[Federal Register Volume 60, Number 73 (Monday, April 17, 1995)]
[Notices]
[Pages 19313-19315]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-9398]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35589; File No. SR-NYSE-94-44]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Notice of Filing 
and Order Granting Accelerated Approval to Amendment No. 1 to Proposed 
Rule Change Relating to Amendments to Market-at-the-Close Order 
Handling Requirements for Expiration and Non-Expiration Days

April 10, 1995.

I. Introduction

    On December 5, 1994, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') submitted to the 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 its market-at-the close 
(``MOC'') order\3\ handling requirements for expiration days and non-
expiration days.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1994).
    \3\A MOC order is a market order to be executed in its entirety 
at the closing price on the Exchange. See NYSE Rule 13.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 35210 (January 10, 1995), 60 FR 3690 (January 
18, 1995). On April 3, 1995, the Exchange submitted to the Commission 
Amendment No. 1 to the proposed rule change.\4\ No comments were 
received on the proposal. This order approves the proposed rule change, 
including Amendment No. 1 on an accelerated basis.

    \4\Letter from Daniel Parker Odell, Assistant Secretary, NYSE, 
to Glen Barrentine, Senior Counsel, Division of Market Regulation, 
SEC, dated March 31, 1995. Amendment No. 1 is further described at 
note 10, infra.
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II. Overview of Proposal

A. Background

    The NYSE currently utilizes two sets of procedures for handling MOC 
orders, one for expirations days\5\ and one for all other trading days. 
The Exchange's auxiliary closing procedures for expiration days have 
been approved on a pilot basis until October 31, 1995.\6\ The pilot 
procedures establish a 3:40 p.m. deadline for (1) the entry of MOC 
orders related to a trading strategy involving an expiring index 
derivative product (i.e., stock index options, stock index futures and 
options on stock index futures) and (2) the cancellation or reduction 
of any MOC order. Moreover, in the pilot stocks,\7\ the specialist 
must, as soon as practicable after 3:40 p.m., disseminate any MOC order 
imbalance of 50,000 shares or more. Thereafter, MOC orders in the pilot 
stocks may be entered only to offset published imbalances; if there is 
no imbalance publication in a given pilot stock, no MOC orders may be 
entered in that stock.

    \5\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'').
    \6\See Securities and Exchange Act Release No. 34916 (October 
31, 1994), 59 FR 55507 (November 7, 1994) (File No. SR-NYSE-94-32) 
(``1994 Pilot Approval Order'').
    \7\The Expiration Friday pilot stocks consist of the 50 most 
highly capitalized Standard & Poors (``S&P'') 500 stocks and any 
component stocks of the Major Market Index (``MMI'') not included 
therein. The QIX Expiration Day pilot stocks consist of the 50 most 
highly capitalized S&P 500 stocks, any component stocks of the MMI 
not included therein and the 10 highest weighted S&P Midcap 400 
stocks.
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    The Exchange's closing procedures for non-expiration days have been 
approved on a permanent basis.\8\ On those trading days, the specialist 
must, as soon as practicable after 3:45 p.m., disseminate any MOC order 
imbalance of 50,000 shares or more in (1) the pilot stocks and (2) any 
stock being added to or dropped from certain stock indexes (or, with 
Floor Official approval, from other stock indexes). A published 
imbalance (or the lack thereof) does not preclude the entry or 
cancellation of any MOC order on either side of the market.

    \8\See Securities Exchange Act Release No. 31291 (October 6, 
1992), 57 FR 47149 (October 14, 1992) (File No. SR-NYSE-92-12).
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B. Proposed Amendments

    The Exchange proposes to amend its MOC order handling requirements 
for both expiration days and non-expiration days.\9\ Under the NYSE 
proposal, on [[Page 19314]] expiration days, all MOC orders, including 
orders not related to a trading strategy involving an expiring index 
derivative product, must be entered by 3:40 p.m. The proposed rule 
change will not affect either (1) the deadline for cancellation or 
reduction of MOC orders or (2) the imbalance dissemination procedures. 
After 3:40 p.m., however, MOC order entry will be permitted only to 
offset published imbalances in the pilot stocks.

