Self-Regulatory Organizations; New York Stock Exchange LLC; Order Granting Approval of Proposed Rule Change as Modified by Amendment No. 1 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 3 Thereto Relating to Rule 92 (Limitations on Members' Trading Because of Customers' Orders), 38110-38115 [E7-13497]
Download as PDF
<![CDATA[
38110
Federal Register / Vol. 72, No. 133 / Thursday, July 12, 2007 / Notices
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange has not solicited, and
does no intend to solicit, comments on
this proposed rule change. The
Exchange has not received any
unsolicited written comments from
members or other interested parties.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the forgoing rule change does
not: (1) Significantly affect the
protection of investors or the public
interest; (2) impose any significant
burden on competition; and (3) become
operative for 30 days after the date of
this filing, or such shorter time as the
Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 11 and Rule 19b–
4(f)(6) thereunder.12
A proposed rule change filed under
19b–4(f)(6) normally may not become
operative prior to 30 days after the date
of filing.13 However, Rule 19b–
4(f)(6)(iii) 14 permits the Commission to
designate a shorter time if such action
is consistent with the protection of
investors and the public interest. The
Exchange has requested that the
Commission waive the 30-day operative
delay. The Commission believes that
waiving the 30-day operative delay is
consistent with the protection of
investors and the public interest
because such waiver would permit
position and exercise limits for options
on IWM to continue at 500,000 option
contracts for a six-month pilot period.
For this reason, the Commission
designates the proposed rule change to
be operative upon filing with the
Commission.15
At any time within 60 days of the
filing of such 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
11 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
13 17 CFR 240.19b–4(f)(6)(iii). In addition, Rule
19b–4(f)(6)(iii) requires that a self-regulatory
organization submit to the Commission written
notice of its intent to file the proposed rule change,
along with a brief description and text of the
proposed rule change, at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied the fiveday pre-filing notice requirement.
14 Id.
15 For the purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
rwilkins on PROD1PC63 with NOTICES
12 17
VerDate Aug<31>2005
16:42 Jul 11, 2007
Jkt 211001
interest, for the protection of investors
or otherwise in furtherance of the
purposes of the Act.
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 rulecomments@sec.gov. Please include File
Number SR–ISE–2007–56 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.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.16
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–13502 Filed 7–11–07; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–56017; File No. SR–NYSE–
2007–21]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Order
Granting Approval of Proposed Rule
Change as Modified by Amendment
No. 1 Thereto and Notice of Filing and
Order Granting Accelerated Approval
to Amendment No. 3 Thereto Relating
to Rule 92 (Limitations on Members’
Trading Because of Customers’
Orders)
July 5, 2007.
I. Introduction
On February 23, 2007, the New York
Stock Exchange LLC (‘‘NYSE’’ or
‘‘Exchange’’) filed with the Securities
All submissions should refer to File
and Exchange Commission
Number SR–ISE–2007–56. This file
(‘‘Commission’’), pursuant to Section
number should be included on the
subject line if e-mail is used. To help the 19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
Commission process and review your
thereunder,2 a proposed rule change to
comments more efficiently, please use
only one method. The Commission will amend NYSE Rule 92, Limitations on
post all comments on the Commission’s Members’ Trading Because of
Customers’ Orders, in order to
Internet Web site (https://www.sec.gov/
harmonize it with similar rules of NASD
rules/sro.shtml). Copies of the
and to address changes to the
submission, all subsequent
marketplace because of the
amendments, all written statements
implementation of NYSE’s Hybrid
with respect to the proposed rule
Market and Regulation NMS (‘‘Reg.
change that are filed with the
NMS’’). On May 22, 2007, NYSE filed
Commission, and all written
Amendment No. 1 to the proposed rule
communications relating to the
change. The proposed rule change was
proposed rule change between the
Commission and any person, other than published for comment in the Federal
Register on May 31, 2007.3 The
those that may be withheld from the
Commission received two comment
public in accordance with the
letters on the proposal.4 On July 3, 2007,
provisions of 5 U.S.C. 552, will be
NYSE responded to the comments 5 and,
available for inspection and copying in
on July 5, 2007, filed Amendment No.
the Commission’s Public Reference
Room, 100 F Street, NE., Washington,
16 17 CFR 200.30–3(a)(12).
DC 20549, on official business days
1 15 U.S.C. 78s(b)(1).
between the hours of 10 a.m. and 3 p.m.
2 17 CFR 240.19b–4.
Copies of the filing also will be available
3 See Securities Exchange Act Release No. 55804
for inspection and copying at the
(May 23, 2007), 72 FR 30410.
principal office of ISE. All comments
4 See letters to Nancy M. Morris, Secretary,
received will be posted without change; Commission, from Ann Vlcek, Managing Director
and Associate General Counsel, Securities Industry
the Commission does not edit personal
and Financial Markets Association (‘‘SIFMA’’),
identifying information from
dated June 22, 2007 (‘‘SIFMA Letter’’) and from Bret
submissions. You should submit only
Engelkemier, Managing Director, Head of Equity
information that you wish to make
Trading, Citigroup Global Markets Inc., dated June
21, 2007 (‘‘CGMI Letter’’).
available publicly. All submissions
5 See letter to Nancy M. Morris, Secretary,
should refer to File Number SR–ISE–
Yeager, Assistant
2007–56 and should be submitted on or Commission, from MaryJuly 3, 2007 (‘‘NYSE
Secretary, NYSE, dated
before August 2, 2007.
Response’’).
PO 00000
Frm 00054
Fmt 4703
Sfmt 4703
E:\FR\FM\12JYN1.SGM
12JYN1
Federal Register / Vol. 72, No. 133 / Thursday, July 12, 2007 / Notices
3 to the proposed rule change.6 This
order approves the proposed rule
change, grants accelerated approval to
Amendment No. 3, and solicits
comments from interested persons on
Amendment No. 3.
