Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving Proposed Rule Change and Amendments No. 1 and 2 and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 3 Thereto Relating to the Establishment of the OX Trading Platform, 44758-44766 [E6-12705]

Download as PDF 44758 Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices Station Place, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSEArca–2006–41. 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 (http://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 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–NYSEArca–2006–41 and should be submitted on or before August 28, 2006. IV. Commission’s Findings and Order Granting Accelerated Approval of the Proposed Rule Change sroberts on PROD1PC70 with NOTICES After careful consideration, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange,6 and, in particular, the requirements of Section 6(b) of the Act 7 and the rules and regulations thereunder. The Commission finds that the proposed rule change is consistent with Section 6(b)(4) of the Act,8 which requires that the rules of the Exchange provide for the equitable allocation of reasonable dues, fees and other charges among its members and other persons using its facilities. The Commission believes that the extension of the Linkage fee pilot until July 31, 2007 will give the Exchange and the Commission further 6 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). 7 15 U.S.C. 78f(b). 8 15 U.S.C. 78f(b)(4). VerDate Aug<31>2005 18:28 Aug 04, 2006 Jkt 208001 opportunity to evaluate whether such fees are appropriate. The Commission finds good cause, pursuant to Section 19(b)(2) of the Act,9 for approving the proposed rule change prior to the thirtieth day after publication of notice thereof in the Federal Register. The Commission believes that granting accelerated approval of the proposed rule change will preserve the Exchange’s existing pilot program for Linkage fees without interruption as the Exchange and the Commission further consider the appropriateness of Linkage fees. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,10 that the proposed rule change (SR–NYSEArca– 2006–41) is hereby approved on an accelerated basis for a pilot period to expire on July 31, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.11 Nancy M. Morris, Secretary. [FR Doc. E6–12701 Filed 8–4–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54238; File No. SR– NYSEArca–2006–13] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving Proposed Rule Change and Amendments No. 1 and 2 and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 3 Thereto Relating to the Establishment of the OX Trading Platform July 28, 2006. I. Introduction On May 2, 2006, NYSE Arca, Inc. (‘‘NYSE Arca’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 to establish the OX trading platform. The Exchange filed Amendments No. 1 and 2 to the proposed rule change on June 9, 2006 and June 15, 2006, respectively. The proposed rule change was published for comment in the Federal Register on 9 15 U.S.C. 78s(b)(2). 10 Id. 11 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00154 Fmt 4703 Sfmt 4703 June 23, 2006.3 The Commission received one comment on the proposal.4 On July 27, 2006, the Exchange filed Amendment No. 3 to the proposal.5 This order approves the proposed rule change, as amended by Amendment Nos. 1 and 2, grants accelerated approval to Amendment No. 3, and solicits comments from interested persons on Amendment No. 3. II. Description of the Proposal NYSE Arca proposes to establish rules for OX, a fully automated trading system for standardized equity options intended to replace NYSE Arca’s current options trading platform, PCX Plus.6 OX would provide an electronic order delivery, execution and reporting system for designated options listed and traded on NYSE Arca through which orders and quotes of Users 7 are consolidated for execution and display. Market Makers would be able to stream quotes to OX either from on the trading floor or remotely. OX would be available for the entry and execution of quotes and orders to OTP Holders,8 OTP Firms 9 and, through Sponsoring OTP Firms,10 certain non-OTP Firms and Holders, known as Sponsored Participants 11 (collectively, ‘‘Users’’). In general, Users would be able to enter market orders, marketable limit orders and limit orders. Only Market Makers would be permitted to enter quotes on OX. As Users enter bids and offers (i.e., orders and quotes) into the system, any nonmarketable limit orders and quotes 3 See Securities Exchange Act Release No. 53995 (June 15, 2006), 71 FR 36145 (‘‘OX Notice’’). 4 See letter dated July 20, 2006 from Bryan Rule (‘‘Rule Letter’’). 5 In Amendment No. 3, the Exchange: (i) Made certain representations about entering into a agreement with the NASD pursuant to Rule 17d– 2 under the Act following approval of this proposed rule change; (ii) offered further analysis of why the proposal is not inconsistent with Section 11(a) of the Act; (iii) clarified that Satisfaction Orders would be handled in the same manner as they are handled on PCX Plus; (iv) submitted a rule that would require a three second exposure period before certain orders could be crossed; (v) represented that NYSE Arca Rule 11.3 would require an OX Market Maker to maintain information barriers that are reasonably designed to prevent the misuse of material, non-public barriers between ‘‘side-byside’’ market makers; (vi) removed a reference to an ‘‘Opening Only’’ order type; (vii) clarified the price at which certain orders would be executed in the Working Order Process and made other technical corrections to the proposal. The complete text of Amendment No. 3 is available on the Commission’s Web site (http://www.sec.gov/rules/sro.shtml), at the Commission’s Public Reference Room, and at the Exchange. 6 See NYSE Arca Rule 6.90. 7 See proposed NYSE Arca Rule 6.1A(a)(19). 8 See NYSE Arca Rule 1.1(q). 9 See NYSE Arca Rule 1.1(r). 10 See proposed NYSE Arca Rule 6.1A(a)(17). 11 See proposed NYSE Arca Rule 6.1A(a)(16). E:\FR\FM\07AUN1.SGM 07AUN1 Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices sroberts on PROD1PC70 with NOTICES would be ranked in an electronic limit order file (the ‘‘OX Book’’) 12 according to price-time priority, such that within each price level, all bids and offers are organized by the time of entry. The OX Book (except for certain Working Orders13 with conditional prices or sizes) would be displayed to all Users. For market orders or marketable limit orders, like-priced bids and offers would be matched by OX for execution at prices equal to or better than the NBBO pursuant to the following algorithm, which is based on price-time priority: Step 1: All market orders and marketable limit orders would be matched against the displayed top of the OX Book. Step 2: If an order has not been executed in its entirety pursuant to Step 1, then OX would match the order against any Working Orders, which are orders with a conditional or undisplayed size. Examples of Working Orders include a reserve order, an order with a portion of the size displayed, and a reserve portion of the size that is not displayed. Step 3: If an order has not been executed in its entirety pursuant to Steps 1 and 2, the order would be routed to another Market Center 14 for execution (either through the intermarket options linkage (‘‘Linkage’’) or via a broker-dealer affiliated with NYSE Arca, Archipelago Securities) unless the User has designated that the order may not be routed to another Market Center. If an order that is routed to another Market Center is not executed in its entirety, the order would be ranked and displayed in the OX Book in accordance with the terms of such order and such order would be eligible for execution. The OX rules also would permit the crossing of orders on the trading floor via open outcry. Specifically, the Exchange would provide rules governing regular-way, facilitation, and solicitation crosses and introduce the ability for OTP Holders and OTP Firms to execute Mid-Point Crosses 15 in accordance with one of the three crossing rules. OTP Holders and OTP Firms meeting certain qualifications would be permitted to register as either Lead Market Makers (‘‘LMMs’’) or Market Makers in one or more option classes traded on OX.16 In addition, LMMs 12 See proposed NYSE Arca Rule 6.1A(a)(14). proposed NYSE Arca Rule 6.62A(e). 14 See proposed NYSE Arca Rule 6.1A(a)(6). 15 See proposed NYSE Arca Rule 6.47(d). 16 Unless specified, or unless the context requires otherwise, the term ‘‘Market Maker’’ as used herein refers to both Market Makers and LMMs. 13 See VerDate Aug<31>2005 17:19 Aug 04, 2006 Jkt 208001 would continue to be responsible for handling orders under the Plan for the Purpose of Creating and Operating an Intermarket Option Linkage (‘‘Linkage Plan’’).17 III. Discussion After careful review, the Commission finds that the proposed rule change, as amended, is consistent with the Act and the rules and regulations promulgated thereunder applicable to a national securities exchange 18 and, in particular, with the requirements of Section 6(b) of the Act.19 Specifically, the Commission finds that approval of the proposed rule change is consistent with Section 6(b)(5) of the Act 20 in that it is designed to facilitate transactions in securities; to prevent fraudulent and manipulative acts and practices; 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. A. Access to OX As noted briefly above, the Exchange proposes to expand the types of market participants eligible to trade on its options trading facility. OTP Holders and OTP Firms with access to PCX Plus at the time of this proposal would continue to have access to the Exchange through the OX platform. In addition, the Exchange proposes to permit entities that are neither OTP Holders nor OTP Firms to access the OX platform as ‘‘Sponsored Participants.’’ The Exchange proposes to define a Sponsored Participant as a person, such as an institutional investor, who has entered into a sponsorship agreement with a Sponsoring OTP Firm, that has been designated to execute, clear, and settle transactions on the Exchange for the Sponsored Participant. 17 See Securities Exchange Act Release No. 43086 (July 28, 2000), 65 FR 48023 (August 4, 2000). Subsequently, upon separate requests by the Philadelphia Stock Exchange, Inc. (‘‘Phlx’’), the Pacific Exchange, Inc. (‘‘PCX’’), and the Boston Stock Exchange, Inc., the Commission issued orders to permit these exchanges to participate in the Linkage Plan. See Securities Exchange Act Release Nos. 43573 (November 16, 2000), 65 FR 70850 (November 28, 2000), 43574 (November 16, 2000), 65 FR 70851 (November 28, 2000) and 49198 (February 5, 2004), 69 FR 7029 (February 12, 2004). 18 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). 19 15 U.S.C. 78f(b). 20 15 U.S.C. 78f(b)(5). PO 00000 Frm 00155 Fmt 4703 Sfmt 4703 44759 The Sponsored Participant and its Sponsoring OTP Firm would be required to enter into a written agreement incorporating the provisions required by proposed NYSE Arca Rule 6.2(c). Specifically, the Sponsoring OTP Firm would acknowledge, among other things, that all orders entered by the Sponsored Participant and any executions occurring as a result of such orders are binding in all respects on the Sponsoring OTP Firm and that it is responsible for any and all actions taken by its Sponsored Participant. The Sponsoring OTP Firm also would be required to provide the Exchange notice that it is responsible for the actions of its Sponsored Participant(s). The Sponsored Participant, in turn, would agree, among other things, to comply with applicable NYSE Arca rules and procedures as if it were an OTP Firm and agree to take precautions to prevent unauthorized access to the Exchange. The Sponsored Participants would be required to establish and maintain an up-to-date list of persons permitted to obtain access to OX on behalf of the Sponsored Participant (i.e., ‘‘Authorized Traders’’) 21 and to provide that list to the Sponsoring OTP Firm. The Commission approved a substantially similar arrangement for trading on NYSE Arca’s predecessor entity, the Pacific Exchange, when the Commission approved the establishment of the Archipelago Exchange (‘‘ArcaEx’’) 22 as the equities trading facility of PCX Equities, Inc.23 The Commission believes that, like the arrangement that the Commission previously approved for ArcaEx, the proposed sponsorship arrangement is consistent with the Act. B. Display Order and Working Order Processes Users of OX would be able to submit orders to an electronic file of orders in the OX Book. The OX Book would feature two trading processes—the ‘‘Display Order Process’’ and the— Working Order Process.’’ Bids and offers would be ranked, maintained, and executed generally according to pricetime priority.24 21 See proposed NYSE Arca Rule 6.1A(a)(1). Arca LLC is the successor entity to ArcaEx. See Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006). 23 See Securities Exchange Act Release No. 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001) (SR–PCX–00–25). 24 Under certain circumstances, an LMM would be guaranteed participation, after all customer orders ranked ahead of the LMM have been executed, in an order when the LMM is quoting the NBBO, but lacks time priority among Users bidding 22 NYSE E:\FR\FM\07AUN1.SGM Continued 07AUN1 44760 Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices sroberts on PROD1PC70 with NOTICES 1. Display and Rank of Orders in the Displayed and Working Order Processes The Exchange would display all nonmarketable Limit Orders in the Display Order Process of the OX Book. Limit Orders, with no other conditions, and quotes would be ranked based on the specified price and the time of original order or quote entry. The displayed portion of Reserve Orders 25 would be ranked in the Display Order Process at the specified limit price and the time of order entry. When the displayed portion of the Reserve Order is decremented completely, the displayed portion of the Reserve Order would be refreshed from the reserve amount for (1) The displayed amount or (2) the entire reserve amount, if the remaining reserve amount is smaller than the displayed amount. The refreshed quote would be submitted and ranked at the specified limit price and the new time that the displayed portion of the order was refreshed. The reserve portion of Reserve Orders would be ranked in the Working Order Process based on the specified limit price and the time of original order entry. After the displayed portion of a Reserve Order is refreshed from the reserve portion, the reserve portion would remain ranked based on the original time of order entry while the displayed portion would be sent to the Directed Order Process with a new time stamp. 2. Execution of Orders in the Display and Working Order Processes Once a booked order becomes marketable or upon a User’s entry of a marketable order, all orders in OX would be matched generally based upon price-time priority, as described more fully below. OX first would attempt to match incoming marketable bids and offers against bids or offers in the Display Order Process at the display price of the resident bids or offers for the total amount of option contracts available at that price or for the size of the incoming order, whichever is smaller. NYSE Arca proposes to allocate incoming marketable bids and offers as follows: If an LMM is quoting in the option series at the NBBO, an incoming marketable bid or offer would be matched against all Customer 26 orders at the NBBO ranked ahead of the LMM. The remaining balance of the incoming marketable bid or offer would be matched against the quote of the LMM for either: (1) An amount equal to 40% or offering the same price. See proposed NYSE Arca Rule 6.76B. 25 See proposed NYSE Arca Rule 6.62A(e)(1). 