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Self-Regulatory Organizations; Order Granting Approval to Proposed Rule Change by the New York Stock Exchange, Inc. Amending NYSE Rule 104

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Information about this document as published in the Federal Register.

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Start Preamble June 19, 2001.

I. Introduction

On June 29, 2000, the New York Stock Exchange, Inc. (“NYSE” or “Exchange”) filed witht he Securities and Exchange Commission (“SEC” or “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 NYSE Rule 104. On February 21, 2001, the Exchange filed Amendment No. 1 to the proposed rule change with the Commission.

The proposed rule change, as presented in Amendment No. 1, was published for comment in the Federal Register on March 9, 2001.[3] No comments were received on the proposal. This order approves the proposal, as amended.[4]

II. Description of the Proposal

Current, NYSE Rule 104 requires specialists to obtain Floor Official approval when purchasing on a direct plus tick or selling on a direct minus tick, or when purchasing on a zero plus tick more than 50% of the stock offered. These transactions are considered destabilizing, and therefore require Floor Official approval to effect. The Exchange is proposing to amend NYSE Rule 104.10(7) to permit specialists to effect these destabilizing transactions, under certain circumstances, to bring the price of a listed foreign security into parity with the price of a foreign ordinary security.

Specifically, in order for a specialist to effect a destabilizing transaction under the proposed rule, the price of the transaction to bring the security into parity (a) must be based on the last sale Start Printed Page 33732price in the home country market,[5] if that market is open, or (b) if the home country market is not open, the parity price must be between the then current bid and offer in the London (UK) market, i.e., the London Stock Exchange, or (c) must be based at any time on changes in the home country—U.S. dollar exchange rate.[6] A destabilizing transaction effected to bring the price of a listed foreign security into parity with the price of the foreign ordinary security in any other market would continue to require Floor Official approval.

The proposed amendment also clarifies that the relief afforded from obtaining Floor Official approval for destabilizing transactions to bring the price of a listed foreign security into parity with the price of the foreign ordinary security is available only where the NYSE is not the principal market for the foreign security. As previously noted, for purposes of this rule, the home country market will be considered the principal market for a foreign security, unless a significant volume of the shares traded in that security take place outside that market.

The proposal also would permit, with Floor Official approval, a specialist to effect consecutive direct tick destabilizing parity trades. The Exchange's proposed rule makes clear that a specialist may not effect consecutive direct tick destabilizing trades unless these transactions are effected to bring the price of a listed foreign security into parity with the price of the foreign ordinary security and a Floor Official has approved the transaction.

III. Discussion

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 the requirements of Section 6(b)(5) [7] 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 a national market system and, in general, to protect investors and the public interest.[8] The Commission also finds that the proposed rule change is consistent with Section 11(b) [9] and Rule 11b-1 thereunder [10] in that it preserves a specialist's obligation to assist in the maintenance of a fair and orderly market.

The Commission believes that the Exchange's proposal to amend NYSE Rule 104.10(7) to faciliate specialist market making in foreign securities traded on the NYSE is consistent with the Act. The Exchange's proposal is limited to “parity” transactions on direct destabilizing ticks to bring the price of a listed foreign security into parity with the price of a foreign ordinary security. Moreover, the only change being effected by the proposal is that such transactions will not require Floor Official approval as currently mandated by NYSE Rule 104. As discussed below, the Commission notes that such transactions must still comply with all of the other requirements of NYSE Rule 104.

The Commission believes that it is appropriate to allow specialists to effect certain destabilizing transactions without Floor Official approval because these transactions can benefit the market and public investors by maintaining parity if there is an absence of public orders on the NYSE while a stock is active in its home country. The requirement to secure Floor Official approval could delay the specialist from effecting such transactions, during which time the price of the listed foreign security could continue to move. The Commission believes, therefore, that the proposal is reasonable to address the above situation.

Furthermore, the Commission believes that the Exchange's proposal requiring a specialist to obtain Floor Official approval to effect a consecutive direct tick destabilizing parity trade is reasonable to ensure that the specialist does not set the price of a speciality stock. Specifically, the Commission 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.

Moreover, the Exchange's proposal does not relieve specialists from the general requirement of NYSE Rule 104 that they effect transactions that are reasonably necessary for them to maintain a fair and orderly market in listed foreign securities.[11] Specialists in these securities remain subject to the specific negative and affirmative obligations imposed on them by NYSE Rule 104. Thus, for example, consistent with the maintenance of a fair and orderly market, transactions for a specialist's own account should be such that they maintain price continuity with reasonable depth, and minimize the effects of temporary disparities between supply and demand.[12] Furthermore, a specialist's quotation made for transactions on his own account should bear a proper relation to proceeding transactions and anticipated succeeding transactions.[13]

Finally, the Commission expects the Exchange to issue a memorandum to all specialists and Floor Officials to explain the relief afforded by the change to MTSE Rule 104. This memorandum will provide specific reference to the interaction between specialists' destabilizing parity transactions and certain Exchange rules, including the requirement that specialists continue to comply with NYSE Rule 123A.30 on percentage orders, NYSE Rule 123A.40 on election of stop orders, NYSE Rule 127 on specialists trading as principal in parity adjustment situations, and NYSE Rule 440B on the short sale rule. Specialists will also be informed that destabilizing parity trades must be reported on Form 81. The Commission believes that the reporting requirement is appropriate because it will assist the Exchange in surveiling for violations of the proposed rule.

As noted above, the Commission has requested submission of adequate surveillance procedures to assure compliance with the rule. This approval order is contingent on the submission of such adequate surveillance procedures.[14]

IV. Conclusion

IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the Act,[15] that the proposed rule change (SR-NYSE-00-30) is approved.[16]

Start Signature
Start Printed Page 33733 For the Commission, by the Division of market Regulation, pursuant to delegated authority.[17]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See Securities Exchange Act Release No. 44033 (March 2, 2001), 66 FR 14239.

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4.  The Commission has requested from the Exchange an explanation of the surveillance procedures it intends to implement to ensure that specialists comply with the proposed rule as amended. This approval order is contingent upon the Commission's finding that such surveillance procedures are adequate.

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5.  The proposed rule states that the home country market for a security is the principal market. However, the Exchange clarified in Amendment No. 1 that if a significant volume of the shares traded in a security takes place outside the home country market, another market will be considered the home country market.

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6.  The Exchange represents that currency exchange rate information is displayed on the Floor of the Exchange utilizing information from Reuters. While specialists may also utilize other sources of vendor-supplied exchange rate information, they must keep a record of the source of the exchange rate information they utilize.

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8.  In approving this rule, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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11.  The Commission requires all national securities exchanges that utilize the services of specialist to enact rules that require a specialist to engage in a course of dealings for his own account to assist in the maintenance of a fair and orderly market. 17 CFR 240.11b-1(a)(2)(ii).

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12.  NYSE-Rule 104.10(1)-(3).

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13.  NYSE Rule 104.10(4).

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14.  See note 4, supra.

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16.  See notes 4 and 14 and accompanying text, supra.

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[FR Doc. 01-15851 Filed 6-22-01; 8:45 am]

BILLING CODE 8010-01-M