    \9\An Information Memo describing the amendments to the NYSE's 
auxiliary closing procedures will be issued before each expiration 
day. An Information Memo describing the amendments to the closing 
procedures for non-expiration days also will be issued upon approval 
of this proposal.
    The Exchange also proposes to adopt requirements for handling MOC 
orders on non-expiration days that are substantially similar to those 
in place for expiration days. As proposed, imbalance disseminations on 
non-expiration days will no longer be solely for information purposes. 
Specifically, the proposed rule change will establish a 3:50 p.m. 
deadline for the entry of all MOC orders and for the cancellation or 
reduction of such orders. In the pilot stocks, stocks being added to or 
dropped from an index and, upon the request of a specialists, any other 
stock with the approval of a Floor Official, the specialist will, as 
soon as practicable after 3:50 p.m., disseminate MOC order imbalances 
of 50,000 shares or more.\10\ Thereafter, MOC orders may be entered 
only to offset published imbalances in the above stocks.\11\

    \10\Amendment No. 1 amended the NYSE's proposal to provide for 
the publications of imbalances of 50,000 shares or more to be made 
in any stock upon the request of a specialist and the approval of a 
Floor Official.
    \11\This proposal will not have a material effect on the NYSE's 
limit-at-the-close (``LOC'') order pilot. A LOC order is a limited 
price order entered for execution at the closing price if the 
closing price is within the limit specified. The Commission has 
approved LOC order entry on a pilot basis until July 15, 1995. See 
Securities Exchange Act Release No. 33706 (March 3, 1994), 59 FR 
11093 (March 9, 1994) (File No. SR-NYSE-92-37). Under that pilot 
program, LOC orders may be entered only to offset a published 
imbalance of MOC orders (which, as proposed herein, will take place 
at 3:40 p.m. on expiration days and 3:50 p.m. on other trading 
days). The deadline for LOC order entry is 3:55 p.m. LOC orders are 
irrevocable on expiration days; on non-expiration days, cancellation 
of LOC orders is prohibited after 3:55 p.m. Currently, the NYSE 
permits LOC order entry in five of the pilot stocks. The NYSE has 
recently filed a proposed rule change with the SEC to amend its LOC 
pilot program and to extend the program for an additional year. See 
File No. SR-NYSE-95-09.
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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, with the requirements of Section 6(b).\12\ In particular, 
the Commission believes the proposal is consistent with the Section 
6(b)(5) 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 interest.

    \12\15 U.S.C. 78f(b) (1988 and Supp. V 1993).
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    In recent years, the self-regulatory organizations have instituted 
certain 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. Based 
on the NYSE's experience,\13\ the Commission believes that the MOC 
order handling requirements work relatively well and may result in more 
orderly markets at the close on expiration days.

    \13\The NYSE has submitted to the Commission several monitoring 
reports describing its experience with the auxiliary closing 
procedures. For further discussion of the NYSE's results, see 1994 
Pilot Approval Order, supra, note 6.
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    The Commission acknowledges the NYSE's concern that a last-minute 
influx or disappearance of MOC orders, whether related to a trading 
strategy involving index derivative products or otherwise, potentially 
could add to volatility at the close. Due to the influx of orders at 
the close on expiration days, even MOC orders that are not derivatives-
related could cause temporary liquidity strains. Thus, for the reasons 
set forth below, the Commission has concluded that the proposed rule 
change should help NYSE specialists to effectuate an orderly closing in 
stocks that are not covered by the existing pilot program.
    In this regard, the Commission notes that the proposed rule change 
will standardize the Exchange's closing procedures on expiration days 
and apply them to all NYSE-listed stocks. Specifically, on expiration 
days, the NYSE proposal will impose a 3:40 p.m. deadline for entry of 
all MOC orders. In conjunction with the prohibition on cancellation or 
reduction of any MOC order after 3:40 p.m., this requirement should 
allow the specialist to make a timely and reliable assessment, for 
every NYSE-listed stock, or MOC order flow and its potential impact on 
the closing price. While the Commission recognizes that 3:40 p.m. is 
relatively near the close, the Commission previously has determined 
that such a deadline strikes a reasonable balance between the need to 
effectuate an orderly closing and the need to avoid unduly infringing 
upon legitimate trading strategies.\14\

