Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices 48691

15 15 U.S.C. 78s(b)(2).

16 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 38574

(May 5, 1997).

4 62 FR 25984 (May 12, 1997).

5See NYSE Rule 104.10(5)(i).

6A plus tick is a price above the price of the last

preceding sale.

7A minus tick is a price below the price of the

last preceding sale.

8Long sales on zero-minus ticks would not be

deemed ‘‘to establish or increase a position.’’

Rather, such sales are deemed liquidating

transactions and are addressed by NYSE Rule

104.10(6). See Securities Exchange Act Release No.

31797 (January 29, 1993) 58 FR 7277 (February 5,

1993) (approval order permitting specialists to

‘‘reliquify’’ a dealer position by selling long on a

zero-minus tick or by purchasing to cover a short

position on a zero-plus tick without Floor Official

approval).

9 15 U.S.C. 78f.

10 15 U.S.C. 78(c).

11 15 U.S.C. 78k and 17 CFR 240.11b–1(a)(2).

1. 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 the filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File No.

SR–NASD–97–10 and should be

submitted by October 7, 1997.

It therefore is ordered, pursuant to

Section 19(b)(2) of the Act,15 that the

proposed rule change (SR–NASD–97–

10), as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.16

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–24542 Filed 9–15–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39036; File No. SR–NYSE–

97–10]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change by

the New York Stock Exchange, Inc.

Relating to Amendments to Rule

104.10(5) Relating to Specialists

Establishing a Position in Specialty

Stocks

September 9. 1997.

I. Introduction

On March 25, 1997, 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 the proposed rule change

to permit specialists to engage in certain

types of transactions by removing

existing restrictions that currently limit

the ability of specialists to engage in

such transactions when establishing or

increasing a position in their specialty

stocks.3 Notice of filing appeared in the

Federal Register on May 12, 1997.4 No

comment letters were received

concerning the proposed rule change.

This order approves the NYSE’s

proposal.

II. Description of the Proposal

The NYSE, pursuant to Rule 19b–4 of

the Act, proposes to amend NYSE Rule

104.10(5)(i) to remove certain

restrictions on specialists’ ability to

establish or increase their positions in

their specialty stocks.

Purpose

NYSE Rule 104 governs specialists’

dealings in their specialty stocks. In

particular, NYSE Rule 104.10(5)(i)

describes certain types of transactions to

establish or increase a specialist’s

position which are not to be effected

unless they are ‘‘reasonably necessary to

render the specialist’s position adequate

to’’ the needs of the market.

Additionally, these types of transactions

require floor official approval unless

they are conducted in ‘‘less active

markets’’ where such transactions are an

essential part of a proper course of

dealings and where the amount of stock

involved and the price change, if any,

are normal in relation to the market.5

Currently, such restrictions apply

equally to transactions that are

beneficial to the market by being against

the market trend. The Exchange is

proposing to apply these restrictions

only to those transactions that are

disadvantageous to the market by being

with the market trend.

Specifically, the revision to NYSE

Rule 104.10(5)(i)(B) would continue to

prohibit a specialist from establishing or

increasing his or her long position by

purchasing more than 50% of the stock

offered for sale in the market on a zeroplus tick (i.e., at a price equal to the last

sale and above the previous different

price sale).6 There would no longer,

however, exist an express restriction on

purchasing stock on a zero-minus tick to

establish or increase a position. The

NYSE believes that purchases on zerominus ticks are against the market trend

and are perceived as being beneficial to

the market.7

Paragraph (C) of NYSE Rule

104.10(5)(i) would be deleted to permit

a specialist to establish or increase his

or her short position by selling stock to

the bid without restriction on a zeroplus tick. The NYSE believes that these

transactions are beneficial to the market

by being against the market trend in

nature. Short sales on zero-minus ticks

will continue to be prohibited pursuant

to SEC Rule 10a–1 under the Act and

Exchange Rule 440B.8

The proposed amendments are

intended to enhance the specialist’s

ability to deal for his or her own

account to provide support to the

market. Under the proposed rule

change, specialists will, to a greater

degree, be able to counter the market

trend in a stock through effecting

proprietary transactions that are against

the market trend. The NYSE believes

that in today’s markets, characterized by

increased volatility and institutional

activity, the use of dealer capital in this

fashion can add liquidity in a manner

beneficial to the market.

