[Federal Register Volume 68, Number 79 (Thursday, April 24, 2003)]
[Notices]
[Pages 20200-20205]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10098]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47689; File No. SR-NYSE-99-51]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the New York Stock Exchange, Inc. Relating to Order Tracking

April 17, 2003.

I. Introduction

    On December 27, 1999, 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''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to require the recording of 
details of orders in Exchange listed securities by its members and 
member organizations. On May 24, 2000, the Exchange filed Amendment No. 
1 to the proposal.\3\ On August 14, 2001, the Exchange filed Amendment 
No. 2 to the proposal.\4\ On January 17, 2002, the Exchange filed 
Amendment No. 3 to the proposal.\5\ The proposed rule change, as 
amended, was published for comment in the Federal Register on January 
30, 2002.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Jennifer Colihan, Attorney, Division of Market 
Regulation, Commission, dated May 22, 2000 (``Amendment No. 1'').
    \4\ See Letter from Darla C. Stuckey, Assistant Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division, Commission, dated 
August 14, 2001 (``Amendment No. 2'').
    \5\ See Letter from Darla C. Stuckey, Assistant Secretary, NYSE 
to Belinda Blaine, Associate Director, Division, Commission, dated 
January 17, 2002 (``Amendment No. 3'').
    \6\ See Securities Exchange Act Release No. 45326 (January 23, 
2002), 67 FR 4479.
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    On February 28, 2002, the Exchange filed Amendment No. 4 to the 
proposal.\7\ The proposed rule change, as amended, was again published 
for comment in the Federal Register on March 15, 2002.\8\
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    \7\ See Letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy Sanow, Assistant Director, Division, Commission, dated 
February 28, 2002 (``Amendment No. 4'').
    \8\ See Securities Exchange Act Release No. 45521 (March 8, 
2002), 67 FR 11735.
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    The Commission received one comment on the proposal.\9\ This order 
approves the proposed rule change, as amended.
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    \9\ See Letter from Stuart J. Kaswell, Senior Vice President and 
General Counsel, Securities Industry Association (``SIA''), to 
Jonathan Katz, Secretary, Commission, dated April 26, 2002.
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II. Background

    The proposed rule change is intended to fulfill certain of the 
undertakings contained in the order issued by the Commission relating 
to the settlement of an enforcement action against the NYSE for failure 
to enforce compliance with section 11(a) and Rule 11a-1 of the Act and 
NYSE Rules 90, 95, and 111.\10\ The SEC Order found that the NYSE's 
floor broker regulatory program suffered from two major deficiencies: 
(1) The NYSE failed to take appropriate action to police for profit-
sharing or other performance-based compensation of independent floor 
brokers; and (2) the NYSE suspended its routine independent floor 
broker surveillance for extensive periods of time. As part of the SEC 
Order, the NYSE agreed and was ordered to comply with a variety of 
undertakings. Among other things, it agreed to, and was ordered to, 
continue the development and implementation of an electronic floor 
system (``Phase I

[[Page 20201]]

Floor Audit Trail'') that will be used to enter details related to 
orders before these orders can be represented on the trading floor. To 
accomplish this undertaking, the NYSE was ordered to submit a proposed 
rule change setting forth the complete details and specifications of 
the Phase I Floor Audit Trail and to implement fully the Phase I Floor 
Audit Trail nine months after Commission approval of the proposal. The 
Exchange complied with this aspect of the SEC Order.\11\
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    \10\ See In the Matter of New York Stock Exchange, Inc., SEC 
Release No. 34-41574, June 29, 1999; Administrative Proceeding File 
No. 3-9925 (``SEC Order'').
    \11\ See Securities Exchange Release No. 43689 (December 7, 
2000), 65 FR 79145 (December 18, 2000) (``Phase I Floor Audit Trail 
Approval Order'').
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    In addition, as part of the SEC Order, the Exchange undertook and 
was ordered ``to design and implement'' ``an audit trail sufficient to 
enable the NYSE to reconstruct its market promptly, to effectively 
surveil the NYSE, and to facilitate the effective enforcement of the 
federal securities laws and NYSE rules.'' In connection with this 
undertaking, at a minimum, the Exchange was required to provide: (a) an 
accurate, time-sequenced record of orders, quotations and transactions, 
beginning with the receipt of an order by any NYSE member firm and 
further documenting the life of the order through the process of 
execution or cancellation of that order; and (b) for synchronization of 
clocks used in connection with the audit trail (``Phase II Floor Audit 
Trail''). This proposed rule change addresses that undertaking.

