Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change and Amendment No. 1 Thereto Relating to the Pilot to Put Into Operation Phase 1 of the NYSE HYBRID MARKET SM, 75519-75523 [05-24251]
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Federal Register / Vol. 70, No. 243 / Tuesday, December 20, 2005 / Notices
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with 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 in
the Commission’s Public Reference
Room. Copies of the filing also will be
available for inspection and copying at
the principal offices of the NASD. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NASD–2005–132 and
should be submitted on or before
January 10, 2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.13
Jonathan G. Katz,
Secretary.
[FR Doc. E5–7521 Filed 12–19–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52954; File No. SR–NYSE–
2005–87]
Self-Regulatory Organizations; New
York Stock Exchange, Inc.; Notice of
Filing and Order Granting Accelerated
Approval of a Proposed Rule Change
and Amendment No. 1 Thereto
Relating to the Pilot to Put Into
Operation Phase 1 of the NYSE
HYBRID MARKET SM
December 14, 2005.
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 December
9, 2005, the New York Stock Exchange,
Inc. (‘‘NYSE’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
13 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Items I and II below, which Items have
been prepared by the Exchange. On
December 13, 2005, the Exchange filed
Amendment No. 1 to the proposed rule
change.3 The Commission is publishing
this notice and order to solicit
comments on the proposed rule change,
as amended, from interested persons
and to approve the proposed rule
change, as amended, on an accelerated
basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is proposing a pilot to
put into operation Phase 1 of the NYSE
HYBRID MARKET SM (‘‘Hybrid
Market’’) initiative, as proposed in SR–
NYSE–2004–05 and amendments
thereto (‘‘Hybrid Market filings’’) with
respect to a group of securities trading
on the Exchange (‘‘Pilot’’).4 In addition,
the Pilot will implement certain system
changes discussed in SR–NYSE–2005–
57.5 This filing sets forth amended rules
(previously described in the Hybrid
Market filings) which would be
operational during the Phase 1 pilot as
well as certain new proposals, discussed
herein. The text of the proposed rule
change is available on NYSE’s Web site
(https://www.nyse.co), at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange 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
3 See Partial Amendment dated December 13,
2005 (‘‘Amendment No. 1’’). In Amendment No. 1,
the Exchange submitted Exhibit 3 to the proposed
rule change, which identified the securities that
would be included in the Pilot, and corrected a
typographical error.
4 See Securities Exchange Act Release No. 50173
(August 10, 2004), 69 FR 50407 (August 16, 2004)
(Amendment No. 1 to SR–NYSE–2004–05);
Securities Exchange Act Release No. 50667
(November 15, 2004), 69 FR 67980 (November 22,
2004) (Amendment Nos. 2 and 3 to SR–NYSE–
2004–05) (The Exchange withdrew Amendment No.
4 and replaced it with Amendment No. 5);
Securities Exchange Act Release No. 51906 (June
22, 2005), 70 FR 37463 (June 29, 2005) (Amendment
No. 5 to SR–NYSE–2004–05). See also Amendment
No. 6 to SR–NYSE–2004–05 (September 16, 2005)
and Amendment No. 7 to SR–NYSE–2004–05
(October 10, 2005).
5 See Securities Exchange Act Release No. 52362
(August 30, 2005), 70 FR 53701 (September 9, 2005)
(SR–NYSE–2005–57). While submitted as effective
upon filing, the Exchange intended to implement
these changes upon approval of the Hybrid Market
filings by the Commission, if such approval is
granted.
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75519
statements may be examined at the
places specified in Item III below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes a Pilot to put
into operation Phase 1 of the Hybrid
Market initiative with respect to a group
of securities, known as Phase 1 6 Pilot
securities (‘‘Pilot securities’’). The Pilot
would commence following
Commission approval of the Pilot,
during the week of December 12, 2005
and would terminate the earlier of: (1)
90 calendar days from the date of
Commission approval, if granted, or (2)
Commission approval of the Exchange’s
Hybrid Market proposal, if granted.
Approximately 200 securities out of
the 3,600 securities listed on the
Exchange (approximately 5%) have
been identified as Pilot securities and
are listed on Exhibit 3 of the filing.7 In
addition, the list of Pilot securities will
be posted on the Exchange’s Web site.
The Pilot will allow the Exchange to
conduct real-time system and user
testing of certain features of the Hybrid
Market filings in order to be in a
position to comply with the
implementation of Regulation NMS.8
The Exchange believes the Pilot will
prove beneficial from both a technology
and a training perspective. It will give
the Exchange the opportunity to identify
and address any system problems and to
identify and incorporate beneficial
system changes that become apparent as
a result of usage in real time and under
real market conditions. The ability to
have such real time user interface will
be invaluable, as it is impossible to
accurately anticipate behavioral changes
in a development or mock-trading
6 See Securities Exchange Act Release No. 51906
(June 22, 2005), 70 FR 37463 (June 29, 2005)
(Amendment No. 5 to SR–NYSE–2004–05).
7 The NYSE selected the Pilot securities based on
the following criteria: (1) Trading location so as to
include in the Pilot securities from each room and
post on the floor; (2) crowd participation so as to
include securities that generally have crowd
participation; (3) trading characteristics so as to
include securities whose trading characteristics are
typically less volatile to minimize the likelihood of
disruptions during the systems testing; and (4)
specialist firm so as to include each of the equity
specialist firms on the floor. The Pilot securities
represent approximately 10% of the average daily
NYSE trading volume. Telephone call between
Nancy Reich Jenkins, NYSE and Kelly Riley, SEC
on December 14, 2005.
8 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005).
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environment. In addition, the Pilot will
allow users to gain essential practical
experience with the new systems and
processes in a well-modulated way.
The Exchange anticipates that the
Pilot will operate with minimal
problems given the amount and degree
of testing and training that has occurred
to date. In addition, the Exchange plans
to phase-in the Pilot, if approved, to
allow for a controlled and moderated
roll out of the new systems and
capabilities.9
There has been extensive testing of
the approximately 15 Exchange systems
impacted by the Pilot, individually and
collectively, both in development and
production environments. This testing
occurred at all levels, including
development testing, automation
testing, SIAC testing, NYSE testing,
integrated system testing and code
reviews, production environment
testing, fall-back and recovery testing,
and regression and new functionality
testing.
In addition, there has been
comprehensive training for both Floor
brokers and specialists, individually
and together in a mock trading
environment. Training was conducted
by the Exchange and was supplemented
in most cases by firm-specific training
conducted by member organizations for
their employees. In addition, the
Exchange training environment was
made available to proprietary system
vendors for their training sessions.
Moreover, the Exchange intends to
have available at all times during the
Pilot two versions of the operating
software—the new version that would
be operational and the original, pre-Pilot
version. If a problem develops during
the Pilot, the Exchange will be able to
revert to the pre-Pilot software within
an average time of two minutes or less.
