Self-Regulatory Organizations; the New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change, and Amendment No. 1 Thereto, To Amend NYSE Rule 123A.30 To Permit Certain Convert-and-Parity Orders To Trade on Parity With Other Limit Orders, Including Orders Entered Through Its Designated Order Turnaround System®, 30436-30439 [E8-11808]
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30436
Federal Register / Vol. 73, No. 102 / Tuesday, May 27, 2008 / Notices
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.
The text of the proposed rule change is
available at the NYSE, the Commission’s
Public Reference Room, and https://
apps.nyse.com/commdata/pub19b4.nsf/
docs/E40ACA575EFD51708525742000
5CC603/$FILE/NYSE–2008–26.pdf. 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–2008–26 and should
be submitted on or before June 17, 2008.
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.11
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–11723 Filed 5–23–08; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57845; File No. SR–NYSE–
2008–32]
Self-Regulatory Organizations; the
New York Stock Exchange LLC; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change, and
Amendment No. 1 Thereto, To Amend
NYSE Rule 123A.30 To Permit Certain
Convert-and-Parity Orders To Trade on
Parity With Other Limit Orders,
Including Orders Entered Through Its
Designated Order Turnaround
System
pwalker on PROD1PC71 with NOTICES
May 21, 2008.
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 April 24,
2008, the New York Stock Exchange
LLC (‘‘NYSE’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been substantially prepared by the
Exchange. Originally, NYSE filed the
proposed rule change pursuant to
Section 19(b)(2) of the Act.3 On May 16,
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)(2).
2008, however, NYSE filed Amendment
No. 1 to the proposed rule change
pursuant to Section 19(b)(3)(A) of the
Act 4 and Rule 19b–4(f)(6) thereunder.5
Accordingly, the proposal became
effective upon the filing of Amendment
No. 1 with the Commission. 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
The Exchange proposes to amend
NYSE Rule 123A.30 to permit certain
convert-and-parity (‘‘CAP’’) orders to
trade on parity with other limit orders,
including orders entered through
NYSE’s Designated Order Turnaround
(‘‘DOT’’) system. The text of the
proposed rule change is available at the
Exchange, 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 received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
This rule filing effects an amendment
to NYSE Rule 123A.30, which, together
with NYSE Rule 1000, governs the
automatic execution of CAP orders. The
amendment permits passively converted
CAP orders—that is, CAP orders that are
converted by the specialist for the
purpose of bidding or offering—to trade
on parity with other limit orders,
including DOT system orders that were
on NYSE’s Display Book at the time of
the conversion and could trade on the
same side of the market and at the same
price as the converted CAP orders.
Before this amendment, CAP orders
were placed in the same parity group as
DOT orders for purposes of parity
allocations among all orders upon
execution. Within that parity group,
those DOT orders had priority over the
converted CAP orders.
a. Background
The Exchange states that CAP orders
are not actually live orders, but rather
are memoranda of orders that can be
made live either automatically via an
electing trade (a trade at a price that
automatically triggers the CAP order to
become a live order and immediately
execute at the triggering price) or
manually via conversion by the
specialist. In the latter situation, the
specialist converts the CAP into a limit
order, and bids or offers on behalf of
that order (referred to as a ‘‘passive
conversion’’). Thereafter, a trade may
take place against some or all of the
converted CAP order; any portions that
are not executed may be ‘‘unconverted’’
and revert to their status as CAP orders.
The Exchange states that, although
they are not live orders, CAP orders
nevertheless represent public customer
interest in which the customer has
consented to trading on parity with the
specialist when they are either elected
or converted. Because CAP orders are
linked, either through election or
conversion, to other customer interest at
a given price, CAP orders give
customers a way to participate in
trades—that is, to ‘‘go along’’ with other
interest at a price—but protect them
from either initiating a trade or
constituting 100% of one side of a trade.
The Exchange states that, at the time
that specialists were given the ability to
passively convert CAP orders as agents
for customers, the Commission was
concerned that specialists not have
unfettered discretion in representing
those orders; although the Commission
recognized that the specialist could
exercise some degree of control over the
timing and size of the conversions, the
Commission insisted on, and the
Exchange agreed to implement, certain
restrictions that would prevent the
specialist from misusing CAP orders to
drive the price of a security up or down
inappropriately.6 Among these
restrictions was the requirement that
passively converted CAP orders could
not be executed before ‘‘conventional’’
limit orders, e.g., DOT orders, that were
on the Display Book at the time of the
conversion and could trade at the same
price and on the same side as the
converted CAP order.
