Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change Relating to A Pilot Until 10/31/06 to Put Into Operation Certain Rule Changes Pending Before the Securities and Exchange Commission to Coincide With the Exchange's Implementation of Phase 3 of the NYSE HYBRID MARKETSM, 60216-60220 [E6-16897]
Download as PDF
<![CDATA[
60216
Federal Register / Vol. 71, No. 197 / Thursday, October 12, 2006 / Notices
rule change, as amended, is consistent
with the Act and the rules and
regulations thereunder applicable to a
national securities exchange, and, in
particular, with Section 6(b)(5) of the
Act117 and Section 11A of the Act.118
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,119 that the
proposed rule change (SR–NYSE–2006–
36) and Amendment Nos. 1 and 2 are
approved.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.120
Nancy M. Morris,
Secretary.
[FR Doc. E6–16888 Filed 10–11–06; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54578; File No. SR–NYSE–
2006–82]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Order Granting Accelerated
Approval of a Proposed Rule Change
Relating to A Pilot Until 10/31/06 to Put
Into Operation Certain Rule Changes
Pending Before the Securities and
Exchange Commission to Coincide
With the Exchange’s Implementation of
Phase 3 of the NYSE HYBRID
MARKETSM
October 5, 2006.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b-4 thereunder,2
notice is hereby given that on October
5, 2006 the New York Stock Exchange
LLC (‘‘NYSE’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’)
the proposed rule change as described
in Items I and II below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice and order to solicit comments on
the proposed rule change from
interested persons and to approve the
proposed rule change on an accelerated
basis.
rwilkins on PROD1PC63 with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is proposing a pilot (the
‘‘Pilot’’) to put into operation certain
rule changes pending before the
117 15
U.S.C. 78f(b)(5).
U.S.C. 78k–1.
119 15 U.S.C. 78s(b)(2).
120 17 CFR 200.30–3(a)(12).
1 15 U.S.C 78s(b)(1).
2 17 CFR 240.19b–4.
16:21 Oct 11, 2006
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
NYSE included statements concerning
the purpose of, and basis for, the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item III below. The NYSE has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Commission approved the Hybrid
Market on March 22, 2006.4 The
approved rules did not become effective
immediately; rather they are being
implemented in a series of phases over
a period of time.
Implementation of Phase 1 of the
Hybrid Market, which focused primarily
on the ability of Floor brokers to
electronically represent their customers’
interest (‘‘e-Quote’’), was substantially
completed on April 5, 2006.
Phase 2 of the Hybrid Market focused
primarily on the ability of specialists to
use their algorithmic systems to quote
and trade. The installation of software
necessary to implement Phase 2 of the
Hybrid Market has been installed Floorwide. Some specialist firms have been
in the process of readying their systems
to quote and trade with receipt of order
information, while others have begun
quoting with receipt of such
information. Phase 2 will continue to
become operational concurrently with
the roll out of Phase 3. In addition,
beginning June 21, 2006, specialists
were permitted to algorithmically quote
(‘‘s-Quote’’) in their specialty securities,
without the receipt of order information
3 The Hybrid Market was approved on March 22,
2006. See Securities Exchange Act Release No.
53539 (March 22, 2006), 71 FR 16353 (March 31,
2006) (SR–NYSE–2004–05) (‘‘Hybrid Market
Order’’).
4 Id.
118 15
VerDate Aug<31>2005
Commission to coincide with the
Exchange’s implementation of NYSE
HYBRID MARKETSM (‘‘Hybrid
Market’’) 3 Phase 3 for the securities
identified in Exhibit 3 of its filing. The
text of the proposed rule change is
available on NYSE’s Web site (https://
www.nyse.com), at the principal office
of the Exchange, and at the
Commission’s Public Reference Room.
Jkt 211001
PO 00000
Frm 00110
Fmt 4703
Sfmt 4703
as such orders are entering Exchange
systems.5 Starting August 15, 2006,
specialists were permitted to send
algorithmically-generated trading
messages to interact with the Exchange
quotation (‘‘hit bid/take offer’’), also
without receipt of order information as
such orders are entering Exchange
systems.6
Phase 3 of the Hybrid Market, as
approved, includes implementation of
the following features:
• Automatic routing of orders to
automated markets posting better bids
and offers in accordance with
Regulation NMS;
• Availability of NYSE IOC orders for
automatic executions;
• Use of indicators to identify NYSE
quotations that are not immediately
available for automatic execution;
• Implementation of gap quoting
requirements;
• Elimination of 1,099 size restriction
for automatic executions and increase in
size eligibility for automatic executions
to 1 million shares; 7
• Elimination of 30-second restriction
on the entry of auto ex orders on orders
from the same person;
• Availability of automatic executions
through the close;
• Elimination of Direct+ availability
only to straight limit orders;
• Elimination of Direct+ suspensions
due to price (i.e., a trade at a price that
would be more than five cents from the
last trade in the stock on the Exchange);
• Elimination of Direct+ suspensions
due to size (i.e., a 100-share published
bid or offer);
• Conversion of marketable limit
orders to auto ex orders; and
• Automatic executions of market
orders.8
The Exchange intends to begin
implementation of Phase 3 on October
6, 2006. The Exchange has proposed
changes to some of the rules already
approved for implementation in Phase
3 9 as well as moving the
implementation of sweeps and liquidity
replenishment points (‘‘LRPs’’)
5 See Securities Exchange Act Release No. 54024
(June 21, 2006), 71 FR 36849 (June 28, 2006) (SR–
NYSE–2006–44). This is effective until Phase 2 is
fully implemented.
6 See Securities Exchange Act Release No. 54316
(August 15, 2006), 71 FR 48569 (August 21, 2006)
(SR–NYSE–2006–59). This is effective until Phase
2 is fully implemented.
7 See Securities Exchange Act Release No. 54520
(September 27, 2006), 71 FR 57590 (September 29,
2006) (SR–NYSE–2006–65) (proposing to amend
several Exchange Rules to clarify certain definitions
and systemic processes (‘‘Omnibus Filing’’)).
8 Id.
9 See Omnibus Filing.
E:\FR\FM\12OCN1.SGM
12OCN1
Federal Register / Vol. 71, No. 197 / Thursday, October 12, 2006 / Notices
rwilkins on PROD1PC63 with NOTICES
originally included for Phase 4 to Phase
3.10
In addition, the Exchange has
proposed modifications to other
Exchange Rules that the Exchange
proposes to become operational as part
of Phase 3 and are the subject of other
pending rule filings.11 The substantive
proposed amendments in the Omnibus
Filing, Stabilization Filing and Block
Cross Filing are necessary to a
successful implementation of Phase 3,
except the proposed changes in the
Omnibus filing applicable to ‘‘auction
limit’’ and ‘‘auction market’’ orders.
These order types will not be available
in Phase 3.
