Self-Regulatory Organizations; New York Stock Exchange LLC; Order Granting Approval of Proposed Rule Change and Amendment Nos. 1, 2, and 3 Thereto and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 5 Thereto Relating to Exchange Rules Governing Certain Definitions, Systemic Processing of Certain Orders, and the Implementation Schedule of the NYSE Hybrid Market, 70824-70831 [E6-20619]
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70824
Federal Register / Vol. 71, No. 234 / Wednesday, December 6, 2006 / Notices
or otherwise in furtherance of the
purposes of the Act.19
be submitted on or before December 27,
2006.
IV. Solicitation of Comments
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.20
Nancy M. Morris,
Secretary.
[FR Doc. E6–20628 Filed 12–5–06; 8:45 am]
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended, is consistent with
the Act. Comments may be submitted by
any of the following methods:
SECURITIES AND EXCHANGE
COMMISSION
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–NSX–2006–13 on the
subject line.
Paper Comments
PWALKER on PRODPC60 with NOTICES
• 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 File
Number SR–NSX–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 (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing also will be
available for inspection and copying at
the principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NSX–2006–13 and should
19 15 U.S.C. 78s(b)(3)(C). For purposes of
calculating the 60-day period within which the
Commission may summarily abrogate the proposal,
the Commission considers the period to commence
on November 17, 2006, the date on which the
Exchange submitted Amendment No. 1.
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[Release No. 34–54820; File No. SR–NYSE–
2006–65]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Order
Granting Approval of Proposed Rule
Change and Amendment Nos. 1, 2, and
3 Thereto and Notice of Filing and
Order Granting Accelerated Approval
of Amendment No. 5 Thereto Relating
to Exchange Rules Governing Certain
Definitions, Systemic Processing of
Certain Orders, and the
Implementation Schedule of the NYSE
Hybrid Market
November 27, 2006.
I. Introduction
On August 23, 2006, the New York
Stock Exchange LLC (‘‘NYSE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder, 2 a proposed rule change to
amend certain aspects of its Hybrid
Market. On September 11, 2006,
September 15, 2006, and September 26,
2006, the Exchange filed Amendment
Nos. 1, 2, and 3 respectively. The
proposed rule change, as amended, was
published for comment in the Federal
Register on September 29, 2006.3 On
November 2, 2006, the Exchange filed
Amendment No. 5 to the proposed rule
change.4 The Commission received
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 54520
(September 27, 2006), 71 FR 57590. On November
1, 2006, the Exchange filed Amendment No. 4 to
the proposed rule change and subsequently
withdrew Amendment No. 4 on November 2, 2006
due to inaccurate exhibits.
4 See Partial Amendment dated November 2, 2006
(‘‘Amendment No. 5’’). In Amendment No. 5, the
Exchange: (1) Removed from Amendment No. 3 an
incorrect exhibit of the proposed rule text; (2)
reconciled the current rule text of the definition of
an IOC Order as modified by a prior proposed rule
change that designated Regulation NMS-compliant
IOC orders; (3) corrected typographical errors in
proposed NYSE Rules 60(e) and NYSE Rule
123F(b)(ii); (4) replaced the term ‘‘NYSE Bonds’’
with the term ‘‘Automated Bond System’’ in its
three comment letters from two
commenters on the proposal.5 On
November 2, 2006, the Exchange filed a
response to the comment letters.6
This order approves the proposed rule
change, as amended by Amendment
Nos. 1, 2 and 3, and grants accelerated
approval to Amendment No. 5. The
Commission is also providing notice
and soliciting comments on
Amendment No. 5.
II. Description of Proposal
On March 22, 2006, the Commission
approved NYSE’s proposal to establish
a Hybrid Market.7 In this proposed rule
change, the Exchange proposes to
amend certain Hybrid Market rules and
other NYSE rules to reflect their
operation in the Hybrid Market.
A. Order Types
1. Auto Ex Order
The Exchange proposes to amend its
definition of Auto Ex Order to clarify
that an Auto Ex Order is an order that
initiates an automatic execution
immediately upon entry into Exchange
systems.8 Accordingly, the Exchange
also proposes to delete elected stop,
stop limit orders, and CAP–DI orders
from the Auto Ex Order definition as
these orders do not initiate an automatic
execution upon their entry on the
Exchange. Further, the Exchange
proposes to clarify that ‘‘non-auto-ex’’
orders, i.e., those orders that do not
initiate an automatic execution
immediately upon entry into NYSE
systems, would participate in automatic
executions in accordance with the rules
governing their operation. Finally, the
Exchange proposes to amend NYSE
Rules 1000–1004 to replace the term
‘‘auto ex’’ with the words
‘‘automatically executing’’ to reflect that
such rules govern all automatic
executions, not just those involving an
Auto Ex Order.
2. Market Orders
The current definition of an Auto Ex
Order in NYSE Rule 13 includes a
1 15
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rules; and (5) specified in NYSE Rule 1000 that the
liquidity replenishment point (‘‘LRP’’) value would
be calculated every 30 seconds. See also Securities
Exchange Act Release No. 54611 (October 16, 2006),
71 FR 62143 (October 23, 2006).
5 See Letters from George Rutherfurd, Consultant,
dated September 10, 2006 (‘‘Rutherfurd Letter I’’)
and November 16, 2006 (‘‘Rutherfurd Letter II’’),
and Junius W. Peake, Monfort Distinguished
Professor Emeritus of Finance, Greeley, Colorado,
dated October 3, 2006 (‘‘Peake Letter’’).
6 See Letter from Mary Yeager, Secretary, NYSE,
to Nancy M. Morris, Secretary, Commission, dated
November 2, 2006 (‘‘Response to Comments’’).
7 See Securities Exchange Act Release No. 53539,
71 FR 16353 (March 31, 2006) (‘‘Hybrid Market
Order’’).
8 See proposed NYSE Rule 13 (‘‘Auto Ex Order’’).
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‘‘market order designated for automatic
execution.’’ The Exchange proposes to
treat all market orders as Auto Ex
Orders unless specifically designated to
be handled in the auction market as
Auction Market Orders. A market order,
therefore, would no longer need to be
designated for automatic execution.
3. Maximum Size
In the Hybrid Market, NYSE
eliminated the size limitation for Auto
Ex Orders. NYSE systems, however,
have a maximum order capacity of
3,000,000 shares. Therefore, NYSE
proposes to gradually increase the size
of orders that may be entered for
automatic execution to a maximum of
3,000,000 shares.9 The Exchange
proposes to phase in the maximum
order size eligibility for automatic
executions, beginning with a maximum
size of 1,000,000 shares. The Exchange
also proposes to move the maximum
order size limitation for automatic
executions to NYSE Rule 1000.10
4. Immediate or Cancel (‘‘IOC’’) Order
In the Hybrid Market, the Exchange
created two types of IOC orders.11 The
first type is an IOC order that complies
with Regulation NMS (‘‘Reg. NMS’’).12
A Reg. NMS IOC order would not be
routed during an Exchange execution to
satisfy better priced protected bids or
offers 13 displayed by other market
centers; rather, a Reg. NMS IOC order
would be cancelled, as soon as its
ability to receive an execution on the
Exchange ends. The second type of IOC
order, an NYSE IOC order, would route
during a sweep to other markets to
satisfy better priced protected bids or
offers and would cancel only when it is
no longer able to receive an execution.
The Exchange proposes to amend the
definition of an NYSE IOC order to
clarify that Exchange systems would
accept NYSE IOC orders for
participation in the re-opening trade
after a trading halt.14 Specifically, NYSE
IOC orders received during a trading
halt would be systemically maintained
in order of their receipt for execution
upon the re-opening of the halted
security. If an NYSE IOC order is not
executed as part of the re-opening trade,
the order would be cancelled.
9 See
proposed NYSE Rule 1000.
Exchange had implemented similar
language as part of an extended auto-ex pilot in
Lucent. See Securities Exchange Act Release No.
53791 (May 11, 2006), 71 FR 28732 (May 17, 2006)
(‘‘Lucent Pilot’’).
11 See NYSE Rule 13.
12 See Rule 600(b)(3), 17 CFR 242.600(b)(3).
13 A protected bid and offer is defined in Rule
600(b)(57) of Reg. NMS. See 17 CFR 242.600(b)(57).
14 See proposed NYSE Rule 13.
PWALKER on PRODPC60 with NOTICES
10 The
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B. Sweeps
As approved in the Hybrid Market
Order, an incoming Auto Ex Order of a
size larger than the Exchange best bid or
offer (‘‘BBO’’) would receive an
execution at two prices—the BBO price
and the ‘‘clean-up’’ price.15 The
Exchange proposes to allow an
automatically executing order to trade
with all interest in the Display Book
system at each successive price outside
of the Exchange BBO.16 As proposed, an
automatically executing order would
trade with the Exchange BBO and at
each successive price until the order is
filled, its limit price (if any) is reached,
an LRP is reached, or, in the case of a
Reg. NMS IOC order, trading at a
particular price on the Exchange would
require cancellation because the order
cannot be routed to another market
center.17
During a sweep, floor broker e-Quotes
trade on parity with orders in the Book
at the clean-up price, but only to the
extent of the size the floor broker
designated as displayable should the
price become the NYSE BBO.18 The size
that would have been placed in reserve
would yield to orders in the Book.19 The
Exchange proposes to eliminate this
distinction and allow all floor broker
agency interest to trade on parity, once
the order with priority has been
satisfied, with orders in the Book at
each successive price during a sweep.
The Exchange also proposes to clarify
how and when CAP–DI orders would
participate in sweeps. Specifically,
CAP–DI orders on the same side as an
automatically executing order would be
elected at each execution price that is
part of the sweep.20 To the extent that
the sweeping order has volume
remaining to be executed, the elected
CAP–DI orders would not participate in
a transaction and would automatically
and systemically be unelected.21 If, at
the last execution price during a sweep,
the sweeping order is filled or is
otherwise unable to continue executing,
and there is contra side volume
remaining on the Display Book system
or from contra-side elected CAP–DI
orders, then the same-side CAP–DI
orders may participate in the final
transaction.22
15 The ‘‘clean-up’’ price is the best price at which
interest in the Display Book system can trade with
an Auto Ex Order outside of the Exchange BBO. See
NYSE Rule 1000(d)(iii).
16 See proposed NYSE Rule 1000(d)(iii).
17 See proposed NYSE Rule 1000(d)(ii)(C).
18 See NYSE Rule 70.20(d)(i).
19 See NYSE Rule 70.20(d)(ii).
20 See proposed NYSE Rule 123A.30(a)(ii).
21 See proposed NYSE Rule 123A.30(a)(ii).
22 See proposed NYSE Rule 123A.30(a)(ii).
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70825
CAP–DI orders on the contra side of
the sweeping order are also elected at
each execution price that is part of the
sweep and would participate at the
electing price, if there is volume
available from the sweeping order on
the Display Book system or from CAP–
DI orders on the same side of the market
as the sweeping order.23
C. Liquidity Replenishment Points
The Exchange proposes to delete the
two types of LRPs it proposed to
implement, and replace them with a
single LRP. The proposed LRP would be
calculated by adding and subtracting a
value (determined by the Exchange) to
the last sale price.24 The LRP value
would not change during the day, and
the Exchange would disseminate the
LRP value.25 According to the
Exchange, the LRP value would be
based on an examination of trading data
and would vary based on the security’s
NYSE average daily volume (‘‘ADV’’),
price, and volatility. The Exchange
proposes a range of LRP values for
securities with preset characteristics of
ADV, price, and volatility.26 The LRP
would not be calculated until there is a
trade on the Exchange in a particular
security.27 If a security opens on a
quote, and there are no trades on the
Exchange, the LRP value would not be
set until there is a trade.
