Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating to Rule 92 (Limitations on Members' Trading Because of Customers' Orders), 30410-30413 [E7-10404]
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Federal Register / Vol. 72, No. 104 / Thursday, May 31, 2007 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act 7 and
subparagraph (f)(2) of Rule 19b–4
thereunder 8 because it establishes or
changes a due, fee, or other charge
applicable only to a member imposed by
the self-regulatory organization.
Accordingly, the proposal is effective
upon Commission receipt of the filing.
At any time within 60 days of the filing
of the proposed rule change, the
Commission may summarily abrogate
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of the filing also will be
available for inspection and copying at
the principal office of NSX. 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–2007–06 and should
be submitted on or before June 21, 2007.
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:
BILLING CODE 8010–01–P
sroberts on PROD1PC70 with NOTICES
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–2007–06 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–NSX–2007–06. 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
7 15
8 17
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
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For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.9
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–10377 Filed 5–30–07; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–55804; File No. SR–NYSE–
2007–21]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing of Proposed Rule Change and
Amendment No. 1 Thereto Relating to
Rule 92 (Limitations on Members’
Trading Because of Customers’
Orders)
May 23, 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 February
23, 2007, 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. On May 22, 2007, NYSE
submitted Amendment No. 1 to the
proposed rule change.3 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
NYSE proposes to amend Rule 92 to
permit, among other things, members or
member organizations to trade ahead of
9 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Amendment No. 1 replaced and superseded the
original filing in its entirety.
1 15
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a customer order if the purpose of the
proprietary order is to execute, on a
riskless principal basis, another order
from a customer and to expand the
consent provisions for trading along
under Rule 92(b). The text of the
proposed rule change is available at
NYSE, the Commission’s Public
Reference Room, and www.nyse.com.
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 had 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
The Exchange proposes to amend
NYSE Rule 92 in order to permit
member organizations to combine
multiple orders into a single order and
to route the order to the Display Book
for execution on a riskless principal
basis via Exchange execution systems.
In addition, the Exchange proposes to
change the notification and consent
provision of Rule 92(b) to permit
customers to provide affirmative blanket
consent, subject to certain requirements,
rather than the current requirement that
members and member organizations
obtain and document consent for
members to trade along with customer
orders on an order-by-order basis.
Finally, the Exchange proposes adding
an additional exemption to Rule 92 to
permit a member organization in certain
situations to enter Regulation NMS
(‘‘Reg. NMS’’) intermarket sweep orders
at the Exchange, subject to certain
conditions, including that the firm yield
its principal executions to any open
customer orders that are required to be
protected by Rule 92. The Exchange
proposes these changes to harmonize
Rule 92 with similar rules of the NASD
and to address the changes to the
marketplace because of the
implementation of NYSE’s Hybrid
Market and Reg. NMS.
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Riskless Principal Transactions
NYSE Rule 92 generally prohibits
members or member organizations from
trading on a proprietary basis ahead of,
or along with, customer orders that are
executable at the same price as the
proprietary order.4 The rule contains
several exceptions that make it
permissible for a member or member
organization to enter a proprietary order
while representing a customer order that
could be executed at the same price, so
long as it is not for an account of an
individual investor and the customer
has provided express permission
(referred to herein as a ‘‘Rule 92(b)
proprietary order’’).5
The Exchange’s proposed amendment
would add a new subsection to Rule 92
that would permit riskless transactions
for the purpose of facilitating the
execution, on a riskless principal basis,
of one or more customer orders. The
proposed rule defines a riskless
principal transaction as one in which a
member or member organization, after
having received one or more orders to
buy (sell) a security, purchases (sells)
the security as principal at the same
price to satisfy the order(s) to buy (sell).
Under the rule, the member would be
required to give the customer the same
price it received, exclusive of any
markup or markdown, commission or
commission equivalent, or other fee.
The proposed amendment seeks to
harmonize the rules of NYSE with
similar rules of the NASD, in particular,
the NASD’s so-called Manning Rule,
which permits riskless principal orders
as an exception to the rule prohibiting
trading ahead of customer market and
limit orders on the NASDAQ market.6
The Manning Rule is an interpretation
of NASD customer protection rules,
which, like NYSE Rule 92, generally
prohibit firms from executing
proprietary orders ahead of customer
orders that could be executed at the
same price. The Exchange states that the
Manning exception was adopted to
permit NASD broker/dealers to manage
their order flow more efficiently; instead
of executing a group of like customer
orders individually, the rule permits
market makers to aggregate like
customer orders, execute a single trade
as principal in the market in place of
4 For the purposes of this rule filing and NYSE
Rule 92, the terms proprietary order and principal
order have the same meaning.