Accordingly, the Exchange proposes
to implement on a pilot basis the
changes that the Exchange has proposed
in the Omnibus Filing, Stabilization
Filing, and the Block Cross Filing.12 The
proposed amendments to rules
previously approved in the Hybrid
Market 13 and new proposals 14 are
discussed in detail in those filings. The
Pilot would apply to a group of
securities, known as Phase 3 Pilot
securities (‘‘Pilot securities’’).15 The
Pilot would commence following
10 The Commission notes that the Exchange has
proposed changes to its sweep functionality and
LRPs. Specifically, in the Omnibus Filing, the
Exchange proposes to amend NYSE Rule
1000(d)(iii) to provide that during a sweep, an order
will trade with all interest at each price capable of
trading, before moving to the next price point. In
addition, the Exchange proposes to amend NYSE
Rule 1000(a)(iv) to implement a single LRP rather
than the two LRPs originally approved in the
Hybrid Market Order. These Omnibus Filing
changes are included in the Pilot.
11 See Securities Exchange Act Release No. 54504
(September 26, 2006), 71 FR 57011 (September 28,
2006) (SR–NYSE 2006–76) (proposing to amend the
specialist stabilization requirements set forth in
Exchange Rule 104.10 (‘‘Stabilization Filing’’)); and
SR–NYSE–2006–73 (filed on September 13, 2006)
(proposing to amend Exchange Rule 127 which
governs the execution of a block cross transaction
at a price outside the prevailing NYSE quotation
(‘‘Block Cross Filing’’)). See also Omnibus Filing
(proposing amendments to Exchange Rules related
to stop order and stop limit orders).
12 The amendments to Exchange rules proposed
pursuant to the Omnibus Filing, Stabilization Filing
and Block Cross Filing are attached to the filing,
available on the Exchange’s Web site, as Exhibits
5A, 5B, and 5C respectively. In Exhibit 5 of the
filing the Exchange proposes to retain NYSE Rule
104.10(7) and to add language to NYSE Rule
104.10(5)(i)(a)(II)(a) to clarify that such transactions
are other than those reaching across the market.
These changes are not reflected in the Stabilization
Filing and Exhibit 5B. In addition, in Exhibit 5 of
the filing, the Exchange proposes additional
changes to Exchange Rule 127 that are also not
reflected in the Block Cross Filing and Exhibit 5C.
The Exchange intends to submit amendments to the
aforementioned filings to the Commission to reflect
these changes.
13 See Omnibus Filing.
14 See Stabilization Filing, Block Cross Filing and
proposed amendments to stop orders and stop limit
orders contained in Omnibus Filing.
15 Phase 3 Pilot securities will also be posted on
the Exchange’s Web site.
VerDate Aug<31>2005
16:21 Oct 11, 2006
Jkt 211001
Securities and Exchange Commission
approval of the Pilot 16 and will
terminate on the close of business on
October 31, 2006.
The Exchange plans to phase-in the
securities in the Pilot, if approved, over
several weeks. However, Exchange Rule
1002(P3) (‘‘Availability of Automatic
Execution Feature’’), which extends
automatic executions to the close, will
apply to all securities on the Exchange
upon commencement of the Pilot.17
To eliminate possible confusion as to
which Exchange Rules or sections
thereof apply to the Pilot securities, the
Exchange has identified the rules that
will be operational during the Pilot with
a ‘‘P3.’’
For purposes of the Pilot, the
Exchange further requests that the
Commission re-interpret the specialist’s
negative obligation to eliminate the
requirement with respect to Exchange
Rule 104(a) that each trade by the
specialist for the dealer account meet a
test of reasonable necessity.18 The
Exchange believes that such an
interpretation is appropriate in view of
the development of the national market
system over the past seventy years since
the interpretation was initially issued.
According to the Exchange, the
Commission has been granted specific
authority by Congress to reinterpret the
negative obligation. Specifically, in
1975, in connection with the 1975
amendments 19 to the Act, Congress
eliminated the negative obligation
clause from Section 11(b) of the Act and
gave the Commission the flexibility to
define dealer obligations for both
exchange members and over-the-counter
market makers. In making the changes,
Congress noted that changes in the
marketplace might warrant changes in
the scope of the dealer obligation:
16 The changes related to stop orders and stop
limit orders proposed in the Omnibus Filing will
be implemented on October 16, 2006 pending SEC
approval of this Pilot, to give customers and
member organizations sufficient time to make any
changes necessary as a result of the elimination of
stop limit orders.
17 The extension of automatic executions to the
close as set forth in NYSE Rule 1002 was approved
as part of the Hybrid Market filings. See Securities
Exchange Act Release No. 53539, supra note 3. As
approved, NYSE Rule 1002 was always intended for
implementation in Phase 3. The amendments to
NYSE Rule 1002, set forth in the pending Omnibus
Filing, are merely technical in nature, clarifying the
rule’s applicability, rather than the operation.
18 The Exchange is not seeking to have the
Commission eliminate trade-by-trade analysis with
respect to rules specifically calling for such an
analysis, such as rules relating to Prohibited trades
under NYSE Rule 104.10(5) and Conditional trades
in inactive securities and NYSE Rule 104.10(6).
19 Securities Acts Amendments of 1975 (‘‘1975
Amendments’’), Pub. L. No. 94–29, 89 Stat. 97 (June
4, 1975).
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
60217
It might well be that with active
competition among market makers and the
elimination of trading advantages specialists
now enjoy, such a restriction on specialists’
dealings would become unnecessary.
Because trading patterns and market making
behavior in the context of a national market
system cannot now be predicted, it appears
appropriate to expand the Commission’s
rulemaking authority in this area so that the
Commission may define responsibilities and
restrict activities of specialists in response to
changing market conditions.20
The Exchange believes that the
conditions for change that were
identified by Congress have largely
come to pass, and that as a result, it is
appropriate to redefine the scope of the
specialist’s negative obligation. For
example, the institutionalization of the
market, increased competition, and
increased application of computer and
communication technology has
significantly diminished the time-andplace advantages of specialists. As a
result, markets have seen increases in
the average daily trading volume and
the movement off the Floor of the
decision making that affects the
direction and extent of movements in
the specialty stocks. There is also a
dramatic increase in transparency with
respect to the specialist’s book through,
among other things, Exchange initiatives
like Exchange OPENBOOK.TM This
increased transparency gives all market
participants, both on and off the Floor,
a greater ability to see and react to
market changes.
There has also been a significant
increase in competition in Exchangelisted securities. For example, unlike in
previous years, Exchange specialists
must now compete with upstairs
liquidity providers and with multiple
OTC dealers, crossing networks and
Alternative Trading Systems. As a result
of UTP and dual listings, specialists also
face competition from other national
and regional exchanges. For all of these
reasons, the Exchange believes that it is
appropriate to reinterpret the negative
obligation away from an emphasis on
trade-by-trade necessity, and toward an
approach based on patterns and
practices in the trading of specialty
securities for the dealer account.