The LRP value would be calculated
automatically throughout the day, as
follows: (1) Every 30 seconds
throughout the day; (2) after a manual
trade by the specialist; and (3) when
automatic executions resume after an
LRP has been reached.28
Further, the Exchange proposes to
change when automatic executions and
Autoquote would resume after an LRP
has been reached. The Exchange
proposes that automatic executions and
Autoquote would resume as soon as
possible after an LRP has been reached,
but in no more than five to ten seconds,
unless the residual is able to trade at a
price beyond the LRP, and the price
creates a locked or crossed market.29 In
such case, automatic executions would
resume with a manual transaction.30
Finally, the Exchange proposes to make
23 See
proposed NYSE Rule 123A.30(a)(iv).
proposed NYSE Rule 1000(a)(iv).
25 See proposed NYSE Rule 1000(a)(iv).
26 See proposed NYSE Rule 1000(a)(iv).
27 See proposed NYSE Rule 1000(a)(iv).
28 See proposed NYSE Rule 1000(a)(iv).
29 See NYSE Rules 60(e)(ii) and 1000(b).
30 See NYSE Rules 60(e)(ii) and 1000(b).
24 See
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Federal Register / Vol. 71, No. 234 / Wednesday, December 6, 2006 / Notices
conforming changes to other Exchange
rules.31
D. Stop Order and Stop Limit Order
The Exchange proposes to modify
how stop orders are handled and
processed on the Exchange. Specifically,
the Exchange proposes that specialists
would no longer have access to
information about stop orders. In
addition, the Exchange proposes to no
longer accept stop limit orders.
1. Processing of Stop Orders
PWALKER on PRODPC60 with NOTICES
Currently, stop orders are entered on
the Exchange primarily through
SuperDOT 32 and routed directly to the
Display Book system, where they reside
awaiting election. The specialist
assigned to each security knows the
prices at which stop orders would be
elected and their sizes. Because the
specialist has access to this information
that is not available to other market
participants, NYSE Rule 123A.40
requires that, in certain circumstances
described below, the specialist must
guarantee the execution of elected stop
orders at the electing price.
The Exchange proposes to restrict the
ability of specialists and their systems
employing algorithms (‘‘specialist
algorithms’’) to view information
regarding stop orders. Specialists would
no longer view the electing price and
size of stop orders, nor possess any
unique information regarding stop
orders. Stop orders would be
maintained in a ‘‘blind file’’ in the
sequence of their receipt. When a
transaction on the Exchange results in
the election of a stop order, the elected
stop order would be sent as a market
order to the Display Book system and
the specialist algorithms, and would be
handled in the same way as any other
market order.
The Exchange also proposes to modify
its opening and closing procedures to
reflect that specialists would no longer
have access to stop order volume that
would be elected by the opening or
closing transaction. Currently, the
specialist calculates the opening price
based in part on the stop order volume
that would be elected by the opening
trade.33 On the close, the specialist
calculates the closing price based in part
on the stop order volume that would be
elected and the volume of buy and sell
market-at-the-close/limit-at-the-close
31 See proposed NYSE Rules 60(e)(C)(iii),
60(e)(C)(iv), 60(d)(i) and (ii), 72(j)(i) and (j)(ii), and
1000(c).
32 SuperDot is an electronic order-routing system
used by NYSE member firms to send market and
limit orders to the NYSE.
33 See, e.g., NYSE Rule 123D.
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(‘‘MOC/LOC’’) 34 orders that would be
executed as a result of the closing
price.35
The Exchange proposes that at the
open, the specialist or his or her trading
assistants would indicate to Exchange
system the price at which the specialist
contemplates opening the stock. The
Exchange system then would calculate
the volume of shares available for
execution on the open at that price,
including stop orders that would be
elected by an execution at such price.
There would be no indication what, if
any, portion of the total volume
accounts for stop orders. There would
only be one opening print and would
include stop orders that are elected by
the opening trade.
Similarly, prior to the close, the
Exchange proposes that the specialist or
his or her trading assistants would
indicate to Exchange system the price at
which the specialist is contemplating
closing the stock. In turn, Exchange
system would calculate the volume of
shares executable on the close at that
price, including stop order volume that
would be elected by an execution at that
price. There would be no indication
what, if any, portion of the total volume
accounts for stop orders. The unelected
stop orders would only be included in
the total volume of shares available to
trade on the close five minutes prior to
the close.
The Exchange proposes to add NYSE
Rule 115A.10 and NYSE Rule 116.50 to
prohibit specialists, trading assistants,
and anyone on their behalf from using
the opening and closing process in a
manner designed to inappropriately
discover information about unelected
stop orders.36
2. Elimination of Specialist’s Guarantee
and Floor Official Approval
Currently, NYSE Rule 123A.40
prohibits a specialist from making a
transaction for his own account in a
stock in which he is registered that
would result in putting into effect any
34 MOC order is a market order, which is to be
executed in its entirety at the closing price, on the
Exchange, of the stock named in the order, and if
not so executed, is to be treated as cancelled. A LOC
order is a limit order, which may or may not receive
execution on the close depending on the closing
price and depth of contra side interest. The term ‘‘at
the close order’’ also includes a limit order that is
entered for execution at the closing price, on the
Exchange, of the stock named in the order, pursuant
to such procedures as the Exchange may from time
to time establish.
35 See, e.g., NYSE Rule 116.40.
36 The proposed opening and closing processes
for stop order handling are not available intraday;
therefore, during the trading day, it is not possible
for these processes to be employed in a manner
designed to inappropriately discover information
about unelected stop orders.
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stop orders he may have on his book.
However, a specialist may be party to
the election of a stop order only: (i)
When his bid or offer has the effect of
bettering the market, when he
guarantees that the stop order will be
executed at the same price as the
electing sale, and with Floor Official
approval if the transaction is more than
0.10 point away from the prior
transaction; or (ii) when the specialist
purchases or sells stock for his own
account solely for the purpose of
facilitating completion of a member’s
order at a single price, where the depth
of the current bid or offer is not
sufficient to do so. When the specialist
is acting in this manner, he shall not be
required to guarantee that the stop order
will be executed at the same price as the
electing sale. In addition, current NYSE
Rule 13.30, which applies to stop orders
in Investment Company units, requires
a specialist to obtain Floor Official
approval prior to making a bid or offer
for its proprietary account that would
elect a stop order and is more than 0.10
point away from the last sale.
Because specialists will no longer be
privy to information about stop orders,
the Exchange proposes to eliminate the
requirement that specialists guarantee
the execution price of stop orders
elected by their trades and the
requirement that they receive Floor
Official approval for certain proprietary
quotes and trades.
3. Floor Broker Stop Order Processing
Under the proposal, floor brokers
would continue to be permitted to
represent stop orders. However, the
Exchange proposes that stop orders
represented by floor brokers in the
Crowd may not be included in eQuote.37
4. Elimination of Stop Limit Orders
Finally, the Exchange proposes to
eliminate stop limit orders as an
acceptable order type. The Exchange
proposes to make conforming changes to
other Exchange rules to reflect the
elimination of stop limit orders.38
E. Other Changes
1. Autoquote
Currently, when Autoquote is
suspended due to a gap quote, NYSE
Rule 60(e)(iv)(C) provides that
Autoquote would continue to update
the NYSE BBO in certain situations.39
According to the Exchange, however,
Autoquote does not continue to update
37 See
proposed NYSE Rule 70.20(a)(i).
proposed NYSE Rules 13, 118(2), 123(e)(7),
123(f), 132B(a)(9), 132B(b)(9), and 476A.
39 See NYSE Rule 60(e)(iv)(c).
38 See
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the BBO when NYSE has a gapped
quote. Thus, the Exchange proposes to
amend its rule to provide that when the
NYSE quote is gapped, Autoquote
would be suspended on both sides of
the market.40
2. Exchange Crossing Rule
The Exchange proposes to amend its
Rule 76 to provide that it would not
apply to automatic executions.41
Currently, when a member has an order
to buy and an order to sell the same
security, NYSE Rule 76 requires that the
member offer such security at a price
which is higher than his bid by the
minimum variation before making a
transaction with himself to enable the
Crowd to trade with the order at such
price. Since automatic executions
cannot accommodate verbal Crowd
participation, the Exchange proposes to
specify that NYSE Rule 76 only applies
to manual transactions.
3. High Priced Securities
The Exchange proposes to amend the
definition of the price of high-priced
securities, which are not eligible for
automatic executions, as the closing
price of a security, or if the security did
not trade, the closing bid price of the
security on the Exchange on the
immediate previous trading day, that is
$1,000 or more.42 Currently, the
Exchange considers securities with a
closing price, or a closing bid price if
the security did not trade, of $300 or
more as high-priced.
F. Hybrid Market Implementation
Schedule
PWALKER on PRODPC60 with NOTICES
The Exchange is in the process of
implementing Phase 3 of the Hybrid
Market. The Exchange proposes to
amend the Phase 3 implementation
schedule 43 to add the following
additional features:
• Elimination of Direct+ suspension
when a better bid or offer is displayed
by another market center;
• Implementation of sweeps (as
redefined herein);
• Implementation of the LRP (as
redefined herein); and
• Implementation of new stop order
processing (as discussed herein).
Exchange Rule 1002 (‘‘Availability of
Automatic Execution Feature’’) would
be available for all stocks through the
close upon implementation of Phase 3
of the Hybrid Market.
40 See
proposed NYSE Rule 60(e)(iii)(c).
proposed NYSE Rule 76.
42 See proposed NYSE Rule 1000(a)(vi).
43 See Hybrid Market Order, supra note 7.
41 See
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IV. Summary of Comments and NYSE’s
Response
The Commission received three
comment letters from two commenters
on the proposed rule change,44 and the
Exchange filed the Response to
Comments.45 One commenter continued
to reiterate his objections to the NYSE’s
Hybrid Market,46 many of which relate
to aspects of the Hybrid Market that the
Commission has already approved.47 In
the recent letters, the commenter raised
objections to two aspects of the current
proposal—the processing of stop orders
and the proposed sweep methodology.
With regard to the proposed stop
order processing, the commenter noted
that the proposal to remove a
specialist’s ability to see stop orders
minimizes the specialist’s ability to
improperly elect and then trade with
stop orders. The commenter, however,
believes that specialists have an
exclusive ability to trade with elected
stops in the Hybrid Market. The
commenter believes that because the
specialist algorithms will receive
information about elected stops, which
will be routed to the Display Book
system as market orders, the specialists
would also be provided with an
opportunity to trade with these orders
before other market participants. The
commenter argues that the specialist’s
ability to algorithmically trade with
elected stop orders before other market
participants would violate the
specialist’s negative obligation. NYSE
noted that the commenter’s belief was
erroneous and that specialists do not
have an exclusive ability to trade with
elected stops.
The commenter also argues that the
Exchange needs to discuss the proposed
stop order processing with the
elimination of the specialist guarantee
in the context of the affirmative and
negative obligations of the specialists.
The commenter argues that the
specialist guarantee provides a benefit
to the market by minimizing price
dislocation that may result from an
influx of elected stop orders into the
market. Absent the specialist guarantee,
the elected stop orders may trade at a
44 See supra note 5. One commenter raised
concerns with respect to floor brokers’ ability to
enter discretionary instructions with regard to
orders they represent. See Peake Letter. The
Commission considered the issues raised by the
commenter in its order approving the floor broker’s
ability to enter discretionary instructions. See
Securities Exchange Act Release No. 54577
(October 5, 2006), 71 FR 60208 (October 12, 2006)
(‘‘d-Quote Order’’).
45 See supra note 6.
46 See Rutherfurd Letters I and II, supra note 5.
47 For example, the commenter continues to
object to specialists’ ability to trade in the Hybrid
Market.
