[Federal Register Volume 69, Number 168 (Tuesday, August 31, 2004)]
[Notices]
[Pages 53123-53126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-1979]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50237; File No. SR-NYSE-2004-37]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the New York Stock Exchange, 
Inc. Relating to Procedures for Gapping the Quote

August 24, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 2, 2004, the New York Stock Exchange (``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. The proposed rule change has 
been filed by the NYSE as a ``non-controversial'' rule change pursuant 
to Rule 19b-4(f)(6) under the Act.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NYSE proposes to describe its new procedures for gapping the 
quote. The proposed rule text consists of NYSE Information Memo 04-27 
(June 9, 2004), which the Exchange previously sent out to its members 
and member organizations. The text of the proposed rule change is 
available for viewing on the Commission's Web site, http://www.sec.gov/rules/sro.shtml, and at the Exchange and the Commission.

 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 Exchange 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. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts of such 
statements.

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

1. Purpose
    The NYSE believes that its auction market provides valuable 
opportunities to price transactions fairly to all investors in a way 
that truly reflects supply and demand. According to the Exchange, at 
the moment of that pricing, transparency of any imbalance is critical 
to attract participation to offset the imbalance and facilitate price 
discovery. In that regard, the NYSE is updating its policies with 
respect to situations

[[Page 53124]]

involving gapping the quote to achieve greater transparency in light of 
faster market conditions and technology. The Exchange believes that the 
procedures that are being updated will provide improved opportunities 
for all market participants to access the NYSE market and serve 
customers, improving transparency in situations where gapped quotations 
are used.

Background

    The purpose of the proposed rule change is to discuss the 
procedures for gapping the quote, as currently described in Information 
Memo 94-32 (August 9, 1994) \4\ and the 2003 Floor Official Manual.\5\ 
The modification involves a new procedure for specifying the size in 
gapped quoting situations, making the size of the gapped quote 100 
shares x size or size x 100 shares, instead of 100 shares x 100 shares. 
In addition, the new procedure shortens the reasonable period of time 
for the gapped quotation to remain in place in light of faster market 
conditions and technology.\6\
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    \4\ The Exchange filed Information Memo 94-32 in File No. SR-
NYSE-93-48. See Securities Exchange Act Release No. 34303 (July 1, 
1994), 59 FR 35157 (July 8, 1994).
    \5\ See NYSE Floor Official Manual at page 38.
    \6\ All other procedures and requirements set forth in NYSE 
Information Memo 94-32 and File No. SR-NYSE-93-48 remain unchanged 
and in effect. See Securities Exchange Act Release No. 34303 (July 
1, 1994), 59 FR 35157 (July 8, 1994). Telephone conversation between 
Jeffery Rosenstrock, Senior Special Counsel, Market Surveillance-
Rule Development, and Kelly Riley, Assistant Director, Division of 
Market Regulation, Commission, on August 12, 2004.
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    According to the Exchange, the purpose of the gapped quote 
procedures is to provide public dissemination of an order imbalance and 
to minimize short-term price dislocation associated with such imbalance 
by allowing appropriate time for the entry of offsetting orders or the 
cancellation of orders on the side of the imbalance. An imbalance may 
occur when the specialist receives a sudden influx of orders on the 
same side of the market at the same time or when there are one or more 
large-size orders and there is no offsetting interest. An imbalance may 
also occur when a member proposes to effect a one-sided block 
transaction at a significant premium or discount from the prevailing 
market.
    When an imbalance exists, the gapped quote procedures provide that 
the specialist widen the spread between the bid and offer, a process 
known as ``gapping.'' In such cases, the quote on the side of the 
imbalance must match (``touch'') the prior sale price. Once a quotation 
has been gapped, it should remain in place for a reasonable time to 
allow interested parties to respond to the order imbalance. A Floor 
Governor, Executive Floor Official, or Senior Floor Official oversees 
and provides input into the gapped quote process.
Prior Practice
    Formerly, the gapped quote procedures provided that the specialist 
show the size associated with the gapped quotation as 100 x 100 and a 
senior-level Floor Official determined a reasonable period of time for 
the gapped quotation to be maintained (generally, not to exceed 5 
minutes), to allow for adequate public disclosure and sufficient time 
to attract contra-side interest.
New Procedures To Accelerate Price Discovery
    In order to provide more useful information and accelerate price 
discovery, the Exchange is updating the gapped quotation procedures to 
require that the specialist disseminate a quote size of 100 shares on 
only one side of the market. Size consistent with the order imbalance 
is to be shown on the other side, i.e., 100 x size or size x 100. The 
100-share side represents the specialist's determination of the price 
at which the stock would trade if no contra-side interest develops or 
no cancellations occur as a result of the gapped quotation. This 
determination takes into account executable orders on the book at 
better prices than the price of the 100-share bid or offer. The size 
side represents the extent of the order imbalance, which can represent 
orders of members in the crowd as well as SuperDot[reg] (``DOT'') 
orders.
    Under the new procedures, when a gapped quotation situation arises, 
the specialist must:
     Complete all related Display Book reports of transactions 
that have been consummated to honor the existing firm quotation, and 
check the status of the order imbalance (to see whether it has 
increased or decreased);
     Gap the quotation:

