[Federal Register Volume 65, Number 95 (Tuesday, May 16, 2000)]
[Notices]
[Pages 31199-31200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-12271]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42770; File No. SR-NYSE-99-31]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Amending Exchange Rules 
902, 903 and 906

May 10, 2000.

I. Introduction

    On June 30, 1999, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') submitted to 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 to amend Exchange Rules 902, 903 
and 906.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on September 1, 1999. No comments were received on the 
proposal. This order approves the proposal.

II. Description of the Proposal

    The Exchange proposes to amend NYSE Rules 902, 903 and 906 to 
permit coupled orders to be submitted after the official closing of the 
9:30 a.m. to 4:00 p.m. trading session until 5:00 p.m. (the period 
after the 4:00 p.m. close until 5:00 p.m. hereafter referred to as 
``Crossing Session 1'') where both sides represent member or member 
organization interest, in circumstances in which a specialist has 
included another member's or member organization's interest in 
offsetting the imbalance when setting a closing price.
    In 1991, the Exchange established its ``Off-Hours Trading 
Facility.'' \3\ In connection with its implementation, the Exchange 
adopted its ``900'' series of rules to govern trading, order 
eligibility, order entry and record keeping requirements.\4\
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    \3\ See Securities Exchange Act Release No. 29237 (May 24, 
1991), 56 FR 24853 (May 31, 1991) (Files No. SR-NYSE-90-52 and SR-
NYSE-90-53).
    \4\ See id.
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    At 4:00 p.m. each day, the Exchange completes its normal procedure 
for the close of trading of the 9:30 a.m.-4:00 p.m. trading session. 
After 4:00 p.m., a common message switch broadcast message is published 
announcing the commencement of Crossing Session 1, which runs until 
5:00 p.m.
    During Crossing Session 1, the Off-Hours Trading Facility permits 
members and member organizations to enter orders to be executed at the 
NYSE closing price, that is, the price established by the last regular 
way sale in a security at the official closing of the 9:30 a.m. to 4:00 
p.m. trading session. Orders may be entered for any Exchange listed 
issue, other than a security that is subject to a trading halt at the 
close of the regular trading session (including a Rule 80B trading 
halt) or is halted after 4:00 p.m.
    The Exchange proposes to modify certain rules pertaining to 
Crossing Session 1 in an effort to reduce volatility and price 
dislocations at the 4:00 p.m. close by enabling the specialist to 
reflect legitimate market interest that was willing to participate in 
the close, but could not enter a timely order.
    In circumstances in which a stock has an imbalance of market-on-
close or limit-on-close orders, or when the closing price will elect a 
significant volume of stop orders, there may be little time to attract 
offsetting orders. A member, member organization or a customer may be 
willing to offset the imbalance, but be unable to enter an order before 
4:00 p.m. The specialist may then have to acquire a substantial 
position or halt trading.
    Under NYSE Rule 902, coupled orders to buy and sell the same amount 
of the same security may be entered into Crossing Session 1. However, 
such coupled orders may not be entered if they are both for an account 
of a member or member organization, or for an account in which an 
``associated person'' of a member or member organization has an 
interest.
    Therefore, while a specialist member organization may enter an 
order coupled with a contra-side order from a non-member in Crossing 
Session 1, it may not enter an order coupled with an order for a 
member's or member organization's account.
    The Exchange proposes to amend NYSE Rule 902 to permit coupled 
orders to be submitted to Crossing Session 1 where both sides represent 
member or member organization interest, in circumstances in which a 
specialist has included another member's or member organization's 
interest in offsetting the imbalance when setting a closing price. 
Thus, the specialist may increase his or her participation at the close 
in anticipation of trading with a member or member organization in 
Crossing Session 1 and the closing price should reflect less of an 
imbalance.
    Under NYSE Rule 903, orders entered in Crossing Session 1, 
including coupled orders, are executed at the 5:00 p.m. close of the 
session. Under NYSE

[[Page 31200]]

