[Federal Register Volume 70, Number 124 (Wednesday, June 29, 2005)]
[Notices]
[Pages 37463-37484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3386]



[[Page 37463]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51906; File No. SR-NYSE-2004-05]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing of Amendment No. 5 to a Proposed Rule Change Relating 
to Enhancements to the Exchange's Existing Automatic Execution Facility 
Pilot (NYSE Direct+[reg])

June 22, 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 June 17, 2005, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') Amendment No. 5 \3\ to a proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the NYSE. The Commission is publishing this notice to 
solicit comments on the proposed rule change as amended by Amendment 
No. 5 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 June 17, 2005 (``Amendment No. 5''). 
The Exchange had submitted Amendment No. 4 to the proposed rule 
change on May 25, 2005, and subsequently withdrew Amendment No. 4 on 
June 17, 2005. Amendment No. 5 supplements the description of 
certain aspects of the Exchange's Hybrid Market and proposes 
additional amendments to the Exchange's rules.
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    The proposed rule change was originally filed on February 9, 2004 
and amended by Amendment No. 1 on August 2, 2004.\4\ The proposed rule 
change, as amended by Amendment No. 1, was published for comment in the 
Federal Register on August 16, 2004.\5\ On August 26, 2004, the 
Commission extended the public comment period with respect to the First 
Notice to September 22, 2004.\6\ On November 8, 2004 and November 9, 
2004, the Exchange filed Amendment Nos. 2 and 3, respectively.\7\ The 
proposed rule change, as further amended by Amendment Nos. 2 and 3, was 
published for comment in the Federal Register on November 22, 2004.\8\ 
The Commission has received 26 comment letters with respect to the 
First and Second Notices.\9\
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    \4\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated July 20, 2004, and accompanying 
Form 19b-4, which replaced the original filing in its entirety 
(``Amendment No. 1'').
    \5\ See Securities Exchange Act Release No. 50173 (August 10, 
2004), 69 FR 50407 (``First Notice'').
    \6\ See Securities Exchange Act Release No. 50277, 69 FR 53759 
(September 2, 2004).
    \7\ See Form 19b-4 dated November 8, 2004 (``Amendment No. 2'') 
and Partial Amendment dated November 9, 2004 (``Amendment No. 3'').
    \8\ See Securities Exchange Act Release No. 50667 (November 15, 
2004), 69 FR 67980 (``Second Notice'').
    \9\ See letter to William Donaldson, Chairman, Commission, from 
Donald E. Weeden, dated August 31, 2004; letters to the Commission 
from: Kim Bang, President and Chief Executive Officer, Bloomberg 
Tradebook LLC, dated September 22, 2004; Marc L. Lipson, Associate 
Professor, the University of Georgia, dated January 4, 2005; and 
Eric D. Roiter, Senior Vice President and General Counsel, Fidelity 
Management & Research Company, dated October 26, 2004 and December 
8, 2004; letters to Jonathan G. Katz, Secretary, Commission, from: 
Philip Angelides, Treasurer, State of California, dated November 23, 
2004; Ari Burstein, Associate Counsel, Investment Company Institute, 
dated September 22, 2004 and December 13, 2004; Gregory van Kipnis, 
Managing Partner, Invictus Partners, LLC, dated December 10, 2004; 
Donald D. Kittell, Executive Vice President, Securities Industry 
Association, dated October 1, 2004; Edward S. Knight, The Nasdaq 
Stock Market, dated January 26, 2005; Ellen L.S. Koplow, Executive 
Vice President and General Counsel, Ameritrade Holding Corporation, 
dated September 22, 2004; Bruce Lisman, Bear, Stearns & Co. Inc., 
dated September 28, 2004; Edward J. Nicoll, Chief Executive Officer, 
Instinet Group Incorporated, dated October 25, 2004; Thomas 
Peterffy, Chairman, and David M. Battan, Vice President, the 
Interactive Brokers Group on behalf of its affiliates Timber Hill 
LLC and Interactive Brokers LLC, dated September 7, 2004 and 
December 14, 2004; Lisa M. Utasi, President, and Kimberly Unger, 
Executive Director, the Security Traders Association of New York, 
Inc., dated September 22, 2004; Ann L. Vlcek, Vice President and 
Associate General Counsel, Securities Industry Association, dated 
December 13, 2004; and letter to Annette L. Nazareth, Director, 
Division, Commission, and Robert L.D. Colby, Deputy Director, 
Division, Commission, from Eric D. Roiter, Senior Vice President and 
General Counsel, Fidelity Management & Research Company, dated 
August 10, 2004. See email to Nancy Reich Jenkins, Managing 
Director, Market Surveillance, NYSE, from George W. Mann Jr., 
Executive Vice President and General Counsel, Boston Stock Exchange, 
Inc., dated September 22, 2004; and emails to the Commission from: 
Jose L. Marques, Ph.D., Managing Member, Telic Management LLC, dated 
September 21, 2004; Junius W. Peake, Monfort Distinguished Professor 
of Finance, Kenneth W. Monfort College of Business, University of 
Northern Colorado, dated September 22, 2004 and June 17, 2005; James 
L. Rothenberg, Esq., dated August 30, 2004; and George Rutherfurd, 
Consultant, dated March 10, 2005 and April 8, 2005.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change consists of amendments to the rules of the 
Exchange governing trading in the NYSE HYBRID MARKETSM (``Hybrid 
Market''). The Exchange Hybrid Market was originally proposed in SR-
NYSE-2004-05 and Amendment Nos. 1, 2, and 3. This Amendment No. 5 
supplements the description of aspects of the Hybrid Market described 
in the First and Second Notices \10\ and proposes additional amendments 
to Exchange rules. In addition, Amendment No. 5 describes the proposed 
Hybrid Market implementation plan. Below is the text of the proposed 
rule change, as proposed by Amendment No. 5. Proposed new language is 
italicized; proposed deletions are in brackets.
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    \10\ See supra notes 5 and 8.
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* * * * *

