Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of a Proposed Rule Change as Modified by Amendment No. 2 Thereto Relating to NYSE Rules 134 and 411, 9985-9989 [E7-3795]

Download as PDF Federal Register / Vol. 72, No. 43 / Tuesday, March 6, 2007 / Notices For the Commission, by the Division of Market Regulation, pursuant to delegated authority.22 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–3837 Filed 3–5–07; 8:45 am] reports of an execution involving an incorrect security, incorrect side of the market, incorrect price or whether an execution actually took place, to be treated as an erroneous trade. The text of the proposed rule change appears below. Proposed new language is italicized; proposed deletions are in [brackets].5 * * * * * BILLING CODE 8010–01–P Rule 134. It is therefore ordered that ISE is relieved of those responsibilities allocated to the NASD under the Plan in File No. 4–529. Differences and Omissions-Cleared Transactions SECURITIES AND EXCHANGE COMMISSION (‘‘QTs’’) [Release No. 34–55361; File No. SR–NYSE– 2006–28] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of a Proposed Rule Change as Modified by Amendment No. 2 Thereto Relating to NYSE Rules 134 and 411 February 27, 2007. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 2, 2006, the New York Stock Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by NYSE. NYSE filed Amendment No. 1 to the proposed rule change on September 22, 2006.3 NYSE filed Amendment No. 2 to the proposed rule change on February 20, 2007.4 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change cprice-sewell on PROD1PC67 with NOTICES The proposed rule change consists of amendments to NYSE Rules 134 (Differences and Omissions-Cleared Transactions) and 411 (Erroneous Reports). The proposed amendments seek to incorporate recognized trading errors into NYSE Rule 134. The Exchange further seeks to expand the use of the Floor broker’s error account to include certain situations involving ‘‘not held’’ orders. Furthermore, the proposed rule change would amend NYSE Rule 411 to allow erroneous 22 17 CFR 200.30–3(a)(34). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Amendment No. 1 supersedes the original filing in its entirety. 4 Amendment No. 2 supersedes Amendment No. 1 in its entirety. 1 15 VerDate Aug<31>2005 15:35 Mar 05, 2007 Jkt 211001 * * * * * (d) * * * * * (iii) Records as to all errors shall be contemporaneous to the error and be maintained by the member or his or her member organization. Such records shall include the audit trail data elements prescribed in Rule 132, as well as the nature and amount of the error, the means whereby the member resolved the error with the member or member organization that cleared the error trade on the member’s behalf, the aggregate amount of liability that the member has incurred and has outstanding, as of the time each such error trade entry is recorded, and such other information as the Exchange may from time to time require. * * * * * (g) For the purposes of this rule an ‘‘error’’ occurs as described in this subsection (g) and (h) below. When an order is executed outside of the customer instructions as entered in the electronic order tracking system of the Exchange pursuant to Rule 123(e). This includes, but is not limited to: (i) When a held or a not held order is executed in: (a) The wrong security; or (b) on the wrong side of the market; or (c) at a price outside the limit price of the order; or (d) is over bought or over sold; or (e) duplicates an execution. (ii) When an error is committed in the execution of a not held order as it relates to symbol, side, or price as noted in (i) above, which causes such not held order to remain unexecuted. 5 The Exchange inadvertently failed to identify the numbering of Rule 134(g)(i) and (ii) as proposed new text. For clarity, this numbering has been italicized herein. The Exchange has committed to file an amendment reflecting the fact that this section numbering is new text prior to Commission approval of the proposed rule change. Telephone conversation between Deanna Logan, Director, Office of the General Counsel, NYSE and David Michehl, Special Counsel, Commission, Division of Market Regulation, on February 21, 2007. PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 9985 (h) When: (i) There is a failure to execute a held order when market conditions permitted; or (ii) when a not held order remains unexecuted, in whole or in part, due to the order being lost or misplaced, or as a result of a system malfunction. (i) The Floor broker must maintain a signed, time-stamped record, including supporting documentation of such error. (j)(i) For the types of errors referred to in (h)(ii) above, such record and supporting documents must be provided to the Exchange Division of Market Surveillance prior to the opening of the Floor on the next trade date following the error. (ii) With respect to the errors described in (h)(ii) above, the Floor broker may execute the order in alignment with half the volume of each Exchange tape print up to the size of the order between the time that the order was entered and the time that the Floor Broker realized that the order was lost, misplaced or not executed as a result of a system malfunction. If executing half the volume of an order based on the Exchange tape print would result in more than a unit of trading, but not a multiple thereof (such as 150 shares), the customer would be entitled to the nearest full unit of shares rounded down (such as 100 shares). (iii) If the Floor broker fails to provide sufficient documentation, (which must include, but is not limited to, the date and time of the error, the date and time the error was discovered, the size of the error, the stock in which the error occurred, the original instructions, the names of all involved parties including the client and any upstairs trader, a detailed narrative of how the error occurred, detail narrative of discussions with relevant parties, the steps taken to correct the error and the ultimate resolution of the error) prior to the next trade date following the error, the Floor broker is prohibited from relying on the provisions of (j)(ii) above. * * * * * Rule 411. Erroneous Reports (a) * * * * * (iii) Except as provided in (iv) below, [A] a report shall not be binding and must be rescinded if an order was not actually executed but was in error reported to have been executed; an order which was executed, but in error reported as not executed, shall be binding; provided, however, when a member who is on the Floor reports in good faith the execution of an order entrusted to him by another member or E:\FR\FM\06MRN1.SGM 06MRN1 9986 Federal Register / Vol. 72, No. 43 / Tuesday, March 6, 2007 / Notices cprice-sewell on PROD1PC67 with NOTICES member organization and the other party to that transaction does not know it, the member or member organization to whom such report was rendered and the member Floor broker who made the report shall treat the transaction as made for the account of the member who made the report, or the account of his member organization, if the price and size of the transaction were within the price and volume of transactions in the security at the time that the member who made the report believed he had executed the order. A detailed memorandum of each such transaction shall be prepared and filed with the Exchange by the member assuming the transaction. (iv) A Floor broker who fails to execute a not held order because of the Floor broker’s error as to symbol, side or price, but reports to the customer the order had been executed in accordance with the customer’s instructions, may treat the terms of the execution report as though they were the terms of a trade, provided: (1) The price and size of the erroneous report are within the range of prices and sizes in the subject security reported on the Exchange portion of the Consolidated Tape on the day in which the order was erroneously reported; (2) the Floor broker reports the error to the customer, and whether the error was favorable or unfavorable to the customer; (3) the Floor broker documents, on a trade-by-trade basis, the name of individual authorized to accept the erroneous report for the customer, the amount of the error, and whether the error was in the customer’s favor; (4) the Floor broker treats the erroneous report as though it were an erroneous trade and his or her error account or the error account of the member organization becomes the opposite side to the report; and (5) the Floor broker assumes any loss occasioned by the erroneous report, and pays any profit to the New York Stock Exchange Foundation. * * * * * II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of VerDate Aug<31>2005 15:35 Mar 05, 2007 Jkt 211001 the most significant aspects of such statements. 