Federal Register / Vol. 63, No. 75 / Monday, April 20, 1998 / Notices 19547

4 15 U.S.C. 78q–1.

5 15 U.S.C. 78s(b)(3)(A)(ii).

6 17 CFR 240.19b–4(e)(2). 7 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3A buy stop order is an order to buy which

becomes a market order when a transaction takes

place at or above the stop price. Conversely, a sell

stop order is an order to sell which becomes a

market order when a transaction takes place at or

below the stop price. See NASD Rule 6440(i)(1).

4Under NASD Rule 6410(d), ‘‘eligible securities’’

means all common stocks, preferred stocks, longterm warrants, and rights entitling the holder to

acquire an eligible security, listed or admitted to

unlisted trading privileges on the American Stock

Exchange (‘‘Amex’’) or the New York Stock

Exchange (‘‘NYSE’’), and securities listed on the

regional stock exchanges which substantially meet

the original listing requirements of the Amex or the

NYSE.

5A buy stop limit order is an order to buy that

becomes a limit order at the limit price when a

transaction occurs at the stop price. Conversely, a

sell stop limit order is an order to sell that becomes

a limit order at the limit price when a transaction

occurs at the stop price.

6See Securities Exchange Act Release No. 38429

(March 21, 1997) 62 FR 14953.

7See Letter from Robert E. Aber, Vice President

and General Counsel, NASD, to Katherine England,

Assistant Director, National Market System and

Continued

Calculation of charges for late

payment obligations in excess of

$5,000,000 will be based on the ratio of

the actual late obligation (rounded to

the next highest million) to $5,000,000,

multiplied by the late fee for obligations

of $5,000,000.

Participants failing to timely satisfy

payment obligations on more than four

occasions within a rolling ninety day

period will be subject to additional late

fees for each occurrence. This amount

will be determined at MBSCC’s

discretion depending on the magnitude

and history of the participant’s late

payments, but any additional late fees

can be no more than twice the fourth

occurrence fee. MBSCC also reserves the

discretion to waive or reduce late fees

when a particular occurrence is not

deemed to be the participant’s fault or

the participant has provided MBSCC

with evidence that it is taking

appropriate corrective action to prevent

recurrence.

Late fees will accrue on the date on

which a late payment is made, and

participants will receive a letter

notifying them of the late fee. The late

fee will be reflected on the participant’s

bill for the month during which such fee

was incurred and is payable at such

time.

MBSCC believes that the proposed

rule change is consistent with the

requirements of Section 17A of the Act 4

and the rules and regulations

thereunder because it provides for the

equitable allocation of dues, fees, and

other charges among MBSCC’s

participants.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

MBSCC does not believe that the

proposed rule change will impose any

burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

No comments on the proposed rule

change were solicited or received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The foregoing rule change has become

effective pursuant to Section

19(b)(3)(A)(ii) 5 of the Act and pursuant

to Rule 19b–4(e)(2) 6 promulgated

thereunder because the proposal

establishes or changes a due, fee, or

other charge imposed by MBSCC. At

any time within sixty days of the filing

of such rule change, the Commission

may summarily abrogate such rule

change if it appears to the Commission

that such action is necessary or

appropriate in the public interest, for

the protection of investors, or otherwise

in furtherance of the purposes of the

Act.

IV. 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 in

the Commission’s Public Reference

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing also will be available for

inspection and copying at the principal

office of MBSCC. All submissions

should refer to File No. SR–MBSCC–97–

09 and should be submitted by May 11,

1998.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–10341 Filed 4–17–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39857; File No. SR–NASD–

97–20]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval to Amendment

No. 1 to the Proposed Rule Change by

the National Association of Securities

Dealers, Inc. Relating to the

Elimination of the Prohibitions Against

NASD Members Accepting Stop Orders

and Stop Limit Orders in ExchangeListed Securities

April 14, 1998.

I. Introduction

On March 10, 1997, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) 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

proposal to amend paragraph (i) of

NASD Rule 6440, ‘‘Trading Practices,’’

to (1) allow members to accept stop

orders 3 in eligible securities; 4 and (2)

eliminate the requirement that the stop

price equal the limit price in order for

a member to accept a stop limit order 5

in an eligible security.

