Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto Relating to an Interpretation of Exchange Rule 108(a), 6804-6811 [E6-1751]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 71, Number 27 (Thursday, February 9, 2006)]
[Notices]
[Pages 6804-6811]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-1751]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53208; File No. SR-NYSE-2005-74]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
and Amendment No. 1 Thereto Relating to an Interpretation of Exchange 
Rule 108(a)

February 2, 2006.
    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 13, 2005, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the NYSE. 
On January 31, 2006, NYSE filed Amendment No. 1 to the proposed rule 
change.\3\ NYSE has designated the proposed rule change as constituting 
a

[[Page 6805]]

stated policy, practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule of the self-
regulatory organization pursuant to Section 19(b)(3)(A)(i) of the Act 
\4\ and Rule 19b-4(f)(1) thereunder,\5\ which renders the proposal 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change, as 
amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Partial Amendment dated January 31, 2006 (``Amendment 
No. 1''). In Amendment No. 1, the Exchange added additional 
discussion regarding the history of NYSE Rule 108 to its Statement 
on Comments on the Proposed Rule Change Received from Members, 
Participants or Others (Item 5 of Form 19b-4).
    \4\ 15 U.S.C. 78s(b)(3)(A)(i).
    \5\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change is a NYSE Information Memo that reflects 
the Exchange's longstanding interpretation of NYSE Rule 108(a) to allow 
brokers to permit specialists who are establishing or increasing 
positions in their specialty securities to be on parity with the 
trading crowd. A copy of the Information Memo, titled Specialist and 
Floor Broker Obligations in Connection with Specialist Parity with 
Orders Represented in the Crowd Under Rule 108, is appended to this 
Notice.

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 NYSE included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NYSE 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
    In SR-NYSE-2004-05, Amendment No. 7, the Exchange clarified that by 
including a customer's order in the broker agency interest file, the 
broker waives his or her objection to the specialist trading on parity 
with such order, with the result that the specialist may trade on 
parity in automatic executions.\6\ As noted in that filing, the 
proposed change comports with, and would incorporate into the rule 
text, the Exchange's longstanding interpretation of NYSE Rule 108(a) as 
permitting a specialist to be on parity with orders in the trading 
crowd (``Crowd'') when the specialist is establishing or increasing his 
or her position, provided that the brokers representing orders in the 
Crowd permit the specialist to trade along with them by not objecting 
to such participation.
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    \6\ See Amendment No. 7 to File No. SR-NYSE-2004-05, dated 
October 10, 2005.
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    The purpose of this filing is to submit to the Commission an 
Information Memo concerning NYSE Rule 108(a). The Information Memo 
reiterates the Exchange's interpretation, and sets forth a procedure 
for specialists to announce their intention to trade on parity under 
NYSE Rule 108(a), and for brokers to object to specialist 
participation. In addition, the Information Memo reminds specialists of 
their negative obligation and its potential impact on a decision to 
trade on parity, and reminds Floor brokers of their obligations to 
disclose to customers that they may permit specialists to trade on 
parity with a customer order for some or all of the executions 
associated with that order, seek guidance from their customers with 
respect to specialists trading on parity, and to conform to that 
guidance in executing customer orders. The memo also sets forth a 
documentation requirement that requires brokers to document objections 
at the time the report of execution is issued in connection with such 
orders.
    The Exchange's interpretation of NYSE Rule 108(a) recognizes that 
there are situations in which a customer or broker wants a specialist 
to trade on parity in a transaction. As a general matter, customers 
often have a strategic desire not to be the sole participant at a 
particular price, and may instruct the broker as such in connection 
with working a not-held order. Similarly, in working a not-held order, 
a broker may determine that the customer's order would benefit from 
specialist participation on parity, or that the terms of the not-held 
order do not preclude a specialist from being on parity.
    A customer gives a broker a not-held order whenever the customer 
wants the broker to exercise discretion in how, when, and at what price 
to execute the order. Even if the customer sets limiting parameters in 
connection with a not-held order, he is, by virtue of the fact that the 
order is ``not-held,'' granting the broker discretion in how to execute 
the order so long as it satisfies those parameters. In contrast, when a 
broker is handling a held order (an order in which he is ``held'' to an 
execution at a particular price, and the broker has no discretion on 
how to execute the order), a broker could permit the specialist to be 
on parity where the customer has explicitly granted the broker such 
authority as a term of the order.
    As noted above, a broker may work the order in the Crowd, and 
permit the specialist to trade on parity if, based on the broker's 
professional judgment, specialist parity is appropriate. For example, a 
broker may decide not to object to specialist parity where the broker 
is handling a go-along order that will benefit from specialist 
participation because the customer wants some party to trade at the 
same time; the customer's concern is only that someone trade alongside, 
and therefore the customer is likely indifferent as to whether that 
party is the specialist or another broker. Similarly, a broker may 
decide not to object to the specialist being on parity whenever the 
broker determines, as fiduciary for the customer, that specialist 
participation could improve the market for an order. For example, a 
broker whose customer is interested in participating only on large 
trades could permit the specialist to be on parity for one trade in 
order to increase its overall size.
    Alternatively, a broker may decide not to object to a specialist 
being on parity where the order contains instructions that would 
accommodate the specialist trading on parity, such as where the 
customer instructs the broker not to trade more than a fixed number of 
shares on any single trade (and where the total contra interest in the 
particular trade exceeds that fixed amount), or where a broker holding 
a large order is nevertheless trading less than the contra-side 
interest in a given trade because the terms of the customer's order 
limits the broker to a fixed volume over a particular period of the 
trading day.
    The Exchange's interpretation of NYSE Rule 108(a) is consistent 
with other rules that permit specialists to trade on parity with the 
Crowd, such as NYSE Rule 123A.30, which expressly authorizes brokers to 
permit specialists to go along with the brokers' CAP orders, regardless 
of whether the specialist is increasing or decreasing his position.\7\ 
The Exchange's interpretation of NYSE Rule 108(a) is also consistent 
with best execution obligations outlined

