[Federal Register Volume 64, Number 243 (Monday, December 20, 1999)]
[Notices]
[Pages 71160-71162]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32819]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42224; File No. SR-NYSE-94-34]
Self-Regulatory Organizations; Notice of Filing of Amendment No.
5 to Proposed Rule Change by the New York Stock Exchange, Inc. to
Revise Exchange Rule 92, ``Limitations on Members' Trading Because of
Customers' Orders''
December 13, 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 October 28, 1999, the New York Stock Exchange, Inc. (``Exchange'' or
``NYSE'') filed with the Securities and Exchange Commission
(``Commission'') Amendment No. 5 to 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, as amended, 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
As originally filed in 1994, the proposed rule change would amend
Exchange Rule 92 (``Rule 92'') to permit NYSE member organizations to
trade along with their customers when such member organizations
liquidate a block facilitation position or engage in bona fide
arbitrage or risk arbitrage. Amendment No. 5 to the proposal clarifies
the limited exception for transactions effected to hedge a customer
facilitation position, and provides further explanation of how the
revised Rule 92 will operate.
The following is the text of the proposed rule change marked to
reflect all of the proposed changes.\3\ Additions to the current text
of Exchange Rule 92 appear in italics while deletions appear in
[brackets].
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\3\ As presented, the text of the proposed rule change
incorporates all of the proposed changes made to the original rule
proposal by Amendment Nos. 1, 2, 3, 4, and 5. See Securities
Exchange Act Release Nos. 35139 (Dec. 22, 1994), 60 FR 156 (Jan. 3,
1995) (notice of filing of proposed rule change, including Amendment
No. 1); 36015 (July 21, 1995), 60 FR 38875 (July 28, 1995) (notice
of filing of Amendment No. 2); 37428 (July 11, 1996), 61 FR 37523
(July 18, 1996) (notice of filing of Amendment No. 3); 39634 (Feb.
9, 1998), 63 FR 8244 (Feb. 18, 1998) (notice of filing of Amendment
No. 4). On November 22, 1999, the Exchange submitted a technical
correction to Amendment No. 5 to better identify the cumulative
proposed changes to Exchange Rule 92. See Electronic mail message
from Donald Siemer, Director, Market Surveillance, Exchange, to
Michael L. Loftus, Special Counsel, Division of Market Regulation,
Commission, dated November 22, 1999.
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Rule 92: Limitations on Members' Trading Because of Customers'
Orders
[(a) No member shall (1) personally buy or initiate the purchase of
any security on the Exchange for his own account or for any account in
which he, his member organization or any other member, allied member or
approved person, in such organization or officer thereof, is directly
or indirectly interested, while such member personally holds or has
knowledge that his member organization holds an unexecuted market order
to buy such security in the unit of trading for a customer, or (2)
personally sell or initiate the sale of any security on the Exchange
for any such account, while he personally holds or has knowledge that
his member organization holds an unexecuted market order to sell such
security in the unit of trading for a customer.
(b) No member shall (1) personally buy or initiate the purchase of
any security on the Exchange for any such account, at or below the
price at which he personally holds or has knowledge that his member
organization holds an unexecuted limited price order to buy such
security in the unit of trading for a customer, or (2) personally sell
or initiate the sale of any security on the Exchange for any such
account at or above the price at which he personally holds or has
knowledge that his member organization holds an unexecuted
[[Page 71161]]
limited price order to sell such security in the unit of trading for a
customer.]
(a) Except as provided in this Rule, no member or member
organization shall cause the entry of an order to buy (sell) any
Exchange-listed security for any account in which such member or member
organization or any approved person thereof is directly or indirectly
interested (a ``proprietary order''), if the person responsible for the
entry of such order has knowledge of any particular unexecuted
customer's order to buy (sell) such security which could be executed at
the same price.