Accordingly, the Exchange believes
that the extensiveness of the testing and
training, the phase-in approach and the
fall-back capabilities provide significant
assurances that the Pilot will operate as
expected. However, in the event systems
or other problems arise with the Pilot
that adversely impact investors or
impede the Exchange’s ability to
maintain a fair and orderly market, the
Exchange will immediately terminate
the Pilot in whole or in part, as
appropriate, and return trading to
9 The NYSE intends to phase in the Pilot
gradually, beginning with a single security on the
first day of the Pilot and expanding gradually over
the course of four weeks. The timing of the phasein will be adjusted depending on the extent and
significance of any technical or user interface
problems that might arise. Telephone call between
Nancy Reich Jenkins, NYSE and Kelly Riley, SEC
on December 14, 2005.
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current operations under current NYSE
rules.
Phase 1 Pilot
During the Pilot, the following rules
and provisions of the Hybrid Market
initiative as outlined in the Hybrid
Market filings will be operational. To
eliminate possible confusion as to what
rule provisions apply to Pilot securities,
the Exchange has identified those new
or amended rules which will be
operational during the Pilot with a ‘‘P.’’
Where part of a provision of a proposed
Hybrid Market rule will be operational
during the Pilot, but another part of the
proposed rule will not, the Exchange
has noted this in the attached rule text
with the designation that the section is
‘‘intentionally omitted.’’ In addition,
during the Pilot, all other Exchange
rules apply to Pilot securities as they do
today.
Direct+
NYSE
(Exchange Rules 1000–
1005)
During the Pilot, NYSE Direct+
(‘‘Direct+’’) will continue to operate as
it does today under current Exchange
Rules 1000–1005 and subject to the
same availability, restrictions and
conditions, as outlined in those rules.
NYSE Floor Broker Agency Interest
Files (Exchange Rule 70.20(a)–(l)(P))
During the Pilot, the Exchange is
proposing to activate the Floor broker
agency file to permit brokers to enter
their interest at or outside the best bid
and offer in Pilot securities (also
referred to as ‘‘e-Quoting’’). The
following sections of proposed
Exchange Rule 70.20, described in the
Hybrid Market filings, would apply
during the Pilot:
• 70.20(a)(i)(ii)
• 70.20(b)
• 70.20(c)(i)–(iv): Floor brokers will
be able to populate the reserve file but
it will be visible to the specialist in this
phase
• 70.20(e)
• 70.20(f)
• 70.20(i)–(l)
• 70.30
During the Pilot, the following
sections of proposed Rule 70.20 would
not apply:
• Rule 70.20(d)(i)–(ii): Sweep
functionality
• Rule 70.20(g)–(h): Feature
permitting brokers to exclude their
interest from the aggregate information
available to the specialist
The above sections that are not
applicable during the Pilot are
intentionally omitted from the proposed
rule text.
In the event that a proprietary vendor
system has not been activated or vender
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systems or Exchange systems that have
been activated otherwise become
unavailable, a Floor broker who is
unable to enter his or her own Floor
broker agency interest has the following
options:
(i) Request a specialist to enter the
agency interest on behalf of the Floor
broker who is unable to enter it for
himself or herself;
(ii) Send an order through
SuperDot; 10
(iii) Send a CAP–DI order 11 to the
specialist;
(iv) Trade manually in the Crowd, as
is done today;
(v) Ask another Floor broker to
represent the order through his or her
agency interest file; or
(vi) Send an order for Direct+
execution.
Rule 70.20(f)(P)
The Hybrid Market filings described
proposed rule 70.20(f) which requires
cancellation of agency interest files
when the broker leaves the Crowd. In
connection with the Pilot, the Exchange
proposes to amend this provision to
clarify that a Floor broker may leave the
Crowd without canceling his or her
agency interest files in order to recharge
his or her handheld device. See
proposed Exchange Rule 70.20(f)(P).
NYSE Specialist Interest Files SM
(Exchange Rule 104(c)(P))
During the Pilot, specialists will be
able to manually layer their interest at
and outside the best bid and offer,
which will give specialists’ bids and
offers persistent standing (also referred
to as s-Quotes). See Exchange Rule
104(c)(P). This means that if the
specialist bids/offers at a price that is
not the best bid/offer, but layers its
interest below/above such best bid/offer,
the specialist’s interest will remain in
the specialist interest file and be
available to be displayed as the best bid/
offer should better bids/offers be
exhausted. The Hybrid Market filings
discuss the specialists’ ability to do this
systemically via algorithmically
generated messages sent via the NYSE
Specialist API SM (‘‘API’’). During the
Pilot, however, specialists will not be
10 SuperDot is an electronic order-routing
system used by NYSE member firms to send market
and limit orders to the NYSE.
11 See Exchange Rule 123A.30. The CAP–DI order
guides the specialist to represent the order to ensure
that the elected or converted portion goes along
with the market, by not initiating a significant price
change or lagging behind the market. CAP–DI
orders are subject to a number of restrictions
intended to minimize the specialist’s discretion in
handling such orders. Elected and converted CAP–
DI orders that are not executed revert to CAP–DI
status.
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able to use systems employing
algorithms to generate messages to bid,
offer, or trade via the API. Accordingly,
for the purposes of the Pilot, the
Exchange is proposing a new rule to
provide specialists with the ability to
manually layer interest at and outside
the Exchange best bid and offer. See
proposed Exchange Rule 104(c)(P).
During the Pilot, specialists will not
be able to disseminate NYSE Specialist
Files SM via NYSE OPENBOOK or
other Exchange data distribution
channels.
During the Pilot, specialists will not
be able to have systems using algorithms
to send messages via the API to layer
their interest or to otherwise trade or
quote, nor will the specialist’s reserve
capability be operational. Therefore,
proposed Exchange Rules 104(b)–(h)
will not be in effect.
Priority, Parity, and Yielding: Exchange
Rules 70.20(b)(P), 72(c)–(g)(P),
104.10(6)(i)(C)P, 108(a)(P)
During the Pilot, the systemic
programming of priority, parity and
yielding, as proposed by the Hybrid
Market filings, other than the yielding
requirements for additional specialist
interest, will be operational. As a result,
the following rules will apply during
the Pilot: 70.20(b)(P), 72(c)–(g)(P),
104.10(6)(i)(C)(P), and 108(a)(P).
The most substantive change that will
apply to trading in Pilot securities will
be that Floor brokers will lose their
current ability to object to the specialist
trading on parity with their orders
unless the specialist is manually trading
with them in the Crowd. However, a
Floor broker’s use of an e-Quote
implicitly suggests his or her agreement
that the specialist can be on parity with
his or her orders. A Floor broker who
does not want to permit the specialist to
trade on parity with his or her orders
may send the order through SuperDot,
enter a Direct+ order, or hit a bid/take
an offer.