26 See proposed NYSE Arca Rule 6.1A(a)(4). VerDate Aug<31>2005 17:19 Aug 04, 2006 Jkt 208001 of the remaining balance of the incoming bid or offer up to the LMM’s disseminated quote size or (2) the LMM’s share in the order of ranking in the OX Book, whichever is greater. Any remaining balance of the incoming marketable bid or offer would be matched against remaining marketable orders and quotes in the Display Order Process in the order of their ranking. If the incoming marketable bid or offer has not been executed in its entirety, the remaining part of the order would be directed to the Working Order Process. An incoming marketable bid or offer or portion thereof that fails to be executed in the Display Order Process, would be matched against orders within the Working Order Process in the order of their ranking. 3. Routing Away If an incoming marketable order has not been executed in its entirety on OX and has been designated as an order type that is eligible to be routed away, the order would be routed either in its entirety or as component orders for execution to other Market Center(s) disseminating the NBBO, either through the Linkage or through the use of the OX Routing Broker, as described below. Where an order or portion of an order is routed away and is not executed either in whole or in part at the other Market Center, the order would be ranked and displayed in the OX Book in accordance with the terms of the order, and the order would be eligible for execution. If an order has been designated as an order type that is not eligible to be routed away, the order either would be placed in the OX Book or cancelled if the order would lock or cross the NBBO. Further, the Working Order Process would provide a method for handling contingency orders as well as other order types, such as Reserve Orders. The Commission believes that the proposal is designed to avoid executions at prices inferior to the NBBO and is consistent with the Linkage Plan, NYSE Arca Rule 6.94 (Order Protection), and the Act. C. New Order Types The proposal would introduce several order types to NYSE Arca. In addition to the Reserve Order, described above, among the most significant order types that NYSE Arca is proposing to introduce are order types related to the routing away function. These new order types are designed to provide greater flexibility to Users to better control the execution of their orders. PO 00000 Frm 00156 Fmt 4703 Sfmt 4703 1. Inside Limit Order An ‘‘Inside Limit Order’’ is defined as a limit order, which, if routed away, would be routed to the market participant or participants with the best displayed price. Any unfilled portion of the order would not be routed to the next best price level until all quotes at the current best bid or offer are exhausted. If the order is no longer marketable, the order would be ranked in the OX Book pursuant to the ranking and display provisions described above. 2. NOW Order A ‘‘NOW Order’’ is defined as a limit order that is to be executed in whole or in part on OX, with any remainder routed away only to one or more ‘‘NOW Recipients’’ for immediate execution. ‘‘NOW Recipients’’ would include any Market Center with which the Exchange maintains an electronic linkage and that provides instantaneous responses to NOW Orders routed from OX. Any portion of a NOW Order that is not immediately executed by the NOW Recipient would be cancelled. If a NOW Order is not marketable when it is submitted to OX, it would be cancelled. 3. PNP Order A ‘‘PNP (Post No Preference) Order’’ is defined as a limit order to buy or sell that is to be executed in whole or in part on the Exchange, and the portion not so executed would be ranked in the OX Book, without routing any portion of the order to another Market Center. The Exchange would cancel any PNP Order that would lock or cross the NBBO. D. Routing Broker and Linkage 1. Routing Broker As described above, in the event that an order is not marketable on OX, but is marketable on another exchange, the Exchange would route the order to another Market Center for execution. Orders could be routed either through Linkage or through a broker-dealer affiliate of NYSE Arca that acts as an agent for routing orders entered into OX by Users (‘‘Routing Broker’’),27 based on preset parameters in its automated routing algorithm, subject to NYSE Arca rules. Accordingly, orders that would be eligible for routing over Linkage (e.g., public customer orders) could be routed to other Market Centers either as Principal Acting as Agent Orders (‘‘P/A Orders’’) 28 via Linkage or as customer 27 NYSE Arca proposes to use Archipelago Securities LLC (‘‘Archipelago Securities’’), a wholly-owned subsidiary of Archipelago Holdings Inc. and a registered broker-dealer, as the Routing Broker. 28 See NYSE Arca Rule 6.92(a)(12)(i). E:\FR\FM\07AUN1.SGM 07AUN1 Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices sroberts on PROD1PC70 with NOTICES orders via Archipelago Securities, based on the automated routing algorithm parameters. Generally, non-customer orders and NOW Orders 29 would be routed to other Market Centers via Archipelago Securities. As described above, certain order types, including Immediate or Cancel and PNP Orders, would not be eligible for routing away to other exchanges. The OX order routing function of Archipelago Securities is an exchange ‘‘facility.’’ 30 As such, any proposed rule change relating to Archipelago Securities’ order-routing function must be filed with the Commission, and must operate in a manner that is consistent with the provisions of the Act applicable to exchanges with NYSE Arca rules. In Amendment No. 3, the Exchange proposes to clarify that the NASD, a self-regulatory organization (‘‘SRO’’) unaffiliated with NYSE Arca or any of its affiliates, would continue to carry out oversight and enforcement responsibilities as the Designated Examining Authority designated by the Commission pursuant to Rule 17d–1 under the Act 31 with the responsibility for examining Archipelago Securities for compliance with the applicable financial responsibility rules. Furthermore, in Amendment No. 3, the Exchange represents that it will enter into a new agreement with the NASD pursuant to Rule 17d–2 under the Act 32 (the ‘‘NYSE Arca Agreement’’) to expand the allocation to the NASD of regulatory responsibility to encompass all of the regulatory oversight and enforcement responsibilities with respect to Archipelago Securities, except for ‘‘real-time market surveillance.’’ NYSE Arca will submit the NYSE Arca Agreement to the Commission under Rule 17d–2 within 90 days of the Commission’s approval of this proposed rule change. The Commission notes that this representation is substantially similar to a representation the Exchange made when it amended the certificate of incorporation of PCX Holdings, Inc., certain rules of the Pacific Exchange, and the bylaws of Archipelago Holdings, Inc. (‘‘Archipelago’’) to facilitate the consummation of the merger between PCX Holdings, Inc. and its subsidiaries, and Archipelago (the ‘‘Merger’’).33 The Commission believes that delegating the regulatory function for the oversight of its wholly-owned 29 See proposed NYSE Arca Rule 6.62A(i). 15 U.S.C. 78c(a)(2). 31 17 CFR 240.17d–1. 32 17 CFR 240.17d–2. 33 See Securities Exchange Act Release No. 52497 (September 22, 2005), 70 FR 56949 (September 29, 2005) (SR–PCX–2005–90). 30 See VerDate Aug<31>2005 17:19 Aug 04, 2006 Jkt 208001 subsidiary should help to ensure independence in the regulatory oversight of Archipelago Securities. 2. Linkage Routing and Obligations The OX system would facilitate the routing of P/A Orders to other Market Centers via Linkage using the account of the LMM assigned to the option class being routed. The OX system, however, would not automatically generate Principal Orders 34 on behalf of Market Makers; rather, Eligible Market Makers 35 would be required to route their own Principal Orders if they want their proprietary orders sent to other Market Centers via Linkage. Satisfaction Orders 36 would be handled in the same manner on OX as they are handled on PCX Plus.37 The existing NYSE Arca rules that apply to Linkage obligations, NYSE Arca Rules 6.92 through 6.96, would apply to OTP Holders and OTP Firms accessing the OX system. For example, those rules, in conjunction with the Linkage Plan, would continue to require: (1) OTP Holders and OTP Firms to avoid Trade-throughs and to adjust their quotes in the event of a locked or crossed market; and (2) for LMMs to handle inbound Linkage Orders. The Commission believes that the Exchange’s proposed automated routing of certain Linkage Orders is consistent with the Linkage Plan. E. Market Makers 1. Market Maker Obligations The OX proposal provides for two types of market makers: LMMs and Market Makers. A Market Maker on OX would be an OTP Holder or OTP Firm registered with NYSE Arca for the purpose of submitting quotes electronically and effecting transactions as a dealer-specialist through the OX trading platform either from the trading floor or from off the trading floor. Market Makers would be designated as specialists on NYSE Arca for all purposes under the Act and rules and regulations thereunder. No more than one LMM would be appointed in each option class, and the Exchange would be required to appoint at least one LMM in each option class. The Exchange may appoint any number of Market Makers in each class, unless limited by quotation system capacity. However, the Exchange will not restrict access to any 34 See NYSE Arca Rule 6.92(a)(12)(ii). Amendment No. 3, NYSE Arca proposed a technical change to its Rule 6.92(a)(7)(ii) to include certain OX Market Makers within the definition of ‘‘Eligible Market Maker.’’ 36 See NYSE Arca Rule 6.92(a)(12)(iii). 37 See Amendment No. 3, supra note 5. 35 In PO 00000 Frm 00157 Fmt 4703 Sfmt 4703 44761 particular option class until the Commission approves objective standards for restricting such access. A Market Maker would be required to, among other things, compete with other Market Makers to improve the market in all series of options classes to which the Market Maker is appointed, update market quotations in response to changed market conditions in all series of options classes within its appointed classes, honor its quotations, and submit quotations in accordance with maximum Exchange prescribed width requirements. In addition, LMMs and Market Makers would be required to provide continuous, two-sided quotes in their appointed issues for 99% and 60%, respectively, of the time the Exchange is open for trading in each issue. LMMs and Market Makers also would be required to trade at least 75% of their contract volume per quarter in classes within their appointment. Market Maker quotes would be ‘‘firm’’ for all orders that are routed to OX. The Exchange would evaluate Market Makers periodically to determine whether they have fulfilled performance standards relating to, among other things, quality of markets, competition among Market Makers, and ethical standards. In transitioning to the OX platform from PCX Plus, the Exchange proposes to eliminate provisions for the appointment of ‘‘Remote Market Makers’’ and ‘‘Supplemental Market Makers.’’ Accordingly, the proposed rules for the OX platform do not direct where Market Makers must be physically located when effecting transactions on NYSE Arca and would eliminate ‘‘in-person’’ trading requirements applicable to Market Makers that trade on the floor. Market Makers receive certain benefits for carrying out their duties. For example, a lender may extend credit to a broker-dealer without regard to the restrictions in Regulation T of the Board of Governors of the Federal Reserve system if the credit is to be used to finance the broker-dealer’s activities as a specialist or market maker on a national securities exchange.38 The Commission believes that a Market Maker must have an affirmative obligation to hold itself out as willing to buy and sell options for its own account on a regular or continuous basis to justify this favorable treatment. In this regard, the Commission believes that OX rules are reasonably designed to impose such affirmative obligations on OX Market Makers. 38 See E:\FR\FM\07AUN1.SGM 12 CFR 221.5(c)(6). 07AUN1 44762 Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices 2. Market Maker Authorized Traders The Exchange is proposing to limit Market Maker access to OX to those OTP Holders or officers, partners, employees or associated persons of OTP Firms that are registered with the Exchange as Market Makers (‘‘Market Maker Authorized Traders’’ or ‘‘MMATs’’). MMAT candidates will be required to pass an examination to demonstrate knowledge of NYSE Arca rules prior to being approved by the Exchange as a Market Maker Authorized Trader. The proposal would also establish standards and procedures governing the suspension of registration of an MMAT. The Commission believes these requirements are reasonably designed to ensure that the Exchange is informed of the identities and qualifications of individuals accessing OX on behalf of Market Makers and are consistent with the Act. 4. Integrated Market Making F. Trading Auctions (Opening and Trading Halt) The Exchange is proposing new procedures for initiating trading in a given options class (‘‘Trading Auction’’). The new procedures will apply to orders designated for inclusion in the opening auction process (‘‘Auction Process’’) and upon re-opening of trading after a trading halt. In particular, the OX system will accept Market Orders and Limit Orders and quotes for inclusion in the Trading Auction, up until the time the Trading Auction is initiated in that options series. NonMarket Makers would be able to submit orders for inclusion in the Trading Auction, and Market Makers would be able to submit two-sided quotes and orders. Contingency orders would not participate in the Auction Process. Any eligible open orders residing in the OX Book from the previous trading session would be included in the Auction Process. After the primary market for the underlying security disseminates the opening trade or the opening quote, the related option series would be opened automatically at a single price. Among the most significant principles in the Trading Auction is that orders will have priority over Market Maker quotes. In addition, orders in the OX Book that are not executed during the Auction Process will be eligible for execution during the Core Trading Hours 40 immediately after the conclusion of the Opening Auction. The opening price of a series would be the price, as determined by the OX system, at which the greatest number of contracts would trade at or nearest to the mid-point of the initial NBBO In Amendment No. 3, the Exchange represents that NYSE Arca Rule 11.3, which governs the use of material, nonpublic information, would apply to OTP 39 See Securities Exchange Act Release No. 47838 (May 13, 2003), 68 FR 27129, 27137 (May 19, 2003) (SR–PCX–2002–36). 40 See proposed NYSE Arca Rule 6.1A(a)(3). 