[Federal Register Volume 62, Number 168 (Friday, August 29, 1997)]
[Notices]
[Pages 45900-45901]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23003]



[[Page 45900]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38963, File No. SR-NYSE-97-24]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the New York Stock Exchange, 
Inc. Relating to Permanent Adoption of a Program to Display Price 
Improvement on the Execution Report Sent to the Entering Firm

August 22, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on July 23, 
1997, the New York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory 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 proposed rule change makes permanent the program initially 
filed as a pilot in Securities Exchange Act Release Nos. 36421 (October 
26, 1995), 60 FR 55625 (November 1, 1995) (File No. SR-NYSE-95-35) and 
36489 (November 16, 1995), 60 FR 58123 (November 24, 1995) (File No. 
SR-NYSE-95-37).\1\ This is a program to calculate and display, on the 
execution reports sent to member firms, the dollar amounts realized as 
savings to their customers as a result of price improvement in the 
execution of their orders on the Exchange.\2\
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    \1\ The pilot program subsequently was extended in Securities 
Exchange Act Release Nos. 37151 (April 29, 1996), 61 FR 20302 (May 
6, 1996) (File No. SR-NYSE-96-10) (extension of pilot until October 
24, 1996); 37812 (October 12, 1996), 61 FR 54477 (October 18, 1996) 
(File No. SR-NYSE-96-28) (extension of pilot until April 24, 1997); 
and 38551 (April 28, 1997), 62 FR 25011 (May 7, 1997) (File No. SR-
NYSE-97-13) (extension of pilot until July 24, 1997).
    \2\ The Commission notes that the NYSE's use of the term ``price 
improvement'' in this notice differs from the Commission's recent 
use of the term. See infra Section V.
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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 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 self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

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

1. Purpose
    The purpose of this proposed rule change is to make permanent a 
pilot program for calculating and displaying, on execution reports sent 
to member firms entering orders, the dollar value saved by their 
customers as a result of price improvement of orders executed on the 
Exchange. This program does not in any way affect the actual execution 
of orders. The Exchange refers to this calculated dollar savings as the 
``NYSE PRIME SM.\3\
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    \3\ NYSE PRIME is a service mark of the New York Stock Exchange, 
Inc.
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    Data from the operation of the pilot for the first six months of 
1997 show price improvement on 23.4% of the execution reports for 
eligible post-opening market orders entered on the Exchange.\4\
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    \4\ The Commission notes that this figure has not been netted to 
reflect price disimprovement, and should not be used for best 
execution evaluations. See infra Section V.
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    The Exchange is revising NYSE PRIME to calculate whether there has 
been price improvement by comparing the execution price to the 
quotation at the time the order entered the system and at the time the 
order is reported following the execution. The Exchange will indicate 
that there is price improvement only if the execution is superior to 
the quotation in both calculations. The amount of any price improvement 
reported will be the lesser of the two calculations. The Exchange has 
committed to having this ``double check'' on line by the fourth quarter 
of 1997.
    NYSE PRIME currently utilizes the Best Pricing Quote (``BPQ''), 
which has been used in the calculation of odd lot pricing, to determine 
price improvement.\5\ The Exchange is developing a capacity to utilize 
the national best bid or offer (``NBBO'') for calculating NYSE PRIME. 
The Exchange has committed to begin using the NBBO in the first half of 
1998.
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    \5\ See Securities Exchange Act Release No. 27981 (May 2, 1990), 
55 FR 19407 (May 9, 1990) (File No. SR-NYSE-90-06). The BPQ is the 
highest bid and lowest offer, respectively, disseminated by the 
Exchange or another market center participating in the Intermarket 
Trading System (``ITS'') at the time the order is received by the 
Exchange. In order to protect against the inclusion of incorrect or 
stale quotations in the BPQ, however, the Exchange includes 
quotations in a stock from other markets only if: (1) The stock is 
included in ITS in that other market; (2) the quotation size is for 
more than 100 shares; (3) the bid or offer is not more than one-
quarter point away from the NYSE's bid or offer; (4) the quotation 
conforms to NYSE Rule 62 governing minimum variations; (5) the 
quotation does not create a locked or crossed market; (6) the market 
disseminating the quotation is not experiencing operational or 
system problems with respect to the dissemination of quotation 
information; and, (7) the quotation is ``firm'' pursuant to Rule 
11Ac1-1 under the Act, 17 CFR 240.11Ac1-1, and the market's rules.
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    NYSE PRIME is available to all member organizations \6\ for intra-
day market orders entered via the Exchange's SuperDOT system that are 
not tick sensitive and are entered from off the Floor.\7\
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    \6\ The Commission notes that member organizations electing to 
receive NYSE PRIME information are required to enter into an 
agreement with the Exchange regarding the use of NYSE PRIME 
information and the NYSE PRIME service mark. Among other things, the 
agreement provides that in any publication or use of NYSE PRIME 
information (unless the Exchange otherwise agrees), the member 
organization must employ the NYSE PRIME service mark.
    \7\ Also excluded from the NYSE PRIME feature are booth entered 
or booth routed orders, booked orders, combination orders (e.g., 
switch orders) and orders diverted to sidecar.
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    The Exchange believes that the NYSE PRIME enhances the information 
made available to investors and improves their understanding of the 
auction market.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \1\ that an Exchange have rules that 
are designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, in general, to protect 
investors and the pubic interest. This proposed rule change is designed 
to perfect the mechanism of a free and open market in that it enhances 
the information provided to investors by displaying to them the dollar 
value of the price improvement their orders may have received when 
executed on the NYSE.
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    \1\ 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.

