40146 (June 30, 1998), 
63 FR 36985.
    \5\ See Amended 19b-4 Filing (``Amendment No. 2''). In Amendment 
No. 2, the Exchange proposes to withdraw the provision of the 
proposal that would have permitted specialists to disclose 
information about buying and selling interest, but not stop orders, 
to a listed company in the company's stock.
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II. Description of the Proposal

    The Exchange is proposing to amend NYSE Rule 115 to permit a 
specialist, acting solely in his or her capacity as a market maker 
(i.e., while on the Floor), and responding to a market probe by a 
member, to give any information concerning buying and selling interest 
of orders the specialist holds on the Specialist's Book (``Book'') in a 
stock.\6\ This proposal would delete the existing limitation that such 
disclosed interest be ``at or near the prevailing quote.'' However, 
with respect to stop orders on the Book for a stock,\7\ the Exchange 
proposes to allow a specialist to disclose this information when the 
specialist judges that the member conducting the market probe intends 
to trade in the stock at a price at which such stop orders would be 
relevant. the Exchange believes that the additional restriction on the 
disclosure of stop orders will permit disclosure in legitimate 
circumstances, e.g., when a proposed trade would be effected at a price 
that would trigger stop orders.
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    \6\ The proposal includes not only orders on the Book, but also 
any percentage orders held by the specialist. Under the amended NYSE 
Rule 115, percentage orders will be disclosed similarly to other 
orders, other than stop orders. See Amendment No. 1, supra note 3. A 
percentage order is a limited price order to buy or sell 50% of the 
volume of a specified stock after its entry. A percentage order is 
essentially a memorandum entry left with a specialist which becomes 
a ``live'' order capable of execution in one of two ways: (i) all or 
part of the order can be ``elected'' as a limit order on the Book 
based on trades in the market; or (ii) all or part of the order can 
be ``converted'' into a limit order to make a bid or offer or to 
participate directly in a trade. See NYSE Rule 13.
    \7\ A stop order is an order to buy or sell at the market when a 
definite price is reached either above (on a buy) or below (on a 
sell) the price that prevailed when the order was given. A stop 
order becomes a market order after a transaction at the stop price 
occurs. A stop-limit order is a stop order that designates a price 
limit. A stop-limit order becomes a limit order when a transaction 
takes place at the stop price. See NYSE Rule 13.
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    The proposal would also permit the specialist to disclose the 
identity of any buyer or seller represented on his Book without being 
required to have express authorization from the member who entered the 
order (as is currently the case), i.e., the members or member 
organizations who are representing the buying and selling interest. 
Nevertheless, a member may request that the identity of a buyer or 
seller not be disclosed at any time, or with respect to a particular 
order left with a specialist. The rule will continue to require a 
specialist to make any information available in a fair and impartial 
manner.

