[Federal Register Volume 68, Number 67 (Tuesday, April 8, 2003)]
[Notices]
[Pages 17140-17146]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8441]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47614; File No. SR-NYSE-2002-55]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change and Amendment Nos. 1 and 2 Thereto by the New York Stock 
Exchange, Inc. Regarding the Dissemination of Liquidity Quotations

April 2, 2003.

I. Introduction

    On October 28, 2002, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'' or ``Exchange Act'')\1\ and 
rule 19b-4 thereunder,\2\ a proposed rule change to amend its rules to 
permit the display and use of quotations in stocks traded on the NYSE 
to show additional depth in the market for those stocks (``Liquidity 
Quote Proposal''). On December 20, 2002, NYSE filed Amendment No. 1 to 
the proposed rule change.\3\ The proposed rule change, as amended, was 
published for public comment in the Federal Register on January 2, 
2003.\4\ On March 20, 2003, NYSE filed Amendment No. 2 to the

[[Page 17141]]

proposed rule change.\5\ The Commission has received 12 substantive 
comment letters on the proposed rule change, including the NYSE's 
response addressing the commenters' concerns.\6\ The Commission has 
substantial concern that the proposed rule change is not consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to the NYSE. As an alternative to instituting 
proceedings to determine whether the proposed rule change should be 
disapproved, 15 U.S.C. 78s(b)(2)(B), this order approves the proposed 
rule change, as amended, conditional on the delayed effectiveness of 
the proposal as described below.
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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 
(``Division''), 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\ Securities Exchange Act Release No. 47091 (December 23, 
2002), 68 FR 133.
    \5\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division, Commission, dated 
March 20, 2003 (``Amendment No. 2''). In Amendment No. 2, the NYSE 
removes paragraph (c) of NYSE Rule 1001, which 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 requites the market. The NYSE's proposed 
autoquoting feature in NYSE Rule 1000, which will systematically 
update a published quotation immediately reflecting the next best 
bid or offer on the specialist's book, will have the effect of 
superceding this provision. This was a technical amendment and is 
not subject to notice and comment.
    \6\ See letters from Thomas F. Secunda, Bloomberg, dated 
December 16, 2002 (``Bloomberg Letter I''); W. Hardy Callcott, 
Senior Vice President and General Counsel, Charles Schwab & Co., 
Inc., dated January 22, 2003 (``Schwab Letter''); Craig S. Tyle, 
General Counsel, Investment Company Institute, dated January 23, 
2003 (``ICI letter''); Thomas F. Secunda, Bloomberg, dated January 
23, 2003 (``Bloomberg Letter II''); Jeffrey T. Brown, Senior Vice 
President, Secretary and General Counsel, Cincinnati Stock Exchange, 
Inc., dated January 24, 2003 (``CSE Letter''); Meyer S. Frucher, 
Chairman and Chief Executive Officer, Philadelphia Stock Exchange, 
Inc., dated February 27, 2003 (``Phlx Letter''); Kevin M. Foley, 
Bloomberg, dated February 26, 2003 (``Bloomberg Letter III''); and 
Paul Merolla, Executive Vice President and General Counsel, Instinet 
Corp., dated March 14, 2003 (``Instinet Letter''), to Jonathan G. 
Katz, Secretary, Commission. See also letters from Richard P. 
Bernard, Executive Vice President and General Counsel, NYSE, to 
Annette Nazareth, Director, Division, Commission, dated February 7, 
2003 (``NYSE Letter''); Richard A. Grasso, Chairman and Chief 
Executive Officer, NYSE, to William H. Donaldson, Chairman, 
Commission, dated March 11, 2003 (``Grasso Letter I'') and March 20, 
2003 (``Grasso Letter II''); and Greg Babyak, Counsel to Bloomberg, 
to William H. Donaldson, Chairman, Commission, dated March 26, 2003 
(``Bloomberg Letter IV''). See also emails from Richard Bernard, 
Executive Vice President and General Counsel, NYSE, to Annette 
Nazareth, Director, Division, Commission, et al., dated February 11, 
2003, February 12, 2003, February 14, 2003, and March 4, 2003. Luis 
de la Torre, Counsel to Commissioner Goldschmid, Brian A. Stern and 
Mary S. Head, Counsels to Commissioner Glassman, wrote memoranda to 
the official file documenting several meetings.
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II. Description of the Liquidity Quote Proposal