1. Purpose This filing seeks to codify current recognized trading errors and to expand the use of the Floor broker’s error account to include certain situations involving not held6 orders. NYSE Rules 134 and 411, related to trading errors and erroneous reports, currently require members who ‘‘assume or acquire’’ a position as a result of an error when handling transactions for a customer to report such position in their designated error account. Pursuant to Information Memoranda 01–38, 02–07, 02–19, and 06–34, the Exchange currently interprets an error to be a mistake in the execution of the order. Current Policy and Procedure for Recognized Trading Errors. At present, recognized trading errors fall into two categories. The first category applies to held7 and not held orders and includes trades that are mistakenly executed outside the written order instructions. These types of errors encompass situations where the transaction was incorrectly executed: (i) In the wrong security; (ii) on the wrong side of the market; (iii) outside of the price instructions; (iv) for a quantity greater than specified in the instructions; or (v) duplicating a prior execution of the same original order. The second category of trading errors applies only to held orders and involves situations where a held order was executable in the prevailing market; however, the member failed to take advantage of the opportunity to execute the order at that time. Under the current rules8 and interpretations9, a Floor broker’s failure to execute a not held order when such not held order was executable in the prevailing market is not an error and the Floor broker cannot use his or her error account to issue reports at prices that the customer would have been entitled to, had the Floor broker executed the not held order in the prevailing market. Similar to the second category of recognized trading errors noted above, that apply only to held orders, there can be instances where a not held order is accepted from a customer but is lost or misplaced or remains unexecuted as a result of a system malfunction and thus the Floor broker fails to execute the not held order when the order would have been executable in the prevailing market. If at the time the Floor broker identifies the execution failure, the customer’s order can be executed in the market at an equal or better price than the customer could have received had the order been executed in the prevailing market, then the Floor broker will execute the order. In the event the market is adverse to the customer’s interest at the time the error is identified, under the current rules and interpretation,10 the remedy is to have the Floor broker issue a difference check11 or offer a commission reduction to address any disadvantage to the customer. In practice, the issuance of a difference check or commission adjustment to resolve any monetary disadvantage suffered by the customer as a result of the Floor broker’s failure to execute a not held order due to administrative mistake or system malfunction has proved cumbersome. Many institutional investors do not want the administrative burden of processing a difference check or commission adjustment. More importantly, the issuance of the difference check or commission adjustment is ultimately not in the best interest of the customer because the administrative cost associated with the processing of the difference check or commission adjustment is ultimately borne by the customer and thus the remedy does not serve to make the customer whole. Proposed Amendments to Rule 134 (Differences and Omissions-Cleared Transactions). According to the Exchange, this proposed rule change seeks to create greater efficiency and increase uniformity in the handling of trading errors. This proposed rule change seeks to codify in NYSE Rule 134 the types of currently recognized trading errors. The filing further seeks to expand the currently recognized trading errors to include certain types of trading errors involving not held orders. The proposed amendment seeks to define a trading error to include 6 A ‘‘not held’’ order is a market or limit order that gives the broker both time and price discretion to attempt to get the best possible execution. 7 A ‘‘held’’ order is a market or limit order that the broker must execute as instructed without discretion as to the time of an execution. 8 See NYSE Rules 134 and 411. 9 See NYSE Regulation, Information Memoranda 01–38, 02–07, 02–19, and 06–34. 10 See NYSE Regulation, Information Memorandum 02–19, issued April 17, 2002, clarifying the application of NYSE Rules 134, 411, and 407A. 11 A ‘‘difference check’’ is a check issued to the customer by the member to cover the monetary difference between the execution price and the price the customer and the member agree was the proper price. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 E:\FR\FM\06MRN1.SGM 06MRN1 Federal Register / Vol. 72, No. 43 / Tuesday, March 6, 2007 / Notices cprice-sewell on PROD1PC67 with NOTICES situations when an order is executed outside of a customer’s instructions as entered in the electronic order tracking systems12 of the Exchange. Under the proposed amendment, types of recognized trading errors include, but are not limited to, the execution of a held or not held order: (i) In the incorrect security; (ii) on the wrong side of the market; (iii) at a price outside the price instructions; (iv) for a quantity of shares greater than the amount of shares specified in the order instructions; or (v) the execution of an order in duplicate.13 In addition, under the proposed amendment the definition of an error includes when a Floor broker: (i) Neglects to execute a not held order when market conditions permit;14 (ii) fails to execute a not held order because he or she committed an error as to symbol, side or price in the execution of said order;15 or (iii) fails to execute a not held order because the order was lost, misplaced or remains unexecuted as a result of a system malfunction.16 Pursuant to the above proposed definition of trading errors, a Floor broker would be allowed to use his or her error account to execute a customer’s not held order in alignment with the Consolidated Tape, when the Floor broker incorrectly executed a customer’s not held order: (i) In the incorrect security; (ii) on the wrong side of the market; or (iii) at a price outside the price instructions when the prevailing market is adverse to the customer’s interest at the time that the error is discovered.17 a. Not Held Orders—Incorrect Security. 18 For example, in instances where the Floor broker purchases or sells the incorrect security, and the market in the correct security is adverse to the customer’s interest when the error is discovered, the proposed rule change would allow the broker to review reports of executions on the Consolidated Tape in the correct security and determine if, from the time the Floor broker executed the order in the incorrect security until the time the error was discovered, the customer’s order was executable in the correct security. In the event the customer’s order was executable during that period of time, the customer is given an execution in the correct stock at the price the stock traded at the time of the broker’s error or during the time the 12 See NYSE Rule 123(e). proposed NYSE Rule 134(g)(i). 14 See proposed NYSE Rule 134(h)(i). 15 See proposed NYSE Rule 134(g)(ii). 16 See proposed NYSE Rule 134(h)(ii) 17 See NYSE Rule 134(d) and proposed NYSE Rule 134(g). 18 See proposed NYSE Rule 134(g)(i)(a). 