A Floor broker who is manually
bidding or offering (i.e., not through his
or her agency interest file) will not be
able to participate in an execution
involving e-Quotes and/or s-Quotes or,
as today, in Direct+ executions.
Other Exchange Rules
During the Pilot, the following rules,
as amended in the Hybrid Market filings
would apply to Pilot securities:
Exchange Rules 60(e)(P), 117P, 122P,
123(e)P, and 132B(a)(D)(P).
Pilot Trading Example
The Exchange quotation is 20.05 bid,
offered at 20.07, 3,000 x 300. The bid
consists of: 1,000 shares of book
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19:23 Dec 19, 2005
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interest, which arrived first and has
priority; 1,000 shares of broker agency
interest comprised of two brokers’ bids
for 500 shares each at 20.07, and 1,000
shares of specialist interest. A market
order to sell 3,000 shares arrives and
trades with the 20.05 bid, as follows:
3,000 shares trade and this is reported
by the specialist via the Smart Report
Template and the system assigns the
contra-parties as follows: 1,000 shares of
book interest trade first (priority), and
the remaining 2,000 shares are split
equally (1,000 shares each) between the
floor broker agency interest files and
specialist interest file, as they are on
parity.
Automatic Execution of CAP–DI Orders
and Stop Orders
Currently, when a trade occurs, the
Exchange’s system notifies the specialist
if any CAP–DI or stop orders have been
elected by such trade. The specialist has
to then determine if there is any
liquidity against which the elected
orders (or portions thereof) can trade. If
so, the specialist manually executes and
reports trades involving the elected
volume.
The Commission recently published
an Exchange filing that provides that
elected stop and CAP–DI volume will be
automatically executed 12 to the extent
that contra-side interest is available to
trade with the elected orders.13 These
executions will be automatically
reported, including the relevant
information regarding participants to
the execution (See Exchange Rule
123A.30, discussed below). Elected
CAP–DI volume unable to trade will
automatically revert to CAP–DI status,
and elected stop limit orders unable to
trade will become a limit order on the
Display Book. Elected stop orders will
be executed in the same manner as any
market order. The rules regarding the
election and execution of CAP–DI and
stop orders remain the same. The
implementation of this process will
commence with the Pilot.
In connection with the Pilot, the
Exchange is proposing changes to Rule
76 to clarify that elected stop and stop
limit orders are exempt from the
requirement that a member expose the
order for possible price improvement
before crossing it.
In addition, the Exchange is
proposing amendments to Rule 13 with
respect to stop and stop limit orders.
Certain of these changes were proposed
in the Hybrid Market filings. With
12 This automatic execution will not be done
through NYSE Direct+, but rather a different
system. Therefore, such execution is not subject to
the volume limitations of the Direct+ rules.
13 See supra note 5.
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75521
respect to the Pilot, the Exchange is
proposing additional changes to Rule 13
to add language that provides for the
possibility of manual representation of
stop and stop limit orders in the Crowd.
Converted CAP–DI Orders and Direct+
In addition, commencing with the
Pilot, converted CAP–DI orders will be
systemically represented to enable them
to participate in NYSE Direct+
executions under current Rules 1000–
1005.14
Automation of Parity Between Specialist
and Elected CAP–DI Orders
Exchange Rule 123A.30 provides that
a Floor broker may permit a specialist
to trade on parity with CAP–DI orders.
The rule currently provides that if a
specialist is on parity with one or more
CAP–DI orders, at no time may the
specialist participate for its own account
in an amount in excess of that which
each CAP–DI order would receive,
except that the specialist may
participate for its own account to an
extent greater than any particular CAP–
DI order where the size specified on
such order has been satisfied. A
specialist trading on parity with a CAP–
DI order remains subject to the
limitations in Exchange Rule 104.10 as
to transactions for his or her own
account effected on destabilizing ticks.
Commencing with the Pilot, the
Exchange will systemically ensure that
the specialist’s participation when
trading along with CAP–DI orders is in
accordance with the parity requirements
of Rule 123A.30. The system will assign
the proper number of shares to the
specialist and CAP–DI orders. The
Exchange filed 15 this change for
immediate effectiveness pursuant to
Section 19(b)(3)(A) of the Act 16 and
Rule 19b–4(f)(5) 17 thereunder.
Automatic Conversions of CAP–DI
Orders
Current Exchange Rule 123A.30 also
provides that specialists have the
ability, subject to certain restrictions
noted in the rule, to convert CAP–DI
orders to participate in transactions or
to bid or offer, without an electing trade.
Proposed Exchange Rule
123A.30(a)(P) 18 provides in part that the
elected or converted portion of a
‘‘percentage order that is convertible on
a destabilizing tick and designated
14 See
id.
id.
16 15 U.S.C. 78s(b)(3)(A).
17 17 CFR 240.19b–4(f)(5).
18 This rule is parallel to amendments made to
Rule 123A.30. See Securities Exchange Act Release
No. 51906 (June 22, 2005), 70 FR 37463 (June 29,
2005) (Amendment No. 5 to SR–NYSE–2004–05).
15 See
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immediate execution or cancel election’’
(‘‘CAP–DI order’’) may be automatically
executed. An elected or converted CAP–
DI order on the same side of the market
as an automatically executed electing
order may participate in a transaction at
the bid (offer) price if there is volume
associated with the bid (offer) remaining
after the electing order is filled in its
entirety. An elected or converted CAP–
DI order on the contra-side of the market
as an automatically executed electing
order may participate in a transaction at
the bid (offer) price if there is volume
remaining in the electing order.
In addition, the Exchange is
proposing to add new section (iv)(P) to
proposed Exchange Rule 123A.30(a)(P)
to provide that when a specialist is
bidding or offering and an automatic
execution occurs with such bid/offer,
marketable CAP–DI orders on the
Display Book on the same side as the
specialist’s interest will be
automatically actively converted to
participate in this execution, with the
system assigning the proper number of
shares to the specialist and CAP–DI
orders, as discussed above. This will
allow CAP–DI orders to better
participate in executions.
However, in certain instances, an
automatic conversion of marketable
CAP–DI orders will not occur even
though the specialist is trading for its
own account. This will occur where the
execution that included automatically
converted CAP–DI orders elects a
contra-side stop or stop limit order. In
this situation, pursuant to current
Exchange Rule 123A.40, the specialist,
as party to the election of the stop order,
owes such elected stop order an
execution at the same price as the
specialist traded. The execution of such
stop orders, in which the specialist is
the contra-party, may be manual 19 or
automatic,20 depending upon whether
any specialist interest remains at the
execution price. In either situation,
marketable CAP–DI interest at that price
will not be automatically converted to
participate along with the specialist.