Rule 906, if the Exchange determines that material news is disclosed 
between 4:00 p.m. and 5:00 p.m., such as news about a corporate 
development, the Exchange will cancel orders received in Crossing 
Session 1 and will preclude the entry of any subsequent orders. 
However, in the circumstances outlined above, it is the Exchange's view 
that a good faith negotiation tied to establishing the closing price 
should not be affected by a subsequent event which ``halts'' trading.
    Therefore, the Exchange proposes to amend NYSE Rules 903 and 906 to 
permit trades for the account of a specialist and a member, member 
organization or a non-member to be executed immediately when entered 
into Crossing Session 1, not at 5:00 p.m., regardless of whether the 
Exchange has determined that all other Crossing Session 1 orders be 
canceled and precluded from entry. In addition, the Exchange proposes 
to require a specialist to obtain Floor Official approval for the entry 
of his or her order into Crossing Session 1 if such order is not to be 
at the risk of the market, i.e., it will be executed immediately and 
will not be precluded from entry because of a trading ``halt.'' The 
Exchange believes this requirement will help to insure that orders 
which are intended to offset the specialist's participation at the 
close have been reflected when the closing price was established. Other 
coupled orders would continue to be executed at 5:00 p.m., subject to 
the stock not being withdrawn from Crossing Session 1. The Exchange 
believes that retaining this provision for other coupled orders is 
appropriate for the protection of investors who may not be aware of the 
corporate development.
    Under the proposal, total executed volume for coupled orders which 
are executed either immediately upon entry or at 5:00 p.m. will be 
reported to the tape as a single print, and will continue to be 
reported as ``sold.''

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.\5\ 
In particular, the Commission finds the proposal is consistent with 
Section 6(b)(5) of the Act,\6\ which requires that an Exchange 
promulgate 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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    \5\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(5).
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    The Exchange's proposed amendment to NYSE Rule 902 should allow a 
specialist to increase his or her participation at the close in 
anticipation of trading with a member or member organization in 
Crossing Session 1, thereby resulting in a more orderly close during 
periods of extraordinary volatility.
    The Exchange also proposes to amend NYSE Rules 903 and 906 to 
permit trades for the account of a specialist and a member, member 
organization or a non-member to be executed immediately when entered 
into Crossing Session 1, rather than at 5:00 p.m. The amendment will 
allow such trades to be executed immediately when entered into Crossing 
Session 1, regardless of whether the Exchange has determined that all 
other Crossing Session 1 orders in a particular security be canceled 
and precluded from entry. The proposal also will require a specialist 
to obtain Floor Official approval for the entry of his or her order 
into Crossing Session 1 if such order is not to be executed immediately 
and will not be precluded from entry because of a trading ``halt.'' The 
Exchange has represented that this amendment is based on the premise 
that a specialist involved in a good faith renegotiation tied to 
establishing the closing price should not have his or her trades remain 
unexecuted if a subsequent event ``halts'' trading in the security.
    The Commission finds that the Exchange's proposed amendments to 
NYSE Rules 903 and 906 should help to insure that orders which are 
intended to offset a specialist's participation at the close have been 
reflected when the closing price was established, resulting in a more 
orderly close. Such provisions are consistent with Section 6(b)(5),\7\ 
which requires the rules of an Exchange be designed 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\ Id.
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    The Commission further finds that retaining the provision requiring 
other coupled orders to continue to be executed at 5:00 p.m., subject 
to the stock not being withdrawn from Crossing Session 1, as 
appropriate under Section 6(b)(5) of the Act,\8\ which requires an 
Exchange's rules be designed to protect investors and the public 
interest. An investor, after having entered an order into Crossing 
Session 1, may be unaware of a corporate development which could have 
substantial impact on the price of a security.Retaining the provision 
which requires other coupled orders to be executed at the close of 
Crossing Session 1 will help to ensure that investors who are unaware 
of corporate news will be adequately protected, should the corporate 
news have an unfavorable impact on the price of the stock.\9\
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    \8\ Id.
    \9\ The Commission, in granting approval, notes that Floor 
Officials should carefully review specialist requests to enter these 
types of trades into Crossing Session 1. In particular, Floor 
Officials should consider the frequency with which particular 
specialists request to use this rule, and whether there have been 
any instances or prior problems associated with a particular 
specialist's use of this rule. For example, Floor Officials should 
consider whether there have been occasions in which there were 
significant discrepancies between the execution price contemplated 
by a member firm and the price actually received as a result of the 
Crossing Session 1 transaction.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-NYSE-99-31) is approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-12271 Filed 5-15-00; 8:45 am]
BILLING CODE 8010-01-M