13 See VerDate Aug<31>2005 15:35 Mar 05, 2007 Jkt 211001 error remained unrecognized. The broker’s error account is the contra-side of this trade and is then long or short the number of shares ordered by the customer at the price the stock was trading in the relevant time range. For example: Order: Buy 10,000 XYZ at the market, not held. Execution: Bought 10,000 KYZ at $98.05 at 11:20 a.m. Error Discovered: 11:45 a.m. prior to rendering a report of execution. Result: Error account long 10,000 KYZ at $98.05. If between 11:20 a.m. and 11:45 a.m. the customer’s order in XYZ was executable in its entirety, then the customer buys 10,000 XYZ in its entirety and error account is short 10,000 XYZ at the 11:20 a.m. price. b. Not Held Order—Wrong Side of Market 19. In instances where the broker incorrectly executes a customer’s order on the wrong side of the market, and the market in the correct security is adverse to the customer’s interest when the error is discovered, the proposed rule change seeks to allow the Floor broker to use his or her error account to take over the incorrect position and execute the customer’s order on the correct side of the market. For example: Order: Buy 10,000 XYZ at the market, not held. Execution: Sold 10,000 XYZ at $45.10. Result: Floor broker takes over error; and Sells customer 10,000 XYZ at $45.10. The error account is ultimately short 20,000 shares XYZ at $45.10 which is the sum of the mistakenly sold 10,000 shares of XYZ taken over by the error account and 10,000 shares sold to the customer at a price of $45.10 from the error account. c. Not Held Orders—Outside of Price Instructions 20 In instances where the Floor broker executes the customer’s order at the incorrect price, the proposed rule change seeks to allow the Floor broker to take the position into the Floor broker’s error account. The Floor broker would then be allowed to execute the customer’s order consistent with the executions, sizes and prices as printed on the Consolidated Tape, if between the time that the Floor broker committed the error and when the error was discovered, the stock traded within the customer’s order price. For example: Order: Buy 10,000 XYZ at $80.50, Not Held. Execution: Bought 10,000 XYZ at $80.80 at 3:00 p.m. Error Discovered: After close buy order limited to $80.50 is unexecuted. 19 See 20 See PO 00000 proposed NYSE Rule 134(g)(i)(b). proposed NYSE Rule 134(g)(i)(c). Frm 00070 Fmt 4703 Sfmt 4703 9987 Result: Error Account Long 10,000 at $80.80. If XYZ traded within the customer’s limit anytime from 3 p.m. to the close, the error account sells 10,000 consistent with the executions, sizes and prices as printed on the Consolidated Tape and customer order is executed. d. Not Held Orders—Over Buy or Over Sell 21 In instances where the Floor broker executes a quantity greater than contained in the order instructions, the proposed rule change seeks to allow the Floor broker to take the position into the Floor broker’s error account. When executing a held or not held order a Floor broker may incorrectly calculate the quantity of shares remaining to fill the order and execute a quantity of shares greater than the instructed amount. For example: Order: Buy 50,000 XYZ at $80.50, Not Held. Execution: Bought 5,000 XYZ at $80.50 at 3 p.m. Bought 5,000 XYZ at $80.49 at 3:10 p.m. Bought 15,000 XYZ at $80.48 at 3:30 p.m. Bought 15,000 XYZ at $80.47 at 3:31 p.m. Bought 5,000 XYZ at $80.48 at 3:36 p.m. Bought 5,000 XYZ at $80.48 at 3:37 p.m. (Order filled) Bought 5,000 XYZ at $80.50 at 3:48 p.m. (Overbuy) Result: Error Account Long 5,000 at $80.50 The last execution of 5,000 shares of XYZ at $80.50 which exceed the quantity specified by the customer is taken into the Floor broker error account. e. Not Held Orders—Duplicate Execution.22 In instances where the Floor broker duplicates an execution, the proposed rule change seeks to allow the Floor broker to take the position into the Floor broker’s error account. During the execution of an order a Floor broker may inadvertently fail to document the execution of an order or may receive a duplicate transmission of an order and thus execute the order in duplicate. The proposal would allow the Floor broker to take the duplicate execution into the Floor broker’s error account. For example: Order: Buy 10,000 XYZ at $80.50, Not Held. Execution: Bought 10,000 XYZ at $80.50 at 3 p.m. Duplicate: Bought 10,000 XYZ at $80.50 at 3:40 p.m. 21 See 22 See E:\FR\FM\06MRN1.SGM proposed NYSE Rule 134(g)(i)(d). proposed NYSE Rule 134(g)(i)(e). 06MRN1 9988 Federal Register / Vol. 72, No. 43 / Tuesday, March 6, 2007 / Notices cprice-sewell on PROD1PC67 with NOTICES Result: Error Account Long 10,000 at $80.50. The duplicate purchase is taken into the Floor broker’s error account. f. Not Held Order—Lost or Misplaced.23 Pursuant to the proposed rule change, the Floor broker would be allowed to use his or her error account to report executions in alignment with the New York portion of the Consolidated Tape when the Floor broker fails to execute a not held order because of an administrative error that resulted in the order being lost or misplaced or remaining unexecuted as a result of a system malfunction and the market at the time the error is discovered is adverse to the customer’s interest (i.e., trading at a price worse than the customer could have received had the error not occurred). Significantly, this proposed amendment would not allow a Floor broker to issue a report of execution from his or her error account in instances where the customer merely did not like the execution, in order to prevent abuse of the new procedure. In instances where the Floor broker fails to execute an order as a result of an administrative error, such as the loss or misplacement of an order or a system malfunction and the current market conditions are adverse to the customer’s interests, the proposed rule change seeks to allow the Floor broker to use his or her error account as the contra party to the misplaced order in alignment with the New York portion of the Consolidated Tape. The Floor broker would be required to execute the customer’s order in alignment with half the volume of every New York portion of the Consolidated Tape print up to the size of the customer order, from the time that the order was entered up to the time that the Floor broker realized that the order was lost, misplaced or not executed because of a system malfunction.24 In the event that this results in a partial round lot, 25 the customer would be entitled to the nearest full lot, rounded down. Therefore if executed volume on the New York portion of the Consolidated Tape was 300 shares, half that volume would result in 150 shares and the customer would be entitled to a report of 100 shares. This is similar to how percentage orders are executed pursuant 23 See proposed NYSE Rule 134(h)(ii). proposed NYSE Rule 134(j)(ii). 25 Securities are generally traded in units of 100 shares referred to as lots. A full round lot is 100 shares. If a trade involves securities that are not in 100 share increments then it is referred to as a partial round lot, e.g., 150 shares. 24 See VerDate Aug<31>2005 15:35 Mar 05, 2007 Jkt 211001 to NYSE Rules 13 and 123A.30. For example: Order: Buy 50,000 XYZ at the market, not held. Event: Order is lost or misplaced or system malfunction. Execution: Execution in alignment according to the New York portion of the Consolidated Tape unless a better price is available in the market. 20,000 shares traded a minute after order entry time on the NYSE as reported to the Consolidated Tape. Floor broker sells 10,000 shares to customer at the same price of the 20,000 share execution. Next transaction in XYZ on the New York portion of the Consolidated Tape was 30,000 shares executed. Floor broker sells 15,000 shares to customer from error account at same price as 30,000 share execution. Next transaction on New York portion of the Consolidated Tape in XYZ was 50,000 shares traded. Floor broker sells 25,000 shares to customer at the same price as the 50,000 share execution. Customer order is now complete. Result: Error account sells to the customer and customer receives appropriate report without having to process adjustments. In order to prevent abuse of the proposed new rules, the filing also seeks to amend NYSE Rule 134(d)(iii) to require a Floor broker to make and keep contemporaneous and detailed records documenting the circumstances surrounding errors. A Floor broker would be required to make and keep a time stamped record 26 of the error containing supporting information the Exchange shall, from time to time, require.27 In addition, the Member Firm Regulation Division of NYSE Regulation, Inc. would include a review of these records during the course of its routine member firm examinations. The burden of proof would be on the Floor broker to substantiate that a legitimate error occurred.28 In instances where the Floor broker asserts that an error occurred as a result of an administrative error, such as the loss or misplacement of the order, or a system malfunction, the proposed amendment requires that a Floor broker submit the aforementioned time stamped record to 26 See proposed NYSE Rule 134(i). record must include the date and time of the error, the date and time the error was discovered, the size of the error, the stock in which the error occurred, the original instructions, the names of all involved parties including the client and any upstairs trader, a detailed narrative of how the error occurred, detail narrative of discussions with relevant parties, the steps taken to correct the error and the ultimate resolution of the error. See proposed NYSE Rule 134(j)(iii). 