Self-Regulatory Organizations; Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment No. 1 to a Proposed Rule Change by the New York Stock Exchange, Inc. Relating to the Definition of Volatile Days in the Specialist Capital Utilization Measure

SECURITIES AND EXCHANGE COMMISSION

[Docket No. 34-41570; File No. SR-NYSE-99-11]

Self-Regulatory Organizations; Filing and Order Granting

Accelerated Approval of Proposed Rule Change and Amendment No. 1 to a

Proposed Rule Change by the New York Stock Exchange, Inc. Relating to

the Definition of Volatile Days in the Specialist Capital Utilization

Measure

June 28, 1999.

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 March 19, 1999, the New York Stock Exchange, Inc. (``NYSE'' or

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

(``SEC'' or ``Commission'') a proposed rule change amending the

definition of ``volatile days'' used in the NYSE's specialist capital

utilization measure. The Exchange amended its proposal on May 4,

1999.\3\ The proposed rule change, as amended, is described in Items I

and II below, which Items have been prepared by the Exchange. The

Commission is publishing this notice and order to solicit comments on

the proposed rule change and Amendment No. 1 from interested persons

and to approve the proposal, as amended, on an accelerated basis.

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

\2\ 15 CFR 240.19b-4.

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

Secretary, NYSE, to Richard Strasser, Assistant Director of Market

Regulation (``Division''), Commission, dated May 4, 1999

(``Amendment No. 1''). Amendment No. 1 provides further details

regarding the Exchange's specialist capital utilization measure and

offers additional reasons to support approval of the proposal on an

accelerated basis.

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I. Self-Regulatory Organization's Statement of the Terms of

Substance of the Proposed Rule Change

The NYSE proposes to revise the definition of volatile days used in

the NYSE's specialist capital utilization measure.\4\ The specialist

capital utilization measure is designed to measure specialist dealer

participation to assist in cushioning price movements during days when

there is general market volatility or significant price movements in

individual stocks (``volatile days''), as well as during non-volatile

periods. As discussed more fully below, the specialist capital

utilization measure provides two definitions of volatile days: (1) days

when the range between the highest and lowest values of the S&P 500

Stock Price Index (``S&P 500 Index'') equals or exceeds 1% of the

previous closing value (``1% Days''); and (2) each stock's 10% most

volatile days (a percentage calculated by comparing a day's high/low

range to the opening price) (``10% Days''). The NYSE proposes to revise

the 1% Days component of this definition by defining volatile days to

include days when the range between the S&P 500 Index's highest and

lowest values equals or exceeds 2%, rather than 1%, of the previous

closing value. The 10% Days definition will remain the same.

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\4\ The specialist capital utilization measure is contained in

the NYSE's Allocation Policy and Procedures (``Allocation Policy''),

which governs the allocation of equity securities to NYSE specialist

units. The Allocation Committee renders decisions based upon the

allocation criteria specified in the Allocation Policy, including

the Specialist Performance Evaluation Questionnaire, objective

performance measures (e.g., the capital utilization measure), and

the Allocation Committee's 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 specialist capital utilization measure

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.

For a detailed discussion of the specialist capital utilization

measure, see Securities Act Release Nos. 33369 (December 22, 1993),

58 FR 69431 (December 30, 1993) (``December 1993 Order''); and 35926

(June 30, 1995), 60 FR 35760 (July 11, 1995) (``June 1995 Order'').

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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 Exchange 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 Exchange 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

Background. In December 1993, the NYSE developed the specialist

capital utilization measure as an objective measure of specialist

performance that recognizes the importance of dealer participation,

particularly in volatile markets, when such participation contributes

to maintaining liquid and orderly markets.\5\ The specialist capital

utilization measure derives two capital utilization percentages for

each eligible stock \6\ traded by a specialist unit: (1) a percentage

calculated by dividing the average daily dollar value of the unit's

stabilizing purchases and sales in a stock by the average daily total

dollar value of shares traded in the unit's stocks; and (2) a

percentage calculated by dividing the average daily dollar value of the

unit's stabilizing plus reliquifying \7\ trades by the average daily

total dollar value of shares traded in the unit's stocks. These two

percentages are calculated separately for base periods (i.e., non-

volatile periods) and volatile periods, so that the performance of a

unit relative to other units can be compared as to volatile and non-

volatile market conditions. As noted above, the NYSE currently defines

volatile periods as (1) days when the range between the highest and

lowest values of the S&P 500 Index equals or exceeds 1% of the previous

closing value (``1% Days''); and (2) each stock's 10% most volatile

days (a percentage calculated by comparing a day's high/low range to

the opening price) (``10% Days'').

