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Notice

Self Regulatory Organizations; New York Stock Exchange, Inc.; Order Approving Proposed Rule Change and Amendments Nos. 1 and 2 Thereto Amending Exchange Rule 97 Which Limits Member Trading Because of Block Positioning

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Start Preamble September 27, 2002.

On August 17, 2001, the New York Stock Exchange, Inc. (“NYSE” or “Exchange”) filed with 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 NYSE Rule 97 (Limitation on Member Trading Because of Block Positioning) so that it applies only to transactions executed at or near the end of the trading day, and to provide exceptions to the rule for member organizations that establish the requisite internal information barriers and for certain hedging transactions. The Exchange filed Amendment No. 1 to the proposed rule change on April 17, 2002.[3] The Exchange filed Amendment No. 2 to the proposed rule change on June 28, 2002.[4]

The proposed rule change, as amended, was published for comment in the Federal Register on July 19, 2002.[5] The Commission received no comments on the proposal.

The Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange [6] and, in particular, the requirements of Section 6 of the Act [7] and the rules and regulations thereunder. The Commission finds specifically that the proposed rule change is consistent with Section 6(b)(5) of the Act [8] because it is designed to promote just and equitable principles of trade, and to remove impediments to and perfect the mechanism of a free and open market and a national market system.

Currently, NYSE Rule 97 prohibits a member firm that holds any part of a long position in its trading account, which resulted from a block transaction with a customer, from purchasing for an account in which such member firm has an interest, additional shares of such stock on a “plus” or “zero plus” tick for the remainder of the trading day under certain conditions. NYSE Rule 97 is intended to address concerns that a member firm might engage in manipulative practices by attempting to “mark-up” the price of a stock to enable the member firm to liquidate a position it acquired during a block transaction it effected with a customer at a profit, or to maintain the market at the price at which the position was acquired.

Under the proposed rule change, NYSE Rule 97 would prevent a member organization that holds a long position in a security that resulted from a block transaction with a customer from effecting within twenty minutes of the close of trading on the Exchange, a purchase on a “plus” tick in that security at a price higher than the lowest price at which any block was acquired in a previous transaction on that day, if the person responsible for the entry of such order to purchase the security had knowledge of the block position.[9] The proposed rule change would also add an exception to permit a member firm to make an otherwise prohibited purchase during the last twenty minutes of the trading day to hedge a position that is economically equivalent to a short position that the firm acquired in the course of facilitating a customer order. Under this exception, the hedge must be clearly related to transaction that created the short position and the size of the hedge must be commensurate with the number of shares required to hedge such position.

The Commission believes that the proposal to limit the restrictions on purchasing stock when a firm holds a long position that resulted from a block facilitation to the last twenty minutes of the trading day is consistent with the Act. The Commission believes it is appropriate for the NYSE to restrict such trading activities during this time of the trading day. However, the Commission notes that purchases executed during any time of the trading day continue to be subject to the anti-manipulative provisions of the Act. Accordingly, the Commission expects the NYSE to continue to surveil the activities of firms that trade while holding positions that result from block transactions with customers to ensure that they are not engaging in manipulative acts and practices during the entire trading day. Start Printed Page 62279

In addition, the Commission believes that the use of information barriers should ensure that member firms' traders are not executing trades to mark-up or maintain the price of a security it acquired during a block transaction with a customer. Finally, the Commission believes that the hedge exception is consistent with the Act. The Commission believes that the NYSE has tailored the hedge exception to ensure that when a member firm purchases a security to hedge a position that is economically equivalent to a short position, it does so to hedge that short position, not to affect the security's price.

It is therefore ordered, pursuant to Section 19(b)(2) of the Act [10] , that the proposed rule change, as amended, (File No. SR-NYSE-2001-24) is approved.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[11]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See letter from Richard P. Bernard, Executive Vice President and General Counsel, NYSE, to Nancy J. Sanow, Assistant Director, Division of Market Regulation (“Division”), Commission, dated April 16, 2002 (“Amendment No. 1”).

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4.  See letter from Darla C. Stuckey, Corporate Secretary, NYSE, to Nancy J. Sanow, Assistant Director, Division, Commission, dated June 27, 2002 (“Amendment No. 2”).

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5.  See Securities Exchange Act Release No. 46191 (July 12, 2002), 67 FR 47588.

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6.  In approving this proposed rule change, the Commission notes that it has considered its impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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9.  NYSE Rule 97 only applies to transactions on the NYSE. However, NYSE Rule 97 would apply to transactions on the NYSE regardless of where the member firm acquired the block position. Telephone conversation between Jeffrey Rosenstrock, Senior Special Counsel, NYSE, and Christopher Solgan, Attorney, Division, Commission, on September 13, 2002.

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[FR Doc. 02-25224 Filed 10-3-02; 8:45 am]

BILLING CODE 8010-01-P