28 See proposed NYSE Rule 134(j)(iii). 27 The PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 the Exchange prior to the opening of the Floor on the next trade date following the error.29 Absent the required documentation, the Floor broker would be prohibited from using his or her error account to address these situations.30 Proposed Amendments to NYSE Rule 411 (Erroneous Reports). The Exchange further proposes to amend NYSE Rule 411 to allow a Floor broker to treat erroneous reports 31 as erroneous trades when the Floor broker committed an error as to security, side, or price in order to alleviate disadvantage to the customer. When a Floor broker commits an error as to security, side or price, there are instances where the Floor broker issues a report to the customer as a result of the execution. The report is issued to the customer prior to the Floor broker identifying that an error occurred. Currently, pursuant to NYSE Rule 411, in instances where a Floor broker issued a report to a customer based on a transaction that was made outside of the customer’s instructions on a not held order as discussed above, the Floor broker would be required to rescind the report leaving the customer’s order unexecuted and disadvantaging the customer. The actual execution price and size are binding, and the trade clears and settles in accordance with the terms of the transaction as executed. The member and the customer resolve any monetary issues between themselves. In instances where a Floor broker executed an order in accordance with its terms but the execution details were reported in error, members and member organizations must always accept a corrected report. In the event the erroneous report was made to a nonmember, then the non-member may choose to refuse acceptance of a corrected report. In those instances, the Floor broker is allowed to treat the erroneous report to a non-member as though it were an erroneous trade. Pursuant to the proposed rule change, a Floor broker would treat ‘‘erroneous reports’’ as erroneous trades when the price and size of the order would have been executable in the market at or near the time of the erroneous transaction. NYSE Rule 411 (Erroneous Reports), in part, addresses these situations and establishes procedures for members and member organizations to follow in handling erroneous report situations; however erroneous reports issued to 29 See proposed NYSE Rule 134(j)(i). proposed NYSE Rule 134(j)(iii). 31 An ‘‘erroneous report’’ is a report of an execution that is incorrect as to stock, price or whether an execution actually took place. 30 See E:\FR\FM\06MRN1.SGM 06MRN1 Federal Register / Vol. 72, No. 43 / Tuesday, March 6, 2007 / Notices customers based on a transaction that was made outside of the customer’s instructions, as discussed above, must be rescinded, leaving the customer’s order unexecuted. The proposed rule change would allow the erroneous report based on a transaction that was made in error as to security, side or price to stand, provided the price and size of the erroneous report were within the range of prices and sizes in the specified security reported to the NYSE portion of the Consolidated Tape on the day in which the order was executed.32 The Floor broker would be required to report the error to the customer, including explaining to the customer whether the error was favorable or unfavorable to the customer.33 The Floor broker would also be required to document on a tradeby-trade basis, the name of the individual authorized to accept the erroneous report for the customer, the amount of the error and whether the error was favorable to the customer.34 The Floor broker would then treat the erroneous report as though it was an erroneous trade and his or her error account would become the opposite side to the report.35 In addition, the Floor broker would assume any loss incurred and any profit that resulted would be paid to the New York Stock Exchange Foundation 36 as currently required by NYSE Rule 411(a)(ii)(5). Thus, any disadvantage would be borne by the Floor broker who was responsible for committing the error, not the customer. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with the provisions of Section 6(b)(5) of the Act 37 because it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. cprice-sewell on PROD1PC67 with NOTICES B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. 32 See proposed NYSE Rule 411(a)(iv)(1). proposed NYSE Rule 411(a)(iv)(2). 34 See proposed NYSE Rule 411(a)(iv)(3). 35 See proposed NYSE Rule 411(a)(iv)(4). 36 See proposed NYSE Rule 411(a)(iv)(5). 37 15 U.S.C. 78f(b)(5). 33 See VerDate Aug<31>2005 15:35 Mar 05, 2007 Jkt 211001 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others The Exchange has neither solicited nor received written comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: A. By order approve such proposed rule change; or B. Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: 9989 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–2006–28 and should be submitted on or before March 27, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.38 Jill M. Peterson, Assistant Secretary. [FR Doc. E7–3795 Filed 3–5–07; 8:45 am] BILLING CODE 8010–01–P SMALL BUSINESS ADMINISTRATION National Small Business Development Center Advisory Board; Public Meeting The U.S. Small Business Administration, National Small Electronic Comments Business Development Center Advisory Board will be hosting a public meeting • Use the Commission’s Internet via conference call to discuss such comment form (https://www.sec.gov/ matters that may be presented by rules/sro.shtml); or • Send an e-mail to rulemembers, staff of the U.S. Small comments@sec.gov. Please include File Business Administration, or interested Number SR–NYSE–2006–28 on the others. The conference call will be held subject line. on Tuesday, March 20, 2007 at 1 p.m. Eastern Standard Time. Paper Comments The purpose of the meeting is to • Send paper comments in triplicate discuss the internal Board issues; the to Nancy M. Morris, Secretary, March 5th agency meeting with senior Securities and Exchange Commission, program management; the Association Station Place, 100 F Street, NE., of Small Business Development Center Washington, DC 20549–1090. (ASBC) Board March meeting; and All submissions should refer to File congressional visits conducted by board Number SR–NYSE–2006–28. This file members. number should be included on the Anyone wishing to make an oral subject line if e-mail is used. To help the presentation to the Board must contact Commission process and review your Erika Fischer, Senior Program Analyst, comments more efficiently, please use only one method. The Commission will U.S. Small Business Administration, post all comments on the Commission’s Office of Small Business Development Centers, 409 3rd Street, SW., Internet Web site (https://www.sec.gov/ Washington, DC 20416, telephone (202) rules/sro.shtml). Copies of the 205–7045 or fax (202) 481–0681. submission, all subsequent amendments, all written statements Matthew Teague, with respect to the proposed rule Committee Management Officer. change that are filed with the [FR Doc. E7–3812 Filed 3–5–07; 8:45 am] Commission, and all written BILLING CODE 8025–01–P communications relating to the proposed rule change between the 38 17 CFR 200.30–3(a)(12). Commission and any person, other than PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 E:\FR\FM\06MRN1.SGM 06MRN1