[[Page 6806]]

in NYSE Rules 13.20, 123A.41, 123A.42, and 123A.44.
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    \7\ A CAP (``convert and parity'') order is a form of percentage 
order. Like other percentage orders, a CAP order may be elected when 
a transaction has occurred at its limit price or a better price. In 
addition, a CAP order instruction from the broker permits the 
specialist to convert all or part of the unelected portion either 
only on stabilizing ticks or on any tick (depending on the broker's 
specific instructions to the specialist). The broker can also 
instruct that any elected portion of a CAP order is to be executed 
immediately in whole or in part, and that whatever is not 
immediately executed does not remain on the book as a limit order, 
but reverts to its status as an unelected percentage order for 
future election or conversion.
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    NYSE Rule 108(a) currently provides that specialists making a bid 
or offer on an order for their own accounts to establish or increase a 
position in a stock are not ``entitled'' to parity with a bid or offer 
that originates off the Floor. An exception is made for so-called ``G'' 
orders, which are orders that originate off the Floor and are executed 
pursuant to Section 11(a)(1)(G) \8\ of the Act and Rule 11a1-1(T) \9\ 
thereunder. But, because the rule only speaks to specialists not being 
``entitled'' (i.e., not having an unconditional right) to be on parity 
rather than flatly prohibiting them from being on parity, the rule, by 
its terms, does not preclude specialists from trading on parity when 
establishing or increasing their positions if brokers in the Crowd 
raise no objections.
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    \8\ 15 U.S.C. 78k(a)(1)(G).
    \9\ 17 CFR 240.11a-1(T).
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    The Exchange believes that its interpretation of NYSE Rule 108(a), 
while potentially increasing the instances in which specialists can 
trade along with the Crowd, benefits the market by encouraging 
specialists to add depth and liquidity by initiating proprietary 
transactions on the Floor of the Exchange. Notably, however, the 
interpretation does not give specialists the unfettered ability to 
trade for their proprietary accounts, since, in effecting such 
transactions, they remain bound by the reasonable necessity 
considerations contained in NYSE Rule 104, and since their ability to 
trade on parity in any event always remains subject to the Crowd's 
objection.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \10\ that an Exchange have rules that 
are 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.
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    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change would not 
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

