Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment No. 1 by the New York Stock Exchange, Inc. Relating to a Pilot for Adjusted Stabilization Measure of Specialist Performance

[Federal Register Volume 64, Number 67 (Thursday, April 8, 1999)]
[Notices]
[Pages 17206-17208]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8683]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41234; File No. SR-NYSE-99-01]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 by the New York Stock Exchange, Inc. Relating to a Pilot for Adjusted 
Stabilization Measure of Specialist Performance

March 31, 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 January 11, 1999, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change regarding ``adjusted 
stabilization'' as a measure of specialist performance. The Exchange 
filed an amendment to its proposal on March 25, 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, until June 30, 2000, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Donald Siemer, Director, Market 
Surveillance, NYSE, to Richard Strasser, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
March 25, 1999 (``Amendment No. 1''). Amendment No. 1 provides 
further details regarding use of the specialist performance measure 
under the Exchange's Allocation Policy and provides an example of an 
adjusted stabilization transaction.
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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 a pilot program which would 
utilize a new measure of specialist performance that the NYSE refers to 
as an ``adjusted stabilization'' rate.

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 NYSE 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
    On November 21, 1997, the Commission approved a rule proposal to 
add, on a one-year pilot basis, a new measure of specialist performance 
that the NYSE refers to as an ``adjusted stabilization'' rate.\4\ The 
pilot expired on November 21, 1998. The current rule filing clarifies 
the scope of the pilot and proposes to renew it through June 30, 2000.
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    \4\ See Securities Exchange Act Release No. 39344 (November 21, 
1997), 62 FR 63592 (December 1, 1997).
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    The Exchange generally expects a specialist to stabilize stock 
price movements in the stocks traded by the specialist unit by buying 
and selling from its own account against the prevailing trend of the 
market. The rate at which the specialist performs such stabilizing 
function (i.e., stabilization rate) is the percentage of shares 
purchased by specialists on minus and zero-minus ticks and the 
percentage of shares sold by specialists on plus and zero-plus ticks. 
This measurement focuses on the specialist's obligation as a dealer, 
which holds that a specialist must buy or sell securities as principal 
when such transactions are necessary to minimize an actual or 
reasonably anticipated short-term imbalance between supply and demand 
in the market.\5\
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    \5\ NYSE Rule 104.10(3) states, in pertinent part, 
``[t]ransactions on the Exchange for his own account affected by a 
member acting as specialist must constitute a course of dealings 
reasonably calculated to contribute to the maintenance of price 
continuity with reasonable depth, and to the minimizing of the 
effects of temporary disparity between supply and demand, immediate 
or reasonably to be anticipated.''
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    Under the proposal, the Exchange would adopt a new measure of 
specialist performance which it refers to as ``adjusted 
stabilization.'' Adjusted stabilization would measure a specialist's 
proprietary purchases on zero-plus ticks on the current bid (provided 
the current bid is below the offer at the time of the immediately 
preceding trade) and proprietary sales on zero-minus tickets on the 
current offer (provided the current offer is above the bid at the time 
of the immediately preceding trade).\6\ These trades would be grouped 
with stabilizing trades to determine the adjusted stabilization rate.
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    \6\ In Amendment No. 1, the Exchange provided the following 
example of an adjusted stabilization transaction: The market in XYZ 
is 25 4/16-25 8/16. The last sale is 25 6/16 on minus tick. Broker A 
enters the crowd and offers to sell 1,000 shares at 25 6/16. The 
quotation becomes 25 4/16-25 6/16. Broker B then enters the crowd 
with an order to buy 2,500 shares at the market. Broker A sells the 
1,000 shares at 25 6/16 to Broker B. The specialist, whose dealer 
position is long, then fills the remainder of Broker B's order by 
selling, 1,500 shares at 25 6/16. Thus, the specialist's transaction 
would qualify as an adjusted stabilization transaction because the 
specialist is selling on a zero-minus tick on the current offer 
(i.e. 25 6/16) and that offer is above the bid at the time of the 
immediately preceding trade (i.e., 25 4/16).
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    The Exchange believes that ``adjusted stabilization'' could be a 
useful measure of specialist performance in that it might reflect depth 
added to the market by specialists. In the example provided by the 
Exchange in Amendment No. 1,\7\ the specialist's sale has added depth 
to the current market by allowing Broker B to complete his order at a 
single price, and the trade was executed at a price set by the market, 
not by the specialist.
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    \7\ See note 6.
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    Programming to initiate collection and storage of the data 
necessary to calculate adjusted stabilization percentages was completed 
in mid-1998. The Exchange then began to accumulate data to produce 
percentages for ``rolling'' three-month performance review periods. A 
separate programming effort was completed in November 1998 to revise: 
(1) the monthly report to the Allocation Committee (covering the three 
most recent months) that would provide each specialist unit's adjusted 
stabilization percentage, and (2) the monthly report to each specialist 
unit (covering the most recent month) that provides, for each stock and 
the unit overall, its dealer participation percentage, stabilization 
percentage, and the new adjusted stabilization percentage. To date, the 
Exchange has not released adjusted stabilization information collected 
during the initial pilot to the specialists or the Allocation 
committee. However, the Exchange will begin including each specialist 
unit's adjusted stabilization percentage in the monthly reports as soon 
as practicable after approval of the new pilot.\8\
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    \8\ Telephone conversation between Donald Siemer, Director, 
Market Surveillance, NYSE, and Anitra Cassas, Attorney, Division, 
Commission, on January 22, 1999.