A. Exchange Rules Affecting Dissemination of Liquidity Quote

    The Exchange is required by Rule 11Ac1-1 under the Act \7\ to 
disseminate the highest bid and lowest offer in its market (i.e., the 
``best quote'' available for dissemination). The Exchange believes that 
decimal trading has resulted in many more price intervals that 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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    \7\ 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 Exchange 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.\8\ Proposed NYSE 
rule 60 includes details on how market and limit orders, as well as 
XPress orders, would be executed against best and liquidity bids and 
offers.
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    \8\ 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.
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    First, with respect to market orders, NYSE proposes that 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 \9\ 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.\10\
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    \9\ 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.
    \10\ 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 1000 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.
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    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.\11\
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    \11\ 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.

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[[Page 17142]]

    Third, regarding the execution of XPress Orders,\12\ 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 Quote 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. 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.
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    \12\ See supra note .
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    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.\13\
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    \13\ 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. 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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B. Automated Dissemination of Quotations

    In conjunction with the dissemination of dual quotations, the 
Exchange proposes to provide for the automated dissemination of the 
NYSE best bid and offer as SuperDOT limit orders are received 
systemically. This is a change to the Exchange's current practice 
whereby specialists are responsible for disseminating bids and offers. 
Proposed NYSE rule 60 would 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 would then 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.\14\
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    \14\ 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.
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    In any instance where the specialist disseminates a proprietary bid 
(offer) of 100 shares or more 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.
    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 \15\ 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.\16\ 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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    \15\ NYSE Direct+ provides for the automatic execution of limit 
orders of 1099 shares or less against the Exchange's disseminated 
bid or offer. See NYSE Rules 1000-1005.
    \16\ See Amendment No. 2, supra note 5.
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    The Exchange believes that the proposed automated dissemination of 
the best bid and offer also 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.\17\ 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.\18\
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    \17\ 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.
    \18\ According to the Exchange, 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.
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C. NYSE Liquidity Quote Service Agreements

    Liquidity Quote would be part of the NYSE OpenBook data feed 
service.\19\ Recipients of the Liquidity Quote data would be subject to 
the terms of the existing NYSE ``vendor'' agreement, and end-users that 
receive the Liquidity Quote data from vendors or broker-dealers would 
continue to be subject to the existing ``subscriber'' agreement. The 
vendor agreement generally authorizes a data feed recipient to provide 
a display of the Liquidity Quote data for retransmission, or to 
distribute the Liquidity Quote data internally.\20\ The vendor 
agreement prohibits data feed recipients from enhancing, integrating, 
or consolidating its market data with data from other market centers 
for retransmission.\21\ In addition, NYSE has imposed a ``window 
requirement'' as part of its service agreements, which requires that 
the Liquidity Quote data be displayed in a separate window, or with a 
line drawn between its data and other markets' data.\22\
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    \19\ For further details on the NYSE OpenBook service, see 
Securities Exchange Act Release No. 45138 (December 7, 2001), 66 FR 
66491 (December 14, 2001) (SR-NYSE-2001-42).
    \20\ For further details on the vendor and subscriber 
agreements, see id. (``Order Approving a Proposed Rule Change by 
NYSE Establishing the Fees for NYSE OpenBook'').
    \21\ See NYSE Letter, at 3 (stating in FN2, ``[o]ur vendor 
contacts provide: `[Vendor] shall not cause * * * the displays of 
[NYSE Depth] Information that [Vendor] provides to [end-users] to be 
integrated with other market information that any source other than 
NYSE makes available [For example, Vendor] shall not permit the 
displays * * * to be consolidated with limit orders [of] any other 
market * * *'').
    \22\ Id., at FN2 (``* * * Vendor [may display] one or more other 
entities' limit orders side-by-side with, or on the same page as, 
displays of OpenBook Information.'').