3. Market Maker Risk Limitation NYSE Arca is proposing to provide a mechanism for limiting Market Maker risk during periods of increased and significant trading activity. OX would activate the Market Maker Risk Limitation Mechanism in a Market Maker’s appointed class whenever a designated number of executions (ranging between 5 and 100 executions) occurs within one second. Orders and quotes received by OX after the Mechanism is activated would not be executed against the Market Maker. The Commission believes that establishing a uniform one second standard in place of the existing variable ‘‘n’’ seconds standard on PCX Plus is consistent with the Act. On the PCX Plus system, the Exchange disseminates a market on behalf of an LMM when there are no Market Makers quoting in a series and volume parameters are exceeded. The Exchange proposes that if the mechanism were activated under the OX system and there were no Market Makers quoting in a series, the Exchange would no longer generate two-sided quotes on behalf of the LMM. Instead, on OX, the best bids and offers residing in the OX Book would be disseminated as the BBO. If there were no orders in the OX Book in the issue at that time, OX would disseminate a bid of zero and an offer of zero. The Commission believes that the proposed approach is consistent with the Act. sroberts on PROD1PC70 with NOTICES Holders and OTP Firms trading on OX. The Exchange represents that this rule would require an OX Market Maker to maintain information barriers— reasonably designed to prevent the misuse of material, non-public information by such member—between the OX Market Maker and any of its affiliates that may act as specialist or market maker in any security underlying the options in which the Market Maker makes a market on OX. The Commission believes that requiring information barriers between the OX Market Maker and its affiliates with respect to transactions in the option and the underlying security are important to reduce the opportunity for unfair trading advantages or misuse of material, non-public information.39 VerDate Aug<31>2005 17:19 Aug 04, 2006 Jkt 208001 PO 00000 Frm 00158 Fmt 4703 Sfmt 4703 calculated by the Exchange from the quotes disseminated by Options Price Reporting Authority, if any, or the midpoint of the best quote bids and quote offers in the OX Book. Mid-point pricing would not occur if that price would result in an order or part of an order being traded through. Instead, the opening would occur at that limit price, or, if the limit price is superior to the quoted market, within the range of 75% of the best quote bid and 125% of the best quote offer. Orders and Marker Maker quotes that do not trade during the Trading Auction, but are marketable against the initial NBBO following the Trading Auction, would ‘‘sweep’’ through the OX Book and be executed in price/time priority. If the best price is at an away Market Center, orders would be routed away to the appropriate Market Center, pursuant to NYSE Arca rules. The Commission believes that the proposed Trading Auction is reasonably designed to facilitate executions at the opening and following trading halts. The Commission further believes that the proposal is designed to avoid executions at prices inferior to the NBBO. G. Crossing Rules Under the proposal, OTP Holders and OTP Firms would be permitted to conduct crossing transactions on the floor of the Exchange. The Exchange is proposing to replace its existing crossing rule with a new NYSE Arca Rule 6.47, which would govern crosses effected on the trading floor. Consistent with the existing version of NYSE Arca Rule 6.47, the proposed amendment provides for non-facilitation (or ‘‘regular way’’) crosses, facilitation crosses, and solicitation crosses. In all cases, orders must be announced to the trading crowd in open outcry, and trading crowd participants would be given a reasonable time to respond with the prices and sizes at which they would be willing to participate in the cross. With respect to all crosses, a Trading Official would be available at each post on the trading floor to assist in the determination of what is a ‘‘reasonable time,’’ when necessary. Trading crowd participants who make bids or offers equal to or better than the proposed cross price would be permitted to participate in a cross. In addition, in no event would a cross occur that would trade through the NBBO or any bids or offers on the Book priced equal to or better than the proposed execution price. Floor Brokers holding orders to buy and sell the same option contract may cross such orders after following the E:\FR\FM\07AUN1.SGM 07AUN1 Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices non-facilitation (regular way) cross procedures. After requesting bids and offers in the option series from the trading crowd, the Floor Broker must bid above the highest bid in the crowd, or offer below the lowest offer in the crowd, by at least the MPV. The Floor Broker may then cross the orders at that price provided that the execution price is equal to or better than the NBBO and that the Floor Broker satisfies any bids or offers on the Book that are priced equal to or better than the proposed execution price. With respect to facilitation crosses, which involve a Floor Broker holding a customer order and an order for the account of an OTP Holder, OTP Firm, or entity under the common control of a Market Maker representing the customer (‘‘Facilitation Order’’), the Floor Broker must be willing to facilitate the entire size of the customer order in order to utilize the mechanism, and the size of the customer order must be at least 50 contracts. After the Floor Broker exposes the customer order to the trading crowd for a reasonable period of time, if at the time of execution there is sufficient size to execute the entire customer order at an improved price (or prices), the customer order would be executed at the improved price, so long as such execution price is equal to or better than the NBBO. If at the time of execution there is insufficient size to execute the entire customer order at an improved price (or prices), a Floor Broker would be permitted to participate in up to 40% of the balance of the order to be facilitated once bids or offers in the Book equal to or better than the proposed execution price, non-member bids and offers in the trading crowd at or better than the proposed execution price, and member bids and offers in the trading crowd priced better than the proposed execution price, have been satisfied.41 Thereafter, Market Makers in the trading crowd who are bidding or offering the proposed execution price may participate in the balance of the customer order based upon price-time priority.42 The balance of the sroberts on PROD1PC70 with NOTICES 41 When executing the customer order to be facilitated against such bids and offers, bids and offers representing customer orders would be required to be executed first. See proposed NYSE Arca Rule 6.47(b)(7). The Commission notes that NYSE Arca’s facilitation cross procedures would allow all NYSE Arca members to avail themselves of the exception to Section 11(a) of the Act set forth in Section 11(a)(1)(G) of the Act and Rule 11a–1(T). 42 The Floor Broker is responsible for determining the sequence in which Market Makers’ bids or offers are vocalized. See NYSE Arca Rule 6.75(f)(1). In the event that the bids or offers of two or more Market Makers are made simultaneously, such bids or offers will be deemed to be on parity and priority VerDate Aug<31>2005 17:19 Aug 04, 2006 Jkt 208001 unexecuted agency order, if any, would be executed against the remaining Floor Broker proprietary interest. The proposal would also permit the crossing of solicited orders, which involve a Floor Broker holding an order for a customer of an OTP Holder or OTP Firm for which the Floor Broker solicits contra side interest in the trading crowd. Crosses involving Solicited Orders would be handled in a manner whereby superior priced and equal priced orders in the book and interest in the crowd which collectively is of sufficient size to execute against the original customer order would be executed before the Solicited Order. Customer orders, at a given price, would be executed before non-Customer orders at the same price.43 The Exchange also proposes to add a new category of cross order, the MidPoint Crossing Order. A Floor Broker who holds a Mid-Point Crossing Order to buy and sell an option contract at the mid-point between the electronically disseminated BBO or better in the subject option series would be permitted to cross such an order in accordance with the procedures for regular way, facilitation or solicitation crosses, as applicable. The Mid-Point Cross will not occur if the price of the midpoint of the NYSE Arca BBO is inferior to the NBBO or if the mid-point does not fall on a standard increment. In reviewing proposed crossing mechanisms, the Commission considers the potential that crosses will lock up large portions of order flow from intramarket price competition by granting certain market participants extensive participation guarantees, such as the guarantee granted to Floor Brokers in the proposed OX Facilitation cross. To that end, the Commission notes that the 40% participation guarantee that Floor Brokers would receive pursuant to the proposed Facilitation Procedure, as described above, is consistent with similar guarantees accorded to members effecting facilitation crosses on other exchanges.44 The Commission believes that the proposed crossing procedures will be afforded to them, insofar as practicable, on an equal basis. See NYSE Arca Rule 6.75(c). 43 In Amendment No. 3, the Exchange clarified the Solicited Cross rule. Specifically, the Exchange represented that only orders that are represented by a Floor Broker as agent are eligible for crossing via the Solicited Order procedures. If the Floor Broker represents an order for a covered account, the member order must satisfy the requirements of Section 11(a) of the Act and the rules thereunder. The Commission further notes that the Exchange has represented that a member may not rely on the exception found in Section 11(a)(1)(G) of the Act when utilizing the solicited order procedures. 44 See, e.g, International Securities Exchange (‘‘ISE’’) Rule 716(d). PO 00000 Frm 00159 Fmt 4703 Sfmt 4703 44763 are reasonably designed to ensure that interest in the crowd and on the book is protected, in that all Customer interest at the same price (whether residing in the trading crowd or on the book) must be satisfied before other interest may be executed. The Commission also believes that these procedures should promote intramarket price competition by providing market makers and other market participants with a reasonable opportunity to compete for the proposed cross. The Commission further notes that the proposed OX rules would not permit electronic crosses. In Amendment No. 3, the Exchanges proposes to clarify that Users seeking to effect certain orders as agent against their own principal account must ensure that either the agency order or the User’s quote must be displayed on OX for three second seconds prior to execution. Specifically the proposed rule would provide, among other things, that Users may not execute as principal orders they represent as agent unless agency orders are first exposed on the Exchange for at least three seconds or the User has been bidding or offering on the Exchange for at least three seconds prior to receiving an agency order that is executable against such bid or offer. The Commission believes this proposed order exposure provision is substantially similar to the rules of other SRO rules that require members to wait three seconds before executing principal orders against an order they represent as agent.45 In addition, the Commission expects that the Exchange will closely surveil to ensure that all crossing transactions are not effected without first being exposed to intramarket competition. H. Section 11(a) of the Act Section 11(a)(1) of the Act 46 prohibits a member of a national securities exchange from effecting transactions on that exchange for its own account, the account of an associated person, or an account over which it or its associated person exercises investment discretion (collectively, ‘‘covered accounts’’) unless an exception applies. Among the transactions excepted under Section 11(a)(1) are those by a dealer acting in the capacity of a market maker, bona fide arbitrage or hedge transactions, and transactions made to offset errors. In the proposed rule change, the Exchange has set forth its analysis of how the proposed rule change is consistent with Section 11(a) of the Act and the rules thereunder. 45 See, 46 15 E:\FR\FM\07AUN1.SGM e.g., ISE Rule 717. U.S.C. 78k(a)(1). 07AUN1 44764 Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices Rule 11a2–2(T) Interpretive Request Rule 11a2–2(T) under the Act,47 known as the ‘‘effect versus execute’’ rule, provides exchange members with another exception from the general Section 11(a)(1) prohibition. Rule 11a2– 2(T) permits an exchange member, subject to certain conditions, to effect transactions for covered accounts by arranging for an unaffiliated member to execute the transactions on the exchange. To comply with Rule 11a2– 2(T)’s conditions, a member (i) Must transmit the order from off the exchange floor; (ii) must not participate in the execution of the transaction once it has been transmitted to the member performing the execution; 48 (iii) must not be affiliated with the executing member; and (iv) with respect to an account over which the member has investment discretion, neither the member nor its associated person may retain any compensation in the connection with effecting the transaction except as provided in the rule. As described by the Commission, these four requirements—off-floor transmission, non-participation in order execution, execution through an unaffiliated member and non-retention of compensation for discretionary accounts—were ‘‘designed to put members and non-members on the same footing, to the extent practicable, in light of the purposes of Section 11(a).’’ 49 If a transaction meets the requirements of the ‘‘effect versus execute’’ rule, it will be deemed to be ‘‘consistent with the purpose of Section 11(a)(1) of the Act, the protection of investors, and the maintenance of fair and orderly markets.’’ 50 The Exchange stated that given OX’s automated 47 17 CFR 240.11a2–2(T). member may, however, participate in clearing and settling the transaction. The commenter raises concerns about whether the proposed OX system satisfies this prong of the ‘‘effect versus execute’’ rule. According to the commenter, the notice of the proposal states that ‘‘NYSE Arca ‘may not participate in the execution of the transaction once the order has been transmitted’ ’’ and that ‘‘[t]he NYSE Arca plan does interfere with the transmission and execution of options orders.’’ To support this assertion, the commenter states that orders may be routed away to different exchanges for execution in certain circumstances. See Rule Letter, supra note 4. The Commission believes that the commenter mischaracterizes the discussion of this prong of the ‘‘effect versus execute’’ rule set forth in the notice of the proposal. The OX Notice states that the exchange member and its associated person (not NYSE Arca, as stated by the commenter) may not participate in the execution of the transaction once the order has been transmitted. The Commission believes that OX satisfies this prong, as discussed above. 49 See Securities Exchange Act Release No. 14713 (April 27, 1978), 43 FR 18557, 18560 (May 1, 1978) (‘‘1978 Release’’). 