[Federal Register Volume 63, Number 148 (Monday, August 3, 1998)]
[Notices]
[Pages 41308-41310]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20557]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40262; File No. SR-NYSE-98-15]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to Proposed Rule Change and Amendment No. 
1 to the Proposed Rule Change by the New York Stock Exchange, Inc. 
Seeking Permanent Approval of the Exchange's Pilot Program Concerning 
Entry of LOC Orders

July 24, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 21, 1998, the New York 
Stock Exchange, Inc. (``NYSE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the NYSE. On July 16, 1998, the Exchange 
submitted Amendment No. 1 to the proposed rule change to the 
Commission.\2\ The Commission is publishing this notice to solicit 
comments on the proposed rule change and Amendment No. 1 to the 
proposed rule change from interested persons and to grant accelerated 
approval to the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ See Letter from Agnes M. Gautier, Vice President, Market 
Surveillance, NYSE to David Sieradzki, Attorney, Division of Market 
Regulation, Commission dated July 13, 1998 (``Amendment No. 1''). In 
Amendment No. 1, the Exchange requests accelerated approval for the 
proposal to allow the Exchange's procedures for limit-at-the-close 
orders to continue on an uninterrupted basis. As noted below, the 
Exchange's pilot program expires on July 31, 1998. See infra note 9 
and accompanying text.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change seeks permanent approval of the procedures 
for handling limit-at-the-close (``LOC'') orders. The text of the 
proposed rule change is available at the Office of the Secretary, NYSE 
and at the Commission.

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 NYSE 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 NYSE 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
    The proposed rule change seeks to make permanent the Exchange's 
pilot program for entry of LOC orders, which was first approved by the 
Commission on March 3, 1994.\3\ 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. NYSE Rule 13 provides, in part, that 
``the term `at the close order' shall also include a limit order that 
is entered for execution at the closing price, on the Exchange, of the 
stock named in the order pursuant to such procedures as the Exchange 
may from time to time establish.'' The LOC order type has been 
available, on a pilot basis, for all NYSE-listed stocks since July 
1995.\4\ Under the original pilot, LOC orders could be entered only to 
offset published imbalances of market-on-close (``MOC'') order \5\ and 
had to be entered by 3:55 p.m. on both expiration and non-expiration 
days.\6\ In addition, on expiration days, LOC orders could not be 
canceled after 3:40 p.m., except for legitimate errors. On non-
expiration days, LOC orders could not be canceled after 3:55 p.m., 
except for legitimate errors.\7\
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    \3\ See Securities Exchange Act Release No. 33706 (March 3, 
1994), 59 FR 11093 (March 9, 1994) (``LOC Pilot Program Approval 
Order'').
    \4\ See Securities Exchange Act Release No. 35854 (June 16, 
1995), 60 FR 32723 (June 23, 1995) (order approving SR-NYSE-95-09).
    \5\ A MOC order is a market order to be executed in its entirety 
at the closing price on the Exchange. See NYSE Rule 13.
    \6\ 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'').
    \7\ See LOC Pilot Program Approval Order, supra note 3.
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    In May 1997, the Exchange 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, and 3:50 p.m. on non-expiration 
days.\8\ Thereafter, as with MOC orders, LOC orders could not be 
canceled (except for legitimate errors), and could be entered only to 
offset published imbalances. LOC orders are subject to the same 
restrictions regarding order entry and cancellation as are MOC orders, 
as well as to the additional limitation that LOC orders yield priority 
to conventional limit orders at the same price.
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    \8\ See Securities Exchange Act Release No. 37969 (November 20, 
1996), 61 FR 60735 (November 29, 1996) (order approving SR-NYSE-96-
21).
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    In June 1998, the Exchange further amended its policy regarding MOC 
and LOC orders.\9\  Under the amended procedures, the deadline for 
entry of all MOC and LOC orders was set at 3:40 p.m. on all trading 
days. Thereafter, MOC and LOC orders cannot be canceled (except for 
legitimate errors), and can only be entered to offset a published 
imbalance. In addition, the Exchange made several changes to its rules 
regarding the publication of order imbalances. First, the Exchange now 
requires publication of all MOC/LOC imbalances of 50,000 shares or more 
in all stocks on any trading day as soon as practicable after 3:40 p.m. 
Second, the Exchange includes marketable LOC orders as well as MOC 
orders in the imbalance publication. Third, the Exchange is now 
allowing publication of MOC/LOC imbalances of any size between 3:00 
p.m. and 3:40 p.m. with Floor Official approval. Finally, an additional 
imbalance publication will be made at 3:50 p.m. for stock that has an 
imbalance published at 3:40 p.m.\10\ These procedures are part of the 
current pilot for LOC orders which expires July 31, 1998.\11\
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    \9\ See Securities Exchange Act Release No. 40094 (June 15, 
1998), 63 FR 33975 (June 22, 1998) (order approving SR-NYSE-97-36).
    \10\ For a more complete description of the changes to the MOC/
LOC program, see Securities Exchange Act Release No. 40094 (June 15, 
1998), 63 FR 33975 (June 22, 1998) (order approving SR-NYSE-97-36).
    \11\ See Securities Exchange Act Release No. 38865 (July 23, 
1997), 62 FR 40881 (July 30, 1998), (order approving SR-NYSE-97-19).
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    The Commission has commented on the appropriateness of LOC orders 
in previous releases. For example, in its release approving the 
original proposal for the creation of LOC orders, the Commission noted 
that LOC orders could help curb excess price volatility at the close 
``without diminishing any benefit to investors from trading strategies 
which rely on MOC orders to

