[Federal Register Volume 64, Number 97 (Thursday, May 20, 1999)]
[Notices]
[Pages 27610-27612]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12666]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41397; File No. SR-NYSE-97-18]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by the New York Stock Exchange, Inc. Relating to 
Specialists' Entry of Bids and Offers in Electronic Communications 
Networks and Other Market Centers

May 13, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 2,

[[Page 27611]]

1997, the New York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') 
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 prepared by the Exchange. On 
November 19, 1997, the Exchange submitted Amendment No. 1 to the 
proposed rule change.\3\ On February 10, 1999, the Exchange submitted 
Amendment No. 2 to the proposed rule change.\4\ 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\ In Amendment No. 1, NYSE modified references the Exchange 
has made to the Commission's Quote Rule.
    \4\ In Amendment No. 2, NYSE removed all references to the 
Commission's Quote Rule. NYSE also eliminated its proposed exemption 
to the proposed restriction on specialists, relating to trading 
orders entered into an electronic communications network (``ECN'') 
or other market centers by an upstairs trading operation conducted 
by a specialist member organization.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change would amend NYSE Rule 104.10 (``Dealings 
By Specialists'') to place certain restrictions on specialists' entry 
of bids and offers in ECNs.\5\ Below is the text of the proposed rule 
change. Proposed additions are italicized.
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    \5\ An ECN is defined in paragraph (a)(8) of Rule 11Ac1-1 under 
the Act.
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    Rule 104
Dealings by Specialists
* * * * *
    No change .10(1)-(9).
    .10 (10)  A specialist's bid or offer in a specialty stock on the 
Exchange may not be inferior to the specialist's market maker bid or 
offer disseminated by an electronic communications network (as that 
term is defined in Securities and Exchange Commission Rule 11Ac1-
1(a)(8)) or any other market center. A specialist may not disseminate a 
market maker bid or offer on another market center or electronic 
communications network at a price at which Exchange rules would 
preclude dissemination of such bid or offer on the Exchange.

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
    The Exchange proposes to amend NYSE Rule 104.10 to indicate that a 
specialist \6\ has a duty to quote his or her best bid and offer on the 
Exchange. Under the proposed rule, a specialist's bid or offer for a 
specialty stock on the Exchange cannot be inferior to his or her bid or 
offer made in an ECN or another market center.\7\ Thus, if a specialist 
places a bid or offer into an ECN or on another market center at a 
price superior to the then disseminated best bid or offer on the 
Exchange, the specialist would be required to communicate \8\ such 
price to the Exchange.
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    \6\ The Exchange defines ``specialist'' as an individual 
specialist on the floor rather than specialist member organizations. 
Per telephone conversation between Donald Siemer, Director, Market 
Surveillance, NYSE, Betsy Minkin, Senior Project Specialist, Market 
Surveillance, NYSE, Jeffrey Schwartz, Special Counsel, Market 
Regulation, SEC, and Heather Traeger, Attorney, Market Regulation, 
SEC on May 12, 1999.
    \7\ ``Another market center'' means a registered national 
securities exchange or registered national securities association.
    \8\ The Exchanges views ``communicate'' in this context to 
require the specialist to make the price, whether bid or offer, 
available for execution on the Exchange. In the exchange's view, the 
specialist would then be liable for executions at this price on both 
the Exchange and on the ECN or other market center. Per telephone 
conversation between Donald Siemer, Director, Market Surveillance, 
NYSE, Betsy Minkin, Senior Project Specialist, Market Surveillance, 
NYSE, Jeffrey Schwartz, Special Counsel, Market Regulation, SEC, and 
Heather Traeger, Attorney, Market Regulation, SEC on May 12, 1999.
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    The Exchange's Specialist Job Description requires a specialist, 
when acting as agent for orders entrusted to him or her, ``to ensure 
the timely and best possible execution in accordance with the terms of 
the order and the rules and policies of the Exchange.'' \9\ The 
Exchange believes that because a specialist is required to make markets 
on the Exchange, the specialist's activities should be focused 
primarily on committing capital and market-making on the Floor of the 
Exchange. The Exchange maintains that the specialist must make 
available on the Exchange his or her best bid or offer in the stocks in 
which he or she specializes.
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    \9\ The Specialist Job Description is found in the NYSE's 1997 
Floor Official Manual, Section 9. Section 9(II)(A) provides:
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II. Primary Duties

