[Federal Register Volume 70, Number 18 (Friday, January 28, 2005)]
[Notices]
[Pages 4171-4173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-319]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51048; File No. SR-NYSE-2004-70]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the New York Stock Exchange, Inc. 
To Amend Exchange Rule 104 to Require Specialists To Yield Orally-
Consummated Proprietary Trades to Later-Arriving System Orders

January 18, 2005.
    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 December 13, 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 
January 7, 2005, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ 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 Form 19b-4 dated January 7, 2004 (``Amendment No. 1''). 
In Amendment No. 1, the NYSE changed the basis under which the 
proposed rule change was filed from section 19(b)(3) of the Act to 
section 19(b)(2) of the Act.
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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, Dealings by 
Specialists, to require that in transactions between a specialist and a 
contra order that have been orally agreed to but not yet reported, the 
specialist must yield to any system orders that enter the specialist's 
book and can take the specialist's position in the orally-consummated 
transaction.
    The text of the proposed amendments is set forth below. Italics 
indicate additions.

Rule 104

Dealings by Specialists

* * * * *
Supplementary Material
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Functions of Specialists

    .10
* * * * *
    (11)(i) Notwithstanding the ability of a specialist to trade for 
his or her dealer account, dealer transactions by a specialist that 
have not yet been reported by the specialist must yield to any order or 
orders received through an Exchange order delivery system after the 
oral commitment to transact, provided that such order or orders are 
capable of trading in place of the specialist in the consummated 
transaction.
    (ii) The provisions of subparagraph (i) above shall not apply if 
the specialist's trade for his or her dealer account:
    (a) Is to correct an error on a previously reported transaction;
    (b) Is executed in satisfaction of the specialist's obligation to 
give up a trade to an agency order;
    (c) Is a non-regular way trade between the specialist and a Crowd 
broker;
    (d) Is the result of the election of ``stop'' orders as required in 
Rule 123A.40;
    (e) Is in connection with the execution of ``stop'' orders or CAP 
orders executed as part of the opening of trading;
    (f) Participates on the closing transaction in a security to offset 
a market-at-the-close and/or limit-at-the-close order imbalance; or
    (g) Is a report of principal participation on a commitment sent to 
another market center through the ITS system.
    (iii) Transactions by a specialist pursuant to subparagraph (ii) 
above must be documented and reported to the Exchange in such manner 
and within such time as the Exchange shall designate.
* * * * *

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 aspects of such 
statements.

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 NYSE Rule 104 to provide that where 
a specialist has completed, but not yet reported, a transaction as 
principal with an order in the book or in the crowd, the specialist 
must yield to any order received through SuperDOT[reg] that could take 
the specialist's place in the unreported principal transaction.
    Exchange rules provide that specialists must always yield to 
customer orders on the book when trading in the specialist's specialty 
securities for the dealer account. When no other interest is present on 
the book, specialists may trade for their own account with interests 
represented on the book or by a broker in the crowd; in such 
situations, the specialist may trade either fully or in parity with 
other contra interests represented in the crowd, as the case may be. 
The Exchange proposes to amend NYSE Rule 104.10 to include new section 
(11) to require that, notwithstanding the ability of a specialist to 
trade as principal with either a system order or a broker in the crowd, 
if a marketable order arrives on the book before the report of the 
specialist's trade as principal is completed, the specialist must yield 
to such order. Where the specialist is required to yield, the customer 
whose order entered the book would be reported as the contra party for 
the trade instead of the specialist.
    The proposed rule would provide seven limited exceptions, 
representing situations in which it would continue to be appropriate 
for the specialist to act as principal, notwithstanding the presence of 
a new customer order on the book. These exceptions are:
    (1) Corrections of bona fide specialist errors;
    (2) Trading in satisfaction of the specialist's obligation to give 
up a trade to an agency order;
    (3) Reports of non-regular-way principal-to-crowd transactions;
    (4) Principal participation on stop order electing transactions;
    (5) Principal participation in connection with opening 
transactions;
    (6) Closing transactions involving market-on-close (``MOC'') 
imbalances; and
    (7) Report of principal participation on a commitment sent to 
another market

[[Page 4172]]