New York Stock Exchange Regulation
(‘‘NYSER’’) has appropriate surveillance
procedures in place to surveil for
compliance with the negative obligation
by specialists. For example, NYSER will
monitor, on a pattern and practice basis,
specialist activity that appears to cause
or exacerbate an excessive price
movement in the market, as such
transactions would appear to be in
violation with a specialist’s negative
20 S.
E:\FR\FM\12OCN1.SGM
Rep. No. 94–75, at 100 (1975).
12OCN1
rwilkins on PROD1PC63 with NOTICES
60218
Federal Register / Vol. 71, No. 197 / Thursday, October 12, 2006 / Notices
obligation. Additionally, the Division of
Market Surveillance of NYSER will
monitor for all subsequent action taken
by the specialist, or lack thereof, to
cushion such price movement. As
today, the Exchange will in the context
of price volatility alerts, monitor for
excessive price movements that may
involve a failure to comply with either
the affirmative or negative obligation.
As the Exchange gains experience with
its new market structure, the Exchange
will enhance existing surveillances and/
or create new surveillances where
necessary and appropriate to monitor
for compliance with the specialist
negative obligations.
The Exchange believes the Pilot will
prove beneficial from both a technology
and a training perspective. The process
will allow for a controlled and
moderated roll out of the new systems
and capabilities. The Pilot will allow
the Exchange to commence
implementation of Hybrid Market Phase
3, as amended, therefore providing the
Exchange and users with real-time
testing of those functionalities.
Further, the Pilot will give the
Exchange the opportunity to identify
and address any system problems and to
identify and incorporate beneficial
system changes that become apparent as
a result of usage in real time and under
real market conditions. The ability to
have such real time user interface will
be invaluable, as it is impossible to
accurately anticipate behavioral changes
in a development or mock-trading
environment. In addition, the Pilot will
allow users to gain essential practical
experience with the new systems and
processes in a well-modulated way.
Prior to the Pilot, there has been
comprehensive training for both Floor
brokers and specialists, individually
and together in a mock trading
environment. Training was conducted
by the Exchange and was supplemented
in most cases by firm-specific training
conducted by member organizations for
their employees. The Exchange training
environment was made available also to
proprietary system vendors for their
training sessions.
In addition, testing has occurred at all
levels, including development testing,
automation testing, SIAC testing, NYSE
testing, integrated system testing and
code reviews, production environment
testing, fall-back and recovery testing,
and regression and new functionality
testing.
Moreover, the Exchange intends to
have available at all times during the
Pilot two versions of the operating
software—the new version that would
be operational and the original, pre-Pilot
version. If a problem develops during
VerDate Aug<31>2005
17:55 Oct 11, 2006
Jkt 211001
the Pilot, the Exchange will be able to
revert to the pre-Pilot software within
an average time of two minutes or less.
The Pilot will also enable the
Exchange to be fully Regulation NMS 21compliant by February 5, 2007 date and
comply with its obligations under the
proposed NMS Linkage Plan.22 Without
this Pilot, it is unlikely the Exchange
will be able to meet either requirement.
The Exchange anticipates that the
Pilot will operate with minimal
problems given the amount and degree
of testing and training that has occurred
to date. Accordingly, the Exchange
believes that the extensiveness of the
testing and training, the phase-in
approach described above and the fallback capabilities of Exchange Systems
provide significant assurances that the
Pilot will operate as expected. However,
in the event systems or other problems
arise with the Pilot that adversely
impact investors or impede the
Exchange’s ability to maintain a fair and
orderly market, the Exchange will
immediately terminate the Pilot in
whole or in part, as appropriate, and
return trading to current operations
under current NYSE rules.
Finally, the Exchange represents that
it will provide the Commission with any
and all data and analysis the
Commission may request regarding the
operation of the rules governing
stabilization.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b)(5) of the Act 23 that an
exchange have rules that are designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system and, in general, to protect
investors and the public interest. The
Exchange believes that the proposed
rule change is also designed to support
the principles of Section 11A(a)(1) 24 of
the Act in that it seeks to assure
economically efficient execution of
securities transactions, make it
practicable for brokers to execute
21 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005) (17 CFR
Parts 200, 201, 230, 240, 242, 249, and 270).
22 A ‘‘Plan for the Purpose of Creating and
Operating an Intermarket Communications Linkage
Pursuant to Section 11A(a)(3)(B) of the Securities
Exchange Act of 1934’’ to facilitate trades between
different market centers. See Securities Exchange
Act Release No. 54551 (September 29, 2006). The
Commission published notice of the NMS Linkage
Plan on July 28, 2006. See also Securities Exchange
Act Release No. 54239 (July 28, 2006), 71 FR 44328
(August 4, 2006), 17 CFR 242.608.
23 15 U.S.C. 78f(b)(5).
24 15 U.S.C. 78k–1(a)(1).
PO 00000
Frm 00112
Fmt 4703
Sfmt 4703
investors’ orders in the best market and
provide an opportunity for investors’
orders to be executed without the
participation of a dealer.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.25
III. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NYSE–2006–82 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
Station Place, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSE–2006–82. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
25 The Commission notes that it has received a
comment letter in response to the Omnibus Filing.
E:\FR\FM\12OCN1.SGM
12OCN1
Federal Register / Vol. 71, No. 197 / Thursday, October 12, 2006 / Notices
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing also will be
available for inspection and copying at
the principal office of the NYSE. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NYSE–2006–82 and should
be submitted on or before November 2,
2006.
rwilkins on PROD1PC63 with NOTICES
IV. Commission’s Finding and Order
Granting Accelerated Approval of the
Proposed Rule Change
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.26 Specifically, the
Commission finds that approval of the
proposed rule change is consistent with
Section 6(b)(5) of the Act because the
proposal is designed to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
With this proposed rule change, the
Exchange has requested temporary
approval by the Commission of certain
proposed amendments to the rules that
govern its Hybrid Market, so that it may
begin to implement Phase 3, with the
rules that the Exchange has proposed to
amend while these changes are pending
approval by the Commission. According
to the Exchange, this Pilot is necessary
so that the Exchange can maintain its
planned implementation schedule for
the Hybrid Market and meet the
Regulation NMS compliance dates. In
addition, this Pilot will allow NYSE to
comply with the new NMS Linkage
Plan.
The Commission is considering each
of the proposed filings that are pending,
including comments received, if any,
and has not reached a decision on
whether they should be approved or
disapproved. The Commission,
however, believes that due to the
limited nature of the Pilot and its short
duration, it is consistent with the Act to
allow NYSE to implement the Pilot so
that it may remain on schedule for
Regulation NMS compliance, begin
26 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).
VerDate Aug<31>2005
16:21 Oct 11, 2006
Jkt 211001
testing its new systems with this Pilot
and comply with the NMS Linkage Plan.