III. Description of Proposal

    The Exchange has proposed the adoption of four new rules which 
would require members and member organizations (herein referred to 
collectively as ``members'') to record and retain order information, to 
synchronize their time keeping equipment with a time source designated 
by the Exchange, and to provide the Exchange with information on orders 
upon request. Specifically, the Exchange has adopted requirements for 
the electronic capture of orders at the point of sale (front end 
systemic capture, or ``FESC'')\12\ and at the point of receipt (order 
tracking system, or ``OTS''). The purpose of the requirements is to 
create a complete systemic record of orders handled by members and 
member organizations. The proposed rules and amendments are described 
below.
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    \12\ See id.
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i. NYSE Rule 123(f)

    Proposed NYSE Rule 123(f) requires that order execution reports be 
entered into FESC and that any member organization proprietary system 
used to record the details of an order must also be capable of 
transmitting a report of the order's execution to FESC. The proposed 
rule further requires that the details of each execution report 
required to be recorded must include the following data elements: (1) 
Order identifier that uniquely identifies the order as required by 
paragraph 123(e); (2) symbol; (3) number of shares or quantity of 
security; (4) transaction price; (5) time the trade was executed; (6) 
executing broker badge number, or alpha symbol as may be used from time 
to time, in regard to its side of the contract; (7) executing broker 
badge number, or alpha symbol as may be used from time to time, of the 
contra side to the contract; (8) clearing firm number, or alpha symbol 
as may be used from time to time, in regard to its side of the 
contract; (9) clearing firm number, or alpha symbol as may be used from 
time to time, in regard to the contra side of the contract; (10) 
whether the account for which the order was executed was that of a 
member or member organization or of a non-member or non-member 
organization; (11) identification of member or member organization 
which recorded order details as required by paragraph (e); (12) date 
the order was entered into an Exchange system; (13) indication as to 
whether this is a modification to a previously submitted report; (14) 
settlement instructions (e.g., cash, next day, or seller's option); 
(15) Special Trade Indication, if applicable; (16) Online Comparison 
System (OCS) Control Number; and (17) such other information as the 
Exchange may from time to time require.

ii. NYSE Rule 132A

    Proposed NYSE Rule 132A requires members to synchronize the 
business clocks used to record the date and time of any event that the 
Exchange requires to be recorded. The Exchange will require that the 
date and time of orders in securities listed on the Exchange be so 
recorded. The proposed Rule also requires that members maintain the 
synchronization of this equipment in conformity with procedures 
prescribed by the Exchange. The Exchange intends to coordinate time 
synchronization with the National Association of Securities Dealers 
Inc.'s (``NASD'') identical requirements.\13\
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    \13\ See NASD Rule 6953.
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iii. NYSE Rule 132B

