Self-Regulatory Organizations; Notice of Filing and Order Granting Temporary Accelerated Approval of a Proposed Rule Change by the New York Stock Exchange, Inc. Relating to Trading Differentials for Equity Securities

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38744; File No. SR-NYSE-97-20]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Temporary Accelerated Approval of a Proposed Rule Change by

the New York Stock Exchange, Inc. Relating to Trading Differentials for

Equity Securities

June 18, 1997.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on June 16, 1997, the New

York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') filed with the

Securities and Exchange Commission (``SEC'' or ``Commission'') the

proposed rule change as described in Items I and II below, which Items

have been prepared by the self-regulatory organization (``SRO''). The

Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons and to grant accelerated

approval on a temporary basis to the proposed rule change.

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

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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 amendments to Exchange Rules

62, 95.30, 118, 127, and 440B to provide flexibility in determining

minimum trading variations. The Exchange is proposing to implement

these rule changes on a temporary accelerated basis.

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

Statutory Basis for, 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 III 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.

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

Statutory Basis for, the Proposed Rule Change

1. Purpose

Exchange Rule 62 currently provides fixed minimum trading

variations for stocks traded on the Exchange. For example, the rule

currently states that ``Bids or offers in stocks above one dollar per

share shall not be made at a less variation than \1/8\ of one dollar

per share.'' In order to provide greater flexibility to adjust trading

variations as may be appropriate, the Exchange is proposing to amend

Rule 62 so that the minimum trading variation may be changed from time

to time.

This increased flexibility would allow the Exchange to determine

trading variations on an expedited basis, without undergoing the delays

inherent in the regulatory approval process. This would put the

Exchange in a comparable regulatory position with respect to minimum

trading variations with other exchanges that are able to change

variations at any time.

In addition, the amendment to Rule 62 will provide flexibility so

that the Exchange could permit its members to trade at increments

smaller than NYSE-established trade variations in order to match other

markets' bids or offers for the purpose of preventing Intermarket

Trading System (``ITS'') trade-throughs. For example, assume that the

established minimum trading variation is one-sixteenth of a dollar, and

the best bid on the Exchange for a particular stock is 10, but there is

a bid for that stock on the ITS at 10\1/32\. The Exchange specialist,

or broker in the Crowd with a ``not held'' order, could execute a

marketable limit order or market order to sell at 10\1/32\ in order to

match the ITS bid. However, the specialist could not accept an order

with a limit of 10\1/32\ because it is not the minimum variation at

which trading is effected on the Exchange.

The Exchange initially intends to set a minimum variation of one-

sixteenth of one dollar.

In addition to Rule 62, several other Exchange rules incorporate

specific references to minimum trading variations. These rules, viz.,

Rule 95.30, Rule 118, Rule 127, and Rule 440B, would be amended to

remove references to specific minimum trading variations of one-eighth

of one dollar.

The Exchange intends to implement the proposed rule change on a

temporary accelerated basis for a 90-day period, during which the

Commission will consider the Exchange's request for permanent approval

of the proposed rule change.

2. Statutory Basis

The Exchange believes the proposed rule change is consistent with

Section 6(b) \2\ of the Act in general and furthers the objectives of

Section 6(b)(5) \3\ in particular in that it is designed to remove

impediments to and perfect the mechanism of a free and open market, to

promote just and equitable principles of trade and, in general, to

protect investors and the public interest.

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\2\ 15 U.S.C. 78f(b).

\3\ 15 U.S.C. 78f(b)(5).

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B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange believes the proposed rule change will not impose any

burden on competition that is not necessary or appropriate in

furtherance of the purposes of the Act.

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

Rule Change Received From Members, Participants, or Others

The Exchange has neither solicited nor received written comments.

III. 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, 450 Fifth Street, N.W., Washington,

D.C. 20549. Also, copies of such filing will be available for

inspection and copying at the principal office of the NYSE. All

submissions should refer to File No. SR-NYSE-97-20 and should be

submitted by July 16, 1997.

IV. Commission's Findings and Order Granting Accelerated Approval of

the Proposed Rule Change

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 and Section 11A of the

Act.\4\

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\4\ 15 U.S.C. 78f(b) and 78k-1. In approving this rule change,

the Commission notes that it has considered the proposal's impact on

efficiency, competition, and capital formation, consistent with

Section 3 of the Act. Id. section 78c(f).