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70827
price away from the last sale that may
be precluded under current Exchange
rules, which could add to market
volatility. NYSE responded that the
reason the specialist is required to
guarantee the price of execution for
certain elected stops is due to its access
to information about the stop orders that
would be executed by its proprietary
trade. Since the specialists would no
longer have access to electing price and
size information for stop orders, the
reason for the price guarantee would no
longer exist and thus should be
eliminated. The Exchange argued that
eliminating the specialist’s knowledge
of information about these orders would
create a more even playing field for
market participants in the Hybrid
Market, and as the commenter has
acknowledged, would reduce the
possibility of the specialists having a
trading advantage or a conflict of
interest.
With respect to the sweeps, the
commenter raises several issues. First,
the commenter argues that the proposed
sweep methodology is fundamentally
unfair to orders in the Book because
they must split executions with
undisplayed e-Quotes. The commenter
states that floor brokers are given a
competitive advantage because they can
enter their automated orders with full
knowledge of limit orders in the Book,
while public customers do not have
similar knowledge about floor brokers’
agency interest outside the BBO. The
commenter believes that this is unfair,
as public customers are not provided an
opportunity to set their limit orders
taking into account interest in the floor
broker agency interest files.
Second, the commenter argues that
the Exchange’s parity rules are unfair to
the Book because the commenter
believes that each individual order
represented in the floor broker agency
interest file is entitled to a split.48 Third,
the commenter argues that the Book
should be executed in price and time
priority, and that non-displayed floor
broker agency interest should be
executed after displayed orders in the
Book. The commenter argues that orders
in the Book attract liquidity, and they
should be executed ahead of nondisplayed orders.49
48 The Commission notes that the commenter is
unclear as to whether he believes that each
individual order that is represented by a floor
broker and placed in the agency interest file gets a
split, or if the commenter believes that each
individual floor broker agency interest file, that may
include multiple customers, gets a split. Under
NYSE’s Hybrid Market rules, the latter is the correct
way parity splits are determined.
49 The Commission notes that the commenter also
argued that specialist interest should not be able to
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V. Discussion
After careful review and
consideration of the comments, the
Commission finds that the proposed
rule change, as amended, is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange and, in particular, with the
requirements of Section 6(b) of the
Act.50 Specifically, the Commission
finds that approval of the proposed rule
change, as amended, is consistent with
Section 6(b)(5) of the Act 51 in that the
proposal is designed to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
The adoption of the Hybrid Market
has fundamentally altered NYSE’s
market structure to a predominately
electronic market. As the Exchange
continues to roll out the implementation
phases of the Hybrid Market, it has also
proposed changes to certain aspects of
the Hybrid Market based on its
experience and the various needs of its
customers and members. As discussed
more fully below, the Commission
believes that the proposed changes to
the Hybrid Market are consistent with
the Act.
PWALKER on PRODPC60 with NOTICES
A. Changes to Order Types
The Exchange proposes to amend the
following order types: (1) Auto Ex
Orders; (2) market orders; (3) Auction
Market Orders; and (4) IOC Orders.
First, with respect to Auto Ex Orders,
the Exchange proposes to clarify that
Auto Ex Orders are orders that initiate
automatic executions immediately upon
arrival into Exchange systems. The
Commission finds that this change
clarifies NYSE’s rule by specifying how
the orders NYSE accepts will be
handled. Second, the Exchange
proposes to consider all market orders
as Auto Ex Orders and therefore would
no longer need to require that they be
trade on parity with floor broker agency interest.
The commenter continues to argue that this is
inconsistent with Section 11A of the Act and the
specialist’s negative obligation. The Commission
approved this aspect of the Hybrid Market, and
NYSE has not proposed to change the approved
parity rule in the instant proposed rule change. See
Hybrid Market Order, supra note 7.
50 15 U.S.C. 78f(b). In approving this proposal, the
Commission has considered the proposed rules’
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
51 15 U.S.C. 78f(b)(5).
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specifically designated for automatic
execution. The Commission finds this
change could enhance automated access
to liquidity on the Exchange, and
facilitate the efficient execution of
market orders on the Exchange. As a
result of the change to market orders,
NYSE also proposes to add a definition
for Auction Market Orders for those
market orders that are to be handled in
the auction market. The Commission
finds that this change is consistent with
the Act because it provides investors
with the option to seek price
improvement through these orders.
Third, the Exchange proposes to amend
the definitions of IOC orders to identify
Reg. NMS-compliant IOC orders and to
amend the definition of an NYSE IOC
order to clarify that Exchange systems
will accept NYSE IOC orders for
participation in the re-opening trade
after a trading halt. The Commission
finds that these changes are consistent
with the Act because they clarify how
these orders will be handled. Finally,
the Exchange proposes to gradually
increase its order size eligibility for
automatic executions to a maximum
size of 3,000,000 shares. The
Commission finds that this proposal is
consistent with the Act and reflects in
NYSE’s rules its systems limitations.
B. Sweeps
The Exchange proposes to allow an
Auto Ex Order to trade with all interest
in the Display Book system at each
successive price outside of the Exchange
BBO instead of receiving an execution at
the BBO price and the clean up price.
The Exchange also proposes to allow all
floor broker agency interest to trade on
parity with orders in the Book at each
successive price during a sweep.
Further, the Exchange clarified the
participation of CAP–DI orders during a
sweep.
One commenter objected to the floor
broker’s ability to trade on parity with
the orders in the Book.52 Specifically,
this commenter believed that nondisplayed interest, such as the floor
broker agency interest file, should yield
to displayed orders in the Book. The
commenter also believed that floor
brokers have a competitive advantage
over public customers because they can
enter their agency interest with
knowledge of orders in the Book, while
public customers would not be aware of
floor broker agency interest outside of
the BBO.
The Commission notes that it has
previously approved the Exchange’s
proposal to allow Auto Ex Orders to
sweep the Display Book system in the
52 See
PO 00000
Rutherfurd Letters I and II, supra note 5.
Frm 00095
Fmt 4703
Sfmt 4703
Hybrid Market Order. In the Hybrid
Market Order, the Commission noted
that NYSE’s proposal to allow Auto Ex
Orders to sweep the Display Book
system was a significant expansion of
the availability and speed of automatic
executions on the Exchange and should
facilitate more efficient transactions on
the Exchange. The Commission
continues to believe that these
execution efficiencies could result in
the Hybrid Market. The Exchange stated
that its customers indicated that they
would not utilize the sweep
functionality as originally approved.53
Accordingly, NYSE made the decision
to amend its rule to allow incoming
orders to trade at each price in the
Display Book system. The Commission
believes that the decision to make this
change is consistent with the Act, and
within the realm of business judgment
typically left to individual markets.
With respect to a floor broker’s ability
to maintain non-displayed interest that
is available for execution, the
Commission notes that it has not
required complete disclosure of all
trading interest, and that it has
previously permitted the use of
undisplayed order types. For example,
in the auction market, floor brokers may
hold significant trading interest that is
not broadly disclosed but is available for
execution and participation in a
transaction on the Exchange. The
Commission found in the Hybrid Market
Order that e-Quotes could trade on
parity with orders in the Book
consistent with the requirements of the
Act.54 While the Exchange now
proposes, under the amended sweep
functionality, to permit the full size of
an e-Quote to trade on parity with
orders in the Book at each successive
price, the Commission continues to
believe that NYSE’s rules provide floor
brokers with incentives to place
liquidity in the Display Book system
and effectively represent their
customers’ orders, and are consistent
with the Act.55
The commenter believes that e-Quotes
should not be entitled to parity because
floor brokers have the ability to change
53 The Commission notes that commenters to the
original Hybrid Market proposal raised this issue.
See Hybrid Market Order, supra note 7.
54 During a sweep in the current Hybrid Market,
only e-Quotes that would be displayed if the price
becomes the Exchange BBO would trade on parity
with orders in the Book.
55 Like in the auction market, each floor broker’s
e-Quote, which may reflect several customers’
orders, would be considered one bidder/offerer, and
the Book would likewise be considered one bidder/
offerer. This aspect of NYSE’s parity rule remains
unchanged, and the Commission believes it
continues to be consistent with the requirements of
the Act.
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PWALKER on PRODPC60 with NOTICES
the prices of their e-Quotes in response
to information about orders in the Book,
while public customers are not provided
information about the floor brokers’
interest outside the BBO. The
Commission, however, notes that
NYSE’s proposal does not alter the
information that is currently available to
floor brokers or investors. Public
customers entering limit orders have
access to the same information as floor
brokers regarding the Book, and can
change their orders in response to that
information. Floor brokers have
information about their own customers’
orders, as they always have had, but do
not have information about other floor
broker interest. Accordingly, the
Commission does not believe that floor
brokers have an inappropriate
informational advantage.
The Commission believes that
exchanges have a certain degree of
flexibility to determine the methods of
order interaction on their markets so
long as the requirements of the Act are
met. Floor brokers represent customers
that are also providing liquidity for
execution. Floor brokers’ customers
often do not want their orders disclosed
and rely on floor brokers to use their
judgment to represent their interest. As
noted above, the Commission has not
required disclosure of this liquidity
outside the BBO, and, in the auction
market, orders represented by floor
brokers have been entitled to parity with
orders in the Book. Accordingly, the
Commission finds that NYSE’s proposal
to allow floor broker agency interest to
trade on parity at each successive price
with orders in the Book during a sweep
is consistent with the requirements of
the Act.
C. Stop Orders
Currently, the specialist acts as agent
for stop orders and, as agent, has
exclusive access to information about
the election price and size of the stop
orders. Because the specialist has
exclusive access to this information, the
Exchange requires the specialist, in
certain situations, to guarantee the price
of an elected stop order. The Exchange
now proposes to modify the manner in
which stop orders are handled and
processed on NYSE by removing the
specialist’s access to information about
stop orders, and eliminating the
requirement that the specialist
guarantee the stop order’s election price
in certain situations. In addition, NYSE
proposes to eliminate the requirement
that the specialist receive Floor Official
approval of certain specialist
proprietary trades that would elect stop
orders. NYSE also proposes to modify
its opening and closing procedures and
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eliminate stop limit orders as an order
type on the Exchange.
One commenter believed that, under
the proposal, the specialist would have
an exclusive ability to trade with elected
stop orders since it would receive
information about elected stop orders
through the specialist algorithm prior to
other market participants.56 This belief
is incorrect. Specialists in the Hybrid
Market can only trade algorithmically in
certain specified instances that are set
forth in NYSE Rule 104. Under the
proposal, specialists and the specialist
algorithm would be restricted from
viewing information regarding the stop
orders. Stop orders would instead be
maintained in a ‘‘blind file’’ in the
sequence of their receipt, and, once
elected, the elected stop order would be
sent by the Exchange system as a market
order to the Display Book system.
Information about the market order also
would be sent to the specialist
algorithm. The market order would be
handled in the same manner as
previously approved for market orders
in the Hybrid Market. Accordingly, in
order to trade against an incoming
market order, the specialist algorithm
would have to: (1) Provide ‘‘additional
specialist volume’’ to partially or
completely fill the market order at the
Exchange BBO; (2) match better bids
and offers published by other market
centers where automatic executions are
immediately available; or (3) provide
price improvement to the market
order.57
The commenter also argued that
eliminating the guarantee implicates the
specialist’s affirmation obligation in
that, without the specialist guarantee,
elected stop orders could trade at a price
away from the last sale and add to
market volatility. The Commission finds
it reasonable and appropriate that NYSE
eliminate the specialist price guarantee
when the specialist is a party to the
56 See Rutherfurd Letters I and II, supra note 5.
In his second letter, the commenter stated that floor
broker d-Quotes would not be able to trade against
incoming market orders and that NYSE’s rules
provide that d-Quotes can only trade against
published NYSE interest. The Commission notes
that this statement is erroneous. NYSE Rule
70.25(b)(i) specifically states that ‘‘[a] [f]loor broker
may set a discretionary price range within the
Exchange best bid and offer that specifies the prices
at which they are willing to trade. This discretion
will be used, as necessary, to initiate or participate
in a trade with an incoming order capable of trading
at a price within the discretionary price range’’
(emphasis added). Accordingly, d-Quotes are
capable of trading with incoming market orders,
and specialists do not maintain an exclusive trading
ability with incoming market orders.
