[Federal Register Volume 68, Number 24 (Wednesday, February 5, 2003)]
[Notices]
[Pages 5948-5950]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2675]



[[Page 5948]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47285; File No. SR-NYSE-2002-44]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the New York Stock Exchange, Inc. 
Relating to Amendments to the Exchange's Automatic Execution Facility 
(NYSE Direct+)

January 29, 2003.
    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 September 9, 2002 the New York Stock Exchange, Inc. (``NYSE'') 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 NYSE. The Exchange submitted an 
amendment to the proposed rule change on January 27, 2003.\3\ 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\ See Letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated January 23, 2003 (``Amendment No. 
1''). Amendment No. 1 clarifies, and provides examples of, how the 
five cent standard would work; clarifies how limit orders received 
while a block transaction is pending would be handled; and explains 
how the Exchange determined that five cents is the appropriate level 
at which to disengage Direct+.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change consists of an amendment to Exchange Rule 
1000 governing NYSE Direct+[reg] (``Direct +''). The 
proposed rule amendment provides that (i) Direct+ executions will not 
be available if the resulting trade would be more than five cents from 
the last sale; and (ii) during the process for completing certain NYSE 
Rule 127 \4\ transactions, the specialist should publish a bid and/or 
offer that is more than five cents away from the last reported 
transaction price in the subject security on the Exchange. The text of 
the proposed rule change is set forth below. Additions are in italics; 
deletion are in brackets.
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    \4\ Exchange Rule 127(b) describes the procedures for a member 
to follow who has a block of stock which he or she intends to cross 
at a specific clean-up price outside the current quotation.
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* * * * *

Rule 1000: Automatic Execution of Limit Orders Against Orders Reflected 
in NYSE Published Quotation

    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;] the execution price would be more than five cents away 
from the last reported transaction price in the subject security on the 
Exchange;
    (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[;] 
that is more than five cents away from the last reported transaction 
price in the subject security on the Exchange;
    (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.
* * * * *

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 NYSE 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
    NYSE Rules 1000-1005 provide for the automatic execution of limit 
orders of 1099 shares or less against the Exchange's disseminated bid 
or offer.\5\ These executions of Direct+ orders are not available under 
unusual market conditions, or in situations when the Exchange's bid or 
offer is only 100 shares.
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    \5\ NYSE Direct+ was originally filed as a one-year pilot in SR-
NYSE-2000-18, which was approved on December 22, 2000. See 
Securities Exchange Act Release No. 43767 (December 22, 2000), 66 FR 
834 (January 4, 2001). The pilot was subsequently extended by SR-
NYSE-2001-50 and SR-NYSE-2002-47. See Securities Exchange Act 
Release Nos. 45331 (January 24, 2002), 67 FR 5024 (February 1, 
2002); 46906 (November 25, 2002), 67 FR 72260 (December 4, 2002), 
respectively. The pilot is currently due to expire on December 24, 
2003.
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    Direct+ executions automatically decrease the size of the NYSE bid 
or offer, which can result in a ``default'' bid or offer of 100 shares 
if the Direct+ executions have traded with all trading interest 
reflected in the Exchange's published bid or offer. This has the effect 
of rendering the automatic execution feature unavailable until the 
specialist can requote the market. In other very active trading 
situations, however, the specialist may quote a 100 share market 
because of transactions being priced in the auction, which also has the 
effect of making Direct+ unavailable and results in the Exchange's 
disseminated quotation not reflecting the actual depth of the NYSE 
market.

NYSE Rule 1000(ii)

    The Exchange is proposing to amend Rule 1000(ii) to replace this 
provision with one that provides that Direct+ executions will not be 
available if the resulting trade would be more than five cents from the 
last sale. This would apply to any trade whether an auto-ex trade or a 
trade in the regular auction market. Any auto-ex order sent that would 
result in an execution more than five cents away from the last trade 
would be routed to the specialist as a SuperDOT limit order. The 
specialist would then represent that order as he or she would represent 
any other limit order received via the SuperDOT system.
    For example, if the last sale in a stock is $20.10, and the current 
quote is $20.09 bid for 300 shares and 900 shares offered at $20.16, an 
auto-ex order to buy 500 shares (which would be executed at the offer 
price) would not be

