[Federal Register Volume 64, Number 116 (Thursday, June 17, 1999)]
[Notices]
[Pages 32596-32599]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15359]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41500; File No. SR-NYSE-99-18]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc. To Amend Exchange Rule 97, 
``Limitation on Members' Trading Because of Block Positioning,'' To 
Permit Member Firms to Net Proprietary Positions Within Aggregation 
Units and To Except Transactions Offsetting Market Risk That Resulted 
From Facilitating a Customer's Order

June 9, 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 May 4, 1999, the New York Stock Exchange, Inc. (``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'' or ``SEC'') 
the proposed rule change as described in Items I, II, and III 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.
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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 proposed rule change consists of amendments to Exchange Rule 
97, ``Limitation on Members' Trading Because of Block Positioning.'' 
First, the Exchange proposes to permit member organizations to 
determine whether they are long for purposes of Rule 97 by netting 
their long facilitation position with their other stock positions 
within the same ``Aggregation Unit.'' \3\ Second, the proposed rule 
change would add an exception to Rule 97 for purchases to offset all or 
part of the market risk of a position, established previously or 
contemporaneously, that is economically equivalent to a short position 
in a stock, provided that such position was established as the result 
of facilitating a customer order. Third, the Exchange proposes to 
replace the term ``trading account'' with ``proprietary account'' to 
clarify that the restrictions of Rule 97 may apply regardless of where 
the long facilitation position is placed. Finally, the proposed rule 
change would delete subparagraph (a)(i), the substance of which is 
included within the meaning of subparagraph (a)(iii).
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    \3\ See note 6 and accompanying text.
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    The following is the text of Exchange Rule 97 marked to reflect the 
proposed rule change. Additions to the current text appear in italic 
and deletions appear in brackets.

Limitation on Members' Trading Because of Block Positioning

    Rule 97  (a) When a member organization holds any part of a long 
position in a stock in [its trading] a proprietary account resulting 
from a block transaction it effected with a customer, such member 
organization may not effect the following transactions for any 
account in which it has a direct or indirect interest for the 
remainder of the trading day on which it acquired such position:
    [(i) a purchase on a ``plus'' tick if such purchase would result 
in a new daily high;]
    (i)[(ii)] a purchase on a ``plus'' tick within one-half hour of 
the close;
    (ii)[(iii)] a purchase on a ``plus'' tick at a higher than the 
lowest price at which any block was acquired in a previous 
transaction on that day; or
    (iii)[(iv)] 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.
    For purposes of the restrictions in subparagraph (ii) [(iii)] 
and (iii)[(iv)] above, in the case where more than one block was

[[Page 32597]]

acquired during the day, the lowest price of any such block will be 
the governing price.
    (b) The provisions of paragraph (a) shall not apply to 
transactions made:
    (1) for bona fide arbitrage or to engage in the purchase and 
sale, or sale and purchase of securities of companies involved in 
publicly announced merger, acquisition, consolidation, tender, etc.;
    (2) to offset a transaction made in error;
    (3) to facilitate the conversion of options;
    (4) by specialists in the stocks in which they are registered;
    (5) to facilitate the sale of a block of stock or a basket of 
stocks by a customer;
    (6) to facilitate an existing customer's order for the purchase 
of a block of stock, or a specific stock within a basket of stocks, 
or a stock which is being added to or reweighted in an index, at or 
after the close of trading on the Exchange, provided that the 
facilitating transactions are recorded as such and the transactions 
in the aggregate do not exceed the number of shares required to 
facilitate the customer's order for such stock; [or]
    (7) 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 index portfolio[.] or
    (8) to hedge a position that is economically equivalent to a 
short stock position, provided that (i) the risk to be hedged is the 
result of a position acquired previously or contemporaneously in the 
course of facilitating a customer's order, and (ii) the transactions 
in the aggregate do not exceed the number of shares required to 
hedge such short position when netted with any long position in the 
stock as defined in .10 of this Rule.

