[Federal Register Volume 69, Number 147 (Monday, August 2, 2004)]
[Notices]
[Pages 46197-46199]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17491]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50090; File No. SR-NYSE-2004-06]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 Thereto by the New York Stock 
Exchange, Inc. Relating to Amendments to Exchange Rule 104 and Rule 123

July 27, 2004.
    Pursuant to section 19(b)(1)\1\ of the Securities Exchange Act of 
1934 (``Act'') and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on February 6, 2004, the New York Stock Exchange, Inc. (``NYSE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the Exchange. On April 
5, 2004, the Exchange amended the proposed rule change.\3\ On July 14, 
2004, the Exchange again amended the proposed rule change.\4\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated April 2, 2004 and accompanying 
Form 19b-4 (``Amendment No. 1''). In Amendment No. 1, the NYSE 
clarified that, under the proposed rule change, customers may limit 
specialists from trading along with their orders and from invoking 
precedence based on size.
    \4\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division, Commission, dated 
July 13, 2004 and accompanying Form 19b-4 (``Amendment No. 2''). In 
Amendment No. 2, NYSE amended the proposed rule text and added 
additional explanatory material to clarify the proposal. Amendment 
No. 2 replaced the Exchange's original filing and Amendment No. 1 
thereto in their entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend NYSE Rule 104.10 (Dealings by 
Specialists) to provide that customers may limit the ability of 
specialists to trade along with their orders or to invoke precedence 
based on size when the specialist is liquidating a position in a 
specialty security for its dealer account. Exchange Rule 123 (Records 
of Orders) is also proposed to be amended to require a record of any 
such request to the specialist to yield.
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in brackets.
* * * * *
Rule 104.

Dealings by Specialists

* * * * *
Supplementary Material:

Functions of Specialists

.10 Regular Specialists.--Any member who expects to act regularly as 
specialist in any listed stock and to solicit orders therein must be 
registered as a regular specialist.
* * * * *
    (6)(i) Transactions on the Exchange by a specialist for his own 
account in liquidating or decreasing his position in a specialty stock 
are to be effected in a reasonable and orderly manner in relation to 
the condition of the general market, the market in the particular stock 
and the adequacy of the specialist's positions to the immediate and 
reasonably anticipated needs of the round-lot and the odd-lot market 
and in this connection:
* * * * *
    (B) the specialist should maintain a fair and orderly market during 
liquidation and, after reliquifying, should re-enter the market to 
offset imbalances between supply and demand. The selling of stock on a 
direct minus tick or a zero minus tick, or the purchasing of stock on a 
direct plus tick or a zero plus tick should be effected in conjunction 
with the specialist's re-entry in the market on the opposite side of 
the market from the liquidating transaction where the imbalance of 
supply and demand indicates that immediately succeeding transactions 
may result in a lower price (following the specialist's sale of stock 
on a direct minus tick or a zero minus tick) or a higher price 
(following the specialist's

[[Page 46198]]

purchase of stock on a direct plus tick or a zero plus tick). During 
any period of volatile or unusual market conditions resulting in a 
significant price movement in the subject security, the specialist's 
transactions in re-entering the market following a liquidating 
transaction effected by selling stock on a direct minus tick or zero 
minus tick, or purchasing stock on a direct plus tick or zero plus 
tick, should, at a minimum, reflect the specialist's usual level of 
dealer participation in the subject security. During such periods of 
unusual price movement in a security, any series of such transactions 
which may be effected in a brief period of time should be accompanied 
by the specialist's re-entry in the market and effecting transactions 
which reflect a significant degree of dealer participation[.];
    (C) transactions by a specialist for his or her dealer account in 
liquidating or decreasing a position in a specialty security must yield 
parity to and may not claim precedence based on size over a customer 
order in the crowd upon the request of the member representing such 
order, where such request has been documented as a term of the order, 
to the extent of the volume of such order that has been included in the 
quote prior to the transaction.
* * * * *
    Rule 123.
Record of Orders
* * * * *
    (g) Requests to Yield.
    A request to a specialist to yield to a customer order in 
accordance with Rule 104.10(6)(C) is a condition of that order and must 
be documented in accordance with applicable books and records 
requirements.
* * * * *

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

    In its filing with the Commission, the NYSE included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below and is set forth in sections A, B, and C below.

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

1. Purpose
    The Exchange proposes to amend Exchange Rules 104.10(6)(i) 
(Dealings by Specialists) and 123 (Records of Orders) to provide that 
customers may limit the ability of specialists to trade along with 
their orders or to invoke precedence based on size when the specialist 
is liquidating a position in a specialty security for its dealer 
account.
    It is well established that specialists must always yield to 
customer orders on the book when trading in their specialty securities 
for their dealer accounts. However, when liquidating a position in a 
specialty security for its dealer account, a specialist is permitted to 
trade along with customer orders represented in the crowd and is 
entitled to invoke precedence based on size. The proposed amendment to 
NYSE Rule 104.10(6)(i) will give the crowd broker the right to require 
that the specialist yield to his or her customer's order. The proposed 
amendment will create more similarity in the way orders on the book and 
in the crowd are handled and will help diminish the perception that 
specialists have an advantage in trading for their dealer accounts.
    NYSE Rule 104 requires that specialists' proprietary dealings be 
reasonably necessary to permit the specialist to maintain a fair and 
orderly market. Specialist dealer transactions when liquidating a 
position must meet this standard. In addition, specialists are required 
to obtain Floor Official approval for any liquidations that are 
conducted on a direct plus or minus tick. Thus, specialists' 
transactions when liquidating proprietary positions are subject to 
specific affirmative market-making standards and review. Nevertheless, 
there may be circumstances in which a customer will wish to preclude a 
specialist from participating with a specific trade. The proposed rule 
change will provide the mechanism for the customer to effect this 
restriction.
    Specifically, Exchange Rule 104.10(6)(i) will be amended to include 
new paragraph (C) to provide that transactions by a specialist for his 
or her dealer account in liquidating or decreasing a position in a 
specialty security must yield to a customer's order in the crowd upon 
the request of the member representing such order, where such request 
has been documented as a term of the order, to the extent of the volume 
of such order included in the quote prior to the transaction. The 
customer's order will then participate in the transaction to the extent 
that priority, parity and precedence rules permit.
    Exchange Rule 123 will be amended to add new paragraph (g) to 
provide that a request to a specialist to yield to a customer order is 
a condition of that order and must be documented in accordance with 
applicable books and records requirements (Exchange Rules 123 and 410; 
Rules 17(a)-3 and (a)-4 \5\ under the Act).
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    \5\ 17 CFR 240.17a-3 and 240.17a-4.
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2. Statutory Basis
    The Exchange believes that the basis under the Act for this 
proposed rule change is the requirement under section 6(b)(5) \6\ that 
an exchange have rules that are designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system and, in general, 
to protect investors and the public interest. The proposed rule change 
also is designed to support the principles of section 11A(a)(1) of the 
Act \7\ in that it seeks to assure economically efficient execution of 
securities transactions, make it practicable for brokers to execute 
investors' orders in the best market and provide an opportunity for 
investors' orders to be executed without the participation of a dealer.
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    \6\ 15 U.S.C. 78f(b)(5).
    \7\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory

[[Page 46199]]

organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NYSE-2004-06 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NYSE-2004-06. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NYSE. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NYSE-2004-06 and should be submitted on or before August 23, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-17491 Filed 7-30-04; 8:45 am]
BILLING CODE 8010-01-P