II. Description of the Proposal
rwilkins on PROD1PC63 with NOTICES
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. Currently, 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 (‘‘Rule
92(b) proprietary order’’).7
The Exchange proposes to 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
proposed 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 Exchange proposes adopting the
underlying order requirements of the
NASD’s Manning Rule 8 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. 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
6 The Exchange filed Amendment No. 2 on July
3, 2007 and subsequently withdrew it on July 5,
2007.
7 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.
8 See NASD IM 2110–2 and Rule 2111.
VerDate Aug<31>2005
16:42 Jul 11, 2007
Jkt 211001
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.
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
(‘‘FESC’’) database linking the execution
of the riskless principal order on the
Exchange to the specific underlying
orders. The information that would 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.
Similar to the Manning Rule, in
allocating riskless principal
transactions, if the riskless principal
transaction includes Rule 92(b)
proprietary orders, such proprietary
orders must yield to orders from
customers that either have not or cannot
consent (for example, an individual
investor with an order of less than
10,000 shares) (‘‘non-consenting
customer’’) and to orders from
customers that have consented to trade
along with Rule 92(b) proprietary orders
until the non-consenting customers are
filled. At that point, the Rule 92(b)
proprietary order can receive an
PO 00000
Frm 00055
Fmt 4703
Sfmt 4703
38111
allocation along side any remaining
customer orders that have consented to
trade along with the Rule 92(b)
proprietary order. In allocating such
orders, member organizations must
follow allocation methodologies that
have been disclosed pursuant to
proposed Rules 92(b) and 92(c)(5).9
Customer Consent Under Rule 92(b)
The Exchange proposes to modify the
consent requirement of NYSE Rule 92(b)
to eliminate the current order-by-order
consent requirement 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 Rule 92.
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. In order to harmonize Rule 92
with the Manning Rule, 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
9 See
E:\FR\FM\12JYN1.SGM
Amendment No. 3.
12JYN1
38112
Federal Register / Vol. 72, No. 133 / Thursday, July 12, 2007 / Notices
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,’’ 10 and therefore
proposes adding that definition to the
supplementary material to Rule 92.
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.
rwilkins on PROD1PC63 with NOTICES
Exemption for Reg. NMS-Compliant
Intermarket Sweep Orders
The Exchange 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
Rules 600(b)(30)(ii) and 611(b)(6) of Reg.
10 See
NASD Rule 3110(c)(4).
VerDate Aug<31>2005
16:42 Jul 11, 2007
Jkt 211001
NMS,11 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. 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. In addition, the Exchange
further proposes adopting the
definitions of Reg. NMS in connection
with the terms ‘‘protected quotation’’
and ‘‘intermarket sweep order.’’ 12
transactions, and the requirement that
member firms use the riskless principal
account type indicator, until January 16,
2008. Before that date, the Exchange
stated that it would work with the
member organizations to develop and
implement the necessary changes to
firms’ systems and FESC to
accommodate the enhanced reporting
requirements contained in the proposed
rule. However, the Exchange would
require, as of the date that each firm
implements riskless principal routing,
that the member firm have in place
systems and controls that allow them to
easily match and tie riskless principal
execution on the Exchange to the
underlying orders. Finally, the
Exchange recognized that the process of
obtaining and documenting affirmative
customer consent under the proposed
amendments to Rule 92(b) will not be
instantaneous, and therefore proposed
that the member firms would have until
September 30, 2007 to obtain
documentation of affirmative consent.
Amendment No. 3
On July 5, 2007, the Exchange filed
Amendment No. 3 to the proposed rule
change. In Amendment No. 3, the
Exchange amended proposed Rule
92(c)(4) to clarify that the inclusion of
a Rule 92(b) proprietary order in the
riskless principal transaction does not
alter the allocation rights of customers
that consented to trade along with a
Rule 92(b) proprietary order. Therefore,
when allocating a riskless principal
transaction, the member firm would
have to yield to all customers until any
non-consenting customer orders have
been filled, and only then could the
member firm trade along with any
remaining customer orders that have
provided consent pursuant to Rule
92(b). The Exchange also amended
proposed Rule 92(d)(5) to clarify that a
member firm must yield the executions
of Reg. NMS-compliant ISOs to open
customer orders except the customer
order that the ISO was sent to facilitate,
if that customer has consented to not
receiving the better prices obtained by
the ISO.
In addition, because it recognized that
the proposed rule might require member
organizations to make certain changes to
their trading and order management
systems, in Amendment No. 3, the
Exchange proposed to delay the
operative date of proposed NYSE Rule
92(c)(3), which requires member firms
to provide batched end-of-day allocation
reporting for riskless principal
III. Summary of Comments and NYSE
Response
The Commission received two
comments on the proposal. The
commenters generally supported the
proposal but expressed concern over
several requirements it would impose
on members and member organizations.
Instead of requiring member firms to
obtain affirmative blanket consent to
trade along with a customer’s orders, the
commenters believed that negative
consent with affirmative disclosure for
both institutional and individual
customers would better align the
Exchange’s regulatory requirements
with today’s market conditions while
also more effectively mitigating the
administrative and recordkeeping
burdens associated with providing
customers with adequate disclosures.13
One commenter noted that the cost to
firms to gather affirmative blanket
consent likely would negate the benefit
of not having to obtain order-by-order
consent, as the rule requires today.14
The Exchange did not agree with the
commenters that negative consent is
appropriate for trading along with
customer orders.15 The Exchange noted
that it must strike a balance between
investor protection and the imposition
of unnecessary burdens on member
organizations by its rules. The Exchange
believed that the proposal strikes the
correct balance by requiring member
firms to affirmatively consent to being
CFR 242.600(b)(30)(ii) and 17 CFR
242.611(b)(6).
