Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by New York Stock Exchange LLC Rescinding NYSE Rule 110 Which Establishes the Role of Competitive Traders and Exchange Rule 107A Which Establishes the Role of the Registered Competitive Market Makers, 17702-17705 [E9-8732]
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17702
Federal Register / Vol. 74, No. 72 / Thursday, April 16, 2009 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–8737 Filed 4–15–09; 8:45 am]
BILLING CODE
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–59746; File No. SR–NYSE–
2009–08]
Self-Regulatory Organizations; Notice
of Filing of Proposed Rule Change by
New York Stock Exchange LLC
Rescinding NYSE Rule 110 Which
Establishes the Role of Competitive
Traders and Exchange Rule 107A
Which Establishes the Role of the
Registered Competitive Market Makers
April 10, 2009.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on April 6,
2009, New York Stock Exchange LLC
(‘‘NYSE’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the selfregulatory organization. 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
The Exchange proposes to rescind
NYSE Rule 110 which establishes the
role of Competitive Traders (‘‘CTs’’) and
Exchange Rule 107A which establishes
the role of the Registered Competitive
Market Makers (‘‘RCMMs’’). The
Exchange also proposes to make
conforming amendments to NYSE Rules
36, 98, 123, 111, 476A, 800, 900 and
1600 to eliminate references to RCMMs
and CTs. The text of the proposed rule
change is available at the Exchange, the
Commission’s Public Reference Room,
and https://www.nyse.com.
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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
self-regulatory organization included
CFR 200.30–3(a)(12).
1 15 U.S.C.78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
16:47 Apr 15, 2009
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to rescind
NYSE Rule 110 which sets forth the role
of CTs and NYSE Rule 107A which sets
forth the role of RCMMs. With the
rescission of NYSE Rule 110 and NYSE
Rule 107A, CTs and RCMMs will no
longer be recognized classes of Floor
Traders on the NYSE Floor.
The Exchange also proposes to make
conforming amendments to NYSE Rules
36, 98, 476A, 111, 800, 900 and 1600 to
eliminate references to RCMMs and
CTs.
I. Background of CTs and RCMMs
The rules establishing CTs and
RCMMs were enacted to create classes
of Floor Traders that would commit
capital to trade in a manner that would
provide additional liquidity, contribute
to mitigating price fluctuations and
enhance competition. CTs were the
class of Floor Traders that the Exchange
established first in 1964.4 CTs were
Floor Traders registered with and
approved by the Exchange to trade for
an account for which the CT had an
interest.
Section 11(a) of the Securities and
Exchange Act of 1934 (the ‘‘Act’’),5 as
amended by the 1975 Amendments,
makes it unlawful, in part, for Exchange
members to effect any transaction on the
Floor for their own accounts. Section
11(a)(1)(A) stated that it would exempt
from this general prohibition
transactions made by a dealer acting in
the capacity of a market maker (‘‘market
maker exception’’).6 A market maker is
defined in Section 3(a)(38) of the Act as
‘‘any dealer who, with respect to a
security, holds himself out (by entering
quotations in an inter-dealer
communications system or otherwise) as
being willing to buy and sell such
security for his own account on a
regular or continuous basis.’’ 7
4 NYSE Rule 110 (Amended May 21, 1964 and
July 16, 1964, effective August 3, 1964).
5 15 U.S.C. 78k(a).
6 15 U.S.C. 78k(a)(1)(A).
7 15 U.S.C. 78c(a)(38).
10 17
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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 those 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 parts of such
statements.
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In order to maintain a class of trader
that could be called in to add depth and
liquidity to the markets in listed stocks,
the Exchange established the RCMM
class of Floor trader in 1978.8 RCMMs
functioned as proprietary traders that
serve as supplemental market makers on
the Floor. Historically, RCMMs were
called upon to narrow the spread
between bids and offers, improve the
depth of the market in a given security
and enter a bid or offer on the side of
the market when called upon to do so
by a Floor official. In their capacity as
dealers, RCMMs were expected to
provide a degree of competition to the
specialists on the NYSE.
On February 24, 1981, the
Commission adopted Rule 11a1–5 9 to
exempt from the proprietary trading
prohibition of Section 11(a)(1) certain
transactions by RCMMs registered on
the Exchange. The Commission
determined that RCMMs had the
potential to provide sufficient benefits
to their markets to warrant an
exemption from the statutory
prohibition pursuant to Section
11(a)(1)(H).10 Rule 11a1–5 set forth that
‘‘any transaction by a New York Stock
Exchange registered competitive market
maker * * * effected in compliance
with their respective governing rules
shall be deemed to be of a kind which
is consistent with the purposes of
Section 11(a)(1) of the Act, the
protection of investors, and the
maintenance of fair and orderly
markets.’’ 11
II. Functions and Obligations of the
RCMMs and CTs
CTs and RCMMs are classes of Floor
traders that commit capital to trade in
a manner that provides additional
liquidity, contribute to mitigating price
fluctuations and enhance competition.
