[Federal Register Volume 66, Number 122 (Monday, June 25, 2001)]
[Notices]
[Pages 33731-33733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-15851]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44450; File No. SR-NYSE-00-30]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change by the New York Stock Exchange, Inc. Amending NYSE 
Rule 104

June 19, 2001.

I. Introduction

    On June 29, 2000, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed witht he 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 proposed rule change to amend NYSE Rule 104. On 
February 21, 2001, the Exchange filed Amendment No. 1 to the proposed 
rule change with the Commission.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change, as presented in Amendment No. 1, was 
published for comment in the Federal Register on March 9, 2001.\3\ No 
comments were received on the proposal. This order approves the 
proposal, as amended.\4\
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    \3\ See Securities Exchange Act Release No. 44033 (March 2, 
2001), 66 FR 14239.
    \4\ The Commission has requested from the Exchange an 
explanation of the surveillance procedures it intends to implement 
to ensure that specialists comply with the proposed rule as amended. 
This approval order is contingent upon the Commission's finding that 
such surveillance procedures are adequate.
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II. Description of the Proposal

    Current, NYSE Rule 104 requires specialists to obtain Floor 
Official approval when purchasing on a direct plus tick or selling on a 
direct minus tick, or when purchasing on a zero plus tick more than 50% 
of the stock offered. These transactions are considered destabilizing, 
and therefore require Floor Official approval to effect. The Exchange 
is proposing to amend NYSE Rule 104.10(7) to permit specialists to 
effect these destabilizing transactions, under certain circumstances, 
to bring the price of a listed foreign security into parity with the 
price of a foreign ordinary security.
    Specifically, in order for a specialist to effect a destabilizing 
transaction under the proposed rule, the price of the transaction to 
bring the security into parity (a) must be based on the last sale

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price in the home country market,\5\ if that market is open, or (b) if 
the home country market is not open, the parity price must be between 
the then current bid and offer in the London (UK) market, i.e.,  the 
London Stock Exchange, or (c) must be based at any time on changes in 
the home country--U.S. dollar exchange rate.\6\ A destabilizing 
transaction effected to bring the price of a listed foreign security 
into parity with the price of the foreign ordinary security in any 
other market would continue to require Floor Official approval.
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    \5\ The proposed rule states that the home country market for a 
security is the principal market. However, the Exchange clarified in 
Amendment No. 1 that if a significant volume of the shares traded in 
a security takes place outside the home country market, another 
market will be considered the home country market.
    \6\ The Exchange represents that currency exchange rate 
information is displayed on the Floor of the Exchange utilizing 
information from Reuters. While specialists may also utilize other 
sources of vendor-supplied exchange rate information, they must keep 
a record of the source of the exchange rate information they 
utilize.
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    The proposed amendment also clarifies that the relief afforded from 
obtaining Floor Official approval for destabilizing transactions to 
bring the price of a listed foreign security into parity with the price 
of the foreign ordinary security is available only where the NYSE is 
not the principal market for the foreign security. As previously noted, 
for purposes of this rule, the home country market will be considered 
the principal market for a foreign security, unless a significant 
volume of the shares traded in that security take place outside that 
market.
    The proposal also would permit, with Floor Official approval, a 
specialist to effect consecutive direct tick destabilizing parity 
trades. The Exchange's proposed rule makes clear that a specialist may 
not effect consecutive direct tick destabilizing trades unless these 
transactions are effected to bring the price of a listed foreign 
security into parity with the price of the foreign ordinary security 
and a Floor Official has approved the transaction.