12 See 17 CFR 242.600(b)(7) and (30).
PO 00000
11 17
Frm 00056
Fmt 4703
Sfmt 4703
13 SIFMA Letter, supra note 4, at 2; see also CGMI
Letter, supra note 4, at 3.
14 SIFMA Letter at 3.
15 NYSE Response, supra note 5, at 3.
E:\FR\FM\12JYN1.SGM
12JYN1
Federal Register / Vol. 72, No. 133 / Thursday, July 12, 2007 / Notices
traded along with by member firms and
relieving member firms of the
administrative burdens of order-byorder consent.16 In addition, the
Exchange recognized that obtaining
affirmative consent is not an
instantaneous process, and therefore
proposed to give member firms until
September 30, 2007 to obtain
documentation of affirmative consent.17
The commenters expressed concern
that the reporting requirements
applicable to a riskless principal
transaction under Rule 92 are
inconsistent with NASD’s riskless
principal transaction reporting
requirements.18 Specifically, NYSE’s
rules require that a member firm mark
the initial leg of a riskless principal
transaction as ‘‘riskless’’ when the order
is sent to the Exchange (‘‘traditional
approach’’) as opposed to submitting an
order to the Exchange marked as
‘‘principal’’ and a separate non-tape,
non-clearing report on the second leg(s)
of the facilitation transaction to the
customer (‘‘alternative approach’’). The
commenters noted that NASD rules
provide member firms the option of
taking the traditional approach or the
alternative approach. The commenters
believed that a large number of member
firms have programmed their systems to
report transactions under the alternative
approach and requiring a member firm
to report transactions under the
traditional approach would result in
significant costs to such member firms.
The commenters believed that NYSE
should make its rules consistent with
NASD’s rules and allow member firms
to use either the traditional approach or
the alternative approach when reporting
riskless principal transactions.19
The Exchange noted that, while the
NASD has the ability to allow firms to
report riskless principal transactions
using the traditional approach or the
alternative approach, its regulatory
reporting systems are designed to use
the traditional approach.20 The
Exchange noted that it would continue
to review its trade reporting
requirements for riskless principal
transactions, but that, in the interim, if
firms want to trade as riskless principal
on the Exchange, they would be
required to follow the traditional
approach.21
The commenters also expressed
concern that member firms would now
be required to submit order execution
reports to FESC linking the execution of
the riskless principal order on the
Exchange to the specific underlying
orders.22 The commenters requested
clarification on when such reports must
be submitted to FESC, suggesting that it
should be end-of-day drop copy
reporting, and requested that the
Exchange consider possible alternatives
to reporting to FESC.23 In addition, one
commenter noted its belief that the
information submitted to FESC could be
available to the Exchange through
alternative means.24
The Exchange clarified that reporting
to FESC would be by end-of-day.25 In
addition, the Exchange proposed to
delay the implementation of FESC
reporting requirements for riskless
principal transactions and the use of the
riskless principal account type indicator
until January 16, 2008 so that member
organizations would have time to
develop and implement the necessary
systems changes to comply with such
requirement.26 However, the Exchange
stated that if a member organization
intended to execute riskless principal
transactions on the Exchange before
January 16, 2008, the member
organization would be required to have
in place systems and controls that
would allow it to easily match and tie
riskless principal executions on the
Exchange to the underlying orders.27
The commenters also noted that the
proposal suggests that when allocating
riskless principal transactions that
include Rule 92(b) proprietary orders,
orders from customers that have
consented to trade along with Rule 92(b)
proprietary orders must yield to the
non-consenting customer orders.28 The
commenters believed that the inclusion
of a Rule 92(b) proprietary order in the
riskless principal transaction should not
alter the allocation rights of customers
that consented to trade along with a
Rule 92(b) proprietary order.29 The
commenters believed that the orders of
customers who have consented to
trading along should not be required to
38113
yield to the non-consenting customer
orders.30
The Exchange agreed with the
commenters that the inclusion of a Rule
92(b) proprietary order in the riskless
principal transaction should not alter
the allocation rights of customers that
consented to trade along with a Rule
92(b) proprietary order.31 The Exchange
amended the proposal to ensure that no
customer would be required to yield to
another customer, subject to regular
parity of order requirements.32
In addition, the commenters
requested that the Exchange clarify how
firms should allocate fills in accordance
with the proposed exemption from Rule
92 for certain Reg. NMS-compliant
ISOs.33 The Exchange clarified that a
member firm must yield the executions
of Reg. NMS-compliant ISOs to open
customer orders except the customer
order that the ISO was sent to facilitate,
if that customer has consented to not
receiving the better prices obtained by
the ISO.34
Finally, one commenter believed that
the Exchange should amend Rule 92 so
that member organizations would be
permitted to trade alongside of a
customer order regardless of whether
the specific purpose of the proprietary
order is the direct liquidation or hedge
of a customer facilitation position.35 In
its response letter, the Exchange stated
that it does not believe that the instant
filing is the proper vehicle for
addressing the issue of expanding Rule
92(b) trading limitations, but noted that
it would continue to review Rule 92 to
determine whether further amendments
are warranted.36
IV. Discussion
The Commission finds that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.37 In particular, the
Commission believes that it is
consistent with Section 6(b)(5) of the
Act,38 which requires, among other
things, that the rules of a national
securities exchange be designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
21 Id.
22 SIFMA
16 Id.
rwilkins on PROD1PC63 with NOTICES
17 Id.;
see also Amendment No. 3.
18 SIFMA Letter at 3 and CGMI Letter at 2.
19 Id.
20 The Exchange stated that it did not believe
there to be any feasible alternative because it does
not have a trade reporting facility capable of
receiving riskless principal orders and because its
surveillance system does not have access to NASD
Order Audit Trail (‘‘OATS’’) data. NYSE Response
at 4.