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[[Page 17143]]

III. Summary of Comments

    The Commission received 12 comment letters on the proposal.\23\ All 
of the commenters generally supported the idea of NYSE's Liquidity 
Quote proposal. The commenters believed that with the advent of 
decimalization, the highest bid and lowest offer no longer reflects the 
true depth of the market. However, there were several issues raised by 
the commenters regarding the form and use of Liquidity Quote data.
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    \23\ See supra note 6.
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    First, four commenters believed that the Commission should require 
the NYSE to submit for public comment the vendor and subscriber 
agreements for the Liquidity Quote service or, at minimum, a 
description of the relevant terms of the agreements for Commission 
review.\24\ Three commenters believed that the contracts constituted 
SRO rules and, as such, the contracts should be filed as a proposed 
rule change for Commission approval, pursuant to section 19(b)(2) of 
the Act.\25\
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    \24\ See Schwab Letter; Bloomberg Letter II; CSE Letter; and 
Bloomberg Letter III.
    \25\ 15 U.S.C. 78s(b). See Bloomberg Letter I, II, III; CSE 
Letter; and Schwab Letter.
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    Second, three commenters also believed that the restrictions of the 
vendor agreements are inconsistent with sections 6 and 11A of the 
Exchange Act.\26\ Specifically, the commenters opposed NYSE's 
contractual restrictions on the integration, display, and 
redistribution of Liquidity Quote data, and stated that the 
restrictions were inconsistent with the standards of a national market 
system set forth in section 11A of the Exchange Act because access to 
this ``critical'' data should be offered on a reasonable and 
nondiscriminatory basis.
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    \26\ Schwab Letter; Bloomberg Letter II; and CSE Letter.
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    Third, three commenters said that the downstream restrictions of 
NYSE's vendor agreements would create a bifurcated market for data and 
transparency. These commenters believe that large broker-dealers would 
have the internal ability to reformat the NYSE data feed and take full 
advantage of the Liquidity Quote data. Conversely, small- and medium-
sized broker-dealers that lack the internal resources to reformat the 
Liquidity Quote data feed would have to rely on market data vendors. 
The commenters concluded that the downstream restrictions of NYSE's 
vendor agreements impose unfair access restrictions on small- and 
medium-sized market participants that are financially unable to 
purchase a data feed directly from the NYSE and thus rely on vendors to 
provide this market information for a reasonable fee.\27\
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    \27\ Id. The Schwab and Bloomberg II Letters also noted that the 
fees charged to retail investors for liquidity quote data are unduly 
excessive, discriminatory, and anticompetitive. See Schwab Letter 
and Bloomberg Letter II.
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    Fourth, one commenter asserted that the downstream restrictions 
prevent market data vendors from providing value-added services to 
their customers, in contravention of the Display Rule.\28\ This 
commenter believed that enhancing the format of the Liquidity Quote 
data and integrating it with data from other markets, or with analytics 
that use the data, would create a more useful product available for 
redistribution to its customers.\29\ The commenter also believed that 
the vendor restrictions on integration are anticompetitive in 
contravention of section 6(b)(8) of the Exchange Act,\30\ in that they 
impair other market centers from viewing Liquidity Quotes in tandem 
with the consolidated quote display, and inhibit competition with the 
NYSE for order flow in NYSE-listed securities.\31\
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    \28\ 17 CFR 240.11Ac1-2. See Bloomberg Letter II.
    \29\ Bloomberg Letter II.
    \30\ 15 U.S.C. 78f(b)(8).
    \31\ Bloomberg Letter II.
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    In response to the commenters' concerns about the Liquidity Quote 
data restrictions, NYSE stated that it intends to compete in the market 
for finished data products by producing and disseminating a 
distinguishable product identified to the NYSE. Therefore, to preserve 
NYSE's branding goal of an independent display of depth data, the 
NYSE's vendor agreements restrict the integration of Liquidity Quote 
data with other markets' data and preclude a vendor from displaying 
rows or columns of other markets' data intermingled with Liquidity 
Quote data.
    In response to commenters concerns regarding vendors' ability to 
provide value-added services to its customers, NYSE argued that the 
Commission should not prohibit NYSE from restricting the way in which 
vendors can package Liquidity Quote data. NYSE asserted that such 
restrictions allow the NYSE to compete with vendors in the market for 
finished data products, as well as compete with the other market 
centers for sizeable order flow. In addition, NYSE stated that the 
integration of Liquidity Quote data with other markets' quotation 
information would be misleading, in that its firm and executable 
liquidity bid or offer would be commingled with ``fleeting'' 100-share 
best bids and offers of its competitors.

