[Federal Register Volume 68, Number 1 (Thursday, January 2, 2003)]
[Notices]
[Pages 133-139]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-33118]



[[Page 133]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47091; File No. SR-NYSE-2002-55]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by the New York Stock Exchange, Inc. Relating to the 
Dissemination of Liquidity Quotations

December 23, 2002.
    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 October 28, 2002, 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 December 20, 2002, the Exchange filed an amendment to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated December 19, 2002 (``Amendment No. 
1''). Amendment No. 1 replaces the filing in its entirety and 
provides, in the proposed rule text and the purpose section of the 
filing, further details on the display of additional quotations in 
stocks to show market depth.
    \4\ The Commission has received one comment letter on the 
proposed rule change. See letter from Thomas F. Secunda, Bloomberg, 
L. P., to Jonathan G. Katz, Secretary, Commission, dated December 
16, 2002 (``Bloomberg Letter''). The commenter notes that the NYSE 
intends to disseminate liquidity quotations under the vendor and 
subscriber contracts that govern NYSE OpenBook service. The 
commenter believes that these contracts should be filed as a 
proposed rule change, pursuant to Section 19(b) of the Act. 15 
U.S.C. 78s(b). The commenter also believes that these contracts 
inappropriately discriminate against vendors and that the 
dissemination of liquidity quotations under such agreements raises 
greater substantive issues than those raised by the NYSE's 
restrictions on redissemination of its NYSE's OpenBook service 
because liquidity quote information is ``* * * as critical as the 
national best bid and offer to those wishing to submit orders.''
    The Commission notes that in approving the NYSE's OpenBook 
service, the Commission did not also consider and approve the vendor 
agreements because such agreements were not a part of the NYSE's 
OpenBook proposal. Indeed, in its order approving the NYSE's 
OpenBook service, the Commission stated that the NYSE's restrictions 
on vendor redissemination and enhancement, integration or 
consolidation of OpenBook data are on their face discriminatory, and 
may raise fair access issues under the Act. See Securities Exchange 
Act Release No. 45138 (December 18, 2001), 66 FR 66491 (December 26, 
2001). We do not believe that it is necessary to resolve the issue 
of whether the contracts need to be filed under 19(b) prior to 
publishing this proposed rule change for comment because the NYSE's 
proposal on liquidity quotations, like its previous proposal on the 
OpenBook service, does not include, and therefore does not seek 
approval of, the agreements to which the commenter objects.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules to permit the display and 
use of quotations in stocks traded on the Exchange to show additional 
depth in the market for those stocks. The additional quotations will be 
referred to as ``liquidity quotes.'' Below is the text of the proposed 
rule change. Proposed new language is italicized; proposed deletions 
are in brackets.
* * * * *

Dissemination of Quotations

    Rule 60 (a)(1) For purposes of this rule, the terms ``quotation 
vendor'', ``bid'', ``offer'', ``reported security'', ``quotation 
size'', ``published bid'', ``published offer'', ``published quotation 
size'', ``make available'', ``aggregate quotation size'' and 
``specified persons'' shall have the meaning given to them in SEC Rule 
11Ac1-1.
    (2) For the purposes of this rule and SEC Rule 11Ac1-1 as applied 
to the Exchange and members on the Floor, the term ``responsible broker 
or dealer'' shall mean, with respect to any bid or offer for any 
reported security made available by the Exchange to quotation vendors, 
the specialist in such reported security, who shall be the responsible 
broker or dealer to the extent of the quotation size he specifies.
    (b) Each member who is a responsible broker or dealer on the Floor 
shall, in addition to meeting his obligations as set forth in paragraph 
(c) of SEC Rule 11Ac1-1 as applicable to such member under this rule, 
also abide by such rules and procedures adopted by the Exchange, in 
order to enable the Exchange to meet its quotation dissemination 
requirements under paragraph (b) of SEC Rule 11Ac1-1 as applicable to 
the Exchange under this rule.
    (c) With respect to paragraph (b) of SEC Rule 11Ac1-1, the Exchange 
shall, at all times it is open for trading, collect, process and make 
available to quotation vendors the highest bid and the lowest offer, 
and the quotation size or the aggregate quotation size associated 
therewith, in each reported security in accordance with paragraphs (e) 
and (g) below (excluding any such bid or offer which is executed 
immediately after being made in the crowd and any such bid or offer 
which is cancelled or withdrawn if not executed immediately after being 
made) except during any period when trading in such reported security 
has been suspended or halted, or prior to the commencement of trading 
in such reported security on any trading day. Bids and offers on the 
Exchange, and associated quotation sizes and aggregate quotations 
sizes, shall be collected, processed and made available to quotation 
vendors as follows:
    (1) Normal Mode--Unless otherwise designated pursuant to the 
provisions of subparagraphs (c)(2), the market on the Floor for each 
reported security shall be considered to be in a ``normal mode''. While 
such market is in a normal mode, only the specialist shall determine 
the size to be communicated to the Reporter and shall be deemed the 
``responsible broker or dealer'' with respect to any bid or offer made 
available by the Exchange to quotation vendors.
    (2) Non-Firm Mode--With respect to subparagraph (b)(3) of SEC Rule 
11Ac1-1, a Floor Governor, Senior Floor Official, or Executive Floor 
Official (or two Floor Officials in the event a Floor Governor, Senior 
Floor Official, or Executive Floor Official is not available) shall 
have the power to determine that the level of trading activity or the 
existence of unusual market conditions are such that the Exchange is 
incapable of collecting, processing and making available to quotation 
vendors bids, offers and quotation sizes with respect to one or more 
reported securities in a manner which accurately reflects the current 
state of the market on the Floor. Such officials are sometimes referred 
to in this subparagraph (2) as the ``Initiating Official(s)''. Upon 
making of such a determination, the specialist shall designate the 
market in such security to be in a ``non-firm mode'', which shall 
remain in effect for a period not to exceed 30 minutes pending review 
as described below.
    Whenever a Floor Governor, Senior Floor Official, or Executive 
Floor Official or two Floor Officials make any such determination with 
respect to any reported security, he or they shall immediately notify 
the Market Surveillance Division of the Exchange. During any period 
that the market in a reported security is in a non-firm mode, members 
on the Floor shall be relieved of their obligations under SEC Rule 
11Ac1-1 as applicable to such members under this Rule 60 with respect 
to such reported security, but the specialist shall report bids and 
offers or revised bids and offers in such reported security, for 
publication, on a ``best efforts'' basis.
    During any period that the market in a reported security is in a 
non-firm mode, the Initiating Official(s) shall

