[Federal Register Volume 60, Number 94 (Tuesday, May 16, 1995)]
[Notices]
[Pages 26060-26062]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12003]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35704; File No. SR-NYSE-95-18]


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 Extension of Rule 103A 
(Specialist Stock Reallocation)

May 10, 1995.
    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 May 2, 1995, 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 and 
II 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.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NYSE proposes to extend the effectiveness of Rule 103A until 
September 10, 1996. [[Page 26061]] 
    The Exchange requests the Commission to find good cause, pursuant 
to section 19(b)(2) of the Act, for approving the proposed rule change 
prior to the thirtieth day after publication in the Federal Register.

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
    The intent of Rule 103A is to encourage a high level of market 
quality and performance in Exchange listed securities. Rule 103A grant 
authority to the Exchange's Market Performance Committee to develop and 
administer systems and procedures, including the determination of 
appropriate standards and measurements of performance, designed to 
measure specialist performance and market quality on a periodic basis 
to determine whether or not particular specialist units need to take 
actions to improve their performance. Based on such determinations, the 
Market Performance Committee is authorized to conduct a formal 
Performance Improvement Action in appropriate cases.
    On May 6, 1994 the SEC extended the effectiveness of the rule until 
May 9, 1995.\3\ In its approval order, the Commission stated its belief 
that the Exchange should develop objective performance standards to 
measure specialist performance.\4\ In this regard, the Exchange has 
developed two objective measures of specialist performance. The first 
objective measure of performance pertains to specialist capital 
utilization. Adopted in December 1993 on a pilot basis, the capital 
utilization measure of specialist performance focuses on a specialist 
unit's use of its own capital in relation to the total dollar value of 
trading activity in the unit's stocks.\5\ The pilot has been extended 
until June 30, 1995.\6\ The Exchange's Allocation Committee is being 
provided with specialist capital utilization information for its use in 
allocation decisions. The second objective measure of performance, 
which was recently developed, pertains to ``near neighbors.'' On 
February 27, 1995, the Exchange filed, on a fifteen month pilot basis, 
for Commission approval of this new measure.\7\ The ``near neighbors'' 
measure compares certain performance measures of a given stock (price 
continuity, depth, quotation spread and capital utilization) to those 
of its ``near neighbors,'' i.e., stocks that have certain similar 
characteristics. The Exchange would provide ``near neighbor'' 
information to the Allocation Committee for its use in allocating 
newly-listed stocks.\8\

    \3\ See Securities Exchange Act Release No. 34022 (May 6, 1994), 
59 FR 25143 (May 13, 1994).
    \4\ See id. The Commission notes that the Exchange's current 
evaluation criteria under Rule 103A.10 include objective standards 
that measure specialist performance at the opening (both regular and 
delayed), systematized order turnaround, and the timeliness of a 
unit's response to status requests. Specialist performance also is 
measured by the Exchange's Specialist Performance Evaluation 
Questionnaire.
    \5\ See Securities Exchange Act Release No. 33369 (December 23, 
1993), 58 FR 69431 (December 30, 1993). The Commission notes that 
the capital utilization measure currently is not included in the 
Exchange's Rule 103A program
    \6\ See Securities Exchange Act Release No. 35175 (December 29, 
1994), 60 FR 2167 (January 6, 1995).
    \7\ See Securities Exchange Act Release No. 35661 (May 2, 1995) 
(File No. SR-NYSE-95-05).
    \8\ The near neighbor measure would provide the Allocation 
Committee with performance data. The Exchange has not proposed to 
include the measure in the Rule 103A program.
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    Regarding the Intermarket Trading System (``ITS''), the Commission 
has stated its belief that the mature status of the ITS as a market 
structure facility warrants the incorporation of ITS turnaround and 
``trade-through'' concern into the NYSE's Rule 103A performance 
standards. The Exchange continues to believe that ITS matters are more 
appropriately addressed by means of the Exchange's regulatory process 
rather than through its performance measurement system, but will 
continue to study the matter.
2. Statutory Basis
    The basis under the Act for the proposed rule change is the 
requirement under Section 6(b)(5) 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 extension of Rule 103A is consistent with these objectives in 
that it will allow the Exchange to continue to administer the rule on 
an uninterrupted basis, fostering quality specialist performance.
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. 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 NW., 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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Section, 450 Fifth Street NW., 
Washington, D.C. 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-95-18 and should be 
submitted by June 6, 1995.

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

    The Commission has reviewed carefully the NYSE's proposed rule 
change and believes that, for the reasons set forth below, the proposal 
is consistent with the requirements of Sections 6 and 11 of the Act \9\ 
and the rules and regulations thereunder applicable to a national 
securities exchange. In particular, the Commission believes that the 
proposal is consistent with the Section 6(b)(5) requirement that the 
rules of the Exchange be designed to promote just and equitable 
[[Page 26062]] principles of trade, perfect the mechanism of a free and 
open national market system, and, in general, further investor 
protection and the public interest.\10\ Further, the Commission finds 
that the proposal is consistent with Section 11(b) of the Act,\11\ and 
Rule 11b-1 thereunder,\12\ which allow securities exchanges to 
promulgate rules relating to specialists consistent with the 
maintenance of fair and orderly markets.