    The Exchange has not solicited written comments on the proposed 
rule change. The Commission received two comment letters (both from the 
same commenter) in connection with filing SR-NYSE-2005-74. The 
Commission staff forwarded those comments to the Exchange and asked the 
Exchange to respond to them in this filing. The comment letters and the 
Exchange's response to them are summarized below.
    Comment letter from George Rutherfurd, dated October 30, 2005: This 
letter is non-substantive. It announces that Mr. Rutherfurd intends to 
file a more detailed letter regarding this filing, and urges the 
Commission not to take action until such time as Mr. Rutherfurd has had 
an opportunity to submit such a letter.
    Comment letter from George Rutherfurd, dated November 1, 2005: This 
letter raises four principal objections: (i) The Exchange's 
interpretation of NYSE Rule 108(a) is at odds with the plain language 
of the Rule; (ii) the fact that the Exchange has filed its 
interpretation with the Commission ``proves'' that the interpretation 
is not reasonably and fairly implied by an existing rule and therefore 
is not eligible for immediate effectiveness; (iii) specialist parity 
trades, at least when they are establishing or increasing their 
positions, are contrary to the interests of public investors and should 
be prohibited; and (iv) Floor brokers cannot effectively protect their 
own or their customers' interests and therefore the specialists must be 
prevented from trading on parity when they are establishing or 
increasing their proprietary positions.
    The Exchange strongly disagrees with the commenter's arguments. In 
its response to the comment letters, the Exchange argues that (i) its 
interpretation of NYSE Rule 108(a) is consistent with the plain 
language of the rule; (ii) the Exchange appropriately sought immediate 
effectiveness for the interpretation; (iii) the Exchange's 
interpretation is consistent with the history of NYSE Rule 108; (iv) 
Floor brokers can protect customers' interests by objecting where 
appropriate; and (v) Mr. Rutherfurd fails to explain why brokers cannot 
protect customers' interests. The Exchange concludes that the 
Exchange's interpretation of NYSE Rule 108(a) is consistent with 
customer protection, and that the proposed Information Memo will 
further clarify the procedures for trading consistent with the 
interpretation and documenting that trading properly. A copy of the 
Exchange's response is attached to its filing with the Commission as 
part of Exhibit 2, and is also set forth below.
    None of the commenter's arguments have merit, inasmuch as they rely 
on sweeping generalizations or incorrect assumptions, are unsupported 
by any verifiable legal or other authority, and consist largely of 
meritless accusations. Nevertheless, the Exchange addresses these 
objections below.
1. The Exchange's Interpretation of Rule 108(a) Is Consistent With the 
Plain Language of the Rule
    Although the commenter dismisses the Exchange's interpretation as 
``ridiculous word games,'' the fact is that statutory interpretation 
must, of necessity, start with the words of the rule or statute to be 
interpreted.\11\ What's more, the words of a statute or rule should be 
given their plain meaning, wherever possible.\12\
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    \11\ See United States v. Kinzler, 55 F.3d 70, 72 (2d Cir. 1995) 
(``Statutory interpretation starts with the language of the statute 
itself * * *'').
    \12\ See Perrin v. United States, 444 U.S. 37, 42 (1979) (``A 
fundamental canon of statutory construction is that, unless 
otherwise defined, words will be interpreted as taking their 
ordinary, contemporary, common meaning.'') (emphasis added).
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    At issue is whether NYSE Rule 108(a) on its face prohibits 
specialists from trading on parity when they are establishing or 
increasing their positions. It does not. As the commenter is well 
aware, the rule states simply that specialists are not ``entitled'' to 
trade on parity.
    According to the commenter (without citations), ``entitled'' means 
``allowed to act''; he interprets that word, when coupled with the word 
``not,'' to mean ``not allowed to act'' or ``prohibited.'' He then 
concludes that since the specialists are, in his formulation, ``not 
allowed to act'' in parity situations, the Exchange's interpretation 
must be intended to put one over on the Commission.
    But perhaps the commenter should consult a dictionary before 
accusing others of being ``intellectually overmatched.'' The Exchange 
consulted two, the American Heritage Dictionary of the English Language 
\13\ and Black's Law Dictionary,\14\ both of which confirmed the 
Exchange's understanding of the meaning of the word, and did not 
support his. To wit,

[[Page 6807]]