11 17
1 15
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17:22 May 23, 2008
4 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). Amendment No. 1
superseded the original filing in its entirety.
5 17
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6 See Securities Exchange Act Release No. 24505
(May 22, 1987), 52 FR 20484 (June 1, 1987) (SR–
NYSE–1985–01).
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Federal Register / Vol. 73, No. 102 / Tuesday, May 27, 2008 / Notices
b. Amendment to NYSE Rule 123A.30
The instant proposal would change
the treatment of passively converted
CAP orders to permit the CAP orders to
trade as a group on parity with other
agency interest, including same-side
same-price DOT orders (i.e., DOT orders
that can trade on the same side of the
market and at the same price as the CAP
orders). The Exchange states that the
proposed rule change is necessitated by
other changes that the Exchange is
making that will permit market
participants to enter non-displayed
reserve interest directly into the Display
Book.
As initially implemented, under Rule
123A.30, passively converted CAP
orders were combined with DOT orders
for purposes of determining the overall
parity allocation in any trade; this socalled ‘‘DOT group’’ was treated as a
single agent in the parity divisor. Thus,
for example, in an execution involving
two brokers’ orders, DOT orders, and
passively converted CAP orders, all on
parity, the DOT group and the brokers
would each be allocated one-third of the
traded shares, even though the DOT
group contained two different customer
groups (conventional limit orders and
passively converted CAP orders). The
Exchange’s system would then
internally allocate shares within the
DOT group in time priority. As a
consequence of this allocation
methodology, passively converted CAP
orders did not receive allocations until
all DOT orders that were on the Display
Book at the time of the conversion were
satisfied in full.
As noted above, NYSE implemented
foundational changes to its systems that
permit customers to enter undisplayed
reserve orders from off-Floor directly
into the Display Book through DOT
(previously, only Floor brokers could
enter undisplayed reserve interest on
behalf of customers).7 Such off-Floor
reserve interest will be included in the
DOT group for purposes of parity
allocations when there is a trade and,
despite being non-displayed, would
within that DOT group, currently be
entitled to priority over passively
converted CAP orders.
NYSE has determined that it is not
feasible at this time to have the system
differentiate between displayed DOT
interest and non-displayed DOT interest
when doing parity allocations. This
could result in two unintended
`
consequences vis-a-vis passively
converted CAP orders: First, the changes
7 See
Securities Exchange Act Release Nos. 57792
(May 7, 2008), 73 FR 27601 (SR–NYSE–2008–36)
and 57688 (April 18, 2008), 73 FR 22194 (SR–
NYSE–2008–30).
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17:22 May 23, 2008
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will result in non-displayed interest
(DOT reserves) taking priority over
displayed interest (passively converted
CAP orders); and second, if there is
substantial interest in reserve, the
change will make it difficult (if not
impossible) for passively converted CAP
orders to receive an execution, since all
displayed and non-displayed DOT
interest would need to be satisfied first.
The Exchange has further determined
that it is not feasible to undo the various
foundational programming changes
necessary to implement off-Floor
reserves in the near future. To address
these issues, the Exchange is proposing
to amend NYSE Rule 123A.30 to change
the parity allocation methodology.
Under the proposed rule change,
passively converted CAP orders would
become their own parity group for
purposes of the parity divisor. For
example, in the execution described
above, involving two brokers, DOT
orders and passively converted CAP
orders, each group would receive onefourth of the executed shares, instead of
the DOT orders and CAP orders sharing
a one-third allocation.
The Exchange believes that the instant
proposal is appropriate because
fundamental changes in the market—
both in terms of market structure and in
terms of the behavior of market
participants—have made it significantly
less likely that specialists could or
would use passively converted CAP
orders to engage in manipulative or
destabilizing conduct.
The Exchange states that, among other
things, the restrictions on passive CAP
conversions were implemented at a time
when NYSE enjoyed a market share in
excess of 80% of transactions in its
listed securities. Today, NYSE market
share is approximately half that amount.
