[Federal Register Volume 66, Number 149 (Thursday, August 2, 2001)]
[Notices]
[Pages 40307-40308]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19282]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44595; File No. SR-NYSE-2001-15]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval to Proposed Rule Change by the New York Stock Exchange, Inc. 
Amending NYSE Rules 104 and 1100 Relating to Trading of ETFs

July 26, 2001.

I. Introduction

    On June 15, 2001, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'' filed with the Securities and Exchange Commission (``SEC'' 
or ``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 consisting of an amendment to NYSE Rule 104 to 
facilitate trading in Exchange Traded Funds (``ETFs''), and amendments 
to NYSE Rule 1100 to clarify that rules relating to Investment Company 
Units apply to such securities traded on the basis of unlisted trading 
privileges (``UTP''), and to authorize the Exchange to close trading in 
an ETF at 4:05 p.m. when trading in a related futures contract has 
closed at that time on the last trading day of the month. The proposed 
rule change was published for comment in the Federal Register on June 
28, 2001.\3\ The Commission received one comment on the proposal.\4\ On 
July 26, 2001, the Exchange submitted a response to the comment 
letter.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 44465 (June 22, 
2001), 66 FR 34503.
    \4\ See letter from Alton B. Harris, Ungaretti & Harris, to 
Jonathan G. Katz, Secretary, Commission, dated July 13, 2001.
    \5\ See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Nancy Sanow, Assistant Director of Market 
Regulation (``Division''), Commission, dated July 26, 2001.
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II. Description of the Proposed Rule Change

    The Exchange plans to begin trading certain ETFs on the Exchange on 
a UTP basis on July 31, 2001. These ETFs are The NASDAQ 100 Trust 
(symbol QQQ), Standard and Poor's Depositary Receipts (symbol SPY) and 
the Dow Industrials DIAMONDS (symbol DIA). ETFs are securities which 
are defined as Investment Company Units in Section 703.16 of the 
Exchange's Listed Company Manual. The Exchange proposes to amend NYSE 
Rule 1100(a) to clarify that NYSE rules applying to Investment Company 
Unites also apply to securities fitting that definition that are traded 
on the Exchange on the basis of UTP.
    NYSE Rule 104 governs specialists' dealings in Their specialty 
stocks. NYSE Rule 104.10 requires specialists to obtain Floor Official 
approval when purchasing on a direct plus tick or selling on a direct 
minus tick, or when purchasing on a zero plus tick more than 50% of the 
stock offered. These transactions are seen as destabilizing, and may be 
effected by the specialist only with Floor Official approval. NYSE Rule 
104.10(7) was amended several years ago to permit a specialist 
registered in an Investment Company Unit to effect proprietary 
destabilizing trades without Floor Official approval to bring the 
security into parity with the value of the index on which the unit is 
based or with The net asset value of the securities comprising the 
unit. The purpose of that amendment was to permit a specialist 
registered in a ``country basket'' to act expeditiously to bring the 
basket into parity with the value of the securities comprising the 
basket.\6\
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    \6\ See Securities Exchange Act Release No. 37016 (March 22, 
1996), 61 FR 14185 (March 29, 1996.)
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    As noted above, ETFs are within the meaning of the term Investment 
Company Units, and thus, an ETF specialist is permitted under NYSE Rule 
104.10(7) to effect proprietary destabilizing trades without Floor 
Official approval to bring the ETF into parity with the underlying 
index or the net asset value of the securities comprising the ETF. The 
Exchange proposes to permit specialists to effect proprietary 
destabilizing trades without floor official approval to bring the ETF 
into parity with a futures contract on the value of the index on which 
the Unit is

[[Page 40308]]

based. Such transactions remain subject to the requirement that they be 
effected in a manner that is consistent with the maintenances of a fair 
and orderly market.
    Finally, the Exchange proposes to close trading in an ETF at 4:05 
p.m. (Eastern Time) on the last business day of each month, which is 
the same time that trading in a related futures contract closes on the 
last business day of the month.