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monitor the activity or condition which formed the basis for his or 
their determination. No more than 30 minutes after such market has been 
designated to be in a non-firm mode, the specialist shall review the 
condition of such market with the Initiating Official(s). In the event 
that the Initiating Official(s) are not available, the specialist shall 
review such condition with another Floor Governor, Senior Floor 
Official, or Executive Floor Official (or two Floor Officials if a 
Floor Governor, Senior Floor Official, or Executive Floor Official is 
not available). Continuation of the non-firm mode for longer than 30 
minutes shall require the reaffirmation of the reviewing Floor 
Governor, Senior Floor Official, or Executive Floor Official or Floor 
Officials. Such review and reaffirmation shall occur not less 
frequently than every 30 minutes thereafter while the non-firm mode is 
in effect.
    When the Exchange is once again capable of collecting, processing 
and making available to quotation vendors bids, offers, quotations 
sizes and aggregate quotation sizes with respect to a reported security 
that is in a non-firm mode in a manner which accurately reflects the 
current state of the market on the Floor, the Initiating Official(s) 
or, in the event he or they are not available, another Floor Governor, 
Senior Floor Official, or Executive Floor Official (or two Floor 
Officials if a Floor Governor, Senior Floor Official, or Executive 
Floor Official is not available) shall immediately renotify the Market 
Surveillance Division and the specialist in such reported security 
shall designate the market therein to be in a normal mode. Members on 
the Floor shall thereupon once again be obligated under SEC Rule 11Ac1-
1 as applicable to such members under this Rule 60 with respect to such 
reported security.
    (d) In addition, the Exchange may disseminate a ``liquidity bid'' 
(at a price and size below the highest bid) and/or a ``liquidity 
offer'' (at a price and size above the lowest offer). The liquidity bid 
and liquidity offer shall reflect all trading interest represented in 
the highest bid and lowest offer, as well as trading interest 
(represented by orders on the specialist's book, members in the Crowd, 
and the specialist as dealer) executable at prices down to (in the case 
of a liquidity bid) the liquidity bid price, or up to (in the case of a 
liquidity offer) the liquidity offer price. Depending on market 
conditions in any particular security, the highest bid or offer and the 
liquidity bid or offer may be the same. The liquidity bid and offer 
shall be ``firm quotations'' available for orders to trade with. The 
specialist shall be the ``responsible broker-dealer,'' for all 
liquidity bids and offers. The Exchange shall not disseminate a 
liquidity bid or offer during any period when trading in the subject 
security has been suspended or halted, or prior to the commencement of 
trading in such security on any trading day. The provisions of Rule 
60(c)(1) and (2) shall be applicable to liquidity bids and liquidity 
offers.
(i) Execution of Market Orders When Liquidity Bid or Offer Is 
Disseminated
    In the case of a market order to sell of a size greater than the 
highest bid size, the order shall be executed against such highest bid 
(or crossed by the specialist if agent for the order) with the balance 
of the order being executed (to the extent possible based on the size 
of the liquidity bid) at the higher of the liquidity bid price or the 
price at which orders on the book would not be traded-through. Auction 
market crossing procedures should be followed, as appropriate, to 
ensure proper execution of orders. The same principles apply in the 
case of a market order to buy.
(ii) Execution of Limit Orders When Liquidity Bid or Offer Is 
Disseminated
    In the case of a limit order to sell whose size is greater than the 
highest bid size, but which is limited to a price executable at or 
above the liquidity bid price, the order shall be executed first 
against the highest bid price (or crossed by the specialist if agent 
for the order), with the balance of the order being executed (to the 
extent possible based on the size of the liquidity bid) within its 
limit price at a price at which orders on the book would not be traded-
through. Auction market crossing procedures should be followed, as 
appropriate, to ensure proper execution of orders. The same principles 
apply in the case of a limit order to buy.
(iii) Execution of XPress Orders When Liquidity Bid or Offer Is 
Disseminated
    An XPress order may be priced at either the highest bid or offer 
price if XPress eligible) or the liquidity bid or offer price (if 
XPress eligible). An XPress order priced at the highest bid or offer 
price shall be executed in accordance with the Exchange's XPress order 
execution procedures. An XPress order to buy priced at the liquidity 
offer price shall be executed at the lower of the liquidity offer price 
or the price at which the XPress order can be filled without trading 
through orders on the book, unless price improvement can be offered to 
the XPress order in accordance with the Exchange's XPress order 
execution procedures. The same principles shall apply in the case of an 
XPress order to sell priced at the liquidity bid price.
    If the specialist receives two XPress orders within a nearly 
simultaneous time frame, one priced at the best bid (offer), and the 
other priced at the liquidity bid (offer), both orders shall be 
executed in accordance with the Exchange's procedures for the execution 
of XPress orders. Both orders shall be exposed to the Crowd for price 
improvement. Those portions of the orders that do not receive price 
improvement shall be executed against the XPress bids (offers), which 
may not then be traded against by other members pursuant to the 
Exchange's procedures for the execution of XPress orders.
    (e) Autoquoting of highest bid/lowest offer and automated 
adjustment of size of liquidity bid and offer. The Exchange will 
autoquote the NYSE's highest bid or lowest offer whenever a limit order 
is transmitted to the specialist's book at a price higher (lower) than 
the previously disseminated highest (lowest) bid (offer). When the 
NYSE's highest bid or lowest offer has been traded with in its 
entirety, the Exchange will autoquote a new bid or offer reflecting the 
total size of orders on the specialist's book at the next highest (in 
the case of a bid) or lowest (in the case of an offer) price. The size 
of any liquidity bid or offer shall be systemically increased to 
reflect any additional limit orders transmitted to the specialist's 
book at prices ranging from the liquidity bid or offer price to the 
highest bid (lowest offer). The size of any liquidity bid or offer 
shall be systematically decreased to reflect the execution of any limit 
orders on the specialist's book at prices ranging from the liquidity 
bid or offer price to the highest bid (lowest offer). However, de 
minimis increases or decreases in the size of limit orders on the book, 
as determined by the specialist, will not result in automated 
augmenting or decrementing of the size of the liquidity bid or offer 
where such bid or offer continues to reflect the actual size of limit 
orders on the book.
    In any instance where the specialist disseminates a proprietary bid 
(offer) of 100 shares on one side of the market, the bid or offer on 
that side of the market shall not be autoquoted. In such an instance, 
any better-priced limit orders received by the specialist shall be 
manually displayed, unless they are executed at a better price in a 
transaction being put together in the auction market at the time that 
the order is received.
    [(d)] (f) In addition to meeting its obligations as set forth in 
paragraph (b) of SEC Rule 11Ac1-1 as applicable to