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 a national securities exchange, and, in 
particular the requirements of Section 6(b)(5) \7\ that the rules of an 
exchange be designed to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, in general, to protect 
investors and the public interest.\8\ The Commission also finds that 
the proposed rule change is consistent with Section 11(b) \9\ and Rule 
11b-1 thereunder \10\ in that it preserves a specialist's obligation to 
assist in the maintenance of a fair and orderly market.
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    \7\ 15 U.S.C. 78f(b)(5).
    \8\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78k(b).
    \1o\ 17 CFR 240.11b-1.
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    The Commission believes that the Exchange's proposal to amend NYSE 
Rule 104.10(7) to faciliate specialist market making in foreign 
securities traded on the NYSE is consistent with the Act. The 
Exchange's proposal is limited to ``parity'' transactions on direct 
destabilizing ticks to bring the price of a listed foreign security 
into parity with the price of a foreign ordinary security. Moreover, 
the only change being effected by the proposal is that such 
transactions will not require Floor Official approval as currently 
mandated by NYSE Rule 104. As discussed below, the Commission notes 
that such transactions must still comply with all of the other 
requirements of NYSE Rule 104.
    The Commission believes that it is appropriate to allow specialists 
to effect certain destabilizing transactions without Floor Official 
approval because these transactions can benefit the market and public 
investors by maintaining parity if there is an absence of public orders 
on the NYSE while a stock is active in its home country. The 
requirement to secure Floor Official approval could delay the 
specialist from effecting such transactions, during which time the 
price of the listed foreign security could continue to move. The 
Commission believes, therefore, that the proposal is reasonable to 
address the above situation.
    Furthermore, the Commission believes that the Exchange's proposal 
requiring a specialist to obtain Floor Official approval to effect a 
consecutive direct tick destabilizing parity trade is reasonable to 
ensure that the specialist does not set the price of a speciality 
stock. Specifically, the Commission expects a specialist to stabilize 
stock price movements in the stocks traded by the specialist unit by 
buying and selling from its own account against the prevailing trend of 
the market.
    Moreover, the Exchange's proposal does not relieve specialists from 
the general requirement of NYSE Rule 104 that they effect transactions 
that are reasonably necessary for them to maintain a fair and orderly 
market in listed foreign securities.\11\ Specialists in these 
securities remain subject to the specific negative and affirmative 
obligations imposed on them by NYSE Rule 104. Thus, for example, 
consistent with the maintenance of a fair and orderly market, 
transactions for a specialist's own account should be such that they 
maintain price continuity with reasonable depth, and minimize the 
effects of temporary disparities between supply and demand.\12\ 
Furthermore, a specialist's quotation made for transactions on his own 
account should bear a proper relation to proceeding transactions and 
anticipated succeeding transactions.\13\
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    \11\ The Commission requires all national securities exchanges 
that utilize the services of specialist to enact rules that require 
a specialist to engage in a course of dealings for his own account 
to assist in the maintenance of a fair and orderly market. 17 CFR 
240.11b-1(a)(2)(ii).
    \12\ NYSE-Rule 104.10(1)-(3).
    \13\ NYSE Rule 104.10(4).
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    Finally, the Commission expects the Exchange to issue a memorandum 
to all specialists and Floor Officials to explain the relief afforded 
by the change to MTSE Rule 104. This memorandum will provide specific 
reference to the interaction between specialists' destabilizing parity 
transactions and certain Exchange rules, including the requirement that 
specialists continue to comply with NYSE Rule 123A.30 on percentage 
orders, NYSE Rule 123A.40 on election of stop orders, NYSE Rule 127 on 
specialists trading as principal in parity adjustment situations, and 
NYSE Rule 440B on the short sale rule. Specialists will also be 
informed that destabilizing parity trades must be reported on Form 81. 
The Commission believes that the reporting requirement is appropriate 
because it will assist the Exchange in surveiling for violations of the 
proposed rule.
    As noted above, the Commission has requested submission of adequate 
surveillance procedures to assure compliance with the rule. This 
approval order is contingent on the submission of such adequate 
surveillance procedures.\14\
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    \14\ See note 4, supra. 
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IV. Conclusion

    IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-NYSE-00-30) is approved.\16\
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ See notes 4 and 14 and accompanying text, supra.


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    For the Commission, by the Division of market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-15851 Filed 6-22-01; 8:45 am]
BILLING CODE 8010-01-M