Self-Regulatory Organizations; Notice of Filing and Order Granting Partial Accelerated Approval of a Proposed Rule Change by the New York Stock Exchange, Inc. to Make Permanent the Near Neighbor, Capital Utilization and Rule 103A Pilot Programs for Measuring Specialist Performance and Adopt a New Specialist Performance Measure

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38158; File No. SR-NYSE-96-34]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Partial Accelerated Approval of a Proposed Rule Change by the

New York Stock Exchange, Inc. to Make Permanent the Near Neighbor,

Capital Utilization and Rule 103A Pilot Programs for Measuring

Specialist Performance and Adopt a New Specialist Performance Measure

January 10, 1997.

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 3, 1996, the New York Stock Exchange, Inc. (``NYSE''

or ``Exchange'') filed with the Securities and Exchange Commission

(``Commission'') the proposed rule change as described in Items I and

II 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 and to

grant accelerated approval to the portion of the proposal to make

permanent the Near Neighbor, Capital Utilization, and Rule 103A pilot

programs for measuring specialist performance.\3\

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

\2\ 17 CFR 240.19b-4.

\3\ In partially approving the NYSE proposal, the Commission is

not approving, at this time, the portion of the proposal relating to

implementing a new specialist performance measure, the ``adjusted

stabilization'' rate. That portion of the proposal is being

published for comment in this notice.

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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 making permanent certain pilot

programs for measuring specialist performance and adopting a new

specialist performance measure. The three pilots are the Near Neighbor

pilot, the Capital Utilization Data pilot, and the Rule 103A pilot.\4\

The Exchange also proposes to adopt a new performance measure, the

``adjusted stabilization'' rate measure.

\4\ The Commission notes that the capital utilization and near

neighbor measures currently are only used by the Allocation

Committee in making specialist allocation decisions. The Commission

initially approved the capital utilization program on a one-year

pilot basis in Securities Exchange Act Release No. 33369 (December

22, 1993), 58 FR 69431 (December 30, 1993). The Commission approved

a six-month extension of the pilot program in Securities Exchange

Act Release No. 35175 (December 29, 1994), 60 FR 2167 (January 6,

1995) (extending pilot through June 30, 1995). The Commission

approved two subsequent extensions of the pilot so that the Exchange

and the Commission could evaluate the capital utilization, near

neighbor, and Rule 103A programs concurrently. See Securities

Exchange Act Release Nos. 35926 (June 30, 1995), 60 FR 35760 (July

11, 1995) (extending pilot through September 10, 1996) and 37668

(September 11, 1996), 61 FR 49371 (September 19, 1996) (extending

pilot through January 10, 1997). The Commission approved the near

neighbor program on a pilot basis in Securities Exchange Act Release

No. 35927 (June 30, 1995), 60 FR 35927 (July 11, 1995) (pilot

approved through September 10, 1996). The Commission approved an

extension of the near neighbor pilot program, until January 10,

1997, in Securities Exchange Act Release No. 37668 (September 11,

1996), 61 FR 49371 (September 19, 1996). The Rule 103A pilot program

was initially adopted in 1979. See Securities Exchange Act Release

Nos. 15827 (May 15, 1979), 44 FR 100 (May 22, 1979). Since then, the

program has been extended many times. The most recent extension

continues the pilot until January 10, 1997. See Securities Exchange

Act Release No. 37667 (September 11, 1996), 61 FR 49185 (September

18, 1996).

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[[Page 2705]]

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 self-regulatory organization

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. The self-regulatory organization

has prepared summaries, set forth in Sections A, B, and C below, of the

most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

1. Purpose

The Exchange currently uses several programs to measure specialist

performance, including specialist capital utilization, the ``near

neighbor'' approach, and the standards of acceptable performance

specified in Rule 103A. Information on these measures is supplied to

the Allocation Committee for its use in determining allocation of

listing companies.\5\ The ``near neighbor'' measure compares certain

performance measures of a stock (price continuity, depth, quotation

spread, and capital utilization) to those stocks with similar trading

characteristics; the comparison is made over ``rolling'' three-month

periods.\6\ The ``near neighbor'' measure has been in use on a pilot

basis since August 1995. Capital utilization 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.\7\ It has been utilized as a

pilot since February 1994. These measures are presented to the

Allocation Committee in summary form for each unit applying for a new

listing and are a factor in allocating newly-listed stock.

