[Federal Register Volume 62, Number 148 (Friday, August 1, 1997)]
[Notices]
[Pages 41456-41457]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20373]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38874; File No. SR-NYSE-96-33]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval To Proposed Rule Change Relating to the 
Execution of Odd-Lot Orders

July 25, 1997.

I. Introduction

    On November 25, 1996, 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 price odd-lot transactions 
according to the next round-lot execution to occur on the Exchange 
under certain circumstances.
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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 February 19, 1997,\3\ and no comments were received. This 
order approves the proposal.
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    \3\ Securities Exchange Act Release No. 38267 (Feb. 11, 1997), 
62 FR 7488 (Feb. 19, 1997).
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II. Description

    Currently, odd-lot market orders are executed in the odd-lot system 
against the specialist in that stock at a price based on the ``best 
pricing quote'' (``BPQ''). This is either the NYSE quote or the best 
quote from another Intermarket Trading System (``ITS'') market center. 
(A buy odd-lot market order is executed at the offer price, and a sell 
odd-lot market order is executed at the bid price.) However, in 
situations where the quote for a stock does not qualify as a valid 
quote, either because it is designated as a non-firm quote or it fails 
a system validation check because it exceeds certain parameters, the 
current procedure prices odd-lot executions using the last sale price 
in the round lot market.\4\ The Exchange believes, however, that this 
may not reflect the current market for the stock because the quote 
condition (i.e. a non-firm or a gapped quote) strongly suggests that 
the market is likely to move away from that last price. In these 
situations, the Exchange believes the current procedure may 
disadvantage customers or the specialist.
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    \4\ See NYSE Rule 124.60 (detailing the circumstances when the 
ITS best bid or offer will not be utilized).
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    In instances when quotation information is not available or the 
security has been determined to be in ``non-firm mode,'' \5\ the NYSE 
proposes to price odd-lot orders by utilizing the price of the next 
Exchange round sale or such other price deemed appropriate under 
prevailing market conditions by the member organization designated by 
the Exchange to act as a market maker for odd-lot orders. In instances 
where the quote in a security does not meet the Exchange's odd-lot 
system guidelines, the NYSE proposes to price odd-lot orders by 
utilizing the price of the next Exchange round sale or the next 
Exchange quote that is within the odd-lot system guidelines (whichever 
occurs

[[Page 41457]]

first) or such other price deemed appropriate under prevailing market 
conditions by the member organization designated by the Exchange to act 
as a market maker for odd-lot orders.\6\ The Exchange believes this 
would provide more appropriate pricing of odd-lot orders as it would 
reflect actual round-lot market prices at the time the odd-lot orders 
are executed.
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    \5\ The Exchange considers a bid or offer as firm when the 
members of the market center disseminating the bid or offer are not 
relieved of their obligations with respect to such bid or offer 
under paragraph (c)(2) of Rule 11Ac1-1 pursuant to the ``unusual 
market'' exception of paragraph (b)(3) of Rule 11Ac1-1. See 17 CFR 
240.11Ac1-1(b)(3); 17 CFR 240.11Ac1-1(c)(2).
    \6\ These uncodified guidelines currently provide for the 
following maximum valid spread ranges:
    Common stock for prices less than or equal to $50, the valid 
spread is 1 point
    for prices between $50 1/64 and $100, the valid spread is 1\3/4\ 
points
    for prices greater than $100, the valid spread is 2\1/2\ points
    Preferred stock:
    for prices less than or equal to $50, the valid spread is 2 
points
    for prices between 50\1/64\ and 100, the valid spread is 2\1/4\ 
points
    for prices greater than $100, the valid spread is 2\1/2\ points
    Spread between quote and last sale must not exceed:
    prices less than or equal to $10, the valid spread is \3/8\ 
point
    prices between 10\1/8\ and $25, the valid spread is \1/2\ point
    prices between 25\1/8\ and $40, the valid spread is \5/8\ point
    prices greater than $40, the valid spread is 2\1/2\ points
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III. Discussion

    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 and, in 
particular, with the requirements of section 6(b).\7\ Specifically, the 
Commission believes the proposal is consistent with the section 6(b)(5) 
\8\ requirements that the rules of an exchange be designed to remove 
impediments to and perfect the mechanism of a free and open market, to 
facilitate transactions in securities and, in general, to protect 
investors and the public interest.\9\
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ In approving this rule, the Commission notes that it has 
considered the proposal's impact on efficiency, competition, and 
capital formation, consistent with section 3 of the Act. 15 U.S.C. 
Sec. 78c(f).
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    The Commission believes it is adequate for the NYSE to price 
standard odd-lot market orders at the price of the next Exchange round-
lot sale when the BPQ is unavailable. Although the current pricing 
algorithm provides investors with more advantageous prices in a 
steadily declining market than the proposed algorithm, utilizing the 
next Exchange round-lot sale price when the BPQ is unavailable is a 
reasonable choice by the Exchange that is not inconsistent with the 
Act. The proposal continues to provide procedures that facilitate the 
execution of odd-lot orders when use of the ITS quote may not be 
appropriate.
    The Commission also believes it is appropriate for the Exchange to 
price odd-lot orders by utilizing the price of the next Exchange round-
lot sale or the next Exchange quote that is within the odd-lot system 
guidelines (whichever occurs first) in instances where the quote in a 
security does not meet the Exchange's odd-lot system guidelines. The 
Commission has previously found that it is appropriate for the Exchange 
to impose certain, limited prerequisites on quotes from other market 
centers before incorporating such quotes into the Exchange's odd-lot 
pricing system.\10\ The Commission stated that such limitations help 
protect the automatic execution features of the Exchange's odd-lot 
pricing system against the inclusion of aberrant quotations.\11\ 
Similarly, the maximum valid spread parameters, as drafted, should help 
to exclude stale quotations from the odd-lot system. If the Exchange 
chooses to narrow these parameters, it must file the proposed change 
with the Commission pursuant to Section 19(b) of the Act.\12\
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    \10\ NYSE Rule 124 generally provides that odd-lot market orders 
will be executed at the price of the ``adjusted ITS bid (offer)'' at 
the time the order is received by the Exchange. NYSE Rule 124.60 
states that a quotation in a stock from another ITS market center 
will be considered if: (1) The stock is included in ITS in that 
market center, (2) the size of the quotation is greater than 100 
shares, (3) the bid or offer is not more than one-quarter dollar 
away from the bid (offer) disseminated by the Exchange, (4) the 
quotation conforms to the Exchange's requirements concerning minimum 
fractional changes, (5) the quotation does not result in a ``locket 
market,'' (6) the market center is not experiencing operational or 
system problems with respect to the dissemination of quotation 
information, and (7) the bid or offer is ``firm'' pursuant to the 
Commission's and the market's rules.
    \11\ Securities Exchange Act Release No. 27971 (May 2, 1990), 55 
FR 19409 (May 9, 1990) (approving File No. SR-NYSE-90-60).
    \12\ 15 U.S.C. 78s(b).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-NYSE-96-33) is approved.


    \13\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-20373 Filed 7-31-97; 8:45 am]
BILLING CODE 8010-1-M