A member registered as an RCMM is
permitted, with certain limitations, to
act as both a Floor Broker and RCMM
in the same trading session. However,
an RCMM may not act as both Floor
Broker and RCMM in the same security
in the same trading session.
As a Floor Broker, the RCMM
executes orders as agent for his
customers, including other Floor
Brokers. In his capacity as a Floor
Broker, the RCMM acts solely as agent
for his customer and does not commit
capital or initiate on-Floor orders,
8 See Securities Exchange Act Release No. 14718
(May 1, 1978), 43 FR 19738 (May 8, 1978) (SR–
NYSE–78–24).
9 17 CFR 240.11a1–5.
10 This provision has since been changed to
Section 11(a)(1)(I).
11 See Securities Exchange Act Release No. 17569,
46 FR 14888 (March 3, 1981).
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except in the case of a trade for his error
account.
As an RCMM, the RCMM may initiate
on-Floor orders to commit capital on his
firm’s behalf, subject to certain
conditions. While acting in an RCMM
capacity, and subject to its dealings, an
RCMM provides additional liquidity in
situations in which the RCMM is
requested to do so by a Floor Official,
DMM, or other Floor Broker.
Additionally, an RCMM may, subject to
certain limitations on its dealings,
provide liquidity in instances in which
the dealings are reasonably calculated to
contribute to maintenance of price
continuity with reasonable depth, and
to minimize temporary disparities
between supply and demand.
RCMMs have both affirmative and
negative obligations pursuant to NYSE
Rule 107A(b). The RCMM’s affirmative
obligations require the RCMM to: (i)
Make a bid or offer in a stock that
contributes to the maintenance of a fair
and orderly market whenever called
upon; and (ii) effect all purchases and
sales for the RCMM’s proprietary
account in a manner that contributes to
the maintenance of price continuity
with reasonable depth and minimizes
the effects of a temporary disparity
between supply and demand. The
negative obligations of the RCMM
require the RCMM to avoid
participation as a dealer during the
opening of the stock in a manner that
would disrupt the public balance of
supply and demand. Furthermore,
RCMMs may not effect transactions for
its own account or the account of its
member organization that are not a part
of a course of dealings reasonably
calculated to contribute to the
maintenance of price continuity with
reasonable depth and to the minimizing
of the effects of any temporary disparity
between supply and demand. RCMMs
must be ready to enter the market with
one round lot if called upon by a Floor
Official or broker to narrow the
quotation spread or add liquidity to the
market.
CTs likewise have these same
affirmative and negative obligations
pursuant to NYSE Rule 110. In addition,
members acting as CTs that desire to
purchase or sell stock for accounts in
which they have an interest shall not
congregate in a particular stock, and
individually or as a group, intentionally
or unintentionally, dominate the market
in that stock, and shall not effect such
purchases or sales except in a
reasonable and orderly manner. CTs are
also subject to meeting certain
stabilization tests which are computed
on a monthly basis. Specifically, CT
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16:47 Apr 15, 2009
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trading is required to be 75%
stabilizing.
NYSE Regulation Inc. is responsible
for reviewing RCMM and CT trading
activity in order to determine that
RCMMs and CTs are complying with
their negative and affirmative
obligations.
III. Viability of CTs and RCMMs in
Today’s NYSE Market
The volume and speed of the
securities markets has increased
dramatically since the inception of the
CTs and RCMMs. Significant changes
have occurred with respect to market
dynamics such as quotations, order
entry and order executions. The
majority of trades on the Exchange are
executed electronically. When the
Exchange introduced its Hybrid
Market,12 the Exchange determined that
a review of the viability of RCMMs and
CTs to trade in the more electronic
trading environment was warranted.
The Exchange undertook to assess the
contributions of RCMMs and CTs to the
liquidity available to the NYSE in its
more electronic market model.
In October 2005, the Exchange
implemented a Moratorium on the
qualification and registration of new
CTs and RCMMs while the Exchange
conducted a study on the future
viability of CTs and RCMMs.13 At the
time the Moratorium was first imposed,
there were 11 registered RCMMs and
one registered but inactive CT. In
December 2006, the largest RCMM firm
ceased its RCMM business and left the
Floor, eliminating 6 RCMMs from the
Floor. This reduced the number of
RCMMs operating on the Exchange to
five.14 These remaining five RCMMs are
associated with two member
organizations.
In its study of the CT and RCMM
trading in the more electronic
environment, the Exchange reviewed
the trading data associated with the CT
and RCMM order execution. The review
found that the CT class of Floor Trader
had not executed any transactions on
the Floor as a result of the non-usage of
the CT license and therefore provided
no contribution to the quality of the
NYSE Market.
From May 2004 to December 2004,
RCMM trading volume comprised only
12 See Securities Exchange Act Release No. 53539
(March 22, 2006), 71 FR 16353 (March 31, 2006)
(SR–NYSE–2004–05) (establishing the Hybrid
Market).
13 See Securities Exchange Act Release No. 52648
(October 21, 2005), 70 FR 62155 (October 28, 2005)
(SR–NYSE–2005–63).
14 Registration as an RCMM is applicable only to
individual members, not member organizations. See
NYSE Rule 107A(1). Accordingly, RCMM trading
licenses are issued to individual members.