[[Page 5949]]

automatically executed at $20.16 since it is more than five cents from 
the last trade at $20.10. It would be routed to the specialist as a 
limit order to buy at $20.16. The specialist would then bid on behalf 
of that order at $20.15 and execute it at $20.16 against the prevailing 
offer, or a broker in the crowd could offer to trade with the order at 
$20.15, offering price improvement to that order in the auction market.
    Under the current provisions of Rule 1000, if the published 
quotation in a stock is gapped for a brief period of time, usually with 
one side or both of the quotation being set at 100 shares because of an 
influx of orders on one side of the market, or if the bid and/or offer 
size of the prevailing quotation is set at 100 shares, the Direct+ 
facility is not available. Under very active market conditions, the 
specialist may quote 100 shares bid or offered in order to allow trades 
in the auction market to be consummated without the last sale price 
being changed due to Direct+ executions. This, however, could result in 
the Exchange's disseminated quotation temporarily not reflecting the 
actual depth of the market for a stock as reflected by the dynamics of 
trading interest in the Crowd. If the Direct+ facility is not available 
in instances where the actual spread in a stock's quotation is greater 
than five cents, the specialist will be able to show the actual depth 
in the market. Of course, if the actual spread resulting from bids and 
offers on the specialist's book, or resulting from trading crowd 
interest results in a spread of less than five cents from the price of 
the last trade, the specialist must display these, and Direct+ orders 
will remain eligible for automatic execution.\6\
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    \6\ See Amendment No. 1, supra note 3.
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NYSE Rule 1000(v)

    NYSE Rule 127 establishes procedures for executions outside the 
NYSE's published bid or offer. It requires a member seeking to cross 
block orders outside the prevailing quotation to inform the specialist 
of his or her intention to execute the transaction at a pre-determined, 
specific price (the ``clean-up'' price), either a premium or discount 
from the prevailing bid/offer. In this situation, the executing broker 
will be bidding and offering on behalf of the cross away from the 
prevailing quotation, to reflect the discount or premium from the 
current market.\7\ Currently, Rule 1000(v) provides that auto ex orders 
will not be executed when an auction market transaction under Exchange 
Rule 127 is being completed, and in that instance, the specialist must 
publish a 100-share bid and/or offer.
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    \7\ Id.
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    The Exchange proposes to amend Rule 1000(v) to provide that the 
specialist (during the process for completing a Rule 127 transaction) 
should publish a bid and/or offer that is more than five cents away 
from the last reported transaction price (instead of a 100-share bid 
and/or offer) in the subject security on the Exchange. Any limit order 
that is received as the Rule 127 trade is being effected that would 
better the market represented by the broker's bid or offer on behalf of 
the NYSE Rule 127 cross trade would be included in the Rule 127 
trade.\8\ For example, assume that the last sale in XYZ is $10.27, and 
the current quote is $10.25 bid for 5000 shares and 5000 shares offered 
at $10.35. A proposed block transaction (Rule 127 trade) is about to be 
effected at the ``clean-up'' (discount price) of $10.15 for 50,000 
shares. Under amended Rule 1000(v), the specialist would publish a bid 
that is more than five cents away from the last reported transaction 
price in order to turn off Direct+. The Rule 127 trade would be 
completed by the broker bidding $10.15 on behalf of the cross, and 
offering at $10.16. If, prior to the completion of the Rule 127 trade, 
a limit order to buy 500 shares at $10.20 was received by the 
specialist, he or she would represent that order to participate in the 
Rule 127 cross and receive an improved price. (Under Exchange Rule 
79A.15, the requirement to display limit orders received by specialists 
does not apply to any customer limit order that is executed upon 
receipt of the order.)\9\
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    \8\ Id.
    \9\ Id.
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    The five cent price parameter will give the specialist additional 
flexibility in disseminating the actual depth of the NYSE auction 
market, while still ensuring that Direct+ is available when there is 
sufficient liquidity at prices closely related to the last sale.\10\
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    \10\ According to the Exchange, a high percentage of executions 
in Direct+ occur within five cents of the last sale. See Amendment 
No. 1, supra note 3.
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2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5)of the Act \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 a national market system and, in general, to protect 
investors and the public interest. The proposed rule change also is 
designed to support the principles of Section 11A(a)(1) of the Act \12\ 
in that it seeks to assure economically efficient execution of 
securities transactions, make it practicable for brokers to execute 
investors' orders in the best market, and provide an opportunity for 
investors' orders to be executed without the participation of a dealer.
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    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 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, as 
amended, 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 NYSE 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 proposal, 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 20549-0609. 
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 in

[[Page 5950]]

the Commission's Public Reference Room. Copies of such filing will also 
be available for inspection and copying at the principal office of the 
NYSE organization.
    All submissions should refer to File No. NYSE-2002-44 and should be 
submitted by February 26, 2003.

    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. 03-2675 Filed 2-4-03; 8:45 am]
BILLING CODE 8010-01-P