    Proposed NYSE Rule 132B prescribes requirements and procedures with 
respect to orders in any security listed on the Exchange received or 
originated by a member. Paragraph (a) of the proposed rule requires 
immediate recordation of the data elements described in paragraph (b). 
If an order is transmitted to another member or is transmitted to 
another department of the same member, information detailed in 
paragraph (c) must be recorded. If an order is modified or cancelled, 
information required by paragraph (d) must be recorded. The various 
data elements and information required by the proposed rule must be 
recorded in an electronic format prescribed by the Exchange. Time 
records must be expressed in hours, minutes and seconds. The Rule makes 
clear that the records required therein must be preserved pursuant to 
Rule 17a-4(b) under the Act and that these records may be produced or 
reproduced on ``micrographic media'' as contemplated under Rule 17a-
4(f) under the Act.
    Paragraph (b) of the proposed rule contains the sixteen data 
elements to be recorded for an order. These include: (1) An order 
identifier; (2) stock symbol; (3) identification of the member; (4) 
department identification of the member or terminal identification 
number for orders received via a SuperDOT terminal; (5) department of 
the member which originated the order; (6) number of shares; (7) buy or 
sell order designation; (8) whether the order is a short sale order; 
(9) whether the order is a market, limit, stop or stop limit order 
(which terms are defined in Rule 13 of the Exchange); (10) any limit 
price, stop price or stop limit price prescribed in the order; (11) the 
date, if any, that an order expires or, if the order is in force for 
less than a day, the time when it expires; (12) the time limit the 
order is in force; (13) any request by the customer that the order not 
be displayed pursuant to Rule 11Ac1-4 under the Act; (14) any special 
handling requests (such as fill or kill, market-on-close, limit-on-
close, not held, etc); (15) date and time of origination or receipt of 
the order; \14\ and (16) the type of account for which the order is 
entered. Each of these data elements are commonly understood and used 
by members.
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    \14\ For purposes of NYSE Rule 132B(b)(15), for electronic 
orders, order origination and time of receipt of an order is the 
time the order is captured by a member organization's electronic 
order-routing or execution system. For manual orders, order 
origination and time of receipt of an order is the time the order is 
first received by the member organization from the customer.
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    Paragraph (e) of the proposed rule explains that the order 
identifier is the order identifier required by NYSE Rule 123(e). This 
is the identifier assigned to an order in connection with the

[[Page 20202]]

Exchange's FESC initiative. Under NYSE Rule 123(e), before an order is 
represented or executed on the Floor of the Exchange, a member must 
assign a unique identifier to it. This identifier will stay with the 
order throughout its processing life, through cancellation or 
execution.
    Paragraph (c) of proposed NYSE Rule 132B requires that certain 
information be recorded when an order is transmitted to another 
department within the member, to another member, or to a non-member. 
When transmitted to another department, the following must be recorded: 
the order identifier, identification of the member, the date of receipt 
or origination of the order, the identification of the department to 
which the order was transmitted and the date and time the order was 
received by the department.
    Paragraph (c)(2) contains requirements for both receiving and 
transmitting members when an order is transmitted from one member to 
another. The transmitting member must record whether the order was 
transmitted manually or electronically, the order identifier, market 
participant symbol for both receiver and transmitter, date of 
origination or receipt by the transmitting member, the date and time 
the order was transmitted, the number of shares so transmitted and, if 
the order is included in a bunched order, the bunched order route 
indicator assigned by the member. A bunched order is any aggregation of 
two or more orders. The receiving member must record whether the 
transmitted order was received manually or electronically, the order 
identifier, and the identifier of the member transmitting the order.
    Exceptions to the requirement for recording information for both 
the transmitting and receiving member are contained in proposed NYSE 
Rules 132B(c)(2)(C) and 132(c)(2)(D). These exceptions are for orders 
transmitted to the Floor via SuperDOT, the Exchange's automated order 
routing system, and orders transmitted to another member on the Floor 
of the Exchange, where the order was entered into an Exchange data base 
pursuant to NYSE Rule 123(e), the Exchange's front-end systemic order 
capture requirements. In light of the objective of being able to 
identify an order from start to finish, both the receiving and 
transmitting members must record the order identifier and the identity 
of the member transmitting and receiving the order.
    For orders transmitted to a non-member, the member must record that 
fact as well as the order identifier, member's identity, date of 
receipt or origination of the order, date and time of the order, number 
of shares, and, if applicable, any bunched order route indicator.
    If an order is modified, proposed NYSE Rule 132B(d) requires that 
the order identifier (and any new order identifier, if applicable), 
date and time of modification and date the original order was received 
or originated be recorded. If an order is cancelled, (d)(2) requires 
the date and time of cancellation, whether the customer or the member 
cancelled the order, and the number of shares cancelled if there is a 
partial execution. This is in addition to the basic requirements to 
record the order identifier, identity of the member and the date and 
time when the order was first received or originated.
    The same exceptions with respect to SuperDOT orders and orders on 
the Floor entered into a database under NYSE Rule 123(e) will apply to 
modifications and cancellations. Modification and cancellation will be 
elements captured in these systems and will not need to be captured by 
the member on the Floor.
    Paragraph (f) of proposed NYSE Rule 132B provides an exception to 
the Rule for proprietary transactions of specialists, Registered 
Competitive Market Makers, and Competitive Traders. The transactions 
these members effected for their own accounts are not orders as 
contemplated by the Rule. Information with respect to these 
transactions is recorded and maintained by these members pursuant to 
the recordkeeping requirements of Exchange \15\ and Commission 
Rules.\16\
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    \15\ See NYSE Rules 123 and 410.
    \16\ See CFR 240.17a-3.
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iv. NYSE Rule 132C