Agencies

[Federal Register Volume 72, Number 43 (Tuesday, March 6, 2007)]
[Notices]
[Pages 9985-9989]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-3795]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55361; File No. SR-NYSE-2006-28]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of a Proposed Rule Change as Modified by Amendment No. 
2 Thereto Relating to NYSE Rules 134 and 411

February 27, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 2, 2006, the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by NYSE. 
NYSE filed Amendment No. 1 to the proposed rule change on September 22, 
2006.\3\ NYSE filed Amendment No. 2 to the proposed rule change on 
February 20, 2007.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 supersedes the original filing in its 
entirety.
    \4\ Amendment No. 2 supersedes Amendment No. 1 in its entirety.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change consists of amendments to NYSE Rules 134 
(Differences and Omissions-Cleared Transactions) and 411 (Erroneous 
Reports). The proposed amendments seek to incorporate recognized 
trading errors into NYSE Rule 134. The Exchange further seeks to expand 
the use of the Floor broker's error account to include certain 
situations involving ``not held'' orders. Furthermore, the proposed 
rule change would amend NYSE Rule 411 to allow erroneous reports of an 
execution involving an incorrect security, incorrect side of the 
market, incorrect price or whether an execution actually took place, to 
be treated as an erroneous trade.
    The text of the proposed rule change appears below. Proposed new 
language is italicized; proposed deletions are in [brackets].\5\
---------------------------------------------------------------------------

    \5\ The Exchange inadvertently failed to identify the numbering 
of Rule 134(g)(i) and (ii) as proposed new text. For clarity, this 
numbering has been italicized herein. The Exchange has committed to 
file an amendment reflecting the fact that this section numbering is 
new text prior to Commission approval of the proposed rule change. 
Telephone conversation between Deanna Logan, Director, Office of the 
General Counsel, NYSE and David Michehl, Special Counsel, 
Commission, Division of Market Regulation, on February 21, 2007.
---------------------------------------------------------------------------

* * * * *
Rule 134.
Differences and Omissions-Cleared Transactions
(``QTs'')
* * * * *
    (d)
* * * * *
    (iii) Records as to all errors shall be contemporaneous to the 
error and be maintained by the member or his or her member 
organization. Such records shall include the audit trail data elements 
prescribed in Rule 132, as well as the nature and amount of the error, 
the means whereby the member resolved the error with the member or 
member organization that cleared the error trade on the member's 
behalf, the aggregate amount of liability that the member has incurred 
and has outstanding, as of the time each such error trade entry is 
recorded, and such other information as the Exchange may from time to 
time require.
* * * * *
    (g) For the purposes of this rule an ``error'' occurs as described 
in this subsection (g) and (h) below. When an order is executed outside 
of the customer instructions as entered in the electronic order 
tracking system of the Exchange pursuant to Rule 123(e). This includes, 
but is not limited to:
    (i) When a held or a not held order is executed in:
    (a) The wrong security; or
    (b) on the wrong side of the market; or
    (c) at a price outside the limit price of the order; or
    (d) is over bought or over sold; or
    (e) duplicates an execution.
    (ii) When an error is committed in the execution of a not held 
order as it relates to symbol, side, or price as noted in (i) above, 
which causes such not held order to remain unexecuted.
    (h) When: (i) There is a failure to execute a held order when 
market conditions permitted; or (ii) when a not held order remains 
unexecuted, in whole or in part, due to the order being lost or 
misplaced, or as a result of a system malfunction.
    (i) The Floor broker must maintain a signed, time-stamped record, 
including supporting documentation of such error.
    (j)(i) For the types of errors referred to in (h)(ii) above, such 
record and supporting documents must be provided to the Exchange 
Division of Market Surveillance prior to the opening of the Floor on 
the next trade date following the error.
    (ii) With respect to the errors described in (h)(ii) above, the 
Floor broker may execute the order in alignment with half the volume of 
each Exchange tape print up to the size of the order between the time 
that the order was entered and the time that the Floor Broker realized 
that the order was lost, misplaced or not executed as a result of a 
system malfunction. If executing half the volume of an order based on 
the Exchange tape print would result in more than a unit of trading, 
but not a multiple thereof (such as 150 shares), the customer would be 
entitled to the nearest full unit of shares rounded down (such as 100 
shares).
    (iii) If the Floor broker fails to provide sufficient 
documentation, (which must include, but is not limited to, the date and 
time of the error, the date and time the error was discovered, the size 
of the error, the stock in which the error occurred, the original 
instructions, the names of all involved parties including the client 
and any upstairs trader, a detailed narrative of how the error 
occurred, detail narrative of discussions with relevant parties, the 
steps taken to correct the error and the ultimate resolution of the 
error) prior to the next trade date following the error, the Floor 
broker is prohibited from relying on the provisions of (j)(ii) above.
* * * * *
Rule 411.
Erroneous Reports
    (a)
* * * * *
    (iii) Except as provided in (iv) below, [A] a report shall not be 
binding and must be rescinded if an order was not actually executed but 
was in error reported to have been executed; an order which was 
executed, but in error reported as not executed, shall be binding; 
provided, however, when a member who is on the Floor reports in good 
faith the execution of an order entrusted to him by another member or

[[Page 9986]]

member organization and the other party to that transaction does not 
know it, the member or member organization to whom such report was 
rendered and the member Floor broker who made the report shall treat 
the transaction as made for the account of the member who made the 
report, or the account of his member organization, if the price and 
size of the transaction were within the price and volume of 
transactions in the security at the time that the member who made the 
report believed he had executed the order. A detailed memorandum of 
each such transaction shall be prepared and filed with the Exchange by 
the member assuming the transaction.
    (iv) A Floor broker who fails to execute a not held order because 
of the Floor broker's error as to symbol, side or price, but reports to 
the customer the order had been executed in accordance with the 
customer's instructions, may treat the terms of the execution report as 
though they were the terms of a trade, provided:
    (1) The price and size of the erroneous report are within the range 
of prices and sizes in the subject security reported on the Exchange 
portion of the Consolidated Tape on the day in which the order was 
erroneously reported;
    (2) the Floor broker reports the error to the customer, and whether 
the error was favorable or unfavorable to the customer;
    (3) the Floor broker documents, on a trade-by-trade basis, the name 
of individual authorized to accept the erroneous report for the 
customer, the amount of the error, and whether the error was in the 
customer's favor;
    (4) the Floor broker treats the erroneous report as though it were 
an erroneous trade and his or her error account or the error account of 
the member organization becomes the opposite side to the report; and
    (5) the Floor broker assumes any loss occasioned by the erroneous 
report, and pays any profit to the New York Stock Exchange Foundation.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    This filing seeks to codify current recognized trading errors and 
to expand the use of the Floor broker's error account to include 
certain situations involving not held\6\ orders. NYSE Rules 134 and 
411, related to trading errors and erroneous reports, currently require 
members who ``assume or acquire'' a position as a result of an error 
when handling transactions for a customer to report such position in 
their designated error account. Pursuant to Information Memoranda 01-
38, 02-07, 02-19, and 06-34, the Exchange currently interprets an error 
to be a mistake in the execution of the order.
---------------------------------------------------------------------------