through the Intermarket Trading System (``ITS'').
    These exceptions are discussed in more detail below:
    1. Corrections of Bona Fide Specialist Errors: These are cases 
where a specialist has to issue corrected reports that include dealer 
participation via the Display Book[reg] to correct a previously 
executed and reported transaction. Such corrections could involve the 
price, volume, or names involved in a transaction. If an executable 
system order is on the same side as the dealer participation necessary 
to correct the error, this would trigger the Display Book's[reg] ``P'' 
indicator (preventing the specialist from participating as dealer ahead 
of executable system orders). In this situation, the specialist would 
be permitted to use the ``Prin Ahead'' override feature, provided that 
the specialist placed the notation ``Error'' in the Display Book's[reg] 
free-form comment field. The specialist would be required to adequately 
document the error on the firm's books and records.
    2. Trading in satisfaction of the specialist's obligation to give 
up a trade to an agency order: These are cases where Exchange rules 
require the specialist to give up a trade to an agency order after the 
initial trade has been reported and the specialist cannot substitute 
the agency customer's name, such as where a customer requests to 
participate on a trade previously executed by the specialist as 
principal on a non-regular way basis. When reporting such substituted 
trades, the specialist would have to participate as dealer in order to 
unwind his own participation in the initial transaction. If an 
executable system order is on the same side as the dealer participation 
necessary to effect the substitution, this would trigger the Display 
Book's[reg] ``P'' indicator. In this situation, the specialist would be 
permitted to use the ``Prin Ahead'' override feature to complete the 
substitute transaction. The specialist would be required to document 
the substitution trade in the Display Book's[reg] free-form comment 
field.
    3. Reports of non-regular-way principal-to-crowd transactions: 
These are cases where a crowd broker represents a non-regular-way 
settlement order (e.g., cash basis, next day, and sellers option) and 
the specialist is willing to trade with that order at a price at which 
there are regular way settlement customer orders on the same side on 
the Display Book[reg]. The ``Prin Ahead'' override feature may be used 
by the specialist to effect the non-regular way transaction, provided, 
however, that the specialist may be required to give up the trade to an 
agency order if the customer indicates its willingness to participate 
on the same terms as the specialist.
    4. Principal participation on stop order electing transactions: 
These are cases where the specialist participation in an electing 
transaction requires the guarantee of the same price to the elected 
stop order(s), the specialist bases the price on the total volume of 
both transactions, and the specialist effects both transactions 
contemporaneously and at the same price. Exchange rules require the 
specialist to report the transaction that elects the stop orders 
independently from the transaction that fills the stop orders. Orders 
may arrive on the Display Book[reg] between the time the specialist 
reports the electing trade and the fill for the stop transaction, which 
would trigger the ``P'' indicator. In connection with the transaction 
filling the stop order, the specialist would be permitted to use the 
``Prin Ahead'' override feature. The specialist would be required to 
document the dealer participation by placing a stop order comment in 
the Display Book's[reg] free-form comment field.
    5. Principal participation in connection with opening transactions: 
These are cases where the specialist participates as dealer in 
connection with stop orders and convert-and-parity (``CAP'') orders \4\ 
that are included in the specialist's calculation of the opening price, 
elected by the opening crossing trade, and executed substantially 
contemporaneously with the opening transaction at the opening cross 
price, but that are reported separately from the report of the opening 
transaction. Orders may arrive on the Display Book[reg] between the 
time the specialist reports the opening trade and the fill for the 
elected stop transaction, which would trigger the ``P'' indicator. In 
connection with the transaction filling the stop order at the opening, 
the specialist would be permitted to use the ``Prin Ahead'' override 
feature. The specialist would be required to document the dealer 
participation by placing a stop order comment in the Display 
Book's[reg] free-form comment field.
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    \4\ CAP orders are orders in which the specialist may convert 
all or part of an unelected portion of a percentage order, and may 
trade on parity with the elected or converted portions of the order, 
as long as the specialist is not holding orders at the same price 
that do not grant parity.
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    6. Closing transactions involving MOC imbalances: These are cases 
where the specialist participates on the closing transaction to offset 
a market-on-close/limit-on-close order imbalance. The situation may 
arise if unexecuted market orders entered just prior to the close are 
assigned to the paired-off portion of the closing trades. When the 
specialist reports dealer participation to offset an imbalance on the 
first print of the closing (as required by Exchange rules) and there 
are market orders on the same side assigned to the paired off portion, 
which is the second print of the close, the ``P'' indicator would be 
triggered. In this instance, the specialist would be permitted to use 
the ``Prin Ahead'' override feature. The specialist would be required 
to document the dealer participation by indicating ``MOC'' in the 
Display Book's[reg] free-form comment field.
    7. Report of principal participation on a commitment sent to 
another market through the ITS System: These are cases where the 
specialist has indicated dealer interest to trade on a regional 
exchange and has sent a commitment to trade. It may take a regional 
exchange up to 30 seconds to execute and report the transaction. 
However, before the specialist can report the trade to the position 
minder system via the Display Book[reg], customer orders on the same 
side at the same or a better price may have been received, which would 
trigger the ``P'' indicator when the specialist attempts to report the 
ITS trade. In such cases, the specialist would be permitted to use the 
``Prin Ahead'' override feature. The specialist would be required to 
document the situation.
    The Exchange believes that the amendment is designed to further 
ensure that public orders receive executions in the Exchange market 
against other public orders to the greatest extent possible.
2. Statutory Basis
    The Exchange believes that the proposal, as amended, is consistent 
with section 6(b)(5) of the Act,\5\ which requires that an exchange 
have rules that are designed to promote just and equitable principles 
of trade, to foster cooperation and coordination with persons engaged 
in regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in securities, 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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    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposal would not impose any burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the Act.

[[Page 4173]]

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 Exchange consents, the Commission will:
    (A) By order approve such 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 e-mail to [email protected]. Please include File 
Number SR-NYSE-2004-70 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-2004-70. 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 Room. Copies of such 
filing will also 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-2004-70 and should be submitted on or before 
February 18, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E5-319 Filed 1-27-05; 8:45 am]
BILLING CODE 8010-01-P