Definitions of Orders

Rule 13

* * * * *

All or None Order

    A market or limited price order [which] designated all or none may 
be designated for automatic execution in accordance with, and to the 
extent provided by Rules 1000-1004. An all or none order is to be 
executed in its entirety or not at all, but, unlike a fill or kill 
order, is not to be treated as cancelled if not executed as soon as it 
is represented in the Trading Crowd or routed to the Display Book [reg] 
for automatic execution. The making of ``all or none'' bids or offers 
in stocks is prohibited and the making of ``all or none'' bids or 
offers in bonds is subject to the restrictions of Rule 61 and Rule 86.
* * * * *

Auction Limit Order

    An auction limit order is an order that provides an opportunity for 
price improvement.
    The limit price of an auction limit order to buy should be at or 
above the Exchange best offer at the time the order is entered on the 
Exchange. The limit price of an auction limit order to sell should be 
at or below the Exchange best bid at the time the order is entered on 
the Exchange.
    An auction limit order to buy with a limit price that is not at or 
above the Exchange best offer when it arrives at the Exchange for 
execution or an auction limit order to sell with a limit price that is 
not at or below the Exchange best bid when it arrives at the Exchange 
for execution shall be entered into the Display Book [reg] at its limit 
price and shall be handled as a non-auto ex limit order.
    An auction limit order shall be quoted and executed in accordance 
with Exchange Rule 123F and routed in accordance with Exchange Rule 
15A.50.
    Auto Ex Order
    An auto ex order is:
    (a) a market order designated for automatic execution or a limit 
order to buy (sell) priced at or above (below) the Exchange best offer 
(bid) at the time such order is routed to the Display Book[reg] or

[[Page 37464]]

    (b) an immediate or cancel order designated for automatic 
execution; or
    (c) a stop or stop limit order systemically delivered to the 
Display Book ® that has been elected; or
    (d) a buy ``minus'', sell ``plus'', or short sale order 
systemically delivered to the Display Book [supreg]; or
    (e) an all or none order; or
    (f) an elected or converted percentage order that is convertible on 
a destabilizing tick and for which the entering broker has granted 
permission for the specialist to be on parity with the order; or
    (g) a part of round lot (PRL) order; or
    (h) orders initially eligible for automatic execution that have 
been cancelled and replaced with an auto ex order in a stock, 
Investment Company Unit (as defined by paragraph 703.16 of the Listed 
Company Manual), or Trust Issued Receipt (as defined in Rule 1200), 
subject to [a limit order of 1099 shares or less priced at or above the 
Exchange's published offer (in the case of an order to buy) or at or 
below the Exchange's published bid (in the case of an order to sell), 
which a member or member organization has entered for] automatic 
execution in accordance with, and to the extent provided by, Exchange 
Rules 1000-1004[5]; or[.]
    (i) an intermarket sweep order, as defined in this rule.
    [Pursuant to a pilot program to run until December 23, 2004, orders 
in Investment Company Units (as defined in paragraph 703.16 of the 
Listed Company Manual), or Trust Issued Receipts (as defined in Rule 
1200) may be entered as limit orders in an amount greater than 1099 
shares. The pilot program shall provide for a gradual, phased-in 
raising of order size eligibility, up to a maximum of 10,000 shares. 
Each raising of order size eligibility shall be preceded by a minimum 
of a one-week advance notice to the Exchange's membership.]
* * * * *