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\5\ The Commission approved the capital utilization measure on a

one-year pilot basis, and subsequently approved three extensions of

the pilot program. See Securities Exchange Act Release Nos. 33369,

supra note 4; 35175 (December 29, 1994), 60 FR 2167 (January 6,

1995) (extending pilot through June 30, 1995); 35926, supra note 4

(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 pilot program on a

permanent basis on January 10, 1997. See Securities Exchange Act

Release No. 38158 (January 10, 1997), 62 FR 2704 (January 17, 1997)

(``January 1997 Order'').

\6\ The following stocks are not included: foreign stocks,

preferred stocks, warrants, when issued stocks, IPOs (for the first

60 days), closed-end funds, stocks selling for $5 and under, stocks

with less than 2,000 shares average daily trading volume and stocks

with more than one class of stock. See June 1995 Order, supra note

4.

\7\ A reliquifying transaction is one in which the specialist

reduces a position in a specialty stock by selling part of a long

position on a zero-minus tick, or purchasing to cover part of a

short position on a zero-plus tick. See December 1993 Order, supra

note 4.

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To compare a specialist unit's capital utilization with other

units, the specialist capital utilization measure separates stocks into

three broad groupings.\8\ Specialist units are then placed into three

tiers based on their capital utilization percentages for each of the

three groupings of stocks. Within each grouping, a Floor-wide mean

capital utilization percentage is calculated. A unit would be in Tier 1

if its capital utilization percentage is more

[[Page 36732]]

than 1.1 standard deviations above the mean.\9\ A unit would be in Tier

2 if its capital utilization percentage is within 1.1 standard

deviations of the mean. A unit would be in Tier 3 if its capital

utilization percentage is more than 1.1 standard deviations below the

mean. The tiers are presented to the Allocation Committee for each

specialist unit applying for a new listing and are a factor in

allocating newly-listed stock.

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\8\ The three broad groupings are: (1) stocks included in the

top 200 stocks in the S&P 500 Stock Index and other stocks that are

at least as active (based on average daily dollar value of shares

traded); (2) the remainder of the S&P 500 and any stocks among the

500 most active on the Exchange; and (3) all other stocks traded on

the Exchange. See June 1995 Order, supra note 4.

\9\ A standard deviation is a statistical measure of the

distance from the mean.

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The Tiers are presented to the Allocation Committee for each

specialist unit applying for a new listing and are one factor among

several in allocating newly-listed stock. Allocation decisions are

based on the professional judgment of the Allocation Committee in

applying specific criteria. A Tier I classification would indicate to

the Committee that the unit's value-added dealer participation was well

above the average for all specialist units, whereas a Tier III

classification would indicate that the unit's value-added dealer

participation was below the average for all specialist units.\10\

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\10\ Telephone call between Don Siemer, Director, Market

Surveillance, NYSE, and Anitra T. Cassas, Division, Commission, on

June 21, 1999.

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Proposal. According to the NYSE, market volatility has increased

substantially since the capital utilization measure was introduced. For

instance, the Exchange notes that while 1% Days occurred on 27% of the

trading days in 1994, 1% Days occurred on 70% of the trading days in

1998. As a result, the NYSE believes that 1% Days are now more

characteristic of usual market conditions.

The Exchange proposes to revise the 1% Day component of its

definition of volatile days to better distinguish between volatile and

base periods in light of increasing overall market volatility since the

NYSE introduced the capital utilization measure. Specifically, the

Exchange proposes to amend its definition of volatile days to include

days when the range between the S&P 500 Index's highest and lowest

values equals or exceeds 2% of the previous closing value. The NYSE

believes that raising the percentage from 1% to 2% will bring the

capital utilization measure's definition of volatile days back in line

with the frequency of overall market volatility that existed in 1993.

According to the NYSE, a 2% daily price movement in the S&P 500 Index

will provide approximately the same number and percentage of volatile

days in 1998 as the 1% daily price movement provided in 1994 (i.e., 55

versus 67 days, or 22% versus 27%).