5 In general, these are transactions in which the
member or member organization is: (1) Liquidating
a position held in a proprietary facilitation account
and the customer’s order is for 10,000 shares or
more; (2) creating a bona fide hedge; (3) modifying
an existing hedge; or (4) engaging in a bona fide
arbitrage or risk arbitrage transaction.
6 See NASD Rule 2111 and IM–2110–2.
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those orders, and then allocate shares
back to the customers within 60 seconds
of receiving a report on the riskless
principal trade and at the same price as
the riskless principal trade, exclusive of
any markup or markdown, commission
or commission equivalent, or other fee.
Currently, NYSE has no equivalent
exception to Rule 92 to permit more
efficient riskless principal trading on
NYSE. The proposed amendment adapts
the riskless principal requirements of
the Manning Rule described above, and
integrates those requirements into the
existing requirements of NYSE Rule 92,
as follows.
The Exchange proposes adopting the
underlying order requirements of the
Manning Rule for riskless principal
transactions at the Exchange.
Accordingly, the Exchange proposes
that a riskless principal transaction can
be effected on behalf of any customer
order, regardless of whether from an
institutional account or an individual
investor. The Exchange believes that
adopting the riskless principal
transaction requirements of the
Manning Rule will ensure that the
marketplace will run efficiently and will
enable member organizations to both
comply with their Reg. NMS
requirements and meet best execution
requirements for customers.
Further requirements for proposed
riskless principal transactions include
that the receipt time reference for the
underlying order would have to be
before the execution report time
reference of the riskless principal
transaction. Within 60 seconds of
receiving an execution report from
NYSE on the riskless principal
transaction, members or member
organizations would be required to
allocate to the accounts represented in
the riskless principal transaction the
same price at which the order was
executed on NYSE, exclusive of any
markup or markdown, commission
equivalent, or other fee.
In addition, under the proposed
amendment, firms would be permitted
to aggregate only orders whose order
types and instructions (including tick
restrictions) permit such aggregation.
The Exchange believes that such
aggregating meets the standards set forth
in the Commission’s July 18, 2005 letter
to the Securities Industry Association
(‘‘SIA’’),7 in which the Commission
granted a riskless principal exemption
from Rule 10a–1 under the Act to permit
7See letter to Ira Hammerman, Senior Vice
President and General Counsel, SIA, from James A.
Brigagliano, Assistant Director, Division of Market
Regulation (‘‘Division’’), Commission, dated July
18, 2005 (available at www.sec.gov/divisions/
marketreg/mr-noaction/sia071805.htm).
PO 00000
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a broker-dealer to fill customer orders
without complying with the ‘‘tick’’
provisions of the Rule, in certain
situations and subject to certain
conditions, as set forth in the letter.
Firms would need to disclose to
customers the method by which the firm
would allocate the shares bought or sold
in the riskless principal transaction
(e.g., strict time priority, precedence
based on size, etc.), and would be
required to allocate shares in
accordance with that method. Such
method must be fair and reasonable, be
consistently applied, and not unfairly
discriminate against any particular class
of accounts or types of orders. The
Exchange would not require a specific
allocation methodology, but would
require that the chosen method be
adequately disclosed to customers and
be consistent with rules governing
parity of orders.
The Exchange would require member
organizations to keep certain books and
records in connection with riskless
principal transactions. In particular,
when executing riskless principal
transactions, firms would be required to
submit order execution reports to the
Exchange’s Front End Systemic Capture
database linking the execution of the
riskless principal order on the Exchange
to the specific underlying orders. The
information that will be provided must
be sufficient for both member firms and
the Exchange to reconstruct in a timesequenced manner all orders, including
allocations to the underlying orders,
with respect to which a member
organization is claiming the riskless
principal exception.
As with the Manning Rule, in
allocating riskless principal
transactions, if the riskless principal
transaction includes Rule 92(b)
proprietary orders, orders from
customers that have consented to trade
along with Rule 92(b) proprietary
orders, and orders from customers that
either have not or cannot consent (for
example, an individual investor with an
order of less than 10,000 shares) to the
member firm trading along with those
orders, the Rule 92(b) proprietary orders
and any customer orders that have
consented to trading along with such
proprietary orders must yield to the
non-consenting customer orders.
