[Federal Register Volume 70, Number 83 (Monday, May 2, 2005)]
[Notices]
[Pages 22736-22738]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2083]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51613; File No. SR-NYSE-2004-42]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto To 
Eliminate the Requirement That a Floor Official Approve Certain 
Transactions on the Exchange's Automated Bond System

April 26, 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 August 10, 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 NYSE. On March 30, 
2005, the NYSE 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, which replaced and superceded the 
original filing in its entirety, the NYSE supplemented its rationale 
for the proposal by, among other things, describing the process that 
a Floor Official follows when considering whether to approve a 
transaction that would occur at a price that is at least two points 
or more than 30 days from the last transaction; recounting some of 
the history of bond trading on the NYSE; explaining that the 
Exchange has not found it necessary to reinstate the two-point/30-
day provision for convertible bonds since it eliminated its 
applicability to convertible bonds in 1998; and noting that Exchange 
Rule 86(g) requires all orders to be entered into ABS at a limit 
price, and that ABS automatically asks a user to reconfirm the price 
of an order that is entered at a price two or more points away from 
the last sale.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NYSE proposes to amend Exchange Rule 86(g) relating to the 
Exchange's Automated Bond System[reg] (``ABS''). The text of the 
proposed rule change, as amended, is available on the NYSE's Web site 
(http://www.nyse.com), at the NYSE's principal office, and at the 
Commission's Public Reference Room.

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. 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 NYSE's Fixed Income Market is centered on its ABS, a fully 
automated trading and information system that allows subscribing firms 
to enter, maintain, view, and execute bond orders through screen 
displays in their offices. Orders are maintained, displayed, and 
matched in ABS on a strict price-and-time priority basis. ABS displays 
current market data and provides subscribers with immediate execution 
reports and locked-in trade comparisons. ABS also provides real-time 
last sale and quotation information to subscribers and market data 
vendors.
    At year-end 2004, ABS had a subscriber base of 37 member firms with 
an installed base of 115 screens. All bonds listed on the NYSE trade 
through ABS. Exchange bond volume for the year 2004 was approximately 
$1.3 billion par value. About 94% of NYSE bond volume was in straight, 
or non-convertible, debt and the remaining 6% of NYSE bond volume was 
in convertible bonds.
    Exchange Rule 86 governs trading in ABS. Existing NYSE Rule 86(g) 
requires that all ABS transactions in non-convertible bonds that are 
made two points or more away from the last sale, or more than 30 days 
after the last sale, may be made only with the approval of a Floor 
Official. As a practical matter, the Floor Official may require that 
the bonds be bid up or offered down before approving such 
transactions.\4\
---------------------------------------------------------------------------

    \4\ If, for example, an order is entered into ABS to buy 10 XYZ 
bonds at 93 when the last sale for XYZ occurred at 90, the Floor 
Official could determine that XYZ bond should be ``bid up'' at a 
decided price increment away from the limit order for a decided 
period of time, typically one ``point'' for one minute. The NYSE 
bond supervisor would then enter the bidding-up starting price, 
price increment, time increment, and final price into ABS, upon 
which a message appears on all ABS screens alerting subscribing 
firms that bidding up in XYZ has commenced. An ABS user could 
execute against that ``bid'' by entering an order to sell at 91 into 
the system. If, after one minute, the ``bid'' at 91 generated no 
interest among ABS users, the order would be bid at 92 for one 
minute. If that ``bid'' generated no interest, then the order would, 
after one minute, be bid at 93 or be matched (traded) at 93, 
depending on whether there was a contra-side order to sell at 93 in 
the ABS at that point in time. Telephone conversation between Fred 
Siesel, Consultant, NYSE, and Tim Fox, Attorney, Commission on April 
18, 2005.
---------------------------------------------------------------------------

    The Exchange proposes to eliminate the current NYSE Rule 86(g). The 
requirement in Exchange Rule 86(g) for Floor Officials to approve 
orders entered at an increment of two points or greater from the last 
transaction has long been made unnecessary by the fact that ABS is an 
order-driven system in which subscribing firms may enter only priced 
orders, and a firm entering an order in ABS at a variation of two 
points or greater is already required to immediately confirm the price 
of such order prior to the order's acceptance into ABS. The entering 
firm would no longer need to confirm an order entered into ABS more 
than 30 days from the last trade of the bond issue, if the price of the 
entered order were less than two points from the previous trade price.

