[Federal Register Volume 69, Number 102 (Wednesday, May 26, 2004)]
[Notices]
[Page 29998]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11881]



[[Page 29998]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49745; File No. SR-NYSE-2003-37]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 Thereto by the New York Stock Exchange, Inc. 
To Amend Exchange Rule 124 To Change the Way Odd-Lot Orders Are Priced 
and Executed Systemically

May 20, 2004.

I. Introduction

    On November 18, 2003, the New York Stock Exchange, Inc. (``NYSE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 
19b-4 thereunder,\2\ to amend Exchange Rule 124 to change the way odd-
lot orders are priced and executed systemically. On March 31, 2004, the 
Exchange amended the proposed rule change.\3\ The proposed rule change, 
as amended by Amendment No. 1, was published for comment in the Federal 
Register on April 14, 2004.\4\ The Commission received no comments on 
the proposed rule change, as amended. This order approves the proposed 
rule change, as amended.
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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 March 30, 2004 and accompanying Form 
19b-4 (``Amendment No. 1'').
    \4\ See Securities Exchange Act Release No. 49536 (April 7, 
2004), 69 FR 19890 (``Notice'').
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II. Description

    The Exchange is proposing to change the way odd-lot orders are 
priced and executed systemically. Currently, odd-lot orders do not 
enter the Exchange's auction market, but are executed systemically, 
with the specialist being assigned as the contra-party in all cases. 
Currently, odd-lot market orders to buy (sell) are generally executed 
at the price of the adjusted ITS round-lot offer (bid) \5\ at the time 
the Exchange's system receives the order, and odd-lot limit orders are 
generally executed at the price of the first round-lot transaction, 
subsequent to the receipt of the order by the system, that is at or 
better than the limit price on the order.
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    \5\ ``Adjusted ITS bid'' and ``adjusted ITS offer'' are defined 
in NYSE Rule 124.60.
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    Under the proposal, odd-lot orders would be priced and executed at 
the price of subsequent round-lot transactions, and in proportion to 
round-lot volume, as follows:
    a. Market Orders. Odd-lot market orders would be executed in time 
priority at the price of the next round-lot transaction. Buy and sell 
orders would, in essence, be netted against one another and executed 
(the specialist is technically the contra party to the buy orders and 
to the sell orders, but since the specialist is buying the same amount 
that he or she is selling, there is no economic consequence to the 
specialist in this type of pairing-off of orders). Any imbalance of buy 
or sell orders would be executed against the specialist, but only up to 
the size of the round-lot transaction. Any market orders that do not 
receive an execution because of the volume limitation would be 
executed, in time priority order, at the price of the next round-lot 
transaction, subject to the volume limitation. There would be a 
``timer'' provision in the rule to provide that an order not executed 
within 30 seconds would be executed at the price of the adjusted ITS 
best round-lot bid (in the case of a sell order) or offer (in the case 
of a buy order).
    b. Limit Orders. Odd-lot limit orders would be executed at the 
price of the first round-lot transaction that is at or better than the 
limit price of the order, subject to the volume limitation of the 
round-lot transaction. Odd-lot limit orders also would be aggregated 
with odd-lot market orders for purposes of the volume limitation. Limit 
orders eligible for execution would be intermingled with market orders 
for purposes of determining time priority, and buy and sell orders 
would be netted against each other in the same fashion as market 
orders. As with odd-lot market orders, odd-lot limit orders which would 
otherwise receive a partial execution would be executed in full. There 
would be no ``timer'' for odd-lot limit orders.
    c. Short Sale Orders. A short sale market odd-lot order would be 
eligible for execution at the price of the next sale in the round-lot 
market on the Exchange which is higher than the last different round-
lot transaction. Short sale limit odd-lot orders would be eligible for 
execution at the price of the first round-lot transaction on the 
Exchange which is at or above the specified limit of the order, and 
which is also higher than the last different round-lot transaction.
    d. Stop Orders. Stop orders in odd-lots would be handled as they 
are today.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\6\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act,\7\ in that it is 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.
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    \6\ 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).
    \7\ 15 U.S.C. 78f(b)(5).
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    In the Notice, the NYSE noted that certain legitimate trading 
strategies may result in specialists having to assume large positions 
of aggregated odd-lot orders at prices that are not necessarily 
reflective of the prices such orders would have received had they been 
executed pursuant to the supply and demand dynamics of the round-lot 
auction market.\8\ The Commission believes that the proposal is a 
reasonable response to this unintended use and consequence of NYSE's 
current odd-lot process. Under the proposed rule change, as amended, 
the NYSE should continue to accommodate traditional odd-lot orders in a 
manner that is based on the prevailing market, while limiting a 
specialist's financial exposure. The Commission believes that the 
proposed rule change, as amended, represents a reasonable method of 
pricing odd-lot orders because the pricing of odd-lot orders at the 
execution would reflect actual round-lot market price and activity at 
the time of execution.
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    \8\ See note 4, supra.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-NYSE-2003-37) and Amendment 
No. 1 are approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-11881 Filed 5-25-04; 8:45 am]
BILLING CODE 8010-01-P