The Exchange states that, where the
specialist once had substantial influence
over the price of a stock, and could
extend his influence further through the
misuse of CAP orders, the specialist
today has significantly less influence
over the price of a stock.
According to the Exchange, market
share aside, the process of converting
CAP orders also impedes the specialist’s
ability in an automated market to
misuse CAP orders to drive the market.
Passive conversions must be conducted
by the specialist manually. The
Exchange states that, because of the
increased automation of modern
markets, and the resulting exponential
increase in the pace of trading over
years past, the delay inherent in a
manual process further erodes the
possibility that a specialist could
realistically use the passive conversion
of CAP orders to manipulate the market.
PO 00000
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30437
The Exchange believes that a
specialist’s ability to drive the market
through CAP conversions is further
diminished simply by the fact that the
number of customers using CAP orders
has dropped off substantially. For
example, during March 2008, there was
an average of 2,125 conversions per day
across the entire NYSE Floor, as
compared to 4,401 conversions per day
during October 2007 and 6,762
conversions during June 2007. More
tellingly, the average number of passive
conversions during 2008 (an average of
2,484 conversions per day, year-to-date)
represented only .0004% of quotes
initiated per day by specialists (‘‘squotes’’) during the same period,8 and
.000045% of all quotes disseminated per
day overall.9 Therefore, the Exchange
believes that the likelihood that a
specialist could misuse a passive
conversion to affect prices is small.
According to the Exchange, the sharp
reduction in the number of CAP orders
reflects the increased popularity of
reserve orders, which permit customers
to achieve the same go-along benefits of
CAP orders, but retain greater control of
the pricing of their orders. Significantly,
despite the fact that reserve interest and
CAP orders can perform similar
functions, they receive disparate parity
treatment: reserve interest trades on
parity,10 while CAP interest does not.
Finally, the Exchange states that it is
also important to keep in mind that,
under the current scheme, CAP orders,
although they represent public customer
orders, are penalized in their parity
treatment for no other reason than that
they have been entrusted to the
specialist for execution. When the
specialist had outsized influence in the
market, this was arguably appropriate
because, in return for inferior parity
treatment, CAP orders received the
benefit of the specialist’s knowledge of
the market and expertise on the optimal
time to bid or offer. But in today’s
environment, where market
fragmentation has reduced the
specialist’s ability to know the overall
market, the Exchange believes this
trade-off no longer makes sense.
Accordingly, the proposed rule change
would eliminate this disadvantage to
CAP orders. At the same time, the
proposal would not eliminate all
disadvantages to CAP order relative to eQuotes: all passively converted CAP
orders would share one slice of the
allocation on an execution, whereas
8 Specialists have averaged 5,268,000 s-quotes per
day during 2008.
9 NYSE has disseminated an average of
54,201,000 quotes per day during 2008.
10 See NYSE Rule 70.20.
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Federal Register / Vol. 73, No. 102 / Tuesday, May 27, 2008 / Notices
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brokers using e-Quotes each take their
own slice. Thus, the parity divisor is
being increased by one, though only on
executions where: (1) There are
passively converted CAP orders being
bid or offered; and (2) the execution size
is in an amount less than necessary to
completely fill all orders at that price.
The Exchange states that, because this
will be the case only a very few times
per day (fewer than once per day per
stock, on average), it does not believe
that the potential harm to DOT orders is
significant.
In short, given the ways in which
liquidity has been fractured among
markets, the sharply reduced number of
conversions today, the disparate
treatment of passively converted CAP
orders and reserve interest, and the
automation of markets making manual
trades commensurately more difficult,
the Exchange believes that: (1) The harm
of manipulation-by-passive-conversion
that NYSE set out to protect against in
1985 is not present today; and (2) when
weighed against the fact that CAP orders
are agency orders on behalf of public
customers just as DOT orders are, it
does not seem appropriate to continue
to discriminate against the passively
converted CAP orders by forcing them
to step behind the DOT orders.