VerDate Aug<31>2005
16:42 Jul 11, 2007
Jkt 211001
Letter at 3–4 and CGMI Letter at 2–3.
commenter suggested that the Exchange
could obtain such information by making a request
to NASD for OTS and OATS reporting. CGMI Letter
at 3.
25 NYSE Response at 4.
26 Id.
27 Id. at 5.
28 CGMI Letter at 4 and CGMI Letter at 4.
29 Id.
PO 00000
24 The
Frm 00057
30 Id.
31 NYSE
23 Id.
Fmt 4703
Sfmt 4703
Response at 5.
Amendment No. 3.
33 SIFMA Letter at 4 and CGMI Letter at 4.
34 NYSE Response at 5–6.
35 CGMI Letter at 2.
36 NYSE Response at 6.
37 The Commission has considered the proposed
rule’s impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
38 15 U.S.C. 78f(b)(5).
32 See
E:\FR\FM\12JYN1.SGM
12JYN1
rwilkins on PROD1PC63 with NOTICES
38114
Federal Register / Vol. 72, No. 133 / Thursday, July 12, 2007 / Notices
open market and a national market
system and, in general, to protect
investors and the public interest.
The Exchange proposes to 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 and proposes to adopt the
underlying order requirements of the
NASD’s Manning Rule 39 for riskless
principal transactions at the Exchange.
Under the proposal, member 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, and
would be required to allocate shares in
accordance with that method. In
addition, when executing riskless
principal transactions, firms would be
required to submit order execution
reports to FESC linking the execution of
the riskless principal order on the
Exchange to the specific underlying
orders, beginning January 16, 2008. The
Commission believes this aspect of the
proposed rule change is reasonable
because it moves the NYSE’s rules
towards harmonization with the
Manning Rule, which should eliminate
duplicative and potentially conflicting
regulatory obligations on member firms,
while at the same time assuring that the
important investor protection provisions
embodied in the Manning Rule apply to
Exchange transactions. The Commission
believes that the Exchange’s proposed
January 16, 2008 implementation date
for FESC reporting requirements for
riskless principal transactions and the
use of the riskless principal account
type indicator is reasonable and should
provide member organizations the
necessary time to revise their systems as
necessary.
The Exchange also proposes to modify
the consent requirement of NYSE Rule
92(b) to eliminate the requirement that
members obtain order-by-order consent
from customers to permit the member to
trade along with such customer, and
instead provide that customers may give
‘‘blanket’’ affirmative written consent
for a member firm to trade along,
provided that certain conditions are
met. In Amendment No. 3, the Exchange
stated that member firms would have
until September 30, 2007 to obtain
documentation of affirmative consent.
The Commission believes this portion of
the proposal is also reasonable because
it should relieve member organizations
of unnecessary administrative burdens
while at the same time still ensuring
that Exchange members obtain
meaningful customer consent to
members’ trading along with their
customers. The Commission also
believes that the proposal to provide
firms until September 30, 2007 to obtain
documentation of affirmative consent is
reasonable in that it should give firms
flexibility to immediately make use of
the new consent requirement while
providing them time for implementation
of the revised requirement.
The Exchange further proposes
expanding the class of investors that
may consent to a Rule 92(b) proprietary
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. The Commission also believes
this aspect of the proposal is reasonable
because it will conform the Exchange’s
rule to the NASD’s Manning Rule,40
thereby eliminating potentially
duplicative and conflicting obligations
on member firms while assuring that
such members are held to a high level
of customer protection.
Finally, the Exchange proposes
adding an additional exemption to Rule
92. The proposed exemption provides
that when routing ISOs, the member
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 except the
customer order that the ISO was sent to
facilitate, if that customer has consented
to not receiving the better prices
obtained by the ISO. The Commission
believes this change is reasonable
because it will facilitate member
compliance with their respective
intermarket sweep order routing
obligations under Rule 611 of
Regulation.41
The Commission finds good cause to
approve Amendment No. 3 to the
proposed rule change prior to the
thirtieth day after such Amendment is
published for comment in the Federal
Register pursuant to Section 19(b)(2) of
the Act.42 The Commission believes that
Amendment No. 3 serves to clarify the
proposal, raises no new issues of
regulatory concern, and that publication
of its provisions would needlessly delay
the implementation of the proposal.
V. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether Amendment No. 3 is
consistent with the Act. Comments may
40 See
NASD Rule 2111 and IM–2110–2.
CFR 242.611(b)(6).
42 15 U.S.C. 78s(b)(2).
be submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR-NYSE–2007–21 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR-NYSE–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, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
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 available publicly. All
submissions should refer to File
Number SR-NYSE–2007–21 and should
be submitted on or before August 2,
2007.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,43 that the
proposed rule change (SR-NYSE–2007–
21), as modified by Amendment No. 1,
be, and hereby is, approved, and that
Amendment No. 3 to the proposed rule
41 17
39 See
NASD Rule 2111 and IM–2110–2.
VerDate Aug<31>2005
16:42 Jul 11, 2007
Jkt 211001
PO 00000
Frm 00058
Fmt 4703
Sfmt 4703
43 15
E:\FR\FM\12JYN1.SGM
U.S.C. 78s(b)(2).
12JYN1
Federal Register / Vol. 72, No. 133 / Thursday, July 12, 2007 / Notices
change be, and hereby is, approved on
an accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.44
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–13497 Filed 7–11–07; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–56021; File No. SR–
NYSEArca–2007–58]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating to the Extension
of a Pilot Program That Increases
Position and Exercise Limits for
Options on the iShares Russell 2000
Index Fund
July 6, 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 June 22,
2007, NYSE Arca, Inc. (‘‘NYSE Arca’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been
substantially prepared by NYSE Arca.