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\5\ The Exchange's Allocation Policy and Procedures govern the

allocation of equity securities to NYSE specialist units. The

Allocation Committee has sole responsibility for the allocation of

securities to specialist units pursuant to Board-delegated

authority, and is overseen by the Quality of Markets Committee of

the Board of Directors. The Allocation Committee renders decisions

based upon the allocation criteria specified in the Allocation

Policy. The Allocation Policy emphasizes that the most significant

allocation criterion is specialist performance. In this regard, the

Allocation Policy states that the Allocation Committee will base its

allocation decisions on the Specialist Performance Evaluation

Questionnaire (``SPEQ''), objective performance measures, and the

Committee's expert professional judgment. See Securities Exchange

Act Release No. 34906 (October 27, 1994), 59 FR 55142 (November 3,

1994) (order approving revisions to the NYSE's Allocation Policy).

The weight given in the allocation decision making process to

the SPEQ was reduced from 1/3 to 1/4 in recognition of the

Exchange's adoption for allocation decision purposes of the near

neighbor and capital utilization objective measures. See Securities

Exchange Act Release No. 35932 (June 30, 1995), 60 FR 35763 (June

30, 1995).

\6\ For a more detailed description of the near neighbor

measure, see Securities Exchange Act Release No. 35927, supra note.

1.

\7\ For a comprehensive description of the capital utilization

measure of specialist performance, see Securities Exchange Act

Release No. 35926, supra note 1.

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Rule 103A, adopted in 1979, codifies standards based on the

Specialist Performance Evaluation Questionnaire (``SPEQ'') and

specialist performance with respect to openings of stocks and

turnaround of order reports and administrative messages received. Data

with respect to these standards is also provided to the Allocation

Committee. In addition, the Market Performance Committee uses the Rule

103A information to initiate performance improvement actions for

specialist units that fall below the criteria detailed in the Rule. A

unit's continued inability to raise its performance level can lead to a

reallocation of one or more of its stocks.

Commission staff have indicated to the NYSE staff the position that

sufficient experience has been gained through extended operation of

these pilot programs in order for the NYSE to determine whether each

should be approved on a permanent basis. Permanent approval will not

mean that the programs cannot be periodically revised and amended to

improve their effectiveness. For example, the Exchange is currently

working with consultants from the Massachusetts Institute of Technology

to refine the near neighbor and capital utilization data to increase

its usefulness. The NYSE notes that these efforts are ongoing and may

lead to enhancements in the future.

In addition to making the three pilot programs permanent, the

Exchange proposes to add, as a new measure of specialist performance,

``adjusted stabilization'' rates. Specialists are expected to stabilize

stock price movements by buying and selling from their own account

against the prevailing trend of the market. ``Stabilization'' refers to

those instances where a stock dealer purchases on minus and zero minus

ticks, and sells on plus and zero plus ticks. For purposes of the

proposed specialist performance measure, ``adjusted stabilization''

would consist of proprietary purchases by specialists on minus and zero

minus ticks, as well as zero plus tick purchases on the current bid

(provided the current bid is below the offer of the immediately

preceding trade); and proprietary sales on plus and zero plus ticks, as

well as zero minus tick sales on the current offer (provided the

current offer is above the bid of the immediately preceding trade). The

Exchange believes that ``adjusted stabilization'' is a useful concept

in that it reflects liquidity added to the market by specialists, and

is consistent with the specialist's overall obligation to stabilize the

market in that the specialist is not initiating either a transaction or

a price change, but is rather adding depth to the market at prices at

which transactions have already occurred.

Adjusted stabilization rate information would be provided to the

Allocation Committee to assist the Committee in assessing the value

added by specialists to the depth and liquidity of stocks they

currently trade.

2. Statutory Basis

The basis under the Act for the proposed rule change is the

requirement under Section 6(b)(5) \8\ 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.

The Exchange believes that the proposed rule change is consistent with

these requirements in that continuing to develop objective measures of

specialist performance would help perfect the mechanism of a free and

open market and protect investors and the public interest.

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\8\ 15 U.S.C. 78f(b)(5).

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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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received From Members, Participants or Others

No written comments either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

Within 35 days of the publication of this notice in the Federal

Register or within such longer period (i) as the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

[[Page 2706]]

(A) by order approve the proposed rule change, or

(B) institute proceedings to determine whether the proposed rule

change should be disapproved.

