[Federal Register Volume 63, Number 96 (Tuesday, May 19, 1998)]
[Notices]
[Pages 27609-27611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-13182]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39981; File No. SR-NYSE-98-11]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc. To Amend Rule 97, 
``Limitation on Members' Trading Because of Block Positioning,'' To 
Except Transactions That Facilitate Certain Customer Stock 
Transactions, and To Except Certain Transactions Made To Rebalance an 
Index Portfolio

May 11, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 30, 1998, the New 
York Stock Exchange, Inc. (``Exchange'' or ``NYSE'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
changes as described in Item I, II, and III below, which Items have 
been prepared by the Exchange. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
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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 amend Exchange Rule 97, ``Limitation 
on Members' Trading Because of Block Positioning,'' to except 
transactions that facilitate certain customer transactions in: (i) 
basket of stock; (ii) blocks of stock; (iii) specific stocks within a 
basket of stocks; and (iv) index component stocks. The proposal would 
also would except certain transactions made to rebalance an index 
portfolio.
    The following is the text of Exchange Rule 97 marked to reflect the 
proposed rule change. Additions to the current text appear in italics 
while deletions appear in brackets.

Limitation on Members' Trading Because of Block Positioning

    Rule 97 (a) When a member organization holds any part of a long 
position in a stock in its trading account resulting from a block 
transaction it effected with a customer, such member organization may 
not effect the following transactions for any account in which it has a 
direct or indirect interest for the remainder of the trading day on 
which it acquired such position:
    (i) a purchase on a ``plus'' tick if such purchase would result in 
a new daily high;
    (ii) a purchase on a ``plus'' tick within one-half hour of the 
close;
    (iii) a purchase on a ``plus'' tick at a price higher than the 
lowest price at which any block was acquired in a previous transaction 
on that day; or
    (iv) a purchase on a ``zero plus'' tick of more than 50% of the 
stock offered at a price higher than the lowest price at which any 
block was acquired in a previous transaction on that day.
    For purposes of the restrictions in subparagraph (iii) and (iv) 
above, in the case where more than one block was acquired during the 
day, the lowest price of any such block will be the governing price.
    (b) The provisions of paragraph (a) shall not apply to transactions 
made:
    (1) For bona fide arbitrage or to engage in the purchase and sale, 
or sale and purchase of securities of companies involved in publicly 
announced merger, acquisition, consolidation, tender, etc.;
    (2) To offset a transaction made in error;
    (3) To facilitate the conversion of options;
    (4) By specialists in the stocks in which they are registered; [or]
    (5) To facilitate the sale of a block of stock or a basket of 
stocks by a customer[.];

[[Page 27610]]

    (6) To facilitate an existing customer's order for the purchase of 
a block of stock, or a specific stock within a basket of stocks, or a 
stock which is being added to or reweighed in an index, at or after the 
close of trading on the Exchange, provided that the facilitating 
transactions are recorded as such and the transactions in the aggregate 
do not exceed the number of shares required to facilitate the 
customer's order for such stock; or
    (7) Due to a stock's addition to an index or an increase in a 
stock's weight in an index, provided that the transactions in the 
aggregate do not exceed the number of shares required to rebalance the 
index portfolio.

Supplementary Material

    .10  Definitions. A block positioner is a member organization which 
engages, either regularly or on an intermittent basis, in a course of 
business of acquiring positions to facilitate the handling of 
customers; order's on the Floor of the Exchange. For the purposes of 
this Rule, a block shall mean a quantity of stock having a market value 
of $500,000 or more which is acquired by a number organization on its 
own behalf and/or others from one or more buyers or sellers in a single 
transaction.
    For purposes of this Rule, a ``basket of stocks'' shall mean a 
group of 15 or more stocks having a total market value of $1 million or 
more.
    For purposes of this Rule, an ``index'' shall mean a publicly 
disseminated statistical composite measure based on the price of market 
value of the component stocks in a group of stocks.
    .20-.50  No change.