the American Heritage Dictionary defines ``entitle'' to mean ``to 
furnish with a right or claim to something,'' while Black's Law 
Dictionary defines ``entitle'' as follows: ``In its usual sense, to 
entitle is to give a right or legal title to.''
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    \13\ 4th Ed. (Hougton Mifflin 2000).
    \14\ 6th Ed. (West 1991).
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    Applying these definitions, it's clear that the Exchange's 
interpretation is neither ``ridiculous'' nor ``intellectually 
bankrupt.'' It is merely a plain reading of the English language. 
Simply put, the rule says only that a member does not have an 
unfettered or automatic right to trade on parity when establishing or 
increasing his position. Tellingly, there is nothing in the plain 
language of the rule about a specialist being ``prohibited'' from 
trading in that situation.
    The logic of this interpretation is further supported by the well-
accepted canon of statutory construction that rule-writers are presumed 
in any rule to have said what they meant, and meant what they said.\15\ 
In particular, where Exchange rules mean to prescribe or proscribe 
specific conduct, the rules use terms such as ``shall'' or ``must'' or 
similar words of obligation.\16\
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    \15\ See Connecticut Nat'l Bank v. Germain, 503 U.S. 249, 253-54 
(1992) (``Courts must presume that a legislature says in a statute 
what it means and means in a statute what it says there.'')
    \16\ See, e.g., NYSE Rule 63 (``Bids and offers in securities 
admitted to dealings on a `when issued' basis shall be made only 
`when issued' * * * ''); NYSE Rule 72(b) (``A member who is 
providing a better price to one side of the cross transaction must 
trade with all other market interest having priority at that price 
before trading with any part of the cross transaction.''); NYSE Rule 
78 (``An offer to sell coupled with an offer to buy back at the time 
or at an advanced price, or the reverse, is a prearranged trade and 
is prohibited.'').
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    Notably, NYSE Rule 108(a) does not use such obligatory language, 
but rather, uses the conditional term ``entitled.'' It would be 
illogical to conclude that the Exchange meant something other than what 
it said; if it had meant to categorically exclude specialists from 
trading on parity in situations in which they are establishing or 
increasing a position, the numerous rules where ``shall'' or ``must'' 
appear certainly demonstrate that the Exchange knew how to write such a 
rule. The fact that the rule is not written that way is evidence of the 
Exchange's different intent with respect to the rule and its scope.
    In the absence of a prohibition on specialist parity when 
establishing or increasing a position, it is entirely consistent with 
the rule, as well as Commission precedent, to state that even if they 
are not entitled, specialists nevertheless may trade on parity under 
certain circumstances.\17\ And what are these circumstances? Exactly 
the ones enunciated in the Information Memo that is the subject of the 
rule filing: the specialist may trade on parity while establishing or 
increasing his position as long as he or she clearly announces an 
intention to trade on parity, and no brokers in the Trading Crowd 
object.
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    \17\ See NASD Manual Section 2341 (``You are not entitled to an 
extension of time on a margin call. While an extension of time to 
meet margin requirements may be available to customers under certain 
conditions, a customer does not have a right to the extension.'') 
(Emphasis in original), approved by Securities Exchange Act Release 
No. 44223 (May 3, 2001), 66 FR 22274, 22276 (April 26, 2001) (NASD-
00-55) (``Some investors believe they are automatically entitled to 
an extension of time to meet margin calls. While an extension of 
time to meet initial margin requirements may be available to the 
customer under certain conditions, it is only granted if the 
clearing firm chooses to request an extension from its Designated 
Examining Authority-the customer does not have a right to an 
automatic extension.'').
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2. The Exchange Appropriately Sought Immediate Effectiveness for the 
Interpretation
    The commenter further argues that the Exchange's filing is not 
properly designated for immediate effectiveness because it is not an 
``interpretation'' that is ``reasonably and fairly implied'' by the 
rule text. But as described above, the Exchange's interpretation of 
NYSE Rule 108(a) is not, as the commenter contends, ``absolutely at 
odds with the rule's plain language''; to the contrary, it is entirely 
consistent with that language. Nevertheless, the commenter claims that 
by filing the interpretation, the Exchange is ``acknowledging the 
obvious,'' namely that the interpretation is not reasonably and fairly 
implied from the existing language. Otherwise, he reasons, why would 
the Exchange have filed it?
    Section 19(b)(3)(A) of the Act \18\ provides that a ``rule change 
may take effect upon filing with the Commission'' if the proposed 
change constitutes a ``stated policy, practice or interpretation'' with 
respect to the meaning of an existing rule. As described more fully 
below, the Exchange has been interpreting NYSE 108(a) since its 
adoption as limiting, but not eliminating, the ability of specialists 
to trade on parity when establishing or increasing their positions. In 
response to inquiries from the Commission, the Exchange has now filed 
that interpretation pursuant to Section 19(b)(3)(A) under the Act. We 
fail to see how this is inconsistent with the underlying scheme of the 
Act, or how this in any way ``proves'' that the current practice is 
illegal; by the commenter's logic, all filings for immediate 
effectiveness would be either unnecessary or indicative of illegal 
conduct by the filing exchange. Surely this is not a proper reading of 
the statute.
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    \18\ 15 U.S.C. 78s(b)(3)(A).
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    In any event, the Exchange strongly disagrees with the commenter's 
claim. As noted above, we believe that the Exchange's interpretation of 
NYSE Rule 108(a) is reasonably and fairly implied from the existing 
language of the rule, since the rule by its terms does not prohibit a 
specialist from trading on parity when he or she is establishing or 
increasing a position. At the same time, the Exchange recognizes that 
the rule does not give specialists carte blanche to trade on parity in 
those situations. Accordingly, the Information Memo reminds specialists 
that their proprietary trading must be consistent with maintaining a 
fair and orderly market, and reminds Floor Brokers that they have an 
obligation to object to specialist parity if not objecting would result 
in a less-than-best execution for their customers. We believe that this 
is also reasonably and fairly implied from the rule, since permission 
to be on parity could not logically come from anyone but the Floor 
Brokers who are, after all, representing the customers' interests.
3. The Exchange's Interpretation Is Consistent With the History of NYSE 
Rule 108
    The commenter claims that the Exchange's interpretation of NYSE 
Rule 108(a) is inconsistent with the history underlying the rule. 
Again, the Exchange strongly disagrees.
    Historically, NYSE Rule 108 was intended to prevent specialists, 
registered competitive market makers and competitive traders from 
unduly profiting from their ``time-place'' trading advantage over other 
market participants by reason of the members' physical presence on the 
Floor, which permitted them to respond to trading activity in a 
particular stock before the transaction appeared on the tape. The issue 
of the proper role of floor trading has been one of contention since 
the passage of the Act in 1934. At that time, there was significant 
pressure to ban floor trading altogether, but Congress tabled the issue 
and directed the newly-formed SEC to study it and make a recommendation 
as to appropriate action. The SEC's conclusion, reported in its 
Segregation Report in 1936,\19\ was