[[Page 45901]]

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

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

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

    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) does not have the effect of limiting access to or availability 
of any Exchange order entry or trading system, the NYSE PRIME program 
has become effective pursuant to Section 19(b)(3)(A) of the Act \9\ and 
Rule 19b-4(e)(5) thereunder.\10\ At any time within 60 days of the 
filing of such 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.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
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 at the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-NYSE-97-24 and should be 
submitted by September 19, 1997.

V. Commission Statement

    As a general matter, price improvement occurs when a customer order 
is executed at a price that is superior to the best contra-side bid or 
ask quote prevailing among the markets and market centers trading the 
security at the time the order was received and executed. Moreover, the 
Commission has noted that it also is possible for a customer order to 
receive negative price ``improvement,'' or price disimprovement, 
instead of price improvement.\11\ Price disimprovement occurs when an 
order is executed at a price that is inferior to the best contra-side 
bid or ask quote prevailing among the markets and market makers trading 
the security at the time the order was received and executed.
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    \11\ See Securities Exchange Act Release No. 37619A (September 
6, 1996), 61 FR 48290 (September 12, 1996) (File No. S7-30-95) 
(``Order Handing Rules Adopting Release''); SEC, Report on the 
Practice of Preferencing (``Preferencing Study'') (April 11, 1997) 
at Part V.D.
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    The Commission previously has noted the importance of the 
opportunity for price improvement as a factor in best execution, 
particularly with regard to broker-dealers routing orders for automatic 
execution. In the Order Handling Rules Adopting Release, the Commission 
stated that where material differences exist between the price 
improvement opportunities offered by markets or market makers, these 
differences must be taken into account by the broker-dealer. The 
Commission made clear that in evaluating price improvement 
opportunities, a broker-dealer must consider, among other things, both 
the amount of price improvement and price disimprovement present in 
each market.\12\ More recently, the Commission's Preferencing Study 
analyzed the amount of price improvement and disimprovement on the NYSE 
and the regional exchanges. The Preferencing Study found that a 
significant amount of price disimprovement occurred on each 
exchange.\13\
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    \12\ Order Handling Rules Adopting Release at n.357.
    \13\ Compare Preferencing Study Tables V-8A to C with Tables V-
9A to C. Of course, the Preferencing Study analyzed price 
improvement and disimprovement in the aggregate. In evaluating 
execution quality across markets, it is important that broker-
dealers consider that execution quality may vary for different types 
of orders and securities. See Preferencing Study at nn. 313 and 314.
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    Therefore, a program such as NYSE Prime, which only provides price 
improvement numbers, should not be used as the basis for best execution 
evaluations. NYSE Prime provides some information to firms on a 
transaction by transaction basis. To be useful for best execution 
evaluations, however, any price improvement information disseminated 
also should reflect the amount of price disimprovement that occurs on 
that market. Accordingly, a market providing price improvement 
statistics on an aggregate basis should indicate the amount of price 
disimprovement as well as the amount of price improvement.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-23003 Filed 8-28-97; 8:45 am]
BILLING CODE 8010-01-M