Customer Consent Under Rule 92(b)
The Exchange further proposes
amending the requirements surrounding
the obtaining of customer consent to
trade along with customer not-held
orders. Under current Rule 92(b), the
Exchange requires that a customer
provide express permission, including
an understanding of the relative price
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and size of allocated execution reports,
before permitting execution of one of
the specified proprietary orders under
that rule that could be executed at the
same price as the customer’s order. The
Exchange has interpreted this provision
to require that consent to trade along be
obtained and documented on an orderby-order basis.
As the Exchange has transitioned to
the Hybrid Market, with its greater
prevalence of automated executions and
rapid pace of order execution, and with
the implementation of Reg. NMS, the
Exchange has concluded that the
current order-by-order consent rule and
attendant documentation requirements
have become outmoded and can operate
to impede market efficiencies.
Moreover, the order-by-order consent
requirement for trading along in Rule 92
is inconsistent with other similar
situations where firms are permitted to
obtain a general or ‘‘blanket’’ approval
to trade along with not-held customer
orders, provided they are accompanied
by appropriate disclosures.8
The Exchange accordingly is
proposing to modify the consent
requirement of NYSE Rule 92(b) to
eliminate the order-by-order consent
and instead provide that customers may
give ‘‘blanket’’ affirmative written
consent for a member firm to trade along
provided that: (i) the customer has
received adequate prior affirmative
notice of the fact that the member or
member organization may trade along
with its orders, including a disclosure of
the method by which the member
organization will allocate shares to the
customer’s order and a disclosure
relating to the allocation methodology
for riskless principal transactions that
include both a Rule 92(b) proprietary
order and an order from a customer that
has not consented to trade along with a
Rule 92(b) proprietary order; (ii) the
customer affirmatively consents prior to
such trading by the member or member
organization; and (iii) the member or
member organization’s trading along is
permitted under one of the exceptions
contained in NYSE Rule 92.
The Exchange believes that this
proposed consent requirement would
provide the same level of investor
protection as the current consent
requirement because both standards
8 See, e.g., Information Memo 05–52 (requiring
member firms to provide periodic affirmative notice
regarding their practice in trading for their
proprietary accounts while in possession of
customer VWAP orders); see also Information
Memo 05–81 (deeming customers to consent to
their Floor brokers’ decision to permit a specialist
to trade on parity with their orders, provided that
the Floor broker has adequately disclosed to the
customer as to the broker’s regular practice in this
regard).
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16:01 May 30, 2007
Jkt 211001
require disclosures and consent before a
member organization can enter a Rule
92(b) proprietary order. However, by
eliminating the order-by-order consent,
the Exchange believes that the proposed
consent requirement would reduce the
burden associated with obtaining
consent in advance of each transaction,
thus permitting member organizations
to trade in the faster environment of
today’s marketplace without having to
pause before each trade to obtain
consent.
The Exchange proposes that member
organizations can document such
affirmative consent either by (i) a signed
writing from the customer that
acknowledges the disclosures, including
that a customer can opt-out on an orderby-order basis, and provides consent; or
(ii) documenting consent that was
provided orally, provided that written
disclosures were provided to the
customer before obtaining the oral
consent and the member organization
provides written notice to the customer
documenting that oral consent. Once a
customer has provided affirmative
written consent and so long as firms
continue to provide written disclosures
on a periodic basis, member
organizations will not need to renew
such affirmative consent.
The Exchange further proposes
expanding the class of investors that
may consent to a Rule 92(b) proprietary
order. Under the Manning Rule, the
NASD permits customers that meet the
NASD’s definition of an institutional
account and individual customers with
orders of 10,000 shares or more, unless
such orders are less than $100,000 in
value, to consent to trade along with a
member’s proprietary order. In contrast,
the current Rule 92 bars both individual
investors and institutional investors
with orders of less than 10,000 shares
from consenting to a member or member
organization from trading along with
their orders. To harmonize this portion
of the rules, the Exchange proposes
amending the class of investors that can
consent to a member or member
organization trading along with a
customer order to include all
institutional investors, regardless of the
size of the order, and individual
investors with orders of 10,000 shares or
more, unless such orders are less than
$100,000 in value. To ensure
consistency, the Exchange proposes to
incorporate, for purposes of Rule 92
only, NASD’s definition of an
‘‘institutional account,’’ 9 and therefore
proposes adding that definition to the
supplementary material to Rule 92.
