[Federal Register Volume 64, Number 129 (Wednesday, July 7, 1999)]
[Notices]
[Pages 36731-36733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-17151]



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SECURITIES AND EXCHANGE COMMISSION

[Docket No. 34-41570; File No. SR-NYSE-99-11]


Self-Regulatory Organizations; Filing and Order Granting 
Accelerated Approval of Proposed Rule Change and Amendment No. 1 to a 
Proposed Rule Change by the New York Stock Exchange, Inc. Relating to 
the Definition of Volatile Days in the Specialist Capital Utilization 
Measure

June 28, 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 March 19, 1999, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change amending the 
definition of ``volatile days'' used in the NYSE's specialist capital 
utilization measure. The Exchange amended its proposal on May 4, 
1999.\3\ The proposed rule change, as amended, is described in Items I 
and II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice and order to solicit comments on 
the proposed rule change and Amendment No. 1 from interested persons 
and to approve the proposal, as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 CFR 240.19b-4.
    \3\ See Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Richard Strasser, Assistant Director of Market 
Regulation (``Division''), Commission, dated May 4, 1999 
(``Amendment No. 1''). Amendment No. 1 provides further details 
regarding the Exchange's specialist capital utilization measure and 
offers additional reasons to support approval of the proposal on an 
accelerated basis.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NYSE proposes to revise the definition of volatile days used in 
the NYSE's specialist capital utilization measure.\4\ The specialist 
capital utilization measure is designed to measure specialist dealer 
participation to assist in cushioning price movements during days when 
there is general market volatility or significant price movements in 
individual stocks (``volatile days''), as well as during non-volatile 
periods. As discussed more fully below, the specialist capital 
utilization measure provides two definitions of volatile days: (1) days 
when the range between the highest and lowest values of the S&P 500 
Stock Price Index (``S&P 500 Index'') equals or exceeds 1% of the 
previous closing value (``1% Days''); and (2) each stock's 10% most 
volatile days (a percentage calculated by comparing a day's high/low 
range to the opening price) (``10% Days''). The NYSE proposes to revise 
the 1% Days component of this definition by defining volatile days to 
include days when the range between the S&P 500 Index's highest and 
lowest values equals or exceeds 2%, rather than 1%, of the previous 
closing value. The 10% Days definition will remain the same.
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    \4\ The specialist capital utilization measure is contained in 
the NYSE's Allocation Policy and Procedures (``Allocation Policy''), 
which governs the allocation of equity securities to NYSE specialist 
units. The Allocation Committee renders decisions based upon the 
allocation criteria specified in the Allocation Policy, including 
the Specialist Performance Evaluation Questionnaire, objective 
performance measures (e.g., the capital utilization measure), and 
the Allocation Committee's professional judgment. See Securities 
Exchange Act Release No. 34906 (October 27, 1994), 59 FR 55142 
(November 3, 1994) (order approving revisions to the NYSE's 
Allocation Policy). The specialist capital utilization measure 
focuses on a specialist unit's use of its own capital in relation to 
the total dollar volume of trading activity in the unit's stocks. 
For a detailed discussion of the specialist capital utilization 
measure, see Securities Act Release Nos. 33369 (December 22, 1993), 
58 FR 69431 (December 30, 1993) (``December 1993 Order''); and 35926 
(June 30, 1995), 60 FR 35760 (July 11, 1995) (``June 1995 Order'').
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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 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 III 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
    Background. In December 1993, the NYSE developed the specialist 
capital utilization measure as an objective measure of specialist 
performance that recognizes the importance of dealer participation, 
particularly in volatile markets, when such participation contributes 
to maintaining liquid and orderly markets.\5\ The specialist capital 
utilization measure derives two capital utilization percentages for 
each eligible stock \6\ traded by a specialist unit: (1) a percentage 
calculated by dividing the average daily dollar value of the unit's 
stabilizing purchases and sales in a stock by the average daily total 
dollar value of shares traded in the unit's stocks; and (2) a 
percentage calculated by dividing the average daily dollar value of the 
unit's stabilizing plus reliquifying \7\ trades by the average daily 
total dollar value of shares traded in the unit's stocks. These two 
percentages are calculated separately for base periods (i.e., non-
volatile periods) and volatile periods, so that the performance of a 
unit relative to other units can be compared as to volatile and non-
volatile market conditions. As noted above, the NYSE currently defines 
volatile periods as (1) days when the range between the highest and 
lowest values of the S&P 500 Index equals or exceeds 1% of the previous 
closing value (``1% Days''); and (2) each stock's 10% most volatile 
days (a percentage calculated by comparing a day's high/low range to 
the opening price) (``10% Days'').
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    \5\ The Commission approved the capital utilization measure on a 
one-year pilot basis, and subsequently approved three extensions of 
the pilot program. See Securities Exchange Act Release Nos. 33369, 
supra note 4; 35175 (December 29, 1994), 60 FR 2167 (January 6, 
1995) (extending pilot through June 30, 1995); 35926, supra note 4 
(extending pilot through September 10, 1996); and 37668 (September 
11, 1996), 61 FR 49371 (September 19, 1996) (extending pilot through 
January 10, 1997). The Commission approved the pilot program on a 
permanent basis on January 10, 1997. See Securities Exchange Act 
Release No. 38158 (January 10, 1997), 62 FR 2704 (January 17, 1997) 
(``January 1997 Order'').
    \6\ The following stocks are not included: foreign stocks, 
preferred stocks, warrants, when issued stocks, IPOs (for the first 
60 days), closed-end funds, stocks selling for $5 and under, stocks 
with less than 2,000 shares average daily trading volume and stocks 
with more than one class of stock. See June 1995 Order, supra note 
4.
    \7\ A reliquifying transaction is one in which the specialist 
reduces a position in a specialty stock by selling part of a long 
position on a zero-minus tick, or purchasing to cover part of a 
short position on a zero-plus tick. See December 1993 Order, supra 
note 4.
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    To compare a specialist unit's capital utilization with other 
units, the specialist capital utilization measure separates stocks into 
three broad groupings.\8\ Specialist units are then placed into three 
tiers based on their capital utilization percentages for each of the 
three groupings of stocks. Within each grouping, a Floor-wide mean 
capital utilization percentage is calculated. A unit would be in Tier 1 
if its capital utilization percentage is more