    Proposed NYSE Rule 132C requires members, upon request, to transmit 
order tracking data to the Exchange. This parallels the approach used 
under NYSE Rule 410A (Automated Submission of Trading Data) for 
submission of transaction information. The Exchange will make requests 
for order tracking information on an as-needed basis in order to carry 
out its surveillance and regulatory functions.\17\ The NYSE has 
represented that this data will be used for regulatory purposes only 
and will not be used by the Exchange to gain an unfair competitive 
advantage over other market participants.
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    \17\ The Exchange does not believe that it is cost-effective to 
store all order tracking data collected from members on a daily 
basis, and that members should be required to submit data to the 
NYSE on an ``as requested'' basis rather than daily as a matter of 
routine.
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    Members will be required to submit the data in an automated format. 
It is the Exchange's experience that submission of data by request has 
proven to be effective and efficient from both the Exchange's and its 
members' viewpoint.
Integration with Existing Exchange Requirements
    With the implementation of NYSE Rule 132B, Exchange rules will 
provide a complete audit trail of orders from receipt through 
execution. As mentioned above, NYSE Rule 123(e) provides for the 
systemic capture of orders before they are represented or executed on 
the Floor. This includes the assignment of the unique identifier to 
each order. In addition, the Exchange will require that all orders be 
systemically delivered to its Floor, thus providing an electronic 
capture of order data from receipt or origination of an order. The 
audit trail requirements of proposed NYSE Rule 132B require information 
on the execution and clearance of transactions, the so-called ``back 
end'' of orders. With the addition of NYSE Rule 123(f), which requires 
recordation of the unique order identifier as part of the execution 
report, the Exchange represents that an order could be tracked 
throughout the life of the order. The unique order identifier would 
link the execution report to the original order.
Violation of Order Tracking Requirements
    If, upon investigation, the Exchange determines that a violation of 
the Rule proposed to be amended or adopted herein has occurred, the 
Exchange will take appropriate action under the procedures of its 
disciplinary rules, including NYSE Rule 476. If a particular violation 
is deemed minor in nature, this could include issuance of a cautionary 
letter.\18\
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    \18\ In the future, the Exchange may consider seeking Commission 
approval to add these rules to the list of rules contained in NYSE 
Rule 476A, which provides for the imposition of fines for minor 
violations of rules.
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Effective Date
    The provisions of the rules and amendments proposed herein will 
become effective 15 months after the date of this order, except that 
the requirement in NYSE Rule 123 that copies of execution reports be 
entered into an Exchange database will become effective six months 
after the date of this order.\19\
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    \19\ See note 7, supra, Amendment No. 4.

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[[Page 20203]]

IV. Summary of Comments

    The Commission received one comment letter on the proposal.\20\ In 
its letter, the commenter raised concerns with respect to four 
subjects: the proposed rule's application to manual orders, how the 
order identifier would be used, the proposed rule's requirement to 
record Online Comparison System (``OCS'') control numbers, and the 
proposed rule's requirement to include a Bunched Order Route Indicator.
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    \20\ See note 9, supra, SIA Letter.
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A. Manual Orders