50 See Rule 11a2–2(T)(e) under the Act. sroberts on PROD1PC70 with NOTICES 48 The VerDate Aug<31>2005 17:19 Aug 04, 2006 Jkt 208001 matching and execution services, no Exchange member will enjoy any special control over the timing of execution or special order handling advantages for orders executed via OX, as all orders will be centrally processed for execution by computer, rather than being handled by a member through bids or offers made on the trading floor. The Exchange further stated that it believes that due to OX’s open, electronic structure that is designed to prevent any Exchange members from gaining any time and place advantages, the Exchange believes that OX satisfies the four requirements of the ‘‘effect versus execute’’ rule as well as the general policy objectives of Section 11(a) of the Act. matching algorithm. The execution depends not on whether an order is for the account of an Exchange member, but rather, upon what other orders are entered into OX at or around the same time as the subject order, what orders are resident in the OX Book and where the order is ranked based on the pricetime priority ranking algorithm. Therefore, the Exchange stated that at no time following the submission of an order is an Exchange member able to acquire control or influence over the result or timing of its order’s execution. As a result, the Commission believes that the non-participation requirement is met because OTP Holder or OTP Firm orders are matched and executed automatically in OX. 1. Off-Floor Transmission Rule 11a2–2(T) requires an order for a covered account to be transmitted from off the exchange floor. In considering the application of this requirement to a number of automated trading and electronic order-handling facilities operated by national securities exchanges, the Commission has deemed the off-floor requirement to be met if the order is transmitted from off the floor directly to the electronic order handling facility that compromises the exchange floor by electronic means.51 Like these other automated systems, the Exchange has represented that orders sent to OX will be transmitted from remote terminals directly to the system by electronic means and that most member orders, except as described below, will be submitted to OX from off of the floor. Therefore, those members’ orders sent to the OX system electronically from off the Exchange floor satisfy the off-floor transmission requirement for the purposes of the ‘‘effect versus execute’’ rule. 3. Execution Through Unaffiliated Member The third requirement of Rule 11a2– 2(T) is that the exchange member who executes the order be unaffiliated with the member initiating the order. The Commission has recognized, however, that this requirement may be met where automated exchange facilities are used. For example, in considering the operation of COMEX and PACE, among other systems, the Commission noted that while there is no independent executing exchange member, the execution of an order is automatic once it has been transmitted into the systems.52 Because the design of these systems ensures that members do not possess any special or unique trading advantages in handling their orders after transmitting them to the exchange floors, the Commission has stated or not objected to the Exchange’s conclusion that executions obtained through these systems satisfy the independent execution requirement of Rule 11a2– 2(T) that the member not be affiliated with the executing broker.53 The Exchange stated that this requirement is satisfied by the OX system because the design of OX ensures that members do not have any special or unique trading advantages in handling their orders after transmission. Accordingly, a transaction for a covered account that submitted directly by a member into OX, from off of the Exchange floor, for execution satisfies the unaffiliated member requirement. 2. Non-Participation in Order Execution The ‘‘effect versus execute’’ rule further provides that the exchange member and its associated person may not participate in the execution of the transaction once the order has been transmitted. The Exchange has represented that upon submission to OX, an order will enter the queue and be executed against another order in the OX Book based on an established 51 See letter from Larry E. Bergmann, Senior Associate Director, Division of Market Regulation (‘‘Division’’), Commission, to Edith Hallahan, Associate General Counsel, Phlx (March 24, 1999) (‘‘VWAP Letter’’); letter from Catherine McGuire, Chief Counsel, Division, Commission, to David E. Rosedahl, PCX (November 30, 1998) (‘‘OptiMark Letter’’); and letter from Brandon Becker, Director, Division, Commission, to George T. Simon, Partner, Foley & Lardner (November 30, 1994) (‘‘Chicago Match Letter’’). PO 00000 Frm 00160 Fmt 4703 Sfmt 4703 4. Non-Retention of Compensation Finally, Rule 11a2–2(T) requires that, in the case of a transaction effected for an account with respect to which an 52 See Securities Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6084 (January 31, 1979) (‘‘1979 Release’’). See also VWAP Letter, OptiMark Letter and Chicago Match Letter. 53 Id. E:\FR\FM\07AUN1.SGM 07AUN1 Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices exchange member or associated person thereof exercises investment discretion, neither the member or its associated persons may retain compensation in connection with effecting the transaction without the express written consent of the person authorized to transact business for the account, given in accordance with the rule. Exchange members relying on Rule 11a2–2(T) for transactions effected through OX must comply with this condition of the rule. The Commission notes that NYSE Arca would enforce this requirement pursuant to its obligation under Section 6(b)(1) of the Act 54 to enforce compliance with the federal securities laws. In Amendment No. 3, the Exchange clarified its discussion regarding the application of Rule 11a2–2(T) found in Amendment No. 1. Specifically, the discussion in Amendment 1 was limited to the application of Rule 11a2–2(T) to orders for covered accounts sent electronically to the OX system directly by the member from off of the exchange for execution. The Commission notes that the Exchange’s discussion in Amendment No. 1 did not address instances where a member on the physical floor of the Exchange submits an order for a covered account into the OX system from the physical floor by electronic means. Accordingly, to rely on the exception set forth in Rule 11a2– 2(T), the Exchange clarified that members must ensure that they send their orders from off the floor to an unaffiliated member for execution, in addition to meeting the rules’ other requirements. If a member sends its order from off of the floor to an affiliated member that is on the floor who then directs the order into the OX system for execution, the member may not rely on Rule 11a2–2(T) for an exception from Section 11(a) of the Act. If a member wishes to rely on the exception found in paragraph (G) of Section 11(a)(1) of the Act, its order may only be executed on the physical floor of the Exchange. Member proprietary orders that rely on the exception found in Section 11(a)(1)(G) of the Act may not be entered into the OX system for execution.55 54 15 U.S.C. 78f(b)(1). Exchange represented to the Commission’s staff that it will submit to the Commission promptly a proposed rule change pursuant to Rule 19b–4 under the Act to prohibit the entry of member orders that must rely on the exception found in Section 11(a)(1)(G) of the Act into the OX system. Telephone conversation among Janet Angstedt, Acting General Counsel, NYSE Arca, Kelly Riley, Assistant Director, Commission, Hong-Anh Tran, Special Counsel, Commission, Raymond Lombardo, Special Counsel, Commission, and Tim Fox, Special Counsel, Commission on July 25, 2006. sroberts on PROD1PC70 with NOTICES 55 The VerDate Aug<31>2005 17:19 Aug 04, 2006 Jkt 208001 I. Accelerated Approval of Amendment No. 3 The Commission finds good cause for approving Amendment No. 3 to the proposed rule change prior to the thirtieth day after publishing notice of Amendment No. 3 in the Federal Register pursuant to Section 19(b)(2) of the Act.56 In Amendment No. 3, the Exchange represents that the NASD would continue to carry out oversight and enforcement responsibilities as the Designated Examining Authority designated by the Commission pursuant to Rule 17d–1 under the Act 57 with the responsibility for examining Archipelago Securities for compliance with the applicable financial responsibility rules. The Exchange also represented that it will enter into an agreement with the NASD pursuant to Rule 17d–2 under the Act 58 to provide that NYSE Arca will delegate to the NASD all regulatory oversight and enforcement responsibilities with respect to Archipelago Securities pursuant to applicable laws, except for real-time market surveillance, within 90 days of the Commission’s approval of this proposed rule change. As discussed above, the Commission believes that these representations raise no new issues of regulatory concern. As described in greater detail above, the Exchange also clarifies in Amendment No. 3 how the proposed OX trading platform and crossing procedures will comply with Section 11(a) of the Act and with the Linkage Plan. In the amendment, the Exchange also proposes to clarify its rules to incorporate an order exposure requirement comparable to similar rules adopted by the other options exchanges. The Exchange represents in Amendment No. 3 that NYSE Arca Rule 11.3 would require an OX Market Maker to maintain information barriers, that are reasonably designed to prevent the misuse of material, non-public information, with any affiliates that may act as specialist or market maker in any security underlying the options for which the OTP Holder/Firm acts as an OX Market Maker. In addition, the Exchange proposes to remove a reference to an ‘‘opening only’’ order type that the Exchange did not specifically propose. In Amendment No. 3, NYSE Arca also proposed to clarify that incoming marketable orders would be matched against all Working Orders in the Working Order Process at the price of the displayed portion (for Reserve 56 15 U.S.C. 78s(b)(2). CFR 240.17d–1. 58 17 CFR 240.17d–2. Orders) or at the limit price (for all other Working Order types). The Commission notes that Amendment No. 3 is intended to reconcile apparent inconsistencies in other parts of the Exchange’s proposed rules. The Commission believes that Amendment No. 3 raises no novel issues of regulatory concern, and is consistent with the Act. Therefore, the Commission finds good cause exists to accelerate approval of Amendment No. 3, pursuant to Section 19(b)(2) of the Act.59 IV. Solicitation of Comment Interested persons are invited to submit written data, views and arguments concerning Amendment No. 3, including whether Amendment No. 3 is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulescomments@sec.gov. Please include File No. SR–NYSEArca–2006–13 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to Amendment No. 3 to File No. SR– NYSEArca–2006–13. 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 (http://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 will also be available for inspection and copying at the principal office of NYSE Arca. All comments received will be posted 57 17 PO 00000 Frm 00161 Fmt 4703 59 15 Sfmt 4703 44765 E:\FR\FM\07AUN1.SGM U.S.C. 78s(b)(2). 07AUN1 44766 Federal Register / Vol. 71, No. 151 / Monday, August 7, 2006 / Notices 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 Amendment No. 3 to File No. SR–NYSEArca–2006– 13 and should be submitted on or before August 28, 2006. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,60 that the proposed rule change (SR–NYSEArca– 2006–13), as amended, be, and it hereby is, approved and Amendment No. 3 is approved on an accelerated basis. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.61 Nancy M. Morris, Secretary. [FR Doc. E6–12705 Filed 8–4–06; 8:45 am] Small Business Administration. Notice. AGENCY: SUMMARY: This is a notice of an Economic Injury Disaster Loan (EIDL) declaration for the State of New York , dated 07/30/2006. Incident: Power Outage Precipitated by Extreme Heat and Rising Temperatures. Incident Period: 07/17/2006 and continuing. Effective Date: 07/31/2006. EIDL Loan Application Deadline Date: 05/01/2007 ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, National Processing And Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street, SW., Suite 6050, Washington, DC 20416. SUPPLEMENTARY INFORMATION: Notice is hereby given that as a result of the Administrator’s EIDL declaration on 07/ 31/2006, applications for economic injury disaster loans may be filed at the address listed above or other locally announced locations. sroberts on PROD1PC70 with NOTICES DATE: U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). VerDate Aug<31>2005 17:19 Aug 04, 2006 Financial Management Service; Proposed Collection of Information: Electronic Funds Transfer (EFT) Market Research Study Dated: July 31, 2006. Steven C. Preston, Administrator. [FR Doc. E6–12730 Filed 8–4–06; 8:45 am] [Public Notice 5484] Disaster Declaration #10554; NEW YORK Disaster # NY–00024 Declaration of Economic Injury 61 17 (Catalog of Federal Domestic Assistance Number 59002). DEPARTMENT OF STATE SMALL BUSINESS ADMINISTRATION 60 15 Dated: July 31, 2006. C. Miller Crouch, Principal Deputy Assistant Secretary for Educational and Cultural Affairs, Department of State. [FR Doc. E6–12765 Filed 8–4–06; 8:45 am] BILLING CODE 8025–01–P BILLING CODE 8010–01–P ACTION: The following areas have been determined to be adversely affected by the disaster: Primary Counties: Queens. Contiguous Counties: New York: Bronx, Kings, Nassau, New York. The Interest Rate is: 4.000. The number assigned to this disaster for economic injury is 105540. The State which received an EIDL Declaration # is New York. Jkt 208001 Culturally Significant Object Imported for Exhibition Determinations: ‘‘Avery Preesman’’ SUMMARY: Notice is hereby given of the following determinations: Pursuant to the authority vested in me by the Act of October 19, 1965 (79 Stat. 985; 22 U.S.C. 2459), Executive Order 12047 of March 27, 1978, the Foreign Affairs Reform and Restructuring Act of 1998 (112 Stat. 2681, et seq.; 22 U.S.C. 6501 note, et seq.), Delegation of Authority No. 234 of October 1, 1999, Delegation of Authority No. 236 of October 19, 1999, as amended, and Delegation of Authority No. 257 of April 15, 2003 [68 FR 19875], I hereby determine that the object to be included in the exhibition ‘‘Avery Preesman’’, imported from abroad for temporary exhibition within the United States, is of cultural significance. The object is imported pursuant to a loan agreement with the foreign owner or custodian. I also determine that the exhibition or display of the exhibit object at The Renaissance Society at The University of Chicago, Chicago, Illinois, from on or about September 17, 2006, until on or about October 29, 2006, and at possible additional venues yet to be determined, is in the national interest. Public Notice of these Determinations is ordered to be published in the Federal Register. FOR FURTHER INFORMATION CONTACT: For further information, contact Paul Manning, Attorney-Adviser, Office of the Legal Adviser, U.S. Department of State (telephone: 202/453–8052). The address is U.S. Department of State, SA– 44, 301 4th Street, SW., Room 700, Washington, DC 20547–0001. PO 00000 Frm 00162 Fmt 4703 Sfmt 4703 BILLING CODE 4710–05–P DEPARTMENT OF THE TREASURY Fiscal Service Financial Management Service, Fiscal Service, Treasury. ACTION: Notice and request for comments. AGENCY: SUMMARY: The Financial Management Service, as part of its continuing effort to reduce paperwork and respondent burden, invites the general public and other Federal agencies to take this opportunity to comment on a continuing information collection. By this notice, the Financial Management Service solicits comments concerning the ‘‘Electronic Funds Transfer (EFT) Market Research Study.’’ DATES: Written comments should be received on or before October 6, 2006. ADDRESSES: Direct all written comments to Financial Management Service, Records and Information Management Branch, Room 135, 3700 East West Highway, Hyattsville, Maryland 20782. FOR FURTHER INFORMATION CONTACT: Request for additional information should be directed to Edita Rickard, EFT Strategy Division, 401 14th Street, SW., Room 418D, Washington, DC 20227, 202–874–7165. SUPPLEMENTARY INFORMATION: Pursuant to the Paperwork Reduction Act of 1995, (44 U.S.C. 3506(c)(2)(A)), the Financial Management Service solicits comments on the collection of information described below: Title: Electronic Funds Transfer (EFT) Market Research Study. OMB Number: 1510–0074. Form Number: None. Abstract: Study of Federal benefit recipients to identify barriers to significant increases in use of EFT for benefit payments. Current Action: Extension of currently approved collection. Type of Review: Regular. Affected Public: Individuals or households. Estimated Number of Respondents: 2,515. E:\FR\FM\07AUN1.SGM 07AUN1