NYSE Arca has filed the proposal
pursuant to Section 19(b)(3)(A) of the
Act 3 and Rule 19b–4(f)(6) thereunder,4
which renders the proposal effective
upon filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
rwilkins on PROD1PC63 with NOTICES
NYSE Arca proposes to amend Rule
6.8 in order to extend the pilot program
(‘‘IWM Pilot’’) which allows for
increased position and exercise limits
on options overlying the iShares
Russell 2000 Index Fund (‘‘IWM’’).
The text of the proposed rule change is
available at NYSE Arca, the
Commission’s Public Reference Room,
and https://www.nysearca.com.
44 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6).
1 15
VerDate Aug<31>2005
16:42 Jul 11, 2007
Jkt 211001
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
NYSE Arca 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. NYSE
Arca 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 purpose of this rule change is to
extend the IWM Pilot for a six-month
period, through January 18, 2008,5 and
to make non-substantive changes to
simplify the rule text describing the
IWM Pilot. The IWM Pilot increases the
position and exercise limits for IWM
options traded on the Exchange. The
Exchange is not proposing any other
changes to the IWM Pilot at this time.
NYSE Arca represents that it has not
encountered any problems or
difficulties relating to the IWM Pilot
since its inception.
The proposal that established the
IWM Pilot was designated by the
Commission to be effective and
operative upon filing and provided that
the pilot would run through July 22,
2007.6 At that time, the Exchange
amended Commentary .06 to Rule 6.8
on a six-month pilot basis to exempt
options on IWM from the Rule 6.8 Pilot
Program. Under the Rule 6.8 Pilot
Program, the position and exercise
limits for IWM would have been
reduced on January 22, 2007 from
500,000 to 250,000 contracts. The
Exchange proposed to allow position
and exercise limits for options on IWM
to remain at 500,000 contracts on a pilot
basis, from January 25, 2007 through
July 22, 2007.
In June 2005, as a result of a 2-for-1
stock split, the position limit for IWM
options was temporarily increased from
250,000 contracts (covering 25,000,000
shares) to 500,000 contracts (covering
5 The actual time period for the extension will be
slightly less than six months. January 18, 2008 is
the third Friday of the month (or expiration Friday),
which is the day on which January 2008 IWM
options will expire.
6 See Securities Exchange Act Release No. 55185
(January 29, 2007), 72 FR 5481 (February 6, 2007)
(SR–NYSEArca–2007–10).
PO 00000
Frm 00059
Fmt 4703
Sfmt 4703
38115
50,000,000 shares). At the time of the
split, the furthest IWM option
expiration date was January 2007.
Therefore, the temporary increase of the
IWM position limit would have reverted
to the pre-split level (as provided for in
connection with the Rule 6.8 Pilot
Program) of 250,000 contracts after
expiration in January 2007, or on
January 22, 2007.
The Exchange described in the
proposal that a position limit of 250,000
contracts is too low and may be a
deterrent to the successful trading of
IWM options. The Exchange stated that
options on IWM are 1/10th the size of
options on the Russell 2000 Index
(‘‘RUT’’), which have a position limit of
50,000 contracts.7 Traders on NYSE
Arca who trade IWM options to hedge
positions in RUT options would likely
find a position limit of 250,000
contracts in IWM options too restrictive
and insufficient to properly hedge. For
example, if a trader held 50,000 RUT
options and wanted to hedge that
position with IWM options, the trader
would need—at a minimum—500,000
IWM options to properly hedge the
position. Therefore, the Exchange
believes that a position limit of 250,000
contracts is too low and may adversely
affect market participants’ ability to
provide liquidity in this product.
As the Exchange also described in the
proposal that established the IWM Pilot,
IWM options have grown to become one
of the largest options contracts in terms
of trading volume. For example, through
May 29, 2007 year-to-date industry
volume in IWM options has averaged
over 460,000 contracts per day, for a
total of over 61 million contracts. In
contrast, QQQQ options, which have a
position limit of 900,000 contracts, have
averaged almost 575,000 contracts per
day.
The Exchange believes that
maintaining the increased position and
exercise limits 8 for IWM options will
lead to a more liquid and competitive
market environment for IWM options
that will benefit all investors interested
in trading this product. As a result, the
Exchange requests that the Commission
extend the pilot for an additional sixmonth time period, through January 18,
2008.
7 See
NYSE Arca Rule 6.8 Commentary .06(b).
to Commentary .03 of NYSE Arca Rule
6.9, the exercise limit established under Rule 6.9 for
IWM options shall be equivalent to the position
limit prescribed for IWM options in Commentary
.06 under Rule 6.8. The increased exercise limits
would only be in effect during the pilot period, to
run from July 22, 2007 through January 18, 2008.
8 Pursuant
E:\FR\FM\12JYN1.SGM
12JYN1
]]>Agencies
[Federal Register Volume 72, Number 133 (Thursday, July 12, 2007)]
[Notices]
[Pages 38110-38115]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-13497]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56017; File No. SR-NYSE-2007-21]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Granting Approval of Proposed Rule Change as Modified by Amendment No.
1 Thereto and Notice of Filing and Order Granting Accelerated Approval
to Amendment No. 3 Thereto Relating to Rule 92 (Limitations on Members'
Trading Because of Customers' Orders)
July 5, 2007.
I. Introduction
On February 23, 2007, the New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend NYSE Rule 92, Limitations on Members'
Trading Because of Customers' Orders, in order to harmonize it with
similar rules of NASD and to address changes to the marketplace because
of the implementation of NYSE's Hybrid Market and Regulation NMS
(``Reg. NMS''). On May 22, 2007, NYSE filed Amendment No. 1 to the
proposed rule change. The proposed rule change was published for
comment in the Federal Register on May 31, 2007.\3\ The Commission
received two comment letters on the proposal.\4\ On July 3, 2007, NYSE
responded to the comments \5\ and, on July 5, 2007, filed Amendment No.