IV. Discussion

    Section 19(b) of the Act \32\ requires the Commission to approve 
the proposed rule change filed by the NYSE if the proposed rule change 
is consistent with the requirements of the Act and the rules and 
regulations thereunder. After careful review, the Commission finds, for 
the reasons discussed below, that NYSE's proposal is consistent with 
the requirements of the Act, and the rules and regulations thereunder 
applicable to a national securities exchange, but only if the NYSE does 
not apply the restrictions on data integration currently contained in 
the vendor agreements.\33\
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    \32\ 15 U.S.C. 78s(b).
    \33\ In approving this rule, the Commission has considered its 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    Specifically, the Commission finds that the Liquidity Quote 
proposal, when viewed apart from the vendor agreements, is consistent 
with sections 6(b)(5) \34\ and 6(b)(8) \35\ of the Act. Section 6(b)(5) 
of the Act \36\ requires, among other things, that the rules of NYSE be 
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; and are not designed to permit unfair 
discrimination between customers, issuers, brokers or dealers. Section 
6(b)(8) of the Act \37\ requires, among other things, that the 
Exchange's rules do not impose any burden on competition not necessary 
or appropriate in furtherance of the purposes of the Act.
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    \34\ 15 U.S.C. 78f(b)(5).
    \35\ 15 U.S.C. 78f(b)(8).
    \36\ 15 U.S.C. 78f(b)(5).
    \37\ 15 U.S.C. 78f(b)(8).
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    The Commission believes that the Liquidity Quote proposal, when 
viewed apart from the NYSE vendor agreements, will substantially 
increase the amount of information available to the public and market 
participants with respect to quotations for, and transactions in, 
certain specified securities listed on the Exchange, consistent with 
sections 6(b)(5) and 6(b)(8) of the Act. In a decimal market 
environment, the highest bid and lowest offer of an exchange may not 
reflect where the actual market is, particularly for sizeable orders, 
because the increase in the number of price increments causes less 
depth to be available at each price point. Accordingly, the 
dissemination, in selected securities, of a liquidity bid or offer 
reflecting NYSE aggregate trading interest, including limit orders, 
trading crowd interest, and

[[Page 17144]]