[[Page 22737]]

The requirements that orders entered into ABS be priced and that the 
user entering the order must reconfirm the price of an order entered at 
a variation of two points or greater from the last sale have been 
programmed into ABS since its inception.
    The Exchange believes that, because firms entering orders into ABS 
control and are responsible for the orders they enter into ABS, the 
requirements of current NYSE Rule 86(g) are unnecessary. They are a 
legacy from the time when NYSE bond trading was floor-based, rather 
than screen-based. These requirements slow down trading in ABS and may 
result in a loss of liquidity. For example, during the period when an 
order is ``bid up'' or ``offered down'' under the existing rule, a 
resting offer/bid in the system might be cancelled, thus causing the 
order being bid up/offered down to miss the opportunity to interact 
with the resting order. The time involved in the Floor Official's 
review of the situation, and the time for the Floor Official to 
determine whether to bid up/offer down can act to the detriment of the 
order. Once an order is entered into ABS, the process is electronic and 
still provides a price confirmation component to help ensure that 
orders are priced correctly.
    Before ABS was developed, the NYSE's bond floor involved two 
trading ``arenas.'' One was the ``free crowd,'' where bond floor 
brokers primarily traded convertible bonds and a handful of active non-
convertible bonds. The other arena involved ``cabinet'' trading. In the 
free crowd, brokers left their mnemonic broker identifications with 
indications of buying or selling interest next to the bond symbol on 
one of a number of boards containing multiple bond symbols. The 
indications were entered in pencil and the boards were erasable and 
cleaned after the close of trading. If a broker had an interest on the 
contra side of an existing indication, the broker would announce that 
interest to the broker on the opposite side. The brokers would agree on 
price, subject to the undisclosed limits of their orders. Also, with 
the broker's announcement of interest in a particular bond, other 
brokers would often join the crowd and trade according to the floor 
trading rules of precedence and parity.
    Cabinet trading involved cards of orders to buy and sell bonds 
which were organized, by bond, in racks. The order cards were organized 
in sequence according to price and time priority under former NYSE Rule 
85. When orders matched, bond floor clerks took the matching orders to 
bond floor brokers to write the trade tickets. Firms not having brokers 
regularly on the bond floor were represented by one of the bond floor 
brokers; however, any equity floor broker could execute bond orders on 
the bond floor. All completed bond trades were reported on the 
dedicated bond ticker.
    ABS initially replaced manual cabinet trading, providing immediate 
matching and reporting of non-free-crowd bond trades and quotations 
with size. Free crowd trade prices, without quotations, were also 
reported through ABS. In the mid-1980s, the few non-convertible bonds 
that traded in the free crowd were moved to ABS. In 1998, the 
convertible bonds commenced trading in ABS on a price-and-time priority 
basis.
    The two-point/30-day provision was eliminated for convertible bonds 
when, in 1998, the physical bond floor was closed and trading in 
convertible bonds was transferred to ABS.\5\ The Exchange asserts that, 
since that time, there have not been any problems with respect to the 
trading of convertible bonds, nor has there been a situation requiring 
the reinstatement of the requirement of Floor Official approval if a 
transaction would occur at two points or more away or more than 30 days 
away from the last sale.\6\ In addition, since the complete closing of 
the bond floor, the only officials available to make bond rulings are 
equity Floor Officials who, in addition to being less familiar with 
bond trading, may be diverted from their responsibilities to the 
Exchange's equity market.
---------------------------------------------------------------------------

    \5\ Prior to moving convertible bonds to ABS, convertible bond 
quotes were non-firm price indications only, with no size. In ABS, 
convertible bond quotes are firm, with size, and are ``live.''
    \6\ Pursuant to NYSE Rule 86(g), a Floor Governor may, if 
prevailing market conditions warrant, impose similar requirements on 
convertible bonds.
---------------------------------------------------------------------------

    In sum, since ABS accepts only limited price orders, and since the 
entering firm must reconfirm the price of the order being entered if 
that order is at a price that is two points or more away from the last 
sale price, the bidding up/offering down requirement of the current 
NYSE Rule 86(g) is unnecessary.
    The Exchange also is proposing to codify in NYSE Rule 86(g) two 
features that have been programmed into ABS since its inception: (1) 
The acceptance of priced orders only; and (2) price confirmation, by 
the entering firm, of orders entered at a price two or more points 
inferior to the last sale price.
2. Statutory Basis
    The basis under the Exchange Act for this proposed rule change is 
the requirement under section 6(b)(5) of the Act \7\ 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.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NYSE does not believe that the proposed rule change, as 
amended, would 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.

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 NYSE consents, the Commission will:
    A. By order approve such proposed rule change, as amended; or
    B. Institute proceedings to determine whether the proposed rule 
change, as amended, 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, as amended, 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-2004-42 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-2004-42. This 
file number should be included on the

[[Page 22738]]

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 Room. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. 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 publicly available. All 
submissions should refer to File Number SR-NYSE-2004-42 and should be 
submitted on or before May 23, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland
Deputy Secretary.
[FR Doc. E5-2083 Filed 4-29-05; 8:45 am]
BILLING CODE 8010-01-P