[[Page 38111]]
3 to the proposed rule change.\6\ This order approves the proposed rule
change, grants accelerated approval to Amendment No. 3, and solicits
comments from interested persons on Amendment No. 3.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 55804 (May 23,
2007), 72 FR 30410.
\4\ See letters to Nancy M. Morris, Secretary, Commission, from
Ann Vlcek, Managing Director and Associate General Counsel,
Securities Industry and Financial Markets Association (``SIFMA''),
dated June 22, 2007 (``SIFMA Letter'') and from Bret Engelkemier,
Managing Director, Head of Equity Trading, Citigroup Global Markets
Inc., dated June 21, 2007 (``CGMI Letter'').
\5\ See letter to Nancy M. Morris, Secretary, Commission, from
Mary Yeager, Assistant Secretary, NYSE, dated July 3, 2007 (``NYSE
Response'').
\6\ The Exchange filed Amendment No. 2 on July 3, 2007 and
subsequently withdrew it on July 5, 2007.
---------------------------------------------------------------------------
II. Description of the Proposal
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.
Currently, 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 (``Rule 92(b)
proprietary order'').\7\
---------------------------------------------------------------------------
\7\ 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.
---------------------------------------------------------------------------
The Exchange proposes to 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 proposed 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 Exchange proposes adopting the underlying order requirements of
the NASD's Manning Rule \8\ 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.
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.
---------------------------------------------------------------------------
\8\ See NASD IM 2110-2 and Rule 2111.
---------------------------------------------------------------------------
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 (``FESC'') database linking the execution of
the riskless principal order on the Exchange to the specific underlying
orders. The information that would 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.
Similar to the Manning Rule, in allocating riskless principal
transactions, if the riskless principal transaction includes Rule 92(b)
proprietary orders, such proprietary orders must yield to orders from
customers that either have not or cannot consent (for example, an
individual investor with an order of less than 10,000 shares) (``non-
consenting customer'') and to orders from customers that have consented
to trade along with Rule 92(b) proprietary orders until the non-
consenting customers are filled. At that point, the Rule 92(b)
proprietary order can receive an allocation along side any remaining
customer orders that have consented to trade along with the Rule 92(b)
proprietary order. In allocating such orders, member organizations must
follow allocation methodologies that have been disclosed pursuant to
proposed Rules 92(b) and 92(c)(5).\9\
---------------------------------------------------------------------------
\9\ See Amendment No. 3.
---------------------------------------------------------------------------
Customer Consent Under Rule 92(b)
The Exchange proposes to modify the consent requirement of NYSE
Rule 92(b) to eliminate the current order-by-order consent requirement
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 Rule 92.
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. In order to harmonize
Rule 92 with the Manning Rule, 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
[[Page 38112]]
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,''
\10\ and therefore proposes adding that definition to the supplementary
material to Rule 92.
---------------------------------------------------------------------------
\10\ See NASD Rule 3110(c)(4).
---------------------------------------------------------------------------
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.
Exemption for Reg. NMS-Compliant Intermarket Sweep Orders
The Exchange 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 Rules 600(b)(30)(ii) and
611(b)(6) of Reg. NMS,\11\ the ISO could violate Rule 92 by trading
ahead of or along with open customer orders.
---------------------------------------------------------------------------
\11\ 17 CFR 242.600(b)(30)(ii) and 17 CFR 242.611(b)(6).
---------------------------------------------------------------------------
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. 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. In addition, the Exchange further proposes adopting the
definitions of Reg. NMS in connection with the terms ``protected
quotation'' and ``intermarket sweep order.'' \12\
---------------------------------------------------------------------------
\12\ See 17 CFR 242.600(b)(7) and (30).
---------------------------------------------------------------------------
Amendment No. 3
On July 5, 2007, the Exchange filed Amendment No. 3 to the proposed
rule change. In Amendment No. 3, the Exchange amended proposed Rule
92(c)(4) to clarify that the inclusion of a Rule 92(b) proprietary
order in the riskless principal transaction does not alter the
allocation rights of customers that consented to trade along with a
Rule 92(b) proprietary order. Therefore, when allocating a riskless
principal transaction, the member firm would have to yield to all
customers until any non-consenting customer orders have been filled,
and only then could the member firm trade along with any remaining
customer orders that have provided consent pursuant to Rule 92(b). The
Exchange also amended proposed Rule 92(d)(5) to clarify that a member
firm must yield the executions of Reg. NMS-compliant ISOs to open
customer orders except the customer order that the ISO was sent to
facilitate, if that customer has consented to not receiving the better
prices obtained by the ISO.
In addition, because it recognized that the proposed rule might
require member organizations to make certain changes to their trading
and order management systems, in Amendment No. 3, the Exchange proposed
to delay the operative date of proposed NYSE Rule 92(c)(3), which
requires member firms to provide batched end-of-day allocation
reporting for riskless principal transactions, and the requirement that
member firms use the riskless principal account type indicator, until
January 16, 2008. Before that date, the Exchange stated that it would
work with the member organizations to develop and implement the
necessary changes to firms' systems and FESC to accommodate the
enhanced reporting requirements contained in the proposed rule.
However, the Exchange would require, as of the date that each firm
implements riskless principal routing, that the member firm have in
place systems and controls that allow them to easily match and tie
riskless principal execution on the Exchange to the underlying orders.
Finally, the Exchange recognized that the process of obtaining and
documenting affirmative customer consent under the proposed amendments
to Rule 92(b) will not be instantaneous, and therefore proposed that
the member firms would have until September 30, 2007 to obtain
documentation of affirmative consent.
