[Federal Register Volume 65, Number 33 (Thursday, February 17, 2000)]
[Notices]
[Pages 8223-8224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-3814]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42411; File No. SR-NYSE-99-10]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 to the Proposed Rule Change by the New York Stock 
Exchange, Inc. To Amend Rule 123A.40

February 10, 2000.

I. Introduction

    On March 19, 1999, 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 123A.40. The proposed rule 
change was published for comment in the Federal Register on July 22, 
1999.\3\ On November 1, 1999, the Exchange filed Amendment No. 1.\4\ 
The Commission received no comments on the proposal. This notice and 
order approves the proposed rule change, as amended, and solicits 
comments from interested persons on Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 41623 (July 16, 1999), 
64 FR 39547.
    \4\ See Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Richard Strasser, Assistant Director, Division 
of Market Regulation, Commission, dated October 29, 1999 
(``Amendment No. 1''). In Amendment No. 1, the Exchange amends the 
proposed rule change of NYSE Rule 123A.40 to allow specialists to 
elect stop orders at a bid or offer that betters the market without 
the specialist obtaining Floor Official approval, unless the price 
of the specialist's electing transaction is more than \2/16\ point 
away from the previous sale. This amends the original filing which 
proposed that the requirement for Floor Official approval be 
eliminated for a specialist's transaction electing a stop order 
unless the price of the electing transaction was more than \4/16\ 
point away from the previous sale.
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II. Description of the Proposal

    The proposed rule change would amend NYSE Rule 123A.40 to allow 
specialists to elect stop orders at a bid or offer that better's the 
market and would eliminate the requirement for specialists to obtain 
Floor Official approval, unless the price of the specialist's electing 
transaction is more than \2/16\ point away from the previous sale.\5\
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    \5\ The provisions of NYSE Rule 123A.40 that requires 
specialists to guarantee the price of elected stop orders and 
requires Floor Official approval when a specialist elects stop 
orders through his own bid or offer are intended to address, in 
part, the situation where a specialist has an accumulation of stop 
orders and desires to ``clean up the book.'' For example, this can 
be accomplished by the specialist entering a bid that elects all of 
the stop sell orders at the lowest stop order price, or by electing 
stop sell orders in a series of descending prices until the lowest 
order is reached. The specialist could use these stop order election 
processes to drive the share price down to an artificially low level 
to obtain cheap stock at the expense of public customers. See 
Securities Exchange Act Release No. 34136 n.10 (May 31, 1994), 59 FR 
29461 (June 7, 1994).
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    Presently, NYSE Rule 123A.40 generally prohibits a specialist from 
making a transaction for his or her own account that would result in 
electing stop orders.\6\ However, the rule permits a specialist to be a 
party to the election of a stop order under two circumstances: (i) when 
the specialist's bid or offer betters the market, is made with the 
prior approval of a Floor Official, and the specialist guarantee's that 
the stop order will be executed at the same price as the electing 
transaction; and (ii) when the specialist purchases or sells stock at 
the current bid or offer to facilitate completion of a member's order 
at a single price, where the depth of the current bid or offer is not 
sufficient.
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    \6\ A stop order is an order that becomes an executable market 
order, or limit order, once the specified price (``stop price'') is 
reached. A stop order is elected when the stock trades at or beyond 
the stop price and, thus, may not necessarily be executed at that 
price. See NYSE Rule 13.
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    The Exchange proposes to amend part (i) of the rule to allow the 
specialist to make a bid or offer that betters the market at a price 
that would elect stop orders and eliminate the requirement to obtain 
Floor Official approval, unless the price of the specialist's electing 
transaction is more than \2/16\ point away from the previous sale.\7\ 
The rule would retain the requirement that the specialist guarantee 
that stop orders be executed at the same price as the electing sale.
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    \7\ See note 4, above.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations under 
the Act applicable to a national securities exchange.\8\ In particular, 
the proposal is

[[Page 8224]]

consistent with Section 6(b)(5) of the Act \9\ in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, and 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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    \8\ In approving this proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change would allow a specialist to make a bid or 
offer that betters the market at a price that would elect stop orders 
and eliminate the requirement to obtain prior Floor Official approval, 
unless the price of the specialist's electing transaction is more than 
\2/16\ point away from the previous sale. The Commission believes that 
eliminating the requirement of Floor Official approval for such 
transactions could help to alleviate the administrative burden for 
Floor Officials and permit the reallocation of useful resources and 
increase the operational efficiency of Floor Officials and 
specialist's, while maintaining the requirement of Floor Official 
approval for the specialist stop order elections that are most likely 
to warrant Floor Official scrutiny (i.e., where the electing 
transaction is more than \2/16\ point away from the previous sale). An 
NYSE review of specialist' stop order electing transactions showed that 
a significant percentage of trades occur at a relatively small or no 
change in price. For example, an Exchange analysis of the difference 
between the electing stop price by specialists and the last sale price 
for September through November 1998 shows that 60% of such electing 
sales took place \2/16\ point or less from the last sale price. Based 
on these statistics the proposal would eliminate approximately 60% of 
required Floor Official approvals in this area. Therefore, the 
Commission believes that the proposed rule change should significantly 
reduce the administrative burden on Floor Officials. Moreover, the 
proposal should assist specialists in facilitating fair and orderly 
markets by not requiring prior Floor Official approval before a 
specialist can make a bid or offer that would elect stop orders. At the 
same time, however, the Commission is mindful that the elimination of 
Floor Official approval in this limited circumstance makes it incumbent 
upon the NYSE to rigorously surveil for possible violations of NYSE 
specialists' agency obligations that may be facilitated by the 
relaxation of the Floor Official requirement. Therefore, the Commission 
requests that the NYSE provide to Commission staff, no later than nine 
months from the date of this order, a report discussing the impact this 
proposal has had on the number of stop orders being elected and any 
possible violation of Commission of NYSE rules resulting from such 
transactions. Moreover, the Commission expects that the NYSE will 
promptly file a proposed rule change with the Commission that conforms 
this rule to decimals.
    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing of the amendment in the Federal 
Register. Specifically, Amendment No. 1 changes the proposal to 
eliminate Floor Official approval for transactions that elect stop 
orders by specialists for transactions that are more than \2/16\ point 
from the last sale, as opposed to more than \4/16\ point away from the 
last sale. Because amendment No. 1 increases the number of specialist 
stop order election transactions that require Floor Official approval, 
it should improve the NYSE's ability to surveil for abuses of 
Commission or NYSE rules that might result from these transactions. 
Thus, the Commission believes that the combination of Amendment No. 1 
to the proposal and the Exchange's surveillance procedures should make 
stop order election by specialist less susceptible to manipulation and 
provide adequate protection for investors. Accordingly, the Commission 
believes that there is good cause, consistent with Sections 6(b)(5) and 
19(b) of the Act,\10\ to approve Amendment No. 1 to the proposal on an 
accelerated basis.
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    \10\ 15 U.S.C. 78f(b)(5) and 78s(b).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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. 25049-0609. 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-99-10 and should 
be submitted by March 9, 2000.

V. Conclusion

    IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the 
Act,\11\ the proposed rule change, as amended, (SR-NYSE-99-10) is 
approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-3814 Filed 2-16-00; 8:45 am]
BILLING CODE 8010-01-M