Release No.34- 7330

June 2, 1964

Securities and Exchange Act Release No. 7330, Adoption of Rule 11a-1.

On April 9, 1964 the Securities and Exchange Commission announced that it had under consideration two related proposals for the regulation of floor trading on national securities exchanges:  (1) the adoption of Rule 11a-1 under Section 11 of the Securities Exchange Act of 1934 ("Exchange Act"); and (2) a plan of the New York Stock Exchange ("Exchange") for the regulation of floor trading on that Exchange.  "Floor trading" is trading by members of national securities exchanges for their own account while personally present on the floor of an exchange.  The Commission has considered the comments and suggestions received on these proposals and has adopted Rule 11a-1 in the form stated below, effective August 3, 1964, and also has declared effective on the same date the plan filed by the New York Stock Exchange.

Summary of Rule 11a-1 and the New York Stock Exchange Plan

The rule provides, with exceptions discussed below, that no member of a national securities exchange, while on the floor of such exchange, may initiate any transaction in any security admitted to trading on the exchange, for an account in which such member has an interest.  The rule defines "floor trading" broadly to include not only transactions initiated on the actual trading floor but also transactions initiated by members from other premises made available for the use of members generally.  The prohibition also extends to orders initiated off the floor for an account in which a member has an interest if the member exercises discretion on the floor in the execution of an order for such an account.

The rule provides an exemption for registered specialists and odd-lot dealers, stabilizing activities pursuant to Rule 10b-7 under the Exchange Act, bona fide arbitrage, transactions approved for the purpose of maintaining a fair and orderly market and transactions made to offset errors.  Finally, the rule permits floor trading transactions effected in conformity with a plan, adopted by an exchange and approved by the Commission, which is designed to eliminate floor trading activities not beneficial to the market.

Under the latter exemption the Exchange has filed a plan consisting of the following Exchange rules and policies having the effect of rules:

1.  A member category known as the "registered trader" is to be established by the Exchange.

2.  Each member registered as a trader is required to meet by January 1, 1965, an initial minimum capital requirement of $250,000, over and above the capital required for the member's other activities.

3.  In order to engage in floor trading, members are required to show a familiarity with the requirements applicable to registered traders through an appropriate examination.

4.  Registered traders are prohibited from executing brokerage orders and floor trading in the same security during a single trading session.

5.  A series of rules have been formulated which are designed to compel registered traders to engage in transactions to contribute to orderliness of markets and to prohibit them from engaging in transactions which have disruptive market effects.

a.  Destabilizing acquisitions of a security above the previous day's closing price in such security are prohibited;

b.  A least 75 percent of all registered trader acquisitions and 75 percent of all liquidations (except for liquidations at a loss) are required to meet a "stabilization" test (i.e., purchases below the last different price and sales above the last different price are to be considered stabilizing).  This performance test will be computed on a monthly basis;

c.  Present Exchange rules which now prohibit members from trading on the floor in such a way as to "dominate" markets in the acquisition of positions are extended to cover liquidations of positions.

6.  Registered traders in the acquisition of positions will have to yield the floor to orders originated off the floor by giving up priority based on time and parity with or precedence based on size over, such orders, and will also yield precedence based on size when liquidating positions.

Purpose of Adoption of Rule 11a-1

Section 11(a) of the Exchange Act provides that the Commission shall prescribe such rules and regulations as it deems necessary or appropriate in the public interest or for the protection of investors to regulate or prevent floor trading.  Rule 11a-1 and the plan of the Exchange will provide a comprehensive system for the regulation of floor trading on the New York Stock Exchange.

As was fully discussed in Securities Exchange Act Release No. 7290, experience has demonstrated that floor trading has frequently interfered with the orderly execution of public brokerage orders by delaying consummation of a public transaction or causing it to be executed at different price than it otherwise would, to the detriment of one or the other of the public customers involved.  Furthermore, to the extent that floor traders engage in transactions which tend to cause market instability, they make it more difficult for specialists to perform their functions.  Floor trading may also distract brokers, as well as specialists, from the performance of their responsibilities.  It also often involves special advantages to exchange members engaging in that activity without any corresponding benefit to investors.  Rule 11a-1 and the plan of the New York Stock Exchange are designed to eliminate these aspects of floor trading.

In Release No. 7290 the Commission also indicated that it would review the operation of the plan filed by the Exchange after effectiveness to determine whether it has the desired effects.  In its order declaring the plan effective, the Commission set forth procedures to be followed in terminating or suspending the plan if it becomes necessary to do so.

It is anticipated that the American Stock Exchange will file a plan for the regulation of floor trading on that Exchange prior to August 3, 1964, the effective date of Rule 11a-1, and that other national securities exchanges will request exemption from the proposed rule under Section 11(c) of the Exchange Act.

Statutory Basis

The Securities and Exchange Commission acting pursuant to the Securities Exchange Act of 1934, as amended, and particularly Sections 11(a) and 23(a) thereof, deeming it necessary for the exercise of the functions vested in it, and necessary and appropriate in the public interest and for the protection of investors, hereby adopts Rule 11a-1 as set forth below, effective August 3, 1964.

Text of Rule 11a-1

[Text of rule admitted]

Action Declaring New York Stock Exchange Plan Effective

The text of the Commission's action declaring effective the floor trading plan of the New York Stock Exchange is as follows:

"The Securities and Exchange Commission acting pursuant to the Securities Exchange Act of 1934, particularly Sections 11(a) and 23(a) thereof, as amended, and Rule 11a-1 under the Act, deeming it necessary for the exercise of the functions vested in it, and having due regard for the maintenance of fair and orderly markets, for the public interest, and for the protection of investors, and finding that the floor trading plan of the New York Stock Exchange filed on May 25, 1964 is designed to eliminate floor trading activities not beneficial to the market hereby declares such plan effective August 3, 1964.  If at any time it appears to the Commission to be necessary or appropriate in the public interest, or for the protection of investors, or for the maintenance of fair and orderly markets, or that the plan has not eliminated the harmful effects of floor trading, the Commission may suspend or terminate the effectiveness of the plan by sending at least sixty days written notice to the New York Stock Exchange.  The New York Stock Exchange shall have the opportunity to submit any written data, views, arguments or modifications in its plan within such sixty-day period in such form as the Commission deems appropriate under the circumstances.  After consideration of all relevant material presented, the Commission shall take such action with respect to the plan as it deems appropriate."

By the Commission.