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the Exchange under this Rule 60, the Exchange shall make available to 
quotation vendors and shall communicate to other specified persons the 
appropriate mode identifier in effect as to each reported security 
which shall, in the case of the initiation and termination of non-firm 
modes, effect the requisite notification and re-notification of 
specified persons under subparagraph (b)(3) of SEC Rule 11Ac1-1.
    [(e)] (g) (1) Each specialist shall promptly report in each 
reported security in which he is registered the highest bid and lowest 
offer made in the trading crowd in such security and the associated 
quotation size that he wishes to make available to quotation vendors.
    (2) Each specialist who is a responsible broker or dealer on the 
Floor shall:
    (i) Promptly report as to the reported security whenever a bid, 
offer or quotation size he previously reported is to be revised; and
    (ii) Promptly report as to the reported security whenever a bid 
and/or offer he previously reported is to be cancelled or withdrawn.

Supplementary Material

    .10 No specialist shall be deemed to be a responsible broker or 
dealer with respect to a published bid or offer that is erroneous as a 
result of an error or omission made by the Exchange or any quotation 
vendor. If a published bid or published offer is accurate but the 
published quotation size (or published aggregate quotation size, as the 
case may be) associated with it is erroneous as a result of an error or 
omission made by the Exchange or any quotation vendor, then the 
specialist who is responsible for the published bid or published offer 
shall be obligated to the extent set forth in paragraph (c) of Rule 
11Ac1-1 but only to the extent of one unit of trading in the reported 
security in question.
    .20 While the market for a reported security is in a ``normal 
mode'', the specialist shall honor any bid or offer then being 
displayed by quotation vendors which is erroneous, up to the quotation 
size then being so displayed, which has been displayed for six minutes 
or more on the Price Display Unit at the post. Provided, however, that 
the specialist shall not be required to honor such a bid or offer which 
is erroneous as to either price or size or both if:
    (i) As a matter or record, an execution, cancellation or update of 
such bid or offer was in effect or in process;
    (ii) In honoring such a bid or offer, the resulting transaction 
would violate applicable Exchange rules or federal regulations;
    (iii) Equipment failure prevents the specialist from monitoring 
such bid or offer; or
    (iv) The price sought upon such quotation is above the current bid 
or below the current offer, on the Floor, by (a) one-half point or more 
in the case of a reported security trading at $50 or less or (b) one 
point or more in the case of a reported security trading at more than 
$50.
* * * * *

