[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]
[[Page 36731]]
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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
[[Page 36732]]
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