For these reasons, NYSE proposes to
eliminate the restriction on giving
passively converted CAP orders parity
with other limit orders, including
resting DOT orders.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Act,11 in general, and
furthers the objectives of Section 6(b)(5)
of the Act,12 in particular, in that it is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities,
and to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system. As described more fully above,
the proposed rule change is intended to
ensure fair treatment of displayed
public orders (passively converted CAP
orders) in connection with changes
being made to other Exchange systems
to permit customers to directly place
non-displayed interest into the Display
Book. In addition, the Exchange believes
that in view of both the substantial
changes to the marketplace and the
Exchange since the original rule was
11 15
12 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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17:22 May 23, 2008
Jkt 214001
adopted, and the paucity of affected
orders, the proposed change does not
substantially affect the public interest or
unreasonably disadvantage another
group of public customers. Conversely,
without the proposed rule change, the
Exchange states that there is a
substantial risk that a group of public
customers would be shut out of the
market entirely, or would receive an
`
inferior treatment vis-a-vis nondisplayed interest, which the Exchange
believes is contrary to the policy of the
Commission regarding rewarding
customers willing to display liquidity in
the market.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange states that written
comments on the proposed rule change
were neither solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change: (1) Does not significantly affect
the protection of investors or the public
interest; (2) does not impose any
significant burden on competition; and
(3) by its terms does not become
operative for 30 days after the date of
this filing, or such shorter time as the
Commission may designate if consistent
with the protection of investors and the
public interest, the proposed rule
change has become effective pursuant to
Section 19(b)(3)(A) of the Act 13 and
Rule 19b–4(f)(6) thereunder.14
A proposed rule change filed under
Rule 19b–4(f)(6) normally does not
become operative for 30 days after the
date of filing. However, Rule 19b–
4(f)(6)(iii) permits the Commission to
designate a shorter time if such action
is consistent with the protection of
investors and the public interest. The
Commission notes NYSE’s
representation regarding its
13 15
U.S.C. 78s(b)(3)(A).
14 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
provide the Commission with 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 fulfilled this requirement.
PO 00000
Frm 00064
Fmt 4703
Sfmt 4703
determination that it is not feasible at
this time to have the Exchange’s system
differentiate between displayed DOT
interest and non-displayed DOT interest
when doing parity allocations.
Accordingly, given the fact that CAP
orders represent customer orders, the
Commission believes that waiving the
30-day operative delay is consistent
with the protection of investors and the
public interest.15
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.16
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–NYSE–2008–32 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–2008–32. 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
15 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
16 15 U.S.C. 78s(b)(3)(C). For purposes of
calculating the 60-day period within which the
Commission may summarily abrogate the proposal,
the Commission considers the period to commence
on May 16, 2008, the date on which the Exchange
submitted Amendment No. 1.
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Federal Register / Vol. 73, No. 102 / Tuesday, May 27, 2008 / Notices
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 the filing also will be available
for inspection and copying at the
principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NYSE–2008–32 and should
be submitted on or before June 17, 2008.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–11808 Filed 5–23–08; 8:45 am]
BILLING CODE 8010–01–P
SMALL BUSINESS ADMINISTRATION
President’s major disaster declaration on
05/19/2008, Private Non-Profit
organizations that provide essential
services of a governmental nature may
file disaster loan applications at the
address listed above or other locally
announced locations.
The following areas have been
determined to be adversely affected by
the disaster:
Primary Counties:
Anderson, Crittenden, Fleming,
Fulton, Hancock, Hopkins, Lewis,
Livingston, Mclean, Nicholas, Ohio,
Spencer, Woodford.
The Interest Rates are:
Percent
Other (Including Non-Profit Organizations) With Credit Available
Elsewhere .................................
Businesses and Non-Profit Organizations Without Credit Available Elsewhere .........................
5.250
4.000
Herbert L. Mitchell,
Associate Administrator for Disaster
Assistance.
[FR Doc. E8–11747 Filed 5–23–08; 8:45 am]
[Disaster Declaration #11242 and #11243]
This is a Notice of the
Presidential declaration of a major
disaster for Public Assistance Only for
the Commonwealth of Kentucky
(FEMA–1757–DR), dated 05/19/2008.
Incident: Severe Storms, Tornadoes,
Flooding, Mudslides, and Landslides.
Incident Period: 04/03/2008 through
04/04/2008.
EFFECTIVE DATE: 05/19/2008.
