SIDECARS,
COLLARS, AND PROGRAM TRADING:
SEC ORDERS CHANGES
Even if your retail clients aren't engaged in program trading, their portfolios are
still affected by the practice when restrictions are imposed during volatile markets. On
February 11, 1999, the Securities and Exchange Commission (SEC) approved a New York Stock
Exchange, Inc. (SR-NYSE-98-45) proposal to amend NYSE Rule 80A to eliminate the
"sidecar" provisions and to widen the trigger levels for the "collar"
provisions, which limit index arbitrage trading.
SIDECAR IS DERAILED
The Old Provision:
Former Rule 80A(a) temporarily diverted program trading orders and imposed
limitations on the entry of stop orders if the primary Standard and Poors' 500 (S&P
500) futures contract declined by 12 points from its previous close prior to 3:25
p.m.(Eastern). Specifically, when the 12-point trigger was reached in the S&P 500
futures, for the next five minutes, market orders involving program trading in each of the
underlying stocks were entered into the NYSE’s automated order-routing facilities and
routed to a separate file for each such stock. Buy and sell orders were then paired in the
file to determine the extent of the order imbalance, if any. After five minutes, the
program trading order imbalances, if any, were reported to the stocks’ specialists.
The program orders then became eligible for execution.
| SEC
Eliminates Sidecar: The NYSE demonstrated that program trading orders were not
entered in significant numbers while a sidecar was in effect and that the collars
contained in Rule 80A, along with the NYSE’s trading halt policy and circuit breakers
contained in NYSE Rule 80B, obviated the need for a sidecar. The SEC concurred and ordered
the elimination of the sidecar provisions. |
LOOSENING THE COLLAR
The Old Provision:
Former Rule 80A(c) applied collar restrictions to index arbitrage trading in any
component of the S&P 500 Stock Price Index whenever the Dow Jones Industrial Average
(DJIA) was up or down 50 points from its previous close. If the DJIA advanced at least 50
points, all index arbitrage orders to buy were to be stabilizing (buy minus); similarly,
if the market declined, all index arbitrage orders to sell were to be stabilizing (sell
plus). The stabilizing requirements were removed if the DJIA moved back to or within 25
points of the previous day’s close.
| SEC
Changes Triggers to Percentages: The SEC agreed to amend Rule 80A(c) by eliminating
the 50/25 point triggers and employing two percent and one percent triggers. Accordingly,
at the beginning of each calendar quarter the NYSE will determine the DJIA's average
during the preceding month and will calculate specific point levels utilizing the 2%/1%
triggers. These percent values would be translated into specific point levels based on an
average for the DJIA over the preceding month. Utilizing the 2% trigger would have reduced
the 1998 collars to from 366 to 42. |
Notwithstanding its Order approving the above amendments,
the SEC noted its concern as to whether the restrictions on index arbitrage retained in
the Rule 80A are appropriate. The SEC noted that the NYSE has substantially increased its
system capacity and can handle five times the trading volumes experienced in October 1987.
Moreover, the variety of derivative products has grown, as has the array of
derivative-related equity trading strategies. Consequently, the SEC opines that it may
make little sense to single out index arbitrage, which it believes ensures that markets
are aligned economically. The SEC remains worried that such restrictions on index
arbitrage serve to disconnect the securities and futures markets, and impose unnecessary
costs on market participants. Accordingly, the SEC recommended that the NYSE periodically
evaluate the continuing need for Rule 80A’s restrictions on index arbitrage.
For further information:
Order Approving Proposed Rule Change by the New York Stock Exchange, Inc. Relating to Amendments to Rule 80A, #34-41041 (SR-NYSE-98-45), February 11, 1999.
|