Definitions of Orders

Rule 13

    .40 The minimum number of shares for an XPress order is [15,000 
shares] (i) 15,000 shares for an XPress order seeking to trade with the 
best bid or offer, and (ii) the size of the liquidity bid or offer for 
an XPress order seeking to trade with such liquidity bid or offer. With 
respect to the best bid or offer, the [The] published bid or offer must 
be at the same price for no less than 15,000 shares for at least 15 
seconds in order to be indicated as an XPress Quote. With respect to 
the liquidity bid or offer, the published bid or offer must be the same 
price for at least 15 seconds in order to be indicated as an XPress 
Quote.
* * * * *

Miscellaneous Requirements

Rule 123A

Supplementary Material

    .10 through .25--No Change.
    .30 A specialist may accept one or more percentage orders.--When 
accepting more than one order, the specialist must make every effort to 
inform the entering brokers that they will be participating with 
another order or orders. Information of this type would alert brokers 
to the fact that each order will do less than 50% of the volume. When 
the specialist is handling more than one percentage order, each such 
order will be on parity with the other. When an odd amount of shares is 
involved, for example, 300 shares, and a specialist holds two 
percentage orders, he must give the extra 100 shares to the broker 
having priority on a time basis. Therefore, all percentage orders given 
to a specialist must be time-stamped by the specialist at his Post 
location.
    If a specialist feels he cannot properly handle a number of 
percentage orders at one time, he should call in a Floor Official to 
discuss the situation.
    If so instructed by the entering broker(s), percentage orders to 
buy will be converted into regular limit orders for transactions 
effected on ``minus'' or ``zero minus'' ticks. Conversely, if so 
instructed by the entering broker(s), percentage orders to sell will be 
converted into regular limit orders for transactions effected on 
``plus'' or ``zero plus'' ticks.
    Special Conversion Instructions. In addition to the conversion 
instructions discussed immediately above, the entering broker(s) may 
further instruct the specialist that he may, but shall not be required 
to, convert a percentage order to buy into a regular limit order for 
transactions effected on ``zero plus'' and ``plus'' ticks. Conversely, 
the entering broker(s) may further instruct the specialist that he may, 
but shall not be required to, convert a percentage order to sell into a 
regular limit order for transactions effected on ``zero minus'' or 
``minus'' ticks. (These ticks are hereinafter collectively referred to 
as ``destabilizing ticks''.) Pursuant to these special conversion 
instructions, the specialist may convert a percentage order on a 
destabilizing tick only where (i) the transaction for which the order 
is being converted is for less than 10,000 shares or a quantity of 
stock having a market value of less than $500,000 and the price at 
which the converted percentage order is to be executed is no more than 
0.10 away from the last sale price; or (ii) the transaction for which 
the order is being converted is for 10,000 shares or more or a quantity 
of stock having a market value of $500,000 or more and the price at 
which the converted percentage order is to be executed is no more than 
0.25 away from the last sale price. [(i) the transaction for which the 
order is being converted is for 10,000 shares or more or a quantity of 
stock having a market value of $500,000 or more (whichever is less); 
and (ii) the price at which the converted percentage order is to be 
executed is no more than 0.25 point away from the last sale price; 
provided, however, that this price parameter may be modified, in 
appropriate cases, with the prior approval of a Floor Official and the 
written consent of the broker who entered the order.]
    The specialist shall not execute a converted percentage order 
pursuant to the preceding paragraph at consecutively higher or lower 
prices such that consecutive up or down ticks (as the case may be), 
follow one another in rapid succession, unless he obtains the prior 
approval of a Floor Governor, Senior Floor Official, or Executive Floor 
Official. In determining whether to grant such prior approval, the 
Floor Governor, Senior Floor Official, or Executive Floor Official 
shall consider any changes in overall market conditions, and any 
changes in buying or selling interest in