However, the specialist will be alerted
to the fact there are CAP–DI orders on
the Display Book capable of trading so
19 If there is no specialist interest remaining in the
bid/offer, and the specialist must guarantee an
execution to the stop order at the electing price
pursuant to Rule 123A.40, the specialist must do a
manual transaction to guarantee that the stop order
receives the same price as the specialist.
20 If there is specialist interest remaining in the
bid/offer and the specialist must guarantee an
execution to the stop order at the electing price
pursuant to Rule 123A.40, the Display Book system
will automatically execute the remaining specialist
interest against the elected stop order at the same
price the specialist traded.
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19:23 Dec 19, 2005
Jkt 208001
that he or she can take appropriate
action.
2. Statutory Basis
The Exchange believes that the
proposed rule change, as amended, is
consistent with Section 6(b)(5) of the
Act 21 in that it is designed to promote
just and equitable principles of trade, to
foster cooperation and coordination
with persons engaged in regulating,
clearing, settling, processing
information with respect to, and
facilitating transactions in securities, 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. The Exchange believes
that the proposed rule change, as
amended, is also designed to support
the principles of Section 11A(a)(1) of
the Act 22 in that it seeks to assure
economically efficient execution of
securities transactions, make it
practicable for brokers to execute
investors’ orders in the best market and
provide an opportunity for investors’
orders to be executed without the
participation of a dealer.
B. Self Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change, as amended,
will impose any burden on competition
that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
See the SEC’s Web site (https://
www.sec.gov) for the comment letters
received on the Hybrid Market initiative
and a copy of the Exchange’s response
to the letters.
III. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended, is consistent with
the Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NYSE–2005–87 on the
subject line.
21 15
22 15
PO 00000
U.S.C. 78f(b)(5).
U.S.C. 78k–1(a)(1).
Frm 00078
Fmt 4703
Sfmt 4703
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–9303.
All submissions should refer to File
Number SR–NYSE–2005–87. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with 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 in
the Commission’s Public Reference
Room. Copies of such filing also will be
available for inspection and copying at
the principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NYSE–2005–87 and should
be submitted on or before January 10,
2006.
IV. Commission’s Finding and Order
Granting Accelerated Approval of the
Proposed Rule Change
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.23 Specifically, the
Commission finds that approval of the
proposed rule change is consistent with
Section 6(b)(5) of the Act because the
proposal is 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.
With this proposed rule change, the
Exchange has requested temporary
23 In approving this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
E:\FR\FM\20DEN1.SGM
20DEN1
Federal Register / Vol. 70, No. 243 / Tuesday, December 20, 2005 / Notices
approval by the Commission of certain
features of its Hybrid Market, so that it
may begin live systems testing in a
limited group of stocks. According to
the Exchange, this Pilot is necessary so
that the Exchange can maintain its
planned implementation schedule for
the Hybrid Market and meet the
Regulation NMS compliance dates.24
The Commission recognizes that certain
of the processes that NYSE has
proposed to begin testing have
generated comment in the Hybrid
Market filings. The Commission wishes
to emphasize that it continues to review
the larger Hybrid Market filings,
including the processes included in this
Pilot.25 The Commission is considering
all of the comments submitted in
response to the Hybrid Market filings
and has not reached a decision on
whether they should be approved or
disapproved. The Commission,
however, believes that due to the
limited nature of the Pilot and its short
duration, that it is consistent with the
Act to allow NYSE to begin testing its
new systems with this Pilot.
The NYSE explained in its filing that
it has tested these functions extensively
but that it needs to test them in an
actual trading environment to ensure
that they operate as intended.
Accordingly, NYSE represented that it
does not anticipate any significant
problems arising from the Pilot.
However, NYSE will immediately
terminate the Pilot, in whole or in part,
as appropriate, should any systems or
other problems arise that adversely
impact the protection of investors or
impede its ability to maintain a fair and
orderly market, and return trading to its
current operations under current NYSE
rules.26
The Commission finds good cause,
pursuant to Section 19(b)(2) of the
24 NYSE has represented that it has proposed the
Hybrid Market with the intent that it will entitle
NYSE quotations to protection under Rule 611 as
well as to comply with its obligations under this
rule. The compliance date for certain rules adopted
under Regulation NMS is June 29, 2006. 17 CFR
242.611.
25 The Commission notes that the scope of the
Pilot is extremely limited. This Pilot is intended to
enable NYSE to technologically test certain features
of its Hybrid Market proposal. Other significant
features of the Hybrid Market proposal, such as the
expansion of Direct+ and the ability of specialists
to electronically interact with the Display Book, are
not included in this Pilot. The NYSE represented
that it expects to be able to use the results of the
systems testing in evaluating and addressing any
technology issues related to its Hybrid Market
proposal that become apparent.
26 The Exchange stated that it would be able to
revert back to pre-Pilot operations within an
average of two minutes or less. The Exchange will
notify the public via its Web site if the Pilot is
terminated in whole or in part. In addition, the
Exchange will notify floor members at the post if
the Pilot is terminated in whole or in part.
VerDate Aug<31>2005
19:23 Dec 19, 2005
Jkt 208001
Act,27 for approving the proposed rule
change prior to the thirtieth day after
the date of publication of the notice in
the Federal Register. The Pilot, which
as discussed above is limited in scope
and duration, will allow the NYSE to
conduct real-time system and user
testing of certain features of the
proposed Hybrid Market. According to
NYSE, such testing should be beneficial
from both a technology and a training
perspective. Although preliminary steps
have been taken—the NYSE has
provided training for both Floor brokers
and specialists, many member
organizations also provided firmspecific training for their employees,
and proprietary system vendors were
able to utilize the NYSE trading
environment for their training
sessions—the Pilot should give the
Exchange the opportunity, in advance of
the compliance date of Regulation NMS,
to identify and address any system
problems with these particular rules
under the proposed Hybrid Market.
Further, the Pilot should allow users to
gain essential practical experience with
the new systems and processes.
Therefore, the Commission finds that
immediate implementation of the Pilot,
which is limited in both scope and
duration, should permit NYSE to remain
on schedule to implement the Hybrid
Market filings, if approved by the
Commission so that it may meet the
Regulation NMS compliance dates.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–NYSE–2005–
87), as amended, is hereby approved on
an accelerated basis until March 14,
2006 or the Commission otherwise acts
on the Hybrid Market filings.
By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 05–24251 Filed 12–19–05; 8:45 am]
BILLING CODE 8010–01–P
75523
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52951; File No. SR–NYSE–
2004–39]
Self-Regulatory Organizations; New
York Stock Exchange, Inc.; Order
Approving a Proposed Rule Change
and Partial Amendment No. 1 To
Amend Exchange Rule 431 (Margin
Requirements)
December 14, 2005.