--On the side of the imbalance, make the bid or offer price, as 
appropriate, touch the last sale; and
--Show the size of the imbalance in that bid or offer size;
--On the side opposite the imbalance, show the possible extent of price 
impact in the bid or offer price, as appropriate; and
--Make the size on that side of the market one round lot;

     Consult with a Floor Governor, Executive Floor Official, 
or Senior Floor Official as to how to proceed;
     Promptly contact known contra-side parties; and
     Continue to permit the entry and cancellation of orders in 
the Display Book.
    The procedures provide that a gapped quotation should remain in 
place for a reasonable time to allow for interested parties to respond 
to the order imbalance. What constitutes a reasonable time is 
determined by the unique circumstances of each gapped quotation 
situation. However, the gapped quotation generally should last at least 
30 seconds unless offsetting interest is received earlier, and 
generally should not exceed two minutes,\7\ unless circumstances 
require otherwise.
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    \7\ NYSE Rule 123D provides that with respect to a trading halt, 
a minimum of five minutes must elapse between the publication of the 
initial indication and the stock's reopening. In the event that more 
than one indication was published, the stock may re-open three 
minutes after the last indication was published, provided that at 
least five minutes had elapsed from the publication of the initial 
indication. See NYSE Information Memo 03-5 (February 27, 2003) and 
Securities Exchange Act Release No. 47104 (December 30, 2002), 68 FR 
597 (January 6, 2003) (File No. SR-NYSE-2002-39) (decreasing the 
minimum number of minutes that must elapse from 10 minutes to 5 
minutes for the first indication, and from 5 minutes to 3 minutes 
for subsequent indications, provided that the minimum 5 minutes has 
elapsed since the first price indication). The Exchange represents 
that these time limits guide Floor Officials as to what may be an 
appropriate duration of a gapped quote.
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    The Floor Governor, Executive Floor Official, or Senior Floor 
Official shall determine whether to:
     Execute the orders immediately;
     Direct the specialist to maintain the gapped quotation 
beyond 30 seconds, but no more than two minutes, unless circumstances 
require otherwise, in order to allow time for contra-side interest to 
develop or cancellations to occur; or
     Halt trading in the stock.
    Under Exchange Rule 60(e), as described in Information Memo 03-21 
(May 15, 2003), in a situation involving the use of the new gapped 
quote procedures, specialists will not be required to modify the 100-
share side of the quotation to post better priced buy or sell limit 
orders or add to size during the reasonable gapped quote period.
Example
    At 2:10 P.M., the market in XYZ is $76.45 bid for 2,000 shares, 
5,000 shares offered at $76.50 with the last sale at $76.47. The 
specialist receives a sudden influx of orders through the system and 
from floor brokers to buy 370,000 shares at the market. The specialist 
executes a portion of the buy order imbalance against the 5,000 shares 
offered to honor the firm quote. 5,000 shares at $76.50 are reported to 
the consolidated tape