specialist proprietary interest, at a price interval below the best bid 
(in the case of a liquidity bid), or above the best offer (in the case 
of a liquidity offer), is consistent with the protection of investors 
and the public, when viewed apart from the NYSE vendor agreements.\38\
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    \38\ The NYSE has represented that in some cases, depending on 
the depth of market, the NYSE best bid or offer and the liquidity 
bid or offer may converge, in which case, the NYSE will make 
available the same price and size both as the best bid (offer) over 
CQS, and the liquidity bid (offer) over the Exchange's CAP line. The 
Commission notes that liquidity bids and offers will be deemed firm 
quotations, subject to the firm quoting obligations of Rule 11Ac1-
1(c) under the Act. 17 CFR 240.11Ac1-1(c). In addition, the 
Commission notes that orders seeking to trade against liquidity bids 
(offers) will be executed in accordance with NYSE's current auction 
market procedures, in particular, with respect to the handling of 
market orders, limit orders, and XPress orders.
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    However, nine commenters criticized the provisions of the NYSE's 
vendor and subscriber agreements for Liquidity Quote that preclude data 
feed recipients from enhancing, integrating, or consolidating its 
market data with data from other market centers for retransmission. 
While these agreements have not been filed with the Commission under 
section 19(b)(2) of the Act,\39\ because these comments directly relate 
to the manner in which the Liquidity Quote proposal will operate, the 
Commission believes that it can and must consider these comments in 
determining whether, or on what terms, to approve or institute 
disapproval proceedings with respect to the Liquidity Quote proposal. 
In other words, in assessing whether the Liquidity Quote is consistent 
with the requirements of section 6, we must measure against the 
standards of section 6, not only the literal terms of the Liquidity 
Quote proposal, but also the operation of Liquidity Quote as governed 
by the provisions of the vendor agreements.
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    \39\ 15 U.S.C. 78s(b)(2). Because of the manner in which the 
Commission is disposing of this matter, the Commission need not 
decide whether the NYSE agreements at issue here or similar such 
agreements should be filed under section 19(b)(2) of the Act. In 
this connection, we note, however, that commenters have not been 
precluded from commenting on these agreements in the absence of such 
a filing and the Commission is able to, and indeed required to, take 
these comments into account to the extent that they relate to the 
manner in which the proposal that has been filed with the Commission 
will operate.
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    Section 6(b), in pertinent part, requires that the Liquidity Quote 
proposal, viewed in the context of the restrictions contained in the 
vendor agreements, (1) ``foster cooperation and coordination with 
persons engaged in * * * processing information with respect to, and 
facilitating transactions in securities;''\40\ (2) ``remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system;''\41\ (3) not be ``designed to permit unfair 
discrimination between customers; * * *''\42\ and (4) ``not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of this title.''\43\ With respect to the first two 
considerations, we look for guidance to section 11A.
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    \40\ 15 U.S.C. 78f(b)(5).
    \41\ Id.
    \42\ Id.
    \43\ See also 15 U.S.C. 78f(b)(8).
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    Section 11A of the Act \44\ provides the Commission with broad 
powers over exclusive processors of market information \45\ and thus 
the Commission is responsible for assuring that exclusive processors 
function in a manner that is neutral with respect to all market 
centers, all market makers, and all private firms.\46\ In particular, 
section 11A(a)(1)(C)(ii) and (iii) of the Act \47\ direct the 
Commission, in the interest of the public, for the protection of 
investors and maintenance of fair and orderly markets, to assure: (1) 
the availability to brokers, dealers and investors of information with 
respect to quotations for and transactions in securities; and (2) fair 
competition among brokers and dealers, among exchange markets, and 
between exchange and other markets.\48\ The NYSE proposes to 
disseminate its Liquidity Quota data on a voluntary basis; however, 
even absent a Commission rule requiring dissemination, if the NYSE 
chooses to disseminate Liquidity Quote data, it must do so on terms 
that are fair and not unreasonably discriminatory, and in accordance 
