regulatory organizations; proposed rule changes: Boston Stock Exchange, Inc.,

[Federal Register: October 16, 1998 (Volume 63, Number 200)]

[Notices]

[Page 55661-55664]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr16oc98-124]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40538; File No. SR-BSE-98-06]

Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval to Proposed Rule Change and Amendment No. 1 to the Proposed Rule Change Seeking Permanent Approval of the Exchange's Market-On-Close Order Handling Requirements Pilot Program

October 9, 1998.

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 August 13, 1998, the Boston Stock Exchange, Inc. (``BSE'' or ``Exchange'') filedwith 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 BSE. On September 17, 1998, the Exchange submitted Amendment No. 1 to the proposal.\3\ The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons and to grant accelerated approval to the proposal, as amended.

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

\2\ 17 CFR 240.19b-4.

\3\ See letter from Karen A. Aluise, Vice President, BSE to Richard Strasser, Assistant Director, Division of Market Regulation, Commission dated September 15, 1998 (``Amendment No. 1''). In Amendment No. 1, the Exchange requests permanent approval of the pilot program relating to market on-close orders.

1. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

   The Exchange seeks to amend its current pilot program regarding procedures for market-on-close (``MOC'') orders\4\ to mirror changes recently made to the comparable New York Stock Exchange (``NYSE'') and American Stock Exchange (``Amex'') rules. Also, the Exchange seeks permanent approval of its MOC pilot procedures as amended by this proposal.

   \4\ A MOC order is a market order to be executed in its entirety at the closing price on the Exchange.

2. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

   In its filing with the Commission, the BSE 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 BSE has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.

   1. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

   1. Purpose

   The purpose of the proposed rule change is to amend the current pilot program for the handling of MOC orders\5\ to mirror recent changes made by the NYSE\6\ and the Amex\7\ and to seek permanent approval of the pilot program. The Exchange's current rules provide for different treatment of MOC orders on Expiration Fridays and Quarterly Index Expiration Days\8\ than on non-expiration days.\9\ In addition,

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   the current rules provide for the publication of order imbalances of 50,000 shares or more only in the pilot stocks,\10\ stocks being added to or dropped from an index, and upon the request of a specialist, any other stock with the approval of a floor official.\11\

   \5\ The Exchanges' current pilot program will expire on October 31, 1998. See Securities Exchange Act Release No. 39327 (November 14, 1997), 62 FR 62381 (November 21, 1997).

   \6\ See Securities Exchange Act Release No. 40094 (June 15, 1998), 63 FR 33975 (June 22, 1998) (NYSE MOC Approval Order).

   \7\ See Securities Exchange Act Release No. 40123 (June 24, 1998), 63 FR 36280 (July 2, 1998) (Amex MOC Approval Order). In the Amex MOC approval order, the Amex also adopted a rule allowing the Amex to accept limit-at-the-close (``LOC'') orders. Id. At this time, the BSE does not accept LOC orders.

   \8\ The term ``expiration days'' refers to both (1) the trading day, usually the third Friday of the month, when some stock index options, stock index futures and options on stock index futures expire or settle concurrently (``Expiration Fridays'') and (2) the trading day on which end of calendar quarter index options expire (``QIX Expiration Days'').

   \9\ See BSE Rules Secs. 22(A) and 22(B).

   \10\ The pilot stocks consist of the 50 most highly capitalized Standard & Poor's (``S&P'') 500 stocks and any component stocks of the Major Market Index (``MMI'') not included in the S&P 500 groups of stocks.

   \11\ See BSE Rules Secs. 22(A)(c) and 22(B)(c).

   While the deadline for entry of indications of interest by floor brokers to the specialist and the cancellation of MOC orders on Expiration Fridays and Quarterly Index Expiration Days is currently set at 3:40 p.m., the deadline on non-expiration days is currently set at 3:50 p.m.\12\ The Exchange seeks to adopt the same time frame as the primary markets, which recently amended their respective procedures to set the deadline at 3:40 p.m. in all stocks on all trading days.\13\

   \12\ See BSE Rules Secs. 22(A)(a) and 22(B)(a).

   \13\ See Amex MOC Approval Order, supra note 7 and NYSE MOC Approval Order, supra note 6.