    \6\ A ``not held'' order is a market or limit order that gives 
the broker both time and price discretion to attempt to get the best 
possible execution.
---------------------------------------------------------------------------

    Current Policy and Procedure for Recognized Trading Errors. At 
present, recognized trading errors fall into two categories. The first 
category applies to held\7\ and not held orders and includes trades 
that are mistakenly executed outside the written order instructions. 
These types of errors encompass situations where the transaction was 
incorrectly executed: (i) In the wrong security; (ii) on the wrong side 
of the market; (iii) outside of the price instructions; (iv) for a 
quantity greater than specified in the instructions; or (v) duplicating 
a prior execution of the same original order. The second category of 
trading errors applies only to held orders and involves situations 
where a held order was executable in the prevailing market; however, 
the member failed to take advantage of the opportunity to execute the 
order at that time.
---------------------------------------------------------------------------

    \7\ A ``held'' order is a market or limit order that the broker 
must execute as instructed without discretion as to the time of an 
execution.
---------------------------------------------------------------------------

    Under the current rules\8\ and interpretations\9\, a Floor broker's 
failure to execute a not held order when such not held order was 
executable in the prevailing market is not an error and the Floor 
broker cannot use his or her error account to issue reports at prices 
that the customer would have been entitled to, had the Floor broker 
executed the not held order in the prevailing market.
---------------------------------------------------------------------------

    \8\ See NYSE Rules 134 and 411.
    \9\ See NYSE Regulation, Information Memoranda 01-38, 02-07, 02-
19, and 06-34.
---------------------------------------------------------------------------

    Similar to the second category of recognized trading errors noted 
above, that apply only to held orders, there can be instances where a 
not held order is accepted from a customer but is lost or misplaced or 
remains unexecuted as a result of a system malfunction and thus the 
Floor broker fails to execute the not held order when the order would 
have been executable in the prevailing market. If at the time the Floor 
broker identifies the execution failure, the customer's order can be 
executed in the market at an equal or better price than the customer 
could have received had the order been executed in the prevailing 
market, then the Floor broker will execute the order. In the event the 
market is adverse to the customer's interest at the time the error is 
identified, under the current rules and interpretation,\10\ the remedy 
is to have the Floor broker issue a difference check\11\ or offer a 
commission reduction to address any disadvantage to the customer.
---------------------------------------------------------------------------

    \10\ See NYSE Regulation, Information Memorandum 02-19, issued 
April 17, 2002, clarifying the application of NYSE Rules 134, 411, 
and 407A.
    \11\ A ``difference check'' is a check issued to the customer by 
the member to cover the monetary difference between the execution 
price and the price the customer and the member agree was the proper 
price.
---------------------------------------------------------------------------

    In practice, the issuance of a difference check or commission 
adjustment to resolve any monetary disadvantage suffered by the 
customer as a result of the Floor broker's failure to execute a not 
held order due to administrative mistake or system malfunction has 
proved cumbersome. Many institutional investors do not want the 
administrative burden of processing a difference check or commission 
adjustment. More importantly, the issuance of the difference check or 
commission adjustment is ultimately not in the best interest of the 
customer because the administrative cost associated with the processing 
of the difference check or commission adjustment is ultimately borne by 
the customer and thus the remedy does not serve to make the customer 
whole.
    Proposed Amendments to Rule 134 (Differences and Omissions-Cleared 
Transactions). According to the Exchange, this proposed rule change 
seeks to create greater efficiency and increase uniformity in the 
handling of trading errors. This proposed rule change seeks to codify 
in NYSE Rule 134 the types of currently recognized trading errors. The 
filing further seeks to expand the currently recognized trading errors 
to include certain types of trading errors involving not held orders.
    The proposed amendment seeks to define a trading error to include

[[Page 9987]]

situations when an order is executed outside of a customer's 
instructions as entered in the electronic order tracking systems\12\ of 
the Exchange. Under the proposed amendment, types of recognized trading 
errors include, but are not limited to, the execution of a held or not 
held order: (i) In the incorrect security; (ii) on the wrong side of 
the market; (iii) at a price outside the price instructions; (iv) for a 
quantity of shares greater than the amount of shares specified in the 
order instructions; or (v) the execution of an order in duplicate.\13\
---------------------------------------------------------------------------

    \12\ See NYSE Rule 123(e).
    \13\ See proposed NYSE Rule 134(g)(i).
---------------------------------------------------------------------------

    In addition, under the proposed amendment the definition of an 
error includes when a Floor broker: (i) Neglects to execute a not held 
order when market conditions permit;\14\ (ii) fails to execute a not 
held order because he or she committed an error as to symbol, side or 
price in the execution of said order;\15\ or (iii) fails to execute a 
not held order because the order was lost, misplaced or remains 
unexecuted as a result of a system malfunction.\16\
---------------------------------------------------------------------------

    \14\ See proposed NYSE Rule 134(h)(i).
    \15\ See proposed NYSE Rule 134(g)(ii).
    \16\ See proposed NYSE Rule 134(h)(ii).
---------------------------------------------------------------------------

    Pursuant to the above proposed definition of trading errors, a 
Floor broker would be allowed to use his or her error account to 
execute a customer's not held order in alignment with the Consolidated 
Tape, when the Floor broker incorrectly executed a customer's not held 
order: (i) In the incorrect security; (ii) on the wrong side of the 
market; or (iii) at a price outside the price instructions when the 
prevailing market is adverse to the customer's interest at the time 
that the error is discovered.\17\
---------------------------------------------------------------------------

    \17\ See NYSE Rule 134(d) and proposed NYSE Rule 134(g).
---------------------------------------------------------------------------

    a. Not Held Orders--Incorrect Security. \18\ For example, in 
instances where the Floor broker purchases or sells the incorrect 
security, and the market in the correct security is adverse to the 
customer's interest when the error is discovered, the proposed rule 
change would allow the broker to review reports of executions on the 
Consolidated Tape in the correct security and determine if, from the 
time the Floor broker executed the order in the incorrect security 
until the time the error was discovered, the customer's order was 
executable in the correct security. In the event the customer's order 
was executable during that period of time, the customer is given an 
execution in the correct stock at the price the stock traded at the 
time of the broker's error or during the time the error remained 
unrecognized. The broker's error account is the contra-side of this 
trade and is then long or short the number of shares ordered by the 
customer at the price the stock was trading in the relevant time range. 
For example:
---------------------------------------------------------------------------