with the objectives of a national market system, as provided by section 
11A of the Act.\49\
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    \44\ 15 U.S.C. 78k-1.
    \45\ The Commission notes that the NYSE would be operating the 
Liquidity Quote service as an ``exclusive processor.'' An 
``exclusive processor'' is defined in section 3(a)(22)(B) of the Act 
as ``any SIP or SRO that, directly or indirectly, engages on an 
exclusive basis, in collecting, processing, or distributing the 
market information of an SRO.'' 15 U.S.C. 78c(a)(22)(B). A 
Securities Information Processor (``SIP'') is defined in section 
3(a)(22)(A) of the Act as ``any person engaged in the business of 
(i) collecting, processing, or preparing for distribution or 
publication, or assisting, participating in, or coordinating the 
distribution or publication of, information with respect to 
transactions in or quotations for any security (other than an 
exempted security) or (ii) distributing or publishing * * * on a 
current and continuing basis, information with respect to such 
transactions or quotations * * * .'' 15 U.S.C. 78c(a)(22)(A).
    \46\ There is no indication in section 11A and its legislative 
history that self-regulatory organizations (``SROs'') acting as SIPs 
should be treated differently under the section because of the 
Commission's separate statutory authority under section 19(b). 
Therefore, section 19(b) review does not limit the Commission's 
authority under section 11A.
    \47\ 15 U.S.C. 78k-1(a)(1)(C)(ii) and (iii).
    \48\ In enacting the Securities Acts Amendments of 1975 (``1975 
Act Amendments''), Congress specifically recognized that the 
securities markets are dynamic and change over time and, therefore, 
specifically rejected mandating the specific components of the 
national market system. Instead, Congress granted the Commission 
broad authority to oversee its implementation. See S. Rep. No. 75, 
94th Cong., 1st Sess. (1975) (``Senate Report''). The 1975 Act 
Amendments added section 11A ``to bring under the SEC's direct 
jurisdiction all organizations engaged in the business of 
collecting, processing, or publishing information relating to 
quotations for, indications of interest to purchase and sell, and 
transactions in securities.'' Id., at 9-10. As a result, the 1975 
Act Amendments greatly expanded the Commission's authority to 
regulate the national market system and matters related to the 
dissemination of market information.
    The goals of this new authority were ``to insure the 
availability of prompt and accurate trading information, to assure 
that these communications networks are not controlled or dominated 
by any particular market center, to guarantee fair access to such 
systems by all brokers, dealers and investors, and to prevent any 
competitive restriction on their operation not justified by the 
purposes of the Act.'' Id. The Commission's broad authority 
``includes all powers necessary to ensure the regulation of the 
securities information processing activities of [the] exchanges and 
associations in the same manner and to the same extent as the 
Commission may regulate securities information processors registered 
and regulated under new section 11A(b).'' Id., at 10.
    Moreover, Congress noted that the Commission's authority under 
section 11A of the Exchange Act includes the authority to regulate 
``what and how information is displayed and qualifications for the 
securities to be included on any tape or within any quotation 
system.'' Id., at 11. Legislative history for section 11A states 
that ``it is critical for those who trade to have access to up-to-
the-second information as to the prices at which transactions in 
particular securities are taking place (i.e., last sale reports) and 
the prices at which other traders have expressed their willingness 
to buy or sell (i.e., quotations).'' Id., at 9.
    \49\ See e.g., Securities Exchange Act Release No. 20874 (April 
17, 1984), 49 FR 17640 (April 24, 1984).
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    In this context, the Commission is concerned that the restrictions 
in the vendor agreements that preclude vendors from providing an 
enhanced, integrated, or consolidated data product to customers raise 
such significant fair and reasonable access issues under section 11A of 
the Act for data recipients, as to preclude the NYSE from disseminating 
Liquidity Quote data in a manner consistent with the statute.
    Specifically, the Commission is concerned that the restrictions in 
the vendor agreements on the use and form of Liquidity Quote data are 
not fair to market data vendors because they will be prevented from 
integrating or commingling Liquidity Quote data with data from other 
markets. This restriction may be particularly unfair and unreasonably 
discriminatory to customers of vendors whose businesses