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than 1.1 standard deviations above the mean.\9\ A unit would be in Tier 
2 if its capital utilization percentage is within 1.1 standard 
deviations of the mean. A unit would be in Tier 3 if its capital 
utilization percentage is more than 1.1 standard deviations below the 
mean. The tiers are presented to the Allocation Committee for each 
specialist unit applying for a new listing and are a factor in 
allocating newly-listed stock.
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    \8\ The three broad groupings are: (1) stocks included in the 
top 200 stocks in the S&P 500 Stock Index and other stocks that are 
at least as active (based on average daily dollar value of shares 
traded); (2) the remainder of the S&P 500 and any stocks among the 
500 most active on the Exchange; and (3) all other stocks traded on 
the Exchange. See June 1995 Order, supra note 4.
    \9\ A standard deviation is a statistical measure of the 
distance from the mean.
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    The Tiers are presented to the Allocation Committee for each 
specialist unit applying for a new listing and are one factor among 
several in allocating newly-listed stock. Allocation decisions are 
based on the professional judgment of the Allocation Committee in 
applying specific criteria. A Tier I classification would indicate to 
the Committee that the unit's value-added dealer participation was well 
above the average for all specialist units, whereas a Tier III 
classification would indicate that the unit's value-added dealer 
participation was below the average for all specialist units.\10\
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    \10\ Telephone call between Don Siemer, Director, Market 
Surveillance, NYSE, and Anitra T. Cassas, Division, Commission, on 
June 21, 1999.
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    Proposal. According to the NYSE, market volatility has increased 
substantially since the capital utilization measure was introduced. For 
instance, the Exchange notes that while 1% Days occurred on 27% of the 
trading days in 1994, 1% Days occurred on 70% of the trading days in 
1998. As a result, the NYSE believes that 1% Days are now more 
characteristic of usual market conditions.
    The Exchange proposes to revise the 1% Day component of its 
definition of volatile days to better distinguish between volatile and 
base periods in light of increasing overall market volatility since the 
NYSE introduced the capital utilization measure. Specifically, the 
Exchange proposes to amend its definition of volatile days to include 
days when the range between the S&P 500 Index's highest and lowest 
values equals or exceeds 2% of the previous closing value. The NYSE 
believes that raising the percentage from 1% to 2% will bring the 
capital utilization measure's definition of volatile days back in line 
with the frequency of overall market volatility that existed in 1993. 
According to the NYSE, a 2% daily price movement in the S&P 500 Index 
will provide approximately the same number and percentage of volatile 
days in 1998 as the 1% daily price movement provided in 1994 (i.e., 55 
versus 67 days, or 22% versus 27%).
    In addition, the NYSE believes that the revised definition of 
volatile days will reinforce the Exchange's expectation that 
specialists provide ``value-added'' dealer participation during periods 
of unusual price movements, and maintain the emphasis given to the 
capital utilization measurement in particularly volatile markets. The 
NYSE notes that the use of a 2% standard for volatile days also will 
coinside with the recent revision of NYSE Rule 80A, which limits the 
entry of index arbitrage orders in any component stock of the S&P 500 
Index when there is a movement in the Dow Jones Industrial Average of 
an amount that approximates 2% of its value.\11\
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    \11\ See Securities Exchange Act Release No. 41041 (February 11, 
1999), 64 FR 8424 (February 19, 1999).
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    The 10% Days definition will remain unchanged.
2. Statutory Basis
    The NYSE believes that the basis under the Act for the proposed 
rule change is the requirement under Section 6(b)(5) \12\ of the Act 
that an exchange have rules that are designed to promote just and 
equitable principles of trade, to remove impediments to, and perfect 
the mechanism of a free and open market and, in general, to protect 
investors and the public interest.
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    \12\ 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. 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, 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 
NYSE. All submissions should refer to file No. SR-NYSE-99-11 and should 
be submitted by July 28, 1999.