Physical Loan Application Deadline
Date: 07/18/2008.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street, SW., Suite 6050,
Washington, DC 20416.
SUPPLEMENTARY INFORMATION: Notice is
hereby given that as a result of the
AGENCY:
Maine Disaster Number ME–00011
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CFR 200.30–3(a)(12).
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17:22 May 23, 2008
Jkt 214001
BILLING CODE 8025–01–P
SMALL BUSINESS ADMINISTRATION
Maine Disaster #ME–00012
SMALL BUSINESS ADMINISTRATION
17 17
Herbert L. Mitchell,
Associate Administrator for Disaster
Assistance.
[FR Doc. E8–11712 Filed 5–23–08; 8:45 am]
(Catalog of Federal Domestic Assistance
Number 59008)
U.S. Small Business
Administration.
ACTION: Notice.
SUMMARY:
(Catalog of Federal Domestic Assistance
Numbers 59002 and 59008)
[Disaster Declaration #11254]
Kentucky Disaster #KY–00016
AGENCY:
The notice
of the Presidential disaster declaration
for the State of Maine, dated 05/09/2008
is hereby amended to include the
following areas as adversely affected by
the disaster:
Primary Counties: (Physical Damage and
Economic Injury Loans):
Penobscot.
Contiguous Counties: (Economic Injury
Loans Only): Maine:
Hancock, Waldo.
All other information in the original
declaration remains unchanged.
SUPPLEMENTARY INFORMATION:
The number assigned to this disaster
for physical damage is 11255.
BILLING CODE 8025–01–P
[Disaster Declaration #11255]
30439
SUMMARY: This is an amendment of the
Presidential declaration of a major
disaster for the State of Maine (FEMA–
1755–DR), dated 05/09/2008.
Incident: Severe Storms and Flooding.
Incident Period: 04/28/2008 and
continuing.
DATES: Effective Date: 05/16/2008.
Physical Loan Application Deadline
Date: 07/08/2008.
EIDL Loan Application Deadline Date:
02/09/2009.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street, SW., Suite 6050,
Washington, DC 20416
Frm 00065
Fmt 4703
Sfmt 4703
SUMMARY: This is a Notice of the
Presidential declaration of a major
disaster for Public Assistance Only for
the State of Maine (FEMA–1755–DR),
dated 05/14/2008.
Incident: Severe Storms and Flooding.
Incident Period: 04/28/2008 and
continuing.
05/14/2008.
Physical Loan Application Deadline
Date: 07/14/2008.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street, SW., Suite 6050,
Washington, DC 20416.
SUPPLEMENTARY INFORMATION: Notice is
hereby given that as a result of the
President’s major disaster declaration on
05/14/2008, Private Non-Profit
organizations that provide essential
services of a governmental nature may
file disaster loan applications at the
address listed above or other locally
announced locations.
The following areas have been
determined to be adversely affected by
the disaster:
Primary Counties:
EFFECTIVE DATE:
U.S. Small Business
Administration.
ACTION: Amendment 1.
PO 00000
U.S. Small Business
Administration.
ACTION: Notice.
AGENCY:
E:\FR\FM\27MYN1.SGM
27MYN1
]]>Agencies
[Federal Register Volume 73, Number 102 (Tuesday, May 27, 2008)]
[Notices]
[Pages 30436-30439]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-11808]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57845; File No. SR-NYSE-2008-32]
Self-Regulatory Organizations; the New York Stock Exchange LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change,
and Amendment No. 1 Thereto, To Amend NYSE Rule 123A.30 To Permit
Certain Convert-and-Parity Orders To Trade on Parity With Other Limit
Orders, Including Orders Entered Through Its Designated Order
Turnaround System[supreg]
May 21, 2008.
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 April 24, 2008, the New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been substantially prepared by the Exchange.
Originally, NYSE filed the proposed rule change pursuant to Section
19(b)(2) of the Act.\3\ On May 16, 2008, however, NYSE filed Amendment
No. 1 to the proposed rule change pursuant to Section 19(b)(3)(A) of
the Act \4\ and Rule 19b-4(f)(6) thereunder.\5\ Accordingly, the
proposal became effective upon the filing of Amendment No. 1 with the
Commission. 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\ 15 U.S.C. 78s(b)(2).