III. Summary of Comments and NYSE Response
The Commission received two comments on the proposal. The
commenters generally supported the proposal but expressed concern over
several requirements it would impose on members and member
organizations. Instead of requiring member firms to obtain affirmative
blanket consent to trade along with a customer's orders, the commenters
believed that negative consent with affirmative disclosure for both
institutional and individual customers would better align the
Exchange's regulatory requirements with today's market conditions while
also more effectively mitigating the administrative and recordkeeping
burdens associated with providing customers with adequate
disclosures.\13\ One commenter noted that the cost to firms to gather
affirmative blanket consent likely would negate the benefit of not
having to obtain order-by-order consent, as the rule requires
today.\14\
---------------------------------------------------------------------------
\13\ SIFMA Letter, supra note 4, at 2; see also CGMI Letter,
supra note 4, at 3.
\14\ SIFMA Letter at 3.
---------------------------------------------------------------------------
The Exchange did not agree with the commenters that negative
consent is appropriate for trading along with customer orders.\15\ The
Exchange noted that it must strike a balance between investor
protection and the imposition of unnecessary burdens on member
organizations by its rules. The Exchange believed that the proposal
strikes the correct balance by requiring member firms to affirmatively
consent to being
[[Page 38113]]
traded along with by member firms and relieving member firms of the
administrative burdens of order-by-order consent.\16\ In addition, the
Exchange recognized that obtaining affirmative consent is not an
instantaneous process, and therefore proposed to give member firms
until September 30, 2007 to obtain documentation of affirmative
consent.\17\
---------------------------------------------------------------------------
\15\ NYSE Response, supra note 5, at 3.
\16\ Id.
\17\ Id.; see also Amendment No. 3.
---------------------------------------------------------------------------
The commenters expressed concern that the reporting requirements
applicable to a riskless principal transaction under Rule 92 are
inconsistent with NASD's riskless principal transaction reporting
requirements.\18\ Specifically, NYSE's rules require that a member firm
mark the initial leg of a riskless principal transaction as
``riskless'' when the order is sent to the Exchange (``traditional
approach'') as opposed to submitting an order to the Exchange marked as
``principal'' and a separate non-tape, non-clearing report on the
second leg(s) of the facilitation transaction to the customer
(``alternative approach''). The commenters noted that NASD rules
provide member firms the option of taking the traditional approach or
the alternative approach. The commenters believed that a large number
of member firms have programmed their systems to report transactions
under the alternative approach and requiring a member firm to report
transactions under the traditional approach would result in significant
costs to such member firms. The commenters believed that NYSE should
make its rules consistent with NASD's rules and allow member firms to
use either the traditional approach or the alternative approach when
reporting riskless principal transactions.\19\
---------------------------------------------------------------------------
\18\ SIFMA Letter at 3 and CGMI Letter at 2.
\19\ Id.
---------------------------------------------------------------------------
The Exchange noted that, while the NASD has the ability to allow
firms to report riskless principal transactions using the traditional
approach or the alternative approach, its regulatory reporting systems
are designed to use the traditional approach.\20\ The Exchange noted
that it would continue to review its trade reporting requirements for
riskless principal transactions, but that, in the interim, if firms
want to trade as riskless principal on the Exchange, they would be
required to follow the traditional approach.\21\
---------------------------------------------------------------------------
\20\ The Exchange stated that it did not believe there to be any
feasible alternative because it does not have a trade reporting
facility capable of receiving riskless principal orders and because
its surveillance system does not have access to NASD Order Audit
Trail (``OATS'') data. NYSE Response at 4.
\21\ Id.
---------------------------------------------------------------------------
The commenters also expressed concern that member firms would now
be required to submit order execution reports to FESC linking the
execution of the riskless principal order on the Exchange to the
specific underlying orders.\22\ The commenters requested clarification
on when such reports must be submitted to FESC, suggesting that it
should be end-of-day drop copy reporting, and requested that the
Exchange consider possible alternatives to reporting to FESC.\23\ In
addition, one commenter noted its belief that the information submitted
to FESC could be available to the Exchange through alternative
means.\24\
---------------------------------------------------------------------------
\22\ SIFMA Letter at 3-4 and CGMI Letter at 2-3.
\23\ Id.
\24\ The commenter suggested that the Exchange could obtain such
information by making a request to NASD for OTS and OATS reporting.
CGMI Letter at 3.
---------------------------------------------------------------------------
The Exchange clarified that reporting to FESC would be by end-of-
day.\25\ In addition, the Exchange proposed to delay the implementation
of FESC reporting requirements for riskless principal transactions and
the use of the riskless principal account type indicator until January
16, 2008 so that member organizations would have time to develop and
implement the necessary systems changes to comply with such
requirement.\26\ However, the Exchange stated that if a member
organization intended to execute riskless principal transactions on the
Exchange before January 16, 2008, the member organization would be
required to have in place systems and controls that would allow it to
easily match and tie riskless principal executions on the Exchange to
the underlying orders.\27\
---------------------------------------------------------------------------
\25\ NYSE Response at 4.
\26\ Id.
\27\ Id. at 5.
---------------------------------------------------------------------------
The commenters also noted that the proposal suggests that when
allocating riskless principal transactions that include Rule 92(b)
proprietary orders, orders from customers that have consented to trade
along with Rule 92(b) proprietary orders must yield to the non-
consenting customer orders.\28\ The commenters believed that the
inclusion of a Rule 92(b) proprietary order in the riskless principal
transaction should not alter the allocation rights of customers that
consented to trade along with a Rule 92(b) proprietary order.\29\ The
commenters believed that the orders of customers who have consented to
trading along should not be required to yield to the non-consenting
customer orders.\30\
---------------------------------------------------------------------------
\28\ CGMI Letter at 4 and CGMI Letter at 4.
\29\ Id.
\30\ Id.
---------------------------------------------------------------------------
The Exchange agreed with the commenters that the inclusion of a
Rule 92(b) proprietary order in the riskless principal transaction
should not alter the allocation rights of customers that consented to
trade along with a Rule 92(b) proprietary order.\31\ The Exchange
amended the proposal to ensure that no customer would be required to
yield to another customer, subject to regular parity of order
requirements.\32\
---------------------------------------------------------------------------
\31\ NYSE Response at 5.