The NYSE explained in its filing that
it has tested these Hybrid Market
functions extensively but that it needs
to test them in an actual trading
environment to ensure that they operate
as intended. Accordingly, NYSE
represented that it does not anticipate
any significant problems arising from
the Pilot. However, NYSE will
immediately terminate the Pilot, in
whole or in part, as appropriate, should
any systems or other problems arise that
adversely impact the protection of
investors or impede its ability to
maintain a fair and orderly market, and
return trading to its current operations
under current NYSE rules.27
A. Stabilization Filing
The Commission is currently
considering the Stabilization Filing. As
noted above, the Exchange has also
requested a temporary interpretation by
the Commission of the specialists’
negative obligation set forth in NYSE
Rule 104(a) to eliminate the requirement
that each trade by a specialist meet a
test of reasonable necessity. NYSE Rule
104(a) states that ‘‘no specialist shall
effect on the Exchange purchases or
sales of any security in which such
specialist is registered, for any account
in which he or his member organization
* * * is directly or indirectly
interested, unless such dealings are
reasonably necessary to permit such
specialist to maintain a fair and orderly
market * * *’’ In 1937, the Commission
issued an interpretation (‘‘Saperstein
Interpretation’’) that among other things,
stated that each transaction by a
specialist for his own account must
meet the test of reasonable necessity.28
The Saperstein Interpretation made
clear that specialist’s transactions for his
own account would be required to meet
the rule on a transaction-by-transaction
basis, rather than on a review of such
transactions generally.
In its filing, the NYSE requested that
the Commission re-interpret the
specialist’s negative obligation to
eliminate the requirement that each
27 The Exchange stated that it would be able to
revert back to pre-Pilot operations within an
average of two minutes or less. The Exchange
represents that it intends to have available at all
times during the Pilot two versions of the operating
software: (1) The new version that would be
operational during the Pilot and (2) the original,
pre-Pilot version which would operational in case
the Pilot prematurely needs to be terminated. The
Exchange will notify the public via its Web site if
the Pilot is terminated in whole or in part. In
addition, the Exchange will notify floor members at
the post if the Pilot is terminated in whole or in
part.
28 See Securities Exchange Release No. 1117
(March 30, 1937), at 4.
PO 00000
Frm 00113
Fmt 4703
Sfmt 4703
60219
trade by the specialist for its dealer
account meet a test of reasonable
necessity. The Exchange has stated that
it intends to amend the Stabilization
Filing to include such a request there as
well. The Commission notes that the
comment period for the Stabilization
Filing has not yet expired, and the
Commission specifically requests
comment on the appropriateness of the
Exchange’s request to amend the
Commission’s interpretation that the
specialist’s negative obligation be
evaluated on a transaction-bytransaction basis.
The Commission agrees with the
NYSE that the national market system
has changed greatly in the nearly
seventy years since the Saperstein
Interpretation was issued. The
Commission also agrees that increased
automation and competition—both
within the Hybrid Market and in the
markets generally—are significant
factors, among others, that must be
considered with regard to the scope of
specialists’ responsibilities and
obligations. The Commission intends to
fully consider the NYSE’s request
relating to the transaction-by-transaction
requirement of the Saperstein
Interpretation when it decides whether
to approve the Stabilization Filing, as
amended. However, the Commission
preliminarily believes that the
Exchange’s request may have merit and,
therefore, is permitting, as part of this
Pilot, the Exchange to review the
specialists’ negative obligations on a
pattern and practice basis, rather than
on a transaction-by-transaction basis.
The Commission emphasizes that this
review applies solely to the
interpretation of Exchange Rule 104(a)
and notes that the specific requirements
and restrictions applicable to
specialists, set forth in NYSE Rule
104.10(5)(i)(b), Rule 104.10(5)(i)(c), and
Rule 104.10(6), must be reviewed and
complied with for each individual
transaction. Further, this temporary
interpretation applies solely to the Pilot
Securities.
The Exchange represented that it will
conduct surveillance of specialist
trading for compliance with their
negative obligation. NYSE further
represented that it will enhance existing
surveillance and/or create new
surveillances as necessary and
appropriate to monitor for compliance
with the negative obligation. The
Commission wishes to emphasize that
specialists remain subject to the
restrictions set forth in the negative
E:\FR\FM\12OCN1.SGM
12OCN1
60220
Federal Register / Vol. 71, No. 197 / Thursday, October 12, 2006 / Notices
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration # 10634]
obligation with regard to proprietary
trading.29
B. Accelerated Approval of the Pilot
Proposal
V. Conclusion
It is therefor ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–NYSE–2006–
82) is hereby approved on an
accelerated basis until October 31, 2006.
For the Commission, by the Division of
Market Regulation, by delegated authority.31
Nancy M. Morris,
Secretary.
[FR Doc. E6–16897 Filed 10–11–06; 8:45 am]
rwilkins on PROD1PC63 with NOTICES
BILLING CODE 8011–01–P
29 See also Hybrid Market Order for a discussion
of the negative obligation, supra note 3.
30 15 U.S.C. 78s(b)(2).
31 17 CFR 200.30–3(a)(12).
16:21 Oct 11, 2006
Jkt 211001
(Catalog of Federal Domestic Assistance
Number 59002).
Disaster # ZZ-00002; The Entire United
States and U.S. Territories
The Commission finds good cause,
pursuant to Section 19(b)(2) of the
Act,30 for approving the proposed rule
change prior to the thirtieth day after
the date of publication of the notice in
the Federal Register. The Pilot, which
as discussed above is limited in scope
and duration, will allow the NYSE to
remain on schedule for compliance with
Regulation NMS, comply with the NMS
Linkage Plan and to conduct real-time
system and user testing of certain
features of the Hybrid Market.
According to NYSE, such testing should
be beneficial from both a technology
and a training perspective. Although
preliminary steps have been taken—in
the form of NYSE-provided training for
both Floor brokers and specialists,
training by member organizations for
their employees, and training by
proprietary system vendors in the NYSE
trading environment for their training
sessions—the Pilot should give the
Exchange the opportunity to identify
and address any system problems with
these particular rules under the Hybrid
Market. Further, the Pilot should allow
users to gain essential practical
experience with the new systems and
processes. Therefore, the Commission
finds that immediate implementation of
the Pilot, which is limited in both scope
and duration, should permit NYSE to
remain on schedule to meet the
Regulation NMS compliance dates,
comply with the NMS Linkage Plan and
continue to implement its Hybrid
Market changes in an orderly manner.
VerDate Aug<31>2005
The number assigned for economic
injury is 10634 0.
U.S. Small Business
Administration.
ACTION: Notice.
AGENCY:
Herbert L. Mitchell,
Associate Administrator for Disaster
Assistance.
[FR Doc. E6–16869 Filed 10–11–06; 8:45 am]
BILLING CODE 8025–01–P
This is a notice of the Military
Reservist Economic Injury Disaster Loan
Program (MREIDL), dated 10/1/2006.
DATES: Effective Date: 10/1/2006.
MREIDL Loan Application Deadline
Date: 90 days after the essential
employee is discharged or released from
active duty.