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.018% of the total NYSE trading volume
for that time period. In 2005, the year
that the Moratorium was implemented,
RCMM trading volume comprised only
.017% of the total NYSE trading volume
for the year. In 2006, the RCMM trading
volume comprised .008% of the total
NYSE trading volume for the year. After
the largest RCMM firm ceased its
business in December 2006, RCMM
trading volume in 2007 and 2008
comprised only .001% of the NYSE total
trading volume for each of those years.
From August 2005 through February
2008, RCMM’s monthly average trading
volume for that time period never
exceeded .021% of the Exchange’s total
trading volume for that time period. On
average during this time period, RCMMs
comprised only .006% of the NYSE’s
trading volume. The Moratorium was
then extended six times 15 while the
Exchange continued its evaluation of CT
and RCMM trading. A review of the
trading volume prior to and during the
Moratorium indicates that RCMM/CT
trading volume was minimally impacted
by the Moratorium.
On October 24, 2008, the Commission
approved the Exchange’s new market
model filing (‘‘Next Generation
NYSE’’).16 The Next Generation NYSE
rule and technology changes: (i)
Provided market participants with
additional abilities to post hidden
liquidity on Exchange systems; (ii)
created a Designated Market Maker
(‘‘DMM’’), and phased out the NYSE
specialist; and (iii) enhanced the speed
of execution through technological
enhancements and a reduction in
message traffic between Exchange
systems and its DMMs. In light of the
implementation of the Next Generation
NYSE, the Exchange requested an
extension of the Moratorium to evaluate
the viability of the RCMMs and CTs in
the proposed New Generation NYSE.17
15 See Securities Exchange Act Release Numbers
54140 (July 13, 2006), 71 FR 41491 (July 21, 2006)
(SR–NYSE–2006–48); 54985 (December 21, 2006),
72 FR 171 (January 3, 2007) (SR–NYSE–2006–113);
55992 (June 29, 2007), 72 FR 37289 (July 9, 2007)
(SR–NYSE–2007–57); 56556 (September 27, 2007),
72 FR 56421 (October 3, 2007) (SR–NYSE–2007–
86); 57072 (December 31, 2007), 73 FR 1252
(January 7, 2008) (SR–NYSE–2007–125); 57601
(April 2, 2008), 73 FR 19123 (April 8, 2008) (SR–
NYSE–2008–22). The Moratorium was also
amended to grant RCMM firms the ability to replace
a RCMM who relinquishes his or her registration
and ceases to conduct business as a RCMM during
the moratorium, with a newly qualified and
registered RCMM. See Securities Exchange Act
Release No. 53549 (March 24, 2006), 71 FR 16388
(March 31, 2006) (SR–NYSE–2006–11).
16 See Securities Exchange Act Release No. 58845
(October 24, 2008), 73 FR 64379 (October 29, 2008)
(SR–NYSE–2008–46).
17 See Securities Exchange Act Release Numbers
58033 (June 26, 2008), 73 FR 38265 (July 3, 2008)
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17704
Federal Register / Vol. 74, No. 72 / Thursday, April 16, 2009 / Notices
The Next Generation NYSE is
currently operating as a pilot scheduled
to end on October 1, 2009. For the time
period of July 2008 to December 2008,
RCMM and CT average trading volume
did not exceed .0011% of the
Exchange’s total trading volume per
month for that time period. On average
over these six months, RCMMs
comprised only .001% of the NYSE’s
trading volume. The review found that
the CT class of Floor Trader still had not
executed any transactions on the Floor
as a result of the non-usage of the CT
license and therefore provided no
contribution to the market quality on
the NYSE. In 2009, RCMM trading is
reported to comprise approximately
.001% of the total NYSE trading volume
to date.
In light of these statistics, the
Exchange has concluded that the level
of participation of the RCMMs and CTs
no longer serve as viable supplemental
market makers because they no longer
contribute significantly to the overall
liquidity available on the NYSE.
In addition to reviewing the trading
statistics of the RCMMs and the sole
inactive CT, NYSE Market and NYSE
Regulation reviewed the technology,
operational and regulatory costs
required to adequately support and
surveil RCMM and CT trading activity
in a predominantly electronic trading
environment. The review included the
projected costs for trading system
enhancements for RCMM and CT
trading, the cost of continued
development of surveillance technology
and procedures, and staff training and
hours spent in these efforts. The NYSE’s
trading systems, including the handheld devices used by Floor brokers on
the NYSE, were not designed to
facilitate trading by RCMMs and CTs
under special supplemental marketmaking rules enacted when the NYSE
was a manual trading center in which
RCMMs and CTs traded on paper. To
develop technology specifically
designed to comport with the RCMM
and CT trading rules in the context of
Next Generation NYSE would not be
cost effective in view of the minimal
current trading volume of the five
RCMMs and the nonexistent trading
volume of the one registered CT. The
fundamental changes in the securities
markets generally and in the NYSE
trading model in particular since the
RCMM and CT rules were first enacted
in the late 1970s and early 1980s have
resulted in much higher trading
(SR–NYSE–2008–49); 58713 (October 2, 2008), 73
FR 59024 (October 8, 2008) (SR–NYSE–2008–96);
59069 (December 8, 2008), 73 FR 76081 (December
15, 2008) (SR–NYSE–2008–124).