The Exchange has requested that the Commission find good cause,

pursuant to Section 19(b)(2) of the Act, for approving the portion of

the proposed rule change relating to making permanent the three pilot

programs on an accelerated basis prior to the thirtieth day after

publication in the Federal Register.

IV. 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, N.W., 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 Room. 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-96-34 and

should be submitted by [insert date 21 days from date of publication].

V. Commission's Findings and Order Granting Partial Accelerated

Approval of Proposed Rule Change

The Commission finds that the portion of the proposed rule change

making permanent the specialist performance measure pilot programs 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)(5) of the

Act.\9\ Section 6(b)(5) requires, among other things, that the 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. Further, the Commission finds that the portion of the

proposal to make permanent the pilot programs is consistent with

Section 11(b) of the Act \10\ and Rule 11b-1 thereunder,\11\ which

allow exchanges to promulgate rules relating to specialists to ensure

fair and orderly markets. For the reasons set forth below, the

Commission continues to believe that the consideration of specialist

near neighbor and capital utilization analysis and the Rule 103A

performance evaluation process by the Allocation Committee will enhance

the Exchange's allocation process and encourage improved specialist

performance, consistent with helping to perfect the mechanism of a free

and open market and to protect investors and the public interest.

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\9\ 15 U.S.C. 78f(b)(5).

\10\ 15 U.S.C. 78k(b).

\11\ 17 CFR 240.11b-1.

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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.\12\ To ensure that specialists fulfill these

obligations, it is important that the Exchange implement objective

measures of specialist performance and prescribe stock allocation

procedures and policies that encourage specialists to strive for

optimal performance. The Commission supports NYSE's ongoing efforts to

develop objective measures of specialist capital utilization and near

neighbor analysis for use in the allocation process to encourage

improved specialist performance and market quality. In addition,

effective oversight, including periodic evaluation of the specialist's

performance, is important to the maintenance of a fair and efficient

marketplace. The Commission believes that the NYSE's Rule 103A

performance evaluation is critical to this oversight in that it

provides the Exchange with the means to identify and correct poor

specialist performance, to ascertain whether specialists are

maintaining fair and orderly markets in their assigned securities, and

to bring performance evaluation actions as a result of the evaluation

process.

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\12\ See, e.g., 17 CFR 240.11b-1; NYSE Rule 104.

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The Commission also believes that making permanent the pilot

programs for these three measures is appropriate because the Exchange

indicates that it has found these measures useful in providing the NYSE

Allocation Committee with measures of specialist performance. The

NYSE's Allocation Policy emphasizes that the most significant

allocation criterion is specialist performance.\13\ 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.\14\

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\13\ See e.g., Securities Exchange Act Release No. 34906, supra

note 4.

\14\ The Commission notes that it would still like the near

neighbor and capital utilization measures to be incorporated into

the Rule 103A evaluation process.

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The Commission finds good cause for approving the portion of the

proposed rule change relating to making permanent the pilot programs

prior to the thirtieth day after the date of publication of notice of

filing thereof in the Federal Register. The Commission believes that

accelerated approval of that portion of the proposal is appropriate

because it will enable the Exchange to continue to make use of the

capital utilization, near neighbor, and Rule 103A evaluation measures

of specialist performance on an uninterrupted basis and will ensure

continuity and consistency in the stock allocation deliberation

process. Further, the initial proposals to adopt the capital

utilization pilot and the near neighbor pilot were noticed previously

in the Federal Register for the full statutory period and the

Commission did not receive any comments on these proposals.\15\ In

addition, a substantial portion of current Rule 103A was noticed for

the full statutory period in 1987, and the Commission did not receive

any adverse commentary on the revised Rule 103A program.\16\

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\15\ See supra Securities Exchange Act Release Nos. 33369 and

35927, note 2.

\16\ See Securities Exchange Act Release Nos. 24919 (September

15, 1987), 52 FR 35821 (September 23, 1987); 25681 (May 9, 1988), 53

FR 17287 (May 16, 1988).

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

\17\ that the portion of the proposed rule change (File No. SR-NYSE-96-

34) relating to making permanent the pilot programs is hereby approved

on an accelerated basis.

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

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\18\

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\18\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97-1220 Filed 1-16-97; 8:45 am]

BILLING CODE 8010-01-M