Agencies

[Federal Register Volume 71, Number 151 (Monday, August 7, 2006)]
[Notices]
[Pages 44758-44766]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-12705]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54238; File No. SR-NYSEArca-2006-13]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving 
Proposed Rule Change and Amendments No. 1 and 2 and Notice of Filing 
and Order Granting Accelerated Approval of Amendment No. 3 Thereto 
Relating to the Establishment of the OX Trading Platform

July 28, 2006.

I. Introduction

    On May 2, 2006, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ to 
establish the OX trading platform. The Exchange filed Amendments No. 1 
and 2 to the proposed rule change on June 9, 2006 and June 15, 2006, 
respectively. The proposed rule change was published for comment in the 
Federal Register on June 23, 2006.\3\ The Commission received one 
comment on the proposal.\4\ On July 27, 2006, the Exchange filed 
Amendment No. 3 to the proposal.\5\ This order approves the proposed 
rule change, as amended by Amendment Nos. 1 and 2, grants accelerated 
approval to Amendment No. 3, and solicits comments from interested 
persons on Amendment No. 3.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 53995 (June 15, 
2006), 71 FR 36145 (``OX Notice'').
    \4\ See letter dated July 20, 2006 from Bryan Rule (``Rule 
Letter'').
    \5\ In Amendment No. 3, the Exchange: (i) Made certain 
representations about entering into a agreement with the NASD 
pursuant to Rule 17d-2 under the Act following approval of this 
proposed rule change; (ii) offered further analysis of why the 
proposal is not inconsistent with Section 11(a) of the Act; (iii) 
clarified that Satisfaction Orders would be handled in the same 
manner as they are handled on PCX Plus; (iv) submitted a rule that 
would require a three second exposure period before certain orders 
could be crossed; (v) represented that NYSE Arca Rule 11.3 would 
require an OX Market Maker to maintain information barriers that are 
reasonably designed to prevent the misuse of material, non-public 
barriers between ``side-by-side'' market makers; (vi) removed a 
reference to an ``Opening Only'' order type; (vii) clarified the 
price at which certain orders would be executed in the Working Order 
Process and made other technical corrections to the proposal. The 
complete text of Amendment No. 3 is available on the Commission's 
Web site (http://www.sec.gov/rules/sro.shtml), at the Commission's 
Public Reference Room, and at the Exchange.
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II. Description of the Proposal

    NYSE Arca proposes to establish rules for OX, a fully automated 
trading system for standardized equity options intended to replace NYSE 
Arca's current options trading platform, PCX Plus.\6\ OX would provide 
an electronic order delivery, execution and reporting system for 
designated options listed and traded on NYSE Arca through which orders 
and quotes of Users \7\ are consolidated for execution and display. 
Market Makers would be able to stream quotes to OX either from on the 
trading floor or remotely.
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    \6\ See NYSE Arca Rule 6.90.
    \7\ See proposed NYSE Arca Rule 6.1A(a)(19).
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    OX would be available for the entry and execution of quotes and 
orders to OTP Holders,\8\ OTP Firms \9\ and, through Sponsoring OTP 
Firms,\10\ certain non-OTP Firms and Holders, known as Sponsored 
Participants \11\ (collectively, ``Users''). In general, Users would be 
able to enter market orders, marketable limit orders and limit orders. 
Only Market Makers would be permitted to enter quotes on OX. As Users 
enter bids and offers (i.e., orders and quotes) into the system, any 
non-marketable limit orders and quotes

[[Page 44759]]

would be ranked in an electronic limit order file (the ``OX Book'') 
\12\ according to price-time priority, such that within each price 
level, all bids and offers are organized by the time of entry. The OX 
Book (except for certain Working Orders\13\ with conditional prices or 
sizes) would be displayed to all Users. For market orders or marketable 
limit orders, like-priced bids and offers would be matched by OX for 
execution at prices equal to or better than the NBBO pursuant to the 
following algorithm, which is based on price-time priority:
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    \8\ See NYSE Arca Rule 1.1(q).
    \9\ See NYSE Arca Rule 1.1(r).
    \10\ See proposed NYSE Arca Rule 6.1A(a)(17).
    \11\ See proposed NYSE Arca Rule 6.1A(a)(16).
    \12\ See proposed NYSE Arca Rule 6.1A(a)(14).
    \13\ See proposed NYSE Arca Rule 6.62A(e).
---------------------------------------------------------------------------

    Step 1: All market orders and marketable limit orders would be 
matched against the displayed top of the OX Book.
    Step 2: If an order has not been executed in its entirety pursuant 
to Step 1, then OX would match the order against any Working Orders, 
which are orders with a conditional or undisplayed size. Examples of 
Working Orders include a reserve order, an order with a portion of the 
size displayed, and a reserve portion of the size that is not 
displayed.
    Step 3: If an order has not been executed in its entirety pursuant 
to Steps 1 and 2, the order would be routed to another Market Center 
\14\ for execution (either through the intermarket options linkage 
(``Linkage'') or via a broker-dealer affiliated with NYSE Arca, 
Archipelago Securities) unless the User has designated that the order 
may not be routed to another Market Center. If an order that is routed 
to another Market Center is not executed in its entirety, the order 
would be ranked and displayed in the OX Book in accordance with the 
terms of such order and such order would be eligible for execution.
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    \14\ See proposed NYSE Arca Rule 6.1A(a)(6).
---------------------------------------------------------------------------

    The OX rules also would permit the crossing of orders on the 
trading floor via open outcry. Specifically, the Exchange would provide 
rules governing regular-way, facilitation, and solicitation crosses and 
introduce the ability for OTP Holders and OTP Firms to execute Mid-
Point Crosses \15\ in accordance with one of the three crossing rules.
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    \15\ See proposed NYSE Arca Rule 6.47(d).
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    OTP Holders and OTP Firms meeting certain qualifications would be 
permitted to register as either Lead Market Makers (``LMMs'') or Market 
Makers in one or more option classes traded on OX.\16\ In addition, 
LMMs would continue to be responsible for handling orders under the 
Plan for the Purpose of Creating and Operating an Intermarket Option 
Linkage (``Linkage Plan'').\17\
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    \16\ Unless specified, or unless the context requires otherwise, 
the term ``Market Maker'' as used herein refers to both Market 
Makers and LMMs.
    \17\ See Securities Exchange Act Release No. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000). Subsequently, upon separate 
requests by the Philadelphia Stock Exchange, Inc. (``Phlx''), the 
Pacific Exchange, Inc. (``PCX''), and the Boston Stock Exchange, 
Inc., the Commission issued orders to permit these exchanges to 
participate in the Linkage Plan. See Securities Exchange Act Release 
Nos. 43573 (November 16, 2000), 65 FR 70850 (November 28, 2000), 
43574 (November 16, 2000), 65 FR 70851 (November 28, 2000) and 49198 
(February 5, 2004), 69 FR 7029 (February 12, 2004).
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the Act and the rules and 
regulations promulgated thereunder applicable to a national securities 
exchange \18\ and, in particular, with the requirements of Section 6(b) 
of the Act.\19\ Specifically, the Commission finds that approval of the 
proposed rule change is consistent with Section 6(b)(5) of the Act \20\ 
in that it is designed to facilitate transactions in securities; to 
prevent fraudulent and manipulative acts and practices; 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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    \18\ 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).
    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

A. Access to OX

    As noted briefly above, the Exchange proposes to expand the types 
of market participants eligible to trade on its options trading 
facility. OTP Holders and OTP Firms with access to PCX Plus at the time 
of this proposal would continue to have access to the Exchange through 
the OX platform. In addition, the Exchange proposes to permit entities 
that are neither OTP Holders nor OTP Firms to access the OX platform as 
``Sponsored Participants.'' The Exchange proposes to define a Sponsored 
Participant as a person, such as an institutional investor, who has 
entered into a sponsorship agreement with a Sponsoring OTP Firm, that 
has been designated to execute, clear, and settle transactions on the 
Exchange for the Sponsored Participant.
    The Sponsored Participant and its Sponsoring OTP Firm would be 
required to enter into a written agreement incorporating the provisions 
required by proposed NYSE Arca Rule 6.2(c). Specifically, the 
Sponsoring OTP Firm would acknowledge, among other things, that all 
orders entered by the Sponsored Participant and any executions 
occurring as a result of such orders are binding in all respects on the 
Sponsoring OTP Firm and that it is responsible for any and all actions 
taken by its Sponsored Participant. The Sponsoring OTP Firm also would 
be required to provide the Exchange notice that it is responsible for 
the actions of its Sponsored Participant(s). The Sponsored Participant, 
in turn, would agree, among other things, to comply with applicable 
NYSE Arca rules and procedures as if it were an OTP Firm and agree to 
take precautions to prevent unauthorized access to the Exchange. The 
Sponsored Participants would be required to establish and maintain an 
up-to-date list of persons permitted to obtain access to OX on behalf 
of the Sponsored Participant (i.e., ``Authorized Traders'') \21\ and to 
provide that list to the Sponsoring OTP Firm.
---------------------------------------------------------------------------

    \21\ See proposed NYSE Arca Rule 6.1A(a)(1).
---------------------------------------------------------------------------

    The Commission approved a substantially similar arrangement for 
trading on NYSE Arca's predecessor entity, the Pacific Exchange, when 
the Commission approved the establishment of the Archipelago Exchange 
(``ArcaEx'') \22\ as the equities trading facility of PCX Equities, 
Inc.\23\ The Commission believes that, like the arrangement that the 
Commission previously approved for ArcaEx, the proposed sponsorship 
arrangement is consistent with the Act.
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    \22\ NYSE Arca LLC is the successor entity to ArcaEx. See 
Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR 
11251 (March 6, 2006).
    \23\ See Securities Exchange Act Release No. 44983 (October 25, 
2001), 66 FR 55225 (November 1, 2001) (SR-PCX-00-25).
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B. Display Order and Working Order Processes

    Users of OX would be able to submit orders to an electronic file of 
orders in the OX Book. The OX Book would feature two trading 
processes--the ``Display Order Process'' and the--Working Order 
Process.'' Bids and offers would be ranked, maintained, and executed 
generally according to price-time priority.\24\
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    \24\ Under certain circumstances, an LMM would be guaranteed 
participation, after all customer orders ranked ahead of the LMM 
have been executed, in an order when the LMM is quoting the NBBO, 
but lacks time priority among Users bidding or offering the same 
price. See proposed NYSE Arca Rule 6.76B.