Supplementary Material

    .10  Definitions. A block positioner is a member organization 
which engages, either regularly or on an intermittent basis, in a 
course of business of acquiring positions to facilitate the handling 
of customers' orders on the Floor of the Exchange. For the purposes 
of this Rule, a block shall mean a quantity of stock having a market 
value of $500,000 or more which is acquired by a member organization 
on its own behalf and/or for others from one or more buyers or 
sellers in a single transaction.
    For purposes of this Rule, a ``basket of stocks'' shall mean a 
group of 15 or more stocks having a total market value of $1 million 
or more.
    For purposes of this Rule, an ``index'' shall mean a publicly 
disseminated statistical composite measure based on the price or 
market value of the component stocks in a group of stocks.
    For purposes of this Rule, a member organization that holds in a 
proprietary account any part of a long position in a stock resulting 
from a block transaction with a customer shall aggregate such long 
position with all other proprietary positions in such stock that are 
held within the same Aggregation Unit as such long position. An 
Aggregation Unit is a defined trading unit within a member 
organization which meets the conditions set forth in TP File No. 97-
42, dated November 23, 1998 issued by the staff of the Securities 
and Exchange Commission (``No-action Letter''). A member 
organization which has not established defined Aggregation Units 
that comply with the No-action Letter shall not aggregate such long 
position with any other position maintained in the member 
organization's proprietary accounts, except at the end of the 
trading day.
    .20  Block positioners required to be registered. No member 
organization shall engage in a course of business as a block 
positioner unless the Exchange has approved of its so acting and has 
not withdrawn such approval.
    .30   Net capital requirement. A member organization which 
applies to be registered as a block positioner is required to have 
and maintain a minimum net capital requirement as defined in Rule 
325 of the Exchange of $1,000,000.
    .40  Reports by block positioners. Upon of the Exchange a member 
organization registered with the Exchange as a block positioner 
shall file a report on Form 97 covering transactions effected on the 
Floor of the Exchange in connection with block positioning during 
the period specified in the request. This report is to be sent to 
Market Surveillance Services, 11 Wall Street, 11th Floor, as 
promptly as possible but no later than the close of business on the 
date in which the report is requested to be filed.
    .50  Basket Transactions. See paragraph (c)(iv) of Rule 800 
(Basket Trading: Applicability and Definitions) in respect of the 
inapplicability of this Rule to long stock positions resulting from 
basket transactions.
* * * * *

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
    Exchange Rule 97 prohibits a member organization that holds any 
part of a long position in a stock in its trading account resulting 
from a block transaction it effected with a customer from purchasing, 
for an account in which the member organization 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. The Rule defines a ``block'' as a quantity of stock having 
a market value of $500,000 or more.
    Paragraph (b) provides exceptions to the rule for purchases 
involving bona fide arbitrage or trading in companies involved in a 
publicly announced merger, acquisition, consolidation or tender offer; 
to offset error transactions; to facilitate the conversion of options; 
for transactions by specialists in their specialty stocks; to 
facilitate the sale of a block of stock or a basket of stock by a 
customer; to facilitate an existing customer order for the purchase of 
a block of stock or a stock in 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; or to increase a proprietary position in a stock which is 
being added or increasing its weight in a publicly disseminated index, 
provided that the transactions in the aggregate do not exceed the 
number of shares required to facilities the customer's purchase of such 
stock after the close or exceed the number of shares required to 
rebalance the portfolios.\4\
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    \4\ See Release No. 34-40404 (September 4, 1998), 63 FR 49145 
(September 14, 1998) (File No. SR-NYSE-98-11).
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    The Exchange is proposing an additional exception (proposed new 
paragraph (b)(8)) for purchases to offset all or part of the market 
risk of a position, established previously or contemporaneously, that 
is economically equivalent to a short position in the stock, provided 
that such position was established as the result of facilitating a 
customer's order. Examples of positions that would be deemed to be 
economically equivalent to a short position in the stock include a long 
put option or a short position in a call option, warrant, right or 
convertible or exchangeable securities. The number of shares purchased 
to hedge the short position must not exceed the outstanding market risk 
when such short position is netted with any long position in the stock 
as defined in .10 of the Rule.
    For example, a member organization has sold short to a customer a 
security which is convertible into 100,000 shares of common stock. 
Thereafter, it facilitates a block transaction for another customer by 
buying 40,000 shares of the common stock for the member organization's 
proprietary account. It seek to hedge its remaining short exposure in 
the convertible security by buying 60,000 shares of the common stock. 
Since the member