9 See
PO 00000
NASD Rule 3110(c)(4).
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Customers would retain the ability to
‘‘opt-out’’ on a trade-by-trade basis or to
modify the instructions obtained under
blanket consent, since the customer
always has the option to submit an
order with an instruction that the
member or member organization not
trade along or alter the terms for trading
along with the order. The Exchange
would require members and member
organizations to periodically disclose
this to customers as well.
Once a customer provides such
‘‘blanket’’ consent, a member or member
organization may trade on a proprietary
basis along with a customer order that
is executable at the same price as a
proprietary order that meets the
exceptions set forth in Rule 92(b). A
member or member organization may
seek to include a Rule 92(b) proprietary
order with a proposed Rule 92(c)
riskless principal order. In such case,
even though a single order is
transmitted to the Exchange, the order
would include both riskless and risk
elements, and therefore would no longer
be a pure riskless principal transaction.
For purposes of parity, Exchange
systems will recognize the riskless
principal order as an agency order,
regardless of whether the order includes
any Rule 92(b) proprietary orders.
However, when allocating the
underlying orders, Rule 92(b)
proprietary orders and any customer
orders that have consented to the Rule
92(b) proprietary orders must yield to
customer orders that have not or cannot
consent to a Rule 92(b) proprietary
order. This allocation methodology
must be disclosed to customers that
consent to trade along with Rule 92(b)
proprietary orders. If the riskless
principal transaction represents only
agency orders and does not include any
proprietary orders, regular allocation of
the underlying orders would apply.
Exemption for Reg. NMS-Compliant
Intermarket Sweep Orders
The Exchange also proposes
amending Rule 92 to add an exemption
so that, when facilitating a customer
order that would otherwise require the
firm to either violate Rule 92 or trade
through protected quotations, member
organizations can comply with their
Reg. NMS obligation without also
violating Rule 92. Under the current
rule, if a member organization is
required to route intermarket sweep
orders as principal to execute against
the full displayed size of any protected
quotation in a security (‘‘ISO’’), for
example, when facilitating a customer
order at a price inferior to the national
best bid or offer or other protected
quotations and in compliance with
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Rules 600(b)(30)(ii) and 611(b)(6) of Reg.
NMS,10 the ISO could violate Rule 92 by
trading ahead of or along with open
customer orders.
The proposed exemption provides
that when routing ISOs, the member
organization must yield its principal
executions to any open customer orders
that are required to be protected by Rule
92 and capable of accepting the fill. As
defined in Rule 92(a), customer orders
that are required to be protected are
those open customer orders that are
known to the member organization
before entry of the ISO. In addition, the
proposed exemption would require that
if a firm executes an ISO to facilitate a
customer order at a price inferior to one
or more protected quotations, that
customer must consent to not receiving
the better price obtained by the ISO(s)
or the firm must yield its principal
execution to that customer.11 For
purposes of this amendment, the
Exchange further proposes adopting the
definitions of Reg. NMS in connection
with the terms ‘‘protected quotation’’
and ‘‘intermarket sweep order.’’ 12
2. Statutory Basis
The basis under the Act for this
proposed rule change is the requirement
under Section 6(b)(5) 13 that an
Exchange have rules that are designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and national market
system, and in general, to protect
investors and the public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will result in
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
sroberts on PROD1PC70 with NOTICES
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
10 17 CFR 242.600(b)(30)(ii) and 17 CFR
242.611(b)(6).
11 Telephone conversation between Clare F.
Saperstein, Principal Rule Counsel, Market
Surveillance, NYSE, and Theodore S. Venuti,
Attorney, Division, Commission, on May 23, 2007.
12 See 17 CFR 242.600(b)(7) and (30).
13 15 U.S.C. 78f(b)(5).
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30413
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 NYSE 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.
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make publicly available. All
submissions should refer to File
Number SR–NYSE–2007–21 and should
be submitted on or before June 21, 2007.