    The commenter objected to both the proposal's general requirement 
that firms be required to record information, including time of 
receipt, regarding manual orders and in particular the requirement that 
they assign manual orders an order identification number. The commenter 
explained that at many small firms, recordation of order information is 
still done primarily by order ticket. According to the commenter, in 
these cases, the order information is not electronically captured and 
cannot be linked to other data for the purpose of creating a complete 
systemic record of the order. The commenter contends that in order to 
comply with the NYSE's proposed rule to capture order information 
relating to manual orders, there would be costs in addition to the cost 
of new technology needed for compliance by members. The commenter 
believes that there would be a ``huge cost'' to investors because, the 
commenter argues, sales-traders would need to divert their attention 
from handling customer orders in order to collect and electronically 
all the data elements required by the proposed rule. The commenter 
believes that a ``legion of sales-traders performing clerical duties 
rather than monitoring markets for execution opportunities will make 
the markets riskier, less efficient and less accessible to investors.''

B. Order Identifier

    The commenter also explained that because manual orders are 
typically written down and are not entered into the receiving firm's 
system, no systemic order identifier is generated. The commenter 
believes that assigning a trader the responsibility of generating and 
appending an order identifier to manual orders could result in 
inefficient handling of orders. The commenter further believes that the 
risk of confusion, duplication, and bad data will be exacerbated as the 
order identifier is then orally relayed and recorded. Lastly, the 
commenter argues that because the NYSE rules contain an exception from 
the order tracking requirements for orders transmitted to the NYSE 
floor via SuperDot, market centers that are not already hard-wired to a 
member firm would be at a competitive disadvantage.

C. Online OCS Control Number

    Pursuant to proposed NYSE Rule 123(f), members would be required to 
record an Online OCS Control Number as part of the order execution 
report entered into FESC. This identifier would allow members to check 
on settlement problems that may occur between a member and the 
Exchange. The commenter contends that the proposed rule's requirement 
to record an OCS Control Number is not reasonable, and the cost to 
build a feed to incorporate this information would be significant. The 
commenter also argues that this information should not be required as 
part of the audit trail, but instead should be maintained by members in 
a manner that they find efficient for use by regulators upon request.

D. Bunched Order Route Indicator

    The commenter argues that compliance with the NYSE's requirement to 
include a ``Bunched Order Route Indicator'' may be impossible because a 
firm typically does not know at the time an order is received whether 
the order will ultimately be part of a bunched order. The commenter 
contends that this provision could only be complied with by 
retroactively attaching an indicator where necessary after personnel 
search for and locate the appropriate part of the order to which they 
must attach the indicator. The commenter believes that the amount of 
time that this process would take makes the rule unworkable.
    The NYSE addressed these concerns in letters to the Commission 
dated August 15, 2002 and April 4, 2003.\21\ The Exchange noted that 
the proposed rule was undertaken pursuant to the SEC Order that 
requires the Exchange to design and implement a comprehensive audit 
trail for all orders. The order audit trail must, among other matters, 
encompass ``an accurate, time-sequenced record of orders, quotations 
and transactions, beginning with the receipt of an order by any NYSE 
member firm, and documenting the life of the order through the process 
of execution or cancellation of that order. * * *'' \22\ Thus, the 
Exchange addressed the SIA comment letter by indicating that the 
components of a complete audit trail require all of the components 
specified in their OTS rule. The Exchange acknowledged that 
``interpretative questions may surface during the practical 
implementation of the OTS system, and [it] is committed to working with 
the SIA to provide appropriate guidance to its members and member 
organizations as particular issues are identified.'' \23\
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    \21\ See Letters from Mary Yeager, Assistant Secretary, NYSE, to 
Jonathan G. Katz, Secretary, Commission, dated August 15, 2002; and 
Darla Stuckey, Corporate Secretary, NYSE, Commission, dated April 3, 
2003.
    \22\ See Letter from Mary Yeager, Assistant Secretary, NYSE, to 
Jonathan G. Katz, Secretary, Commission, dated August 15, 2002, 
quoting Securities Exchange Act Release No. 41574 (June 29, 1999).
    \23\ Id.
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    Further, the Exchange specifically addressed issues raised 
regarding the OCS Control Number and the Bunched Order Route 
Indicator.\24\ With respect to the OCS Control Number, the Exchange 
represented that it did not believe, contrary to the assertion of the 
commenter, that inclusion of this identifier would be unduly 
burdensome, particularly in light of its value. The Exchange stressed 
the importance of the OCS Control Number as ``a critical component in 
establishing a complete order audit trail from order entry through 
execution.'' The Exchange explained that the OCS Control Number would 
allow the Exchange to link the entry of an order, the execution report, 
and any modification to such report, thus providing a complete trail 
for each order.
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    \24\ See Letter from Darla Stuckey, Corporate Secretary, NYSE, 
Commission, dated April 3, 2003.
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    The Exchange also addressed the commenter's concerns regarding the 
Bunched Order Route Indicator. The Exchange noted that this indicator 
would likely be used infrequently as in many instances, a firm 
receiving additional trading interest from a customer would choose to 
modify an existing order rather than create an additional order which 
might then have to be bunched with a prior order. The Exchange also 
explained that in the event a Bunched Order Route Indicator was needed, 
the OCS Control Number could be utilized to locate and link together 
any parts of an order to which a Bunched Order Route Indicator might 
need to be appended.

V. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national

[[Page 20204]]

securities exchange.\25\ In particular, the Commission believes that 
the proposal is consistent with section 6(b)(5) of the Act,\26\ which 
requires, among other things, that the rules of an exchange 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 
to protect investors and the public interest.
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    \25\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \26\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds that the Exchange, through the proposed 
rule change, satisfies an undertaking set forth in the SEC Order. 
Specifically, the SEC Order directed the Exchange to ``design and 
implement * * * an audit trail sufficient to enable the NYSE to 
reconstruct its market promptly, to effectively surveil the NYSE and to 
facilitate the effective enforcement of the federal securities laws and 
NYSE rules.'' At a minimum, the SEC Order called for the NYSE to 
provide ``an accurate, time-sequenced record of orders * * *'' 
throughout an order's life, from receipt through execution or 
cancellation and for synchronization of clocks used in connection with 
the audit trail of orders.
    The proposed rule change will implement: (1) NYSE Rule 123(f) to 
require that order execution reports containing certain data elements 
be entered into FESC and that any member organization proprietary 
system used to record the details of an order must also be capable of 
transmitting a report of the order's execution to FESC; (2) NYSE Rule 
132C to require members, upon request, to transmit order tracking data 
to the Exchange; and (3) NYSE Rule 132B to prescribe requirements and 
procedures with respect to orders in any security listed on the 
Exchange received or originated by a member. The Commission believes 
that the implementation of this proposed rule change will establish a 
complete and comprehensive audit trail which will provide the NYSE with 
an effective means to track and surveil an order from receipt through 
execution (or cancellation).
    The Commission finds that the proposed rule change was designed to 
comply with, and fulfills an undertaking contained in the SEC Order 
relating to the Exchange's regulatory responsibilities to establish the 
Phase II Order Audit Trail. As specified in the SEC Order, this 
proposed rule change establishes an audit trail that will enable the 
Exchange to fulfill its regulatory responsibilities to effectively 
surveil its market and facilitate the effective enforcement of the 
Exchange Act and NYSE rules.
    As described above, the sole commenter to the proposed rule change 
expressed concerns regarding the proposal's requirement that firms 
record information, including the time of receipt, for manual orders. 
The commenter also expressed dissatisfaction with the requirement that 
members must assign manual orders an order identification number. While 
the Commission appreciates these concerns, it notes that manual orders 
often are large or block-sized orders, therefore such orders have great 
potential to significantly impact the market and are particularly 
susceptible to manipulation. In the Commission's view, it is therefore 
essential to the creation of a complete and effective systemic order 
audit trail that the life of manual orders is captured to guard 
against, and aid surveillance for, potential manipulation.
    The commenter also argued the proposal's requirement that members 
record an OCS Control Number is not reasonable because it would require 
members to build a feed to incorporate this information into the audit 
trail and the cost would be significant. Again, the Commission 
appreciates the concerns regarding potential costs associated with 
providing the Exchange with an OCS Control Number. However, in light of 
the vital regulatory purpose that will be achieved by the creation of 
an effective and complete systemic order audit trail, the Commission 
believes that the anticipated development costs are not undue or 
unwarranted. In the Commission's view, the OCS Control Number, or its 
equivalent, is an important part of the audit trail. The OCS Control 
Number will permit the Exchange to establish a complete order audit 
trail from order receipt through execution, thus permitting the 
Exchange to comply with its obligations under the SEC Order. 
Specifically, the Commission notes that the OCS Control Number will 
allow the Exchange to link the entry of an order, the execution report, 
and any modification to such report, thus providing a complete, 
systemic trail for each order.
    Finally, the commenter expressed concern that compliance with the 
NYSE's requirement to include a ``Bunched Order Route Indicator'' may 
be impossible because a firm typically does not know at the time an 
order is received whether the order will ultimately be part of a 
bunched order. The Commission notes, however, that in order to comply 
with this provision, a member can make use to the OCS Control Number to 
locate and link together any parts of an order to which a Bunched Order 
Route Indicator might need to be appended. Further, the Commission 
notes that while this process may be somewhat time consuming, it does 
not expect that orders will be bunched on a regular basis; thus the 
process will be utilized only on rare occasions.
    In approving this proposed rule change, the Commission emphasizes 
that the Exchange has committed to the following:

    The Exchange believes it should not have access to data 
generated by members and member organizations pursuant to these 
requirements for the purpose of gaining an unfair advantage over 
other market participants. In this vein, the Exchange commits that 
it will not use data received from its members and member 
organizations pursuant to these requirements to gain a competitive 
advantage over another self-regulatory organization or broker-dealer 
(market maker or electronic communications network).\27\
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    \27\ See Letter from Darla C. Stuckey, Assistant Secretary, NYSE 
to Belinda Blaine, Associate Director, Division, Commission, dated 
January 17, 2002 (``Amendment No. 3'').

    The Commission would be concerned if the information gained 
pursuant to OTS were used for any purpose other than regulatory 
surveillance.
    In sum, the Commission recognizes that OTS will require some degree 
of system changes by NYSE members that will vary depending upon the 
business mix of the particular firm. These changes will entail costs 
for all NYSE members. Nevertheless, the Commission believes any costs 
are far outweighed by the substantial benefit to NYSE surveillance and 
enforcement that will be derived from OTS. The Commission expects that 
during the process of implementing and reviewing OTS, the Commission, 
the NYSE and NYSE members may identify ways in which to improve OTS to 
make it more efficient and effective from a technological or cost 
perspective. The Commission encourages a cooperative effort between the 
NYSE and its members to develop proposals that could achieve such 
efficiency while satisfying the requirements of the Exchange Act and 
the SEC Order for the NYSE audit trail.\28\
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    \28\ The Exchange states it is committed to a cooperative effort 
between the NYSE and its members and member organizations in 
implementing OTS. See Letter from Mary Yeager, Assistant Secretary, 
NYSE, to Jonathan G. Katz, Secretary, Commission, dated August 15, 
2002.

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[[Page 20205]]

VI. Conclusion

    The Commission believes that the proposal, as amended, should 
significantly assist the NYSE's efforts in fulfilling its regulatory 
responsibilities. The Commission further believes that the proposed 
rules meet the minimum requirements for an order audit trail system 
imposed by the Commission in the SEC Order, which required a time-
sequenced record of orders and market-wide synchronization of all 
member firms' business clocks. In addition, OTS should provide a useful 
surveillance tool that will allow earlier detection of fraudulent 
activity for the benefit of investors and the public. Therefore, the 
Commission believes the approval of the proposed OTS, as amended, is 
appropriate and consistent with the requirements of the Act applicable 
to a national securities exchange, and in particular, with the 
requirements of section 6(b)(5) of the Act,\29\ and the rules and 
regulations thereunder.
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    \29\ 15 U.S.C. 78f(b)(5).
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    It is therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\30\ that the proposed rule change, as amended, (NYSE-99-51) is 
approved.
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    \30\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-10098 Filed 4-23-03; 8:45 am]
BILLING CODE 8010-01-P