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16:47 Apr 15, 2009
Jkt 217001
volumes and message traffic through
NYSE systems. The RCMM and CT rules
were enacted for a marketplace that
functioned much differently than
today’s high speed and high volume
trading environment.
There are now new opportunities for
market participants to efficiently access
the NYSE market. The NYSE has
developed a new class of electronic
liquidity providers, Supplemental
Liquidity Providers (‘‘SLPs’’)18 that has
largely supplanted the role once filled
by RCMMs and CTs. SLPs are off-Floor
entities that quote and trade on the
NYSE electronically. The operation of
SLPs is intended to provide incentives
for quoting and to add competition to
the existing group of Floor-based
liquidity providers, the DMMs. An SLP
is required to quote at the National Best
Bid (‘‘NBB’’) or the National Best Offer
(‘‘NBO’’) at least 5% of the trading day
for each assigned security in round lots
to maintain its status as an SLP. If an
SLP posts liquidity in its assigned
securities that results in an execution,
the Exchange will pay the SLP a
financial rebate per share for such
executions provided that the SLP meets
its monthly quoting requirement for
rebates averaging 3% at the NBB or NBO
in its assigned securities in round lots.
The Exchange believes that this rebate
program will encourage SLPs to
aggressively provide liquidity to the
NYSE market and will also provide
customers with the premier venue for
price discovery, competitive quote and
price improvement.
Because of the electronic nature of
SLP trading, the regulatory and
technology considerations that exist
with maintaining CTs and RCMMs as
classes of Floor Traders on the NYSE are
not present. The intent behind
establishing the CT and RCMM classes
of trading, i.e., providing additional
liquidity in the NYSE market, is now
best fulfilled through the SLP process.
Given all of the above, the Exchange
seeks to rescind CTs and RCMMs as
valid classes of Floor Traders.
The Exchange notes that while it is
proposing the rescission of RCMMs and
CTs as classes of traders, it is not
rescinding membership to the Exchange.
Those RCMMs and CTs currently
trading on the Exchange will continue
to be Exchange members but will not be
permitted to trade for their proprietary
accounts in their roles as RCMMs and
CTs. RCMMs and CTs will continue to
have electronic access to the market and
are permitted to continue trading as a
18 See Securities Exchange Act Release No. 58877
(October 29, 2008), 73 FR 65904 (November 5, 2008)
(SR–NYSE–2008–108). See also NYSE Rule 1600.
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different class of trader subject to
regulatory requirements to change their
respective business models.
IV. Conforming Changes to NYSE Rules
36, 98, 111, 123, 476A, 800, 900 and
1600
The Exchange seeks to make
conforming amendments to NYSE Rules
36, 98, 111, 123, 476A, 800, 900 and
1600 to delete references to RCMMs and
CTs throughout the rule text.
V. Conclusion
RCMMs and CTs are no longer viable
classes of Floor Traders due to the
significant evolution of the NYSE
marketplace since the enactment of the
original rules establishing these classes
of members. The existing RCMMs and
sole CT no longer meet the objectives of
adding depth and liquidity to the NYSE
market and providing a degree of
competition to the NYSE DMMs. The
Exchange concludes that these classes of
Floor Traders should be rescinded given
the trading volumes associated with CTs
and RCMMs and the considerable costs
to regulate these classes of traders.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with and
furthers the objectives of Section 6(b)(5)
of the Act,19 in that it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to, and perfect the
mechanism of, a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
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
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
19 15
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U.S.C. 78f(b)(5).
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90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve the proposed
rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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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–2009–08 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NYSE–2009–08. 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 the filing will also be available
for inspection and copying at the
principal office of the self-regulatory
organization. All comments received
will be posted without change; the
Commission does not edit personal
identifying information from
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16:47 Apr 15, 2009
Jkt 217001
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–NYSE–
2009–08 and should be submitted on or
before May 7, 2009.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–8732 Filed 4–15–09; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–59745; File No. SR–FINRA–
2009–017]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Proposed Rule Change To Adopt
Incorporated NYSE Rule 406
(Designation of Accounts) as a FINRA
Rule in the Consolidated FINRA
Rulebook
April 10, 2009.
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 March 26,
2009, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) (f/k/a
National Association of Securities
Dealers, Inc. (‘‘NASD’’)) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
substantially prepared by FINRA. 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
FINRA is proposing to adopt
Incorporated NYSE Rule 406
(Designation of Accounts) as a FINRA
rule in the consolidated FINRA
rulebook with minor changes. The
proposed rule change would renumber
Incorporated NYSE Rule 406 as FINRA
Rule 3250 in the consolidated FINRA
rulebook.