ADDRESSES: Submit completed loan
applications to:
U.S. Small Business Administration,
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 Public
Law 106–50, the Veterans
Entrepreneurship and Small Business
Development Act of 1999, this notice
establishes the application filing period
for the Military Reservist Economic
Injury Disaster Loan Program.
Effective 10/1/2006, small businesses
employing military reservists may apply
for economic injury disaster loans if
those employees are called up to active
duty during a period of military conflict
existing on or after March 24, 1999 and
those employees are essential to the
success of the small business daily
operations.
The purpose of the Military Reservist
economic injury disaster loan program
(MREIDL) is to provide funds to eligible
small businesses to meet its ordinary
and necessary operating expenses that it
could have met, but is unable to meet,
because an essential employee was
called-up to active duty in their role as
a military reservist. These loans are
intended only to provide the amount of
working capital needed by a small
business to pay its necessary obligations
as they mature until operations return to
normal after the essential employee is
released from active duty. For
information/applications contact 1–
800–659–2955 or visit https://
www.sba.gov.
Applications for the Military Reservist
Economic Injury Disaster Loan Program
may be filed at the above address.
The Interest Rate for eligible small
businesses is 4.000.
SUMMARY:
PO 00000
Frm 00114
Fmt 4703
Sfmt 4703
SMALL BUSINESS ADMINISTRATION
Small Business Size Standards:
Waiver of the Nonmanufacturer Rule
U.S. Small Business
Administration.
ACTION: Notice of intent to waive the
Nonmanufacturer Rule for Personal
Computers.
AGENCY:
SUMMARY: The U.S. Small Business
Administration (SBA) is considering
granting a request for a waiver of the
Nonmanufacturer Rule for Personal
Computers Manufacturing. According to
the request, no small business
manufacturers are supplying this class
of product to the Federal government. If
granted, the waiver would allow
otherwise qualified regular dealers to
supply the products of any domestic
manufacturer on a Federal contract set
aside for small businesses; servicedisabled veteran-owned small business
or SBA’s 8(a) Business Development
Program.
DATES: Comments and source
information must be submitted October
27, 2006.
ADDRESSES: You may submit comments
and source information to Edith Butler,
Program Analyst, U.S. Small Business
Administration, Office of Government
Contracting, 409 3rd Street, SW., Suite
8800, Washington, DC 20416.
FOR FURTHER INFORMATION CONTACT:
Edith Butler, Program Analyst, by
telephone at (202) 619–0422; by FAX at
(202) 481–1788; or by e-mail at
edith.butler@sba.gov.
Section
8(a)(17) of the Small Business Act (Act),
15 U.S.C. 637(a)(17), requires that
recipients of Federal contracts set aside
for small businesses, service-disabled
veteran-owned small businesses, or
SBA’s 8(a) Business Development
Program provide the product of a small
business manufacturer or processor, if
the recipient is other than the actual
manufacturer or processor of the
product. This requirement is commonly
referred to as the Nonmanufacturer
Rule. The SBA regulations imposing
this requirement are found at 13 CFR
121.406(b). Section 8(a)(17)(b)(iv) of the
SUPPLEMENTARY INFORMATION:
E:\FR\FM\12OCN1.SGM
12OCN1
]]>Agencies
[Federal Register Volume 71, Number 197 (Thursday, October 12, 2006)]
[Notices]
[Pages 60216-60220]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-16897]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54578; File No. SR-NYSE-2006-82]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing and Order Granting Accelerated Approval of a Proposed
Rule Change Relating to A Pilot Until 10/31/06 to Put Into Operation
Certain Rule Changes Pending Before the Securities and Exchange
Commission to Coincide With the Exchange's Implementation of Phase 3 of
the NYSE HYBRID MARKETSM
October 5, 2006.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 5, 2006 the New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice and order to solicit comments
on the proposed rule change from interested persons and to approve the
proposed rule change on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing a pilot (the ``Pilot'') to put into
operation certain rule changes pending before the Commission to
coincide with the Exchange's implementation of NYSE HYBRID
MARKETSM (``Hybrid Market'') \3\ Phase 3 for the securities
identified in Exhibit 3 of its filing. The text of the proposed rule
change is available on NYSE's Web site (https://www.nyse.com), at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
---------------------------------------------------------------------------
\3\ The Hybrid Market was approved on March 22, 2006. See
Securities Exchange Act Release No. 53539 (March 22, 2006), 71 FR
16353 (March 31, 2006) (SR-NYSE-2004-05) (``Hybrid Market Order'').
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NYSE included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The NYSE has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Commission approved the Hybrid Market on March 22, 2006.\4\ The
approved rules did not become effective immediately; rather they are
being implemented in a series of phases over a period of time.
---------------------------------------------------------------------------
\4\ Id.
---------------------------------------------------------------------------
Implementation of Phase 1 of the Hybrid Market, which focused
primarily on the ability of Floor brokers to electronically represent
their customers' interest (``e-Quote''), was substantially completed on
April 5, 2006.
Phase 2 of the Hybrid Market focused primarily on the ability of
specialists to use their algorithmic systems to quote and trade. The
installation of software necessary to implement Phase 2 of the Hybrid
Market has been installed Floor-wide. Some specialist firms have been
in the process of readying their systems to quote and trade with
receipt of order information, while others have begun quoting with
receipt of such information. Phase 2 will continue to become
operational concurrently with the roll out of Phase 3. In addition,
beginning June 21, 2006, specialists were permitted to algorithmically
quote (``s-Quote'') in their specialty securities, without the receipt
of order information as such orders are entering Exchange systems.\5\
Starting August 15, 2006, specialists were permitted to send
algorithmically-generated trading messages to interact with the
Exchange quotation (``hit bid/take offer''), also without receipt of
order information as such orders are entering Exchange systems.\6\
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 54024 (June 21,
2006), 71 FR 36849 (June 28, 2006) (SR-NYSE-2006-44). This is
effective until Phase 2 is fully implemented.
\6\ See Securities Exchange Act Release No. 54316 (August 15,
2006), 71 FR 48569 (August 21, 2006) (SR-NYSE-2006-59). This is
effective until Phase 2 is fully implemented.
---------------------------------------------------------------------------
Phase 3 of the Hybrid Market, as approved, includes implementation
of the following features:
Automatic routing of orders to automated markets posting
better bids and offers in accordance with Regulation NMS;
Availability of NYSE IOC orders for automatic executions;
Use of indicators to identify NYSE quotations that are not
immediately available for automatic execution;
Implementation of gap quoting requirements;
Elimination of 1,099 size restriction for automatic
executions and increase in size eligibility for automatic executions to
1 million shares; \7\
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 54520 (September 27,
2006), 71 FR 57590 (September 29, 2006) (SR-NYSE-2006-65) (proposing
to amend several Exchange Rules to clarify certain definitions and
systemic processes (``Omnibus Filing'')).