Notice of the proposed rule change

was published for comment and

appeared in the Federal Register on

March 28, 1997.6 No comment letters

were received on the proposal. On April

1, 1997, the NASD filed Amendment

No. 1 to the proposed rule change.7 In
19548 Federal Register / Vol. 63, No. 75 / Monday, April 20, 1998 / Notices

Over-the-Counter Regulation, Division of Market

Regulation (‘‘Division’’), Commission, dated April

1, 1997 (‘‘Amendment No. 1’’). In Amendment No.

1, the NASD corrected a typographical error in

NASD Rule 6440(i)(2). Specifically, NASD Rule

6440(i)(2) stated that when a transaction occurs at

the stop price, a stop limit order to buy or sell

becomes a limit order at the stop price. Amendment

No. 1 revises NASD Rule 6440(i)(2) to state that

when a transaction occurs at the stop price, a stop

limit order to buy or sell becomes a limit order at

the limit price.

8See Letter from Thomas R. Gira, Vice President,

NASD Regulation, Inc., to Katherine England,

Assistant Director, National Market System and

Over-the-Counter Regulation, Division,

Commission, dated February 27, 1998.

9The third market is the over-the-counter market

for exchange-listed securities.

10 In approving this rule change, the Commission

has considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

11See Securities Exchange Act Release No. 29063

(April 10, 1991) 56 FR 15652 (April 17, 1991) (order

approving File No. SR–Amex–90–31) (‘‘Amex

Approval Order’’).

12See NASD Rule 6440(i)(2).

13Telephone conversation between Thomas R.

Gira, Vice President, NASD Regulation, and Yvonne

Fraticelli, Attorney, Office of Market Supervision,

Division, Commission, on April 2, 1998.

14The Commission has had a continuing interest

in potential manipulation and trading abuses in

connection with elections of stop orders by

exchange specialists. See e.g., Division of Trading

and Exchanges, SEC, Stop Orders (1963) (detailing

various problems associated with the execution of

stop orders); Securities Exchange Act Release No.

24021 (January 21, 1987) 52 FR 3370 (February 3,

1987) (order approving File No. SR–Amex–84–32);

and Amex Approval Order, supra note 10. These

abuses typically involved exchange specialists

electing stop orders through principal transactions

at price levels either well above the market price

in the case of stop buy orders or well below the

market price in the case of sell stop orders. See

Amex Approval Order, supra note 10. As discussed

more fully infra, the Commission believes that the

NASD has adequately addressed the potential

problems that may arise in connection with the

handling of stop orders.

15 In 1993, the third market garnered 7.4% of

reported NYSE volume and 9.3% of the reported

trades. See Division, Commission, Market 2000: An

Examination of Current Equity Market

Developments (January 1994) (‘‘Market 2000

Study’’) at II–11.

16See Market 2000 Study, supra note 16, at II–

8.

addition, the NASD submitted a letter

describing the surveillance procedures

it will use to monitor the handling of

stop orders and stop limit orders.8 This

order approves the NASD’s proposal, as

amended.

II. Description of the Proposal

The NASD proposes to amend NASD

Rule 6440 to eliminate current

restrictions on the ability of NASD

members to accept stop orders and

certain stop limit orders in eligible

securities. Currently, NASD Rule

6440(i)(1) prohibits NASD members

from accepting stop orders in eligible

securities, and NASD Rule 6440(i)(2)

allows members to accept stop limit

orders in eligible securities where the

stop price and the limit price are the

same. The NASD proposes to amend

NASD Rule 6440(i) to: (1) allow

members to accept stop orders in

eligible securities; and (2) eliminate the

requirement that the stop price must

equal the limit price in order for a

member to accept a stop limit order in

an eligible security. In addition, the

proposal clarifies that NASD members

are not obligated to accept stop orders

or stop limit orders.

The NASD believes there is no

economic or regulatory reason to

preclude or restrict investors from

placing stop orders or stop limit orders

in eligible securities. In this regard, the

NASD notes that there are no

comparable restrictions on the

placement of stop orders or stop limit

orders in securities listed on The

Nasdaq Stock Market (‘‘Nasdaq’’). The

NASD believes that investors in the

third market 9 also should be able to

receive the benefits and protections that

result from placing stop orders and stop

limit orders. In particular, the NASD

believes that the placement of stop

orders and stop limit orders will help

investors to implement their investment

strategies and manage their portfolios.