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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17705
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA 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. FINRA 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
As part of the process of developing
a new consolidated rulebook
(‘‘Consolidated FINRA Rulebook’’),3
FINRA is proposing to adopt
Incorporated NYSE Rule 406 into the
Consolidated FINRA Rulebook with
minor changes, discussed below. The
proposed rule change would renumber
Incorporated NYSE Rule 406 as FINRA
Rule 3250. Incorporated NYSE Rule 406
provides that no member organization
shall carry an account on its books in
the name of a person other than that of
the customer, except that an account
may be designated by a number or
symbol, provided the member has on
file a written statement signed by the
customer attesting the ownership of
such account. In effect, this rule
establishes a general requirement that a
member must hold each customer
account in the customer’s name, except
that a member may identify a customer’s
account with a number or symbol, as
long as the member maintains
documentation identifying the
customer.4
Currently, Incorporated NYSE Rule
406 applies only to Dual Members (i.e.,
3 The current FINRA rulebook consists of (1)
FINRA Rules; (2) NASD Rules; and (3) rules
incorporated from NYSE (‘‘Incorporated NYSE
Rules’’) (together, the NASD Rules and Incorporated
NYSE Rules are referred to as the ‘‘Transitional
Rulebook’’). While the NASD Rules generally apply
to all FINRA members, the Incorporated NYSE
Rules apply only to those members of FINRA that
are also members of the NYSE (‘‘Dual Members’’).
The FINRA Rules apply to all FINRA members,
unless such rules have a more limited application
by their terms. For more information about the
rulebook consolidation process, see FINRA
Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
4 Members are subject to additional requirements
regarding customer accounts. See, e.g., Rule 17a3(a)(9) under the Act (requiring records indicating
the name and address of the beneficial owner of
each cash and margin customer account). 17 CFR
240.17a–3(a)(9).
E:\FR\FM\16APN1.SGM
16APN1
Agencies
[Federal Register Volume 74, Number 72 (Thursday, April 16, 2009)]
[Notices]
[Pages 17702-17705]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-8732]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-59746; File No. SR-NYSE-2009-08]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by New York Stock Exchange LLC Rescinding NYSE Rule 110 Which
Establishes the Role of Competitive Traders and Exchange Rule 107A
Which Establishes the Role of the Registered Competitive Market Makers
April 10, 2009.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on April 6, 2009, New York Stock Exchange LLC (``NYSE'' or
the ``Exchange'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C.78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to rescind NYSE Rule 110 which establishes
the role of Competitive Traders (``CTs'') and Exchange Rule 107A which
establishes the role of the Registered Competitive Market Makers
(``RCMMs''). The Exchange also proposes to make conforming amendments
to NYSE Rules 36, 98, 123, 111, 476A, 800, 900 and 1600 to eliminate
references to RCMMs and CTs. The text of the proposed rule change is
available at the Exchange, the Commission's Public Reference Room, and
https://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 self-regulatory organization
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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to rescind NYSE Rule 110 which sets forth the
role of CTs and NYSE Rule 107A which sets forth the role of RCMMs. With
the rescission of NYSE Rule 110 and NYSE Rule 107A, CTs and RCMMs will
no longer be recognized classes of Floor Traders on the NYSE Floor.
The Exchange also proposes to make conforming amendments to NYSE
Rules 36, 98, 476A, 111, 800, 900 and 1600 to eliminate references to
RCMMs and CTs.
I. Background of CTs and RCMMs
The rules establishing CTs and RCMMs were enacted to create classes
of Floor Traders that would commit capital to trade in a manner that
would provide additional liquidity, contribute to mitigating price
fluctuations and enhance competition. CTs were the class of Floor
Traders that the Exchange established first in 1964.\4\ CTs were Floor
Traders registered with and approved by the Exchange to trade for an
account for which the CT had an interest.
---------------------------------------------------------------------------
\4\ NYSE Rule 110 (Amended May 21, 1964 and July 16, 1964,
effective August 3, 1964).
---------------------------------------------------------------------------
Section 11(a) of the Securities and Exchange Act of 1934 (the
``Act''),\5\ as amended by the 1975 Amendments, makes it unlawful, in
part, for Exchange members to effect any transaction on the Floor for
their own accounts. Section 11(a)(1)(A) stated that it would exempt
from this general prohibition transactions made by a dealer acting in
the capacity of a market maker (``market maker exception'').\6\ A
market maker is defined in Section 3(a)(38) of the Act as ``any dealer
who, with respect to a security, holds himself out (by entering
quotations in an inter-dealer communications system or otherwise) as
being willing to buy and sell such security for his own account on a
regular or continuous basis.'' \7\
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\5\ 15 U.S.C. 78k(a).
\6\ 15 U.S.C. 78k(a)(1)(A).
\7\ 15 U.S.C. 78c(a)(38).
---------------------------------------------------------------------------
In order to maintain a class of trader that could be called in to
add depth and liquidity to the markets in listed stocks, the Exchange
established the RCMM class of Floor trader in 1978.\8\ RCMMs functioned
as proprietary traders that serve as supplemental market makers on the
Floor. Historically, RCMMs were called upon to narrow the spread
between bids and offers, improve the depth of the market in a given
security and enter a bid or offer on the side of the market when called
upon to do so by a Floor official. In their capacity as dealers, RCMMs
were expected to provide a degree of competition to the specialists on
the NYSE.