I. Introduction
On July 12, 2004, the New York Stock
Exchange, Inc. (the ‘‘Exchange’’ or
‘‘NYSE’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or the
‘‘Commission’’) a proposed rule change
to amend specified provision of
Exchange Rule 431 (margin
requirements) pursuant to Section
19(b)(1) 1 of the Securities Exchange Act
of 1934 (the ‘‘Exchange Act’’) 2 and Rule
19b–4 thereunder.3 On September 29,
2005, the Exchange filed a partial
amendment to its proposed rule
change.4 The proposed rule change, as
amended, was published for comment
in the Federal Register on November 10,
2005.5 The Commission received no
comments on the proposal.
II. Description
The Exchange has proposed
amendments to Rule 431 (margin
requirements) that will recognize
specific additional complex option
spread strategies and set margin
requirements commensurate with the
risk of such spread strategies. These
complex spread strategies are a
combination of two or more basic option
spreads that are already covered under
Exchange Rule 431. In addition, the
Exchange has proposed the elimination
of the two-dollar standard exercise price
interval limitation for listed options and
certain terminology with respect to
‘‘permitted offsets,’’ as defined in its
Rule. The proposed amendments
described below have been developed in
conjunction with the Chicago Board
Options Exchange (‘‘CBOE’’).
A. Complex Option Spreads
As noted, the Exchange has proposed
amendments to Rule 431 to recognize
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a et seq.
3 17 CFR 240.19b–4.
4 SR–NYSE–2004–39: Amendment No. 1. The
NYSE, in coordination with the Chicago Board
Options Exchange, Incorporated (‘‘CBOE’’), filed the
partial amendment to conform the complex options
spreads strategies to which its rule amendments
apply to those of the CBOE.
5 See Securities Exchange Act Release No. 52738
(Nov. 4, 2005); 70 FR 68501 (Nov. 10, 2005).
2 15
27 15
PO 00000
U.S.C. 78s(b)(2).
Frm 00079
Fmt 4703
Sfmt 4703
E:\FR\FM\20DEN1.SGM
20DEN1
]]>Agencies
[Federal Register Volume 70, Number 243 (Tuesday, December 20, 2005)]
[Notices]
[Pages 75519-75523]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-24251]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52954; File No. SR-NYSE-2005-87]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Notice of Filing and Order Granting Accelerated Approval of a Proposed
Rule Change and Amendment No. 1 Thereto Relating to the Pilot to Put
Into Operation Phase 1 of the NYSE HYBRID MARKET \SM\
December 14, 2005.
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 December 9, 2005, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. On December
13, 2005, the Exchange filed Amendment No. 1 to the proposed rule
change.\3\ The Commission is publishing this notice and order to
solicit comments on the proposed rule change, as amended, from
interested persons and to approve the proposed rule change, as amended,
on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Partial Amendment dated December 13, 2005 (``Amendment
No. 1''). In Amendment No. 1, the Exchange submitted Exhibit 3 to
the proposed rule change, which identified the securities that would
be included in the Pilot, and corrected a typographical error.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing a pilot to put into operation Phase 1 of
the NYSE HYBRID MARKET \SM\ (``Hybrid Market'') initiative, as proposed
in SR-NYSE-2004-05 and amendments thereto (``Hybrid Market filings'')
with respect to a group of securities trading on the Exchange
(``Pilot'').\4\ In addition, the Pilot will implement certain system
changes discussed in SR-NYSE-2005-57.\5\ This filing sets forth amended
rules (previously described in the Hybrid Market filings) which would
be operational during the Phase 1 pilot as well as certain new
proposals, discussed herein. The text of the proposed rule change is
available on NYSE's Web site (https://www.nyse.co), at the principal
office of the Exchange, and at the Commission's Public Reference Room.
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 50173 (August 10,
2004), 69 FR 50407 (August 16, 2004) (Amendment No. 1 to SR-NYSE-
2004-05); Securities Exchange Act Release No. 50667 (November 15,
2004), 69 FR 67980 (November 22, 2004) (Amendment Nos. 2 and 3 to
SR-NYSE-2004-05) (The Exchange withdrew Amendment No. 4 and replaced
it with Amendment No. 5); Securities Exchange Act Release No. 51906
(June 22, 2005), 70 FR 37463 (June 29, 2005) (Amendment No. 5 to SR-
NYSE-2004-05). See also Amendment No. 6 to SR-NYSE-2004-05
(September 16, 2005) and Amendment No. 7 to SR-NYSE-2004-05 (October
10, 2005).
\5\ See Securities Exchange Act Release No. 52362 (August 30,
2005), 70 FR 53701 (September 9, 2005) (SR-NYSE-2005-57). While
submitted as effective upon filing, the Exchange intended to
implement these changes upon approval of the Hybrid Market filings
by the Commission, if such approval is granted.
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange 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 III below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes a Pilot to put into operation Phase 1 of the
Hybrid Market initiative with respect to a group of securities, known
as Phase 1 \6\ Pilot securities (``Pilot securities''). The Pilot would
commence following Commission approval of the Pilot, during the week of
December 12, 2005 and would terminate the earlier of: (1) 90 calendar
days from the date of Commission approval, if granted, or (2)
Commission approval of the Exchange's Hybrid Market proposal, if
granted.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 51906 (June 22,
2005), 70 FR 37463 (June 29, 2005) (Amendment No. 5 to SR-NYSE-2004-
05).
---------------------------------------------------------------------------
Approximately 200 securities out of the 3,600 securities listed on
the Exchange (approximately 5%) have been identified as Pilot
securities and are listed on Exhibit 3 of the filing.\7\ In addition,
the list of Pilot securities will be posted on the Exchange's Web site.
---------------------------------------------------------------------------
\7\ The NYSE selected the Pilot securities based on the
following criteria: (1) Trading location so as to include in the
Pilot securities from each room and post on the floor; (2) crowd
participation so as to include securities that generally have crowd
participation; (3) trading characteristics so as to include
securities whose trading characteristics are typically less volatile
to minimize the likelihood of disruptions during the systems
testing; and (4) specialist firm so as to include each of the equity
specialist firms on the floor. The Pilot securities represent
approximately 10% of the average daily NYSE trading volume.
Telephone call between Nancy Reich Jenkins, NYSE and Kelly Riley,
SEC on December 14, 2005.
---------------------------------------------------------------------------
The Pilot will allow the Exchange to conduct real-time system and
user testing of certain features of the Hybrid Market filings in order
to be in a position to comply with the implementation of Regulation
NMS.\8\
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005).
---------------------------------------------------------------------------
The Exchange believes the Pilot will prove beneficial from both a
technology and a training perspective. It will give the Exchange the
opportunity to identify and address any system problems and to identify
and incorporate beneficial system changes that become apparent as a
result of usage in real time and under real market conditions. The
ability to have such real time user interface will be invaluable, as it
is impossible to accurately anticipate behavioral changes in a
development or mock-trading
[[Page 75520]]
environment. In addition, the Pilot will allow users to gain essential
practical experience with the new systems and processes in a well-
modulated way.
