[Federal Register Volume 60, Number 4 (Friday, January 6, 1995)]
[Notices]
[Pages 2167-2169]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-370]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35175; File No. SR-NYSE-94-49]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to a Six-Month Extension of the Pilot for the 
Capital Utilization Measure of Specialist Performance

December 29, 1994.
    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 December 22, 1994, 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, II and III 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. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change consists of extending for six months the 
pilot to use a measure of specialist performance which focuses on a 
specialist unit's use of its own capital in relation to the total 
dollar volume of trading activity in the unit's stocks. This capital 
utilization measure (described in detail below) would be used by the 
Allocation Committee (``Committee'') in allocating newly-listed stocks.

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 IV below and is set forth in Sections A, B and C below.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In recognition of the importance of dealer participation, 
particularly in volatile markets when such participation is viewed as 
providing ``value added'' in maintaining fair and orderly markets, the 
Exchange has developed a measure of specialist performance dealing with 
utilization of capital for market-making. This measure of 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.
    On December 22, 1993, the Commission approved, on a pilot basis 
ending December 31, 1994, the Exchange's proposed rule change to adopt 
capital utilization as an additional measure of specialist 
performance.\3\ The Exchange is now seeking to extend that pilot for an 
additional six months, through June 30, 1995.

    \3\See Securities Exchange Act Release No. 33369 (December 22, 
1993), 58 FR 69431 (File No. SR-NYSE-93-30).
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    Under the pilot, a capital utilization percentage is derived for 
each eligible stock\4\ and the specialist unit overall by 
[[Page 2168]] dividing the average daily dollar value of the unit's 
stabilizing purchases and sales by the average daily total dollar value 
of shares traded in the unit's stocks. This percentage is calculated 
both for stabilizing trades only and stabilizing plus reliquefying 
trades. (A reliquefying transaction is one in which the specialist 
reduces a position in a specialty stock by selling part of a long 
position on a zero-minus tick, or purchasing to cover part of a short 
position on a zero-plus tick.) These percentages are provided for base 
periods (ie., non-volatile periods) and volatile periods (days when 
there is a change of one percent or more in the S&P 500 Stock Price 
Index),\5\ and each stock's ten percent most volatile days,\6\ so that 
performance of a unit relative to other units can be compared as to 
volatile and non-volatile market conditions.

    \4\The following are not included in any grouping of eligible 
stocks: foreign stocks, preferred stocks, warrants, when-issued 
stocks, IPOs (for the first 60 days), closed-end funds, stocks 
selling for $5 and under, stocks with less than 2,000 shares average 
daily trading volume, and stocks that have been delisted for more 
than six months.
    \5\``S&P 500 Stock Price Index'' is a service mark of Standard 
and Poor's Corporation.
    The base period calculation includes the total average daily 
dollar value for the trading days within the twelve month period 
excluding those days during which there was a change of 1% or more 
in the S&P 500 Price Index. The volatile period calculation includes 
the total average daily dollar value for the trading days within the 
twelve month period during which there was a change of 1% or more in 
the S&P 500 Price Index.
    \6\The base period calculation include the total average daily 
dollar value for the days within the twelve month trading period 
that were not among the 10% most volatile. The volatile period 
calculation includes the average daily dollar value for the days 
within the twelve month period that were the 10% most volatile.
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    The capital utilization measure separates stocks into three broad 
groupings including:
    <bullet> Stocks included in the top 200 stocks in the S&P 500 Stock 
Price Index and other stocks that are at least as active (based on 
average daily dollar value of shares traded).
    <bullet> The remainder of the S&P 500 and any stocks among the 500 
most active on the Exchange.
    <bullet> All other stocks.
    Specialist units are placed alphabetically into three tiers based 
on their base day and volatile day capital utilization percentages for 
each of the three groupings of stocks. Within each grouping, a Floor-
wide mean capital utilization percentage is calculated. A unit will be 
in Tier 1 if its capital utilization percentage is more than 1.1 
standard deviations above the mean. (A standard deviation is a 
statistical measure of the distance from the mean.) A unit will be in 
Tier 2 if its capital utilization percentage is within 1.1 standard 
deviations above or below the mean. A unit will be in Tier 3 if its 
capital utilization percentage is more than 1.1 standard deviations 
below the mean.
    During the past year, the Allocation Committee has received 
specialist capital utilization information on a ``rolling'' 12-month 
basis. The Allocation Committee has been given information as to a 
unit's tier in each stock grouping, with the tier data being included 
with other objective data, such as DOT turnaround performance, 
stabilization rates and TTV percentages. The specialist units 
themselves have been given, on a monthly basis for the prior 12 months, 
their actual capital utilization percentages for each stock.\7\