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:
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–NYSE–2007–21 on the
subject line.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.14
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–10404 Filed 5–30–07; 8:45 am]
BILLING CODE 8010–01–P
[Release No. 34–55803; File No. SR–Phlx–
2007–37]
Self-Regulatory Organizations;
Philadelphia Stock Exchange, Inc.;
Notice of Filing and Order Granting
Accelerated Approval of a Proposed
Rule Change and Amendment No. 1
Thereto Relating to the Extension of a
Pilot Concerning the Exchange’s
Directed Order Program
May 23, 2007.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
Paper Comments
notice is hereby given that on May 8,
• Send paper comments in triplicate
2007, the Philadelphia Stock Exchange,
to Nancy M. Morris, Secretary,
Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with
Securities and Exchange Commission,
the Securities and Exchange
Station Place, 100 F Street, NE.,
Commission (‘‘Commission’’) the
Washington, DC 20549–1090.
proposed rule change as described in
All submissions should refer to File
Items I and II below, which Items have
Number SR–NYSE–2007–21. This file
been substantially prepared by the
number should be included on the
Exchange. On May 10, 2007, the
subject line if e-mail is used. To help the Exchange filed Amendment No. 1. The
Commission process and review your
Commission is publishing this notice to
comments more efficiently, please use
solicit comments on the proposed rule
only one method. The Commission will change, as amended, from interested
post all comments on the Commission’s persons and is approving the proposal
Internet Web site (https://www.sec.gov/
as modified by Amendment No. 1 on an
rules/sro.shtml). Copies of the
accelerated basis, for a pilot period
submission, all subsequent
through May 27, 2008.
amendments, all written statements
I. Self-Regulatory Organization’s
with respect to the proposed rule
Statement of the Terms of Substance of
change that are filed with the
the Proposed Rule Change
Commission, and all written
The Phlx proposes to extend, for an
communications relating to the
additional one year period, a pilot
proposed rule change between the
Commission and any person, other than program concerning Exchange Rule
1080, Phlx Automated Options Market
those that may be withheld from the
(AUTOM) 3 and Automatic Execution
public in accordance with the
provisions of 5 U.S.C. 552, will be
14 17 CFR 200.30–3(a)(12).
available for inspection and copying in
1 15 U.S.C. 78s(b)(1).
the Commission’s Public Reference
2 17 CFR 240.19b–4.
Room. Copies of such filing also will be
3 AUTOM is the Exchange’s electronic order
available for inspection and copying at
delivery, routing, execution and reporting system,
the principal office of NYSE. All
which provides for the automatic entry and routing
Continued
comments received will be posted
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Agencies
[Federal Register Volume 72, Number 104 (Thursday, May 31, 2007)]
[Notices]
[Pages 30410-30413]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-10404]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55804; File No. SR-NYSE-2007-21]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto
Relating to Rule 92 (Limitations on Members' Trading Because of
Customers' Orders)
May 23, 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 February 23, 2007, 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. On
May 22, 2007, NYSE submitted Amendment No. 1 to the proposed rule
change.\3\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 replaced and superseded the original filing
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NYSE proposes to amend Rule 92 to permit, among other things,
members or member organizations to trade ahead of a customer order if
the purpose of the proprietary order is to execute, on a riskless
principal basis, another order from a customer and to expand the
consent provisions for trading along under Rule 92(b). The text of the
proposed rule change is available at NYSE, the Commission's Public
Reference Room, and www.nyse.com.
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 had 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
The Exchange proposes to amend NYSE Rule 92 in order to permit
member organizations to combine multiple orders into a single order and
to route the order to the Display Book[supreg] for execution on a
riskless principal basis via Exchange execution systems. In addition,
the Exchange proposes to change the notification and consent provision
of Rule 92(b) to permit customers to provide affirmative blanket
consent, subject to certain requirements, rather than the current
requirement that members and member organizations obtain and document
consent for members to trade along with customer orders on an order-by-
order basis. Finally, the Exchange proposes adding an additional
exemption to Rule 92 to permit a member organization in certain
situations to enter Regulation NMS (``Reg. NMS'') intermarket sweep
orders at the Exchange, subject to certain conditions, including that
the firm yield its principal executions to any open customer orders
that are required to be protected by Rule 92. The Exchange proposes
these changes to harmonize Rule 92 with similar rules of the NASD and
to address the changes to the marketplace because of the implementation
of NYSE's Hybrid Market and Reg. NMS.
[[Page 30411]]
Riskless Principal Transactions
NYSE Rule 92 generally prohibits members or member organizations
from trading on a proprietary basis ahead of, or along with, customer
orders that are executable at the same price as the proprietary
order.\4\ The rule contains several exceptions that make it permissible
for a member or member organization to enter a proprietary order while
representing a customer order that could be executed at the same price,
so long as it is not for an account of an individual investor and the
customer has provided express permission (referred to herein as a
``Rule 92(b) proprietary order'').\5\
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\4\ For the purposes of this rule filing and NYSE Rule 92, the
terms proprietary order and principal order have the same meaning.