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the stock in question. Where a specialist reasonably believes, based on 
prevailing market conditions (for example, a brief period of time where 
there is an influx of buying/selling interest and a ``fast market'' 
condition) that it may be appropriate and necessary for him to convert 
percentage orders, on destabilizing ticks, in a series of trades which, 
while not consecutive, may be effected within a short period of time, 
the specialist shall first seek the approval of a Floor Governor, 
Senior Floor Official, or Executive Floor Official. In granting such 
approval, the Floor Governor, Senior Floor Official, or Executive Floor 
Official should, based on his evaluation of the buying/selling and 
contra-side interest in the market, determine a price a reasonable 
amount away from the market, to which price the specialist may convert 
percentage orders in a series of non-consecutive trades. As this price 
is approached, the specialist shall again consult with a Floor 
Governor, Senior Floor Official, or Executive Floor Official, who will 
re-evaluate the situation at that time. Any subsequent approvals by the 
Floor Governor, Senior Floor Official, or Executive Floor Official 
shall follow the principles discussed immediately above.
    The specialist may convert a percentage order on a stabilizing tick 
to make a bid or offer in such size as he deems appropriate. The 
specialist may convert a percentage order on a destabilizing tick to 
make a bid or offer in such size as he deems appropriate to add size to 
prevailing bid or offer.
    In addition, the specialist may, except as provided below, convert 
a percentage order on a destabilizing tick to establish a new bid in 
such size as he deems appropriate, (i) immediately following a 
transaction where such transaction has cleared the Floor of bids and 
offers, or (ii) to narrow the quotation spread, provided that no such 
bid may be more than 0.10 of a point higher than the last sale. The 
specialist's conversion of a percentage order to establish a new bid 
pursuant to (i) and (ii) above shall be further subject to the 
following conditions:
    (1) Where the specialist has converted a percentage order to buy on 
a destabilizing tick [to participate in a transaction of at least 
10,000 shares or in a transaction with a quantity of stock having a 
market value of $500,000 or more (whichever is less)] as otherwise 
permitted by this rule, he may not convert a percentage order to buy to 
establish a new bid at a price which is higher than the price of the 
transaction, unless there is an intervening transaction at a price that 
is independent of the price established by the specialist through the 
conversion of a percentage order.
    (2) Where the specialist has converted a percentage order to buy to 
establish a new bid that is higher than the last sale price, with the 
result that a transaction is effected at the bid price, he may not 
convert a percentage order to buy to participate in a trade [of at 
least 10,000 shares or a quantity of stock having a market value of 
$500,000 or more (whichever is less)] as otherwise permitted by this 
rule, unless there is an intervening transaction at a price that is 
independent of the price established by the specialist through the 
conversion of a percentage order.
    (3) Where the specialist has converted a percentage order to buy to 
establish a new bid that is higher than the last sale, he may not 
convert a percentage order to subsequently establish a higher bid, 
unless there is an intervening transaction at a price independent of 
the price established by the specialist through the conversion of a 
percentage order.
    The same principles shall apply in the case of a specialist's 
conversion of percentage orders to sell. With the prior approval of a 
Floor Governor, Senior Floor Official, or Executive Floor Official, the 
specialist may convert a percentage order to make a destabilizing bid 
or offer at a price which would otherwise be prohibited under the 
limitations and conditions stated above.
    Any percentage order or portion thereof converted to make a bid or 
offer shall be considered as a limit order on the book and will be 
ahead of other limit orders subsequently received by the specialist at 
that price, and any such bid or offer made pursuant to such order shall 
have the same standing in the market as would be provided any other bid 
or offer under the Exchange's auction market rules and procedures 
dealing with priority, parity, and precedence. Where the specialist has 
converted a percentage order to make or add to a bid (offer) as 
permitted by this rule, and subsequently additional buying or selling 
interest enters the market and establishes a different higher bid 
(lower offer), the original converted order or portion thereof shall 
retain its status on the book as a limit order at the price at which it 
was converted. However, unless the order has been converted at its 
maximum limit price, if a transaction is effected upon such higher bid 
(lower offer), and another bid (offer) is made at a price higher 
(lower) than such transaction, the original converted order or portion 
thereof shall be treated as a cancelled order on the book and revert to 
its original status as a percentage order subject to subsequent 
election or further conversion as permitted by this rule. Where the 
specialist has converted a percentage order to make or add to a bid or 
offer as permitted by this rule, and subsequently additional size is 
added to a prevailing bid or offer on the opposite side of the market 
from the converted percentage order, or a different bid or offer is 
established on the opposite side of the market from the converted 
percentage order, the specialist may cancel the converted order or 
portion thereof if he intends to reconvert the order to trade with the 
interest on the opposite side of the market, and such trade is 
otherwise permitted by this rule. The specialist must document the 
status of a converted percentage order on the book as a limit order at 
the price it was converted.
    Notwithstanding the provisions of this Rule permitting percentage 
orders to be converted on destabilizing ticks, where a member holds 
orders of 10,000 shares or more or a quantity of stock having a market 
value of $500,000 or more (whichever is less) to buy or sell a 
particular stock which he proposes to cross at or within the prevailing 
market, the specialist may not, unless asked to do so by the member 
with the cross (assuming the cross is at or within the 0.25 point price 
parameter of this Rule), convert any percentage order on a 
destabilizing tick for execution in such proposed cross transaction 
unless the specialist can (at or within the 0.25 of a point price 
parameter specified in this Rule, and within the limit price of the 
order) provide a better price to one side or the other of the proposed 
cross.
    When the specialist is holding one or more percentage orders with 
special instructions permitting conversions on destabilizing ticks as 
provided in this Rule, and a member who holds orders to buy and sell 
10,000 shares or more or a quantity of stock having a market value of 
$500,000 or more (whichever is less) proposes to cross such orders at 
or within the prevailing market, the specialist shall not, unless asked 
to do so by the member with the cross, trade for his own account with 
either the bid or the offer side of such cross (as the case may be), 
where the effect of such proprietary trade would be to establish a new 
last sale price, and thereby extend the 0.25 point price parameter 
specified in this Rule.
    In any situation where the specialist is taking or supplying for 
his own account the security named in a percentage order entrusted to 
him, the specialist and the entering broker shall comply with the 
procedures for