(b) A member or member organization may enter a proprietary order
while representing a customer order which could be executed at the same
price, provided the customer's order is not for the account of an
individual investor, and the customer has given express permission,
including an understanding of the relative price and size of allocated
execution reports, under the following conditions:
(1) the member or member organization is liquidating a position
held in a proprietary facilitation account, and the customer's order is
for 10,000 shares or more;
(2) the member or member organization is creating a bona fide hedge
(``hedge'') and (i) the creation of the hedge, whether through one or
more transactions, occurs so close in time to the completion of the
transaction precipitating such hedge that the hedge is clearly related;
(ii) the size of the hedge is commensurate with the risk it offsets;
(iii) the risk to be offset is the result of a position acquired in the
course of facilitating a customer's order; and (iv) the customer's
order is for 10,000 shares or more;
(3) the member or member organization is modifying an existing
hedge and (i) the size of the hedge, as modified, remains commensurate
with the risk it offsets; (ii) the hedge was created to offset a
position acquired in the course of facilitating a customer's order; and
(iii) the customer's order is for 10,000 shares or more; or
(4) the member or member organization is engaging in bona fide
arbitrage or risk arbitrage transactions, and recording such
transactions in an account used solely to record arbitrage transactions
(an ``arbitrage account'').
(c) The provisions of this Rule shall not apply to:
(1) [to] any purchase or sale of any security in an amount of less
than the unit of trading made by an odd-lot dealer to offset odd-lot
orders for customers[, or];
(2) [to] any purchase or sale of any security upon terms for
delivery other than those specified in such unexecuted market or
limited price order[.];
(3) transactions by a member or member organization acting in the
capacity of a market maker pursuant to Securities and Exchange
Commission Rule 19c-3 in a security listed on the Exchange;
(4) transactions by a member or member organization acting in the
capacity of a specialist or market maker on another national securities
exchange; and
(5) transactions made to correct bona fide errors.
Supplementary Material
.10 A member or employee of a member or member organization
responsible for entering proprietary orders shall be presumed to have
knowledge of a particular customer order unless the member organization
has implemented a reasonable system of internal policies and procedures
to prevent the misuse of information about customer orders by those
responsible for entering such proprietary orders.
.20 This Rule shall apply to any agency or proprietary transaction
effected on the Exchange if such transaction (``Exchange transaction'')
is part of a group of related transactions that together have the
effects prohibited by the Rule, regardless of whether (i) one or more
of the other related transactions were effected on other market
centers; or (ii) the Exchange transaction by itself had such effects.
.30 This Rule shall also apply to a member organization's member on
the Floor, who may not execute a proprietary order at the same price,
or at a better price, as an unexecuted customer order that he or she is
representing, except to the extent the member organization itself could
do so under this Rule.
.40 For purposes of paragraph (b) above, the term ``account of an
individual investor'' shall have the same meaning as the meaning
ascribed to that term in Exchange Rule 80A. For purposes of paragraph
(b)(1) above, the term ``proprietary facilitation account'' shall mean
an account in which a member organization has a direct interest and
which is used to record transactions whereby the member organization
acquires positions in the course of facilitating customer orders. Only
those positions which are recorded in a proprietary facilitation
account may be liquidated as provided in paragraph (b)(1). For purposes
of paragraph (b)(2) and (b)(4) above, the terms ``bona fide hedge'',
``bona fide arbitrage'' and ``risk arbitrage'' shall have the meaning
ascribed to such terms in Securities Exchange Act Release No. 15533,
January 29, 1979. All transactions effected pursuant to paragraph
(b)(4) above must be recorded in an arbitrage account.
.50 For purposes of paragraph (b)(2) above, a hedge will be deemed
to be ``clearly related'' if either the first or last transaction
comprising the hedge is executed on the same trade date as the
transaction that precipitates such hedge. A member shall mark all
memoranda of orders to identify each transaction creating or modifying
a hedge as permitted under this Rule.
[.10] .60 A member who issues a commitment or obligation to trade
from the Exchange through ITS or any other Application of the System
shall, as a consequence thereof, be deemed to be initiating a purchase
or sale of a security on the Exchange as referred to in this Rule.