\5\ In general, these are transactions in which the member or
member organization is: (1) Liquidating a position held in a
proprietary facilitation account and the customer's order is for
10,000 shares or more; (2) creating a bona fide hedge; (3) modifying
an existing hedge; or (4) engaging in a bona fide arbitrage or risk
arbitrage transaction.
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The Exchange's proposed amendment would add a new subsection to
Rule 92 that would permit riskless transactions for the purpose of
facilitating the execution, on a riskless principal basis, of one or
more customer orders. The proposed rule defines a riskless principal
transaction as one in which a member or member organization, after
having received one or more orders to buy (sell) a security, purchases
(sells) the security as principal at the same price to satisfy the
order(s) to buy (sell). Under the rule, the member would be required to
give the customer the same price it received, exclusive of any markup
or markdown, commission or commission equivalent, or other fee.
The proposed amendment seeks to harmonize the rules of NYSE with
similar rules of the NASD, in particular, the NASD's so-called Manning
Rule, which permits riskless principal orders as an exception to the
rule prohibiting trading ahead of customer market and limit orders on
the NASDAQ market.\6\ The Manning Rule is an interpretation of NASD
customer protection rules, which, like NYSE Rule 92, generally prohibit
firms from executing proprietary orders ahead of customer orders that
could be executed at the same price. The Exchange states that the
Manning exception was adopted to permit NASD broker/dealers to manage
their order flow more efficiently; instead of executing a group of like
customer orders individually, the rule permits market makers to
aggregate like customer orders, execute a single trade as principal in
the market in place of those orders, and then allocate shares back to
the customers within 60 seconds of receiving a report on the riskless
principal trade and at the same price as the riskless principal trade,
exclusive of any markup or markdown, commission or commission
equivalent, or other fee. Currently, NYSE has no equivalent exception
to Rule 92 to permit more efficient riskless principal trading on NYSE.
The proposed amendment adapts the riskless principal requirements of
the Manning Rule described above, and integrates those requirements
into the existing requirements of NYSE Rule 92, as follows.
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\6\ See NASD Rule 2111 and IM-2110-2.
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The Exchange proposes adopting the underlying order requirements of
the Manning Rule for riskless principal transactions at the Exchange.
Accordingly, the Exchange proposes that a riskless principal
transaction can be effected on behalf of any customer order, regardless
of whether from an institutional account or an individual investor. The
Exchange believes that adopting the riskless principal transaction
requirements of the Manning Rule will ensure that the marketplace will
run efficiently and will enable member organizations to both comply
with their Reg. NMS requirements and meet best execution requirements
for customers.
Further requirements for proposed riskless principal transactions
include that the receipt time reference for the underlying order would
have to be before the execution report time reference of the riskless
principal transaction. Within 60 seconds of receiving an execution
report from NYSE on the riskless principal transaction, members or
member organizations would be required to allocate to the accounts
represented in the riskless principal transaction the same price at
which the order was executed on NYSE, exclusive of any markup or
markdown, commission equivalent, or other fee.
In addition, under the proposed amendment, firms would be permitted
to aggregate only orders whose order types and instructions (including
tick restrictions) permit such aggregation. The Exchange believes that
such aggregating meets the standards set forth in the Commission's July
18, 2005 letter to the Securities Industry Association (``SIA''),\7\ in
which the Commission granted a riskless principal exemption from Rule
10a-1 under the Act to permit a broker-dealer to fill customer orders
without complying with the ``tick'' provisions of the Rule, in certain
situations and subject to certain conditions, as set forth in the
letter.
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\7\See letter to Ira Hammerman, Senior Vice President and
General Counsel, SIA, from James A. Brigagliano, Assistant Director,
Division of Market Regulation (``Division''), Commission, dated July
18, 2005 (available at www.sec.gov/divisions/marketreg/mr-noaction/
sia071805.htm).
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Firms would need to disclose to customers the method by which the
firm would allocate the shares bought or sold in the riskless principal
transaction (e.g., strict time priority, precedence based on size,
etc.), and would be required to allocate shares in accordance with that
method. Such method must be fair and reasonable, be consistently
applied, and not unfairly discriminate against any particular class of
accounts or types of orders. The Exchange would not require a specific
allocation methodology, but would require that the chosen method be
adequately disclosed to customers and be consistent with rules
governing parity of orders.
The Exchange would require member organizations to keep certain
books and records in connection with riskless principal transactions.
