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 Trades One or Two Points Away From the Last Sale and To Stop Orders

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34136; File No. SR-NYSE-89-17]

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 Trades One or Two Points Away From the Last

Sale and To Stop Orders

May 31, 1994.

I. Introduction

On July 12, 1989, 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 NYSE Rules 79A.30 and

123A.40. On March 15, 1993, the NYSE submitted Amendment No. 1 to the

rule filing.\3\

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\1\15 U.S.C. 78s(b)(1) (1988).

\2\17 CFR 240.19b-4 (1993).

\3\Amendment No. 1 limited the proposed rule change to NYSE Rule

79A.30 to securities trading at $100 or over.

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The proposed rule change was published for comment in Securities

Exchange Act Release No. 28202 (July 13, 1990), 55 FR 29696 (July 20,

1990). No comments were received on the proposal.

II. Description of the Proposal

Currently, all transactions made at one point or more away from the

last previous sale when such previous sale is under $20 per share, or

at two points or more away from the last previous sale when such

previous sale is at $20 per share or over, may not be published on the

tape without the prior approval of a Floor Official.\4\ The rule change

to NYSE Rule 79A.30 will permit a Floor Governor, during unusual market

conditions, to change the two point parameter requiring Floor Official

approval for a particular security when the last previous sale for such

security occurs at $100 per share or more. The special price parameter

will apply only for the trading day it was approved, but may be re-

confirmed by the Floor Governor for subsequent trading sessions for the

particular security on a day-by-day basis. Once a Floor Governor has

established a special price parameter, a Floor Official must approve

the publication on the tape of any trade that exceeds such parameter,

except when Floor Governor approval is required under Rule 123A.40, as

discussed below. Changes to the two point parameter must be reported to

the Exchange's Market Surveillance Division by the Floor Governor.

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\4\See NYSE Rule 79A.30.

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NYSE Rule 123A.40 prohibits a specialist from trading for his own

account in a stock in which he is registered if the trade would result

in electing any stop order on his book, unless (i) his bid or offer has

the effect of bettering the market, (ii) a Floor Official approves the

transaction, and (iii) the stop order is guaranteed to be executed at

the same price as the electing sale.\5\ While the above requirements

would remain for transactions where the specialist's bid or offer

results in the election of a stop order, under the proposal a

specialist would be permitted to participate in a trade solely for the

purpose of facilitating the completion of an order at a single price

where the depth of the current public bid or offer (which would not be

the specialist's bid or offer) is not sufficient to do so, without

guaranteeing the execution price of any stop orders elected by the

transaction and without obtaining Floor Official approval for each

transaction. The proposal, however, requires a specialist to obtain the

approval of a Floor Governor rather than a floor official as currently

required, prior to engaging in a transaction for his own account at the

electing sale price if a stop order will be elected (pursuant to the

rule's conditions) and executed at a price outside the price parameters

provided in NYSE Rule 79A.40.\6\

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\5\Stop orders are orders which become executable market or

limit orders once the price specified on the order is reached in the

market. if the order is an executable market order, it will be

executed at the next best market price, which may not be the stop

order (``electing'') price.

\6\See supra note 4 and accompanying text. Should the two point

price parameter provided in Rule 79A.30 be change for securities

traded at $100 or over pursuant to the change to Rule 79A.30 being

approved herein, that temporary price parameter will be the

determining point for floor Governor approval pursuant to Rule

123A.40.

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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) of the Act.\7\ 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.

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\7\15 U.S.C. 78f(b) (1988).

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The Commission believes that the rule change to NYSE Rule 79A.30 to

permit a Floor Governor to change the two point parameter for

transactions in securities trading at $100 or over, is consistent with

Section 6(b)(5) of the Act in that it will facilitate trading during

unusual market conditions. The Commission believes that the rule change

may help to minimize the possibility of delays in reporting trades to

the Tape during highly volatile trading days by eliminating the need to

obtain Floor Official approval for certain trades of higher priced

securities.

Furthermore, because Floor Official approval is required for each

transaction to be executed outside of the price parameters once a Floor

Governor approves a change, the Commission believes that the rule

change provides appropriate Exchange oversight of trades away from the

last sale of a security, which will help to ensure that specialists

satisfy their market making responsibilities during unusual market

conditions.\8\ In addition, all changes in the two point parameter will

be reported to the exchange's Market Surveillance Division by the Floor

Governor, thereby providing Exchange oversight of the Floor Governor's

decision. The Commission further believes requiring that the decision

to change the two point price parameter be made by a Floor Governor on

a day-by-day basis will emphasize the intent that the two point

parameter be changed only in unusual circumstances.\9\

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\8\Under Section 11 of the Act, 15 U.S.C. 78k, specialists have

the responsibility to act as dealers to the extent necessary to

maintain fair and orderly markets, which includes tempering sudden

price movements and keeping any general price movements orderly. See

Division of Market Regulation, October 1987 Market Break Report, at

4-3.