    \18\ See proposed NYSE Rule 134(g)(i)(a).
---------------------------------------------------------------------------

    Order: Buy 10,000 XYZ at the market, not held.
    Execution: Bought 10,000 KYZ at $98.05 at 11:20 a.m.
    Error Discovered: 11:45 a.m. prior to rendering a report of 
execution.
    Result: Error account long 10,000 KYZ at $98.05.
    If between 11:20 a.m. and 11:45 a.m. the customer's order in XYZ 
was executable in its entirety, then the customer buys 10,000 XYZ in 
its entirety and error account is short 10,000 XYZ at the 11:20 a.m. 
price.
    b. Not Held Order--Wrong Side of Market \19\. In instances where 
the broker incorrectly executes a customer's order on the wrong side of 
the market, and the market in the correct security is adverse to the 
customer's interest when the error is discovered, the proposed rule 
change seeks to allow the Floor broker to use his or her error account 
to take over the incorrect position and execute the customer's order on 
the correct side of the market. For example:
---------------------------------------------------------------------------

    \19\ See proposed NYSE Rule 134(g)(i)(b).
---------------------------------------------------------------------------

    Order: Buy 10,000 XYZ at the market, not held.
    Execution: Sold 10,000 XYZ at $45.10.
    Result: Floor broker takes over error; and Sells customer 10,000 
XYZ at $45.10. The error account is ultimately short 20,000 shares XYZ 
at $45.10 which is the sum of the mistakenly sold 10,000 shares of XYZ 
taken over by the error account and 10,000 shares sold to the customer 
at a price of $45.10 from the error account.
    c. Not Held Orders--Outside of Price Instructions \20\
---------------------------------------------------------------------------

    \20\ See proposed NYSE Rule 134(g)(i)(c).
---------------------------------------------------------------------------

    In instances where the Floor broker executes the customer's order 
at the incorrect price, the proposed rule change seeks to allow the 
Floor broker to take the position into the Floor broker's error 
account. The Floor broker would then be allowed to execute the 
customer's order consistent with the executions, sizes and prices as 
printed on the Consolidated Tape, if between the time that the Floor 
broker committed the error and when the error was discovered, the stock 
traded within the customer's order price. For example:
    Order: Buy 10,000 XYZ at $80.50, Not Held.
    Execution: Bought 10,000 XYZ at $80.80 at 3:00 p.m.
    Error Discovered: After close buy order limited to $80.50 is 
unexecuted.
    Result: Error Account Long 10,000 at $80.80.
    If XYZ traded within the customer's limit anytime from 3 p.m. to 
the close, the error account sells 10,000 consistent with the 
executions, sizes and prices as printed on the Consolidated Tape and 
customer order is executed.
    d. Not Held Orders--Over Buy or Over Sell \21\
---------------------------------------------------------------------------

    \21\ See proposed NYSE Rule 134(g)(i)(d).
---------------------------------------------------------------------------

    In instances where the Floor broker executes a quantity greater 
than contained in the order instructions, the proposed rule change 
seeks to allow the Floor broker to take the position into the Floor 
broker's error account. When executing a held or not held order a Floor 
broker may incorrectly calculate the quantity of shares remaining to 
fill the order and execute a quantity of shares greater than the 
instructed amount. For example:
    Order: Buy 50,000 XYZ at $80.50, Not Held.
    Execution: Bought 5,000 XYZ at $80.50 at 3 p.m.
    Bought 5,000 XYZ at $80.49 at 3:10 p.m.
    Bought 15,000 XYZ at $80.48 at 3:30 p.m.
    Bought 15,000 XYZ at $80.47 at 3:31 p.m.
    Bought 5,000 XYZ at $80.48 at 3:36 p.m.
    Bought 5,000 XYZ at $80.48 at 3:37 p.m. (Order filled)
    Bought 5,000 XYZ at $80.50 at 3:48 p.m. (Overbuy)
    Result: Error Account Long 5,000 at $80.50
    The last execution of 5,000 shares of XYZ at $80.50 which exceed 
the quantity specified by the customer is taken into the Floor broker 
error account.
    e. Not Held Orders--Duplicate Execution.\22\ In instances where the 
Floor broker duplicates an execution, the proposed rule change seeks to 
allow the Floor broker to take the position into the Floor broker's 
error account. During the execution of an order a Floor broker may 
inadvertently fail to document the execution of an order or may receive 
a duplicate transmission of an order and thus execute the order in 
duplicate. The proposal would allow the Floor broker to take the 
duplicate execution into the Floor broker's error account. For example:
---------------------------------------------------------------------------

    \22\ See proposed NYSE Rule 134(g)(i)(e).
---------------------------------------------------------------------------

    Order: Buy 10,000 XYZ at $80.50, Not Held.
    Execution: Bought 10,000 XYZ at $80.50 at 3 p.m.
    Duplicate: Bought 10,000 XYZ at $80.50 at 3:40 p.m.

[[Page 9988]]

    Result: Error Account Long 10,000 at $80.50.
    The duplicate purchase is taken into the Floor broker's error 
account.
    f. Not Held Order--Lost or Misplaced.\23\ Pursuant to the proposed 
rule change, the Floor broker would be allowed to use his or her error 
account to report executions in alignment with the New York portion of 
the Consolidated Tape when the Floor broker fails to execute a not held 
order because of an administrative error that resulted in the order 
being lost or misplaced or remaining unexecuted as a result of a system 
malfunction and the market at the time the error is discovered is 
adverse to the customer's interest (i.e., trading at a price worse than 
the customer could have received had the error not occurred). 
Significantly, this proposed amendment would not allow a Floor broker 
to issue a report of execution from his or her error account in 
instances where the customer merely did not like the execution, in 
order to prevent abuse of the new procedure.
---------------------------------------------------------------------------

    \23\ See proposed NYSE Rule 134(h)(ii).
---------------------------------------------------------------------------

    In instances where the Floor broker fails to execute an order as a 
result of an administrative error, such as the loss or misplacement of 
an order or a system malfunction and the current market conditions are 
adverse to the customer's interests, the proposed rule change seeks to 
allow the Floor broker to use his or her error account as the contra 
party to the misplaced order in alignment with the New York portion of 
the Consolidated Tape. The Floor broker would be required to execute 
the customer's order in alignment with half the volume of every New 
York portion of the Consolidated Tape print up to the size of the 
customer order, from the time that the order was entered up to the time 
that the Floor broker realized that the order was lost, misplaced or 
not executed because of a system malfunction.\24\ In the event that 
this results in a partial round lot, \25\ the customer would be 
entitled to the nearest full lot, rounded down. Therefore if executed 
volume on the New York portion of the Consolidated Tape was 300 shares, 
half that volume would result in 150 shares and the customer would be 
entitled to a report of 100 shares. This is similar to how percentage 
orders are executed pursuant to NYSE Rules 13 and 123A.30. For example:
---------------------------------------------------------------------------