\4\ 15 U.S.C. 78s(b)(3)(A).
\5\ 17 CFR 240.19b-4(f)(6). Amendment No. 1 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
The Exchange proposes to amend NYSE Rule 123A.30 to permit certain
convert-and-parity (``CAP'') orders to trade on parity with other limit
orders, including orders entered through NYSE's Designated Order
Turnaround (``DOT'') system[supreg]. The text of the proposed rule
change is available at the Exchange, 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 received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
This rule filing effects an amendment to NYSE Rule 123A.30, which,
together with NYSE Rule 1000, governs the automatic execution of CAP
orders. The amendment permits passively converted CAP orders--that is,
CAP orders that are converted by the specialist for the purpose of
bidding or offering--to trade on parity with other limit orders,
including DOT system orders that were on NYSE's Display Book[supreg] at
the time of the conversion and could trade on the same side of the
market and at the same price as the converted CAP orders. Before this
amendment, CAP orders were placed in the same parity group as DOT
orders for purposes of parity allocations among all orders upon
execution. Within that parity group, those DOT orders had priority over
the converted CAP orders.
a. Background
The Exchange states that CAP orders are not actually live orders,
but rather are memoranda of orders that can be made live either
automatically via an electing trade (a trade at a price that
automatically triggers the CAP order to become a live order and
immediately execute at the triggering price) or manually via conversion
by the specialist. In the latter situation, the specialist converts the
CAP into a limit order, and bids or offers on behalf of that order
(referred to as a ``passive conversion''). Thereafter, a trade may take
place against some or all of the converted CAP order; any portions that
are not executed may be ``unconverted'' and revert to their status as
CAP orders.
The Exchange states that, although they are not live orders, CAP
orders nevertheless represent public customer interest in which the
customer has consented to trading on parity with the specialist when
they are either elected or converted. Because CAP orders are linked,
either through election or conversion, to other customer interest at a
given price, CAP orders give customers a way to participate in trades--
that is, to ``go along'' with other interest at a price--but protect
them from either initiating a trade or constituting 100% of one side of
a trade.
The Exchange states that, at the time that specialists were given
the ability to passively convert CAP orders as agents for customers,
the Commission was concerned that specialists not have unfettered
discretion in representing those orders; although the Commission
recognized that the specialist could exercise some degree of control
over the timing and size of the conversions, the Commission insisted
on, and the Exchange agreed to implement, certain restrictions that
would prevent the specialist from misusing CAP orders to drive the
price of a security up or down inappropriately.\6\ Among these
restrictions was the requirement that passively converted CAP orders
could not be executed before ``conventional'' limit orders, e.g., DOT
orders, that were on the Display Book at the time of the conversion and
could trade at the same price and on the same side as the converted CAP
order.
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\6\ See Securities Exchange Act Release No. 24505 (May 22,
1987), 52 FR 20484 (June 1, 1987) (SR-NYSE-1985-01).
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[[Page 30437]]
b. Amendment to NYSE Rule 123A.30
The instant proposal would change the treatment of passively
converted CAP orders to permit the CAP orders to trade as a group on
parity with other agency interest, including same-side same-price DOT
orders (i.e., DOT orders that can trade on the same side of the market
and at the same price as the CAP orders). The Exchange states that the
proposed rule change is necessitated by other changes that the Exchange
is making that will permit market participants to enter non-displayed
reserve interest directly into the Display Book.
As initially implemented, under Rule 123A.30, passively converted
CAP orders were combined with DOT orders for purposes of determining
the overall parity allocation in any trade; this so-called ``DOT
group'' was treated as a single agent in the parity divisor. Thus, for
example, in an execution involving two brokers' orders, DOT orders, and
passively converted CAP orders, all on parity, the DOT group and the
brokers would each be allocated one-third of the traded shares, even
though the DOT group contained two different customer groups
(conventional limit orders and passively converted CAP orders). The
Exchange's system would then internally allocate shares within the DOT
group in time priority. As a consequence of this allocation
methodology, passively converted CAP orders did not receive allocations
until all DOT orders that were on the Display Book at the time of the
conversion were satisfied in full.