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 14718 (May 1, 1978),
43 FR 19738 (May 8, 1978) (SR-NYSE-78-24).
---------------------------------------------------------------------------
On February 24, 1981, the Commission adopted Rule 11a1-5 \9\ to
exempt from the proprietary trading prohibition of Section 11(a)(1)
certain transactions by RCMMs registered on the Exchange. The
Commission determined that RCMMs had the potential to provide
sufficient benefits to their markets to warrant an exemption from the
statutory prohibition pursuant to Section 11(a)(1)(H).\10\ Rule 11a1-5
set forth that ``any transaction by a New York Stock Exchange
registered competitive market maker * * * effected in compliance with
their respective governing rules shall be deemed to be of a kind which
is consistent with the purposes of Section 11(a)(1) of the Act, the
protection of investors, and the maintenance of fair and orderly
markets.'' \11\
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\9\ 17 CFR 240.11a1-5.
\10\ This provision has since been changed to Section
11(a)(1)(I).
\11\ See Securities Exchange Act Release No. 17569, 46 FR 14888
(March 3, 1981).
---------------------------------------------------------------------------
II. Functions and Obligations of the RCMMs and CTs
CTs and RCMMs are classes of Floor traders that commit capital to
trade in a manner that provides additional liquidity, contribute to
mitigating price fluctuations and enhance competition. A member
registered as an RCMM is permitted, with certain limitations, to act as
both a Floor Broker and RCMM in the same trading session. However, an
RCMM may not act as both Floor Broker and RCMM in the same security in
the same trading session.
As a Floor Broker, the RCMM executes orders as agent for his
customers, including other Floor Brokers. In his capacity as a Floor
Broker, the RCMM acts solely as agent for his customer and does not
commit capital or initiate on-Floor orders,
[[Page 17703]]
except in the case of a trade for his error account.
As an RCMM, the RCMM may initiate on-Floor orders to commit capital
on his firm's behalf, subject to certain conditions. While acting in an
RCMM capacity, and subject to its dealings, an RCMM provides additional
liquidity in situations in which the RCMM is requested to do so by a
Floor Official, DMM, or other Floor Broker. Additionally, an RCMM may,
subject to certain limitations on its dealings, provide liquidity in
instances in which the dealings are reasonably calculated to contribute
to maintenance of price continuity with reasonable depth, and to
minimize temporary disparities between supply and demand.
RCMMs have both affirmative and negative obligations pursuant to
NYSE Rule 107A(b). The RCMM's affirmative obligations require the RCMM
to: (i) Make a bid or offer in a stock that contributes to the
maintenance of a fair and orderly market whenever called upon; and (ii)
effect all purchases and sales for the RCMM's proprietary account in a
manner that contributes to the maintenance of price continuity with
reasonable depth and minimizes the effects of a temporary disparity
between supply and demand. The negative obligations of the RCMM require
the RCMM to avoid participation as a dealer during the opening of the
stock in a manner that would disrupt the public balance of supply and
demand. Furthermore, RCMMs may not effect transactions for its own
account or the account of its member organization that are not a part
of a course of dealings reasonably calculated to contribute to the
maintenance of price continuity with reasonable depth and to the
minimizing of the effects of any temporary disparity between supply and
demand. RCMMs must be ready to enter the market with one round lot if
called upon by a Floor Official or broker to narrow the quotation
spread or add liquidity to the market.
CTs likewise have these same affirmative and negative obligations
pursuant to NYSE Rule 110. In addition, members acting as CTs that
desire to purchase or sell stock for accounts in which they have an
interest shall not congregate in a particular stock, and individually
or as a group, intentionally or unintentionally, dominate the market in
that stock, and shall not effect such purchases or sales except in a
reasonable and orderly manner. CTs are also subject to meeting certain
stabilization tests which are computed on a monthly basis.
Specifically, CT trading is required to be 75% stabilizing.
NYSE Regulation Inc. is responsible for reviewing RCMM and CT
trading activity in order to determine that RCMMs and CTs are complying
with their negative and affirmative obligations.
III. Viability of CTs and RCMMs in Today's NYSE Market
The volume and speed of the securities markets has increased
dramatically since the inception of the CTs and RCMMs. Significant
changes have occurred with respect to market dynamics such as
quotations, order entry and order executions. The majority of trades on
the Exchange are executed electronically. When the Exchange introduced
its Hybrid Market,\12\ the Exchange determined that a review of the
viability of RCMMs and CTs to trade in the more electronic trading
environment was warranted. The Exchange undertook to assess the
contributions of RCMMs and CTs to the liquidity available to the NYSE
in its more electronic market model.
---------------------------------------------------------------------------
\12\ See Securities Exchange Act Release No. 53539 (March 22,
2006), 71 FR 16353 (March 31, 2006) (SR-NYSE-2004-05) (establishing
the Hybrid Market).