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[[Page 44760]]

1. Display and Rank of Orders in the Displayed and Working Order 
Processes
    The Exchange would display all non-marketable Limit Orders in the 
Display Order Process of the OX Book. Limit Orders, with no other 
conditions, and quotes would be ranked based on the specified price and 
the time of original order or quote entry. The displayed portion of 
Reserve Orders \25\ would be ranked in the Display Order Process at the 
specified limit price and the time of order entry. When the displayed 
portion of the Reserve Order is decremented completely, the displayed 
portion of the Reserve Order would be refreshed from the reserve amount 
for (1) The displayed amount or (2) the entire reserve amount, if the 
remaining reserve amount is smaller than the displayed amount. The 
refreshed quote would be submitted and ranked at the specified limit 
price and the new time that the displayed portion of the order was 
refreshed.
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    \25\ See proposed NYSE Arca Rule 6.62A(e)(1).
---------------------------------------------------------------------------

    The reserve portion of Reserve Orders would be ranked in the 
Working Order Process based on the specified limit price and the time 
of original order entry. After the displayed portion of a Reserve Order 
is refreshed from the reserve portion, the reserve portion would remain 
ranked based on the original time of order entry while the displayed 
portion would be sent to the Directed Order Process with a new time 
stamp.
2. Execution of Orders in the Display and Working Order Processes
    Once a booked order becomes marketable or upon a User's entry of a 
marketable order, all orders in OX would be matched generally based 
upon price-time priority, as described more fully below. OX first would 
attempt to match incoming marketable bids and offers against bids or 
offers in the Display Order Process at the display price of the 
resident bids or offers for the total amount of option contracts 
available at that price or for the size of the incoming order, 
whichever is smaller. NYSE Arca proposes to allocate incoming 
marketable bids and offers as follows:
    If an LMM is quoting in the option series at the NBBO, an incoming 
marketable bid or offer would be matched against all Customer \26\ 
orders at the NBBO ranked ahead of the LMM. The remaining balance of 
the incoming marketable bid or offer would be matched against the quote 
of the LMM for either: (1) An amount equal to 40% of the remaining 
balance of the incoming bid or offer up to the LMM's disseminated quote 
size or (2) the LMM's share in the order of ranking in the OX Book, 
whichever is greater. Any remaining balance of the incoming marketable 
bid or offer would be matched against remaining marketable orders and 
quotes in the Display Order Process in the order of their ranking. If 
the incoming marketable bid or offer has not been executed in its 
entirety, the remaining part of the order would be directed to the 
Working Order Process.
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    \26\ See proposed NYSE Arca Rule 6.1A(a)(4).
---------------------------------------------------------------------------

    An incoming marketable bid or offer or portion thereof that fails 
to be executed in the Display Order Process, would be matched against 
orders within the Working Order Process in the order of their ranking.
3. Routing Away
    If an incoming marketable order has not been executed in its 
entirety on OX and has been designated as an order type that is 
eligible to be routed away, the order would be routed either in its 
entirety or as component orders for execution to other Market Center(s) 
disseminating the NBBO, either through the Linkage or through the use 
of the OX Routing Broker, as described below. Where an order or portion 
of an order is routed away and is not executed either in whole or in 
part at the other Market Center, the order would be ranked and 
displayed in the OX Book in accordance with the terms of the order, and 
the order would be eligible for execution. If an order has been 
designated as an order type that is not eligible to be routed away, the 
order either would be placed in the OX Book or cancelled if the order 
would lock or cross the NBBO.
    Further, the Working Order Process would provide a method for 
handling contingency orders as well as other order types, such as 
Reserve Orders. The Commission believes that the proposal is designed 
to avoid executions at prices inferior to the NBBO and is consistent 
with the Linkage Plan, NYSE Arca Rule 6.94 (Order Protection), and the 
Act.

C. New Order Types

    The proposal would introduce several order types to NYSE Arca. In 
addition to the Reserve Order, described above, among the most 
significant order types that NYSE Arca is proposing to introduce are 
order types related to the routing away function. These new order types 
are designed to provide greater flexibility to Users to better control 
the execution of their orders.
1. Inside Limit Order
    An ``Inside Limit Order'' is defined as a limit order, which, if 
routed away, would be routed to the market participant or participants 
with the best displayed price. Any unfilled portion of the order would 
not be routed to the next best price level until all quotes at the 
current best bid or offer are exhausted. If the order is no longer 
marketable, the order would be ranked in the OX Book pursuant to the 
ranking and display provisions described above.
2. NOW Order
    A ``NOW Order'' is defined as a limit order that is to be executed 
in whole or in part on OX, with any remainder routed away only to one 
or more ``NOW Recipients'' for immediate execution. ``NOW Recipients'' 
would include any Market Center with which the Exchange maintains an 
electronic linkage and that provides instantaneous responses to NOW 
Orders routed from OX. Any portion of a NOW Order that is not 
immediately executed by the NOW Recipient would be cancelled. If a NOW 
Order is not marketable when it is submitted to OX, it would be 
cancelled.
3. PNP Order
    A ``PNP (Post No Preference) Order'' is defined as a limit order to 
buy or sell that is to be executed in whole or in part on the Exchange, 
and the portion not so executed would be ranked in the OX Book, without 
routing any portion of the order to another Market Center. The Exchange 
would cancel any PNP Order that would lock or cross the NBBO.

D. Routing Broker and Linkage

1. Routing Broker
    As described above, in the event that an order is not marketable on 
OX, but is marketable on another exchange, the Exchange would route the 
order to another Market Center for execution. Orders could be routed 
either through Linkage or through a broker-dealer affiliate of NYSE 
Arca that acts as an agent for routing orders entered into OX by Users 
(``Routing Broker''),\27\ based on preset parameters in its automated 
routing algorithm, subject to NYSE Arca rules. Accordingly, orders that 
would be eligible for routing over Linkage (e.g., public customer 
orders) could be routed to other Market Centers either as Principal 
Acting as Agent Orders (``P/A Orders'') \28\ via Linkage or as customer

[[Page 44761]]

orders via Archipelago Securities, based on the automated routing 
algorithm parameters. Generally, non-customer orders and NOW Orders 
\29\ would be routed to other Market Centers via Archipelago 
Securities. As described above, certain order types, including 
Immediate or Cancel and PNP Orders, would not be eligible for routing 
away to other exchanges.
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    \27\ NYSE Arca proposes to use Archipelago Securities LLC 
(``Archipelago Securities''), a wholly-owned subsidiary of 
Archipelago Holdings Inc. and a registered broker-dealer, as the 
Routing Broker.
    \28\ See NYSE Arca Rule 6.92(a)(12)(i).
    \29\ See proposed NYSE Arca Rule 6.62A(i).
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    The OX order routing function of Archipelago Securities is an 
exchange ``facility.'' \30\ As such, any proposed rule change relating 
to Archipelago Securities' order-routing function must be filed with 
the Commission, and must operate in a manner that is consistent with 
the provisions of the Act applicable to exchanges with NYSE Arca rules. 
In Amendment No. 3, the Exchange proposes to clarify that the NASD, a 
self-regulatory organization (``SRO'') unaffiliated with NYSE Arca or 
any of its affiliates, would continue to carry out oversight and 
enforcement responsibilities as the Designated Examining Authority 
designated by the Commission pursuant to Rule 17d-1 under the Act \31\ 
with the responsibility for examining Archipelago Securities for 
compliance with the applicable financial responsibility rules.
---------------------------------------------------------------------------

    \30\ See 15 U.S.C. 78c(a)(2).
    \31\ 17 CFR 240.17d-1.
---------------------------------------------------------------------------

    Furthermore, in Amendment No. 3, the Exchange represents that it 
will enter into a new agreement with the NASD pursuant to Rule 17d-2 
under the Act \32\ (the ``NYSE Arca Agreement'') to expand the 
allocation to the NASD of regulatory responsibility to encompass all of 
the regulatory oversight and enforcement responsibilities with respect 
to Archipelago Securities, except for ``real-time market 
surveillance.'' NYSE Arca will submit the NYSE Arca Agreement to the 
Commission under Rule 17d-2 within 90 days of the Commission's approval 
of this proposed rule change.
---------------------------------------------------------------------------

    \32\ 17 CFR 240.17d-2.
---------------------------------------------------------------------------

    The Commission notes that this representation is substantially 
similar to a representation the Exchange made when it amended the 
certificate of incorporation of PCX Holdings, Inc., certain rules of 
the Pacific Exchange, and the bylaws of Archipelago Holdings, Inc. 
(``Archipelago'') to facilitate the consummation of the merger between 
PCX Holdings, Inc. and its subsidiaries, and Archipelago (the 
``Merger'').\33\ The Commission believes that delegating the regulatory 
function for the oversight of its wholly-owned subsidiary should help 
to ensure independence in the regulatory oversight of Archipelago 
Securities.
---------------------------------------------------------------------------

    \33\ See Securities Exchange Act Release No. 52497 (September 
22, 2005), 70 FR 56949 (September 29, 2005) (SR-PCX-2005-90).
---------------------------------------------------------------------------

2. Linkage Routing and Obligations
    The OX system would facilitate the routing of P/A Orders to other 
Market Centers via Linkage using the account of the LMM assigned to the 
option class being routed. The OX system, however, would not 
automatically generate Principal Orders \34\ on behalf of Market 
Makers; rather, Eligible Market Makers \35\ would be required to route 
their own Principal Orders if they want their proprietary orders sent 
to other Market Centers via Linkage. Satisfaction Orders \36\ would be 
handled in the same manner on OX as they are handled on PCX Plus.\37\
---------------------------------------------------------------------------

    \34\ See NYSE Arca Rule 6.92(a)(12)(ii).
    \35\ In Amendment No. 3, NYSE Arca proposed a technical change 
to its Rule 6.92(a)(7)(ii) to include certain OX Market Makers 
within the definition of ``Eligible Market Maker.''
    \36\ See NYSE Arca Rule 6.92(a)(12)(iii).
    \37\ See Amendment No. 3, supra note 5.
---------------------------------------------------------------------------

    The existing NYSE Arca rules that apply to Linkage obligations, 
NYSE Arca Rules 6.92 through 6.96, would apply to OTP Holders and OTP 
Firms accessing the OX system. For example, those rules, in conjunction 
with the Linkage Plan, would continue to require: (1) OTP Holders and 
OTP Firms to avoid Trade-throughs and to adjust their quotes in the 
event of a locked or crossed market; and (2) for LMMs to handle inbound 
Linkage Orders. The Commission believes that the Exchange's proposed 
automated routing of certain Linkage Orders is consistent with the 
Linkage Plan.

E. Market Makers

1. Market Maker Obligations
    The OX proposal provides for two types of market makers: LMMs and 
Market Makers. A Market Maker on OX would be an OTP Holder or OTP Firm 
registered with NYSE Arca for the purpose of submitting quotes 
electronically and effecting transactions as a dealer-specialist 
through the OX trading platform either from the trading floor or from 
off the trading floor. Market Makers would be designated as specialists 
on NYSE Arca for all purposes under the Act and rules and regulations 
thereunder. No more than one LMM would be appointed in each option 
class, and the Exchange would be required to appoint at least one LMM 
in each option class. The Exchange may appoint any number of Market 
Makers in each class, unless limited by quotation system capacity. 
However, the Exchange will not restrict access to any particular option 
class until the Commission approves objective standards for restricting 
such access.
    A Market Maker would be required to, among other things, compete 
with other Market Makers to improve the market in all series of options 
classes to which the Market Maker is appointed, update market 
quotations in response to changed market conditions in all series of 
options classes within its appointed classes, honor its quotations, and 
submit quotations in accordance with maximum Exchange prescribed width 
requirements. In addition, LMMs and Market Makers would be required to 
provide continuous, two-sided quotes in their appointed issues for 99% 
and 60%, respectively, of the time the Exchange is open for trading in 
each issue. LMMs and Market Makers also would be required to trade at 
least 75% of their contract volume per quarter in classes within their 
appointment. Market Maker quotes would be ``firm'' for all orders that 
are routed to OX. The Exchange would evaluate Market Makers 
periodically to determine whether they have fulfilled performance 
standards relating to, among other things, quality of markets, 
competition among Market Makers, and ethical standards.
    In transitioning to the OX platform from PCX Plus, the Exchange 
proposes to eliminate provisions for the appointment of ``Remote Market 
Makers'' and ``Supplemental Market Makers.'' Accordingly, the proposed 
rules for the OX platform do not direct where Market Makers must be 
physically located when effecting transactions on NYSE Arca and would 
eliminate ``in-person'' trading requirements applicable to Market 
Makers that trade on the floor.
    Market Makers receive certain benefits for carrying out their 
duties. For example, a lender may extend credit to a broker-dealer 
without regard to the restrictions in Regulation T of the Board of 
Governors of the Federal Reserve system if the credit is to be used to 
finance the broker-dealer's activities as a specialist or market maker 
on a national securities exchange.\38\ The Commission believes that a 
Market Maker must have an affirmative obligation to hold itself out as 
willing to buy and sell options for its own account on a regular or 
continuous basis to justify this favorable treatment. In this regard, 
the Commission believes that OX rules are reasonably designed to impose 
such affirmative obligations on OX Market Makers.
---------------------------------------------------------------------------

    \38\ See 12 CFR 221.5(c)(6).