   The current rules also address the publication of order imbalances of 50,000 shares or more on Expiration Fridays and Quarterly Index Expiration Days. Currently, publication is required as soon as practicable after 3:40 p.m. on expiration days, and as soon as practicable after 3:50 p.m. on nonexpiration days. The Exchange seeks to provide that publication of order imbalances of 50,000 shares or more in NYSE-listed securities (and 25,000 shares or more in Amex- listed securities) shall occur as soon as practicable after 3:40 p.m. on all trading days, bringing the BSE rule into conformity with its primary market counterparts.

   An additional publication shall be required at 3:50 p.m. on all trading days for any NYSE-listed security that had an imbalance publication at 3:40 p.m. If the imbalance at 3:50 p.m. is less than 50,000 shares, a ``no imbalance'' status must be published, although an imbalance of less than 50,000 shares may be published with floor official approval, provided there had been an imbalance publication at 3:40 p.m. If the 3:50 p.m. imbalance publication reversed the first imbalance publication, only MOC orders that offset the 3:50 p.m. imbalance would be permitted to be entered thereafter. This requirement is intended to present market participants with a more timely and accurate picture of imbalances before the close.

   In addition, the current rules provide for the publication of order imbalances (on both Expiration Fridays/Quarterly Index Expiration Days and non-expiration days) in the pilot stocks, stocks being added to or dropped from an index, and upon the request of a specialist, any other stock with the approval of a floor official. The Exchange seeks to publish order imbalances in all stocks on all trading days, also in conformity with the primary market rules.\14\

   \14\ See NYSE MOC Approval Order, supra note 6.

   The Exchange proposes to adopt language that will permit, but not require, the publication of order imbalances of less than 50,000 shares in NYSE-listed securities (and less than 25,000 shares in Amex-listed securities) as soon as practicable after 3:40 p.m. in any stock with the approval of a floor official, thereby permitting the publication of an imbalance which, although less than 50,000 (25,000) shares, may be significantly greater than the average daily volume in a stock.

3. Discussion

   The Commission finds that the proposed rule change is consistent with Section 6 of the Act \15\ and the rules and regulations thereunder. In particular, the Commission believes that the proposal is consistent with the Section 6(b)(5) \16\ requirements that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to, and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.\17\

   \15\ 15 U.S.C. 78f.

   \16\ 15 U.S.C. 78f(b)(5).

   \17\ In approving the proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78f(b).

   In recent years, the Exchange and other self-regulatory organizations have instituted certain safeguards to minimize excess market volatility that may arise from the liquidation of stock positions at the end of the trading day. Special procedures regarding the entry of MOC orders on Expiration Fridays were first used by the NYSE in 1986 for assisting in handling the order flow associated with the concurrent quarterly expiration of stock index futures, stock index options and options on stock index futures on Expiration Fridays.\18\

   \18\ See Securities Exchange Act Release No. 24926 (September 17, 1987), 52 FR 24926 (approving File No. SR-NYSE-87-32 and noting that the MOC procedures described therein had been utilized on a quarterly basis since September 1986).

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   These procedures allow specialists to determine the burying and selling interest in MOC orders and, if there is a substantial imbalance on one side of the market, to provide the investing public with timely and reliable notice of the imbalance and with an opportunity to make appropriate investment decisions in response. Based on the NYSE's experience,\19\ the Commission believes that the MOC order handling requirements work relatively well and may result in more orderly markets at the close on expiration days.

   \19\ The NYSE has submitted to the Commission several monitoring reports describing its experience with the auxiliary closing procedures. For further discussion of the reports filedby the NYSE, see Securities Exchange Act Release No. 36404 (October 20, 1995), 60 FR 55071 (approving File No. SR-NYSE-95-28). The most recent report filedby the NYSE was received on May 14, 1998.

   In today's highly competitive market environment, however, it is possible that a regional exchange, which trades NYSE-and Amex-listed stocks but does not have comparable closing procedures, could be utilized by market participants to enter MOC orders prohibited on the primary markets. Although the Commission has no reason to believe that the BSE market has become a significant alternative market to enter otherwise prohibited MOC orders, the Commission agrees with the BSE that, if this possibility were realized, it could have a negative impact on the fairness and orderliness of the national market system.\20\ Accordingly, the Commission believes that it is reasonable for the BSE to adopt procedures for the handling of MOC orders that mirror those of the NYSE and Amex, thereby ensuring the equal treatment of orders in those markets and, in the event of unusual market conditions, offering the BSE the same benefits in terms of potentially reducing volatility.

   \20\ For example, if MOC orders prohibited on the NYSE and Amex were entered instead on the BSE, unusually large MOC order imbalances on the regional exchange could contribute to overall market volatility.