[[Page 137]]

confirmation of transactions specified in Exchange Rule 91.10.
    When converting a percentage order into a limit order, the 
specialist shall give priority to conventional limit orders on his book 
at that price on the same side of the market, which orders were entered 
before the conversion. This means that the converted percentage order 
may receive an execution at any particular price only after all such 
conventional limit orders on the book at that price are satisfied.
    The entering broker may permit the specialist to be on parity with 
his order. However, when the specialist is handling more than one 
percentage order, he may not be on parity with any such order unless 
permission has been obtained from all brokers for whom he is holding 
percentage orders in the particular stock. If a specialist is on parity 
with one or more percentage orders, at no time may the specialist 
participate for his own account in an amount in excess of what each 
percentage order would receive, except that the specialist may 
participate for his own account to an extent greater than any 
particular percentage order where the size specified on such order has 
been satisfied. A specialist on parity with a percentage order remains 
subject to the limitations in Exchange Rule 104.10 as to transactions 
for his own account effected on destabilizing ticks. A specialist on 
parity with a percentage order shall inform the entering broker at the 
time the order is entered, whether or not he intends to buy or sell, as 
the case may be, along with the order. Specialists must make every 
effort to execute percentage orders in amounts which correspond as 
nearly as possible to the percentage specified therein.
    The elected portion of a percentage order shall be handled as a new 
limited price order and shall take its place on the specialist's book 
as though it were a new order received at the time of the electing 
transaction. When a specialist holds more than one percentage order 
each individual order shall be elected to the extent of the full amount 
of the electing transaction; except that percentage orders held by a 
specialist shall not be elected by any portion of volume which results 
from the execution of a previously elected or converted portion of a 
percentage order that is on the same side of the market.
    All percentage orders and special instructions related thereto, and 
any modifications or cancellations thereof shall be in writing. (See 
also Rule 13 and ``Records of Specialists'' at Rule 121.)
* * * * *

Automatic Execution of Limit Orders Against Orders Reflected in NYSE 
Published Quotation

    Rule 1000 Only straight limit orders without tick restrictions are 
eligible for entry as auto ex orders. Auto ex orders to buy shall be 
priced at or above the price of the published NYSE offer. Auto ex 
orders to sell shall be priced at or below the price of the NYSE bid. 
An auto ex order shall receive an immediate, automatic execution 
against orders reflected in the Exchange's published quotation and 
shall be immediately reported as NYSE transactions, unless:
    (i) The NYSE's published quotation is in the non-firm quote mode;
    (ii) The NYSE's published quotation has been gapped for a brief 
period because of an influx of orders on one side of the market, and 
the NYSE's published quotation size is one hundred shares at the bid 
and/or offer;
    (iii) With respect to a single-sided auto ex order, a better price 
exists in another ITS participating market center;
    (iv) With respect to a single-sided auto ex order, the NYSE's 
published bid or offer is 100 shares;
    (v) A transaction outside the NYSE's published bid or offer 
pursuant to Rule 127 is in the process of being completed, in which 
case the specialist should publish a 100-share bid and/or offer;
    (vi) Trading in the subject security has been halted.
    Auto ex orders that cannot be immediately executed shall be 
displayed as limit orders in the auction market. An auto ex order equal 
to or greater than the size of the NYSE's published bid or offer shall 
trade against the entire published bid or offer, and a new bid or offer 
shall be published pursuant to Rule 60(e). The unfilled balance of the 
auto ex order shall be displayed as a limit order in the auction 
market.
* * * * *

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 and is set forth in Sections A, B, and C below.

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

1. Purpose
    The Exchange is required by SEC Rule 11Ac1-1 under the Act \5\ to 
disseminate the highest bid and lowest offer in its market (i.e., the 
``best quote'' available for dissemination). The Exchange believes that 
the advent of decimal trading has resulted in many more price intervals 
which can be the best quote, with the result that the highest bid and 
lowest offer may not reflect the true depth of the market at prices 
reasonably related to the last sale.
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    \5\ 17 CFR 240.11Ac1-1.
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    The Exchange is proposing to address this issue by providing for 
the dissemination, in selected securities as appropriate, of a 
``liquidity bid'' and a ``liquidity offer,'' which would reflect 
aggregated trading interest at a specific price interval below the best 
bid (in the case of a liquidity bid) or at a specific price interval 
above the best offer (in the case of a liquidity offer). The specific 
price interval above or below the best bid and offer, as well as the 
minimum size of the liquidity bid or offer, would be established by the 
specialist in the subject security. Liquidity bids and offers would 
include orders on the specialist's book, trading interest of brokers in 
the trading crowd, and the specialist's dealer interest, at prices 
ranging from the best bid (offer) down to the liquidity bid (up to the 
liquidity offer).
    According to the Exchange, it would not be mandatory to disseminate 
a separate liquidity bid and/or offer. In certain instances, depending 
on the depth of the market, the Exchange represents that the best bid 
(offer) and the liquidity bid (offer) may converge. In such case, the 
Exchange would make available the same price and size both as the best 
(bid) offer over the Consolidated Quotation System (``CQS'') and as the 
liquidity bid (offer) via the Exchange's Common Access Point (``CAP''). 
In any event, all disseminated bids and offers (best and liquidity) 
would be deemed to be ``firm quotations'' that are available for 
interaction with trading interest. Orders seeking to trade against the 
best and liquidity bids/offers would be executed in accordance with 
NYSE auction procedures and NYSE procedures governing the execution of 
XPress orders.
    The NYSE proposes to amend NYSE Rule 60 (``Dissemination of 
Quotations'') to provide for the dissemination of

[[Page 138]]

liquidity bids and offers. The proposed amended rule contains a 
discussion of how market and limit orders, as well as XPress orders, 
would be executed against best and liquidity bids and offers.