57 In order to provide price improvement, the
specialist would have to be represented in the BBO
in a significant size and would be required to
provide a minimum amount of price improvement.
See NYSE Rule 104(b).
PO 00000
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70829
election of stop orders, since specialists
would no longer have information
regarding the electing price and size of
stop orders. With respect to the
commenter’s concern that removing the
specialist price guarantee would
necessarily impact the specialist’s
affirmative obligations, NYSE explained
that the specialist price guarantee was a
requirement originally put in place due
to the specialist’s ability to view the
electing price and sizes of all stop
orders in a stock, information that is not
available to other market participants.
Requiring the specialist to guarantee the
price at which these orders are executed
removed any incentives for the
specialist to effect proprietary trades
that would inappropriately elect stop
orders. Accordingly, the Exchange
believes that, since the specialists
would no longer have access to electing
price and size information for stop
orders under this proposal, the reason
for the price guarantee would no longer
exist and thus should be eliminated.
The Commission notes that a specialist
in the Hybrid Market remains obligated
to comply with NYSE Rule 104.10,
which includes the maintenance, in so
far as reasonably practicable, of a fair
and orderly market. Under NYSE Rule
104.10(2), in connection with the
maintenance of a fair and orderly
market, a specialist should engage to a
reasonable degree under existing
circumstances in dealings for its own
account when lack of price continuity,
lack of depth, or disparity between
supply and demand exists or is
reasonably to be anticipated. The
elimination of the specialist guarantee
for executing certain elected stops at the
electing price would not alter this
affirmation obligation.
The Commission also believes that
eliminating the specialist’s ability to
view the prices at which stop orders
would be elected and their sizes would
minimize the specialist’s unique
informational advantage over other
market participants with respect to stop
orders. The Commission finds that the
proposal would create a more level
playing field for market participants in
the Hybrid Market.
The Exchange has proposed a
reasonable method by which specialists
can continue to effectively open and
close the market by allowing specialists
to query the system, at discrete times, to
determine the total number of shares
available for execution (including stop
orders) at a proposed opening or closing
price. NYSE has proposed to
specifically prohibit in its rules
specialists, trading assistants, and
anyone on their behalf from using the
amended opening and closing process
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Federal Register / Vol. 71, No. 234 / Wednesday, December 6, 2006 / Notices
in a manner designed to inappropriately
discover information about unelected
stop orders. The Commission believes
that the Exchange’s enforcement of this
provision and surveillance for its
compliance will provide investors with
additional protection against any
remaining potential trading abuses
related to the election and execution of
stop orders.
Similarly, because the specialist
would no longer have access to
information about stop orders, the
Commission believes it is appropriate
for NYSE to remove the requirement
that the specialist obtain Floor Official
approval prior to trading or making a
bid or offer 58 for its proprietary account
that would elect a stop order and is
more than 0.10 point away from the last
sale.
Finally, the Commission believes it is
reasonable for NYSE to no longer accept
the stop limit order type in Exchange
systems given their infrequent use.
Accordingly, the Commission finds it
appropriate for NYSE to eliminate the
definition and all references to stop
limit orders from its rules.
PWALKER on PRODPC60 with NOTICES
D. Liquidity Replenishment Point
The Exchange proposes to replace the
two types of LRPs approved in the
Hybrid Market Order—the sweep LRP
and the momentum LRP—with a single
LRP that would be calculated by adding
and subtracting a value to the security’s
last sale price. NYSE proposes that the
value would not change intraday and
would be disseminated by the
Exchange. The Exchange also proposes
to change when Autoquote and
automatic executions would resume
after an LRP has been reached.
The Commission believes that the
proposed LRP changes are within the
realm of business judgments generally
left to the discretion of individual
markets. The Commission has
previously approved the Exchange’s use
of LRPs in its Hybrid Market model.59
The Commission believes that the
proposal to change the calculation of the
LRP is consistent with the requirements
of the Act. By providing for a single LRP
and simplifying its calculation, the
Commission believes that the proposal
may assist market participants in
determining when automatic executions
and Autoquote may be halted on the
Exchange. The Commission also notes
that the specific value ranges used to
calculate the LRP have been
incorporated into proposed NYSE Rule
58 Stop orders in ETFs may be elected by a quote.
See NYSE Rule 13.30.
59 See Hybrid Market Order, supra note 7.
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1000(a)(iv) and that the LRP values will
be disseminated by the Exchange.
E. Other Changes
Finally, the Exchange proposes to
amend NYSE Rule 60 to indicate that
Autoquote will not update the BBO
when the quote has been gapped in
accordance with Exchange procedures.
The Commission notes that this
proposed change to NYSE Rule 60 is
consistent with NYSE Rule 79A.15
regarding gapped quotes. The purpose
of a gapped quote is to provide public
notice of an order imbalance and to
minimize short-term price dislocation
associated with such imbalance by
allowing for entry of offsetting orders or
the cancellation of orders on the side of
the imbalance. The Commission has
previously found that NYSE rules do
not have to require that both sides of its
quote be updated to reflect better priced
limit orders when the quote is gapped.60
The Commission continues to believe
that it is consistent with the Act to
disengage Autoquote when the quote is
gapped to allow the specialist to
disseminate an order imbalance.
The Exchange also proposes to make
clear that the crossing requirements in
NYSE Rule 76 would only apply to
manual transactions. The Commission
finds it appropriate for NYSE to amend
this rule to exclude automatic
executions since they cannot
accommodate verbal Crowd
participation.
Finally, the Exchange proposes to
increase the dollar threshold for highpriced securities, which are not eligible
for automatic executions, from $300 to
$1,000. The Commission believes that
increasing the dollar threshold for highpriced securities is consistent with the
Act and could expand the eligibility of
orders for automatic executions on the
Exchange.
F. Hybrid Market Implementation Plan
The Exchange proposes to alter the
Hybrid Market implementation plan to
add additional features to Phase 3.
Specifically, NYSE proposes to
implement the amended sweeps and
LRP, original planned for Phase 4,
earlier in Phase 3. In addition, the
Exchange proposes to implement in
Phase 3 the new stop order processing
and eliminate Direct+ suspension when
a better bid or offer is displayed by
another market center. NYSE also
proposes that Exchange Rule 1002 be
available for all stocks through the close
upon implementation of Phase 3.
60 See Securities Exchange Act Release No. 39129
(September 25, 1997), 62 FR 51497 (October 1,
1997).
PO 00000
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Fmt 4703
Sfmt 4703
The Commission finds that the
proposed changes to the Hybrid Market
implementation plan are consistent with
the Act. The Commission notes that it
approved on a pilot basis for a limited
number of securities the changes to the
implementation plan, including the
changes to NYSE rules proposed
herein.61 The Exchange has represented
that the implementation of Phase 3 has
not incurred any significant problems to
date.
VI. Accelerated Approval of
Amendment No. 5
The Commission finds good cause to
accelerate approval of the changes in
Amendment No. 5. prior to the thirtieth
day after the amendment is published
for comment in the Federal Register
pursuant to Section 19(b)(2) of the Act 62
for the reasons discussed below. In
Amendment No. 5, NYSE proposes to:
(1) Remove from Amendment No. 3 an
incorrect exhibit of the proposed rule
text; (2) reconcile the current rule text
of the definition of an IOC Order as
modified by a prior proposed rule
change that designated Reg. NMScompliant IOC orders; 63 (3) correct
typographical errors in proposed NYSE
Rules 60(e) and 123F(b)(ii); (4) correct
the term ‘‘NYSE Bonds’’ that was used
in the prior amendments to designate
the automated system in which bonds
trade and replace it with ‘‘Automated
Bond System’’ in order to reflect the
current name of the system and existing
NYSE rule text; 64 and (5) incorporate in
NYSE Rule 1000 that the LRP value
would be calculated every 30 seconds.
The Commission finds good cause to
accelerate approval of NYSE’s proposal
to correct its exhibit of proposed rule
text and the definition of an IOC Order,
to make technical corrections in
proposed NYSE Rules 60(e) and
123F(b)(ii), and to replace the term
‘‘NYSE Bonds’’ with ‘‘Automated Bond
System’’ prior to the thirtieth day after
publication in the Federal Register
because it would accurately reflect
NYSE’s existing rule text and raises no
new regulatory issues. In addition, the
Commission finds good cause to
accelerate approval of NYSE’s proposal
to incorporate in NYSE Rule 1000 the
30-second time period in which the LRP
61See Securities Exchange Act Release Nos. 54578
(October 5, 2006), 71 FR 60216 (October 12, 2006)
and 54675 (October 31, 2006), 71 FR 65019
(November 6, 2006).
6215 U.S.C. 78s(b)(2).
63See Securities Exchange Act Release No. 54611,
supra note 4.
64See Securities Exchange Act Release No. 54615
(October 17, 2006), 71 FR 62338 (October 24, 2006)
(pending proposed rule change to rename the
automated system in which bonds would trade as
‘‘NYSE Bonds’’).
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Federal Register / Vol. 71, No. 234 / Wednesday, December 6, 2006 / Notices
would be calculated because it would
codify into NYSE’s rules the manner in
which the LRP would be determined
and provide clarity and specificity to its
operation.
VII. Solicitation of Comments on
Amendment No. 5
Interested persons are invited to
submit written data, views and
arguments concerning Amendment No.
5, including whether such amendment
is consistent with the Act. Comments
may be submitted by any of the
following methods:
VIII. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,65 that the
proposed rule change (SR–NYSE–2006–
65) and Amendment Nos. 1, 2, and 3,
are approved and that Amendment No.
5 thereto is approved on an accelerated
basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.66
Nancy M. Morris,
Secretary.
[FR Doc. E6–20619 Filed 12–5–06; 8:45 am]
• 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–2006–65 on the
subject line.
Paper Comments
SMALL BUSINESS ADMINISTRATION
Emergence Capital Partners SBIC, L.P.
License No. 09/79–0454; Notice
Seeking Exemption Under Section 312
of the Small Business Investment Act,
Conflicts of Interest
PWALKER on PRODPC60 with NOTICES
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
Notice is hereby given that Emergence
Capital Partners SBIC, L.P., 160 Bovet
Road, Suite 300, San Mateo, CA 94402,
a Federal Licensee under the Small
Business Investment Act of 1958, as
amended (‘‘the Act’’), in connection
All submissions should refer to File
with the financing of a small concern,
Number SR–NYSE–2006–65. This file
has sought an exemption under section
number should be included on the
subject line if e-mail is used. To help the 312 of the Act and section 107.730,
Financings Which Constitute Conflicts
Commission process and review your
of Interest of the Small Business
comments more efficiently, please use
only one method. The Commission will Administration (‘‘SBA’’) Rules and
post all comments on the Commission’s Regulations (13 CFR 107.730).
Emergence Capital Partners SBIC, L.P.
Internet Web site (https://www.sec.gov/
proposes to provide equity/debt security
rules/sro.shtml). Copies of the
financing to Ketera Technologies, Inc.
submission, all subsequent
(‘‘Ketera’’), 3965 Freedom Circle, 16th
amendments, all written statements
Floor, Santa Clara, CA 95054. The
with respect to the proposed rule
financing is contemplated for working
change that are filed with the
capital and general corporate purposes.