The Exchange anticipates that the Pilot will operate with minimal
problems given the amount and degree of testing and training that has
occurred to date. In addition, the Exchange plans to phase-in the
Pilot, if approved, to allow for a controlled and moderated roll out of
the new systems and capabilities.\9\
---------------------------------------------------------------------------
\9\ The NYSE intends to phase in the Pilot gradually, beginning
with a single security on the first day of the Pilot and expanding
gradually over the course of four weeks. The timing of the phase-in
will be adjusted depending on the extent and significance of any
technical or user interface problems that might arise. Telephone
call between Nancy Reich Jenkins, NYSE and Kelly Riley, SEC on
December 14, 2005.
---------------------------------------------------------------------------
There has been extensive testing of the approximately 15 Exchange
systems impacted by the Pilot, individually and collectively, both in
development and production environments. This testing occurred at all
levels, including development testing, automation testing, SIAC
testing, NYSE testing, integrated system testing and code reviews,
production environment testing, fall-back and recovery testing, and
regression and new functionality testing.
In addition, there has been comprehensive training for both Floor
brokers and specialists, individually and together in a mock trading
environment. Training was conducted by the Exchange and was
supplemented in most cases by firm-specific training conducted by
member organizations for their employees. In addition, the Exchange
training environment was made available to proprietary system vendors
for their training sessions.
Moreover, the Exchange intends to have available at all times
during the Pilot two versions of the operating software--the new
version that would be operational and the original, pre-Pilot version.
If a problem develops during the Pilot, the Exchange will be able to
revert to the pre-Pilot software within an average time of two minutes
or less.
Accordingly, the Exchange believes that the extensiveness of the
testing and training, the phase-in approach and the fall-back
capabilities provide significant assurances that the Pilot will operate
as expected. However, in the event systems or other problems arise with
the Pilot that adversely impact investors or impede the Exchange's
ability to maintain a fair and orderly market, the Exchange will
immediately terminate the Pilot in whole or in part, as appropriate,
and return trading to current operations under current NYSE rules.
Phase 1 Pilot
During the Pilot, the following rules and provisions of the Hybrid
Market initiative as outlined in the Hybrid Market filings will be
operational. To eliminate possible confusion as to what rule provisions
apply to Pilot securities, the Exchange has identified those new or
amended rules which will be operational during the Pilot with a ``P.''
Where part of a provision of a proposed Hybrid Market rule will be
operational during the Pilot, but another part of the proposed rule
will not, the Exchange has noted this in the attached rule text with
the designation that the section is ``intentionally omitted.'' In
addition, during the Pilot, all other Exchange rules apply to Pilot
securities as they do today.
NYSE Direct+[reg] (Exchange Rules 1000-1005)
During the Pilot, NYSE Direct+[supreg] (``Direct+'') will continue
to operate as it does today under current Exchange Rules 1000-1005 and
subject to the same availability, restrictions and conditions, as
outlined in those rules.
NYSE Floor Broker Agency Interest Files [reg] (Exchange Rule
70.20(a)-(l)(P))
During the Pilot, the Exchange is proposing to activate the Floor
broker agency file to permit brokers to enter their interest at or
outside the best bid and offer in Pilot securities (also referred to as
``e-Quoting''). The following sections of proposed Exchange Rule 70.20,
described in the Hybrid Market filings, would apply during the Pilot:
70.20(a)(i)(ii)
70.20(b)
70.20(c)(i)-(iv): Floor brokers will be able to populate
the reserve file but it will be visible to the specialist in this phase
70.20(e)
70.20(f)
70.20(i)-(l)
70.30
During the Pilot, the following sections of proposed Rule 70.20
would not apply:
Rule 70.20(d)(i)-(ii): Sweep functionality
Rule 70.20(g)-(h): Feature permitting brokers to exclude
their interest from the aggregate information available to the
specialist
The above sections that are not applicable during the Pilot are
intentionally omitted from the proposed rule text.
In the event that a proprietary vendor system has not been
activated or vender systems or Exchange systems that have been
activated otherwise become unavailable, a Floor broker who is unable to
enter his or her own Floor broker agency interest has the following
options:
(i) Request a specialist to enter the agency interest on behalf of
the Floor broker who is unable to enter it for himself or herself;
(ii) Send an order through SuperDot; [reg] \10\
---------------------------------------------------------------------------
\10\ SuperDot [reg] is an electronic order-routing
system used by NYSE member firms to send market and limit orders to
the NYSE.
---------------------------------------------------------------------------
(iii) Send a CAP-DI order \11\ to the specialist;
---------------------------------------------------------------------------
\11\ See Exchange Rule 123A.30. The CAP-DI order guides the
specialist to represent the order to ensure that the elected or
converted portion goes along with the market, by not initiating a
significant price change or lagging behind the market. CAP-DI orders
are subject to a number of restrictions intended to minimize the
specialist's discretion in handling such orders. Elected and
converted CAP-DI orders that are not executed revert to CAP-DI
status.
---------------------------------------------------------------------------
(iv) Trade manually in the Crowd, as is done today;
(v) Ask another Floor broker to represent the order through his or
her agency interest file; or
(vi) Send an order for Direct+ execution.
Rule 70.20(f)(P)
The Hybrid Market filings described proposed rule 70.20(f) which
requires cancellation of agency interest files when the broker leaves
the Crowd. In connection with the Pilot, the Exchange proposes to amend
this provision to clarify that a Floor broker may leave the Crowd
without canceling his or her agency interest files in order to recharge
his or her handheld device. See proposed Exchange Rule 70.20(f)(P).
NYSE Specialist Interest Files \SM\ (Exchange Rule 104(c)(P))
During the Pilot, specialists will be able to manually layer their
interest at and outside the best bid and offer, which will give
specialists' bids and offers persistent standing (also referred to as
s-Quotes). See Exchange Rule 104(c)(P). This means that if the
specialist bids/offers at a price that is not the best bid/offer, but
layers its interest below/above such best bid/offer, the specialist's
interest will remain in the specialist interest file and be available
to be displayed as the best bid/offer should better bids/offers be
exhausted. The Hybrid Market filings discuss the specialists' ability
to do this systemically via algorithmically generated messages sent via
the NYSE Specialist API \SM\ (``API''). During the Pilot, however,
specialists will not be
[[Page 75521]]
able to use systems employing algorithms to generate messages to bid,
offer, or trade via the API. Accordingly, for the purposes of the
Pilot, the Exchange is proposing a new rule to provide specialists with
the ability to manually layer interest at and outside the Exchange best
bid and offer. See proposed Exchange Rule 104(c)(P).
During the Pilot, specialists will not be able to disseminate NYSE
Specialist Files \SM\ via NYSE OPENBOOK [reg] or other
Exchange data distribution channels.