    \24\ See proposed NYSE Rule 134(j)(ii).
    \25\ Securities are generally traded in units of 100 shares 
referred to as lots. A full round lot is 100 shares. If a trade 
involves securities that are not in 100 share increments then it is 
referred to as a partial round lot, e.g., 150 shares.
---------------------------------------------------------------------------

    Order: Buy 50,000 XYZ at the market, not held.
    Event: Order is lost or misplaced or system malfunction.
    Execution: Execution in alignment according to the New York portion 
of the Consolidated Tape unless a better price is available in the 
market.
    20,000 shares traded a minute after order entry time on the NYSE as 
reported to the Consolidated Tape. Floor broker sells 10,000 shares to 
customer at the same price of the 20,000 share execution.
    Next transaction in XYZ on the New York portion of the Consolidated 
Tape was 30,000 shares executed. Floor broker sells 15,000 shares to 
customer from error account at same price as 30,000 share execution.
    Next transaction on New York portion of the Consolidated Tape in 
XYZ was 50,000 shares traded. Floor broker sells 25,000 shares to 
customer at the same price as the 50,000 share execution.
    Customer order is now complete.
    Result: Error account sells to the customer and customer receives 
appropriate report without having to process adjustments.
    In order to prevent abuse of the proposed new rules, the filing 
also seeks to amend NYSE Rule 134(d)(iii) to require a Floor broker to 
make and keep contemporaneous and detailed records documenting the 
circumstances surrounding errors. A Floor broker would be required to 
make and keep a time stamped record \26\ of the error containing 
supporting information the Exchange shall, from time to time, 
require.\27\ In addition, the Member Firm Regulation Division of NYSE 
Regulation, Inc. would include a review of these records during the 
course of its routine member firm examinations.
---------------------------------------------------------------------------

    \26\ See proposed NYSE Rule 134(i).
    \27\ The record must include the date and time of the error, the 
date and time the error was discovered, the size of the error, the 
stock in which the error occurred, the original instructions, the 
names of all involved parties including the client and any upstairs 
trader, a detailed narrative of how the error occurred, detail 
narrative of discussions with relevant parties, the steps taken to 
correct the error and the ultimate resolution of the error. See 
proposed NYSE Rule 134(j)(iii).
---------------------------------------------------------------------------

    The burden of proof would be on the Floor broker to substantiate 
that a legitimate error occurred.\28\ In instances where the Floor 
broker asserts that an error occurred as a result of an administrative 
error, such as the loss or misplacement of the order, or a system 
malfunction, the proposed amendment requires that a Floor broker submit 
the aforementioned time stamped record to the Exchange prior to the 
opening of the Floor on the next trade date following the error.\29\ 
Absent the required documentation, the Floor broker would be prohibited 
from using his or her error account to address these situations.\30\
---------------------------------------------------------------------------

    \28\ See proposed NYSE Rule 134(j)(iii).
    \29\ See proposed NYSE Rule 134(j)(i).
    \30\ See proposed NYSE Rule 134(j)(iii).
---------------------------------------------------------------------------

    Proposed Amendments to NYSE Rule 411 (Erroneous Reports). The 
Exchange further proposes to amend NYSE Rule 411 to allow a Floor 
broker to treat erroneous reports \31\ as erroneous trades when the 
Floor broker committed an error as to security, side, or price in order 
to alleviate disadvantage to the customer.
---------------------------------------------------------------------------

    \31\ An ``erroneous report'' is a report of an execution that is 
incorrect as to stock, price or whether an execution actually took 
place.
---------------------------------------------------------------------------

    When a Floor broker commits an error as to security, side or price, 
there are instances where the Floor broker issues a report to the 
customer as a result of the execution. The report is issued to the 
customer prior to the Floor broker identifying that an error occurred. 
Currently, pursuant to NYSE Rule 411, in instances where a Floor broker 
issued a report to a customer based on a transaction that was made 
outside of the customer's instructions on a not held order as discussed 
above, the Floor broker would be required to rescind the report leaving 
the customer's order unexecuted and disadvantaging the customer. The 
actual execution price and size are binding, and the trade clears and 
settles in accordance with the terms of the transaction as executed. 
The member and the customer resolve any monetary issues between 
themselves.
    In instances where a Floor broker executed an order in accordance 
with its terms but the execution details were reported in error, 
members and member organizations must always accept a corrected report. 
In the event the erroneous report was made to a non-member, then the 
non-member may choose to refuse acceptance of a corrected report. In 
those instances, the Floor broker is allowed to treat the erroneous 
report to a non-member as though it were an erroneous trade.
    Pursuant to the proposed rule change, a Floor broker would treat 
``erroneous reports'' as erroneous trades when the price and size of 
the order would have been executable in the market at or near the time 
of the erroneous transaction. NYSE Rule 411 (Erroneous Reports), in 
part, addresses these situations and establishes procedures for members 
and member organizations to follow in handling erroneous report 
situations; however erroneous reports issued to

[[Page 9989]]

customers based on a transaction that was made outside of the 
customer's instructions, as discussed above, must be rescinded, leaving 
the customer's order unexecuted.
    The proposed rule change would allow the erroneous report based on 
a transaction that was made in error as to security, side or price to 
stand, provided the price and size of the erroneous report were within 
the range of prices and sizes in the specified security reported to the 
NYSE portion of the Consolidated Tape on the day in which the order was 
executed.\32\ The Floor broker would be required to report the error to 
the customer, including explaining to the customer whether the error 
was favorable or unfavorable to the customer.\33\ The Floor broker 
would also be required to document on a trade-by-trade basis, the name 
of the individual authorized to accept the erroneous report for the 
customer, the amount of the error and whether the error was favorable 
to the customer.\34\ The Floor broker would then treat the erroneous 
report as though it was an erroneous trade and his or her error account 
would become the opposite side to the report.\35\ In addition, the 
Floor broker would assume any loss incurred and any profit that 
resulted would be paid to the New York Stock Exchange Foundation \36\ 
as currently required by NYSE Rule 411(a)(ii)(5). Thus, any 
disadvantage would be borne by the Floor broker who was responsible for 
committing the error, not the customer.
---------------------------------------------------------------------------

    \32\ See proposed NYSE Rule 411(a)(iv)(1).
    \33\ See proposed NYSE Rule 411(a)(iv)(2).
    \34\ See proposed NYSE Rule 411(a)(iv)(3).
    \35\ See proposed NYSE Rule 411(a)(iv)(4).
    \36\ See proposed NYSE Rule 411(a)(iv)(5).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b)(5) of the Act \37\ because it is 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change; or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2006-28 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NYSE-2006-28. 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-2006-28 and should be submitted on or before March 
27, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\38\
---------------------------------------------------------------------------

    \38\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E7-3795 Filed 3-5-07; 8:45 am]
BILLING CODE 8010-01-P