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[[Page 17207]]

    Under the new pilot, the Allocation Committee will receive 
information on each specialist's stabilization and adjusted 
stabilization percentages, along with other objective performance 
measures under the Allocation Policy, such as capital utilization. The 
Exchange expects that this data will assist the Committee in assessing 
the value added by specialists to the depth and liquidity of stocks 
that they currently trade. The Committee will use this information in 
making new stock allocation decisions.\9\
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    \9\ See Amendment No. 1.
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    The new pilot would run through June 30, 2000, which would allow 
the Exchange to gain experience with this new performance measure. The 
Exchange will submit to the Commission a proposed rule change, no later 
than three months prior to the expiration of the pilot, either to 
continue, modify or terminate the pilot, or request permanent approval 
of the proposal.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) \10\ of the Act, in general, and furthers the objectives 
of Section 6(b)(5),\11\ in particular, in that it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities and, in general, to protect investors and 
the public interest.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will impose no 
inappropriate burden on competition.

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, DC 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. Sec. 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-99-01 and should 
be submitted by April 29, 1999.

IV. Commission's Findings and Order Granting Accelerated Approval 
of the Proposed Rule Change

    The Commission finds, for the reasons set forth below, 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)\12\ of the Act. Specifically, the Commission believes the 
proposal is consistent with the Section 6(b)(5)\13\ requirement that 
the rules of an exchange be designed to facilitate transaction in 
securities.\14\ Further, the Commission believes that the proposal is 
consistent with Section 11(b)\15\ of the Act and Rule 11b-1\16\ under 
the Act, which allows securities exchanges to permit exchange members 
to register as specialists, provided that the exchange requires the 
specialist to assist in maintaining a fair and orderly market.
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    \12\ 15 U.S.C. 78f(b).
    \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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    The Commission believes that, under certain circumstances, 
``adjusted stabilization'' transactions could reflect depth and 
liquidity added to the market by specialists. Thus, the Commission 
believes that ``adjusted stabilization'' could be a relevant measure of 
specialist performance because it might help the Exchange determine 
whether a specialist is assisting in maintaining a fair and orderly 
market.\17\
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    \17\ The Commission notes that ``adjusted stabilization'' 
transactions would not constitute ``stabilizing'' as the Commission 
has defined that term under the Act. In particular, Regulation M 
under the Act defines ``stabilizing'' as ``the placing of any bid, 
or the effecting of any purchase, for the purpose of pegging, 
fixing, or maintaining the price of a security.'' 17 CFR 242.100(b).
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    By providing for the performance measure on a pilot basis through 
June 30, 2000, the Exchange and the Commission will have the 
opportunity to study the effects of the use of the measure on the 
NYSE's allocation process. It is unclear to the Commission, at this 
point, whether adjusted stabilization transactions will, in practice, 
promote the maintenance of a fair and orderly market (e.g., by adding 
depth or liquidity) in the stocks the specialist's unit trades. 
Accordingly, the Commission has requested the Exchange to report on the 
following matters when the Exchange proposes to renew or modify the 
proposal or when it seeks permanent approval for the pilot: (1) the 
impact ``adjusted stabilization'' transactions have had on the depth 
and liquidity of the stocks at issue; (2) the number of allocations 
reviewed by the Committee and the number of applicants for each 
allocation; (3) the monthly adjusted stabilization percentage as 
presented to the Allocation Committee for each allocation applicant; 
and (4) the Committee's allocation decisions and the effect, if any, an 
applicant's ``adjusted stabilization'' rate had on the allocation 
decision.
    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 Exchange will be able 
to continue to accumulate relevant data and provide such information to 
the specialists and the Allocation Committee for their use without 
further delay. The Commission also notes that the previous pilot was 
noticed for the full statutory period and the Commission received no 
comments on the proposal. Accordingly, the Commission does not believe 
that the current filing raises any regulatory issues not raised by the 
previous filing.
    It is therefore ordered, pursuant to Section 19(b)(2)\18\ of the 
Act, that the proposed rule change (SR-NYSE-99-01), as amended, is 
approved as a pilot through June 30, 2000, on an accelerated basis.

    \18\ 15 U.S.C. 78s(b)(2).

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[[Page 17208]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-8683 Filed 4-7-99; 8:45 am]
BILLING CODE 8010-01-M