During the Pilot, specialists will not be able to have systems
using algorithms to send messages via the API to layer their interest
or to otherwise trade or quote, nor will the specialist's reserve
capability be operational. Therefore, proposed Exchange Rules 104(b)-
(h) will not be in effect.
Priority, Parity, and Yielding: Exchange Rules 70.20(b)(P), 72(c)-
(g)(P), 104.10(6)(i)(C)P, 108(a)(P)
During the Pilot, the systemic programming of priority, parity and
yielding, as proposed by the Hybrid Market filings, other than the
yielding requirements for additional specialist interest, will be
operational. As a result, the following rules will apply during the
Pilot: 70.20(b)(P), 72(c)-(g)(P), 104.10(6)(i)(C)(P), and 108(a)(P).
The most substantive change that will apply to trading in Pilot
securities will be that Floor brokers will lose their current ability
to object to the specialist trading on parity with their orders unless
the specialist is manually trading with them in the Crowd. However, a
Floor broker's use of an e-Quote implicitly suggests his or her
agreement that the specialist can be on parity with his or her orders.
A Floor broker who does not want to permit the specialist to trade on
parity with his or her orders may send the order through
SuperDot,[reg] enter a Direct+ order, or hit a bid/take an
offer.
A Floor broker who is manually bidding or offering (i.e., not
through his or her agency interest file) will not be able to
participate in an execution involving e-Quotes and/or s-Quotes or, as
today, in Direct+ executions.
Other Exchange Rules
During the Pilot, the following rules, as amended in the Hybrid
Market filings would apply to Pilot securities: Exchange Rules
60(e)(P), 117P, 122P, 123(e)P, and 132B(a)(D)(P).
Pilot Trading Example
The Exchange quotation is 20.05 bid, offered at 20.07, 3,000 x 300.
The bid consists of: 1,000 shares of book interest, which arrived first
and has priority; 1,000 shares of broker agency interest comprised of
two brokers' bids for 500 shares each at 20.07, and 1,000 shares of
specialist interest. A market order to sell 3,000 shares arrives and
trades with the 20.05 bid, as follows: 3,000 shares trade and this is
reported by the specialist via the Smart Report Template and the system
assigns the contra-parties as follows: 1,000 shares of book interest
trade first (priority), and the remaining 2,000 shares are split
equally (1,000 shares each) between the floor broker agency interest
files and specialist interest file, as they are on parity.
Automatic Execution of CAP-DI Orders and Stop Orders
Currently, when a trade occurs, the Exchange's system notifies the
specialist if any CAP-DI or stop orders have been elected by such
trade. The specialist has to then determine if there is any liquidity
against which the elected orders (or portions thereof) can trade. If
so, the specialist manually executes and reports trades involving the
elected volume.
The Commission recently published an Exchange filing that provides
that elected stop and CAP-DI volume will be automatically executed \12\
to the extent that contra-side interest is available to trade with the
elected orders.\13\ These executions will be automatically reported,
including the relevant information regarding participants to the
execution (See Exchange Rule 123A.30, discussed below). Elected CAP-DI
volume unable to trade will automatically revert to CAP-DI status, and
elected stop limit orders unable to trade will become a limit order on
the Display Book. Elected stop orders will be executed in the same
manner as any market order. The rules regarding the election and
execution of CAP-DI and stop orders remain the same. The implementation
of this process will commence with the Pilot.
---------------------------------------------------------------------------
\12\ This automatic execution will not be done through NYSE
Direct+, but rather a different system. Therefore, such execution is
not subject to the volume limitations of the Direct+ rules.
\13\ See supra note 5.
---------------------------------------------------------------------------
In connection with the Pilot, the Exchange is proposing changes to
Rule 76 to clarify that elected stop and stop limit orders are exempt
from the requirement that a member expose the order for possible price
improvement before crossing it.
In addition, the Exchange is proposing amendments to Rule 13 with
respect to stop and stop limit orders. Certain of these changes were
proposed in the Hybrid Market filings. With respect to the Pilot, the
Exchange is proposing additional changes to Rule 13 to add language
that provides for the possibility of manual representation of stop and
stop limit orders in the Crowd.
Converted CAP-DI Orders and Direct+
In addition, commencing with the Pilot, converted CAP-DI orders
will be systemically represented to enable them to participate in NYSE
Direct+[reg] executions under current Rules 1000-1005.\14\
---------------------------------------------------------------------------
\14\ See id.
---------------------------------------------------------------------------
Automation of Parity Between Specialist and Elected CAP-DI Orders
Exchange Rule 123A.30 provides that a Floor broker may permit a
specialist to trade on parity with CAP-DI orders. The rule currently
provides that if a specialist is on parity with one or more CAP-DI
orders, at no time may the specialist participate for its own account
in an amount in excess of that which each CAP-DI order would receive,
except that the specialist may participate for its own account to an
extent greater than any particular CAP-DI order where the size
specified on such order has been satisfied. A specialist trading on
parity with a CAP-DI order remains subject to the limitations in
Exchange Rule 104.10 as to transactions for his or her own account
effected on destabilizing ticks.
Commencing with the Pilot, the Exchange will systemically ensure
that the specialist's participation when trading along with CAP-DI
orders is in accordance with the parity requirements of Rule 123A.30.
The system will assign the proper number of shares to the specialist
and CAP-DI orders. The Exchange filed \15\ this change for immediate
effectiveness pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule
19b-4(f)(5) \17\ thereunder.
---------------------------------------------------------------------------
\15\ See id.
\16\ 15 U.S.C. 78s(b)(3)(A).
\17\ 17 CFR 240.19b-4(f)(5).
---------------------------------------------------------------------------
Automatic Conversions of CAP-DI Orders
Current Exchange Rule 123A.30 also provides that specialists have
the ability, subject to certain restrictions noted in the rule, to
convert CAP-DI orders to participate in transactions or to bid or
offer, without an electing trade.
Proposed Exchange Rule 123A.30(a)(P) \18\ provides in part that the
elected or converted portion of a ``percentage order that is
convertible on a destabilizing tick and designated
[[Page 75522]]
immediate execution or cancel election'' (``CAP-DI order'') may be
automatically executed. An elected or converted CAP-DI order on the
same side of the market as an automatically executed electing order may
participate in a transaction at the bid (offer) price if there is
volume associated with the bid (offer) remaining after the electing
order is filled in its entirety. An elected or converted CAP-DI order
on the contra-side of the market as an automatically executed electing
order may participate in a transaction at the bid (offer) price if
there is volume remaining in the electing order.
---------------------------------------------------------------------------
\18\ This rule is parallel to amendments made to Rule 123A.30.
See Securities Exchange Act Release No. 51906 (June 22, 2005), 70 FR
37463 (June 29, 2005) (Amendment No. 5 to SR-NYSE-2004-05).
