Self-Regulatory Organizations; New York Stock Exchange, Inc.; Order Approving Proposed Rule Change Relating to the Same-Day Comparison of Initial Trade Data in Listed Stocks Through the NYSE's On-Line Comparison System

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34153; File No. SR-NYSE-94-08]

Self-Regulatory Organizations; New York Stock Exchange, Inc.;

Order Approving Proposed Rule Change Relating to the Same-Day

Comparison of Initial Trade Data in Listed Stocks Through the NYSE's

On-Line Comparison System

June 3, 1994.

On March 10, 1994, the New York Stock Exchange, Inc. (``NYSE'')

filed with the Securities and Exchange Commission (``Commission'') a

proposed rule change (File No. SR-NYSE-94-08) under section 19(b) of

the Securities Exchange Act of 1934 (``Act'').\1\ Notice of the

proposed rule change was published in the Federal Register on May 18,

1994, to solicit comments from interested persons.\2\ No comments were

received by the Commission. This order approves the proposal.

---------------------------------------------------------------------------

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

\2\Securities Exchange Act Release No. 34023 (May 6, 1994), 59

FR 25979.

---------------------------------------------------------------------------

I. Description of the Proposal

The proposed rule change will allow the NYSE to implement its On-

Line Comparison System (``OCS''). With OCS, NYSE clearing members will

be able to submit trade data on listed stocks to NYSE on trade date for

initial comparison. Implementation of NYSE's same-day comparison will

be in a phased-in approach similar to that which was used to implement

next-day (``T+1'') comparison of NYSE transactions.\3\ The NYSE's

target date for full implementation of trade-date comparison is June

30, 1995. The NYSE filed this proposal with the Commission to provide

the NYSE community with almost eighteen months advance notice in order

to afford them time to plan and implement the operational changes that

may be necessary.\4\

---------------------------------------------------------------------------

\3\In March 1989, the Commission approved the NYSE's Rule 130.

That rule, which was used to implement overnight comparison over the

eighteen months following its approval, established the principle

that ``regular way'' transactions in listed stocks, rights, and

warrants must be compared or closed out within one business day

after the trade date. Securities Exchange Act Release No. 26627

(March 14, 1989) 54 FR 11470 [File No. SR-NYSE-88-36] (order

approving proposed rule change).

\4\The NYSE has distributed to its members a circular, dated

January 29, 1994, describing implementation of trade date

comparison.

---------------------------------------------------------------------------

Beginning on June 1, 1994, the NYSE will require its member

clearing firms to submit to it periodically during the trading day

trade data for transactions in listed stocks, rights, and warrants

effected on the NYSE for ``regular way,''\5\ ``next day,''\6\

``cash,''\7\ and ``seller's option'' settlement.\8\ Trade data for

transactions in listed stocks traded on an ``issued,'' ``when

issued,''\9\ and ``when distributed''\10\ basis also will have to be

submitted periodically during the trading day. The NYSE's existing

Overnight Comparison System will be the main processor of the data

submitted for initial comparison. Accordingly, the NYSE has changed

that system's name to the On-Line Comparison System and will continue

to use the same acronym of OCS. Compared trades will be submitted by

the NYSE to a ``qualified clearing agency''\11\ to complete the

clearance and settlement process.

---------------------------------------------------------------------------

\5\The term ``regular way'' settlement means settlement on T+5.

NYSE Rule 64(3).

\6\``Next day'' settlement means settlement on T+1. NYSE Rule

64(2).

\7\``Cash'' settlement means settlement on trade date. NYSE Rule

64(1).

\8\``Seller's option'' settlement means settlement within the

time specified in the contract. NYSE 64(4).

\9\A ``when issued'' stock refers to a stock which trades after

the date of issue but before the certificates have been issued. NYSE

Rule 440B.16; D. Scott, Wall Street Words 385 (1988).

\10\A ``when distributed'' stock refers to a stock which trades

after the date of issue but before the certificates have been

issued. NYSE Rule 440B.16; D. Scott, Wall Street Words 385 (1988).

\11\For this purpose, the term ``qualified clearing agency''

means a clearing agency that is registered under the Act, that

maintains facilities through which NYSE trades may be compared or

settled, that has agreed to supply the NYSE with data in connection

with the NYSE's compliance duties under the Act, and that has agreed

to establish rules and procedures to facilitate comparison of

transactions as provided in NYSE Rule 130. NYSE Rules 130,

Supplementary Material .10, and 132, Supplementary Material .10.

---------------------------------------------------------------------------

Implementation of trade-date comparison will require clearing firms

to meet three general requirements. First, they will have to suppress

certain comparison data submissions to qualified clearing agencies as

the NYSE locks-in additional trades. Second, they will have to submit

their comparison data to the NYSE for comparison rather than to a

qualified clearing agency. Third, they will have to submit virtually

all comparison data to the NYSE during the trading session rather than

after the close of trading.\12\

---------------------------------------------------------------------------

\12\While the NYSE's ultimate goal is to lock-in all trades

electronically and to have all trades compared during the trading

session, as a practical matter, there will be trades at the close or

immediately before or after the close that are not submitted for

comparison during the trading session. This will be especially true

in the early stages of the proposal's implementation. Conversation

between Harry F. Day, Counsel-Regulation, NYSE; Stanley Jacoby,

Trade Comparison Specialist, Post Trade Services, NYSE; and Thomas

C. Etter, Jr., Attorney, Division of Market Regulation, Commission

(May 27, 1994).