---------------------------------------------------------------------------
In October 2005, the Exchange implemented a Moratorium on the
qualification and registration of new CTs and RCMMs while the Exchange
conducted a study on the future viability of CTs and RCMMs.\13\ At the
time the Moratorium was first imposed, there were 11 registered RCMMs
and one registered but inactive CT. In December 2006, the largest RCMM
firm ceased its RCMM business and left the Floor, eliminating 6 RCMMs
from the Floor. This reduced the number of RCMMs operating on the
Exchange to five.\14\ These remaining five RCMMs are associated with
two member organizations.
---------------------------------------------------------------------------
\13\ See Securities Exchange Act Release No. 52648 (October 21,
2005), 70 FR 62155 (October 28, 2005) (SR-NYSE-2005-63).
\14\ Registration as an RCMM is applicable only to individual
members, not member organizations. See NYSE Rule 107A(1).
Accordingly, RCMM trading licenses are issued to individual members.
---------------------------------------------------------------------------
In its study of the CT and RCMM trading in the more electronic
environment, the Exchange reviewed the trading data associated with the
CT and RCMM order execution. The review found that the CT class of
Floor Trader had not executed any transactions on the Floor as a result
of the non-usage of the CT license and therefore provided no
contribution to the quality of the NYSE Market.
From May 2004 to December 2004, RCMM trading volume comprised only
.018% of the total NYSE trading volume for that time period. In 2005,
the year that the Moratorium was implemented, RCMM trading volume
comprised only .017% of the total NYSE trading volume for the year. In
2006, the RCMM trading volume comprised .008% of the total NYSE trading
volume for the year. After the largest RCMM firm ceased its business in
December 2006, RCMM trading volume in 2007 and 2008 comprised only
.001% of the NYSE total trading volume for each of those years.
From August 2005 through February 2008, RCMM's monthly average
trading volume for that time period never exceeded .021% of the
Exchange's total trading volume for that time period. On average during
this time period, RCMMs comprised only .006% of the NYSE's trading
volume. The Moratorium was then extended six times \15\ while the
Exchange continued its evaluation of CT and RCMM trading. A review of
the trading volume prior to and during the Moratorium indicates that
RCMM/CT trading volume was minimally impacted by the Moratorium.
---------------------------------------------------------------------------
\15\ See Securities Exchange Act Release Numbers 54140 (July 13,
2006), 71 FR 41491 (July 21, 2006) (SR-NYSE-2006-48); 54985
(December 21, 2006), 72 FR 171 (January 3, 2007) (SR-NYSE-2006-113);
55992 (June 29, 2007), 72 FR 37289 (July 9, 2007) (SR-NYSE-2007-57);
56556 (September 27, 2007), 72 FR 56421 (October 3, 2007) (SR-NYSE-
2007-86); 57072 (December 31, 2007), 73 FR 1252 (January 7, 2008)
(SR-NYSE-2007-125); 57601 (April 2, 2008), 73 FR 19123 (April 8,
2008) (SR-NYSE-2008-22). The Moratorium was also amended to grant
RCMM firms the ability to replace a RCMM who relinquishes his or her
registration and ceases to conduct business as a RCMM during the
moratorium, with a newly qualified and registered RCMM. See
Securities Exchange Act Release No. 53549 (March 24, 2006), 71 FR
16388 (March 31, 2006) (SR-NYSE-2006-11).
---------------------------------------------------------------------------
On October 24, 2008, the Commission approved the Exchange's new
market model filing (``Next Generation NYSE'').\16\ The Next Generation
NYSE rule and technology changes: (i) Provided market participants with
additional abilities to post hidden liquidity on Exchange systems; (ii)
created a Designated Market Maker (``DMM''), and phased out the NYSE
specialist; and (iii) enhanced the speed of execution through
technological enhancements and a reduction in message traffic between
Exchange systems and its DMMs. In light of the implementation of the
Next Generation NYSE, the Exchange requested an extension of the
Moratorium to evaluate the viability of the RCMMs and CTs in the
proposed New Generation NYSE.\17\
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\16\ See Securities Exchange Act Release No. 58845 (October 24,
2008), 73 FR 64379 (October 29, 2008) (SR-NYSE-2008-46).
\17\ See Securities Exchange Act Release Numbers 58033 (June 26,
2008), 73 FR 38265 (July 3, 2008) (SR-NYSE-2008-49); 58713 (October
2, 2008), 73 FR 59024 (October 8, 2008) (SR-NYSE-2008-96); 59069
(December 8, 2008), 73 FR 76081 (December 15, 2008) (SR-NYSE-2008-
124).
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[[Page 17704]]
The Next Generation NYSE is currently operating as a pilot
scheduled to end on October 1, 2009. For the time period of July 2008
to December 2008, RCMM and CT average trading volume did not exceed
.0011% of the Exchange's total trading volume per month for that time
period. On average over these six months, RCMMs comprised only .001% of
the NYSE's trading volume. The review found that the CT class of Floor
Trader still had not executed any transactions on the Floor as a result
of the non-usage of the CT license and therefore provided no
contribution to the market quality on the NYSE. In 2009, RCMM trading
is reported to comprise approximately .001% of the total NYSE trading
volume to date.