[[Page 6808]]

that there was not a clear-cut case for eliminating all floor trading. 
With respect particularly to specialists trading for their own 
accounts, the Segregation Report concluded that ``[i]mmediate concern 
for the reduction of this activity is * * * not demanded'' and 
recommended further study.\20\
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    \19\ ``Report on the Feasibility and Advisability of the 
Complete Segregation of the Functions of Dealer and Broker,'' 
Securities and Exchange Commission (1936) (``Segregation Report'').
    \20\ Id. at 111.
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    Over the next nine years, between 1936 and 1945, the Commission and 
the NYSE (among others) debated whether floor trading was harmful or 
beneficial to the goals of securities regulation. In January 1945, the 
SEC's Trading and Exchange Division issued its ``Report on Floor 
Trading'' which reported on an extensive study of floor trading.\21\ 
The report recommended the elimination of floor trading by competitive 
traders altogether and by specialists except where such transactions 
were reasonably necessary to the maintenance of a fair and orderly 
market.
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    \21\ See Securities Exchange Act Release No. 3640 (January 16, 
1945).
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    In August 1945, in response to the SEC's recommendation, the 
Exchange adopted the predecessor to NYSE Rule 108. The Exchange's 
action amounted to a compromise with the SEC, in that the Exchange 
agreed to restrict floor trading substantially in order to ``remove * * 
* any conceivable advantage which the floor trader may be presumed to 
have over public customers of our member firms.'' \22\ Significantly, 
the SEC did not adopt the Floor Trading Report's recommendations,\23\ 
and although the SEC revisited the issue of floor trading several times 
after 1945, the fundamental principles underlying NYSE Rule 108 have 
been preserved to date.
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    \22\ Statement of NYSE President Emil Schram, August 28, 1945 
(copy maintained in NYSE Archives).
    \23\ Securities Exchange Act Release No. 3727 (August 28, 1945).
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    Statements in a 1979 rule amendment filing, SR-NYSE-79-2,\24\ 
reinforce the conclusion that the NYSE's interpretation has not 
substantially changed over the years. That filing was made in response 
to implementation of Section 11(a)(1)(G) of Act,\25\ and expressly 
entitled specialists to be on parity with members' off-Floor 
proprietary orders (the so-called ``G orders,'' after the section 
number). In essence, the amendment permitted a specialist to trade on 
parity with G orders even if the entering member would have objected to 
parity.
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    \24\ See Securities Exchange Act Release No. 15535 (January 29, 
1979), 44 FR 6240 (January 31, 1979) (Notice of proposed rule 
change).
    \25\ 15 U.S.C. 78k(a)(1)(G).
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    Notably, the rule filing specifically limited the change to G order 
situations: ``No changes are proposed with respect to priority, parity 
and precedence based on size vis-[agrave]-vis orders of public 
customers.'' Also notable is the Exchange's own description in the 
filing as to the scope of NYSE Rule 108, which is not inconsistent with 
the interpretation that is the subject of the Information Memo:

    In varying degrees, Exchange Rules 108 and 112 restrict bids and 
offers of specialists * * * from having priority, parity or 
precedence based on size over orders initiated off the Floor * * * 
The restriction primarily applies when a member is establishing or 
increasing a position as opposed to liquidating a position. 
(Emphasis added.) \26\
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    \26\ Securities Exchange Act Release No. 15535, supra note 24.

    The use of the terms ``restrict'' and ``restriction'' instead of 
``prohibit'' and ``prohibition'' is significant, as it reinforces the 
interpretation that NYSE Rule 108 does not, and was not intended to, 
``prohibit'' specialist parity, but merely to ``restrict'' it in 
certain situations--namely, where a broker objects to the specialist 
trading on parity.
    Subsequent interpretive guidance on NYSE Rule 108, such as 
statements contained in the Exchange's annually-published Floor 
Official Manual, is also not inconsistent with the Exchange's 
interpretation of NYSE Rule 108. For example, NYSE Floor Official 
Manuals as far back as 1991 state that specialists ``must yield 
parity'' to off-Floor orders when establishing or increasing positions, 
however, this merely reiterates that the right of specialists to trade 
on parity is not unfettered--that is, that if a broker objects to 
specialist parity when the specialist is establishing or increasing a 
position, then the specialist has no choice but defer to that order. In 
other words, in the face of an objection, the specialist ``must yield'' 
parity. But this language does not prohibit a specialist from being on 
parity when no broker objects. The specialist may not insert himself 
unilaterally, but can be given the right-of-way.
    While NYSE Rule 108 in its current form preserves the restrictions 
on on-floor trading by stating that a member's order for his or its own 
account are not ``entitled'' to parity with a public order if the 
member is establishing or increasing a position, the rule does not, and 
was not meant to, completely eliminate parity trading by specialists 
when establishing or increasing a position. Instead, the rule was 
intended only to control it, in order to remove undue advantages that 
specialists had over the public customer.
    Notably, the Exchange's subsequent interpretation of NYSE Rule 
108(a) is entirely consistent with that aim, in that it prevents 
specialists from taking advantage of public customers by requiring them 
to refrain from trading on parity when any broker representing a public 
customer's order in that auction objects to the specialist's 
participation.
4. Objections by Floor Brokers Can Effectively Protect Their Customers' 
Interests Under Rule 108(a)
    a. Brokers can protect customers' interests by objecting where 
appropriate.
    The commenter nakedly asserts that Floor brokers cannot be counted 
on to object to specialist parity trading because they are intimidated 
by the ``retributive powers of specialists'' and must ``get along by 
going along.'' His sweeping conclusion, however, is not supported by 
meaningful objective data, and the commenter thus leaves the Exchange 
with the impossible task of disproving an unproven factoid. We also 
note that this argument is illogical, since, in a competitive 
marketplace, brokers who failed to adequately execute orders as a 
result of specialists ``bullying'' them would quickly lose customer 
business.
    In any event, the Exchange notes that as a result of the issuance 
of the Information Memo at issue, there should be no doubts among the 
Floor members either as to the duties of the specialists in potential 
parity trades or as to the obligations on the brokers to object, if an 
objection is called for. In addition, there should not be any doubt 
that the decision to permit the specialist to trade on parity or not is 
intimately connected with both the specialists' obligations under NYSE 
Rule 104, and the brokers' best execution obligations under NYSE Rules 
13.20, 123A.41, 123A.42, and 123A.43, and will be evaluated by NYSE 
Regulation on that basis as well.
    We also note that because brokers are required to inform their 
customers about specialist parity and about the brokers' practices in 
deciding whether to permit the specialists to trade on parity, 
customers may increase the instances in which they request, as a term 
of their orders, that the specialist not trade on parity. These 
notices, and the resulting public awareness of Floor trading practices 
regarding parity, are likely to increase members' vigilance to ensure 
that no one, either broker or specialist, trades on parity if it would 
be inappropriate to do so.