Commission, and all written
The financing is brought within the
communications relating to the
purview of § 107.730(a)(1) of the
proposed rule change between the
Commission and any person, other than Regulations because Emergence Capital
Partners, L.P. and Emergence Capital
those that may be withheld from the
Associates, L.P., all Associates of
public in accordance with the
Emergence Capital Partners SBIC, L.P.,
provisions of 5 U.S.C. 552, will be
own more than ten percent of Ketera,
available for inspection and copying in
and therefore Ketera is considered an
the Commission’s Public Reference
Room. Copies of such filing also will be Associate of Emergence Capital Partners
SBIC, L.P. as detailed in § 107.50 of the
available for inspection and copying at
the principal office of the Exchange. All Regulations.
comments received will be posted
Notice is hereby given that any
without change; the Commission does
interested person may submit written
not edit personal identifying
comments on the transaction to the
information from submissions. You
Associate Administrator for Investment,
should submit only information that
U.S. Small Business Administration,
you wish to make available publicly. All 409 Third Street, SW., Washington, DC
submissions should refer to File
20416.
Number SR–NYSE–2006–65 and should
be submitted on or before December 27,
6515 U.S.C. 78s(b)(2).
2006.
6617 CFR 200.30–3(a)(12).
16:03 Dec 05, 2006
Dated: November 9, 2006.
Harry S. Haskins,
Acting Associate Administrator for
Investment.
[FR Doc. E6–20613 Filed 12–5–06; 8:45 am]
BILLING CODE 8025–01–P
SMALL BUSINESS ADMINISTRATION
Emergence Capital Partners SBIC,
L.P.; License No. 09/79–0454; Notice
Seeking Exemption Under Section 312
of the Small Business Investment Act,
Conflicts of Interest
BILLING CODE 8011–01–P
Electronic Comments
VerDate Aug<31>2005
70831
Jkt 211001
PO 00000
Frm 00098
Fmt 4703
Sfmt 4703
Notice is hereby given that Emergence
Capital Partners SBIC, L.P., 160 Bovet
Road, Suite 300, San Mateo, CA 94402,
a Federal Licensee under the Small
Business Investment Act of 1958, as
amended (‘‘the Act’’), in connection
with the financing of a small concern,
has sought an exemption under Section
312 of the Act and Section 107.730,
Financings which Constitute Conflicts
of Interest of the Small Business
Administration (‘‘SBA’’) Rules and
Regulations (13 CFR 107.730).
Emergence Capital Partners SBIC, L.P.
proposes to provide equity/debt security
financing to Intacct Corporation.
(‘‘Intacct’’), 125 S. Market Street, Suite
600, San Jose, CA 95113. The financing
is contemplated to bridge the company’s
operations until either the round of
equity is raised or a sale occurs.
The financing is brought within the
purview of § 107.730(a)(1) of the
Regulations because Emergence Capital
Partners, L.P. and Emergence Capital
Associates, L.P., all Associates of
Emergence Capital Partners SBIC, L.P.,
own more than ten percent of Intacct,
and therefore Intacct is considered an
Associate of Emergence Capital Partners
SBIC, L.P. as detailed in § 107.50 of the
Regulations.
Notice is hereby given that any
interested person may submit written
comments on the transaction to the
Associate Administrator for Investment,
U.S. Small Business Administration,
409 Third Street, SW., Washington, DC
20416.
Dated: November 9, 2006.
´
Jaime Guzman-Fournier,
Associate Administrator for Investment.
[FR Doc. E6–20614 Filed 12–5–06; 8:45 am]
BILLING CODE 8025–01–P
E:\FR\FM\06DEN1.SGM
06DEN1
]]>Agencies
[Federal Register Volume 71, Number 234 (Wednesday, December 6, 2006)]
[Notices]
[Pages 70824-70831]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-20619]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54820; File No. SR-NYSE-2006-65]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Granting Approval of Proposed Rule Change and Amendment Nos. 1, 2, and
3 Thereto and Notice of Filing and Order Granting Accelerated Approval
of Amendment No. 5 Thereto Relating to Exchange Rules Governing Certain
Definitions, Systemic Processing of Certain Orders, and the
Implementation Schedule of the NYSE Hybrid Market
November 27, 2006.
I. Introduction
On August 23, 2006, the New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder, \2\ a
proposed rule change to amend certain aspects of its Hybrid Market. On
September 11, 2006, September 15, 2006, and September 26, 2006, the
Exchange filed Amendment Nos. 1, 2, and 3 respectively. The proposed
rule change, as amended, was published for comment in the Federal
Register on September 29, 2006.\3\ On November 2, 2006, the Exchange
filed Amendment No. 5 to the proposed rule change.\4\ The Commission
received three comment letters from two commenters on the proposal.\5\
On November 2, 2006, the Exchange filed a response to the comment
letters.\6\
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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. 54520 (September 27,
2006), 71 FR 57590. On November 1, 2006, the Exchange filed
Amendment No. 4 to the proposed rule change and subsequently
withdrew Amendment No. 4 on November 2, 2006 due to inaccurate
exhibits.
\4\ See Partial Amendment dated November 2, 2006 (``Amendment
No. 5''). In Amendment No. 5, the Exchange: (1) Removed from
Amendment No. 3 an incorrect exhibit of the proposed rule text; (2)
reconciled the current rule text of the definition of an IOC Order
as modified by a prior proposed rule change that designated
Regulation NMS-compliant IOC orders; (3) corrected typographical
errors in proposed NYSE Rules 60(e) and NYSE Rule 123F(b)(ii); (4)
replaced the term ``NYSE Bonds'' with the term ``Automated Bond
System'' in its rules; and (5) specified in NYSE Rule 1000 that the
liquidity replenishment point (``LRP'') value would be calculated
every 30 seconds. See also Securities Exchange Act Release No. 54611
(October 16, 2006), 71 FR 62143 (October 23, 2006).
\5\ See Letters from George Rutherfurd, Consultant, dated
September 10, 2006 (``Rutherfurd Letter I'') and November 16, 2006
(``Rutherfurd Letter II''), and Junius W. Peake, Monfort
Distinguished Professor Emeritus of Finance, Greeley, Colorado,
dated October 3, 2006 (``Peake Letter'').
\6\ See Letter from Mary Yeager, Secretary, NYSE, to Nancy M.
Morris, Secretary, Commission, dated November 2, 2006 (``Response to
Comments'').
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This order approves the proposed rule change, as amended by
Amendment Nos. 1, 2 and 3, and grants accelerated approval to Amendment
No. 5. The Commission is also providing notice and soliciting comments
on Amendment No. 5.
II. Description of Proposal
On March 22, 2006, the Commission approved NYSE's proposal to
establish a Hybrid Market.\7\ In this proposed rule change, the
Exchange proposes to amend certain Hybrid Market rules and other NYSE
rules to reflect their operation in the Hybrid Market.
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\7\ See Securities Exchange Act Release No. 53539, 71 FR 16353
(March 31, 2006) (``Hybrid Market Order'').
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A. Order Types
1. Auto Ex Order
The Exchange proposes to amend its definition of Auto Ex Order to
clarify that an Auto Ex Order is an order that initiates an automatic
execution immediately upon entry into Exchange systems.\8\ Accordingly,
the Exchange also proposes to delete elected stop, stop limit orders,
and CAP-DI orders from the Auto Ex Order definition as these orders do
not initiate an automatic execution upon their entry on the Exchange.
Further, the Exchange proposes to clarify that ``non-auto-ex'' orders,
i.e., those orders that do not initiate an automatic execution
immediately upon entry into NYSE systems, would participate in
automatic executions in accordance with the rules governing their
operation. Finally, the Exchange proposes to amend NYSE Rules 1000-1004
to replace the term ``auto ex'' with the words ``automatically
executing'' to reflect that such rules govern all automatic executions,
not just those involving an Auto Ex Order.
---------------------------------------------------------------------------
\8\ See proposed NYSE Rule 13 (``Auto Ex Order'').
---------------------------------------------------------------------------
2. Market Orders
The current definition of an Auto Ex Order in NYSE Rule 13 includes
a
[[Page 70825]]
``market order designated for automatic execution.'' The Exchange
proposes to treat all market orders as Auto Ex Orders unless
specifically designated to be handled in the auction market as Auction
Market Orders. A market order, therefore, would no longer need to be
designated for automatic execution.
3. Maximum Size
In the Hybrid Market, NYSE eliminated the size limitation for Auto
Ex Orders. NYSE systems, however, have a maximum order capacity of
3,000,000 shares. Therefore, NYSE proposes to gradually increase the
size of orders that may be entered for automatic execution to a maximum
of 3,000,000 shares.\9\ The Exchange proposes to phase in the maximum
order size eligibility for automatic executions, beginning with a
maximum size of 1,000,000 shares. The Exchange also proposes to move
the maximum order size limitation for automatic executions to NYSE Rule
1000.\10\
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\9\ See proposed NYSE Rule 1000.
\10\ The Exchange had implemented similar language as part of an
extended auto-ex pilot in Lucent. See Securities Exchange Act
Release No. 53791 (May 11, 2006), 71 FR 28732 (May 17, 2006)
(``Lucent Pilot'').
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4. Immediate or Cancel (``IOC'') Order
In the Hybrid Market, the Exchange created two types of IOC
orders.\11\ The first type is an IOC order that complies with
Regulation NMS (``Reg. NMS'').\12\ A Reg. NMS IOC order would not be
routed during an Exchange execution to satisfy better priced protected
bids or offers \13\ displayed by other market centers; rather, a Reg.
NMS IOC order would be cancelled, as soon as its ability to receive an
execution on the Exchange ends. The second type of IOC order, an NYSE
IOC order, would route during a sweep to other markets to satisfy
better priced protected bids or offers and would cancel only when it is
no longer able to receive an execution.
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\11\ See NYSE Rule 13.
\12\ See Rule 600(b)(3), 17 CFR 242.600(b)(3).
\13\ A protected bid and offer is defined in Rule 600(b)(57) of
Reg. NMS. See 17 CFR 242.600(b)(57).
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The Exchange proposes to amend the definition of an NYSE IOC order
to clarify that Exchange systems would accept NYSE IOC orders for
participation in the re-opening trade after a trading halt.\14\
Specifically, NYSE IOC orders received during a trading halt would be
systemically maintained in order of their receipt for execution upon
the re-opening of the halted security. If an NYSE IOC order is not
executed as part of the re-opening trade, the order would be cancelled.
---------------------------------------------------------------------------
\14\ See proposed NYSE Rule 13.
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B. Sweeps
As approved in the Hybrid Market Order, an incoming Auto Ex Order
of a size larger than the Exchange best bid or offer (``BBO'') would
receive an execution at two prices--the BBO price and the ``clean-up''
price.\15\ The Exchange proposes to allow an automatically executing
order to trade with all interest in the Display Book system at each
successive price outside of the Exchange BBO.\16\ As proposed, an
automatically executing order would trade with the Exchange BBO and at
each successive price until the order is filled, its limit price (if
any) is reached, an LRP is reached, or, in the case of a Reg. NMS IOC
order, trading at a particular price on the Exchange would require
cancellation because the order cannot be routed to another market
center.\17\
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\15\ The ``clean-up'' price is the best price at which interest
in the Display Book system can trade with an Auto Ex Order outside
of the Exchange BBO. See NYSE Rule 1000(d)(iii).
\16\ See proposed NYSE Rule 1000(d)(iii).
\17\ See proposed NYSE Rule 1000(d)(ii)(C).
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During a sweep, floor broker e-Quotes trade on parity with orders
in the Book at the clean-up price, but only to the extent of the size
the floor broker designated as displayable should the price become the
NYSE BBO.\18\ The size that would have been placed in reserve would
yield to orders in the Book.\19\ The Exchange proposes to eliminate
this distinction and allow all floor broker agency interest to trade on
parity, once the order with priority has been satisfied, with orders in
the Book at each successive price during a sweep.