---------------------------------------------------------------------------
In addition, the Exchange is proposing to add new section (iv)(P)
to proposed Exchange Rule 123A.30(a)(P) to provide that when a
specialist is bidding or offering and an automatic execution occurs
with such bid/offer, marketable CAP-DI orders on the Display
Book[supreg] on the same side as the specialist's interest will be
automatically actively converted to participate in this execution, with
the system assigning the proper number of shares to the specialist and
CAP-DI orders, as discussed above. This will allow CAP-DI orders to
better participate in executions.
However, in certain instances, an automatic conversion of
marketable CAP-DI orders will not occur even though the specialist is
trading for its own account. This will occur where the execution that
included automatically converted CAP-DI orders elects a contra-side
stop or stop limit order. In this situation, pursuant to current
Exchange Rule 123A.40, the specialist, as party to the election of the
stop order, owes such elected stop order an execution at the same price
as the specialist traded. The execution of such stop orders, in which
the specialist is the contra-party, may be manual \19\ or
automatic,\20\ depending upon whether any specialist interest remains
at the execution price. In either situation, marketable CAP-DI interest
at that price will not be automatically converted to participate along
with the specialist. However, the specialist will be alerted to the
fact there are CAP-DI orders on the Display Book[supreg] capable of
trading so that he or she can take appropriate action.
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\19\ If there is no specialist interest remaining in the bid/
offer, and the specialist must guarantee an execution to the stop
order at the electing price pursuant to Rule 123A.40, the specialist
must do a manual transaction to guarantee that the stop order
receives the same price as the specialist.
\20\ If there is specialist interest remaining in the bid/offer
and the specialist must guarantee an execution to the stop order at
the electing price pursuant to Rule 123A.40, the Display Book system
will automatically execute the remaining specialist interest against
the elected stop order at the same price the specialist traded.
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2. Statutory Basis
The Exchange believes that the proposed rule change, as amended, is
consistent with Section 6(b)(5) of the Act \21\ in that it is designed
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, 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.
The Exchange believes that the proposed rule change, as amended, is
also designed to support the principles of Section 11A(a)(1) of the Act
\22\ in that it seeks to assure economically efficient execution of
securities transactions, make it practicable for brokers to execute
investors' orders in the best market and provide an opportunity for
investors' orders to be executed without the participation of a dealer.
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\21\ 15 U.S.C. 78f(b)(5).
\22\ 15 U.S.C. 78k-1(a)(1).
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B. Self Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change, as
amended, will impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
See the SEC's Web site (https://www.sec.gov) for the comment letters
received on the Hybrid Market initiative and a copy of the Exchange's
response to the letters.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NYSE-2005-87 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
All submissions should refer to File Number SR-NYSE-2005-87. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with 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 in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NYSE-2005-87 and should be submitted on or before
January 10, 2006.
IV. Commission's Finding and Order Granting Accelerated Approval of the
Proposed Rule Change
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.\23\ Specifically, the Commission finds that approval of the
proposed rule change is consistent with Section 6(b)(5) of the Act
because the proposal is 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.
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\23\ In approving this proposal, 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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With this proposed rule change, the Exchange has requested
temporary
[[Page 75523]]
approval by the Commission of certain features of its Hybrid Market, so
that it may begin live systems testing in a limited group of stocks.
According to the Exchange, this Pilot is necessary so that the Exchange
can maintain its planned implementation schedule for the Hybrid Market
and meet the Regulation NMS compliance dates.\24\ The Commission
recognizes that certain of the processes that NYSE has proposed to
begin testing have generated comment in the Hybrid Market filings. The
Commission wishes to emphasize that it continues to review the larger
Hybrid Market filings, including the processes included in this
Pilot.\25\ The Commission is considering all of the comments submitted
in response to the Hybrid Market filings and has not reached a decision
on whether they should be approved or disapproved. The Commission,
however, believes that due to the limited nature of the Pilot and its
short duration, that it is consistent with the Act to allow NYSE to
begin testing its new systems with this Pilot.
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\24\ NYSE has represented that it has proposed the Hybrid Market
with the intent that it will entitle NYSE quotations to protection
under Rule 611 as well as to comply with its obligations under this
rule. The compliance date for certain rules adopted under Regulation
NMS is June 29, 2006. 17 CFR 242.611.
\25\ The Commission notes that the scope of the Pilot is
extremely limited. This Pilot is intended to enable NYSE to
technologically test certain features of its Hybrid Market proposal.
Other significant features of the Hybrid Market proposal, such as
the expansion of Direct+ and the ability of specialists to
electronically interact with the Display Book, are not included in
this Pilot. The NYSE represented that it expects to be able to use
the results of the systems testing in evaluating and addressing any
technology issues related to its Hybrid Market proposal that become
apparent.
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The NYSE explained in its filing that it has tested these functions
extensively but that it needs to test them in an actual trading
environment to ensure that they operate as intended. Accordingly, NYSE
represented that it does not anticipate any significant problems
arising from the Pilot. However, NYSE will immediately terminate the
Pilot, in whole or in part, as appropriate, should any systems or other
problems arise that adversely impact the protection of investors or
impede its ability to maintain a fair and orderly market, and return
trading to its current operations under current NYSE rules.\26\
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\26\ The Exchange stated that it would be able to revert back to
pre-Pilot operations within an average of two minutes or less. The
Exchange will notify the public via its Web site if the Pilot is
terminated in whole or in part. In addition, the Exchange will
notify floor members at the post if the Pilot is terminated in whole
or in part.
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The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\27\ for approving the proposed rule change prior to the
thirtieth day after the date of publication of the notice in the
Federal Register. The Pilot, which as discussed above is limited in
scope and duration, will allow the NYSE to conduct real-time system and
user testing of certain features of the proposed Hybrid Market.
According to NYSE, such testing should be beneficial from both a
technology and a training perspective. Although preliminary steps have
been taken--the NYSE has provided training for both Floor brokers and
specialists, many member organizations also provided firm-specific
training for their employees, and proprietary system vendors were able
to utilize the NYSE trading environment for their training sessions--
the Pilot should give the Exchange the opportunity, in advance of the
compliance date of Regulation NMS, to identify and address any system
problems with these particular rules under the proposed Hybrid Market.
Further, the Pilot should allow users to gain essential practical
experience with the new systems and processes. Therefore, the
Commission finds that immediate implementation of the Pilot, which is
limited in both scope and duration, should permit NYSE to remain on
schedule to implement the Hybrid Market filings, if approved by the
Commission so that it may meet the Regulation NMS compliance dates.
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\27\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NYSE-2005-87), as amended, is hereby
approved on an accelerated basis until March 14, 2006 or the Commission
otherwise acts on the Hybrid Market filings.
By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 05-24251 Filed 12-19-05; 8:45 am]
BILLING CODE 8010-01-P