In light of these statistics, the Exchange has concluded that the
level of participation of the RCMMs and CTs no longer serve as viable
supplemental market makers because they no longer contribute
significantly to the overall liquidity available on the NYSE.
In addition to reviewing the trading statistics of the RCMMs and
the sole inactive CT, NYSE Market and NYSE Regulation reviewed the
technology, operational and regulatory costs required to adequately
support and surveil RCMM and CT trading activity in a predominantly
electronic trading environment. The review included the projected costs
for trading system enhancements for RCMM and CT trading, the cost of
continued development of surveillance technology and procedures, and
staff training and hours spent in these efforts. The NYSE's trading
systems, including the hand-held devices used by Floor brokers on the
NYSE, were not designed to facilitate trading by RCMMs and CTs under
special supplemental market-making rules enacted when the NYSE was a
manual trading center in which RCMMs and CTs traded on paper. To
develop technology specifically designed to comport with the RCMM and
CT trading rules in the context of Next Generation NYSE would not be
cost effective in view of the minimal current trading volume of the
five RCMMs and the nonexistent trading volume of the one registered CT.
The fundamental changes in the securities markets generally and in the
NYSE trading model in particular since the RCMM and CT rules were first
enacted in the late 1970s and early 1980s have resulted in much higher
trading volumes and message traffic through NYSE systems. The RCMM and
CT rules were enacted for a marketplace that functioned much
differently than today's high speed and high volume trading
environment.
There are now new opportunities for market participants to
efficiently access the NYSE market. The NYSE has developed a new class
of electronic liquidity providers, Supplemental Liquidity Providers
(``SLPs'')\18\ that has largely supplanted the role once filled by
RCMMs and CTs. SLPs are off-Floor entities that quote and trade on the
NYSE electronically. The operation of SLPs is intended to provide
incentives for quoting and to add competition to the existing group of
Floor-based liquidity providers, the DMMs. An SLP is required to quote
at the National Best Bid (``NBB'') or the National Best Offer (``NBO'')
at least 5% of the trading day for each assigned security in round lots
to maintain its status as an SLP. If an SLP posts liquidity in its
assigned securities that results in an execution, the Exchange will pay
the SLP a financial rebate per share for such executions provided that
the SLP meets its monthly quoting requirement for rebates averaging 3%
at the NBB or NBO in its assigned securities in round lots. The
Exchange believes that this rebate program will encourage SLPs to
aggressively provide liquidity to the NYSE market and will also provide
customers with the premier venue for price discovery, competitive quote
and price improvement.
---------------------------------------------------------------------------
\18\ See Securities Exchange Act Release No. 58877 (October 29,
2008), 73 FR 65904 (November 5, 2008) (SR-NYSE-2008-108). See also
NYSE Rule 1600.
---------------------------------------------------------------------------
Because of the electronic nature of SLP trading, the regulatory and
technology considerations that exist with maintaining CTs and RCMMs as
classes of Floor Traders on the NYSE are not present. The intent behind
establishing the CT and RCMM classes of trading, i.e., providing
additional liquidity in the NYSE market, is now best fulfilled through
the SLP process. Given all of the above, the Exchange seeks to rescind
CTs and RCMMs as valid classes of Floor Traders.
The Exchange notes that while it is proposing the rescission of
RCMMs and CTs as classes of traders, it is not rescinding membership to
the Exchange. Those RCMMs and CTs currently trading on the Exchange
will continue to be Exchange members but will not be permitted to trade
for their proprietary accounts in their roles as RCMMs and CTs. RCMMs
and CTs will continue to have electronic access to the market and are
permitted to continue trading as a different class of trader subject to
regulatory requirements to change their respective business models.
IV. Conforming Changes to NYSE Rules 36, 98, 111, 123, 476A, 800, 900
and 1600
The Exchange seeks to make conforming amendments to NYSE Rules 36,
98, 111, 123, 476A, 800, 900 and 1600 to delete references to RCMMs and
CTs throughout the rule text.
V. Conclusion
RCMMs and CTs are no longer viable classes of Floor Traders due to
the significant evolution of the NYSE marketplace since the enactment
of the original rules establishing these classes of members. The
existing RCMMs and sole CT no longer meet the objectives of adding
depth and liquidity to the NYSE market and providing a degree of
competition to the NYSE DMMs. The Exchange concludes that these classes
of Floor Traders should be rescinded given the trading volumes
associated with CTs and RCMMs and the considerable costs to regulate
these classes of traders.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
and furthers the objectives of Section 6(b)(5) of the Act,\19\ in that
it is designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of, a free and open market
and a national market system, and, in general, to protect investors and
the public interest.
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to
[[Page 17705]]
90 days of such date if it finds such longer period to be appropriate
and publishes its reasons for so finding or (ii) as to which the self-
regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NYSE-2009-08 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2009-08. 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 the filing will also be available for
inspection and copying at the principal office of the self-regulatory
organization. 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-2009-08 and should be submitted on or before May 7, 2009.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-8732 Filed 4-15-09; 8:45 am]
BILLING CODE 8010-01-P