---------------------------------------------------------------------------
\18\ See NYSE Rule 70.20(d)(i).
\19\ See NYSE Rule 70.20(d)(ii).
---------------------------------------------------------------------------
The Exchange also proposes to clarify how and when CAP-DI orders
would participate in sweeps. Specifically, CAP-DI orders on the same
side as an automatically executing order would be elected at each
execution price that is part of the sweep.\20\ To the extent that the
sweeping order has volume remaining to be executed, the elected CAP-DI
orders would not participate in a transaction and would automatically
and systemically be unelected.\21\ If, at the last execution price
during a sweep, the sweeping order is filled or is otherwise unable to
continue executing, and there is contra side volume remaining on the
Display Book system or from contra-side elected CAP-DI orders, then the
same-side CAP-DI orders may participate in the final transaction.\22\
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\20\ See proposed NYSE Rule 123A.30(a)(ii).
\21\ See proposed NYSE Rule 123A.30(a)(ii).
\22\ See proposed NYSE Rule 123A.30(a)(ii).
---------------------------------------------------------------------------
CAP-DI orders on the contra side of the sweeping order are also
elected at each execution price that is part of the sweep and would
participate at the electing price, if there is volume available from
the sweeping order on the Display Book system or from CAP-DI orders on
the same side of the market as the sweeping order.\23\
---------------------------------------------------------------------------
\23\ See proposed NYSE Rule 123A.30(a)(iv).
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C. Liquidity Replenishment Points
The Exchange proposes to delete the two types of LRPs it proposed
to implement, and replace them with a single LRP. The proposed LRP
would be calculated by adding and subtracting a value (determined by
the Exchange) to the last sale price.\24\ The LRP value would not
change during the day, and the Exchange would disseminate the LRP
value.\25\ According to the Exchange, the LRP value would be based on
an examination of trading data and would vary based on the security's
NYSE average daily volume (``ADV''), price, and volatility. The
Exchange proposes a range of LRP values for securities with preset
characteristics of ADV, price, and volatility.\26\ The LRP would not be
calculated until there is a trade on the Exchange in a particular
security.\27\ If a security opens on a quote, and there are no trades
on the Exchange, the LRP value would not be set until there is a trade.
---------------------------------------------------------------------------
\24\ See proposed NYSE Rule 1000(a)(iv).
\25\ See proposed NYSE Rule 1000(a)(iv).
\26\ See proposed NYSE Rule 1000(a)(iv).
\27\ See proposed NYSE Rule 1000(a)(iv).
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The LRP value would be calculated automatically throughout the day,
as follows: (1) Every 30 seconds throughout the day; (2) after a manual
trade by the specialist; and (3) when automatic executions resume after
an LRP has been reached.\28\
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\28\ See proposed NYSE Rule 1000(a)(iv).
---------------------------------------------------------------------------
Further, the Exchange proposes to change when automatic executions
and Autoquote would resume after an LRP has been reached. The Exchange
proposes that automatic executions and Autoquote would resume as soon
as possible after an LRP has been reached, but in no more than five to
ten seconds, unless the residual is able to trade at a price beyond the
LRP, and the price creates a locked or crossed market.\29\ In such
case, automatic executions would resume with a manual transaction.\30\
Finally, the Exchange proposes to make
[[Page 70826]]
conforming changes to other Exchange rules.\31\
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\29\ See NYSE Rules 60(e)(ii) and 1000(b).
\30\ See NYSE Rules 60(e)(ii) and 1000(b).
\31\ See proposed NYSE Rules 60(e)(C)(iii), 60(e)(C)(iv),
60(d)(i) and (ii), 72(j)(i) and (j)(ii), and 1000(c).
---------------------------------------------------------------------------
D. Stop Order and Stop Limit Order
The Exchange proposes to modify how stop orders are handled and
processed on the Exchange. Specifically, the Exchange proposes that
specialists would no longer have access to information about stop
orders. In addition, the Exchange proposes to no longer accept stop
limit orders.
1. Processing of Stop Orders
Currently, stop orders are entered on the Exchange primarily
through SuperDOT \32\ and routed directly to the Display Book system,
where they reside awaiting election. The specialist assigned to each
security knows the prices at which stop orders would be elected and
their sizes. Because the specialist has access to this information that
is not available to other market participants, NYSE Rule 123A.40
requires that, in certain circumstances described below, the specialist
must guarantee the execution of elected stop orders at the electing
price.
---------------------------------------------------------------------------
\32\ SuperDot is an electronic order-routing system used by NYSE
member firms to send market and limit orders to the NYSE.
---------------------------------------------------------------------------
The Exchange proposes to restrict the ability of specialists and
their systems employing algorithms (``specialist algorithms'') to view
information regarding stop orders. Specialists would no longer view the
electing price and size of stop orders, nor possess any unique
information regarding stop orders. Stop orders would be maintained in a
``blind file'' in the sequence of their receipt. When a transaction on
the Exchange results in the election of a stop order, the elected stop
order would be sent as a market order to the Display Book system and
the specialist algorithms, and would be handled in the same way as any
other market order.
The Exchange also proposes to modify its opening and closing
procedures to reflect that specialists would no longer have access to
stop order volume that would be elected by the opening or closing
transaction. Currently, the specialist calculates the opening price
based in part on the stop order volume that would be elected by the
opening trade.\33\ On the close, the specialist calculates the closing
price based in part on the stop order volume that would be elected and
the volume of buy and sell market-at-the-close/limit-at-the-close
(``MOC/LOC'') \34\ orders that would be executed as a result of the
closing price.\35\
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\33\ See, e.g., NYSE Rule 123D.
\34\ MOC order is a market order, which is to be executed in its
entirety at the closing price, on the Exchange, of the stock named
in the order, and if not so executed, is to be treated as cancelled.
A LOC order is a limit order, which may or may not receive execution
on the close depending on the closing price and depth of contra side
interest. The term ``at the close order'' also includes a limit
order that is entered for execution at the closing price, on the
Exchange, of the stock named in the order, pursuant to such
procedures as the Exchange may from time to time establish.
\35\ See, e.g., NYSE Rule 116.40.
---------------------------------------------------------------------------
The Exchange proposes that at the open, the specialist or his or
her trading assistants would indicate to Exchange system the price at
which the specialist contemplates opening the stock. The Exchange
system then would calculate the volume of shares available for
execution on the open at that price, including stop orders that would
be elected by an execution at such price. There would be no indication
what, if any, portion of the total volume accounts for stop orders.
There would only be one opening print and would include stop orders
that are elected by the opening trade.
Similarly, prior to the close, the Exchange proposes that the
specialist or his or her trading assistants would indicate to Exchange
system the price at which the specialist is contemplating closing the
stock. In turn, Exchange system would calculate the volume of shares
executable on the close at that price, including stop order volume that
would be elected by an execution at that price. There would be no
indication what, if any, portion of the total volume accounts for stop
orders. The unelected stop orders would only be included in the total
volume of shares available to trade on the close five minutes prior to
the close.
The Exchange proposes to add NYSE Rule 115A.10 and NYSE Rule 116.50
to prohibit specialists, trading assistants, and anyone on their behalf
from using the opening and closing process in a manner designed to
inappropriately discover information about unelected stop orders.\36\
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\36\ The proposed opening and closing processes for stop order
handling are not available intraday; therefore, during the trading
day, it is not possible for these processes to be employed in a
manner designed to inappropriately discover information about
unelected stop orders.
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2. Elimination of Specialist's Guarantee and Floor Official Approval
Currently, NYSE Rule 123A.40 prohibits a specialist from making a
transaction for his own account in a stock in which he is registered
that would result in putting into effect any stop orders he may have on
his book. However, a specialist may be party to the election of a stop
order only: (i) When his bid or offer has the effect of bettering the
market, when he guarantees that the stop order will be executed at the
same price as the electing sale, and with Floor Official approval if
the transaction is more than 0.10 point away from the prior
transaction; or (ii) when the specialist purchases or sells stock for
his own account solely for the purpose of facilitating completion of a
member's order at a single price, where the depth of the current bid or
offer is not sufficient to do so. When the specialist is acting in this
manner, he shall not be required to guarantee that the stop order will
be executed at the same price as the electing sale. In addition,
current NYSE Rule 13.30, which applies to stop orders in Investment
Company units, requires a specialist to obtain Floor Official approval
prior to making a bid or offer for its proprietary account that would
elect a stop order and is more than 0.10 point away from the last sale.
Because specialists will no longer be privy to information about
stop orders, the Exchange proposes to eliminate the requirement that
specialists guarantee the execution price of stop orders elected by
their trades and the requirement that they receive Floor Official
approval for certain proprietary quotes and trades.
3. Floor Broker Stop Order Processing
Under the proposal, floor brokers would continue to be permitted to
represent stop orders. However, the Exchange proposes that stop orders
represented by floor brokers in the Crowd may not be included in e-
Quote.\37\
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\37\ See proposed NYSE Rule 70.20(a)(i).
---------------------------------------------------------------------------
4. Elimination of Stop Limit Orders
Finally, the Exchange proposes to eliminate stop limit orders as an
acceptable order type. The Exchange proposes to make conforming changes
to other Exchange rules to reflect the elimination of stop limit
orders.\38\
---------------------------------------------------------------------------
\38\ See proposed NYSE Rules 13, 118(2), 123(e)(7), 123(f),
132B(a)(9), 132B(b)(9), and 476A.
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E. Other Changes
1. Autoquote
Currently, when Autoquote is suspended due to a gap quote, NYSE
Rule 60(e)(iv)(C) provides that Autoquote would continue to update the
NYSE BBO in certain situations.\39\ According to the Exchange, however,
Autoquote does not continue to update
[[Page 70827]]
the BBO when NYSE has a gapped quote. Thus, the Exchange proposes to
amend its rule to provide that when the NYSE quote is gapped, Autoquote
would be suspended on both sides of the market.\40\
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\39\ See NYSE Rule 60(e)(iv)(c).
\40\ See proposed NYSE Rule 60(e)(iii)(c).
---------------------------------------------------------------------------
2. Exchange Crossing Rule
The Exchange proposes to amend its Rule 76 to provide that it would
not apply to automatic executions.\41\ Currently, when a member has an
order to buy and an order to sell the same security, NYSE Rule 76
requires that the member offer such security at a price which is higher
than his bid by the minimum variation before making a transaction with
himself to enable the Crowd to trade with the order at such price.
Since automatic executions cannot accommodate verbal Crowd
participation, the Exchange proposes to specify that NYSE Rule 76 only
applies to manual transactions.
---------------------------------------------------------------------------
\41\ See proposed NYSE Rule 76.
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3. High Priced Securities
The Exchange proposes to amend the definition of the price of high-
priced securities, which are not eligible for automatic executions, as
the closing price of a security, or if the security did not trade, the
closing bid price of the security on the Exchange on the immediate
previous trading day, that is $1,000 or more.\42\ Currently, the
Exchange considers securities with a closing price, or a closing bid
price if the security did not trade, of $300 or more as high-priced.
---------------------------------------------------------------------------
\42\ See proposed NYSE Rule 1000(a)(vi).
---------------------------------------------------------------------------
F. Hybrid Market Implementation Schedule
The Exchange is in the process of implementing Phase 3 of the
Hybrid Market. The Exchange proposes to amend the Phase 3
implementation schedule \43\ to add the following additional features:
---------------------------------------------------------------------------
\43\ See Hybrid Market Order, supra note 7.