    (A) Agency Function--In view of the specialist's central position 
in the Exchange's continuous two-way agency auction market, a 
specialist should:

    Act as agent on behalf of orders entrusted to the specialist, 
hold the interests of such orders above the specialist's own, and 
properly represent each order, regardless of its size or source, in 
the marketplace to ensure the timely and best possible execution in 
accordance with the terms of the order and the rules and policies of 
the Exchange.

    See also Securities Exchange Act Release No. 25398 (February 26, 
1988) 53 FR 7458 (March 8, 1988), and Securities Exchange Act Release 
No. 26523 (February 7, 1989) 54 FR 6631 (February 13, 1989), the notice 
and order approving the revised Specialist Job Description. In 
addition, in November 1989, the Commission approved a proposal further 
revising the Specialist Job Description. See Securities Exchange Act 
Release No. 27427 (November 7, 1989), 54 FR 47628 (November 15, 1989).
    In addition, the proposed rule change would prohibit a specialist 
from entering a bid or offer for a specialty stock in an ECN or on 
another market center at a price variation that specialist would not be 
permitted to quote or trade under Exchange rules. The Exchange 
represents that this proposed provision will facilitate the 
specialist's compliance with the obligation to make his or her best bid 
and offer on the Exchange Floor. If the specialist placed a superior 
priced bid or offer in an ECN \10\ or other market center at a 
variation that could not be quoted or traded on the Exchange, the 
Exchange believes that the specialist would be unable to satisfy his or 
her specialist obligations (i.e., trading at his or her best bid or 
offer with contra-side marketable orders received on the Exchange). 
Alternatively, if the specialist placed in an ECN or other market 
center an inferior bid or offer at a variation not traded on the 
Exchange which was subsequently executed on the ECN or other market 
center, the specialist, consistent with his or her

[[Page 27612]]

responsibilities as agent, would be required to satisfy any superior-
priced (higher bid or lower offer) orders on his or her book at the 
price of his or her trade off the Exchange. This could not be done at a 
price variation that could not be traded or quoted on the Exchange.
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    \10\ The Exchange views the proposal as applying only to 
specialists when they add liquidity on an ECN or another market 
center (i.e., entering a new bid or offer) and not when they remove 
liquidity (i.e., hitting a pre-existing bid or offer) or enter 
``fill-or-kill'' orders. Per telephone conversation between Donald 
Siemer, Director, Market Surveillance, NYSE, Betsy Minkin, Senior 
Project Specialist, Market Surveillance, NYSE, Jeffrey Schwartz, 
Special Counsel, Market Regulation, SEC, and Heather Traeger, 
Attorney, Market Regulation, SEC on May 12, 1999.
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    This proposed rule change would apply to all bids and offers made 
by a member acting as a specialist on the Floor of the Exchange in any 
of the specialty stocks in which he or she is registered.
2. Statutory Basis
    The Exchange states that the basis under the Act for the proposed 
rule change is the requirement under Section 6(b)(5) \11\ 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 in general, to protect investors and the 
public interest. The Exchange believes the proposed amendment to Rule 
104.10 accomplishes these ends in that it would ensure that orders 
entered on the Exchange would be able to receive the best price that 
the specialist was quoting.
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    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange represents that the proposed rule change will impose 
no 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 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. In particular, the Commission is 
seeking comment on the following issues:
    1. Whether the proposed provision prohibiting specialists to quote 
in pricing increments not permitted on the Exchange would have an anti-
competitive impact on specialists or other trading mechanisms and if 
so, whether the anti-competitive impact is necessary to ensure 
specialists quote their best prices publicly.
    2. What impact this proposal is likely to have when the markets 
begin quoting in decimals.
    Persons making written submissions should file six copies thereof 
with the Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. 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 Room. 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-97-18 and should be 
submitted by July 6, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-12666 Filed 5-19-99; 8:45 am]
BILLING CODE 8010-01-M