III. Commission Findings and

Conclusions

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

Section 6(b)(5) of the Act.9 The

Commission believes the proposal is

consistent with the Section 6(b)(5)

requirements that the rules of an

exchange be designed to promote just

and equitable principals of trade,

remove impediments to and perfect the

mechanism of a free and open market,

and, in general, protect investors and

the public interest, promote efficiency,

competition and capital formation.10

The Commission also believes that the

proposal is consistent with Section

11(b) of the Act and Rule 11b–1

thereunder,11 which allow exchanges to

promulgate rules relating to specialists

in order to maintain fair and orderly

markets.

Both the Act and NYSE Rules reflect

the crucial role played by specialists in
48692 Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices

12Rule 11b–1 under the Act, 17 CFR 240.11b–1

and NYSE Rule 104.

13 17 CFR 240.11b–1(a)(2).

14See 1987 Report, February 1988 at xvii, 4–1.

15See 1987 Report, 4–23 to 4–24 and 4–26, to 4–

27. Generally, ‘‘upstairs firms,’’ or block trading

desks of large broker dealers (as opposed to

specialists and other traders on the NYSE Floor),

can, at times, provide an additional source of

liquidity for NYSE-listed issues through their

trading activities. During the 1987 market break,

however, particularly on October 19, 1987, very

little buying was effected by upstairs firms, forcing

specialists to be the contra-side to large blocks of

stock.

16See 1987 Report at 4–58.

17See Market Analysis of October 13 and 16, 1989

(‘‘1989 Analysis’’) at 3–4 and 33–44.

18See 1987 Report at 4–8 and 1989 Report at 23–

26.

19A specialist’s dealer responsibilities consist of

‘‘affirmative’’ and ‘‘negative’’ obligations. In

accordance with their affirmative obligations,

specialists are obligated to trade for their own

accounts to minimize order disparities and

contribute to continuity and deputy in the market.

Conversely, pursuant to their negative obligations,

specialists are precluded from trading for their own

accounts unless such dealing is necessary for the

maintenance of a fair and orderly market. In view

of these obligations, the price trend in a security

should be determined not by specialist trading but

by the movements of the incoming orders that

initiate these trades.

20The Commission notes that Rule 104.10(5)(i)

currently only requires floor official approval for

purchases or sales at a price equal to the last sale

price when all or substantially all the stock offered/

bid on the limit order book represents all or

substantially all the stock offered/bid in the market.

Moreover, the rule currently does not require floor

official approval of such transactions if they are

effected in ‘‘less active markets’’ where they are an

essential part of a proper course of dealings and

where the amount of stock involved and the price

change, if any, are normal in relation to the market.

21 In addition, NYSE Rule 104.10(5)(i) clearly

requires that covered transactions must be

reasonably necessary to render the specialist’s

position adequate to such needs.

22Section 19(g) of the Act requires every selfregulatory organization to comply with, and enforce

compliance with, the Act, the rules thereunder and

its own rules.