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[[Page 44762]]

2. Market Maker Authorized Traders
    The Exchange is proposing to limit Market Maker access to OX to 
those OTP Holders or officers, partners, employees or associated 
persons of OTP Firms that are registered with the Exchange as Market 
Makers (``Market Maker Authorized Traders'' or ``MMATs''). MMAT 
candidates will be required to pass an examination to demonstrate 
knowledge of NYSE Arca rules prior to being approved by the Exchange as 
a Market Maker Authorized Trader. The proposal would also establish 
standards and procedures governing the suspension of registration of an 
MMAT. The Commission believes these requirements are reasonably 
designed to ensure that the Exchange is informed of the identities and 
qualifications of individuals accessing OX on behalf of Market Makers 
and are consistent with the Act.
3. Market Maker Risk Limitation
    NYSE Arca is proposing to provide a mechanism for limiting Market 
Maker risk during periods of increased and significant trading 
activity. OX would activate the Market Maker Risk Limitation Mechanism 
in a Market Maker's appointed class whenever a designated number of 
executions (ranging between 5 and 100 executions) occurs within one 
second. Orders and quotes received by OX after the Mechanism is 
activated would not be executed against the Market Maker. The 
Commission believes that establishing a uniform one second standard in 
place of the existing variable ``n'' seconds standard on PCX Plus is 
consistent with the Act.
    On the PCX Plus system, the Exchange disseminates a market on 
behalf of an LMM when there are no Market Makers quoting in a series 
and volume parameters are exceeded. The Exchange proposes that if the 
mechanism were activated under the OX system and there were no Market 
Makers quoting in a series, the Exchange would no longer generate two-
sided quotes on behalf of the LMM. Instead, on OX, the best bids and 
offers residing in the OX Book would be disseminated as the BBO. If 
there were no orders in the OX Book in the issue at that time, OX would 
disseminate a bid of zero and an offer of zero. The Commission believes 
that the proposed approach is consistent with the Act.
4. Integrated Market Making
    In Amendment No. 3, the Exchange represents that NYSE Arca Rule 
11.3, which governs the use of material, non-public information, would 
apply to OTP Holders and OTP Firms trading on OX. The Exchange 
represents that this rule would require an OX Market Maker to maintain 
information barriers--reasonably designed to prevent the misuse of 
material, non-public information by such member--between the OX Market 
Maker and any of its affiliates that may act as specialist or market 
maker in any security underlying the options in which the Market Maker 
makes a market on OX. The Commission believes that requiring 
information barriers between the OX Market Maker and its affiliates 
with respect to transactions in the option and the underlying security 
are important to reduce the opportunity for unfair trading advantages 
or misuse of material, non-public information.\39\
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    \39\ See Securities Exchange Act Release No. 47838 (May 13, 
2003), 68 FR 27129, 27137 (May 19, 2003) (SR-PCX-2002-36).
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F. Trading Auctions (Opening and Trading Halt)

    The Exchange is proposing new procedures for initiating trading in 
a given options class (``Trading Auction''). The new procedures will 
apply to orders designated for inclusion in the opening auction process 
(``Auction Process'') and upon re-opening of trading after a trading 
halt. In particular, the OX system will accept Market Orders and Limit 
Orders and quotes for inclusion in the Trading Auction, up until the 
time the Trading Auction is initiated in that options series. Non-
Market Makers would be able to submit orders for inclusion in the 
Trading Auction, and Market Makers would be able to submit two-sided 
quotes and orders. Contingency orders would not participate in the 
Auction Process. Any eligible open orders residing in the OX Book from 
the previous trading session would be included in the Auction Process.
    After the primary market for the underlying security disseminates 
the opening trade or the opening quote, the related option series would 
be opened automatically at a single price. Among the most significant 
principles in the Trading Auction is that orders will have priority 
over Market Maker quotes. In addition, orders in the OX Book that are 
not executed during the Auction Process will be eligible for execution 
during the Core Trading Hours \40\ immediately after the conclusion of 
the Opening Auction.
---------------------------------------------------------------------------

    \40\ See proposed NYSE Arca Rule 6.1A(a)(3).
---------------------------------------------------------------------------

    The opening price of a series would be the price, as determined by 
the OX system, at which the greatest number of contracts would trade at 
or nearest to the mid-point of the initial NBBO calculated by the 
Exchange from the quotes disseminated by Options Price Reporting 
Authority, if any, or the mid-point of the best quote bids and quote 
offers in the OX Book. Mid-point pricing would not occur if that price 
would result in an order or part of an order being traded through. 
Instead, the opening would occur at that limit price, or, if the limit 
price is superior to the quoted market, within the range of 75% of the 
best quote bid and 125% of the best quote offer. Orders and Marker 
Maker quotes that do not trade during the Trading Auction, but are 
marketable against the initial NBBO following the Trading Auction, 
would ``sweep'' through the OX Book and be executed in price/time 
priority. If the best price is at an away Market Center, orders would 
be routed away to the appropriate Market Center, pursuant to NYSE Arca 
rules.
    The Commission believes that the proposed Trading Auction is 
reasonably designed to facilitate executions at the opening and 
following trading halts. The Commission further believes that the 
proposal is designed to avoid executions at prices inferior to the 
NBBO.

G. Crossing Rules

    Under the proposal, OTP Holders and OTP Firms would be permitted to 
conduct crossing transactions on the floor of the Exchange. The 
Exchange is proposing to replace its existing crossing rule with a new 
NYSE Arca Rule 6.47, which would govern crosses effected on the trading 
floor. Consistent with the existing version of NYSE Arca Rule 6.47, the 
proposed amendment provides for non-facilitation (or ``regular way'') 
crosses, facilitation crosses, and solicitation crosses. In all cases, 
orders must be announced to the trading crowd in open outcry, and 
trading crowd participants would be given a reasonable time to respond 
with the prices and sizes at which they would be willing to participate 
in the cross. With respect to all crosses, a Trading Official would be 
available at each post on the trading floor to assist in the 
determination of what is a ``reasonable time,'' when necessary. Trading 
crowd participants who make bids or offers equal to or better than the 
proposed cross price would be permitted to participate in a cross. In 
addition, in no event would a cross occur that would trade through the 
NBBO or any bids or offers on the Book priced equal to or better than 
the proposed execution price.
    Floor Brokers holding orders to buy and sell the same option 
contract may cross such orders after following the

[[Page 44763]]

non-facilitation (regular way) cross procedures. After requesting bids 
and offers in the option series from the trading crowd, the Floor 
Broker must bid above the highest bid in the crowd, or offer below the 
lowest offer in the crowd, by at least the MPV. The Floor Broker may 
then cross the orders at that price provided that the execution price 
is equal to or better than the NBBO and that the Floor Broker satisfies 
any bids or offers on the Book that are priced equal to or better than 
the proposed execution price.
    With respect to facilitation crosses, which involve a Floor Broker 
holding a customer order and an order for the account of an OTP Holder, 
OTP Firm, or entity under the common control of a Market Maker 
representing the customer (``Facilitation Order''), the Floor Broker 
must be willing to facilitate the entire size of the customer order in 
order to utilize the mechanism, and the size of the customer order must 
be at least 50 contracts. After the Floor Broker exposes the customer 
order to the trading crowd for a reasonable period of time, if at the 
time of execution there is sufficient size to execute the entire 
customer order at an improved price (or prices), the customer order 
would be executed at the improved price, so long as such execution 
price is equal to or better than the NBBO.
    If at the time of execution there is insufficient size to execute 
the entire customer order at an improved price (or prices), a Floor 
Broker would be permitted to participate in up to 40% of the balance of 
the order to be facilitated once bids or offers in the Book equal to or 
better than the proposed execution price, non-member bids and offers in 
the trading crowd at or better than the proposed execution price, and 
member bids and offers in the trading crowd priced better than the 
proposed execution price, have been satisfied.\41\ Thereafter, Market 
Makers in the trading crowd who are bidding or offering the proposed 
execution price may participate in the balance of the customer order 
based upon price-time priority.\42\ The balance of the unexecuted 
agency order, if any, would be executed against the remaining Floor 
Broker proprietary interest.
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    \41\ When executing the customer order to be facilitated against 
such bids and offers, bids and offers representing customer orders 
would be required to be executed first. See proposed NYSE Arca Rule 
6.47(b)(7). The Commission notes that NYSE Arca's facilitation cross 
procedures would allow all NYSE Arca members to avail themselves of 
the exception to Section 11(a) of the Act set forth in Section 
11(a)(1)(G) of the Act and Rule 11a-1(T).
    \42\ The Floor Broker is responsible for determining the 
sequence in which Market Makers' bids or offers are vocalized. See 
NYSE Arca Rule 6.75(f)(1). In the event that the bids or offers of 
two or more Market Makers are made simultaneously, such bids or 
offers will be deemed to be on parity and priority will be afforded 
to them, insofar as practicable, on an equal basis. See NYSE Arca 
Rule 6.75(c).
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    The proposal would also permit the crossing of solicited orders, 
which involve a Floor Broker holding an order for a customer of an OTP 
Holder or OTP Firm for which the Floor Broker solicits contra side 
interest in the trading crowd. Crosses involving Solicited Orders would 
be handled in a manner whereby superior priced and equal priced orders 
in the book and interest in the crowd which collectively is of 
sufficient size to execute against the original customer order would be 
executed before the Solicited Order. Customer orders, at a given price, 
would be executed before non-Customer orders at the same price.\43\
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    \43\ In Amendment No. 3, the Exchange clarified the Solicited 
Cross rule. Specifically, the Exchange represented that only orders 
that are represented by a Floor Broker as agent are eligible for 
crossing via the Solicited Order procedures. If the Floor Broker 
represents an order for a covered account, the member order must 
satisfy the requirements of Section 11(a) of the Act and the rules 
thereunder. The Commission further notes that the Exchange has 
represented that a member may not rely on the exception found in 
Section 11(a)(1)(G) of the Act when utilizing the solicited order 
procedures.
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    The Exchange also proposes to add a new category of cross order, 
the Mid-Point Crossing Order. A Floor Broker who holds a Mid-Point 
Crossing Order to buy and sell an option contract at the mid-point 
between the electronically disseminated BBO or better in the subject 
option series would be permitted to cross such an order in accordance 
with the procedures for regular way, facilitation or solicitation 
crosses, as applicable. The Mid-Point Cross will not occur if the price 
of the midpoint of the NYSE Arca BBO is inferior to the NBBO or if the 
mid-point does not fall on a standard increment.
    In reviewing proposed crossing mechanisms, the Commission considers 
the potential that crosses will lock up large portions of order flow 
from intramarket price competition by granting certain market 
participants extensive participation guarantees, such as the guarantee 
granted to Floor Brokers in the proposed OX Facilitation cross. To that 
end, the Commission notes that the 40% participation guarantee that 
Floor Brokers would receive pursuant to the proposed Facilitation 
Procedure, as described above, is consistent with similar guarantees 
accorded to members effecting facilitation crosses on other 
exchanges.\44\ The Commission believes that the proposed crossing 
procedures are reasonably designed to ensure that interest in the crowd 
and on the book is protected, in that all Customer interest at the same 
price (whether residing in the trading crowd or on the book) must be 
satisfied before other interest may be executed. The Commission also 
believes that these procedures should promote intramarket price 
competition by providing market makers and other market participants 
with a reasonable opportunity to compete for the proposed cross.
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    \44\ See, e.g, International Securities Exchange (``ISE'') Rule 
716(d).
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    The Commission further notes that the proposed OX rules would not 
permit electronic crosses. In Amendment No. 3, the Exchanges proposes 
to clarify that Users seeking to effect certain orders as agent against 
their own principal account must ensure that either the agency order or 
the User's quote must be displayed on OX for three second seconds prior 
to execution. Specifically the proposed rule would provide, among other 
things, that Users may not execute as principal orders they represent 
as agent unless agency orders are first exposed on the Exchange for at 
least three seconds or the User has been bidding or offering on the 
Exchange for at least three seconds prior to receiving an agency order 
that is executable against such bid or offer. The Commission believes 
this proposed order exposure provision is substantially similar to the 
rules of other SRO rules that require members to wait three seconds 
before executing principal orders against an order they represent as 
agent.\45\ In addition, the Commission expects that the Exchange will 
closely surveil to ensure that all crossing transactions are not 
effected without first being exposed to intramarket competition.
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    \45\ See, e.g., ISE Rule 717.
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 H. Section 11(a) of the Act

    Section 11(a)(1) of the Act \46\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises investment discretion 
(collectively, ``covered accounts'') unless an exception applies.
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    \46\ 15 U.S.C. 78k(a)(1).
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    Among the transactions excepted under Section 11(a)(1) are those by 
a dealer acting in the capacity of a market maker, bona fide arbitrage 
or hedge transactions, and transactions made to offset errors. In the 
proposed rule change, the Exchange has set forth its analysis of how 
the proposed rule change is consistent with Section 11(a) of the Act 
and the rules thereunder.