In particular, when executing riskless principal transactions, firms
would be required to submit order execution reports to the Exchange's
Front End Systemic Capture database linking the execution of the
riskless principal order on the Exchange to the specific underlying
orders. The information that will be provided must be sufficient for
both member firms and the Exchange to reconstruct in a time-sequenced
manner all orders, including allocations to the underlying orders, with
respect to which a member organization is claiming the riskless
principal exception.
As with the Manning Rule, in allocating riskless principal
transactions, if the riskless principal transaction includes Rule 92(b)
proprietary orders, orders from customers that have consented to trade
along with Rule 92(b) proprietary orders, and orders from customers
that either have not or cannot consent (for example, an individual
investor with an order of less than 10,000 shares) to the member firm
trading along with those orders, the Rule 92(b) proprietary orders and
any customer orders that have consented to trading along with such
proprietary orders must yield to the non-consenting customer orders.
Customer Consent Under Rule 92(b)
The Exchange further proposes amending the requirements surrounding
the obtaining of customer consent to trade along with customer not-held
orders. Under current Rule 92(b), the Exchange requires that a customer
provide express permission, including an understanding of the relative
price
[[Page 30412]]
and size of allocated execution reports, before permitting execution of
one of the specified proprietary orders under that rule that could be
executed at the same price as the customer's order. The Exchange has
interpreted this provision to require that consent to trade along be
obtained and documented on an order-by-order basis.
As the Exchange has transitioned to the Hybrid Market, with its
greater prevalence of automated executions and rapid pace of order
execution, and with the implementation of Reg. NMS, the Exchange has
concluded that the current order-by-order consent rule and attendant
documentation requirements have become outmoded and can operate to
impede market efficiencies. Moreover, the order-by-order consent
requirement for trading along in Rule 92 is inconsistent with other
similar situations where firms are permitted to obtain a general or
``blanket'' approval to trade along with not-held customer orders,
provided they are accompanied by appropriate disclosures.\8\
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\8\ See, e.g., Information Memo 05-52 (requiring member firms to
provide periodic affirmative notice regarding their practice in
trading for their proprietary accounts while in possession of
customer VWAP orders); see also Information Memo 05-81 (deeming
customers to consent to their Floor brokers' decision to permit a
specialist to trade on parity with their orders, provided that the
Floor broker has adequately disclosed to the customer as to the
broker's regular practice in this regard).
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The Exchange accordingly is proposing to modify the consent
requirement of NYSE Rule 92(b) to eliminate the order-by-order consent
and instead provide that customers may give ``blanket'' affirmative
written consent for a member firm to trade along provided that: (i) the
customer has received adequate prior affirmative notice of the fact
that the member or member organization may trade along with its orders,
including a disclosure of the method by which the member organization
will allocate shares to the customer's order and a disclosure relating
to the allocation methodology for riskless principal transactions that
include both a Rule 92(b) proprietary order and an order from a
customer that has not consented to trade along with a Rule 92(b)
proprietary order; (ii) the customer affirmatively consents prior to
such trading by the member or member organization; and (iii) the member
or member organization's trading along is permitted under one of the
exceptions contained in NYSE Rule 92.
The Exchange believes that this proposed consent requirement would
provide the same level of investor protection as the current consent
requirement because both standards require disclosures and consent
before a member organization can enter a Rule 92(b) proprietary order.
However, by eliminating the order-by-order consent, the Exchange
believes that the proposed consent requirement would reduce the burden
associated with obtaining consent in advance of each transaction, thus
permitting member organizations to trade in the faster environment of
today's marketplace without having to pause before each trade to obtain
consent.
The Exchange proposes that member organizations can document such
affirmative consent either by (i) a signed writing from the customer
that acknowledges the disclosures, including that a customer can opt-
out on an order-by-order basis, and provides consent; or (ii)
documenting consent that was provided orally, provided that written
disclosures were provided to the customer before obtaining the oral
consent and the member organization provides written notice to the
customer documenting that oral consent. Once a customer has provided
affirmative written consent and so long as firms continue to provide
written disclosures on a periodic basis, member organizations will not
need to renew such affirmative consent.