---------------------------------------------------------------------------
Elimination of Direct+ suspension when a better bid or
offer is displayed by another market center;
Implementation of sweeps (as redefined herein);
Implementation of the LRP (as redefined herein); and
Implementation of new stop order processing (as discussed
herein).
Exchange Rule 1002 (``Availability of Automatic Execution Feature'')
would be available for all stocks through the close upon implementation
of Phase 3 of the Hybrid Market.
IV. Summary of Comments and NYSE's Response
The Commission received three comment letters from two commenters
on the proposed rule change,\44\ and the Exchange filed the Response to
Comments.\45\ One commenter continued to reiterate his objections to
the NYSE's Hybrid Market,\46\ many of which relate to aspects of the
Hybrid Market that the Commission has already approved.\47\ In the
recent letters, the commenter raised objections to two aspects of the
current proposal--the processing of stop orders and the proposed sweep
methodology.
---------------------------------------------------------------------------
\44\ See supra note 5. One commenter raised concerns with
respect to floor brokers' ability to enter discretionary
instructions with regard to orders they represent. See Peake Letter.
The Commission considered the issues raised by the commenter in its
order approving the floor broker's ability to enter discretionary
instructions. See Securities Exchange Act Release No. 54577 (October
5, 2006), 71 FR 60208 (October 12, 2006) (``d-Quote Order'').
\45\ See supra note 6.
\46\ See Rutherfurd Letters I and II, supra note 5.
\47\ For example, the commenter continues to object to
specialists' ability to trade in the Hybrid Market.
---------------------------------------------------------------------------
With regard to the proposed stop order processing, the commenter
noted that the proposal to remove a specialist's ability to see stop
orders minimizes the specialist's ability to improperly elect and then
trade with stop orders. The commenter, however, believes that
specialists have an exclusive ability to trade with elected stops in
the Hybrid Market. The commenter believes that because the specialist
algorithms will receive information about elected stops, which will be
routed to the Display Book system as market orders, the specialists
would also be provided with an opportunity to trade with these orders
before other market participants. The commenter argues that the
specialist's ability to algorithmically trade with elected stop orders
before other market participants would violate the specialist's
negative obligation. NYSE noted that the commenter's belief was
erroneous and that specialists do not have an exclusive ability to
trade with elected stops.
The commenter also argues that the Exchange needs to discuss the
proposed stop order processing with the elimination of the specialist
guarantee in the context of the affirmative and negative obligations of
the specialists. The commenter argues that the specialist guarantee
provides a benefit to the market by minimizing price dislocation that
may result from an influx of elected stop orders into the market.
Absent the specialist guarantee, the elected stop orders may trade at a
price away from the last sale that may be precluded under current
Exchange rules, which could add to market volatility. NYSE responded
that the reason the specialist is required to guarantee the price of
execution for certain elected stops is due to its access to information
about the stop orders that would be executed by its proprietary trade.
Since the specialists would no longer have access to electing price and
size information for stop orders, the reason for the price guarantee
would no longer exist and thus should be eliminated. The Exchange
argued that eliminating the specialist's knowledge of information about
these orders would create a more even playing field for market
participants in the Hybrid Market, and as the commenter has
acknowledged, would reduce the possibility of the specialists having a
trading advantage or a conflict of interest.
With respect to the sweeps, the commenter raises several issues.
First, the commenter argues that the proposed sweep methodology is
fundamentally unfair to orders in the Book because they must split
executions with undisplayed e-Quotes. The commenter states that floor
brokers are given a competitive advantage because they can enter their
automated orders with full knowledge of limit orders in the Book, while
public customers do not have similar knowledge about floor brokers'
agency interest outside the BBO. The commenter believes that this is
unfair, as public customers are not provided an opportunity to set
their limit orders taking into account interest in the floor broker
agency interest files.
Second, the commenter argues that the Exchange's parity rules are
unfair to the Book because the commenter believes that each individual
order represented in the floor broker agency interest file is entitled
to a split.\48\ Third, the commenter argues that the Book should be
executed in price and time priority, and that non-displayed floor
broker agency interest should be executed after displayed orders in the
Book. The commenter argues that orders in the Book attract liquidity,
and they should be executed ahead of non-displayed orders.\49\
---------------------------------------------------------------------------
\48\ The Commission notes that the commenter is unclear as to
whether he believes that each individual order that is represented
by a floor broker and placed in the agency interest file gets a
split, or if the commenter believes that each individual floor
broker agency interest file, that may include multiple customers,
gets a split. Under NYSE's Hybrid Market rules, the latter is the
correct way parity splits are determined.
\49\ The Commission notes that the commenter also argued that
specialist interest should not be able to trade on parity with floor
broker agency interest. The commenter continues to argue that this
is inconsistent with Section 11A of the Act and the specialist's
negative obligation. The Commission approved this aspect of the
Hybrid Market, and NYSE has not proposed to change the approved
parity rule in the instant proposed rule change. See Hybrid Market
Order, supra note 7.
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[[Page 70828]]
V. Discussion
After careful review and consideration of the comments, the
Commission finds that the proposed rule change, as amended, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, with the requirements of Section 6(b) of the
Act.\50\ Specifically, the Commission finds that approval of the
proposed rule change, as amended, is consistent with Section 6(b)(5) of
the Act \51\ in that the proposal is designed to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------
\50\ 15 U.S.C. 78f(b). In approving this proposal, the
Commission has considered the proposed rules' impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
\51\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The adoption of the Hybrid Market has fundamentally altered NYSE's
market structure to a predominately electronic market. As the Exchange
continues to roll out the implementation phases of the Hybrid Market,
it has also proposed changes to certain aspects of the Hybrid Market
based on its experience and the various needs of its customers and
members. As discussed more fully below, the Commission believes that
the proposed changes to the Hybrid Market are consistent with the Act.
A. Changes to Order Types
The Exchange proposes to amend the following order types: (1) Auto
Ex Orders; (2) market orders; (3) Auction Market Orders; and (4) IOC
Orders. First, with respect to Auto Ex Orders, the Exchange proposes to
clarify that Auto Ex Orders are orders that initiate automatic
executions immediately upon arrival into Exchange systems. The
Commission finds that this change clarifies NYSE's rule by specifying
how the orders NYSE accepts will be handled. Second, the Exchange
proposes to consider all market orders as Auto Ex Orders and therefore
would no longer need to require that they be specifically designated
for automatic execution. The Commission finds this change could enhance
automated access to liquidity on the Exchange, and facilitate the
efficient execution of market orders on the Exchange. As a result of
the change to market orders, NYSE also proposes to add a definition for
Auction Market Orders for those market orders that are to be handled in
the auction market. The Commission finds that this change is consistent
with the Act because it provides investors with the option to seek
price improvement through these orders. Third, the Exchange proposes to
amend the definitions of IOC orders to identify Reg. NMS-compliant IOC
orders and to amend the definition of an NYSE IOC order to clarify that
Exchange systems will accept NYSE IOC orders for participation in the
re-opening trade after a trading halt. The Commission finds that these
changes are consistent with the Act because they clarify how these
orders will be handled. Finally, the Exchange proposes to gradually
increase its order size eligibility for automatic executions to a
maximum size of 3,000,000 shares. The Commission finds that this
proposal is consistent with the Act and reflects in NYSE's rules its
systems limitations.
B. Sweeps
The Exchange proposes to allow an Auto Ex Order to trade with all
interest in the Display Book system at each successive price outside of
the Exchange BBO instead of receiving an execution at the BBO price and
the clean up price. The Exchange also proposes to allow all floor
broker agency interest to trade on parity with orders in the Book at
each successive price during a sweep. Further, the Exchange clarified
the participation of CAP-DI orders during a sweep.
One commenter objected to the floor broker's ability to trade on
parity with the orders in the Book.\52\ Specifically, this commenter
believed that non-displayed interest, such as the floor broker agency
interest file, should yield to displayed orders in the Book. The
commenter also believed that floor brokers have a competitive advantage
over public customers because they can enter their agency interest with
knowledge of orders in the Book, while public customers would not be
aware of floor broker agency interest outside of the BBO.
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\52\ See Rutherfurd Letters I and II, supra note 5.
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The Commission notes that it has previously approved the Exchange's
proposal to allow Auto Ex Orders to sweep the Display Book system in
the Hybrid Market Order. In the Hybrid Market Order, the Commission
noted that NYSE's proposal to allow Auto Ex Orders to sweep the Display
Book system was a significant expansion of the availability and speed
of automatic executions on the Exchange and should facilitate more
efficient transactions on the Exchange. The Commission continues to
believe that these execution efficiencies could result in the Hybrid
Market. The Exchange stated that its customers indicated that they
would not utilize the sweep functionality as originally approved.\53\
Accordingly, NYSE made the decision to amend its rule to allow incoming
orders to trade at each price in the Display Book system. The
Commission believes that the decision to make this change is consistent
with the Act, and within the realm of business judgment typically left
to individual markets.
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\53\ The Commission notes that commenters to the original Hybrid
Market proposal raised this issue. See Hybrid Market Order, supra
note 7.
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With respect to a floor broker's ability to maintain non-displayed
interest that is available for execution, the Commission notes that it
has not required complete disclosure of all trading interest, and that
it has previously permitted the use of undisplayed order types. For
example, in the auction market, floor brokers may hold significant
trading interest that is not broadly disclosed but is available for
execution and participation in a transaction on the Exchange. The
Commission found in the Hybrid Market Order that e-Quotes could trade
on parity with orders in the Book consistent with the requirements of
the Act.\54\ While the Exchange now proposes, under the amended sweep
functionality, to permit the full size of an e-Quote to trade on parity
with orders in the Book at each successive price, the Commission
continues to believe that NYSE's rules provide floor brokers with
incentives to place liquidity in the Display Book system and
effectively represent their customers' orders, and are consistent with
the Act.\55\
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\54\ During a sweep in the current Hybrid Market, only e-Quotes
that would be displayed if the price becomes the Exchange BBO would
trade on parity with orders in the Book.
\55\ Like in the auction market, each floor broker's e-Quote,
which may reflect several customers' orders, would be considered one
bidder/offerer, and the Book would likewise be considered one
bidder/offerer. This aspect of NYSE's parity rule remains unchanged,
and the Commission believes it continues to be consistent with the
requirements of the Act.
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The commenter believes that e-Quotes should not be entitled to
parity because floor brokers have the ability to change
[[Page 70829]]
the prices of their e-Quotes in response to information about orders in
the Book, while public customers are not provided information about the
floor brokers' interest outside the BBO. The Commission, however, notes
that NYSE's proposal does not alter the information that is currently
available to floor brokers or investors. Public customers entering
limit orders have access to the same information as floor brokers
regarding the Book, and can change their orders in response to that
information. Floor brokers have information about their own customers'
orders, as they always have had, but do not have information about
other floor broker interest. Accordingly, the Commission does not
believe that floor brokers have an inappropriate informational
advantage.
The Commission believes that exchanges have a certain degree of
flexibility to determine the methods of order interaction on their
markets so long as the requirements of the Act are met. Floor brokers
represent customers that are also providing liquidity for execution.
Floor brokers' customers often do not want their orders disclosed and
rely on floor brokers to use their judgment to represent their
interest. As noted above, the Commission has not required disclosure of
this liquidity outside the BBO, and, in the auction market, orders
represented by floor brokers have been entitled to parity with orders
in the Book. Accordingly, the Commission finds that NYSE's proposal to
allow floor broker agency interest to trade on parity at each
successive price with orders in the Book during a sweep is consistent
with the requirements of the Act.