\32\ See Amendment No. 3.
---------------------------------------------------------------------------
In addition, the commenters requested that the Exchange clarify how
firms should allocate fills in accordance with the proposed exemption
from Rule 92 for certain Reg. NMS-compliant ISOs.\33\ The Exchange
clarified that a member firm must yield the executions of Reg. NMS-
compliant ISOs to open customer orders except the customer order that
the ISO was sent to facilitate, if that customer has consented to not
receiving the better prices obtained by the ISO.\34\
---------------------------------------------------------------------------
\33\ SIFMA Letter at 4 and CGMI Letter at 4.
\34\ NYSE Response at 5-6.
---------------------------------------------------------------------------
Finally, one commenter believed that the Exchange should amend Rule
92 so that member organizations would be permitted to trade alongside
of a customer order regardless of whether the specific purpose of the
proprietary order is the direct liquidation or hedge of a customer
facilitation position.\35\ In its response letter, the Exchange stated
that it does not believe that the instant filing is the proper vehicle
for addressing the issue of expanding Rule 92(b) trading limitations,
but noted that it would continue to review Rule 92 to determine whether
further amendments are warranted.\36\
---------------------------------------------------------------------------
\35\ CGMI Letter at 2.
\36\ NYSE Response at 6.
---------------------------------------------------------------------------
IV. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\37\ In
particular, the Commission believes that it is consistent with Section
6(b)(5) of the Act,\38\ which requires, among other things, that the
rules of a national securities exchange be designed to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and
[[Page 38114]]
open market and a national market system and, in general, to protect
investors and the public interest.
---------------------------------------------------------------------------
\37\ The Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
\38\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange proposes to 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 and proposes to adopt the underlying order requirements of the
NASD's Manning Rule \39\ for riskless principal transactions at the
Exchange. Under the proposal, member 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, and would be required to
allocate shares in accordance with that method. In addition, when
executing riskless principal transactions, firms would be required to
submit order execution reports to FESC linking the execution of the
riskless principal order on the Exchange to the specific underlying
orders, beginning January 16, 2008. The Commission believes this aspect
of the proposed rule change is reasonable because it moves the NYSE's
rules towards harmonization with the Manning Rule, which should
eliminate duplicative and potentially conflicting regulatory
obligations on member firms, while at the same time assuring that the
important investor protection provisions embodied in the Manning Rule
apply to Exchange transactions. The Commission believes that the
Exchange's proposed January 16, 2008 implementation date for FESC
reporting requirements for riskless principal transactions and the use
of the riskless principal account type indicator is reasonable and
should provide member organizations the necessary time to revise their
systems as necessary.
---------------------------------------------------------------------------
\39\ See NASD Rule 2111 and IM-2110-2.
---------------------------------------------------------------------------
The Exchange also proposes to modify the consent requirement of
NYSE Rule 92(b) to eliminate the requirement that members obtain order-
by-order consent from customers to permit the member to trade along
with such customer, and instead provide that customers may give
``blanket'' affirmative written consent for a member firm to trade
along, provided that certain conditions are met. In Amendment No. 3,
the Exchange stated that member firms would have until September 30,
2007 to obtain documentation of affirmative consent. The Commission
believes this portion of the proposal is also reasonable because it
should relieve member organizations of unnecessary administrative
burdens while at the same time still ensuring that Exchange members
obtain meaningful customer consent to members' trading along with their
customers. The Commission also believes that the proposal to provide
firms until September 30, 2007 to obtain documentation of affirmative
consent is reasonable in that it should give firms flexibility to
immediately make use of the new consent requirement while providing
them time for implementation of the revised requirement.
The Exchange further proposes expanding the class of investors that
may consent to a Rule 92(b) proprietary 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. The Commission also believes
this aspect of the proposal is reasonable because it will conform the
Exchange's rule to the NASD's Manning Rule,\40\ thereby eliminating
potentially duplicative and conflicting obligations on member firms
while assuring that such members are held to a high level of customer
protection.
---------------------------------------------------------------------------
\40\ See NASD Rule 2111 and IM-2110-2.
---------------------------------------------------------------------------
Finally, the Exchange proposes adding an additional exemption to
Rule 92. The proposed exemption provides that when routing ISOs, the
member 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 except the customer order that the ISO was sent to facilitate,
if that customer has consented to not receiving the better prices
obtained by the ISO. The Commission believes this change is reasonable
because it will facilitate member compliance with their respective
intermarket sweep order routing obligations under Rule 611 of
Regulation.\41\
---------------------------------------------------------------------------
\41\ 17 CFR 242.611(b)(6).
---------------------------------------------------------------------------
The Commission finds good cause to approve Amendment No. 3 to the
proposed rule change prior to the thirtieth day after such Amendment is
published for comment in the Federal Register pursuant to Section
19(b)(2) of the Act.\42\ The Commission believes that Amendment No. 3
serves to clarify the proposal, raises no new issues of regulatory
concern, and that publication of its provisions would needlessly delay
the implementation of the proposal.
---------------------------------------------------------------------------
\42\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 3
is consistent with the Act. Comments may be submitted by any of the
following methods:
Electronic Comments
Use the Commission's Internet comment form (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, 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, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. 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 available publicly. All
submissions should refer to File Number SR-NYSE-2007-21 and should be
submitted on or before August 2, 2007.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\43\ that the proposed rule change (SR-NYSE-2007-21), as modified
by Amendment No. 1, be, and hereby is, approved, and that Amendment No.
3 to the proposed rule
[[Page 38115]]
change be, and hereby is, approved on an accelerated basis.
---------------------------------------------------------------------------
\43\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\44\
---------------------------------------------------------------------------
\44\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-13497 Filed 7-11-07; 8:45 am]
BILLING CODE 8010-01-P
