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 Rule 80B (Trading Halts Due to Extraordinary Market Volatility)

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37457; File No. SR-NYSE-96-09]

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 Rule 80B (Trading Halts Due to

Extraordinary Market Volatility)

July 19, 1996.

I. Introduction

On April 11, 1996, 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 circuit breaker

rules.

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

\2\ 17 CFR 240.19b-4.

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The proposed rule change was published for comment in Securities

Exchange Act Release No. 37145 (Apr. 26, 1996), 61 FR 19651 (May 2,

1996). On July 9, 1996, the Exchange submitted to the Commission

Amendment No. 1 to the proposed rule change.\3\ This order approves the

proposed rule change, including Amendment No. 1 on an accelerated

basis.

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\3\ See letter from James E. Buck, Senior Vice President and

Secretary, NYSE, to Ivette Lopez, Assistant Director, Division of

Market Regulation, SEC, dated July 3, 1996 (``Amendment No. 1'').

For a description of Amendment No. 1, see infra note 8 and

accompanying text.

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II. Description of Proposal

Currently, NYSE Rule 80B provides that if the Dow Jones Industrial

Average (``DJIA'') \4\ falls 250 or more points below its previous

trading day's closing value, trading in all stocks on the Exchange will

halt for one hour. It further provides that, if on the same day the

DJIA drops 400 or more points from its previous trading day's close,

trading on the exchange will halt for two hours.

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\4\ ``Dow Jones Industrial Average'' is a service mark of Dow

Jones & Company, Inc.

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Moreover, under the current Supplementary Material .30 to NYSE Rule

80B, if the 250-point trigger is reached during the last hour, but

before the last half-hour, of trading, or if the 400-point trigger is

reached during the last two hours, but before the last hour, of

trading, the Exchange may use abbreviated reopening procedures either

to permit trading to reopen before 4:00 p.m. or to establish closing

prices. The current provision further provides that if the 250-point

trigger is reached during the last half-hour, or if the 400-point

trigger is reached during the last hour, the Exchange shall not reopen

for trading on that day.\5\

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\5\ See Securities Exchange Act Release No. 26198 (Oct. 19,

1988), 53 FR 41637 (Oct. 24, 1988). Since the initial approval of

the circuit breaker rules on a pilot basis, the Commission has

extended the pilot program each year. The most recent extension of

the pilot program was approved on October 25, 1995, and is scheduled

to expire on October 31, 1996. See Securities Exchange Act Release

No. 36414 (Oct. 25, 1995), 60 FR 55630 (Nov. 1, 1995).

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With the proposed rule change, the Exchange proposes to shorten the

time periods for halting trading when the 250-point or 400-point level

is triggered from one hour and two hours to one-half hour and one hour,

respectively.\6\ After consulting with its constituents, other markets,

and the Commission, the Exchange believes that it is appropriate to

reduce the time periods during which trading will be halted,

particularly given the current level of automation support for the

trading process. The Exchange believes that these revised time periods

should be sufficient to provide a meaningful ``time out'' for

participants to evaluate changing market conditions, without unduly

constraining trading activity. The Exchange states that it intends to

continue discussions with its constituents as to whether any revisions

to these point parameters might be appropriate.

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\6\ The Exchange has represented to the Commission that it will

use the intermarket telecommunications system known as Information

Network for Futures, Options, and Equities (``INFOE'') system as

well as the Consolidated Tape to announce the precise time when the

circuit breaker thresholds are reached. Telephone conversation

between Brian McNamara, Vice President, Market Surveillance, NYSE,

and Alton Harvey, Office Head, Division of Market Regulation, SEC,

on April 24, 1996.

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With respect to Supplementary Material .30, in its original

proposal, the Exchange proposed to replace the provision with an

amendment, which would provide that if the 250-point trigger is reached

during the last half-hour of trading, or if the 400-point trigger is

reached during the last hour of trading, the Exchange may use

abbreviated reopening procedures to establish new last sale prices.\7\

Subsequently, after discussing the proposed changes to Rule 80B with

constituent groups, the Investment Company Institute, and other self-

regulatory organizations, the Exchange filed Amendment No. 1 to

eliminate the proposed provision for the abbreviated reopening

procedures to establish new last sale prices if trigger values are

reached in the last one-half hour or hour of trading.\8\ Therefore, the

Exchange now proposes to delete the current provision in Supplementary

Material .30 without adding new language.

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\7\ In conjunction with its proposal for abbreviated reopening

procedures, the Exchange proposed to amend Rule 51 to provide that

the 9:30 a.m. to 4:00 p.m. trading session may be extended to permit

closing transactions pursuant to Rule 80B. See Securities Exchange

Act Release No. 37145 (Apr. 26, 1996), 61 FR 19651 (May 2, 1996).