C. Stop Orders
Currently, the specialist acts as agent for stop orders and, as
agent, has exclusive access to information about the election price and
size of the stop orders. Because the specialist has exclusive access to
this information, the Exchange requires the specialist, in certain
situations, to guarantee the price of an elected stop order. The
Exchange now proposes to modify the manner in which stop orders are
handled and processed on NYSE by removing the specialist's access to
information about stop orders, and eliminating the requirement that the
specialist guarantee the stop order's election price in certain
situations. In addition, NYSE proposes to eliminate the requirement
that the specialist receive Floor Official approval of certain
specialist proprietary trades that would elect stop orders. NYSE also
proposes to modify its opening and closing procedures and eliminate
stop limit orders as an order type on the Exchange.
One commenter believed that, under the proposal, the specialist
would have an exclusive ability to trade with elected stop orders since
it would receive information about elected stop orders through the
specialist algorithm prior to other market participants.\56\ This
belief is incorrect. Specialists in the Hybrid Market can only trade
algorithmically in certain specified instances that are set forth in
NYSE Rule 104. Under the proposal, specialists and the specialist
algorithm would be restricted from viewing information regarding the
stop orders. Stop orders would instead be maintained in a ``blind
file'' in the sequence of their receipt, and, once elected, the elected
stop order would be sent by the Exchange system as a market order to
the Display Book system. Information about the market order also would
be sent to the specialist algorithm. The market order would be handled
in the same manner as previously approved for market orders in the
Hybrid Market. Accordingly, in order to trade against an incoming
market order, the specialist algorithm would have to: (1) Provide
``additional specialist volume'' to partially or completely fill the
market order at the Exchange BBO; (2) match better bids and offers
published by other market centers where automatic executions are
immediately available; or (3) provide price improvement to the market
order.\57\
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\56\ See Rutherfurd Letters I and II, supra note 5. In his
second letter, the commenter stated that floor broker d-Quotes would
not be able to trade against incoming market orders and that NYSE's
rules provide that d-Quotes can only trade against published NYSE
interest. The Commission notes that this statement is erroneous.
NYSE Rule 70.25(b)(i) specifically states that ``[a] [f]loor broker
may set a discretionary price range within the Exchange best bid and
offer that specifies the prices at which they are willing to trade.
This discretion will be used, as necessary, to initiate or
participate in a trade with an incoming order capable of trading at
a price within the discretionary price range'' (emphasis added).
Accordingly, d-Quotes are capable of trading with incoming market
orders, and specialists do not maintain an exclusive trading ability
with incoming market orders.
\57\ In order to provide price improvement, the specialist would
have to be represented in the BBO in a significant size and would be
required to provide a minimum amount of price improvement. See NYSE
Rule 104(b).
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The commenter also argued that eliminating the guarantee implicates
the specialist's affirmation obligation in that, without the specialist
guarantee, elected stop orders could trade at a price away from the
last sale and add to market volatility. The Commission finds it
reasonable and appropriate that NYSE eliminate the specialist price
guarantee when the specialist is a party to the election of stop
orders, since specialists would no longer have information regarding
the electing price and size of stop orders. With respect to the
commenter's concern that removing the specialist price guarantee would
necessarily impact the specialist's affirmative obligations, NYSE
explained that the specialist price guarantee was a requirement
originally put in place due to the specialist's ability to view the
electing price and sizes of all stop orders in a stock, information
that is not available to other market participants. Requiring the
specialist to guarantee the price at which these orders are executed
removed any incentives for the specialist to effect proprietary trades
that would inappropriately elect stop orders. Accordingly, the Exchange
believes that, since the specialists would no longer have access to
electing price and size information for stop orders under this
proposal, the reason for the price guarantee would no longer exist and
thus should be eliminated. The Commission notes that a specialist in
the Hybrid Market remains obligated to comply with NYSE Rule 104.10,
which includes the maintenance, in so far as reasonably practicable, of
a fair and orderly market. Under NYSE Rule 104.10(2), in connection
with the maintenance of a fair and orderly market, a specialist should
engage to a reasonable degree under existing circumstances in dealings
for its own account when lack of price continuity, lack of depth, or
disparity between supply and demand exists or is reasonably to be
anticipated. The elimination of the specialist guarantee for executing
certain elected stops at the electing price would not alter this
affirmation obligation.
The Commission also believes that eliminating the specialist's
ability to view the prices at which stop orders would be elected and
their sizes would minimize the specialist's unique informational
advantage over other market participants with respect to stop orders.
The Commission finds that the proposal would create a more level
playing field for market participants in the Hybrid Market.
The Exchange has proposed a reasonable method by which specialists
can continue to effectively open and close the market by allowing
specialists to query the system, at discrete times, to determine the
total number of shares available for execution (including stop orders)
at a proposed opening or closing price. NYSE has proposed to
specifically prohibit in its rules specialists, trading assistants, and
anyone on their behalf from using the amended opening and closing
process
[[Page 70830]]
in a manner designed to inappropriately discover information about
unelected stop orders. The Commission believes that the Exchange's
enforcement of this provision and surveillance for its compliance will
provide investors with additional protection against any remaining
potential trading abuses related to the election and execution of stop
orders.
Similarly, because the specialist would no longer have access to
information about stop orders, the Commission believes it is
appropriate for NYSE to remove the requirement that the specialist
obtain Floor Official approval prior to trading or making a bid or
offer \58\ for its proprietary account that would elect a stop order
and is more than 0.10 point away from the last sale.
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\58\ Stop orders in ETFs may be elected by a quote. See NYSE
Rule 13.30.
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Finally, the Commission believes it is reasonable for NYSE to no
longer accept the stop limit order type in Exchange systems given their
infrequent use. Accordingly, the Commission finds it appropriate for
NYSE to eliminate the definition and all references to stop limit
orders from its rules.
D. Liquidity Replenishment Point
The Exchange proposes to replace the two types of LRPs approved in
the Hybrid Market Order--the sweep LRP and the momentum LRP--with a
single LRP that would be calculated by adding and subtracting a value
to the security's last sale price. NYSE proposes that the value would
not change intraday and would be disseminated by the Exchange. The
Exchange also proposes to change when Autoquote and automatic
executions would resume after an LRP has been reached.
The Commission believes that the proposed LRP changes are within
the realm of business judgments generally left to the discretion of
individual markets. The Commission has previously approved the
Exchange's use of LRPs in its Hybrid Market model.\59\ The Commission
believes that the proposal to change the calculation of the LRP is
consistent with the requirements of the Act. By providing for a single
LRP and simplifying its calculation, the Commission believes that the
proposal may assist market participants in determining when automatic
executions and Autoquote may be halted on the Exchange. The Commission
also notes that the specific value ranges used to calculate the LRP
have been incorporated into proposed NYSE Rule 1000(a)(iv) and that the
LRP values will be disseminated by the Exchange.
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\59\ See Hybrid Market Order, supra note 7.
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E. Other Changes
Finally, the Exchange proposes to amend NYSE Rule 60 to indicate
that Autoquote will not update the BBO when the quote has been gapped
in accordance with Exchange procedures. The Commission notes that this
proposed change to NYSE Rule 60 is consistent with NYSE Rule 79A.15
regarding gapped quotes. The purpose of a gapped quote is to provide
public notice of an order imbalance and to minimize short-term price
dislocation associated with such imbalance by allowing for entry of
offsetting orders or the cancellation of orders on the side of the
imbalance. The Commission has previously found that NYSE rules do not
have to require that both sides of its quote be updated to reflect
better priced limit orders when the quote is gapped.\60\ The Commission
continues to believe that it is consistent with the Act to disengage
Autoquote when the quote is gapped to allow the specialist to
disseminate an order imbalance.
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\60\ See Securities Exchange Act Release No. 39129 (September
25, 1997), 62 FR 51497 (October 1, 1997).
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The Exchange also proposes to make clear that the crossing
requirements in NYSE Rule 76 would only apply to manual transactions.
The Commission finds it appropriate for NYSE to amend this rule to
exclude automatic executions since they cannot accommodate verbal Crowd
participation.
Finally, the Exchange proposes to increase the dollar threshold for
high-priced securities, which are not eligible for automatic
executions, from $300 to $1,000. The Commission believes that
increasing the dollar threshold for high-priced securities is
consistent with the Act and could expand the eligibility of orders for
automatic executions on the Exchange.
F. Hybrid Market Implementation Plan
The Exchange proposes to alter the Hybrid Market implementation
plan to add additional features to Phase 3. Specifically, NYSE proposes
to implement the amended sweeps and LRP, original planned for Phase 4,
earlier in Phase 3. In addition, the Exchange proposes to implement in
Phase 3 the new stop order processing and eliminate Direct+ suspension
when a better bid or offer is displayed by another market center. NYSE
also proposes that Exchange Rule 1002 be available for all stocks
through the close upon implementation of Phase 3.
The Commission finds that the proposed changes to the Hybrid Market
implementation plan are consistent with the Act. The Commission notes
that it approved on a pilot basis for a limited number of securities
the changes to the implementation plan, including the changes to NYSE
rules proposed herein.\61\ The Exchange has represented that the
implementation of Phase 3 has not incurred any significant problems to
date.
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\61\See Securities Exchange Act Release Nos. 54578 (October 5,
2006), 71 FR 60216 (October 12, 2006) and 54675 (October 31, 2006),
71 FR 65019 (November 6, 2006).
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VI. Accelerated Approval of Amendment No. 5
The Commission finds good cause to accelerate approval of the
changes in Amendment No. 5. prior to the thirtieth day after the
amendment is published for comment in the Federal Register pursuant to
Section 19(b)(2) of the Act \62\ for the reasons discussed below. In
Amendment No. 5, NYSE proposes to: (1) Remove from Amendment No. 3 an
incorrect exhibit of the proposed rule text; (2) reconcile the current
rule text of the definition of an IOC Order as modified by a prior
proposed rule change that designated Reg. NMS-compliant IOC orders;
\63\ (3) correct typographical errors in proposed NYSE Rules 60(e) and
123F(b)(ii); (4) correct the term ``NYSE Bonds'' that was used in the
prior amendments to designate the automated system in which bonds trade
and replace it with ``Automated Bond System'' in order to reflect the
current name of the system and existing NYSE rule text; \64\ and (5)
incorporate in NYSE Rule 1000 that the LRP value would be calculated
every 30 seconds.
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\62\15 U.S.C. 78s(b)(2).
\63\See Securities Exchange Act Release No. 54611, supra note 4.
\64\See Securities Exchange Act Release No. 54615 (October 17,
2006), 71 FR 62338 (October 24, 2006) (pending proposed rule change
to rename the automated system in which bonds would trade as ``NYSE
Bonds'').
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The Commission finds good cause to accelerate approval of NYSE's
proposal to correct its exhibit of proposed rule text and the
definition of an IOC Order, to make technical corrections in proposed
NYSE Rules 60(e) and 123F(b)(ii), and to replace the term ``NYSE
Bonds'' with ``Automated Bond System'' prior to the thirtieth day after
publication in the Federal Register because it would accurately reflect
NYSE's existing rule text and raises no new regulatory issues. In
addition, the Commission finds good cause to accelerate approval of
NYSE's proposal to incorporate in NYSE Rule 1000 the 30-second time
period in which the LRP
[[Page 70831]]
would be calculated because it would codify into NYSE's rules the
manner in which the LRP would be determined and provide clarity and
specificity to its operation.
VII. Solicitation of Comments on Amendment No. 5
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 5, including whether such amendment
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-2006-65 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 File Number SR-NYSE-2006-65. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NYSE-2006-65 and should be submitted on or before
December 27, 2006.
VIII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\65\ that the proposed rule change (SR-NYSE-2006-65) and Amendment
Nos. 1, 2, and 3, are approved and that Amendment No. 5 thereto is
approved on an accelerated basis.
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\65\15 U.S.C. 78s(b)(2).
\66\17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\66\
Nancy M. Morris,
Secretary.
[FR Doc. E6-20619 Filed 12-5-06; 8:45 am]
BILLING CODE 8011-01-P
