[Federal Register Volume 66, Number 221 (Thursday, November 15, 2001)]
[Notices]
[Pages 57498-57499]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28584]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45023; File No. SR-NYSE-2001-14]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change to Amend Rule 13 on XPress Quote 
Parameters

November 5, 2001.

I. Introduction

    On June 13, 2001, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change amending NYSE Rule 13 on XPress quote parameters. 
The proposed rule change was published for public comment in the 
Federal Register on July 18, 2001.\3\ The Commission received two 
comment letter regarding the proposed rule change.\4\ The Exchange 
submitted a letter responding to comments on October 19, 2001.\5\ This 
order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 44539 (July 11, 2001), 
66 FR 37509.
    \4\ Letter from Ari Burnstein, Associate Counsel, Investment 
Company Institute (``ICI'') to Jonathan G. Katz, Secretary, 
Commission, dated August 7, 2001 (``ICI Letter''); Letter from 
Junius W. Peake, Monfort Distinguished Professor of Finance, 
University of Northern Colorado, dated August 29, 2001 (``Peake 
Letter'').
    \5\ Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Jonathan G. Katz, Secretary, Commission, dated 
October 18, 2001 (``NYSE Letter'').

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[[Page 57499]]

II. Description of the Proposed Rule Change

    The Exchange proposes to amend NYSE Rule 13.30 to: (i) reduce the 
minimum size of XPress orders and quotes from 25,000 shares to 15,000 
shares; and (ii) reduce the time period for designation as an XPress 
quote from 30 seconds to 15 seconds.

III. Comments

    The Commission received two comment letters from the Investment 
Company Institute (``ICI'') and Junius W. Peake (``Peake'').\6\ The ICI 
stated that the Institutional XPress system does not adequately respond 
to the problems faced by institutional investors trading on the NYSE. 
The ICI stated that the proposal to reduce the minimum XPress order and 
quote size and to reduce the minimum display period for XPress quote, 
although a small improvement, does not address the issues of inadequate 
protection of limit orders placed on the Exchange's limit order book 
and the inability of investors to interact with those orders. The ICI 
stated that the NYSE should eliminate the required time display for 
quotes to qualify as XPress, make XPress orders ineligible for price 
improvement, and allow XPress orders to reach through to orders on the 
book below the best bid and offer.
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    \6\ See supra note 4.
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    In response to the ICI Letter, the NYSE stated that the ICI's 
suggested changes would ``result in automatic execution of large-size 
orders against contra side interest that is both reflected in the 
current quotation, and reflected as away from the market limit orders 
on the limit order book that have never been exposed to the auction 
market.'' \7\ The Exchange stated that these modifications would 
redefine the Exchange's agency auction market structure and would 
disrupt its auction market price discovery mechanism. The Exchange also 
stated that requiring XPress orders to be exposed to the market for 
price improvement opportunities is essential ``because it affords the 
opportunity for the most advantageous price to the XPress order, and it 
allows other market participants, who may * * * not wish to show their 
interest in the displayed quotation, to interact with the XPress order 
at the improved price.'' Finally, the Exchange stated that the ICI's 
proposal to allow XPress orders to penetrate the limit order book would 
``distort the auction market pricing mechanism'' and ``would result in 
executions at prices away from the current market, with no opportunity 
for other market participants to interact with XPress orders at the 
away from the market prices unless they expose their interest on the 
limit order book.''
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    \7\ See NYSE Letter, supra note 5.
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    Peake supported the ICI's position, but stated that the ICI ``did 
not go far enough in criticizing the NYSE's system.'' In addition, 
Peake stated, among other things, that ``[t]he NYSE's system continues 
to favor its specialists by giving them time to react to bids and 
offers sent to them before requiring execution.'' Peake also stated 
that ``[m]any institutional investors are reluctant to expose their 
orders to the Floor, since it provides a golden opportunity for those 
with advance information to front run investors' orders, either for 
themselves or for their favored customers.''
    In response to the Peake Letter, the NYSE stated that the NYSE's 
market structure does not favor specialists by allowing them to react 
to bids and offers before executing them. According to the Exchange, 
the specialist ``must expose all agency orders to the auction, 
represent them in accordance with the principles of agency law, and may 
not trade for his or her own account at prices at which he or she holds 
an executable agency order.'' In addition, the Exchange stated that the 
XPress system addresses the issue of front running by ``freezing the 
contra side of the market from further auction trading once the XPress 
order is announced.''

IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange. In particular, 
the Commission finds that the proposed rule change is consistent with 
section 6(b)(5) of the Act \8\ which requires an Exchange to 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 public interest.\9\ The Commission also finds that 
the proposed rule change is consistent with section 11A(a)(1)(C)(i) of 
the Act \10\ which states that it is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure economically efficient execution of 
securities transactions.
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    \8\ 15 U.S.C. 78f(b)(5).
    \9\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78k-1(a)(1)(C)(i).
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    The Commission believes that by reducing the required number of 
shares for XPress orders and quotes and the minimum display requirement 
for XPress quotes, the proposed rule change should result in more 
orders and quotes being XPress eligible, which should help to assure 
the economically efficient execution of securities transactions and 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. In addition, the Commission 
believes that the 15 second display requirement should continue to 
provide brokers and non-XPress orders the opportunity to interact with 
the quote before it becomes XPress eligible.
    The Commission finds that the Exchange has addressed the most 
significant concerns raised by commenters.\11\ The Commission believes 
that the proposed parameters of the XPress system are appropriate and 
within the Exchange's business discretion. Moreover, the Commission 
believes that it is appropriate for the Exchange to attempt to balance 
the needs of institutional investors with the Exchange's desire to 
preserve its agency auction market structure.
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    \11\ See supra section III.
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-NYSE-2001-14) is approved.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-28584 Filed 11-14-01; 8:45 am]
BILLING CODE 8010-01-M