[[Page 17145]]

primarily consist of packaging quotation information from all reporting 
market centers on a consolidated basis for sale to customers. Such 
customers seek to avoid the costs of desktop integration, and the NYSE 
restrictions would impose integration costs that smaller users of 
market data may be unable to bear.\50\
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    \50\ Desktop integration requires certain infrastructure, such 
as data storage and application installation and maintenance, that 
many small users currently do not directly bear. Such smaller users 
often take advantage of the economies of scale offered by data 
vendors that provide integration at a central location.
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    In addition, the Commission believes that restrictions on 
integration of data such as Liquidity Quote are likely to be more 
troublesome than restrictions on integration for products such as NYSE 
OpenBook.\51\ OpenBook contains only a display of orders left with the 
specialist, while Liquidity Quote reflects orders in the book, interest 
in the crowd, and the specialist's own interest at a price and size 
usually different than the NYSE's best bid or offer. In other words, 
Liquidity Quote differs from OpenBook in that it: (1) Represents the 
NYSE's market-wide price for a specific size, not just a subset of 
orders on the NYSE; and (2) immediately may be executed against. The 
Commission believes that preventing vendors from integrating quotations 
of this type with quotations from other markets is a more substantial 
restriction on the ability of vendors to provide useful market data 
than posed by OpenBook and would, unlike OpenBook, impose on users 
integration costs with respect to immediately executable, market-wide 
quotations in a manner that would: (1) Be inconsistent with fostering 
``cooperation and coordination with persons engaged in processing 
information with respect to * * * securities;''; (2) ``be ``designed to 
permit unfair discrimination between customers;'' and (3) impede, 
rather than remove impediments to, a ``free and open market and a 
national market system.'' \52\
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    \51\ For further details on the NYSE OpenBook service, see 
Securities Exchange Act Release No. 45138 (December 18, 2001), 66 FR 
66491 (December 26, 2001). In its order approving the NYSE's 
OpenBook service, the Commission stated that ``NYSE's * * * 
restrictions on vendor redissemination of OpenBook data, including 
the prohibition on providing the full data feed and providing 
enhanced, integrated, or consolidated data found in these agreements 
are on their face discriminatory, and may raise fair access issues 
under the Act.''
    \52\ See section 6(b)(5) of the Act, 15 U.S.C. 78f(b)(5). In the 
context of the Liquidity Quote proposal, we have received comment 
from a more diverse array of commenters and have received more 
information about the potential negative transparency and 
competitive effects, and effects on smaller market data users, than 
we received in response to publication of the OpenBook proposal. We 
also have had the advantage of experience with the operations of the 
restrictions on the dissemination of the OpenBook product, which 
shows that our expectation, as expressed in our cautionary statement 
in the OpenBook order, see note 51, supra, that the market would 
challenge these types of vendor agreement restrictions, has not been 
fulfilled. The Commission has a statutory responsibility to balance 
the statutory goals of facilitating the provision of more quotation 
information to the market with the goals of ensuring that quotations 
information is provided in a fair way and in a way that does not 
unreasonably burden competition. In conducting this balance, as we 
have done here with respect to the Liquidity Quote proposal, we must 
take into account all the information provided to us by commenters 
and by market experience. The additional experience we have with 
respect to the failure of market forces to act to address the anti-
competitive nature of the vendor contracts in the context of the 
OpenBook proposal further informs and reinforces our decision here.
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    The Commission also believes that the restrictions on integrating 
Liquidity Quote data and only permitting the data to be displayed in a 
separate window raise substantial concerns about burdens on 
competition, which may be inconsistent with section 6(b)(8) of the Act. 
In particular, the Commission believes that in the case of other market 
centers, the restrictions likely could inhibit competition with the 
NYSE for order flow in NYSE-listed securities because Liquidity Quote 
data is precluded from being viewed in tandem with the consolidated 
quote display. In addition, the Commission is concerned that the 
restrictions may be anticompetitive as to small- and medium-sized 
market participants that are unable to choose useful formats to view 
the Liquidity Quote data.
    The NYSE argues that these restrictions are designed to maintain 
the integrity of its data so that it is uniquely identified to the 
NYSE. We are not persuaded by this argument. We believe that a less 
restrictive labelling requirement, such as one that simply would 
require the clear identification of the data as the NYSE Liquidity 
Quote, might well achieve the stated objective. The Commission believes 
that whatever ownership interests the NYSE may have in these data 
cannot be asserted in a manner inconsistent with the requirements of 
sections 6(b)(5) and 6(b)(8). The Commission believes that there is a 
substantial question as to whether, to be consistent with these 
standards, Liquidity Quote should be provided in a way that allows data 
feed recipients to be able to enhance, integrate or consolidate 
Liquidity Quote data in a reasonable format.\53\
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    \53\ The Commission believes that it would be reasonable and 
consistent with the statute for the NYSE to require that data feed 
recipients who choose to provide a value-added liquidity quote data 
package to: (i) Give the NYSE attribution next to any integrated 
quote that includes NYSE data; and (ii) make available to customers 
NYSE's liquidity quote product as a separate branded package.
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    While it is arguable that an SRO may restrict the integration of 
some information that is not required by current SEC rules to be 
disseminated in a consolidated format, the Commission believes it is 
also arguable that, at a minimum, where a market chooses to disseminate 
quotation data that is immediately executable and represents a market's 
entire interest at a particular price such market data should be 
consolidatable.\54\ The NYSE argues that as owner of this data, it has 
the legal right to ``brand'' this data and, in order to preserve its 
brand, it must be able to restrict integration of this data with other 
data. The Commission preliminarily believes that the better view of 
section 11A is that these statutory provisions preclude the NYSE, once 
it makes the decision to disseminate this data, from asserting whatever 
property rights it may have to this data in a way that unfairly and 
unreasonably limits vendor and investors access and use of this data 
and has a negative effect on intermarket competition in NYSE listed 
securities.
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    \54\ The NYSE believes that the Commission is ``extend[ing] the 
consolidated Display Rule to NYLQ [or Liquidity Quote].'' See Grasso 
(NYSE) Letter, at 2. The NYSE argues, in referencing the ``Report of 
the Advisory Committee on Market Information: A Blueprint for 
Responsible Change,'' September 14, 2001 (``Seligman Report''), that 
the Seligman Report concluded that such data should be free from 
``mandatory consolidation requirements.'' See id. (citing, the 
Seligman Report). The Commission is not mandating that the NYSE 
consolidate its Liquidity Quote data with that of other markets. The 
Commission does believe, however, that the Liquidity Quote data 
should be disseminated in a consolidatable format--i.e., vendors and 
investors should not be precluded from opting to consolidate the 
Liquidity Quote data. Contrary to the NYSE's views, the Seligman 
Report did not recommend that markets be able to make their own 
market data non-consolidatable; the Seligman Report recommended that 
markets no longer be required to centrally consolidate their data.
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    The Commission, therefore, is approving this proposal on the 
condition that the proposed rule change is not effective until the NYSE 
accepts the condition to remove from its contracts the prohibition on 
the ability of data feed recipients, including vendors, to integrate 
the data with the display of other markets' data, and demonstrates its 
acceptance of the condition to the Commission. If the NYSE accepts the 
condition, it must do so by the close of business on April 9, 2003. If 
the NYSE accepts the condition, it may not implement the Liquidity 
Quote Proposal until the prohibition is removed from its vendor 
contracts.
    If by the close of business on April 9, 2003, the NYSE has not 
demonstrated