As noted above, NYSE implemented foundational changes to its
systems that permit customers to enter undisplayed reserve orders from
off-Floor directly into the Display Book through DOT (previously, only
Floor brokers could enter undisplayed reserve interest on behalf of
customers).\7\ Such off-Floor reserve interest will be included in the
DOT group for purposes of parity allocations when there is a trade and,
despite being non-displayed, would within that DOT group, currently be
entitled to priority over passively converted CAP orders.
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\7\ See Securities Exchange Act Release Nos. 57792 (May 7,
2008), 73 FR 27601 (SR-NYSE-2008-36) and 57688 (April 18, 2008), 73
FR 22194 (SR-NYSE-2008-30).
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NYSE has determined that it is not feasible at this time to have
the system differentiate between displayed DOT interest and non-
displayed DOT interest when doing parity allocations. This could result
in two unintended consequences vis-[agrave]-vis passively converted CAP
orders: First, the changes will result in non-displayed interest (DOT
reserves) taking priority over displayed interest (passively converted
CAP orders); and second, if there is substantial interest in reserve,
the change will make it difficult (if not impossible) for passively
converted CAP orders to receive an execution, since all displayed and
non-displayed DOT interest would need to be satisfied first.
The Exchange has further determined that it is not feasible to undo
the various foundational programming changes necessary to implement
off-Floor reserves in the near future. To address these issues, the
Exchange is proposing to amend NYSE Rule 123A.30 to change the parity
allocation methodology. Under the proposed rule change, passively
converted CAP orders would become their own parity group for purposes
of the parity divisor. For example, in the execution described above,
involving two brokers, DOT orders and passively converted CAP orders,
each group would receive one-fourth of the executed shares, instead of
the DOT orders and CAP orders sharing a one-third allocation.
The Exchange believes that the instant proposal is appropriate
because fundamental changes in the market--both in terms of market
structure and in terms of the behavior of market participants--have
made it significantly less likely that specialists could or would use
passively converted CAP orders to engage in manipulative or
destabilizing conduct.
The Exchange states that, among other things, the restrictions on
passive CAP conversions were implemented at a time when NYSE enjoyed a
market share in excess of 80% of transactions in its listed securities.
Today, NYSE market share is approximately half that amount. The
Exchange states that, where the specialist once had substantial
influence over the price of a stock, and could extend his influence
further through the misuse of CAP orders, the specialist today has
significantly less influence over the price of a stock.
According to the Exchange, market share aside, the process of
converting CAP orders also impedes the specialist's ability in an
automated market to misuse CAP orders to drive the market. Passive
conversions must be conducted by the specialist manually. The Exchange
states that, because of the increased automation of modern markets, and
the resulting exponential increase in the pace of trading over years
past, the delay inherent in a manual process further erodes the
possibility that a specialist could realistically use the passive
conversion of CAP orders to manipulate the market.
The Exchange believes that a specialist's ability to drive the
market through CAP conversions is further diminished simply by the fact
that the number of customers using CAP orders has dropped off
substantially. For example, during March 2008, there was an average of
2,125 conversions per day across the entire NYSE Floor, as compared to
4,401 conversions per day during October 2007 and 6,762 conversions
during June 2007. More tellingly, the average number of passive
conversions during 2008 (an average of 2,484 conversions per day, year-
to-date) represented only .0004% of quotes initiated per day by
specialists (``s-quotes'') during the same period,\8\ and .000045% of
all quotes disseminated per day overall.\9\ Therefore, the Exchange
believes that the likelihood that a specialist could misuse a passive
conversion to affect prices is small.
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\8\ Specialists have averaged 5,268,000 s-quotes per day during
2008.
\9\ NYSE has disseminated an average of 54,201,000 quotes per
day during 2008.
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According to the Exchange, the sharp reduction in the number of CAP
orders reflects the increased popularity of reserve orders, which
permit customers to achieve the same go-along benefits of CAP orders,
but retain greater control of the pricing of their orders.
Significantly, despite the fact that reserve interest and CAP orders
can perform similar functions, they receive disparate parity treatment:
reserve interest trades on parity,\10\ while CAP interest does not.
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\10\ See NYSE Rule 70.20.