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Recently, there has been a movement within the industry to reduce

the minimum trading and quotation increments imposed by the various

SROs. Both the American Stock Exchange (``Amex'') and The Nasdaq Stock

Market (``Nasdaq'') have recently reduced their minimum increments.\5\

In addition, several third market makers have begun quoting securities

in increments smaller than the primary markets. The proposed rule

change will allow the NYSE the flexibility it needs to address this

development and remain competitive with these markets. Nevertheless,

the Commission notes that any further change in the minimum increments

constitutes (1) a change in a stated policy, practice, or

interpretation with respect to the meaning, administration, or

enforcement of an existing rule of the NYSE, or (2) a change in an

existing order-entry or trading system of an SRO, or (3) both.

Therefore, the Exchange is still obligated to file such proposed

changes with the Commission.\6\

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\5\ Securities Exchange Act Release No. 38571 (May 5, 1997)

(approving Amex proposal to reduce the minimum trading increment

from \1/8\ to \1/16\ for Amex-listed equity securities priced at or

above $10.00); Securities Exchange Act Release No. 38678 (May 27,

1997), 62 FR 30363 (June 6, 1997) (approving a proposed rule change

by Nasdaq to reduce the minimum quotation increment from \1/8\ to

\1/16\ for Nasdaq-listed securities whose bid price is equal to or

greater than $10.00).

\6\ These changes, however, may become effective upon filing if

they meet certain statutory requirements. See 15 U.S.C.

78s(b)(3)(A)(i) and 17 CFR 240.19b-4(e).

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The Commission also believes the proposed rule change will likely

enhance the quality of the market for the affected NYSE-listed

securities. The Exchange currently only allows quotes in eighths for

equity securities that are above $1.00, sixteenths for equity

securities that are below $1.00 but above $0.50, and thirty-seconds in

stocks below $0.50.\7\ Allowing the NYSE to quote all securities in

finer increments will facilitate quote competition.\8\ This

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should help produce more accurate pricing of such securities and can

result in tighter quotations.\9\ In addition, if the quoted markets are

improved by reducing the minimum increment, the change could result in

added benefits to the market such as reduced transaction costs.

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\7\ NYSE Rule 62.

\8\ The rule change is consistent with the recommendation of the

Division of Market Regulation (``Division'') in its Market 2000

Study, in which the Division noted that the \1/8\ minimum variation

can cause artificially wide spreads and hinder quote competition by

preventing offers to buy or sell at prices inside the prevailing

quote. See SEC, Division of Market Regulation, Market 2000: An

Examination of Current Equity Market Developments 18-19 (Jan. 1994).

\9\ A study that analyzed the reduction in the minimum tick size

from \1/8\ to \1/16\ for securities listed on the Amex priced

between $1.00 and $5.00 found that, in general, the spreads for

those securities decreased significantly while trading activity and

market depth were relatively unaffected. See Hee-Joon Ahn, Charles

Q. Chao, and Hyuk Choe, Tick Size, Spread, and Volume, 5 J. Fin.

Intermediation 2 (1996).

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The Commission finds good cause for approving the proposed rule

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

notice thereof in the Federal Register.\10\ The proposal provides the

NYSE with the ability to quickly modify its trading increment to meet

changing market conditions. This will enable the NYSE to quote

competitively with other markets. Waiting the full statutory review

period for the proposed rule change could place the NYSE at a

significant competitive disadvantage to other markets. At the same

time, the proposal is effective for only ninety days. This will provide

the Commission with a sufficient period to receive and assess comments

on the NYSE's proposal before it is adopted on a permanent basis.\11\

Therefore, the Commission believes it is consistent with Section

6(b)(5) and Section 19(b)(2) of the Act to grant accelerated approval

on a temporary basis to the proposed rule change.\12\

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\10\ A prior proposal by another exchange to reduce its minimum

fractional change was published for the full statutory comment

period without any comments being received by the Commission.

Securities Exchange Act Release No. 38571 (May 5, 1997) (approving a

proposed rule change by the Amex to reduce the minimum trading

differential from \1/8\ to \1/16\ for equity securities priced at or

above $10.00).

\11\ The Exchange has submitted a companion filing that requests

permanent approval of the procedures described herein. See

Securities Exchange Act Release No. 34-38745 (June 18, 1997)

(publishing notice of File No. SR-NYSE-97-21).

\12\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).

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V. Conclusion

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

Act,\13\ that the proposed rule change (SR-NYSE-97-20) is hereby

approved on an accelerated basis through September 16, 1997.

\13\ 15 U.S.C. 78s(b)(2).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\14\

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\14\ 17 C.F.R. 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97-16574 Filed 6-24-97; 8:45 am]

BILLING CODE 8010-01-M