Market Orders

    When a liquidity bid is published in addition to a best bid, a 
market order to sell of a size greater than the size of the best bid 
will be executed to the extent possible against the best bid (or the 
order will be crossed by the specialist when he or she is acting as 
agent for the order using the auction market procedures in NYSE Rule 
76, which calls for the member to publicly bid and offer on behalf of 
the orders before making a transaction with him--or herself) with the 
balance of the sell order being executed at the higher price of the 
liquidity bid or at the price of other orders on the book below the 
best bid, but above the liquidity bid. For example, assume the best bid 
is $20.10 for 200 shares, while the liquidity bid is $20.05 for 10,000 
shares, with no other bids in between the best and liquidity bids. If a 
market order to sell 1,000 shares is received by the specialist, 200 
shares would trade at the best bid price of $20.10, and 800 shares 
would trade at $20.05, the liquidity bid price, unless the specialist 
in crossing the order obtains price improvement for it. If there were 
other bids on the book between the best and liquidity bids, the sell 
market order could receive executions at those prices. For example, if, 
in addition to the best and liquidity bids of $20.10 and $20.05 in the 
previous example, there were also a bid of $20.07 for 300 shares, the 
market order to sell would be executed as follows--200 shares at the 
best bid of $20.10, 300 shares at $20.07 and 500 shares at the 
liquidity bid of $20.05, unless the specialist in crossing the order 
obtains price improvement for it. Market orders to buy would follow the 
same principles using the best and liquidity offers.

Limit Orders

    NYSE is proposing that similar procedures would be used for the 
execution of limit orders when there are liquidity bids and offers as 
well as best bids and offers. In that regard, when a liquidity bid is 
published in addition to a best bid, a limit order to sell of a size 
greater than the size of the best bid, but which is limited to a price 
executable at or above the liquidity bid price, would be executed first 
against the best bid (or crossed as explained above), with the balance 
of the order being executed within its limit price at a price at which 
orders on the book will not be traded through. For example, assume 
there is a best bid for 200 shares of $20.10 and a liquidity bid of 
$20.05 for 10,000 shares. In addition, there is a bid for 500 shares at 
$20.07. If a limit order to sell 1,000 shares at $20.05 is received by 
the specialist, it would be executed as follows--200 shares at $20.10, 
500 shares at $20.07 and 300 shares at the liquidity bid of $20.05. In 
all these examples, however, as with market orders, the specialist 
would follow NYSE auction market crossing procedures in an effort to 
obtain price improvement for the order. Limit orders to buy would 
follow the same principles.

Execution of XPress Orders

    An XPress order is an order of a specified minimum size that is to 
be executed against a displayed XPress quote, or at an improved price, 
if obtainable. In order to be indicated as an XPress quote, a published 
bid or offer must be for no less than the minimum share size, currently 
15,000 shares, at the same price for no less than 15 seconds.
    With respect to liquidity quotes, the Exchange proposes to amend 
Supplementary Material .40 of NYSE Rule 13 (``Definitions of Orders'') 
to provide that a liquidity bid or offer, regardless of size, will be 
XPress eligible if it has been published for at least 15 seconds. The 
Exchange expects that the size of liquidity bids and offers will be of 
a size that represents significant interest for a stock and will, in 
many stocks, be greater than 15,000 shares. However, where the share 
size of the liquidity bid or offer does not equal 15,000 shares, the 
Exchange believes that institutional interest in trading at the 
liquidity price may still be present, and that utilizing the XPress 
trading protocol will be an appropriate way for this interest to access 
such displayed greater liquidity. A liquidity quote will still be 
required to be at the same liquidity price for at least 15 seconds to 
be eligible as a quotation against which an XPress order may be 
executed.
    Further, the Exchange proposes to amend NYSE Rule 60 to provide 
that an XPress order may be priced at either the best bid or offer 
price if XPress eligible (i.e., for at least 15,000 shares for at least 
15 seconds), or priced at the liquidity bid or offer price, if, again, 
XPress eligible. An XPress order to buy priced at the liquidity offer 
price will be either executed at that price, or a price that will allow 
an XPress order to be filled without trading through orders on the 
book. The Exchange represents that specialists will seek price 
improvement for XPress orders in accordance with the Exchange's 
procedures for the execution of XPress orders.
    The Exchange proposes that if a specialist receives two XPress 
orders within a nearly simultaneous time frame, one priced at the best 
bid (offer), and the other priced at the liquidity bid (offer), both 
orders will be executed in accordance with the Exchange's procedures 
for the execution of XPress orders.\6\ Both orders will also be exposed 
to the trading crowd for price improvement. Those portions of the 
orders that do not receive price improvement will be executed against 
the XPress bids (offers), which may not then be traded against by other 
members pursuant to the Exchange's procedures for the execution of 
XPress orders.
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    \6\ See Amendment No. 1, supra note 3.
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Automated Dissemination of Quotations