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 the NASD and, in

particular, the requirements of Section

15A(b)(6) in that 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, in general, to protect

investors and the public interest.10

Specifically, the Commission believes

that it is reasonable for the NASD to

amend its rules to allow members to: (1)

accept stop orders in eligible securities;

and (2) accept stop limit orders in

eligible securities where the limit price

differs from the stop price. The

Commission also believes that it is

reasonable for the NASD to clarify its

rules to indicate that members are not

obligated to accept stop orders or stop

limit orders.

The Commission believes that

amending NASD Rule 6440(i)(1) to

permit members to accept stop orders in

eligible securities will extend the

benefits and protections associated with

stop orders to transactions in the third

market. In general, an investor enters a

stop sell order in a stock whose price

has increased substantially in order to

protect his or her profit if the stock’s

price declines; similarly, an investor

with a short position may enter a stop

buy order to limit his or her losses if the

stock’s price increases.11 The

Commission believes that allowing

NASD members to accept stop orders in

eligible securities will extend these

benefits to investors trading eligible

securities in the third market and

provide them with additional flexibility

in implementing their trading strategies.

The Commission notes that NASD

members currently may accept stop

orders in securities that are not eligible

securities (generally, securities listed on

Nasdaq), as well as stop limit orders in

eligible securities.12 The NASD

represents that it has not experienced

any problems in connection with the

use of stop orders for non-eligible

securities or with the use of stop limit

orders for eligible securities.13

The Commission believes that the

NASD has developed procedures that

will allow it to monitor the handling of

stop orders and stop limit orders in

eligible securities.14 In addition to

protections afforded by market

surveillance, the Commission believes

that the NASD’s surveillance procedures

will help to detect and deter efforts by

market makers to use stop orders to

manipulate the price of stock. Several

characteristics of the trading in the third

market minimize the likelihood that

NASD market makers would be able to

manipulate the price of an eligible

security through their handling of stop

orders. In this regard, the Commission

notes, first, that a limited amount of the

trading of eligible securities occurs in

the third market.15 Second, the

exchanges, rather than the third market,

are the primary price discovery markets

for eligible securities; third market

makers usually base their quotations on

the primary market quote.16 Third, there

are multiple third market makers (as

opposed to a single exchange

specialists) for each eligible security.

The Commission believes that these

factors, taken together, would make it

difficult for a third market maker to

manipulate the price of an eligible

security through the use of stop orders.

The Commission also believes that it

is reasonable for the NASD to amend

NASD Rule 6440(i)(2) to allow members

to accept stop limit orders in eligible

securities where the stop price differs

from the limit price in order to provide

investors with additional flexibility in

using stop limit orders. A stop limit

order, which must be executed at the

limit price or better, is designed to
Federal Register / Vol. 63, No. 75 / Monday, April 20, 1998 / Notices 19549

17Similarly, NASD Rule 6440(i)(1), as amended,

will state that a member may, but is not obligated

to, accept a stop order in an eligible security.

18 15 U.S.C. 78s(b)(2).

19 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Letter from Michael D. Pierson; Senior

Attorney, Regulatory Policy, PCX, to Matthew S.

Morris, Office of Market Supervision, Division of

Market Regulation, Commission, dated March 26,

1997 (‘‘Amendment No. 1’’).

4See Securities Exchange Act Release No. 38612

(May 12, 1997) 62 FR 27643 (May 20, 1997).

5The PCX defines a customer order as one that

is entered, cleared, and in which the resulting

position is carried with the firm.

6The Commission notes that any solicitation of a

member by another member or customer to

facilitate a customer order must comply with the

relevant Exchange rules concerning solicited

transactions.

guarantee that an order receives an

execution at no worse than the limit

price. However, if the market drops

below the limit price of a sell stop order

before the order can be executed, it is

possible that the order will be executed.