[[Page 44764]]

Rule 11a2-2(T) Interpretive Request

    Rule 11a2-2(T) under the Act,\47\ known as the ``effect versus 
execute'' rule, provides exchange members with another exception from 
the general Section 11(a)(1) prohibition. Rule 11a2-2(T) permits an 
exchange member, subject to certain conditions, to effect transactions 
for covered accounts by arranging for an unaffiliated member to execute 
the transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member (i) Must transmit the order from off the exchange 
floor; (ii) must not participate in the execution of the transaction 
once it has been transmitted to the member performing the execution; 
\48\ (iii) must not be affiliated with the executing member; and (iv) 
with respect to an account over which the member has investment 
discretion, neither the member nor its associated person may retain any 
compensation in the connection with effecting the transaction except as 
provided in the rule. As described by the Commission, these four 
requirements--off-floor transmission, non-participation in order 
execution, execution through an unaffiliated member and non-retention 
of compensation for discretionary accounts--were ``designed to put 
members and non-members on the same footing, to the extent practicable, 
in light of the purposes of Section 11(a).'' \49\ If a transaction 
meets the requirements of the ``effect versus execute'' rule, it will 
be deemed to be ``consistent with the purpose of Section 11(a)(1) of 
the Act, the protection of investors, and the maintenance of fair and 
orderly markets.'' \50\ The Exchange stated that given OX's automated 
matching and execution services, no Exchange member will enjoy any 
special control over the timing of execution or special order handling 
advantages for orders executed via OX, as all orders will be centrally 
processed for execution by computer, rather than being handled by a 
member through bids or offers made on the trading floor. The Exchange 
further stated that it believes that due to OX's open, electronic 
structure that is designed to prevent any Exchange members from gaining 
any time and place advantages, the Exchange believes that OX satisfies 
the four requirements of the ``effect versus execute'' rule as well as 
the general policy objectives of Section 11(a) of the Act.
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    \47\ 17 CFR 240.11a2-2(T).
    \48\ The member may, however, participate in clearing and 
settling the transaction. The commenter raises concerns about 
whether the proposed OX system satisfies this prong of the ``effect 
versus execute'' rule. According to the commenter, the notice of the 
proposal states that ``NYSE Arca `may not participate in the 
execution of the transaction once the order has been transmitted' '' 
and that ``[t]he NYSE Arca plan does interfere with the transmission 
and execution of options orders.'' To support this assertion, the 
commenter states that orders may be routed away to different 
exchanges for execution in certain circumstances. See Rule Letter, 
supra note 4. The Commission believes that the commenter 
mischaracterizes the discussion of this prong of the ``effect versus 
execute'' rule set forth in the notice of the proposal. The OX 
Notice states that the exchange member and its associated person 
(not NYSE Arca, as stated by the commenter) may not participate in 
the execution of the transaction once the order has been 
transmitted. The Commission believes that OX satisfies this prong, 
as discussed above.
    \49\ See Securities Exchange Act Release No. 14713 (April 27, 
1978), 43 FR 18557, 18560 (May 1, 1978) (``1978 Release'').
    \50\ See Rule 11a2-2(T)(e) under the Act.
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1. Off-Floor Transmission
    Rule 11a2-2(T) requires an order for a covered account to be 
transmitted from off the exchange floor. In considering the application 
of this requirement to a number of automated trading and electronic 
order-handling facilities operated by national securities exchanges, 
the Commission has deemed the off-floor requirement to be met if the 
order is transmitted from off the floor directly to the electronic 
order handling facility that compromises the exchange floor by 
electronic means.\51\ Like these other automated systems, the Exchange 
has represented that orders sent to OX will be transmitted from remote 
terminals directly to the system by electronic means and that most 
member orders, except as described below, will be submitted to OX from 
off of the floor. Therefore, those members' orders sent to the OX 
system electronically from off the Exchange floor satisfy the off-floor 
transmission requirement for the purposes of the ``effect versus 
execute'' rule.
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    \51\ See letter from Larry E. Bergmann, Senior Associate 
Director, Division of Market Regulation (``Division''), Commission, 
to Edith Hallahan, Associate General Counsel, Phlx (March 24, 1999) 
(``VWAP Letter''); letter from Catherine McGuire, Chief Counsel, 
Division, Commission, to David E. Rosedahl, PCX (November 30, 1998) 
(``OptiMark Letter''); and letter from Brandon Becker, Director, 
Division, Commission, to George T. Simon, Partner, Foley & Lardner 
(November 30, 1994) (``Chicago Match Letter'').
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2. Non-Participation in Order Execution
    The ``effect versus execute'' rule further provides that the 
exchange member and its associated person may not participate in the 
execution of the transaction once the order has been transmitted. The 
Exchange has represented that upon submission to OX, an order will 
enter the queue and be executed against another order in the OX Book 
based on an established matching algorithm. The execution depends not 
on whether an order is for the account of an Exchange member, but 
rather, upon what other orders are entered into OX at or around the 
same time as the subject order, what orders are resident in the OX Book 
and where the order is ranked based on the price-time priority ranking 
algorithm. Therefore, the Exchange stated that at no time following the 
submission of an order is an Exchange member able to acquire control or 
influence over the result or timing of its order's execution. As a 
result, the Commission believes that the non-participation requirement 
is met because OTP Holder or OTP Firm orders are matched and executed 
automatically in OX.
3. Execution Through Unaffiliated Member
    The third requirement of Rule 11a2-2(T) is that the exchange member 
who executes the order be unaffiliated with the member initiating the 
order. The Commission has recognized, however, that this requirement 
may be met where automated exchange facilities are used. For example, 
in considering the operation of COMEX and PACE, among other systems, 
the Commission noted that while there is no independent executing 
exchange member, the execution of an order is automatic once it has 
been transmitted into the systems.\52\ Because the design of these 
systems ensures that members do not possess any special or unique 
trading advantages in handling their orders after transmitting them to 
the exchange floors, the Commission has stated or not objected to the 
Exchange's conclusion that executions obtained through these systems 
satisfy the independent execution requirement of Rule 11a2-2(T) that 
the member not be affiliated with the executing broker.\53\ The 
Exchange stated that this requirement is satisfied by the OX system 
because the design of OX ensures that members do not have any special 
or unique trading advantages in handling their orders after 
transmission. Accordingly, a transaction for a covered account that 
submitted directly by a member into OX, from off of the Exchange floor, 
for execution satisfies the unaffiliated member requirement.
---------------------------------------------------------------------------

    \52\ See Securities Exchange Act Release No. 15533 (January 29, 
1979), 44 FR 6084 (January 31, 1979) (``1979 Release''). See also 
VWAP Letter, OptiMark Letter and Chicago Match Letter.
    \53\ Id.
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4. Non-Retention of Compensation
    Finally, Rule 11a2-2(T) requires that, in the case of a transaction 
effected for an account with respect to which an

[[Page 44765]]

exchange member or associated person thereof exercises investment 
discretion, neither the member or its associated persons may retain 
compensation in connection with effecting the transaction without the 
express written consent of the person authorized to transact business 
for the account, given in accordance with the rule. Exchange members 
relying on Rule 11a2-2(T) for transactions effected through OX must 
comply with this condition of the rule. The Commission notes that NYSE 
Arca would enforce this requirement pursuant to its obligation under 
Section 6(b)(1) of the Act \54\ to enforce compliance with the federal 
securities laws.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    In Amendment No. 3, the Exchange clarified its discussion regarding 
the application of Rule 11a2-2(T) found in Amendment No. 1. 
Specifically, the discussion in Amendment 1 was limited to the 
application of Rule 11a2-2(T) to orders for covered accounts sent 
electronically to the OX system directly by the member from off of the 
exchange for execution. The Commission notes that the Exchange's 
discussion in Amendment No. 1 did not address instances where a member 
on the physical floor of the Exchange submits an order for a covered 
account into the OX system from the physical floor by electronic means. 
Accordingly, to rely on the exception set forth in Rule 11a2-2(T), the 
Exchange clarified that members must ensure that they send their orders 
from off the floor to an unaffiliated member for execution, in addition 
to meeting the rules' other requirements. If a member sends its order 
from off of the floor to an affiliated member that is on the floor who 
then directs the order into the OX system for execution, the member may 
not rely on Rule 11a2-2(T) for an exception from Section 11(a) of the 
Act. If a member wishes to rely on the exception found in paragraph (G) 
of Section 11(a)(1) of the Act, its order may only be executed on the 
physical floor of the Exchange. Member proprietary orders that rely on 
the exception found in Section 11(a)(1)(G) of the Act may not be 
entered into the OX system for execution.\55\
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    \55\ The Exchange represented to the Commission's staff that it 
will submit to the Commission promptly a proposed rule change 
pursuant to Rule 19b-4 under the Act to prohibit the entry of member 
orders that must rely on the exception found in Section 11(a)(1)(G) 
of the Act into the OX system. Telephone conversation among Janet 
Angstedt, Acting General Counsel, NYSE Arca, Kelly Riley, Assistant 
Director, Commission, Hong-Anh Tran, Special Counsel, Commission, 
Raymond Lombardo, Special Counsel, Commission, and Tim Fox, Special 
Counsel, Commission on July 25, 2006.
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I. Accelerated Approval of Amendment No. 3

    The Commission finds good cause for approving Amendment No. 3 to 
the proposed rule change prior to the thirtieth day after publishing 
notice of Amendment No. 3 in the Federal Register pursuant to Section 
19(b)(2) of the Act.\56\
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    In Amendment No. 3, the Exchange represents that the NASD would 
continue to carry out oversight and enforcement responsibilities as the 
Designated Examining Authority designated by the Commission pursuant to 
Rule 17d-1 under the Act \57\ with the responsibility for examining 
Archipelago Securities for compliance with the applicable financial 
responsibility rules. The Exchange also represented that it will enter 
into an agreement with the NASD pursuant to Rule 17d-2 under the Act 
\58\ to provide that NYSE Arca will delegate to the NASD all regulatory 
oversight and enforcement responsibilities with respect to Archipelago 
Securities pursuant to applicable laws, except for real-time market 
surveillance, within 90 days of the Commission's approval of this 
proposed rule change. As discussed above, the Commission believes that 
these representations raise no new issues of regulatory concern.
---------------------------------------------------------------------------

    \57\ 17 CFR 240.17d-1.
    \58\ 17 CFR 240.17d-2.
---------------------------------------------------------------------------

    As described in greater detail above, the Exchange also clarifies 
in Amendment No. 3 how the proposed OX trading platform and crossing 
procedures will comply with Section 11(a) of the Act and with the 
Linkage Plan. In the amendment, the Exchange also proposes to clarify 
its rules to incorporate an order exposure requirement comparable to 
similar rules adopted by the other options exchanges. The Exchange 
represents in Amendment No. 3 that NYSE Arca Rule 11.3 would require an 
OX Market Maker to maintain information barriers, that are reasonably 
designed to prevent the misuse of material, non-public information, 
with any affiliates that may act as specialist or market maker in any 
security underlying the options for which the OTP Holder/Firm acts as 
an OX Market Maker. In addition, the Exchange proposes to remove a 
reference to an ``opening only'' order type that the Exchange did not 
specifically propose.
    In Amendment No. 3, NYSE Arca also proposed to clarify that 
incoming marketable orders would be matched against all Working Orders 
in the Working Order Process at the price of the displayed portion (for 
Reserve Orders) or at the limit price (for all other Working Order 
types).
    The Commission notes that Amendment No. 3 is intended to reconcile 
apparent inconsistencies in other parts of the Exchange's proposed 
rules. The Commission believes that Amendment No. 3 raises no novel 
issues of regulatory concern, and is consistent with the Act. 
Therefore, the Commission finds good cause exists to accelerate 
approval of Amendment No. 3, pursuant to Section 19(b)(2) of the 
Act.\59\
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comment

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 3, including whether Amendment No. 3 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rules-comments@sec.gov. Please include 
File No. SR-NYSEArca-2006-13 on the subject line.

Paper Comments

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

All submissions should refer to Amendment No. 3 to File No. SR-
NYSEArca-2006-13. 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 (http://
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 will also be available for 
inspection and copying at the principal office of NYSE Arca. All 
comments received will be posted

[[Page 44766]]

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 
Amendment No. 3 to File No. SR-NYSEArca-2006-13 and should be submitted 
on or before August 28, 2006.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\60\ that the proposed rule change (SR-NYSEArca-2006-13), as 
amended, be, and it hereby is, approved and Amendment No. 3 is approved 
on an accelerated basis.
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    \60\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\61\
---------------------------------------------------------------------------

    \61\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-12705 Filed 8-4-06; 8:45 am]
BILLING CODE 8010-01-P