\9\This rule change is intended to apply only to intra-day

trading, and will not affect opening transactions. See Letter from

James E. Buck, Senior Vice President and Secretary, NYSE, to Howard

Kramer, Assistant Director, Division of Market Regulation, dated

June 12, 1990. The Exchange states that it has a ``a long-standing

policy of requiring Floor Official approval for the opening trades

in any stock transaction that will result in a price change of * * *

two points or more away from a last sale of $20 or more.'' Id.

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The Commission believes the rule change to NYSE Rule 123A.40 to

permit specialists to participate in transactions which result in the

election of stop orders without guaranteeing the execution price of the

stop orders is consistent with Section 6(b)(5) of the Act in that it

will benefit investors by facilitating single-price executions of

orders. Currently, when a market order arrives at a specialist's post

and the depth of the current bid or offer is not sufficient to provide

a single-price execution of the order, the specialist cannot

participate in the transaction if a stop order would be elected without

guaranteeing the price of the stop order and obtaining Floor Official

approval. When the specialist does not participate, the market order is

partially executed against the best bid or offer, and partially

executed against any elected stop orders and limit orders on the

specialist's book, usually at different prices. The rule change allows

the specialist to participate in such transactions without guaranteeing

the price of any elected stop orders or obtaining Floor Official

approval, and thereby makes it more likely that specialists will

provide investors with single-price execution of their orders.

While the Commission views the prohibition on specialist

participation in the election of stop orders as helpful in guarding

against the potential for abuse,\10\ we recognize that certain benefits

can accrue from permitting limited specialist participation under the

conditions set forth in the rule to facilitate single price executions.

Specifically, unlike the situation where the specialist enters his own

bid or offer, when a specialist participates in the execution of a

customer's market order under the proposed rule, he will not be setting

the price of the transaction that elects the stop orders. Rather, the

price will be determined by another market participant, independent of

any price-setting determination by the specialist. The Commission

therefore believes that allowing specialists to facilitate single-price

execution of market orders through passive participation will not

negatively affect the execution of stop orders elected by the

transactions, and does not present the opportunity for abuses that may

be present were the specialist is actively setting the price through

his own proprietary bids or offers.\11\

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\10\The provision of Rule 123A.40 that requires specialists to

guarantee the price of elected stop orders and requires floor

official approval when a specialist elects stop orders through his

own bid or offer are intended to address, in part, the situation

where a specialist has an accumulation of stop orders and desires to

``clean up the book.'' This can be accomplished by the specialist

entering a bid, for example, that elects all of the stop sell orders

at the lowest stop order price, or by electing stop sell orders in a

series of descending prices until the lowest order is reached. The

specialist could use these stop order election processes to drive

the share price down to an artificially low level in order to obtain

cheap stock at the expense of the public customers. The potential

for this type of abuse is not present, however, where a customer

market order sets the trading price and incidentally elects stop

orders of which the customer was unaware.

\11\See id.

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The Commission further believes that the rule change requiring

Floor Governor approval for any transactions which will result in the

execution of an elected stop order outside the one or two point

parameters contained in NYSE Rule 79A.30, or any temporary parameters

established by a Floor Governor during unusual market conditions

pursuant thereto, will provide increased scrutiny of gap-executions of

stop orders and thereby benefit investors consistent with section

6(b)(5) of the Act. The Commission notes that under Rule 79A.30, Floor

Official approval is needed for transactions effected outside the price

parameters contained therein, but that under Rule 123A.40, Floor

Governor approval is necessary for the execution of stop orders outside

the price parameters of Rule, 79A.30 when the stop orders are elected

by a transaction in which a specialist participated. The Commission

believes this increased Exchange oversight of specialists' proprietary

activity will provide investors with additional protection against

potential trading abuses related to the execution of stop orders.

The Commission finds good cause for approving Amendment No. 1 to

the rule change prior to the thirtieth day after publication of notice

of filing thereof. Amendment No. 1 added language to the rule change

that limits Floor Governor changes to the price parameters provide in

NYSE Rule 97A.30 to securities traded at $100 per share or over.\12\

The NYSE's proposed rule change was published in the Federal Register

for the full statutory period and no comments were received.\13\

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\12\As originally filed, the proposed rule change would have

allowed Floor Governors to change the price parameters in NYSE Rule

79A.30 for all securities.

\13\See Securities Exchange Act Release No. 28202 (July 13,

1990), 55 FR 29696 (July 20, 1990).

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IV. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning Amendment No. 1. 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 inspecting and

copying at the Commission's Public Reference Section, 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-89-17 and should be

submitted by June 28, 1994.

V. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the

Act,\14\ that the proposed rule change (SR-NYSE-89-17) is approved.

\14\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.\15\

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\15\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-13737 Filed 6-6-94; 8:45 am]

BILLING CODE 8010-01-M