For example, if an investor enters a sell

stop limit order where the stop price

and the limit price are 34, then the

investor’s order may be executed only at

34 or better and may not be executed at

all if the market moves below 34 before

the order can be executed. However, if

the investor is able to enter a sell order

with a stop price of 34 and a limit price

of 32, then the investor’s order may be

executed at 32 or better. Accordingly, by

permitting investors to place orders

where the limit price differs from the

stop price, the NASD’s proposal will

increase the opportunities for execution

of investors’ orders and will allow

investors to tailor their orders to reflect

their objectives and strategies.

The Commission also believes that it

is reasonable for the NASD to amend

NASD Rule 6440(i) to clarify that

members are not obligated to accept

stop orders or stop limit orders.

Currently, NASD Rule 6440(i)(2) states

that members may accept stop limit

orders in eligible securities. The NASD

proposes to add language to NASD Rule

6440(i)(2) indicating that members are

not obligated to accept stop limit

orders.17 Because this is a clarification

of the NASD’s existing policy, it does

not raise new regulatory issues.

The Commission finds good cause for

approving Amendment No. 1 to the

proposed rule change prior to the

thirtieth day after the date of

publication of notice thereof in the

Federal Register. Amendment No. 1

corrects a typographical error in NASD

Rule 6440(I)(2). Specifically, NASD Rule

6440(i)(2) stated that when a transaction

occurs at the stop price, a stop limit

order to buy or sell becomes a limit

order at the stop price. Amendment No.

1 revises NASD Rule 6440(i)(2) to state

that when a transaction occurs at the

stop price, a stop limit order to buy or

sell becomes a limit order at the limit

price. Because Amendment No. 1

corrects the text of the NASD’s rule, the

Commission finds that it is consistent

with Sections 6(b) and 19(b)(2) of the

Act to approve Amendment No. 1 on an

accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

1, including whether Amendment No. 1

is consistent with the Act. 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 in

the Commission’s Public Reference

Room. Copies of such 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–97–20 and should be

submitted by May 11, 1998.

V. Conclusion

It Is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,18 that the

proposed rule change (SR–NASD–97–

20) is approved, and that Amendment

No. 1 is approved on an accelerated

basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.19

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–10339 Filed 4–17–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39855; File No. SR–PCX–

97–07]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Amendment No. 1 Thereto, by the

Pacific Exchange, Inc., Relating to

Position and Exercise Limits

April 13, 1998.

I. Introduction

On March 5, 1997, the Pacific

Exchange, Inc. (‘‘PCX’’ or ‘‘Exchange’’)

submitted to the Securities and

Exchange Commission (‘‘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 modify its rules

on option position and exercise limits

by (a) expanding the scope of the firm

facilitation exemption, (b) increasing the

position and exercise limits for narrowbased index options, (c) expanding the

broad-based index hedge exemption to

include broker-dealers, and (d)

clarifying the general rule on exercise

limits. On March 27, 1997, the PCX

submitted an amendment to the

Commission regarding its proposal.3

The proposed rule change appeared in

the Federal Register on May 20, 1997.4

No comments were received on the

proposed rule change. This order

approves the PCX’s proposal, as

amended.

II. Description

The Exchange has proposed to modify

several of its rules on position and

exercise limits for equity and index

options as follows:

A. Firm Facilitation Exemption

The PCX’s firm facilitation exemption

currently applies only to a member firm

that facilitates and executes an order for

its own customer.5 The PCX proposes to

amend the firm facilitation exemption

in two ways. First, a member firm will

qualify for the exemption if it facilitates

its own customer whose account it

carries, whether the firm executes the

order itself or gives the order to an

independent broker for execution.

Second, the exemption will be

expanded to include member firms who

facilitate another member’s customer

order. Such a customer order must be

for execution only against the member

firm’s proprietary account. Further,

unlike a member firm that facilitates its

own customer, the resulting position

will not be carried by the facilitating

member firm.6

Specifically, PCX Rule 6.8,

Commentary .08 currently provides that

for the purpose of facilitating (in

accordance with the provisions of PCX

Rule 6.47(b)) orders of its own customer

(one that will enter, clear and have the

resulting position carried with the firm)

in non-multiply-listed Exchange

options, the proprietary account of a