\8\ The Exchange also withdrew from the proposed rule change

amendments to Rule 51 because the abbreviated reopening procedures

are no longer being proposed in the rule filing. See Amendment No.

1, supra note 3.

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III. Summary of Comments

The Commission received four comment letters on the NYSE's rule

proposal.\9\ Two comment letters were

[[Page 39177]]

generally supportive of the NYSE's proposal to reduce the time periods

for halting trading when the circuit breaker threshold levels are

triggered,\10\ and two comment letters questioned whether trading

should ever be halted on the Exchange.\11\

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\9\ See Letter from William R. Rothe, Chairman, and John L.

Watson III, President, Security Traders Association, to Jonathan G.

Katz, Secretary, SEC, dated May 10, 1996 (``STA Letter''); Letter

from Peter W. Jenkins, Chairman, and Holly A. Stark, Vice Chairman,

Securities Traders Association's Institutional Committee, to

Jonathan G. Katz, Secretary, SEC, dated May 17, 1996 (``STA

Institutional Committee Letter''); Letter from Joseph R. Hardiman,

President, National Association of Securities Dealers, to Jonathan

G. Katz, Secretary, SEC, dated May 23, 1996 (``NASD Letter'');

Letter from Paul Schott Stevens, Senior Vice President and General

Counsel, Investment Company Institute, to Jonathan G. Katz,

Secretary, SEC, dated May 23, 1996 (``ICI Letter'').

\10\ See NASD Letter and ICI Letter, supra note 9.

\11\ See STA Letter and STA Institutional Committee Letter,

supra note 9.

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With respect to the specific features of the NYSE's proposal, three

commenters addressed the NYSE's proposed abbreviated closing

session.\12\ They believed that there should be no reopening after 4:00

p.m. because reopening could confuse investors and disrupt end of the

day procedures such as mutual fund pricing. One commenter expressed

concern that the NYSE provided no details regarding such ``abbreviated

reopening procedures.'' \13\ In response, the NYSE withdrew its

proposal to allow the NYSE to use abbreviated reopening procedures to

establish new last sale prices.\14\

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\12\ See STA Letter, NASD Letter, and ICI Letter, supra note 9.

\13\ See ICI Letter, supra note 9.

\14\ See Amendment No. 1, supra note 3. The Exchange plans to

continue holding discussions as to whether additional procedures may

be appropriate for expiration days.

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Beyond the specific proposals currently before the Commission, all

of the commenters expressed their concerns about circuit breakers in

general. They believed that the circuit breaker thresholds of 250 and

400 points should be increased because these trigger levels no longer

reflect extraordinary market volatility due to the growth in market

values since the initial adoption of the circuit breaker rules. One

commenter urged the Commission not to take any action on the NYSE's

proposal until there has been an opportunity for public comment on

increasing the trading halt trigger levels.\15\ One commenter argued

that the circuit breaker trigger levels should be increased to reflect

a 10% movement in the DJIA.\16\ Another commenter questioned why the

circuit breaker trading halts are based on static numbers instead of

percentage movements in the DJIA.\17\ Finally, two commenters believed

that the DJIA may not be the appropriate index to activate circuit

breaker trading halts because it does not reflect the overall market

and that using a broader-based index may be a better approach.\18\

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\15\ See ICI Letter, supra note 9.

\16\ See STA Letter, supra note 9. Another commenter believed

that the circuit breaker levels should be periodically reset to

reflect percentage movements of 10% to 15%. See NASD Letter, supra

note 9.

\17\ See STA Institutional Committee Letter, supra note 9.

\18\ See STA Institutional Committee Letter and NASD Letter,

supra note 9.

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IV. Discussion

After careful review of the Exchange's proposed amendments to the

circuit breaker rules and the comments thereto and for the reasons

discussed below, the Commission believes 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).\19\

Specifically, the Commission believes the proposal is consistent with

the Section 6(b)(5) requirements that the rules of an exchange be

designed 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.

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\19\ 15 U.S.C. 78f(b).

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In 1988, the Commission approved the Exchange's circuit breaker

proposal, along with those of the other securities exchanges and the

National Association of Securities Dealers (``NASD''), because the

Commission believed that the circuit breaker rules proposed would help

promote stability in the equity and equity-related markets by providing

for an enhanced opportunity for market participants to assess

information during times of extreme market movements.\20\ The

proposals, in part, were in response to the events of October 19, 1987,

when the DJIA declined 22.6%. The Commission believed that the circuit

breaker proposals would provide market participants with an opportunity

during a severe market decline to reestablish an equilibrium between

buying and selling interest in a more orderly fashion. The futures

exchanges also adopted analogous trading halts to provide coordinated

means to address potentially destabilizing market volatility.\21\

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\20\ See Securities Exchange Act Release No. 26198, supra note

5.