---------------------------------------------------------------------------

As mentioned above, the implementation of trade date comparison

will use a phased-in approach, which the NYSE found successful in

implementing T+1 overnight comparison. Beginning June 1, 1994, NYSE

clearing members will be required to submit trade data directly to OCS

within two hours of trade execution. In August or September of 1994,

clearing members will be required to submit trade data within one hour

of execution. In October of 1994, clearing members will be required to

make on-line, real time submissions of trade data. These time frames

are flexible and may be altered by the NYSE as it evaluates clearing

firms' abilities to comply. The NYSE intends to monitor closely the

implementation of each phase and will not implement a new phase until

it is satisfied that no significant operational problems exist.

II. Discussion

For the reasons discussed below, the Commission believes the

proposal is consistent with the Act. Section 6(b)(5) of the Act states

that exchange rules should be designed to foster cooperation and

coordination with persons engaged in regulating, clearing, settling,

and processing information with respect to securities transactions; to

remove impediments to a free and open market; and to protect investors

and the public interest.\13\

---------------------------------------------------------------------------

\13\15 U.S.C. 78f(b)(5) (1988).

---------------------------------------------------------------------------

The risks posed by uncompared trades and by the long span of time

between trade execution and trade comparison (i.e., as long as five

business days) came under intense scrutiny after the Market Break of

October 1987. The leading studies of the Market Break of 1987

identified uncompared trades as a major stress point in post-trade

processing which, together with the unprecedented trading volume and

the unprecedented price volatility during the Market Break, posed an

unacceptable threat to the marketplace.\14\ The Commission, in its

recommendations to Congress in February of 1988, proposed that markets

accelerate their efforts to compare all trades on trade date.\15\

---------------------------------------------------------------------------

\14\See Securities Exchange Act Release No. 26627 (March 14,

1989), 54 FR 11470 [File No. SR-NYSE-88-36] (order approving

proposed rule change) and Division of Market Regulation, Market

Analysis of October 13 and 16, 1989, 117-129 (December 1990).

\15\Testimony on the Securities and Exchange Commission's

Recommendations Regarding the October 1987 Market Break delivered by

David S. Ruder, Chairman, Commission, before the Senate Committee on

Banking, Housing and Urban Affairs at 23-24 (February 3, 1988).

---------------------------------------------------------------------------

Since 1988, the NYSE, among others, has sought to improve clearing

operations and to reduce exposure to losses associated with market

volatility occurring during the period between execution and

settlement. The NYSE reduced its comparison cycle in stocks first from

T+5 in 1990.\16\ T+1 comparison also was made applicable to NYSE listed

options in 1992\17\ and to NYSE listed bonds in 1993.\18\ Currently,

according to the NYSE, more than seventy-five percent of all trades

executed on the NYSE trading floor are captured and locked-in

electronically. The NYSE views the electronic capture of the remaining

twenty-five percent of its trades, which primarily occur in trading

crowds on its trading floor, as a major goal of OCS.

---------------------------------------------------------------------------

\16\Securities Exchange Act Release No. 28285 (July 30, 1990),

55 FR 31030 [File No. SR-NYSE-90-21] (order approving proposed rule

change).

\17\For a discussion of T+1 comparison or close-out for options,

refer to Securities Exchange Act Release No. 30293 (January 27,

1992), 57 FR 4229 [File No. SR-NYSE-91-36].

\18\For a discussion of T+1 comparison of close-out for bonds,

refer to Securities Exchange Act Release No. 31826 (February 4,

1993), 58 FR 8075 [File No. SR-NYSE-92-32].

---------------------------------------------------------------------------

The NYSE's main objectives as it moves toward complete

implementation of OCS include: (1) Increasing the percentage of

electronically locked-in trades; (2) maintaining a low rate of

uncompared trades rate during the various phases of the project; (3)

electronic capture and comparison of trades, especially trading crowd

transactions, that currently are not captured by any electronic order

entry system; and (4) elimination of any redundant comparison

processing. Significantly, as the NYSE moves through its various

implementation phases of OCS, its current Rule 130 will remain in

operation. That rule requires that each transaction effected on the

NYSE be compared or closed out by NYSE's close of business on T+1.

The required changes may affect numerous clearing and non-clearing

firms' operations, including such things as trading floor operations,

purchase and sales department procedures, clearing operations, and

internal account balancing and reconciliation procedures. Because of

these significant changes, the NYSE has established two committees, a

steering committee and a working group, to advise it on the best

methods by which trade-date comparison may be achieved. Additionally,

this program of trade-date comparison is being implemented in

conjunction with the National Securities Clearing Corporation and the

American Stock Exchange, Inc.

As stated above, the Commission believes that the proposed rule

change, by shortening the NYSE comparison cycle from T+1 to trade date,

will make NYSE's comparison process safer in terms of the risks

resulting from market price volatility and more efficient in terms of

the time and expense involved in post-trade processing. The Commission

believes that the proposal will offer additional protection to

investors, brokers, and other persons that safeguard investors' funds

and facilitate investors' transactions. In the Commission's view, this

proposal will provide fundamental and important improvements to the

marketplace.

III. Conclusion

For the reasons discussed above, the Commission finds that the

proposed rule change is consistent with the Act, particularly with

sections 6(b)(5) of the Act, and the rules and regulations thereunder.

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

that the above-mentioned proposed rule change (File No. SR-NYSE-94-08)

be, and hereby is, approved.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\19\

---------------------------------------------------------------------------

\19\17 CFR 200.30-3(a)(12) (1993).

---------------------------------------------------------------------------

Jonathan G. Katz,

Secretary.

[FR Doc. 94-14128 Filed 6-9-94; 8:45 am]

BILLING CODE 8010-01-M