In addition, the NYSE believes that the revised definition of

volatile days will reinforce the Exchange's expectation that

specialists provide ``value-added'' dealer participation during periods

of unusual price movements, and maintain the emphasis given to the

capital utilization measurement in particularly volatile markets. The

NYSE notes that the use of a 2% standard for volatile days also will

coinside with the recent revision of NYSE Rule 80A, which limits the

entry of index arbitrage orders in any component stock of the S&P 500

Index when there is a movement in the Dow Jones Industrial Average of

an amount that approximates 2% of its value.\11\

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\11\ See Securities Exchange Act Release No. 41041 (February 11,

1999), 64 FR 8424 (February 19, 1999).

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The 10% Days definition will remain unchanged.

2. Statutory Basis

The NYSE believes that the basis under the Act for the proposed

rule change is the requirement under Section 6(b)(5) \12\ of the Act

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.

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\12\ 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 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 on

the proposed rule change.

III. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the foregoing, including whether the proposed rule

change is consistent with the Act. 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-

0609. 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

NYSE. All submissions should refer to file No. SR-NYSE-99-11 and should

be submitted by July 28, 1999.

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 under

the Act applicable to a national securities exchange and, in

particular, with the requirements of Section 6(b)(5) \13\ of the

Act.\14\ Specifically, the Commission finds the proposal is consistent

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

designed to facilitate transactions in securities. Further, the

Commission finds that the proposal is consistent with Section 11(b)

\15\ of the Act and Rule 11b-1 \16\ under the Act, which allow

securities exchanges to promulgate rules relating to specialists to

ensure fair and orderly markets. Specifically, the Commission believes

that amending the definition of volatile days in the capital

utilization measure to include days when the range between the S&p 500

Index's highest and lowest values equals or exceeds 2% of the previous

closing value will help to maintain the effectiveness of the capital

utilization measure as an objective measure of specialist performance,

thereby protecting investors and the public interest.

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

\14\ In approving this rule change, the Commission has

considered the proposed rule's impact on efficiency, competition,

and capital formation. 15 U.S.C. 78c(f).

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

\16\ 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. The NYSE implemented

objective measures of specialist performance, like the capital

utilization measure, to help ensure that specialists fulfill the

obligations imposed on them by the NYSE and by the Act and rules

thereunder to maintain fair and orderly markets in designated

securities.\17\ The Commission believes that performance-based stock

allocation could provide an

[[Page 36733]]

incentive for specialists to improve their performance or maintain

superior performance.\18\

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

\18\ See January 1997 Order, supra note 4.

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The Commission continues to believe, as it has concluded

previously, that capital utilization is a relevant measure of

specialist performance because if indicates the extent to which a

specialist unit commits capital to and participates in the market for

its securities, thereby contributing to market liquidity.\19\ According

to the NYSE, market volatility has increased substantially since the

NYSE implemented the specialist capital utilization measure in 1993.

The NYSE notes, for example, that 1% Days occurred on 27% of the

trading days in 1994, and on 70% of the trading days in 1998. As a

result, the NYSE believes that the 1% Days definition of volatility is

now more characteristic of usual market conditions. The 2% Days

definition is designed to better distinguish between volatile and non-

volatile days in light of the increased overall market volatility since

1993. According to the NYSE, the 2% Days definition would have provided

approximately the same number and percentage of volatile days in 1998

as the 1% Days definition provided in 1994 (i.e., 55 days versus 67

days or 22% versus 27%).

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\19\ See December 1993 Order, supra note 4.

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The Commission believes that the proposed rule change will ensure

that the definition of volatile days is meaningful in light of current

market conditions. Accordingly, the Commission believes that the

proposed rule change will make the definition of volatile day

consistent with the spirit of the rule adopted in 1993, when the NYSE

implemented the specialist capital utilization measure, and will ensure

that the capital utilization measure continues to function effectively

as an indication of specialist performance.

The Commission finds good cause for approving the proposed rule

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

notice of the filing in the Federal Register. The Commission believes

accelerated approval should help maintain the relative proportion of

volatile periods to base periods comparable to that which existed when

the capital utilization measure was adopted, thereby preserving the

original intent of the performance measure.

It is therefore ordered, pursuant to Section 19(b)(2)\20\ of the

Act, that the proposed rule change (SR-NYSE-99-11), as amended, is

approved on an accelerated basis.

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\20\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\21\

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\21\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 99-17151 Filed 7-6-99: 8:45 am]

BILLING CODE 8010-01-M