---------------------------------------------------------------------------
Elimination of 30-second restriction on the entry of auto
ex orders on orders from the same person;
Availability of automatic executions through the close;
Elimination of Direct+ availability only to straight limit
orders;
Elimination of Direct+ suspensions due to price (i.e., a
trade at a price that would be more than five cents from the last trade
in the stock on the Exchange);
Elimination of Direct+ suspensions due to size (i.e., a
100-share published bid or offer);
Conversion of marketable limit orders to auto ex orders;
and
Automatic executions of market orders.\8\
---------------------------------------------------------------------------
\8\ Id.
---------------------------------------------------------------------------
The Exchange intends to begin implementation of Phase 3 on October
6, 2006. The Exchange has proposed changes to some of the rules already
approved for implementation in Phase 3 \9\ as well as moving the
implementation of sweeps and liquidity replenishment points (``LRPs'')
[[Page 60217]]
originally included for Phase 4 to Phase 3.\10\
---------------------------------------------------------------------------
\9\ See Omnibus Filing.
\10\ The Commission notes that the Exchange has proposed changes
to its sweep functionality and LRPs. Specifically, in the Omnibus
Filing, the Exchange proposes to amend NYSE Rule 1000(d)(iii) to
provide that during a sweep, an order will trade with all interest
at each price capable of trading, before moving to the next price
point. In addition, the Exchange proposes to amend NYSE Rule
1000(a)(iv) to implement a single LRP rather than the two LRPs
originally approved in the Hybrid Market Order. These Omnibus Filing
changes are included in the Pilot.
---------------------------------------------------------------------------
In addition, the Exchange has proposed modifications to other
Exchange Rules that the Exchange proposes to become operational as part
of Phase 3 and are the subject of other pending rule filings.\11\ The
substantive proposed amendments in the Omnibus Filing, Stabilization
Filing and Block Cross Filing are necessary to a successful
implementation of Phase 3, except the proposed changes in the Omnibus
filing applicable to ``auction limit'' and ``auction market'' orders.
These order types will not be available in Phase 3.
---------------------------------------------------------------------------
\11\ See Securities Exchange Act Release No. 54504 (September
26, 2006), 71 FR 57011 (September 28, 2006) (SR-NYSE 2006-76)
(proposing to amend the specialist stabilization requirements set
forth in Exchange Rule 104.10 (``Stabilization Filing'')); and SR-
NYSE-2006-73 (filed on September 13, 2006) (proposing to amend
Exchange Rule 127 which governs the execution of a block cross
transaction at a price outside the prevailing NYSE quotation
(``Block Cross Filing'')). See also Omnibus Filing (proposing
amendments to Exchange Rules related to stop order and stop limit
orders).
---------------------------------------------------------------------------
Accordingly, the Exchange proposes to implement on a pilot basis
the changes that the Exchange has proposed in the Omnibus Filing,
Stabilization Filing, and the Block Cross Filing.\12\ The proposed
amendments to rules previously approved in the Hybrid Market \13\ and
new proposals \14\ are discussed in detail in those filings. The Pilot
would apply to a group of securities, known as Phase 3 Pilot securities
(``Pilot securities'').\15\ The Pilot would commence following
Securities and Exchange Commission approval of the Pilot \16\ and will
terminate on the close of business on October 31, 2006.
---------------------------------------------------------------------------
\12\ The amendments to Exchange rules proposed pursuant to the
Omnibus Filing, Stabilization Filing and Block Cross Filing are
attached to the filing, available on the Exchange's Web site, as
Exhibits 5A, 5B, and 5C respectively. In Exhibit 5 of the filing the
Exchange proposes to retain NYSE Rule 104.10(7) and to add language
to NYSE Rule 104.10(5)(i)(a)(II)(a) to clarify that such
transactions are other than those reaching across the market. These
changes are not reflected in the Stabilization Filing and Exhibit
5B. In addition, in Exhibit 5 of the filing, the Exchange proposes
additional changes to Exchange Rule 127 that are also not reflected
in the Block Cross Filing and Exhibit 5C. The Exchange intends to
submit amendments to the aforementioned filings to the Commission to
reflect these changes.
\13\ See Omnibus Filing.
\14\ See Stabilization Filing, Block Cross Filing and proposed
amendments to stop orders and stop limit orders contained in Omnibus
Filing.
\15\ Phase 3 Pilot securities will also be posted on the
Exchange's Web site.
\16\ The changes related to stop orders and stop limit orders
proposed in the Omnibus Filing will be implemented on October 16,
2006 pending SEC approval of this Pilot, to give customers and
member organizations sufficient time to make any changes necessary
as a result of the elimination of stop limit orders.
---------------------------------------------------------------------------
The Exchange plans to phase-in the securities in the Pilot, if
approved, over several weeks. However, Exchange Rule 1002(P3)
(``Availability of Automatic Execution Feature''), which extends
automatic executions to the close, will apply to all securities on the
Exchange upon commencement of the Pilot.\17\
---------------------------------------------------------------------------
\17\ The extension of automatic executions to the close as set
forth in NYSE Rule 1002 was approved as part of the Hybrid Market
filings. See Securities Exchange Act Release No. 53539, supra note
3. As approved, NYSE Rule 1002 was always intended for
implementation in Phase 3. The amendments to NYSE Rule 1002, set
forth in the pending Omnibus Filing, are merely technical in nature,
clarifying the rule's applicability, rather than the operation.
---------------------------------------------------------------------------
To eliminate possible confusion as to which Exchange Rules or
sections thereof apply to the Pilot securities, the Exchange has
identified the rules that will be operational during the Pilot with a
``P3.''
For purposes of the Pilot, the Exchange further requests that the
Commission re-interpret the specialist's negative obligation to
eliminate the requirement with respect to Exchange Rule 104(a) that
each trade by the specialist for the dealer account meet a test of
reasonable necessity.\18\ The Exchange believes that such an
interpretation is appropriate in view of the development of the
national market system over the past seventy years since the
interpretation was initially issued.
---------------------------------------------------------------------------
\18\ The Exchange is not seeking to have the Commission
eliminate trade-by-trade analysis with respect to rules specifically
calling for such an analysis, such as rules relating to Prohibited
trades under NYSE Rule 104.10(5) and Conditional trades in inactive
securities and NYSE Rule 104.10(6).
---------------------------------------------------------------------------
According to the Exchange, the Commission has been granted specific
authority by Congress to reinterpret the negative obligation.
Specifically, in 1975, in connection with the 1975 amendments \19\ to
the Act, Congress eliminated the negative obligation clause from
Section 11(b) of the Act and gave the Commission the flexibility to
define dealer obligations for both exchange members and over-the-
counter market makers. In making the changes, Congress noted that
changes in the marketplace might warrant changes in the scope of the
dealer obligation:
---------------------------------------------------------------------------
\19\ Securities Acts Amendments of 1975 (``1975 Amendments''),
Pub. L. No. 94-29, 89 Stat. 97 (June 4, 1975).