IV. Commission's Findings and Order Granting Accelerated Approval 
of the Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations under 
the Act applicable to a national securities exchange and, in 
particular, with the requirements of Section 6(b)(5) \13\ of the 
Act.\14\ Specifically, the Commission finds the proposal is consistent 
with the Section 6(b)(5) requirements that the rules of an exchange be 
designed to facilitate transactions in securities. Further, the 
Commission finds that the proposal is consistent with Section 11(b) 
\15\ of the Act and Rule 11b-1 \16\ under the Act, which allow 
securities exchanges to promulgate rules relating to specialists to 
ensure fair and orderly markets. Specifically, the Commission believes 
that amending the definition of volatile days in the capital 
utilization measure to include days when the range between the S&p 500 
Index's highest and lowest values equals or exceeds 2% of the previous 
closing value will help to maintain the effectiveness of the capital 
utilization measure as an objective measure of specialist performance, 
thereby protecting investors and the public interest.
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    \13\ 15 U.S.C. 78f(b)(5).
    \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. 78k(b).
    \16\ 17 CFR 240.11b-1.
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    Specialists play a crucial role in providing stability, liquidity 
and continuity to the trading of securities. The NYSE implemented 
objective measures of specialist performance, like the capital 
utilization measure, to help ensure that specialists fulfill the 
obligations imposed on them by the NYSE and by the Act and rules 
thereunder to maintain fair and orderly markets in designated 
securities.\17\ The Commission believes that performance-based stock 
allocation could provide an

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incentive for specialists to improve their performance or maintain 
superior performance.\18\
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    \17\See, e.g., 17 CFR 240.11b-1; NYSE Rule 104.
    \18\ See January 1997 Order, supra note 4.
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    The Commission continues to believe, as it has concluded 
previously, that capital utilization is a relevant measure of 
specialist performance because if indicates the extent to which a 
specialist unit commits capital to and participates in the market for 
its securities, thereby contributing to market liquidity.\19\ According 
to the NYSE, market volatility has increased substantially since the 
NYSE implemented the specialist capital utilization measure in 1993. 
The NYSE notes, for example, that 1% Days occurred on 27% of the 
trading days in 1994, and on 70% of the trading days in 1998. As a 
result, the NYSE believes that the 1% Days definition of volatility is 
now more characteristic of usual market conditions. The 2% Days 
definition is designed to better distinguish between volatile and non-
volatile days in light of the increased overall market volatility since 
1993. According to the NYSE, the 2% Days definition would have provided 
approximately the same number and percentage of volatile days in 1998 
as the 1% Days definition provided in 1994 (i.e., 55 days versus 67 
days or 22% versus 27%).
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    \19\ See December 1993 Order, supra note 4.
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    The Commission believes that the proposed rule change will ensure 
that the definition of volatile days is meaningful in light of current 
market conditions. Accordingly, the Commission believes that the 
proposed rule change will make the definition of volatile day 
consistent with the spirit of the rule adopted in 1993, when the NYSE 
implemented the specialist capital utilization measure, and will ensure 
that the capital utilization measure continues to function effectively 
as an indication of specialist performance.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of the filing in the Federal Register. The Commission believes 
accelerated approval should help maintain the relative proportion of 
volatile periods to base periods comparable to that which existed when 
the capital utilization measure was adopted, thereby preserving the 
original intent of the performance measure.
    It is therefore ordered, pursuant to Section 19(b)(2)\20\ of the 
Act, that the proposed rule change (SR-NYSE-99-11), as amended, is 
approved on an accelerated basis.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-17151 Filed 7-6-99: 8:45 am]
BILLING CODE 8010-01-M