[[Page 41309]]

guarantee a fill at the closing price.'' \12\ In its most recent 
approval order for the LOC pilot, the Commission commented that since 
LOC orders are required to yield priority to conventional limit orders 
at the same price, ``it is satisfied that public customer orders on the 
specialist book will not be disadvantaged by this proposal.''\13\ The 
Commission has also stated that it does not believe that allowing the 
use of LOC orders throughout the day would have harmful effects on 
other orders for on the market in general.\14\
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    \12\ See LOC Pilot Program Approval Order, supra note 3.
    \13\ See supra note 9.
    \14\ See supra note 8.
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    The Exchange has submitted three monitoring reports on LOC orders 
to the Commission. The reports suggest that use of LOC orders, while 
limited, may contribute to reducing volatility at the close. Although 
use of LOC orders remains limited, the Exchange believes it is 
appropriate to seek permanent approval for the use of LOC orders to 
continue to provide Exchange members with the flexibility to enter such 
orders, which help them to manage risk at the close.
2. Statutory Basis
    The basis under the Act for the proposed rule change is the 
requirement under Section 6(b)(5) \15\ 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 fee 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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    \15\ 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 Member, Participants or Others

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

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street NW., Washington, 
DC 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 at 450 Fifth Street, 
NW., Washington, DC 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the NYSE. All 
submissions should refer to File No. SR-NYSE-98-15 and should be 
submitted by August 24, 1998.

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

    The Commission finds that the proposed rule change is consistent 
with the Act and the rules and regulations thereunder applicable to a 
national securities exchange, and, in particular, with the requirements 
of Section 6(b) of the Act.\16\ Specifically, the Commission believes 
the proposal is consistent with the Section 6(b)(5)\17\ requirements 
that the rules of an exchange be designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts, and, 
in general, to protect investors and the public.\18\
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ 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).
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    This pilot program has been a part of the Exchange's effort 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 believes that LOC orders may 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. The Commission believes that LOC orders may appeal to certain 
market participants who might otherwise be reluctant to commit capital 
of the close. Specifically, unlike a MOC order, which results in 
significant exposure to adverse price movements, LOC orders 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 LOC 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 may be a useful investment vehicle for curbing excess price 
volatility at the close.
    The Commission also believes that the NYSE has established 
appropriate procedures for handling 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 customers order on the specialist's book will not 
be disadvantaged by this proposal. The Commission believes that the 
prohibition on canceling 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. Although the use LOC 
orders has been

[[Page 41310]]

limited, the use of such orders could help reduce volatility at the 
close. Accordingly, the Commission believes that it is reasonable and 
consistent with the Act for the Exchange to seek permanent approval of 
the LOC procedures.
    The Commission finds good cause for approving the proposed rule 
change and 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. Accelerated approval of the proposal will allow the 
NYSE to continue to use its procedures for entering LOC orders to 
continue on an uninterrupted basis. The Commission notes that this 
proposal does not make any substantive changes to the Exchange's 
existing LOC program. In its proposal, the Exchange simply requests 
permanent approval of its existing LOC program. Further, the Commission 
notes that the last substantive change to the LOC program was published 
for the full notice and comment period and the Commission received no 
comments on that proposal.\19\ Accordingly, the Commission does not 
believe that the current filing raises any new regulatory issues. 
Therefore, the Commission believes it is consistent with Section 
6(b)(5) and Section 19(b)(2) of the Act to grant accelerated approval 
to the proposed rule change.\20\
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    \19\ See Securities Exchange Act Release No. 40094 (June 15, 
1998), 63 FR 33975 (June 22, 1998) (order approving SR-NYSE-97-36).
    \20\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-NYSE-98-15) is approved.

    \21\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-20557 Filed 7-31-98; 8:45 am]
BILLING CODE 8010-01-M