[[Page 17146]]

its acceptance of the condition to the Commission, the Commission will 
issue an order beginning proceedings to disapprove the proposed rule 
change, pursuant to section 19(b)(2)(B) of the Act.\55\
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    \55\ 15 U.S.C. 78s(b)(2)(B).
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V. Conclusion

    It is ordered, pursuant to section 19(b)(2) of the Act,\56\ that 
the proposed rule change (SR-NYSE-2002-55), as amended, is approved, on 
the condition that the proposed rule change will not be effective 
unless the NYSE demonstrates to the Commission by April 9, 2003 that it 
has accepted the condition that it remove from its vendor agreements 
the prohibition on data feed recipients, including vendors, from 
integrating Liquidity Quote data with other markets' data or with the 
display of other markets' data, provided however that the NYSE may 
require that vendors provide the NYSE attribution in any display that 
includes Liquidity Quote and also may require vendors that purchase the 
Liquidity Quote product to make Liquidity Quote available to their 
customers as a separate branded package.
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    \56\ 15 U.S.C. 78s(b)(2).
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    It is further ordered that the Liquidity Quote Proposal may not be 
implemented until the prohibition is removed from the NYSE's vendor 
agreements.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-8441 Filed 4-7-03; 8:45 am]
BILLING CODE 8010-01-P