[[Page 6809]]

    b. The commenter fails to explain why brokers cannot protect 
customers' interests.
    The commenter argues that the interpretation is unnecessary, as the 
Exchange's current rules could accommodate specialist ``trade along'' 
participation, and concludes as a result that the Exchange's true 
motivation in filing the interpretation must have been to provide 
specialists with additional opportunities to participate as dealer at 
the expense of customers. The Exchange disagrees with both his 
supposition and his conclusion.
    We note that the commenter cites two examples in which, supposedly, 
the specialist could provide ``trade along'' participation without 
being on parity. Unfortunately, his examples do not comport with 
existing Exchange rules, approved by the SEC, regarding bidding and 
offering and therefore are inappropriate. Interestingly, however, they 
ably demonstrate how the newly-announced procedures in connection with 
NYSE Rule 108(a) protect the public customers' interests.
    In his first example, the commenter poses a scenario in which there 
is a 2,000 share bid consisting of a single broker, Broker A, who bids 
for 1,000 shares, and the specialist also bidding for 1,000 shares (on 
parity) to establish or increase a position. Broker A's customer, 
Customer A, would prefer not to be 100% of the trading volume. Another 
broker, Broker B, enters the crowd to sell 1,000 shares to the bid.
    Under the Exchange's interpretation, the specialist could trade on 
parity if Broker A did not object, and therefore the specialist and 
Broker A would each buy 500 shares, which would satisfy Customer A's 
preference not to be 100% of the volume. The commenter, however, 
suggests that instead, Broker A should buy 500 shares in a single 
trade, and then the specialist could provide ``covering volume'' in a 
second trade of 500 shares.
    The commenter's example ignores the fact that Broker A has made a 
firm bid for 1,000 shares, and that as a result, if the specialist is 
not on parity in the first transaction, Broker A could not buy only 500 
shares. Rather, he would be obligated under NYSE Rule 60 and Rule 
11Ac1-1 under the Act to buy the entire 1,000 shares--the extent of his 
bid--from Broker B, who is willing to sell 1,000 shares. Significantly, 
the commenter also fails to explain how the Exchange's interpretation 
would permit the specialist to `` `elbow aside' Broker A to the extent 
of 500 shares that should otherwise go to [Customer A].'' Presumably, 
if Customer A simply wants someone--anyone--else on the trade with him, 
the specialist's participation on parity should not be problematic. If, 
on the other hand, Customer A would object to the specialist trading on 
parity, Customer A could instruct Broker A to object to specialist 
parity (meaning that Broker A would have to wait until another broker 
bid as well, in order to satisfy Customer A's concurrent desire not to 
be 100% of the volume on any trade), or in the absence of a specific 
parity instruction, Broker A could, in the reasonable exercise of his 
judgment, object on his own to the specialist trading on parity. In 
either event, the Exchange's interpretation and associated procedures 
result in no ``elbowing aside,'' and in fact actually safeguard 
Customer A's interests.
    In the commenter's second example, he poses a situation in which 
there are four brokers (A through D) each bidding for 2,000 shares, and 
the specialist bidding for 2,000 shares as well. Another broker, Broker 
E, enters the crowd to sell 8,000 shares. If the specialist is not 
permitted to trade on parity, Brokers A, B, C and D would each buy 
2,000 shares; if the specialist is permitted to trade on parity, the 
brokers and the specialist would each buy 1,600 shares. From this, the 
commenter concludes that Customers A, B, C and D must have been 
disadvantaged, since they did not get complete fills.
    The commenter's proposed solution is, like the first scenario, 
inconsistent with how Floor trading rules operate--he suggests that the 
specialist should not participate in the transaction with Brokers A, B, 
C, and D, but could participate if any of the brokers did not ``take an 
`equal split.' '' But as noted before, given that each broker has bid 
2,000 shares, and Broker E is selling 8,000 shares, there could never 
be an ``unequal split''--the four brokers' bids would be hit by Broker 
E (4 x 2,000 = 8,000), leaving nothing for the specialist.
    His analysis, moreover, also ignores several possibilities that are 
positive for the customer, such as the possibility that the specialist 
is buying into a declining market, and that as a result of his trading 
on parity, Customers A, B, C and D might complete their purchases at 
one or more lower prices.
    And again, ironically, the commenter's second example highlights 
the utility of the Exchange's interpretation of NYSE Rule 108(a)--if 
any of the four customers did not want the specialist to trade on 
parity, that customer or the broker representing that customer would be 
free to object, thus preventing the specialist from buying 1,600 
shares, and getting the ability to complete his or its entire 2,000 
share bid. Significantly, the commenter does not explain why this 
result could not come about, other than to reiterate his familiar 
canard that brokers are in thrall to the ``all-powerful'' specialist.
5. Conclusion
    In sum, the Exchange's interpretation of NYSE Rule 108(a) is 
reasonably and fairly implied from the text of the rule and its history 
and from the history of regulation of floor trading, and therefore is 
appropriately filed for immediate effectiveness. Moreover, the Exchange 
believes that it is consistent with customer protection, and that the 
proposed Information Memo will further clarify the procedures for 
trading consistent with the interpretation and documenting that trading 
properly.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change, as amended, has become effective 
pursuant to Section 19(b)(3)(A)(i) of the Act \27\ and subparagraph 
(f)(1) of Rule 19b-4 thereunder.\28\ The proposed rule change is a 
stated policy, practice or interpretation with respect to the meaning, 
administration or enforcement of existing rules of the Exchange.
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    \27\ 15 U.S.C. 78s(b)(3)(A)(i).
    \28\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.\29\
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    \29\ The effective date of the original proposed rule is 
December 13, 2005. The effective date of Amendment No. 1 is January 
31, 2006. For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change under 
Section 19(b)(3)(C) of the Act, the Commission considers the period 
to commence on January 31, 2006, the date on which NYSE submitted 
Amendment No. 1. See 15 U.S.C. 78s(b)(3)(C).
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IV. 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