It might well be that with active competition among market
makers and the elimination of trading advantages specialists now
enjoy, such a restriction on specialists' dealings would become
unnecessary. Because trading patterns and market making behavior in
the context of a national market system cannot now be predicted, it
appears appropriate to expand the Commission's rulemaking authority
in this area so that the Commission may define responsibilities and
restrict activities of specialists in response to changing market
conditions.\20\
---------------------------------------------------------------------------
\20\ S. Rep. No. 94-75, at 100 (1975).
The Exchange believes that the conditions for change that were
identified by Congress have largely come to pass, and that as a result,
it is appropriate to redefine the scope of the specialist's negative
obligation. For example, the institutionalization of the market,
increased competition, and increased application of computer and
communication technology has significantly diminished the time-and-
place advantages of specialists. As a result, markets have seen
increases in the average daily trading volume and the movement off the
Floor of the decision making that affects the direction and extent of
movements in the specialty stocks. There is also a dramatic increase in
transparency with respect to the specialist's book through, among other
things, Exchange initiatives like Exchange OPENBOOK.TM This
increased transparency gives all market participants, both on and off
the Floor, a greater ability to see and react to market changes.
There has also been a significant increase in competition in
Exchange-listed securities. For example, unlike in previous years,
Exchange specialists must now compete with upstairs liquidity providers
and with multiple OTC dealers, crossing networks and Alternative
Trading Systems. As a result of UTP and dual listings, specialists also
face competition from other national and regional exchanges. For all of
these reasons, the Exchange believes that it is appropriate to
reinterpret the negative obligation away from an emphasis on trade-by-
trade necessity, and toward an approach based on patterns and practices
in the trading of specialty securities for the dealer account.
New York Stock Exchange Regulation (``NYSER'') has appropriate
surveillance procedures in place to surveil for compliance with the
negative obligation by specialists. For example, NYSER will monitor, on
a pattern and practice basis, specialist activity that appears to cause
or exacerbate an excessive price movement in the market, as such
transactions would appear to be in violation with a specialist's
negative
[[Page 60218]]
obligation. Additionally, the Division of Market Surveillance of NYSER
will monitor for all subsequent action taken by the specialist, or lack
thereof, to cushion such price movement. As today, the Exchange will in
the context of price volatility alerts, monitor for excessive price
movements that may involve a failure to comply with either the
affirmative or negative obligation. As the Exchange gains experience
with its new market structure, the Exchange will enhance existing
surveillances and/or create new surveillances where necessary and
appropriate to monitor for compliance with the specialist negative
obligations.
The Exchange believes the Pilot will prove beneficial from both a
technology and a training perspective. The process will allow for a
controlled and moderated roll out of the new systems and capabilities.
The Pilot will allow the Exchange to commence implementation of Hybrid
Market Phase 3, as amended, therefore providing the Exchange and users
with real-time testing of those functionalities.
Further, the Pilot will give the Exchange the opportunity to
identify and address any system problems and to identify and
incorporate beneficial system changes that become apparent as a result
of usage in real time and under real market conditions. The ability to
have such real time user interface will be invaluable, as it is
impossible to accurately anticipate behavioral changes in a development
or mock-trading environment. In addition, the Pilot will allow users to
gain essential practical experience with the new systems and processes
in a well-modulated way.
Prior to the Pilot, there has been comprehensive training for both
Floor brokers and specialists, individually and together in a mock
trading environment. Training was conducted by the Exchange and was
supplemented in most cases by firm-specific training conducted by
member organizations for their employees. The Exchange training
environment was made available also to proprietary system vendors for
their training sessions.
In addition, testing has occurred at all levels, including
development testing, automation testing, SIAC testing, NYSE testing,
integrated system testing and code reviews, production environment
testing, fall-back and recovery testing, and regression and new
functionality testing.
Moreover, the Exchange intends to have available at all times
during the Pilot two versions of the operating software--the new
version that would be operational and the original, pre-Pilot version.
If a problem develops during the Pilot, the Exchange will be able to
revert to the pre-Pilot software within an average time of two minutes
or less.
The Pilot will also enable the Exchange to be fully Regulation NMS
\21\-compliant by February 5, 2007 date and comply with its obligations
under the proposed NMS Linkage Plan.\22\ Without this Pilot, it is
unlikely the Exchange will be able to meet either requirement.
---------------------------------------------------------------------------
\21\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005) (17 CFR Parts 200, 201, 230, 240,
242, 249, and 270).
\22\ A ``Plan for the Purpose of Creating and Operating an
Intermarket Communications Linkage Pursuant to Section 11A(a)(3)(B)
of the Securities Exchange Act of 1934'' to facilitate trades
between different market centers. See Securities Exchange Act
Release No. 54551 (September 29, 2006). The Commission published
notice of the NMS Linkage Plan on July 28, 2006. See also Securities
Exchange Act Release No. 54239 (July 28, 2006), 71 FR 44328 (August
4, 2006), 17 CFR 242.608.
---------------------------------------------------------------------------
The Exchange anticipates that the Pilot will operate with minimal
problems given the amount and degree of testing and training that has
occurred to date. Accordingly, the Exchange believes that the
extensiveness of the testing and training, the phase-in approach
described above and the fall-back capabilities of Exchange Systems
provide significant assurances that the Pilot will operate as expected.
However, in the event systems or other problems arise with the Pilot
that adversely impact investors or impede the Exchange's ability to
maintain a fair and orderly market, the Exchange will immediately
terminate the Pilot in whole or in part, as appropriate, and return
trading to current operations under current NYSE rules.
Finally, the Exchange represents that it will provide the
Commission with any and all data and analysis the Commission may
request regarding the operation of the rules governing stabilization.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act \23\ that an exchange have rules that
are designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system and, in general, to protect
investors and the public interest. The Exchange believes that the
proposed rule change is also designed to support the principles of
Section 11A(a)(1) \24\ of the Act in that it seeks to assure
economically efficient execution of securities transactions, make it
practicable for brokers to execute investors' orders in the best market
and provide an opportunity for investors' orders to be executed without
the participation of a dealer.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78f(b)(5).
\24\ 15 U.S.C. 78k-1(a)(1).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.\25\
---------------------------------------------------------------------------
\25\ The Commission notes that it has received a comment letter
in response to the Omnibus Filing.
---------------------------------------------------------------------------
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NYSE-2006-82 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2006-82. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be
[[Page 60219]]
available for inspection and copying in the Commission's Public
Reference Room. Copies of such filing also will be available for
inspection and copying at the principal office of the NYSE. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSE-2006-82 and should be
submitted on or before November 2, 2006.
IV. Commission's Finding and Order Granting Accelerated Approval of the
Proposed Rule Change
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.\26\
Specifically, the Commission finds that approval of the proposed rule
change is consistent with Section 6(b)(5) of the Act because the
proposal is designed to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
---------------------------------------------------------------------------
\26\ 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).