    \14\See, e.g., Securities Exchange Act Release No. 33639 
(February 17, 1994), 59 FR 9295 (February 25, 1994) (File No. SR-
BSE-93-04) (approving BSE proposal to adopt MOC procedures 
substantially similar to the NYSE's current pilot program).
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    The amended procedures for expiration days will continue to require 
that, as soon as practicable after 3:40 p.m., NYSE specialists 
disseminate substantial imbalances in the pilot stocks. Thereafter, no 
MOC orders may be entered except to offset a published imbalance in a 
pilot stock. In this regard, the NYSE pilot program combines early 
submission of MOC orders with prompt dissemination of imbalances that 
reflect actual investor interest. As noted in prior Commission orders 
approving these procedures,\15\ the NYSE should have sufficient 
opportunity to attract any contra-side interest necessary to alleviate 
substantial MOC order imbalances in the pilot stocks and to dampen 
their effect on the closing price.

    \15\See 1994 Pilot Approval Order, supra, note 6.
    Finally, under the proposed rule change, the NYSE will adopt MOC 
order handling requirements for non-expiration days that are 
substantially similar to those in place for expiration days. This will 
allow members and member organizations to follow comparable procedures 
at the close on all trading days.
    Although there is less likelihood of an influx of MOC orders at the 
close on non-expiration days, certain trading and asset allocation 
strategies use NYSE closing prices and, accordingly, could employ MOC 
orders. The 3:50 p.m. deadline for MOC order entry and cancellation on 
non-expiration days should help the specialist make a timely and 
reliable assessment of MOC order flow and its potential impact on the 
closing price and also should ensure that any imbalance publications 
reflect actual investor interest. In the Commission's opinion, a 3:50 
p.m. deadline strikes a more appropriate balance for non-expiration 
days (as opposed to the 3:40 p.m. deadline for expiration days) given 
the reduced likelihood of substantial MOC order imbalances due to 
derivatives-related trading strategies.
    In the event of unusual market conditions, the Commission believes 
that the amended procedures for non-expiration days will offer benefits 
in terms of assessing volatility at the close of trading in the same 
manner as the [[Page 19315]] NYSE's procedures for expiration days. 
Additionally, the Commission notes that, by permitting a Floor Official 
to authorize the publication of substantial MOC order imbalances on 
non-expiration days in any stock, the proposal should increase the 
information available to market participants and provide NYSE 
specialists with a mechanism, if necessary, to attract contra-side 
interest in any NYSE-listed stock.\16\

    \16\The Commission encourages the NYSE to propose a 
corresponding provision for expiration days that would provide for 
the dissemination of substantial MOC order imbalances on expiration 
days in stock other than pilot stocks.
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    The Commission is approving the amendments to the NYSE's auxiliary 
closing procedures for expiration days as part of the existing pilot 
program that lasts until October 31, 1995. The Commission is approving 
the amendments to the NYSE's closing procedures for non-expiration days 
on a permanent basis.
    The Commission finds good cause for approving Amendment No. 1 prior 
to the thirtieth day after the date of publication of notice of filing 
thereof. Amendment No. 1 merely clarifies the scope of the original 
filing. Finally, the commission did not receive any comments on the 
original proposal, which was published in the Federal Register for the 
full comment period.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1 to the proposed rule change. 
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 rules 
change that are filed with the Commission, and all written 
communications relating to Amendment No. 1 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 Section, 
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such filing 
will also be available at the principal office of the NYSE. All 
submissions should refer to File No. SR-NYSE-94-44 and should be 
submitted by May 8, 1995.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-NYSE-94-44) is approved, 
including Amendment No. 1 on an accelerated basis.

    \17\15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\

    \18\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-9398 Filed 4-14-95; 8:45 am]
BILLING CODE 8010-01-M