II. Self-Regulatory Organizations'; Statement of the Purpose of, 
and Statutory Basis for, the Proposed Rule Change.

    In its filing with the Commission, the Exchange included statements 
concerning the purposes 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 IV below. The Exchange 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
    Exchange Rule 97 currently prohibits a member organization that 
holds any part of a long stock position in its trading account, which 
position resulted from a block transaction it effected with a customer, 
from purchasing for an account in which it (i.e., the block positioning 
member organization) has a direct or indirect interest, additional 
shares of each stock on a ``plus'' or ``zero plus'' tick under certain 
conditions for the remainder of the trading day on which the member 
organization acquired the long position. Under Exchange Rule 97, the 
term ``block'' is defined as a quantity of stock having a market value 
of $500,000 or more that was acquired in a single transaction.
    The restrictions in Exchange Rule 97 presently do not apply to 
transactions that: (i) involve bona fide arbitrage or the purchase and 
sale (or sale and purchase) of securities of companies involved in a 
publicly announced merger, acquisition, consolidation or tender offer; 
(ii) offset transaction made in error; (iii) facilitate the conversion 
of options; (iv) are engaged in by specialists in their specialty 
stocks; or (v) facilitate the sale of a block of stock by a customer.
    Exchange Rule 97 was adopted to address concerns that a member 
organization might engage in manipulative practices by attempting to 
``mark-up'' the price of a stock to enable the position acquired in the 
course of block positioning to be liquidated at a profit, or to 
maintain the market at the price at which the position was acquired. 
The ``tick'' restrictions of Exchange Rule 97 are designed to address 
these specific concerns. The current exceptions under Exchange Rule 97 
permit certain types of purchases that are effected for a permitted 
purpose, but do not include transactions solely effected to increase 
the block positioner's position.
    The Exchange seeks to amend Exchange Rule 97 to provide certain 
additional exceptions. The proposed additional exceptions would apply 
to purchases by the block positioning member organization that increase 
a position in order to: (i) facilitate the sale of a basket of stocks 
by a customer; and (ii) facilitate an existing customer's order for the 
purchase of a block of stock, a specific stock within a basket of 
stocks, or a stock being added to or reweighted in an index, at or 
after the close of trading on the Exchange. The proposal requires that 
these facilitating transactions be recorded as such and the 
transactions in the aggregate may not exceed the number of shares 
required to facilitate the customer's order for such stock. Finally, 
the proposal would add an exception for transactions made due to a 
stock's addition to an index or an increase in a stock's weight in an 
index provided that the transactions in the aggregate do not exceed the 
number of shares required to rebalance the index portfolio.
    With respect to revised paragraph (b)(5), the proposal would extend 
the exception, which currently applies to a subsequent facilitation 
trade of block size ,to a facilitation trade of less than block size 
provided that the stock was part of a ``basket'' of stocks being sold 
by a customer. Proposed Supplementary Material .10, ``Definitions,'' 
defines the term ``basket'' as a group of 15 or more stocks having a 
market value of one million dollars or more.
    As to proposed paragraph (b)(6), the proposal would permit a block 
positioner to purchase stock to increase its position up to the amount 
required to facilitate a customer's purchase at the close or after-
hours of a block of stock, a specific stock within a basket of stocks, 
or a stock being added to or reweighted in an index, provided the firm 
has an existing customer's order for the at-the-close or after-hours 
purchase. This provision will permit a member organization to position 
stock to effect a cross with a customer at or after the close. The 
proprietary purchase would be required to be recorded in a manner which 
identifies them as transactions entered into for the purpose of 
facilitating the customer buy transaction. Also, the transactions in 
the aggregate could not exceed the number of shares required to 
facilitate the customer's order.
    The block positioner's purchases exempted under proposed paragraph 
(b)(6) would, however, remain subject to the limitations on positioning 
to facilitate customer orders as discussed in Exchange Information 
Memorandum No. 95-28, ``Positioning to Facilitate Customer Orders.'' 
\2\ These limitations generally preclude a block positioner, that has 
committed to sell securities after the close to a customer at the 
closing price, from being in the market on a proprietary basis after 
3:40 p.m. when it has left a portion of its positioning to be executed 
at the close, and such at-the-close proprietary order can be reasonably 
expected to impact the closing price.
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    \2\ See Securities Exchange Act Release No. 35837 (June 12, 
1995), 60 FR 31749 (June 16, 1995).
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    Finally, with regard to proposed paragraph (b)(7), the proposal 
would allow a block positioner to increase its proprietary portion in a 
stock where such stock is being added to an index or its weight in an 
index is being increased. However, purchases in the

[[Page 27611]]

aggregate may not exceed the number of shares required to rebalance an 
index portfolio.
    The Exchange believes the proposed exceptions in paragraphs (b)(5) 
and (b)(6) to facilitate certain customer transactions are appropriate 
because these types of transactions are effected to accommodate a 
customer. The Exchange further believes the proposed exception in 
paragraph (b)(7) for additions to, or increased weigh in, an index is 
appropriate because such purchases are usually made at the close of 
trading to obtain the closing price of the index and therefore are 
indifferent to the price level so long as it represents the closing 
valuation.
    The proposal also would expand the Rule's Supplementary Material, 
Section .10, ``Definitions,'' to provide definitions for the terms 
``basket'' and ``index,'' which terms are used in proposed paragraphs 
(b)(5), (b)(6), and (b)(7). The term ``basket'' would be defined as a 
group of 15 or more stocks having a total market value of $1 million or 
more. The Exchange has represented that this definition is consistent 
with the use of ``basket'' in the definition of program trading that 
appears in Exchange Rule 80A. The proposal would define ``index'' as a 
publicly disseminated statistical composite measure based on the price 
or market value of the component stocks in a group of stocks. The 
Exchange believes this definition would preclude the possibility of a 
firm creating an ``index'' for the purpose of circumventing the 
restrictions of the Rule.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b)(5) of the Act \3\ in that it is designed to facilitate 
transactions in securities, and remove impediment to and perfect the 
mechanism of a free and open market. The Exchange believes the proposed 
rule change would permit trading by member organizations, when 
appropriate, to facilitate customer trading, and would thereby add 
depth, liquidity, and quality to the market for Exchange-traded 
securities.
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    \3\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 submissions, 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 persons, 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 in 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of such filing will also be available for inspection and copying 
at the principal office of the Exchange. All submissions should refer 
to File No. SR-NYSE-98-11 and should be submitted by June 9, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-13182 Filed 5-18-98; 8:45 am]
BILLING CODE 8010-01-M