[[Page 32598]]

organization has acquired a long facilitation position (i.e., the 
40,000 share purchase), it must now calculate whether it is long for 
purposes of Rule 97 as described in section .10 of the supplementary 
material to the Rule. If the firm determines it is long for purposes of 
Rule 97, it would be limited in the manner by which it could hedge the 
remaining short market risk. The proposed exception would permit the 
member organization to purchase up to the amount of its net short 
exposure without being subject to the tick restrictions of Rule 97.
    Rule 97 was adopted due to concerns that a member organization 
might engage in manipulative practices by attempting to ``mark-up'' or 
``peg'' the price of a stock in order 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. A 
stock purchase which offsets existing short market risk resulting from 
a facilitation and which does not establish a long position, does not 
provide an incentive to ``mark up'' or ``peg'' the price of a long 
stock position previously acquired as a block facilitation trade. 
Therefore, the Exchange believes that the proposed exception should be 
adopted.
    The Exchange also is proposing to amend section .10 of the 
supplementary material to the Rule to specify how a member organization 
that has acquired a long position in a stock as the result of 
facilitating a customer's block transaction shall determine whether it 
is long for purposes of Rule 97, i.e., under what circumstances the 
member organization must aggregate such position with other proprietary 
positions.
    The Commission staff has recently issued a no-action letter \5\ 
setting forth conditions for permitting an individual trading unit 
(``Aggregation Unit'') in a member organization to calculate its net 
position in a particular security for purposes of Rule 10a-1 under the 
Act \6\ independently from other Aggregation Units.\7\
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    \5\ Letter from Richard R. Lindsey, Director, Division of Market 
Regulation to Roger D. Blanc, Esq., Wilkie Farr & Gallagher, dated 
November 23, 1998 (TP File No. 97-42).
    \6\ 17 CFR 240.10a-1.
    \7\ These conditions include the following requirements: (1) a 
written plan that identifies each Aggregation Unit, specifies its 
trading objective, and supports its independent identity; (2) real-
time netting by each Aggregation Unit of its positions; (3) 
reconciling at least once a day of net positions of all Aggregation 
Units with the firm's net position; (4) individual traders can be 
assigned to only one Aggregation Unit at any time; and (5) each 
trader pursuing a particular trading strategy must be included in 
one Aggregation Unit.
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    Under the proposed amendment to section .10 of the supplementary 
material to Rule 97, a member organization that has chosen to calculate 
its net positions by defined Aggregation Units, which meet the 
conditions set forth by the Commission staff in the 1998 no-action 
letter, would determine whether it is long for purposes of Rule 97 by 
netting its long facilitation position with its other stock positions 
within the same Aggregation Unit. A member organization that has not 
established defined Aggregation Units that comply with the no-action 
letter may not net such long position with any short position 
maintained in the member organization's proprietary accounts, except at 
the end of the trading day. For such a member organization, the 
restrictions would apply as long as it held any part of a long 
facilitation position resulting from a block transaction on the day the 
position was acquired.
    Thus, the restrictions contained in paragraph (a) of the Rule would 
be triggered only if three conditions are met: (1) the member 
organization acquired a long position in a stock as the result of 
facilitating a block trade by a customer on that trading day; (2) the 
member organization is long for purposes of Rule 97 as defined in 
section .10 of the supplementary material; and (3) the member 
organization's purchase on a plus or zero plus tick does not fall under 
any exception in paragraph (b).
    The requirement in section .10 of the supplementary material to 
aggregate a long block facilitation position with other proprietary 
positions within the same Aggregation Unit is proposed to be added to 
the Rule in recognition of current practices of large multi-service 
broker-dealers where profit and loss are calculated within defined 
Aggregation Units and each such unit conducts its trading without 
regard to the positions or activities of other units.
    The Exchange is also proposing to replace the term ``trading 
account'' in paragraph (a) of the Rule with ``proprietary account'' to 
clarify that the Rule's restrictions may apply regardless of where the 
long facilitation position is placed, e.g., a facilitation account or a 
trading account.
    In addition, the Exchange is proposing to delete subparagraph 
(a)(i) (a purchase on a ``plus'' tick if such purchase would result in 
a new daily high) as it is included within the meaning of subparagraph 
(a)(iii) (a purchase on a ``plus'' tick at a price higher than the 
lowest price at which any block was acquired in a previous transaction 
on that day), and renumbering accordingly.
2. Statutory Basis
    The basis under the Act for this proposed rule change is Section 
6(b)(5)\8\ which, in part, calls for exchange rules to facilitate 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market. The proposed rule change would 
define a long position for purposes of Rule 97 in a manner in that the 
Exchange believes more closely follows industry practice. It would also 
permit trading by member organizations to offset the risk of the 
equivalent of a short stock position, and thereby, add depth, liquidity 
and quality to the market for Exchange securities.
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    \8\ 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. 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 proposal 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,

[[Page 32599]]

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 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. 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-99-18 and should be submitted by July 8, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-15359 Filed 6-16-99; 8:45 am]
BILLING CODE 8010-01-M