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Finally, the Exchange states that it is also important to keep in
mind that, under the current scheme, CAP orders, although they
represent public customer orders, are penalized in their parity
treatment for no other reason than that they have been entrusted to the
specialist for execution. When the specialist had outsized influence in
the market, this was arguably appropriate because, in return for
inferior parity treatment, CAP orders received the benefit of the
specialist's knowledge of the market and expertise on the optimal time
to bid or offer. But in today's environment, where market fragmentation
has reduced the specialist's ability to know the overall market, the
Exchange believes this trade-off no longer makes sense. Accordingly,
the proposed rule change would eliminate this disadvantage to CAP
orders. At the same time, the proposal would not eliminate all
disadvantages to CAP order relative to e-Quotes: all passively
converted CAP orders would share one slice of the allocation on an
execution, whereas
[[Page 30438]]
brokers using e-Quotes each take their own slice. Thus, the parity
divisor is being increased by one, though only on executions where: (1)
There are passively converted CAP orders being bid or offered; and (2)
the execution size is in an amount less than necessary to completely
fill all orders at that price. The Exchange states that, because this
will be the case only a very few times per day (fewer than once per day
per stock, on average), it does not believe that the potential harm to
DOT orders is significant.
In short, given the ways in which liquidity has been fractured
among markets, the sharply reduced number of conversions today, the
disparate treatment of passively converted CAP orders and reserve
interest, and the automation of markets making manual trades
commensurately more difficult, the Exchange believes that: (1) The harm
of manipulation-by-passive-conversion that NYSE set out to protect
against in 1985 is not present today; and (2) when weighed against the
fact that CAP orders are agency orders on behalf of public customers
just as DOT orders are, it does not seem appropriate to continue to
discriminate against the passively converted CAP orders by forcing them
to step behind the DOT orders.
For these reasons, NYSE proposes to eliminate the restriction on
giving passively converted CAP orders parity with other limit orders,
including resting DOT orders.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\11\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\12\ in particular, in that it
is designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transactions in securities, and to remove impediments to and perfect
the mechanism of a free and open market and a national market system.
As described more fully above, the proposed rule change is intended to
ensure fair treatment of displayed public orders (passively converted
CAP orders) in connection with changes being made to other Exchange
systems to permit customers to directly place non-displayed interest
into the Display Book. In addition, the Exchange believes that in view
of both the substantial changes to the marketplace and the Exchange
since the original rule was adopted, and the paucity of affected
orders, the proposed change does not substantially affect the public
interest or unreasonably disadvantage another group of public
customers. Conversely, without the proposed rule change, the Exchange
states that there is a substantial risk that a group of public
customers would be shut out of the market entirely, or would receive an
inferior treatment vis-[agrave]-vis non-displayed interest, which the
Exchange believes is contrary to the policy of the Commission regarding
rewarding customers willing to display liquidity in the market.
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\11\ 15 U.S.C. 78f(b).
\12\ 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
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange states that written comments on the proposed rule
change were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change: (1) Does not
significantly affect the protection of investors or the public
interest; (2) does not impose any significant burden on competition;
and (3) by its terms does not become operative for 30 days after the
date of this filing, or such shorter time as the Commission may
designate if consistent with the protection of investors and the public
interest, the proposed rule change has become effective pursuant to
Section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6)
thereunder.\14\
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\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to provide the Commission
with 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 fulfilled this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days after the date of filing. However,
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter
time if such action is consistent with the protection of investors and
the public interest. The Commission notes NYSE's representation
regarding its determination that it is not feasible at this time to
have the Exchange's system differentiate between displayed DOT interest
and non-displayed DOT interest when doing parity allocations.
Accordingly, given the fact that CAP orders represent customer orders,
the Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public
interest.\15\
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\15\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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.\16\
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\16\ 15 U.S.C. 78s(b)(3)(C). For purposes of calculating the 60-
day period within which the Commission may summarily abrogate the
proposal, the Commission considers the period to commence on May 16,
2008, the date on which the Exchange submitted Amendment No. 1.
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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-2008-32 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-2008-32. 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
[[Page 30439]]
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 the filing also will be available for inspection and
copying at the principal office of the Exchange. All comments received
will be posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSE-2008-32 and should be submitted on
or before June 17, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-11808 Filed 5-23-08; 8:45 am]
BILLING CODE 8010-01-P