The Exchange further proposes expanding the class of investors that
may consent to a Rule 92(b) proprietary order. Under the Manning Rule,
the NASD permits customers that meet the NASD's definition of an
institutional account and individual customers with orders of 10,000
shares or more, unless such orders are less than $100,000 in value, to
consent to trade along with a member's proprietary order. In contrast,
the current Rule 92 bars both individual investors and institutional
investors with orders of less than 10,000 shares from consenting to a
member or member organization from trading along with their orders. To
harmonize this portion of the rules, the Exchange proposes amending the
class of investors that can consent to a member or member organization
trading along with a customer order to include all institutional
investors, regardless of the size of the order, and individual
investors with orders of 10,000 shares or more, unless such orders are
less than $100,000 in value. To ensure consistency, the Exchange
proposes to incorporate, for purposes of Rule 92 only, NASD's
definition of an ``institutional account,'' \9\ and therefore proposes
adding that definition to the supplementary material to Rule 92.
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\9\ See NASD Rule 3110(c)(4).
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Customers would retain the ability to ``opt-out'' on a trade-by-
trade basis or to modify the instructions obtained under blanket
consent, since the customer always has the option to submit an order
with an instruction that the member or member organization not trade
along or alter the terms for trading along with the order. The Exchange
would require members and member organizations to periodically disclose
this to customers as well.
Once a customer provides such ``blanket'' consent, a member or
member organization may trade on a proprietary basis along with a
customer order that is executable at the same price as a proprietary
order that meets the exceptions set forth in Rule 92(b). A member or
member organization may seek to include a Rule 92(b) proprietary order
with a proposed Rule 92(c) riskless principal order. In such case, even
though a single order is transmitted to the Exchange, the order would
include both riskless and risk elements, and therefore would no longer
be a pure riskless principal transaction. For purposes of parity,
Exchange systems will recognize the riskless principal order as an
agency order, regardless of whether the order includes any Rule 92(b)
proprietary orders. However, when allocating the underlying orders,
Rule 92(b) proprietary orders and any customer orders that have
consented to the Rule 92(b) proprietary orders must yield to customer
orders that have not or cannot consent to a Rule 92(b) proprietary
order. This allocation methodology must be disclosed to customers that
consent to trade along with Rule 92(b) proprietary orders. If the
riskless principal transaction represents only agency orders and does
not include any proprietary orders, regular allocation of the
underlying orders would apply.
Exemption for Reg. NMS-Compliant Intermarket Sweep Orders
The Exchange also proposes amending Rule 92 to add an exemption so
that, when facilitating a customer order that would otherwise require
the firm to either violate Rule 92 or trade through protected
quotations, member organizations can comply with their Reg. NMS
obligation without also violating Rule 92. Under the current rule, if a
member organization is required to route intermarket sweep orders as
principal to execute against the full displayed size of any protected
quotation in a security (``ISO''), for example, when facilitating a
customer order at a price inferior to the national best bid or offer or
other protected quotations and in compliance with
[[Page 30413]]
Rules 600(b)(30)(ii) and 611(b)(6) of Reg. NMS,\10\ the ISO could
violate Rule 92 by trading ahead of or along with open customer orders.
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\10\ 17 CFR 242.600(b)(30)(ii) and 17 CFR 242.611(b)(6).
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The proposed exemption provides that when routing ISOs, the member
organization must yield its principal executions to any open customer
orders that are required to be protected by Rule 92 and capable of
accepting the fill. As defined in Rule 92(a), customer orders that are
required to be protected are those open customer orders that are known
to the member organization before entry of the ISO. In addition, the
proposed exemption would require that if a firm executes an ISO to
facilitate a customer order at a price inferior to one or more
protected quotations, that customer must consent to not receiving the
better price obtained by the ISO(s) or the firm must yield its
principal execution to that customer.\11\ For purposes of this
amendment, the Exchange further proposes adopting the definitions of
Reg. NMS in connection with the terms ``protected quotation'' and
``intermarket sweep order.'' \12\
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\11\ Telephone conversation between Clare F. Saperstein,
Principal Rule Counsel, Market Surveillance, NYSE, and Theodore S.
Venuti, Attorney, Division, Commission, on May 23, 2007.
\12\ See 17 CFR 242.600(b)(7) and (30).
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2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \13\ that an Exchange have rules that
are designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanism of a free and open
market and national market system, and in general, to protect investors
and the public interest.
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\13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in 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 NYSE 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-2007-21 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-2007-21. 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 NYSE. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only information that you wish to
make publicly available. All submissions should refer to File Number
SR-NYSE-2007-21 and should be submitted on or before June 21, 2007.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-10404 Filed 5-30-07; 8:45 am]
BILLING CODE 8010-01-P