    \9\ 15 U.S.C. 78f and 78k (1988).
    \10\ 15 U.S.C. 78f(5) (1988).
    \11\ 15 U.S.C. 78k(b) (1988).
    \12\ 17 CFR 240.11b-1 (1994).
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    Specifically, because specialist units play a crucial role in 
providing stability, liquidity, and continuity to the trading of stocks 
on the Exchange, the Commission believes that effective oversight, 
including periodic evaluation of the specialists' performance, is 
important to the maintenance of a fair and efficient marketplace. The 
Commission believes that the NYSE's Rule 103A performance evaluation 
process is critical to this oversight in that it provides the Exchange 
with the means to identify and correct poor specialist performance and 
to ascertain whether specialists are maintaining fair and orderly 
markets in their assigned securities, as required pursuant to Exchange 
rules and the Act, and the rules thereunder.\13\ Moreover, the 
possibility of a performance improvement action as a result of the 
evaluation process, in addition to the use of the evaluation results in 
stock allocation decisions, should help motivate and provide incentives 
for specialists to maintain and improve their market making performance 
for the benefit of investors.

    \13\ See generally NYSE Rule 104 (Dealing By Specialists); and 
Commission Rule 11b-1 under the Act, 17 CFR 240.11b-1 (1994).
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    In previous orders extending the Rule 103A pilot,\14\ the 
Commission emphasized its desire for the Exchange to develop objective 
measures of market making performance and incorporate such measures 
into the Rule 103A pilot.\15\ In addition, the Commission previously 
stated that it believes the mature status of the Intermarket Trading 
System (``ITS''), as a market structure facility, warrants the 
incorporation of ITS turnaround and trade-through concerns into the 
NYSE's Rule 1903A performance standards. As discussed fully in the 
previous extension order,\16\ the Commission believes that objective 
measures of specialist performance with regard to these concerns should 
be incorporated into the evaluation process.

    \14\ See Securities Exchange Act Release Nos. 34022 (May 6, 
1994), 59 FR 25143 (May 13, 1994); 32285 (May 10, 1993), 58 FR 28905 
(May 17, 1993); 29180 (May 8, 1991), 56 FR 22489 (May 15m, 1991); 
and 28215 (July 17, 1990), 55 FR 30060 (July 24, 1990).
    \15\ See supra. Although the Exchange has developed the capital 
utilization and near neighbor measures of market making performance 
for use by the Allocation Committee, it has not yet proposed to 
include these objective measures in its Rule 103A program.
    \16\ See Securities Exchange Act Release No. 34022, supra note 
3.
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    Even though the proposal lacks objective market marking performance 
standards, the Commission has determined to approve the proposal to 
extend the effectiveness of Rule 103A for an additional sixteen months 
in light of the substantial time and resources the Exchange has 
dedicated to the development of the capital utilization and near 
neighbor measures. The Commission notes that the NYSE has not proposed 
to incorporate these objective measures into their specialist 
evaluation program at this time.\17\ The Commission believes that it is 
reasonable to extend the pilot to give the Exchange time to gain 
experience with these measures before incorporating them into the Rule 
103A evaluation criteria.\18\

    \17\ See supra notes 5, 8 and 15.
    \18\ As of July 1996, the NYSE should have two years experience 
with the capital utilization measure and a full year's experience 
with the near neighbor measure of specialist performance.
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    The Commission continues to believe that the Exchange should 
include objective performance standards that would measure accurately 
the traditional indica of specialist performance, namely market depth, 
price continuity and dealer participation and stabilization in the Rule 
103A program. The Commission encourages the NYSE to incorporate 
objective standards, including those relating to ITS and market making 
performance, into the program prior to or simultaneous with future 
proposals to extend the effectiveness of Rule 103A or adopt the Rule on 
a permanent basis.\19\

    \19\ Assuming that the experience with the capital utilization 
and near neighbor measure is good, the NYSE should incorporate these 
measures in the Rule 103A evaluation prior to the Exchange's next 
request for an extension or permanent approval of the Rule. In this 
regard, the Commission expects the NYSE to submit to the Division of 
Market Regulation, by July 1, 1996, a proposed rule change pursuant 
to Rule 19b-4 under the Act, 17 CFR 240.19b-4, to extend the Rule 
103A pilot.
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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 thereof in the Federal Register. The Commission believes it is 
appropriate to approve the proposed rule change on an accelerated basis 
so that the Exchange can continue to administer, on an uninterrupted 
basis, its Rule 103A evaluation process. During the extension of the 
Rule, the Commission expects the NYSE to continue its examination of 
the efficacy of its current specialist evaluation procedures.\20\ In 
addition, a substantial portion of current Rule 103A was noticed for 
the full statutory period in 1987, and the Commission did not receive 
any adverse commentary on the revised Rule 103A program.\21\ Further, 
interested persons were invited to comment on the most recent of such 
proposals being the extension of Rule 103A until May 9, 1995.\22\ The 
Commission received no comments on these proposals. The Commission 
believes, therefore, that granting accelerated approval of the proposed 
rule change is appropriate and consistent with Section 6 of the Act.

    \20\ The Commission requests that the Exchange submit to the 
Division by July 1, 1996, a status report on the implementation of 
Rule 103A. The report should contain data, for each quarter of 1995 
and the first quarter of 1996, on (1) the number of specialists that 
fell below acceptance levels of performance for each category; (2) 
the number of performance improvement actions commenced; (3) the 
number of units subjected to informal counseling to improve 
performance; and (4) a list of stocks reallocated due to substandard 
performance under the Rule and the particular unit involved.
    \21\ See Securities Exchange Act Release Nos. 24919 (September 
15, 1987), 52 FR 35821 (September 23, 1987); and 25681 (May 9, 
1988), 53 FR 17287 (May 16, 1987).
    \22\ See supra note 3.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change is hereby approved on an 
accelerated basis until September 10, 1996.

    \23\ 15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\

    \24\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-12003 Filed 5-15-95; 8:45 am]
BILLING CODE 8010-01-M