    In conjunction with the dissemination of dual quotations, the 
Exchange proposes to provide for the automated dissemination of the 
best bid and offer as SuperDOT limit orders are received systemically. 
The Exchange notes that this is a change to the current practice 
whereby specialists are responsible for disseminating bids and offers. 
NYSE Rule 60 would be amended to provide that the Exchange will 
autoquote the NYSE's highest bid or lowest offer whenever a limit order 
is transmitted to the specialist's book at a price higher (lower) than 
the previously disseminated highest (lowest) bid (offer). When the 
NYSE's highest bid or lowest offer has been traded with in its 
entirety, the Exchange will autoquote a new bid or offer reflecting the 
total size of orders on the specialist's book at the next highest (in 
the case of a bid) or lowest (in the case of an offer) price. NYSE Rule 
60 would also be amended to provide that autoquoting will include: (i) 
Adding size to the best and liquidity bids/offers as additional limit 
orders are received; and (ii) reducing the size of the best and 
liquidity bids/offers as limit orders on the book are executed or 
cancelled. However, the Exchange notes that de minimis increases or 
decreases in the size of limit orders on the book, as determined by the 
specialist, will not result in automated augmenting or decrementing of 
the size of the liquidity bid or offer where such bid or offer 
continues to reflect the actual size of limit orders on the book.
    In any instance where the specialist disseminates a proprietary bid 
(offer) of 100 shares on one side of the market, the bid or offer on 
that side of the market shall not be autoquoted. In such an instance, 
any better-priced limit

[[Page 139]]

orders received by the specialist shall be manually displayed, unless 
they are executed at a better price in a transaction being put together 
in the auction market at the time that the order is received.
    In conjunction with autoquoting of bids and offers, NYSE Rule 1000 
(``Automatic Execution of Limit Orders Against Orders Reflected in NYSE 
Published Quotation'') would be amended to provide that a NYSE 
Direct+[reg] (``NYSE Direct+'') order equal to or greater 
than the size of the published bid/offer will exhaust the entire bid/
offer, rather than decrease it to 100 shares as is the case today.\7\ 
The purpose of this change is to facilitate the autoquoting of the next 
highest bid/lowest offer. The unfilled balance of the NYSE Direct+ 
order would be displayed in the auction market as a SuperDOT limit 
order.
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    \7\ NYSE Rule 1001(c) currently provides that if executions of 
auto ex orders have traded with all trading interest reflected in 
the Exchange's published bid or offer, the Exchange will disseminate 
a bid or offer at that price of 100 shares until the specialist 
requotes that market. See Securities Exchange Act Release No. 43767 
(December 22, 2000), 66 FR 834 (January 4, 2001) (SR-NYSE-2000-18). 
The NYSE Direct+ pilot was subsequently extended for an additional 
year, see Securities Exchange Act Release No. 45331 (January 24, 
2002), 67 FR 5024 (February 1, 2002) (SR-NYSE-2001-50); and, 
recently extended until December 23, 2003, see Securities Exchange 
Act Release No. 46906 (November 25, 2002), 67 FR 72260 (December 4, 
2002) (SR-NYSE-2002-47). The Exchange recognizes that the proposed 
language in NYSE Rule 1000 will have the effect of superseding the 
provisions of NYSE Rule 1001(c). The Exchange represents that it 
will submit an amendment to delete Rule 1001(c) before approval of 
the proposed rule change. The Exchange also represents that, if 
approved, amended NYSE Rule 1000 will be part of the pilot program 
for NYSE Direct+ rules.
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    The Exchange believes that the proposed automated dissemination of 
the best bid and offer suggests a need to amend Supplementary Material 
.30 to NYSE Rule 123A (``Miscellaneous Requirements'') to enable 
specialists to trade percentage orders against incoming SuperDOT 
orders. Currently, specialists may bid or offer (within $0.10 of the 
last sale) on behalf of a percentage order, and an incoming SuperDOT 
order may then trade against such bid or offer. The specialist may not 
``reach across the market'' to trade a percentage order against a bid 
or offer in a ``destabilizing'' transaction (bid above the last sale or 
sell below the last sale) unless the trade is for at least 10,000 
shares or a quantity of stock with a market value of at least $500,000. 
With the automating of SuperDOT bids and offers, specialists would not 
be permitted to interact with such orders on behalf of percentage 
orders as they do today because they cannot ``reach across the market'' 
to effect smaller size trades. Thus, the Exchange is proposing to amend 
NYSE Rule 123A.30 to permit specialists to ``reach across the market'' 
with percentage orders to effect trades of less than 10,000 shares or a 
quantity of stock having a market value of less than $500,000. 
Specialists could not ``reach across the market'' more than $0.10 from 
the last sale to effect these smaller size trades if the trade would be 
destabilizing. This $0.10 limitation is the same as the current 
limitation on making destabilizing bids or offers against which 
incoming orders may trade.
2. Statutory Basis
    The Exchange believes that the statutory basis for this proposed 
rule change is in Section 6(b)(5) of the Act,\8\ which requires 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 public interest. The Exchange 
believes that the proposed rule change also supports the principles of 
Section 11A(a)(1) of the Act,\9\ in that it seeks to assure the 
availability to market participants of information with respect to 
market interest in securities traded on the Exchange, and thereby 
promote economically efficient execution of securities transactions.
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    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    The Exchange 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

    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 Exchange 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, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street NW., Washington, 
DC 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 in 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 the 
file number in the caption above and should be submitted by January 23, 
2003.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-33118 Filed 12-31-02; 8:45 am]
BILLING CODE 8010-01-P