[[Page 53125]]

and the related floor reports are issued. The specialist then gaps the 
quote, making the market $76.50 bid for 365,000 shares, 100 shares 
offered at $78.00. Note that this gapped quotation meets all of the 
requirements discussed above. The bid price touches the last sale. The 
size of the imbalance, which was reduced when the specialist took the 
offer, is published as the bid size. The offer price indicates the 
possible extent of the impact of the buy imbalance on the price of the 
stock. Lastly, the offer size is shown as 100 shares to indicate that 
there is insufficient interest on the sell side of the market.
Autoquote Feature
    When the specialist disseminates a 100-share quote on one side of 
the market (100 x size or size x 100) where the 100-share side 
represents the specialist's bid or offer, the autoquote feature is 
temporarily not available on that side of the market for the limited 
period of the gapped quote. However, the side of the market displaying 
size will continue to be subject to autoquoting.
NYSE Direct+ (``Direct+'')
    Auto ex orders will continue to trade with and will reduce the size 
of the side of the market where the imbalance is being shown. Auto ex 
executions will not take place on the side of the market showing 100 
shares.\8\
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    \8\ Under Exchange Rule 1000(iv), an auto ex order shall receive 
an immediate, automatic execution against orders reflected in the 
Exchange's published quotation and shall be immediately reported as 
NYSE transactions, unless, with respect to a single-sided auto ex 
order, the NYSE's published bid or offer is 100 shares.
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Inappropriate Use of Manual 100-Share Market
    The Exchange believes that it would not be appropriate for a 
specialist to repeat or continue to disseminate the manual 100-share by 
100-share market as that could have the effect of not displaying or 
quoting a limit order (unless executed or cancelled) until after 30 
seconds.
    Changes to the Exchange's Direct+ facility and market structure may 
affect the procedures described herein. However, until rule changes are 
submitted to the Commission for comment and review, and approval and 
implementation, the procedures described above will remain in place.\9\
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    \9\ The Commission notes that the NYSE filed a proposal to 
change its Direct+ facility and market structure, which was 
published for comment in the Federal Register on August 16, 2004. 
See Securities Exchange Act Release No. 50173 (August 10, 2004), 69 
FR 50407 (August 16, 2004) (File No. SR-NYSE-2004-05).
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    The new procedures on gapping the quote are described in 
Information Memo 04-27, which has been sent to all members and member 
organizations.\10\
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    \10\ The Commission notes that the proposed rule change was not 
effective until filed with the Commission on July 2, 2004.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\11\ in general, and furthers the 
objectives of section 6(b)(5) of the Act,\12\ in particular, in that it 
is designed to promote just and equitable principles of trade and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, according to the Exchange, is 
not designed to permit unfair discrimination between customers, 
brokers, or dealers, or to regulate by virtue of any authority matters 
not related to the administration of the Exchange.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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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

    Written comments were neither solicited nor received with respect 
to the proposed rule change.

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

    Because, the foregoing proposed rule change (1) does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms, does not become operative until 30 days from the 
date on which it was filed, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, and the Exchange provided the Commission with written notice 
of its intent to file the proposed rule change at least five business 
days prior to the date of filing of the proposed rule change, or such 
shorter time as designated by the Commission, it has become effective 
pursuant to section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) 
thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
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    The NYSE has requested that the Commission waive the 30-day 
operative delay. The Commission believes waiving the 30-day operative 
delay is consistent with the protection of investors and the public 
interest. Acceleration of the operative date will allow the Exchange to 
transition to the new gapped quoting procedures, which provide more 
information regarding imbalances, without delay. For these reasons, the 
Commission designates the proposal to be effective and operative upon 
filing with the Commission.\15\ At any time within 60 days of the 
filing of this proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \15\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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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].

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-2004-37. 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

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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-2004-37 and should be 
submitted on or before September 21, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).

Jill M. Peterson,
Assistant Secretary.
[FR Doc. E4-1979 Filed 8-30-04; 8:45 am]
BILLING CODE 8010-01-P