[.20] .70 See paragraph (c)(i) of Rule 800 (Basket Trading:
Applicability and Definitions) and paragraph (d)(ii) of Rule 900 (Off-
Hours Trading: Applicability and Definitions) in respect of the ability
to initiate basket transactions and transactions through the ``Off-
Hours Trading Facility'' (as Rule 900 defines that term), respectively,
notwithstanding the limitations of this Rule.
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 and is set forth in Sections A, B, and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
As reflected in the original filing and Amendment Nos. 1, 2, 3, and
4 thereto, the proposed rule change would establish limited exceptions
to Rule 92 that permit NYSE member organizations to trade along with
their customers when liquidating a block facilitation position, hedging
a previously established facilitation position, or engaging in bona
fide arbitrage or risk arbitrage. Amendment No. 4 to the filing
proposed to extend the application of Rule 92 to trades effected by an
NYSE member or member organization in
[[Page 71162]]
NYSE-listed securities, even if such trades occurred on other market
centers (certain exceptions would be provided to over-the-counter
market makers and specialists on regional exchanges).
a. Bona Fide Hedge Exception
The Exchange seeks to clarify the proposed exception from Rule 92
that would allow NYSE members or member organizations to trade along
with a customer in the same security when the member or member
organization engages in proprietary bona fide hedge transactions. Under
the proposal, the creation of a bona fide hedge (``hedge'') must occur
so close in time to the completion of the transaction precipitating
such hedge that the hedge is clearly related. A hedge will be deemed to
be ``clearly related'' to the transaction precipitating the hedge if
either the first or last transaction comprising the hedge is executed
on the same trade date as the transaction that precipitates such hedge.
In addition, the size of the hedge must be commensurate with the risk
it offsets. The proposal also requires that the risk to be offset must
result from a position acquired when the member or member organization
facilitated a customer's order. Finally, the customer's order that the
NYSE member or member organization trades along with must be for 10,000
shares or more.
The proposal also would permit NYSE members or member organizations
to modify an existing hedge that was created to offset a position
acquired in a customer facilitation transaction. The hedge, as
modified, must remain commensurate with the risk it offsets, and the
customer's order that the NYSE member or member organization trades
along with must be for 10,000 shares or more.
b. Application of Rule 92 to Other Market Centers
The proposal prohibits NYSE members or member organizations from
entering an order for their own or related accounts if the person
entering the order has knowledge of a customer order capable of
execution at the same price. Under Amendment No. 4 to the proposal,
this prohibition would apply whether the trade for the customer or the
NYSE member or member organization occurred on the Exchange or any
other market center. Amendment No. 4 provides specific guidelines to
help determine when Rule 92 would apply to proprietary or agency trades
effected on another market center, including situations where neither
segment nor ``leg'' of a customer facilitation transaction occurred on
the Exchange.
The Exchange seeks to further revise the proposed application of
Rule 92. Specifically, the Exchange proposes to apply Rule 92 only in
those situations where one or both trades (proprietary or agency) of a
customer facilitation transaction are effected on the NYSE. If neither
segment of a customer facilitation transaction occurs on the Exchange,
Rule 92 would not apply.
c. Bona Fide Errors
The proposal also would permit NYSE members and member
organizations to trade along with customers when effecting a
transaction to correct a bona fide error.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6(b)(5) of the Act \4\ in that it is designed to promote
just and equitable principles of trade, remove impediments to and
perfect the mechanism of a free and open market, and, in general,
protect investors and the public interest. The Exchange also believes
that the proposed rule change will enable NYSE members and member
organizations to add depth and liquidity to the Exchange's market, and
help protect investors by requiring the express permission of customers
in trading along situations.
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\4\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change will not 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 did not solicit or received written comments with
respect to 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 Exchange 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 proposed rule
change, as amended, 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 submissions, 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 persons, 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 Section, at 450 Fifth
street, NW, Washington, DC 20549. 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-94-34 and
should be submitted by January 10, 2000.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\5\
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\5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-32819 Filed 12-17-99; 8:45 am]
BILLING CODE 8010-01-M