[[Page 6810]]

     Send an e-mail to rule-comments@sec.gov. Please include 
File No. SR-NYSE-2005-74 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2005-74. 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 NYSE.
    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-2005-74 
and should be submitted on or before March 2, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.

Appendix

Attention: Floor Members, Senior Management, General Counsel and 
Compliance Personnel

TO: All Members and Member Organizations
SUBJECT: Specialist and Floor Broker Obligations in Connection With 
Specialist Parity With Orders Represented in the Crowd Under Rule 
108

    The purpose of this Information Memo is to reiterate the New 
York Stock Exchange's (the ``Exchange'' or ``NYSE'') long-standing 
interpretation of NYSE Rule 108(a) regarding the specialist trading 
on parity with orders in the Crowd when the specialist is 
establishing or increasing his or her position.
    The Exchange interprets NYSE Rule 108(a) as permitting a 
specialist to be on parity with orders in the Crowd when the 
specialist is establishing or increasing his or her position, 
provided that the brokers representing orders in the Crowd permit 
the specialist trading along with them by not objecting to such 
participation. This is consistent with other rules that permit a 
specialist to trade on parity with the Crowd, such as NYSE Rule 
123A.30, which expressly authorizes Floor brokers to permit a 
specialist to go along with brokers' convert-and-parity (``CAP'') 
orders, regardless of the specialist's proprietary position.
    NYSE Rule 108(a) provides that a specialist making a bid or 
offer on an order for his (or her) own account to establish or 
increase a position in a stock is not ``entitled'' to parity with a 
bid or offer that originates off the Floor. An exception is made for 
so-called ``G'' orders, which are orders that originate off the 
Floor and are executed pursuant to Section 11(a)(1)(G) of the 
Securities Exchange Act of 1934 (the ``SEA'') and SEA Rule 11a1-1(T) 
thereunder. But, because the rule only speaks to the specialist not 
being ``entitled'' (i.e., not having an unconditional right) to be 
on parity rather than flatly prohibiting him from being on parity, 
NYSE Rule 108(a), by its terms, does not preclude the specialist 
from trading on parity when establishing or increasing the 
specialist's position if the brokers in the Crowd raise no 
objection.
    In connection with specialists trading on parity under NYSE Rule 
108(a), members and member organizations should adhere to the 
following procedures:

1. Obligations of Specialists and Specialist Organizations

    Specialists and specialist organizations are reminded that in 
order to ensure that brokers in the Crowd are making informed 
decisions when they permit a specialist who is establishing or 
increasing his or her position to trade along with the Crowd, the 
specialist must clearly announce his or her intention to trade on 
parity, and must give brokers representing orders in the Crowd a 
reasonable opportunity to object.\1\ The obligation set out in this 
paragraph does not apply when specialists are handling CAP orders.
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    \1\ Pursuant to NYSE Rule 104.10(6)(i)(C), the specialist must 
similarly announce that he or she intends to trade on parity, and 
give brokers a meaningful opportunity to object. Please note that 
NYSE Rule 104.10(6)(i)(C) applies only when a specialist is 
liquidating or decreasing a position. Brokers who object to the 
specialist trading on parity must state as such and must record such 
objection using the procedures described in this memo in connection 
with NYSE Rule 108(a). Brokers are reminded that where a customer 
has specifically requested that the specialist not be on parity with 
the customer's order under NYSE Rule 104.10(6)(i)(C), such request 
is a condition of the order and must be documented pursuant to NYSE 
Rule 123(g).
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    In the event that a Floor broker objects to the specialist 
trading on parity under NYSE Rule 108(a), the specialist must honor 
such request and refrain from trading on parity for that trade. 
Specialists and specialist organizations are also advised that 
notwithstanding the Exchange's interpretation, in determining 
whether to effect transactions under NYSE Rule 108(a), they remain 
bound by the reasonable necessity requirements of NYSE Rule 104. 
Thus, even if no Floor broker objects to the specialist trading on 
parity under NYSE Rule 108(a), such transactions by the specialist 
may nevertheless be inappropriate if the specialist's participation 
is not reasonably calculated to contribute to the maintenance of 
price continuity with reasonable depth, or to minimize the effects 
of temporary disparities between supply and demand that are 
immediate or reasonably anticipated.

2. Obligations of Floor Broker Members and Member Organizations

    Floor brokers who object to the specialist trading on parity 
under NYSE Rule 108(a) with orders that they are representing must 
openly and audibly state such objections and document them.\2\ If a 
Floor broker is making a continuing objection for all executions 
pertaining to the order he or she is representing, the objection 
should be stated (and subsequently documented as discussed below) 
when the Floor broker enters the Crowd. If a Floor broker is 
objecting only in specific auctions (but not for all executions 
pertaining to the order he or she is representing), the objection 
should be stated (and subsequently documented as discussed below) 
when the specialist announces, in connection with a particular 
auction, that he or she is seeking to trade on parity. Brokers who 
have not made a firm bid or offer in the particular auction where 
the specialist expresses an intention to trade on parity would not 
have standing under NYSE Rule 108(a) to object to the specialist 
trading on parity in that auction.
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    \2\ Upstairs firms must maintain records of customer 
disapprovals when such is provided.
---------------------------------------------------------------------------

    The Exchange expects that when a Floor broker objects to the 
specialist trading on parity in connection with an order he or she 
is representing, the Floor broker must document his or her objection 
at the time the report of execution is issued in connection with 
such order. Floor broker members and member organizations must keep 
appropriate records of their objections pursuant to Securities 
Exchange Act Rule 17a-3 and NYSE Rule 440. The Exchange may from 
time to time revise or supplement the documentation requirements as 
necessary, and will notify members and member organizations 
accordingly.
    Floor broker members and member organizations must disclose to 
customers that in executing orders on the Floor, the Floor broker 
may permit the specialist to trade on parity with the order for some 
or all of the executions associated with filling that order, where 
such permission would not be inconsistent with the broker's best 
execution obligations. Disclosures should be written and reasonably 
calculated to provide customers with sufficient notice of the Floor 
broker's practice in this regard. For example, such disclosure could 
be in the form of an affirmative written notice that is provided to 
customers in advance of trading.

[[Page 6811]]

    In deciding whether to permit a specialist to trade on parity 
with orders that they are representing, Floor brokers must be 
mindful of their ``best execution'' obligations under the NYSE Rules 
13.20, 123A.41, 123A.42 and 123A.44, including the obligation that 
they use due diligence to execute the order at the best price 
available to them under the published market procedures of the 
Exchange (subject to the customer's limit price, if the order is a 
limit order). Provided that they have made appropriate disclosures 
to their customers, Floor brokers are not required to obtain 
separate customer approval to permit the specialist to trade on 
parity under NYSE Rule 108(a) for each order or trade, but may rely 
on the disclosures to customers and any resulting guidance provided 
by their customers, as described above.
    If a broker believes that a specialist has improperly traded on 
parity with his or her order, the broker should promptly alert any 
member of the On-Floor Surveillance Unit, located in the Extended 
Blue Room, or contact Pat Giraldi, Director of the unit, at (212) 
656-6804.

3. All Members and Member Organizations

    Members and member organizations should take steps to inform and 
educate management and associated persons regarding the information 
contained in this Information Memo, and are reminded that pursuant 
to Exchange Rule 342, they must have appropriate systems, procedures 
and controls for ensuring compliance with the above-referenced 
policies.
* * * * *
    Questions regarding the above may be directed to Patrick 
Giraldi, Director, Market Surveillance, at (212) 656-6804, Gordon 
Brown, Manager, On-Floor Surveillance Unit, in the Extended Blue 
Room or at (212) 656-5321, or Daniel M. Labovitz, Director, Market 
Surveillance, at (212) 656-2081.

Robert A. Marchman,
Executive Vice President, Market Surveillance.

[FR Doc. E6-1751 Filed 2-8-06; 8:45 am]
BILLING CODE 8010-01-P