    \7\The specialist capital utilization measure is not being added 
as a basis for initiating a Performance Improvement Action under 
NYSE Rule 103A. During the pilot period, the Market Performance 
Committee will receive quarterly reports on the initiative, with a 
view toward their recommending such enhancements or modifications as 
may seem appropriate based on actual experience with this measure. 
Any modifications or enhancements would be filed with the 
Commission, and would be implemented only with the Commission's 
approval.
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    The Exchange implemented this new measure of specialist performance 
as a one-year pilot which is due to expire on December 31, 1994. In its 
July 25, 1994, report on the Allocation and Capital Utilization pilots, 
the Exchange reviewed the Committee's use of the capital utilization 
measure in allocation decisions. The measure appears to be a useful 
addition to the other measures of specialist performance referred to by 
the Committee. It is proposed that the pilot measure of specialist 
capital utilization be extended for an additional six months, through 
June 30, 1995, to be used by the Allocation Committee as described 
above.
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.

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, 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 other 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, 
NW., Washington, DC.
    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-94-49, and should be submitted by January 27, 
1995.

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

    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, with the requirements of Sections 6 and 11 of the Act. 
Section 6(v)(5) requires 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 interest. Section 11(b) of the Act and Rule 11b-1 thereunder 
allow exchanges to promulgate rules relating to specialists in order to 
maintain fair and orderly markets. For the reasons set forth below, the 
Commission continues to believe that the consideration of specialist 
capital utilization by the Allocation Committee should enhance the 
Exchange's allocation process and encourage improved specialist 
performance, consistent with the protection of investors and the public 
interest. [[Page 2169]] 
    Specialists play a crucial role in providing stability, liquidity 
and continuity to the trading of securities. Among the obligations 
imposed upon specialists by the Exchange, and by the Act and rules 
thereunder, is the maintenance of fair and orderly markets in 
designated securities.\8\ To ensure that specialists fulfill these 
obligations, it is important that the Exchange develop objective 
measures of specialist performance and prescribe stock allocation 
procedures and policies that encourage specialists to strive for 
optimal performance. The Commission supports the NYSE's effort to 
develop an objective measure of specialist capital utilization to 
encourage improved specialist performance and market quality.

    \8\See, e.g., Rule 11b-1, 17 CFR 240.11b-1 (1994); NYSE Rule 
104.
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    The Commission believes that extending the pilot period for the 
specialist capital utilization tier ratings is appropriate because that 
standard should provide the NYSE Allocation Committee with an objective 
measure of specialist performance that will refine the Exchange's 
allocation process and thereby encourage improved specialist 
performance. The NYSE's Allocation Policy emphasizes that the most 
significant allocation criterion is specialist performance.\9\ In the 
Commission's view, performance based stock allocations not only help to 
ensure that stocks are allocated to specialists who will make the best 
markets, but will provide an incentive for specialists to improve their 
performance or maintain superior performance.

    \9\See, e.g., Commission's order approving revisions to the 
NYSE's Allocation Policy and Procedures, Securities Exchange Act 
Release No. 34906 (October 27, 1994), 59 FR 55142.
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    For these reasons and for the other reasons discussed in Release 
No. 33369,\10\ the Commission has determined to extend the pilot period 
for this measure through June 30, 1995. The Commission believes that 
extending the pilot period is appropriate because it will provide the 
Exchange and the Commission with an opportunity to further study the 
effects of the use of the measure on the NYSE's allocation process. 
During the pilot period, the Commission continues to expect the NYSE to 
monitor carefully the effects of the revised Allocation Policy and 
report its findings to the Commission. Specifically, the Commission 
request the NYSE report the capital utilization data as presented to 
the Allocation Committee in three tiers\11\ and any action taken by the 
Allocation Committee.\12\ The Commission also requests that the NYSE 
submit its monitoring report, as well as any requests for extension or 
permanent approval of the use of the capital utilization measure, by 
May 1, 1995.

    \10\See note 3, supra.
    \11\The Commission notes that this request for information is 
not exclusive an that the NYSE should add any additional data and 
analysis to the report in order to assess the effectiveness of the 
capital utilization measure.
    \12\This information should include which stocks were 
reallocated due to performance, and the specialist units involved in 
each reallocation.
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    The Commission finds good cause pursuant to Section 19(b)(2) of the 
Act for approving the proposed rule change prior to the thirtieth day 
after publication of the proposed rule change in the Federal Register. 
Accelerated approval will enable the Exchange to continue to make use 
of the capital utilization measure of specialist performance on an 
uninterrupted basis and will ensure continuity and consistency in the 
stock allocation deliberation process.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-NYSE-94-49) be 
approved through June 30, 1995.

    \13\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\

    \14\17 CFR Sec. 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-370 Filed 1-5-95; 8:45 am]
BILLING CODE 8010-01-M