III. Summary of Comments

    The commenter stated that registered competitive market makers on 
the Exchange should be treated in a similar manner as specialists when 
trading ETFs on a UTP basis with respect to the ability to effect 
destabilizing transactions.
    The Exchange responded that, as a matter of policy, it has a 
determined to utilize a unitary market maker system, i.e., specialists, 
when trading ETFs on a UTP basis.

IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange \7\ 
and, in particular, the requirements of Section 6 of the Act \8\ and 
the rules and regulations thereunder. The Commission finds specifically 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Act \9\ because it is designed to promote just and equitable principles 
of trade, to remove impediments to and perfect the mechanism of a free 
and open market and a national market system and, in general, to 
protect investors and the public interest.
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    \7\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(5).
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    In particular, the Commission finds that the proposed amendments to 
NYSE Rules 104 and 1100 will enable the NYSE to accommodate the trading 
of ETFs on a UTP basis. The Commission believes clarifying NYSE Rule 
1100(a) to expressly state that NYSE rules applying to Investment 
Company Units will also apply to ETFs trading on the Exchange on the 
basis of UTP should provide members and investors with notice as to the 
rules applicable to ETFs traded on the NYSE.
    In addition, because ETFs are considered Investment Company Units, 
an ETF specialist is permitted under current NYSE Rule 104.10(7) to 
effect proprietary destabilizing trades without Floor Official approval 
to bring the ETF into parity with the underlying index or the net asset 
value of the securities comprising the ETF. The Exchange proposes to 
amend this rule to permit an ETF specialist to effect proprietary 
destabilizing transactions without Floor Official approval to bring the 
ETF into parity with a futures contract on the index on which the ETF 
is based. The Commission believes that it is reasonable to allow such 
transactions without Floor Official approval, so long as such trades 
are effected in a manner that is consistent with the maintenance of a 
fair and orderly market.\10\ The Commission notes that ETFs have a 
pricing and trading relationship linked to the index on which the ETF 
is based, the net asset value of securities comprising the Unit, as 
well as the futures contract on the value of the index on which the 
Unit is based. Thus, a specialist may determine that it needs to engage 
in a parity transaction to bring the ETF in line with these related 
products. The requirement to secure floor approval could delay 
specialists from effectuating such transactions, during which time the 
values of the related index, components, or futures contract could 
continue to move. Therefore, the Commission believes that it is 
reasonable for NYSE to remove floor official approval when a specialist 
engages in transactions to bring an ETF in line with its related 
futures contract.
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    \10\ The Commission notes, however, that direct destabilizing 
transactions that are leading, rather than following, the related 
futures contract would continue to require Floor Official approval. 
In addition, specialists remain subject to all other requirements of 
NYSE Rule 104 with respect to their affirmative and negative 
obligations to maintain a fair and orderly market. Telephone 
conversation between Don Siemer, Director, Market Surveillance, 
NYSE, and Kelly Riley, Special Counsel, Division, Commission, on 
July 26, 2001.
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    Furthermore, the Exchange proposal to close trading in an ETF at 
4:05 p.m. on the last business day of each month is consistent with the 
close of trading in ETFs and futures on other markets and should 
facilitate the trading of these products across markets.
    Finally, the Commission notes that the proposal was noticed for a 
15-day comment period and the Commission received only one comment 
letter regarding the proposal for which the Exchange provided a 
response. Accordingly, the Commission finds good cause pursuant to 
Section 19(b)(2) of the Act \11\ to approve the proposed rule change on 
an accelerated basis prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register in 
order to allow the NYSE to have these amendments to its rules in place 
to accommodate the trading of ETFs on a UTP basis scheduled to begin on 
July 31, 2001.
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    \11\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    For the foregoing reasons, the Commission finds that the proposal 
is consistent with the requirements of the Act and rules and 
regulations thereunder.
    It is Therefore Ordered, pursuant to Section 19(b)(2) of the Act 
\12\ that the proposed rule change (File No. SR-NYSE-2001-15) be, and 
it hereby is, approved on an accelerated basis.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-19282 Filed 8-1-01; 8:45 am]
BILLING CODE 8010-01-M