---------------------------------------------------------------------------
With this proposed rule change, the Exchange has requested
temporary approval by the Commission of certain proposed amendments to
the rules that govern its Hybrid Market, so that it may begin to
implement Phase 3, with the rules that the Exchange has proposed to
amend while these changes are pending approval by the Commission.
According to the Exchange, this Pilot is necessary so that the Exchange
can maintain its planned implementation schedule for the Hybrid Market
and meet the Regulation NMS compliance dates. In addition, this Pilot
will allow NYSE to comply with the new NMS Linkage Plan.
The Commission is considering each of the proposed filings that are
pending, including comments received, if any, and has not reached a
decision on whether they should be approved or disapproved. The
Commission, however, believes that due to the limited nature of the
Pilot and its short duration, it is consistent with the Act to allow
NYSE to implement the Pilot so that it may remain on schedule for
Regulation NMS compliance, begin testing its new systems with this
Pilot and comply with the NMS Linkage Plan.
The NYSE explained in its filing that it has tested these Hybrid
Market functions extensively but that it needs to test them in an
actual trading environment to ensure that they operate as intended.
Accordingly, NYSE represented that it does not anticipate any
significant problems arising from the Pilot. However, NYSE will
immediately terminate the Pilot, in whole or in part, as appropriate,
should any systems or other problems arise that adversely impact the
protection of investors or impede its ability to maintain a fair and
orderly market, and return trading to its current operations under
current NYSE rules.\27\
---------------------------------------------------------------------------
\27\ The Exchange stated that it would be able to revert back to
pre-Pilot operations within an average of two minutes or less. The
Exchange represents that it intends to have available at all times
during the Pilot two versions of the operating software: (1) The new
version that would be operational during the Pilot and (2) the
original, pre-Pilot version which would operational in case the
Pilot prematurely needs to be terminated. The Exchange will notify
the public via its Web site if the Pilot is terminated in whole or
in part. In addition, the Exchange will notify floor members at the
post if the Pilot is terminated in whole or in part.
---------------------------------------------------------------------------
A. Stabilization Filing
The Commission is currently considering the Stabilization Filing.
As noted above, the Exchange has also requested a temporary
interpretation by the Commission of the specialists' negative
obligation set forth in NYSE Rule 104(a) to eliminate the requirement
that each trade by a specialist meet a test of reasonable necessity.
NYSE Rule 104(a) states that ``no specialist shall effect on the
Exchange purchases or sales of any security in which such specialist is
registered, for any account in which he or his member organization * *
* is directly or indirectly interested, unless such dealings are
reasonably necessary to permit such specialist to maintain a fair and
orderly market * * *'' In 1937, the Commission issued an interpretation
(``Saperstein Interpretation'') that among other things, stated that
each transaction by a specialist for his own account must meet the test
of reasonable necessity.\28\ The Saperstein Interpretation made clear
that specialist's transactions for his own account would be required to
meet the rule on a transaction-by-transaction basis, rather than on a
review of such transactions generally.
---------------------------------------------------------------------------
\28\ See Securities Exchange Release No. 1117 (March 30, 1937),
at 4.
---------------------------------------------------------------------------
In its filing, the NYSE requested that the Commission re-interpret
the specialist's negative obligation to eliminate the requirement that
each trade by the specialist for its dealer account meet a test of
reasonable necessity. The Exchange has stated that it intends to amend
the Stabilization Filing to include such a request there as well. The
Commission notes that the comment period for the Stabilization Filing
has not yet expired, and the Commission specifically requests comment
on the appropriateness of the Exchange's request to amend the
Commission's interpretation that the specialist's negative obligation
be evaluated on a transaction-by-transaction basis.
The Commission agrees with the NYSE that the national market system
has changed greatly in the nearly seventy years since the Saperstein
Interpretation was issued. The Commission also agrees that increased
automation and competition--both within the Hybrid Market and in the
markets generally--are significant factors, among others, that must be
considered with regard to the scope of specialists' responsibilities
and obligations. The Commission intends to fully consider the NYSE's
request relating to the transaction-by-transaction requirement of the
Saperstein Interpretation when it decides whether to approve the
Stabilization Filing, as amended. However, the Commission preliminarily
believes that the Exchange's request may have merit and, therefore, is
permitting, as part of this Pilot, the Exchange to review the
specialists' negative obligations on a pattern and practice basis,
rather than on a transaction-by-transaction basis. The Commission
emphasizes that this review applies solely to the interpretation of
Exchange Rule 104(a) and notes that the specific requirements and
restrictions applicable to specialists, set forth in NYSE Rule
104.10(5)(i)(b), Rule 104.10(5)(i)(c), and Rule 104.10(6), must be
reviewed and complied with for each individual transaction. Further,
this temporary interpretation applies solely to the Pilot Securities.
The Exchange represented that it will conduct surveillance of
specialist trading for compliance with their negative obligation. NYSE
further represented that it will enhance existing surveillance and/or
create new surveillances as necessary and appropriate to monitor for
compliance with the negative obligation. The Commission wishes to
emphasize that specialists remain subject to the restrictions set forth
in the negative
[[Page 60220]]
obligation with regard to proprietary trading.\29\
---------------------------------------------------------------------------
\29\ See also Hybrid Market Order for a discussion of the
negative obligation, supra note 3.
---------------------------------------------------------------------------
B. Accelerated Approval of the Pilot Proposal
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\30\ for approving the proposed rule change prior to the
thirtieth day after the date of publication of the notice in the
Federal Register. The Pilot, which as discussed above is limited in
scope and duration, will allow the NYSE to remain on schedule for
compliance with Regulation NMS, comply with the NMS Linkage Plan and to
conduct real-time system and user testing of certain features of the
Hybrid Market. According to NYSE, such testing should be beneficial
from both a technology and a training perspective. Although preliminary
steps have been taken--in the form of NYSE-provided training for both
Floor brokers and specialists, training by member organizations for
their employees, and training by proprietary system vendors in the NYSE
trading environment for their training sessions--the Pilot should give
the Exchange the opportunity to identify and address any system
problems with these particular rules under the Hybrid Market. Further,
the Pilot should allow users to gain essential practical experience
with the new systems and processes. Therefore, the Commission finds
that immediate implementation of the Pilot, which is limited in both
scope and duration, should permit NYSE to remain on schedule to meet
the Regulation NMS compliance dates, comply with the NMS Linkage Plan
and continue to implement its Hybrid Market changes in an orderly
manner.
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
V. Conclusion
It is therefor ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NYSE-2006-82) is hereby approved on
an accelerated basis until October 31, 2006.
For the Commission, by the Division of Market Regulation, by
delegated authority.\31\
---------------------------------------------------------------------------
\31\ 17 CFR 200.30-3(a)(12).
Nancy M. Morris,
Secretary.
[FR Doc. E6-16897 Filed 10-11-06; 8:45 am]
BILLING CODE 8011-01-P