III. Comments

    The Commission received two comment letters on the proposal.\8\ The 
comment letters generally supported the proposed rule change's 
increased disclosure of information on the specialist's book to members 
but raised concerns about the issuer-specialist contact provision. One 
commenter believed that the issuer-specialist contact provision, unless 
it was extended to all market participants, would give issuers an 
unfair advantage over others.\9\ The other commenter asserted that the 
provision would provide ``[o]ne class of equity market participant (the 
issuing companies) * * * a significant, non-competitive and arbitrary 
economic advantage over other investors.'' \10\
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    \8\ See letters from Peter Jenkins, Director of Global Equity 
Trading, Scudder Kemper Investments and Mike Cormack, Manager, 
Equity Trading, American Century Investment Management to Richard 
Strasser, Assistant Director, Division, Commission, respectively 
dated November 24, 1998 and December 15, 1998. (The ``Scudder Kemper 
Letter'' and the ``American Century Letter,'' respectively).
    \9\ See Scudder Kemper Letter.
    \10\ See American Century Letter.
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    In Amendment No. 1, which was filed before the Commission received 
the two comment letters, the Exchange explained its belief that the 
issuer-specialist contact provision of the proposal was consistent with 
other Exchange initiatives designed to foster and enhance positive 
issuer-specialist relations.\11\ The Exchange also explained its belief 
that the issuer-specialist contact provision was not unfairly 
discriminatory because ``[t]he information which a specialist [could] 
provide [under the proposal] is the same type of information available 
to all market participants through a member's probe, namely, buying and 
selling interest in a stock.'' \12\ Nevertheless, in Amendment No. 2 
the Exchange withdrew this provision.\13\
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    \11\ See Amendment No. 1, note 3, supra.
    \12\ See id.
    \13\ See note 5, supra.
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IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange,\14\ and, in 
particular, with the requirements of Section 6(b)(5),\15\ 
11A(a)(1)(C)(iii),\16\ and 11(b) of the Act.\17\ Section 6(b)(5) of the 
Act \18\ requires, among other things, that an exchange have rules 
which are designed to promote just and equitable principles of trade, 
to facilitate transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market, and, in general, to 
protect investors and the public interest. In Section 11A(a)(1)(C)(iii) 
of the Act \19\ Congress found that it is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure the availability to brokers, dealers, and 
investors of information with respect to quotations for the 
transactions in securities. Section 11(b) of the Act,\20\ among other 
things, prohibits a specialist or Exchange official from disclosing 
information with respect to orders that is not available to all members 
of the Exchange to any person other than an official of the Exchange, a 
representative of the Commission, or a specialist who may be acting for 
such specialist.
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    \14\ In approving this rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ 15 U.S.C. 78k-l(a)(1)(C)(iii).
    \17\ 15 U.S.C. 78k(b).
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ 15 U.S.C. 78k-l(a)(1)(C)(iii).
    \20\ 15 U.S.C. 78k(b).
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    Presently Exchange Rule 115 prohibits specialists from disclosing 
Book information to other exchange members who are probing the market, 
unless the market probe is made at or near the prevailing quote. The 
proposed rule change would liberalize the specialist disclosure 
provisions by permitting specialists, in response to a market probe by 
a member, to give any information concerning buying and selling 
interest or orders the specialist holds on the Book in a stock. All 
market participants, including individual investors and issuers, will 
be able to obtain the Book information through a member's probe. The 
Commission believes that this provision should promote the objectives 
of Sections 6(b)(5) and 11A of the Act \21\ by increasing price 
transparency, broadening the public dissemination of market 
information, and enhancing the ability of investors to develop 
strategies and make informed investment decisions. Moreover, because 
the proposed amendments to NYSE Rule 115 will make Book information 
available to all member organizations on a non-exclusive basis and 
requires a specialist to disclose information in a fair and impartial 
manner, the proposal is consistent with Section11(b) of the Act.\22\
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    \21\ 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78k-l.
    \22\ 15 U.S.C. 78k(b).

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[[Page 28850]]

    Stop orders, however, are treated differently than orders that are 
not price-triggered under the proposed rule change. Under the proposed 
rule change, specialists may disclose information about stop orders 
when the specialist judges that the member conducting the market probe 
has the intention to trade in the stock at a price at which such stop 
orders would be relevant. Orders other than stop orders may be 
disclosed without restriction in response to a member's probe. The 
Commission believes that because stop orders held on the book may be 
far away from the market the proposal's special treatment of top orders 
is reasonable. The Commission believes that it is reasonable that 
specialists only disclose stop order information when a member's market 
probe reasonably indicates an intention to trade at a price at which 
the stop orders would be relevant. This restriction should help 
safeguard against potential market manipulation and provide investors 
who place stop orders with a level of protection and confidence that 
Exchange members will not be permitted to obtain information regarding 
stop orders unless they have a legitimate market interest in that 
information.
    The proposed rule change also alters the presumption for the non-
disclosure of an investor's identity. Under the proposal, a specialist 
may disclose to a member the identify of any buyer or seller on the 
Book, unless the buyer or seller expressly requests that his or her 
investment anonymity be maintained at all times or with respect to a 
specific order. The Commission believes that this provision strikes a 
reasonable balance between the public interest in the broad 
dissemination of market information and the private interest of a 
specific investor to have his or her identity withheld from the public 
for legitimate and strategic investment purposes.
    The Commission finds good cause to approve Amendment No. 2 to the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice filing of the amendment in the Federal Register. 
Specifically, Amendment No. 2 withdraws from the proposed rule change 
the provision that appeared in the proposal as originally filed which 
would have permitted specialists to disclose information about orders, 
but not stop orders, to listed companies. Both comment letters received 
by the Commission raised concerns that the proposal would allow direct 
specialist-issuer contact, but did not provide for similar specialist 
access for other non-member market participants.\23\ The Commission 
believes that by withdrawing the issuer-specialist contact provision 
the Exchange has helped to ensure that the proposal complies with 
Section 6(b)(5) of the Act \24\ which prohibits exchange rules from 
unfairly discriminating between customers, issuers, brokers or dealers. 
Accordingly, the Commission believes that there is good cause, 
consistent with Sections 6(b)(5) and 19(b) of the Act,\25\ to approve 
Amendment No. 2 to the proposal on an accelerated basis.
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    \23\ See note 8, supra.
    \24\ 15 U.S.C. 78f(b)(5).
    \25\ 15 U.S.C. 78f(b)(5) and 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 Amendment No. 2 
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. 20549-0609. 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-NYSE-98-10 and 
should be submitted by June 21, 1999.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-NYSE-98-10), as amended, is 
approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 99-13466 Filed 5-26-99; 8:45 am]
BILLING CODE 8010-01-M