\21\ See Letter from Todd E. Petzel, Vice President, Financial

Research, Chicago Mercantile Exchange (``CME''), to Jean A. Webb,

Secretary, Commodity Futures Trading Commission (``CFTC''), dated

September 1, 1988. See also letters to Jean A. Webb, Secretary,

CFTC, from Paul J. Draths, Vice President and Secretary, Chicago

Board of Trade (``CBT''), dated July 29, 1988; Michael Braude,

President, Kansas City Board of Trade (``KCBT''), dated August 10,

1988; and Milton M. Stein, Vice President, Regulation and

Surveillance, New York Futures Exchange (``NYFE''), dated September

2, 1988.

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Since the implementation of the circuit breakers, the DJIA has

risen significantly. The 250 point and 400 point triggers, which

represented 12% and 19% of the DJIA when implemented, now represent

4.5% and 7% of the DJIA. The Exchange and members of the industry have

continued to study the circuit breaker rules and to consider the

possible effects of triggering the current circuit breakers in light of

the rise in the DJIA since their implementation.

While the Exchange evaluates the need to change the circuit breaker

trigger levels, the Commission believes, in the near term, it is

reasonable for the Exchange to shorten the length of the trading halts.

The Exchange believes and the Commission agrees that, with advances in

technology and increases in the operational capacity of the markets,

the current length of the trading halts may not be necessary for market

participants to become aware of and respond to significant price

movements. The shorter time periods proposed by the Exchange for

halting all trades should be sufficient to allow market participants to

evaluate and act on changing market conditions without unduly

constraining market activities.

Moreover, the Commission believes that shortening the length of the

trading halts does not need to be delayed pending the resolution of

other circuit breaker issues. While an examination of the broader issue

of raising the circuit breaker triggers may be warranted, the trading

halt periods should be shortened irrespective of the level of the

trigger points. Nevertheless, the Commission encourages the Exchange

and members of the industry to continue to evaluate the trigger levels

for the trading halts in light of the changing circumstances of the

markets since 1988.\22\

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\22\ To coordinate trading halts across all securities and

futures markets, the regional and futures exchanges have submitted

amendments to their circuit breaker rules. For more detail on the

specifics of these proposals, see Securities Exchange Act Release

No. 37459 (July 19, 1996); Letter from Norman E. Mains, Senior Vice

President, Chief, Economist, and Director of Research, CME, to Jean

A. Webb, Secretary, Commodity Futures Trading Commission, dated July

5, 1996. The NASD's Policy Statement on Market Closings state that

the NASD will, upon the request of the Commission, act to halt

domestic trading in all securities quoted on the Nasdaq system and

domestic trading in equity or equity-related securities in the over-

the-counter market. The Commission notes that it has a standing

request with the NASD to halt trading as quickly as practicable

whenever the NYSE and other equity markets have suspended trading.

The NYSE's proposed rule change does not affect the Commission's

standing request. See Letter from Richard Ketchum, Chief Operating

Officer and Executive Vice President, NASD, to Howard Kramer,

Associate Director, Division of Market Regulation, SEC, dated July

18, 1996.

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[[Page 39178]]

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

the proposed rule change prior to the thirtieth day after the date of

publication of notice of filing thereof. The Exchange's original

proposal was published in the Federal Register for the full statutory

period and Amendment No. 1, which deletes the provision in the proposal

that provides for an abbreviated reopening session, was submitted in

response to the comments received. Moreover, the Commission believes

that deleting this provision is appropriate where the details of such a

session were not fully developed and might have created confusion on

the Exchange or among the various equities and futures markets during

times of extreme volatility. Based on the above, the Commission finds

that there is good cause, consistent with section 6(b)(5) of the Act,

to accelerate approval of the amended proposed rule change.

The Commission also believes that the circuit breaker mechanisms

must be coordinated across the U.S. equity, futures and options markets

to be effective in times of extreme market volatility. Therefore, the

new NYSE circuit breaker proposal will become effective on July 22,

1996, which will also be the effective date of the amended rules of the

other markets, so that the circuit breaker trading halts will continue

to be coordinated among the different markets.\23\

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\23\ See Securities Exchange Act Release No. 37145, supra note

7.

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V. 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,

D.C. 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 inspection and

copying at the Commission's Public Reference Section, 450 Fifth Street,

NW., Washington, D.C. 20549. Copies of such filing will also be

available for inspection and copying at the principal office of the

Exchange. All submissions should refer to File No. SR-NYSE-96-09 and

should be submitted by August 16, 1996.

VI. Conclusion

IT IS THEREFORE ORDERED, pursuant to section 19(b)(2) of the

Act,\24\ that the proposed rule change (SR-NYSE-96-09) is approved and

effective on July 22, 1996.

\24\ 15 U.S.C. 78s(b)(2).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\25\

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\25\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-19035 Filed 7-25-96; 8:45 am]

BILLING CODE 8010-01-M