   In this regard, the Commission notes that the proposed rule change will standardize the BSE's closing procedures on expiration and non- expiration days with those on the NYSE and Annex.\21\ The proposal will impose a deadline of 3:40 p.m. for entry of all MOC orders on both expiration and on-expiration days. Floor brokers representing MOC orders also must indicate their MOC interest to the specialist by 3:40 p.m. every day. In conjunction with the prohibition on canceling or reducing any MOC order after 3:40 p.m., the Commission believes that these requirements should allow the specialist to make a timely and reliable assessment, on expiration and non-expiration days alike, of MOC order flow and its potential impact on closing prices.

   \21\ See Amex MOC Approval Order, supra note 7, and NYSE MOC Approval Order, supra note 6.

   The proposal will also provide that publication of order imbalances of 50,000 shares or more in all NYSE-listed securities (and 25,000 shares or more in all Amex-listed securities) shall occur as soon as practicable after 3:40 p.m. on all trading days. An additional publication shall be required at 3:50 p.m. on all trading days for any NYSE-listed security which had an imbalance publication at 3:40 p.m. If the imbalance at 3:50 p.m. is less than 50,000 shares, a ``no imbalance'' status must be published, although an imbalance of less than 50,000 shares may be published with floor official approval, provided there had been an imbalance publication at 3:40 p.m. If the 3:50 p.m. imbalance publication reversed the first imbalance publication, only MOC orders which offset the 3:50 p.m. imbalance would be permitted to be entered thereafter.

   Finally, the proposal permits, but does not require, the publication of order imbalances of less than 50,000shares in NYSE- listed securities (and less than 25,000 shares in Amex-listed securities) as soon as practicable after 3:40 p.m. in any stock with the approval of a floor official, thereby permitting the publication of an imbalance which, although less than 50,000 (25,000) shares, may be significantly greater than the average daily volume in a stock.

   The Commission believes that the enhanced publication requirements described above are appropriate and consistent with the Act. Requiring an additional order imbalance publication at 3:50 p.m. for all NYSE- listed securities having a published imbalance as of 3:40 p.m. is consistent with the current practice on the NYSE and may help ease market volatility at the close by attracting additional offsetting MOC orders for stocks that have a significant order imbalance as of 3:50 p.m. In addition, the Commission believes that allowing the publication of imbalances of less than 50,000 (25,000) shares in all stocks with the approval of a floor official is consistent with the practice on the NYSE and Amex and may assist in easing volatility at the close. With respect to changing the deadline for entering MOC orders on non- expiration days, the Commission believes that, by giving market participants more time to

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   react to published MOC order imbalances, the proposal may contribute to reducing volatility at the close. Finally, the proposal requests that the Commission permanently approve the Exchange's MOC pilot program. As noted above, these auxiliary closing procedures have been used by the NYSE since 1986 without significant difficulty. Therefore, the Commission believes that it is appropriate at this time to approve the Exchange's pilot program on a permanent basis.

   The Commission finds good cause for approving the proposed rule change and Amendment No. 1 to the proposed rule change prior to the thirtieth day after the date of publication of notice of filing of this proposal in the Federal Register. As discussed in more detail above, the changes made in this proposal are identical to changes made by the NYSE and the Amex.\22\ As a result, the Commission does not believe that the proposal raises any new regulatory issues. Further, the Commission notes that the Amex and NYSE proposals were published for the full 21-day comment period during which no comment letters against either proposal were received by the Commission. Accordingly, the Commission believes there is good cause, consistent with Sections 6(b)(5) and 19(b) \23\ of the Act, to approve the Exchange's proposal and Amendment No. 1 to the Exchange's proposal on an accelerated basis.

   \22\ Id.

   \23\ 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78s(b).

4. Solicitation of Comments

   Interested persons are invited to submit written data, views and arguments concerning the proposed rule change and Amendment No. 1, including whether it 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. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filedwith 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 BSE. All submissions should refer to File No. SR-BSE-98-06 and should be submitted by November 6, 1998.

5. Conclusion

   It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\24\ that the proposed rule change (SR-BSE-98-06) is approved.

   \24\ 15 U.S.C. 78s(b)(2).

   For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\25\

   \25\ 17 CFR 200.30-3(a)(12).

   Margaret H. McFarland, Deputy Secretary.

   [FR Doc. 98-27822Filed10-15-98; 8:45 am]

   BILLING CODE 8010-01-M