23 17 CFR 200.30–3(a)(12).

providing stability, liquidity and

continuity in the Exchange’s auction

market. Recognizing the importance of

the specialist in the auction market, the

Act and NYSE Rules impose stringent

obligations upon specialists.12 Primary

among these obligations are the

requirements to maintain fair and

orderly markets and to restrict specialist

dealings to those that are ‘‘reasonably

necessary’’ in order to maintain a fair

and orderly market.13

The importance of specialist

performance to the quality of markets

was highlighted during the 1987 and

1989 market breaks. In The October

1987 Market Break Report (‘‘1987

Report’’), the Division examined

specialist performance on the NYSE on

October 19 and 20, 1987.14 The Division

found that, during periods of the

greatest volatility in 1987, particularly

on October 19, 1987, NYSE specialists

had to act as the primary, or sometimes

the only, buyers for many of the

specialty stocks because of the lack of

buying interest by upstairs firms.15 The

increased volume of order flow, coupled

with the lack of participation on the part

of the upstairs firms, resulted in NYSE

specialists having to take large dealer

positions.16 Although many NYSE

specialists appeared to perform well

under the adverse conditions, specialist

performance during this period varied

widely.

The Division also examined NYSE

specialist performance during the

volatile conditions of October 13 and

16, 1989. The Division found that

specialist performance during that time

was similar in many respects to

specialist performance during the 1987

market break.17 Specifically, the

Division found that, during these two

periods of extreme market volatility,

specialists were confronted with

extraordinary order imbalances that

required unprecedented capital

commitments.18 As in October 1987,

specialists as a whole on October 13,

1989 were substantial buyer in the face

of heavy selling pressure, although

performance varied among specialists.

Both the 1987 Report and the 1989

Analysis reaffirmed the importance of

specialist participation in countering

market trends during periods of market

volatility. At the same time, the reports

emphasized the importance the

Commission placed on the NYSE’s

ability to ensure that all specialists

comply with their affirmative and

negative market making obligations

during such periods.19

The Commission recognizes that

market conditions may exist at times

where it is necessary or desirable to

provide specialists with additional

flexibility in establishing or increasing a

position in order to facilitate their

ability to maintain fair and orderly

markets, particularly during unusual

market conditions. Accordingly, the

Commission believes that it is

appropriate for the NYSE to remove

those provisions of Rule 104.10(5)(i)

that require floor official approval for

certain specialist purchases on zerominus ticks and specialist sales on zeroplus ticks.20 The proposed changes may

allow specialists, during periods of

market volatility, to keep any general

price movements orderly, thereby

furthering the maintenance of fair and

orderly markets consistent with

Sections 6 and 11 of the Act. The

Commission emphasizes, however, that

the expanded flexibility afforded to

specialists by the proposal merely

obviates the current required floor

official approval for the affected

transactions and does not reflect that all

specialist purchases on zero-minus ticks

and sales on zero-plus ticks are

appropriate. Notably, specialists remain

subject to their ‘‘negative obligations,’’

specifically, the requirement that

specialists are precluded from trading

for their own account unless such

dealing is necessary for the maintenance

of a fair and orderly market.21

Finally, the Commission believes that

the NYSE’s established surveillance

procedures and criteria should allow the

Exchange to monitor specialist

compliance with NYSE Rule

104.10(5)(i). More specifically, the

Commission expects the NYSE to

monitor carefully compliance with the

procedures of NYSE Rule 104 as

required under Section 19(g) of the

Act.22

For the foregoing reasons, the

Commission finds that the NYSE’s

proposal to permit specialists to engage

in certain types of transactions by

removing existing restrictions that

currently limit specialists when

establishing or increasing a position in

their specialty stocks is consistent with

the requirements of the Act and the

rules and regulations thereunder.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act, that the

proposed rule change (SR–NYSE–10), as

amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.23

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–24543 Filed 9–15–97; 8:45 am]

BILLING CODE 8010–01–M

SMALL BUSINESS ADMINISTRATION

Declaration of Disaster #2965: State of

Michigan, Amendment #2

In accordance with information

received from the Federal Emergency

Management Agency dated September

4, 1997, the above-numbered

Declaration is hereby amended to

extend the deadline for filing

applications for physical damage as a

result of this disaster to September 23,

1997.

All other information remains the

same, i.e., the deadline for filing

applications for economic injury is

April 13, 1998.

(Catalog of Federal Domestic Assistance

Program Nos. 59002 and 59008.)