Self-Regulatory Organizations; Order Approving Proposed Rule Change by the New York Stock Exchange, Inc. to Amend Rule 104.10 to Require Floor Official Approval for Destabilizing Odd-Lot Transactions

[Federal Register Volume 64, Number 39 (Monday, March 1, 1999)]
[Notices]
[Pages 10050-10051]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-4960]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41084; File No. SR-NYSE-98-34]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the New York Stock Exchange, Inc. to Amend Rule 104.10 to 
Require Floor Official Approval for Destabilizing Odd-Lot Transactions

February 22, 1999.

I. Introduction

    On October 16, 1998, the New York Stock Exchange, Inc. (``NYSE'') 
submitted to the Securities and Exchange Commission (``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 Rule 104.10 by deleting the odd-lot exception. The proposed rule 
change was published for comment in the Federal Register on December 4, 
1998.\3\ On November 20, 1998, the NYSE submitted a letter to the 
Commission clarifying the treatment of odd-lot offsets, the substance 
of which was incorporated into the notice and this order.\4\ The 
Commission received no comments on the proposal. This order approves 
the proposal.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 40711 (November 25, 
1998), 63 FR 67160.
    \4\ Letter from Agnes Gautier, Vice President, Market 
Surveillance, NYSE, to Richard Strasser, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
November 20, 1998 (``NYSE Letter'').
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange is proposing to amend NYSE Rule 104.10(b)(i) by 
eliminating paragraph (C), which provides an exception to the Floor 
Official approval requirement for specialist purchases and sales on 
destabilizing ticks to offset position acquired by the specialist in 
executing odd-lot orders in the same day.
    NYSE Rule 104 governs specialists' dealings in their specialty 
stocks. In particular, NYSE Rule 104.10(6) describes the manner in 
which a specialist may liquidate or increase his or her position in a 
specialty stock. In general, the rule requires such

[[Page 10051]]

transactions to be effected ``in a reasonable and orderly manner'' in 
relocation to the overall market. The rule also requires the market in 
the particular stock and the adequacy of the specialist's position to 
meet the reasonably anticipated needs of the market. NYSE Rule 
104.10(6)(i)(A) provides that specialist may liquidate a position by 
selling stock on a direct minus tick or by purchasing stock on a direct 
plus tick (destabilizing ticks), only if the transaction is reasonably 
necessary in relation to the specialist's overall position in the stock 
and if the specialist obtains Floor Official approval. Floor Official 
approval provides an independent review of these destabilizing 
transactions for compatibility with the reasonableness test.
    NYSE Rule 104.10(6)(i)(C) provides an exception to the Floor 
Official approval requirement for specialist purchases and sales on 
destabilizing ticks to offset positions acquired by the specialist in 
executing odd-lot orders on the same day. Odd-lot orders are executed 
throughout the day in the odd-lot system against the specialist in that 
stock. Periodically, the specialist receives an automated notification 
of the net amount of odd-lots that have been executed against his or 
her position. The specialist can then offset these odd-lot transactions 
by buying or selling for his or her own account.
    The basis for the exception was that these odd-lot offsets would 
not have an impact on the market as a whole. However, there has been a 
marked increase in the volume of odd-lot transactions in the last 
several years \5\ and, as a result, an increase in specialist offset 
transactions. The Exchange believes that odd-lot offsets should be 
treated as other liquidating transactions and be netted with round lot 
transactions. All destabilizing transactions would require Floor 
Official approval pursuant to Exchange Rules.\6\ Therefore, the 
Exchange is proposing to delete the exception for odd-lots in paragraph 
(C).
---------------------------------------------------------------------------

    \5\ Odd-lot volume exceeded 1 billion shares on the NYSE in 
1997, an 87% increase from 1994. Telephone conversation between 
Agnes Gautier, Vice President, Market Surveillance, NYSE, and Robert 
B. Long, Attorney, Division, Commission, on October 23, 1998.
    \6\ See NYSE Letter, supra note 4.
---------------------------------------------------------------------------

III. Discussion

    After careful review, 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.\7\ 
In Particular, the Commission believes the proposal is consistent with 
the requirements of sections 6(b)(5) and 11(b) of the Act.\8\ Section 
6(b)(5) provides, in part, that the rules of an exchange be 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. Section 11(b) 
allows exchanges to promulgate rules relating to specialists to 
maintain fair and orderly markets.
---------------------------------------------------------------------------

    \7\ In approving this proposal, the Commission has considered 
the proposal's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5) and 78k(b).
---------------------------------------------------------------------------

    Pursuant to Rule 11b-1(a)(2)(ii) under the Act, the rules of a 
national securities exchange must provide, as a condition of a 
specialist's registration, that a specialist engage in a course of 
dealings for his own account to assist in the maintenance, so far as 
practicable, of a fair and orderly market.\9\ NYSE Rule 104.10(6) 
regulates specialist transactions on the Exchange. Currently, odd-lot 
transactions are excluded from Exchange Rule 104.10(6)(i)(A), which 
regulates when specialists may trade, for their own account on 
destabilizing ticks. These transactions were excluded from the 
provisions of Rule 104.10(6)(i)(A) because odd-lot volume was 
relatively small and presumably did not have significant market impact.
---------------------------------------------------------------------------

    \9\ 17 CFR 240.11b-1(a)(2)(ii).
---------------------------------------------------------------------------

    The Exchange represents that odd-lot volume has increased 
significantly.\10\ As a result, odd-lot destabilizing transactions 
could impact the market price of a security. The Commission believes 
that specialist purchases and sales on destabilizing ticks should be 
effected in a reasonable manner because of their potential 
destabilizing effect on the market. Under the proposed rule change, 
these destabilizing odd-lot transactions would be governed by NYSE Rule 
104.10(6)(i)(C), which permits such transactions if they are reasonably 
necessary and the specialist obtains the prior approval of a Floor 
Official.\11\ The Commission believes that it is reasonable and 
consistent with the Act to subject destabilizing odd-lot transactions 
to the same level of scrutiny currently applicable to other 
destabilizing transactions. The proposal should help ensure that odd-
lot destabilizing transactions are effected in a manner consistent with 
the maintenance of fair and orderly markets.
---------------------------------------------------------------------------

    \10\ See telephone conversation discussed in note 5.
    \11\ See NYSE Rule 104.10(6)(i)(A).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-NYSE-98-34) is approved.

    \12\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-4960 Filed 2-26-99; 8:45 am]
BILLING CODE 8010-01-M