[Federal Register Volume 62, Number 146 (Wednesday, July 30, 1997)]
[Notices]
[Pages 40881-40882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20050]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38865; File No. SR-NYSE-97-19]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the New York 
Stock Exchange, Inc., Relating to the Pilot for Entry of Limit-at-the-
Close Orders

July 23, 1997.
    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 June 16, 1997, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons and to 
grant accelerated approval to the proposed rule change.
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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

    The proposed rule change would extend for one year a pilot to 
permit limit-at-the-close (``LOC'') orders to be entered in any stock 
at any time during the trading day up to 3:40 p.m. on expiration days, 
and 3:50 p.m. on non-expiration days. The current pilot is scheduled to 
expire July 31, 1997.

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 self-regulatory organization 
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 III below. The self-regulatory 
organization has prepared summaries, set forth in Sections A, B, and C 
below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    A LOC order is one that is entered for execution at the closing 
price, provided that the closing price is at or within the limit 
specified. Originally, LOC orders could be entered only to offset 
published imbalances of market-on-close (``MOC'') orders.\3\ LOC orders 
had to be entered by 3:55 p.m. on both expiration and non-expiration 
days, and could not be cancelled, except for legitimate errors.\4\
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    \3\ A MOC order is a market order to be executed in its entirety 
at the closing price on the Exchange. See NYSE Rule 13. The NYSE 
pilot program for entry of MOC orders was permanently approved in 
1996. See Securities Exchange Act Release No. 37894 (Oct. 30, 1996), 
61 FR 56987 (Nov. 5, 1996).
    \4\ See Securities Exchange Act Release No. 33706 (Mar. 3, 
1994), 59 FR 11093 (Mar. 9, 1994) (order approving the original LOC 
pilot program).
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    The Exchange recently implemented an amended policy regarding LOC 
orders to permit their entry at any time during the trading day up to 
3:40 p.m. on expiration days,\5\ and 3:50 p.m. on non-expiration 
days.\6\ Thereafter, as with MOC orders, LOC orders could not be 
cancelled (except for legitimate errors), and could be entered only to 
offset published imbalances. These new procedures are part of the 
current pilot for LOC orders which expires at the end of July 1997.\7\
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    \5\ The term ``expiration days'' refers to both (1) the trading 
day, usually the third Friday of the month, when some stock index 
options, stock index futures and options on stock index futures 
expire or settle concurrently (``Expiration Fridays'') and (2) the 
trading day on which end of calendar quarter index options expire 
(``QIX Expiration Days'').
    \6\ See Securities Exchange Act Release No. 37969 (Nov. 20, 
1996), 61 FR 60735 (Nov. 29, 1996).
    \7\ See Securities Exchange Act Release No. 37507 (July 31, 
1996), 61 FR 40871 (Aug. 6, 1996).
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    The Exchange is proposing to extend the LOC pilot for an additional 
year, until July 31, 1998, in order to study the effects of the new 
order entry procedures. The Exchange will make a recommendation at that 
time as to continuation of the pilot or a request for permanent status 
of LOC orders.
2. Statutory Basis
    The basis under the Act for the proposed rule change is the 
requirement under Section 6(b)(5)\8\ that an Exchange have 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. 
The proposed rule change perfects the mechanism of a free and open 
market by providing investors with the ability to use LOC orders as a 
vehicle for managing risk at the close.
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    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange represents that the proposed rule change will impose 
no burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
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 be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-NYSE-97-19 and 
should be submitted by August 20, 1997.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    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, the requirements of Section 6 \9\ and the rules and 
regulations thereunder. Specifically, the Commission finds that the 
proposed rule change is consistent with the Section 6(b)(5)\10\ 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to remove

[[Page 40882]]

impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.\11\
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 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).
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    This pilot program is part of an effort by the Exchange to 
institute safeguards to minimize excess market volatility that may 
arise from the liquidation of stock positions related to trading 
strategies involving index derivative products. For instance, since 
1986, the NYSE has utilized auxiliary closing procedures on expiration 
days. These procedures allow NYSE specialists to obtain an indication 
of the buying and selling interest in MOC orders at expiration and, if 
there is a substantial imbalance on one side of the market, to provide 
the investing public with timely and reliable notice thereof and with 
an opportunity to make appropriate investment decisions in response.
    The NYSE auxiliary closing procedures have worked relatively well 
and may have resulted in more orderly markets on expiration days. 
Nevertheless, both the Commission and the NYSE remain concerned about 
the potential for excess market volatility, particularly at the close 
on expiration days. Although, to date, the NYSE has been able to 
attract sufficient contra-side interest to effectuate an orderly 
closing, adverse market conditions could converge on an expiration day 
to create a situation in which member firms and their customers would 
be unwilling to acquire significant positions.
    The Commission continues to believe preliminarily that LOC orders 
should provide the NYSE with an additional means of attracting contra-
side interest to help alleviate MOC order imbalances both on expiration 
and non-expiration days. As a practical matter, the Commission believes 
that LOC orders will appeal to certain market participants who 
otherwise might be reluctant to commit capital at the close. 
Specifically, unlike a MOC order, which results in significant exposure 
to adverse price movements, a LOC order will allow each investor to 
determine the maximum/minimum price at which he or she is willing to 
buy/sell. To the extent that such risk management benefits encourage 
NYSE member firms and their customers to enter orders to offset MOC 
order imbalances of 50,000 shares or more, thereby adding liquidity to 
the market, the Commission agrees with the NYSE that LOC orders could 
become a useful investment vehicle for curbing excess price volatility 
at the close.
    The Commission also finds that the NYSE has established appropriate 
procedures for the balancing of LOC orders and that the NYSE's existing 
surveillance should be adequate to monitor compliance with those 
procedures. Because LOC orders will be required to yield priority to 
conventional limit orders at the same price, the Commission is 
satisfied that public customer orders on the specialist's book will not 
be disadvantaged by this proposal. In the Commission's opinion, the 
prohibition on cancelling LOC orders is consistent with the Exchange's 
auxiliary closing procedures and, like those procedures, should allow 
specialists to make a timely and reliable assessment of order flow and 
its potential impact on the closing price.
    The Commission notes that the LOC order pilot program has been 
ongoing since 1994 and the NYSE has submitted detailed reports 
describing its experience with the pilot program. The Exchange 
represents that LOC orders have not been widely used and that the 
Exchange requires an additional year to educate members about LOC 
orders and to observe the use of LOC orders on the Exchange.\12\ The 
Commission expects the Exchange to seek permanent approval of the 
procedures or to determine to discontinue the program, after the 
Exchange analyzes the data for the report due on May 31, 1998. If the 
Exchange decides to seek permanent approval of the pilot procedures, 
any such request should also be submitted to the Commission by May 31, 
1998, as a proposed rule change pursuant to Section 19(b) of the Act.
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    \12\ Telephone conversation between Agnes Gautier, Vice 
President, Market Surveillance, NYSE and David Sieradzki, Attorney, 
Division of Market Regulation, SEC (July 16, 1997).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register because there are no 
changes being made to the current provisions, which originally were 
subject to the full notice and comment procedures. In addition, 
accelerated approval would enable the Exchange to continue the program 
on an uninterrupted basis.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-NYSE-97-19) is approved, and 
accordingly, that the LOC pilot program is extended until July 31, 
1998.

    \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 C.F.R. 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-20050 Filed 7-29-97; 8:45 am]
BILLING CODE 8010-01-M