Immediate or Cancel Order

    A market or limited price order [which] designated immediate or 
cancel is to be executed [in whole or in part] to the extent possible 
as soon as such order is represented in the Trading Crowd or if 
designated auto ex, is to be automatically executed in accordance with, 
and to the extent provided by, Exchange Rules 1000-1004 and the portion 
not so executed is to be treated as cancelled. [For the purposes of 
this definition, a ``stop'' is considered an execution.] An immediate 
or cancel order may be entered before the Exchange opening for 
participation in the opening trade. If not executed as part of the 
opening trade, the order shall be treated as cancelled.
    A ``commitment to trade'' received [on the Floor] through ITS will 
be automatically executed in accordance with, and to the extent 
provided by, Exchange Rules 1000-1004, [shall be treated in the same 
manner, and entitled to the same privileges, as would an immediate or 
cancel order that reaches the Floor at the same time] except as 
otherwise provided in the Plan and except further that such a 
commitment may not be ``stopped.'' [and the commitment shall remain 
irrevocable for the time period chosen by the sender of the 
commitment.] After trading with the Exchange published bid (offer) to 
the extent of the displayed volume associated with such bid (offer), 
any unfilled balance of a commitment to trade shall be automatically 
reported to ITS as cancelled.

Intermarket Sweep Order

    An ``intermarket sweep order'' is a limit order designated for 
automatic execution in a particular security, that meets the following 
requirements:
    (i) It is identified as an intermarket sweep order in the manner 
prescribed by the Exchange; and
    (ii) Simultaneously with the routing of an intermarket sweep order 
to the Exchange, one or more additional limit orders, as necessary, are 
routed to execute against the full displayed size of any protected bid 
(as defined in (v), below) in the case of a limit order to sell, or the 
full displayed size of any protected offer (as defined in (v), below) 
in the case of a limit order to buy with a price that is superior to 
the limit price of the limit order identified as an intermarket sweep 
order. These additional routed orders must be identified as intermarket 
sweep orders; and
    (iii) An intermarket sweep order may be designated as immediate or 
cancel (IOC).
    (iv) An intermarket sweep order is immediately executable by the 
Exchange pursuant to Rules 1000-1004.
    (v) A ``protected bid or offer'' means a quotation in a stock that:
    (a) is displayed by an automated trading center;
    (b) is disseminated pursuant to an effective national market system 
plan; and
    (c) is an automated quotation that is the best bid or offer of 
another market center.

Limit, Limited Order or Limited Price Order

    An order to buy or sell a stated amount of a security at a 
specified price, or at a better price, if obtainable, after the order 
is represented in the Trading Crowd.
    A marketable limit order is an order on the Exchange that can be 
immediately executed; that is, an order to buy priced at or above the 
Exchange best offer or an order to sell priced at or below the Exchange 
best bid.
    A marketable limit order systemically delivered to the Display Book 
[reg] is an auto ex order subject to automatic execution in accordance 
with, and to the extent provided by, Exchange Rules 1000-1004.

Market Order

    An order to buy or sell a stated amount of a security at the most 
advantageous price obtainable after the order is represented in the 
Trading Crowd or systemically delivered to the Display Book [reg].
    A market order is not an auto ex order unless so designated and if 
not so designated shall be quoted and executed in accordance with 
Exchange Rule 123F and routed in accordance with Exchange Rule 15A.50.
    A market order designated for automatic execution is an auto ex 
order and shall be executed in accordance with, and to the extent 
provided by, Exchange Rules 1000-1004.
* * * * *

Percentage Order

    A limited price order to buy (or sell) 50% of the volume of a 
specified stock after its entry. There are four types of percentage 
orders:
    (a) Straight Limit Percentage Orders-Such an order is elected when 
a transaction has occurred at the limit price or a better price. Unless 
otherwise specified, only volume at or below the limit subsequent to 
the receipt of the order will be applied in determining the elected 
portion of buy orders. Conversely, only volume at or above the limit 
will be calculated in determining the elected portion of sell orders.
    (b) Last Sale Percentage Orders-The elected portion of an order 
designated ``last sale'' shall be executed only at the last sale price 
or at a better price, provided that such price is at or better than the 
limit specified in the order. If the order is further designated ``last 
sale-cumulative volume'', the elected portion shall be placed on the 
[book] Display Book [reg] at the price of the electing sale, but if not 
executed, shall be cancelled and re-entered on the [book] Display Book 
[reg] at the price of the subsequent transactions on the Exchange, 
provided the price of such subsequent transactions is at or better than 
the limit specified in the order.

[[Page 37465]]

    (c) ``Buy Minus''-''Sell Plus'' Percentage Orders-The elected 
portion of an order to ``buy minus'' shall be executed only on a 
``minus'' or ``zero minus'' tick. Orders of this type must also be 
qualified further by designating a limit price. The elected portion of 
an order to ``sell plus'' shall be executed only on a ``plus'' or 
``zero plus'' tick. Orders so designated are handled in the same manner 
as an order to sell short. (See [] 2123A.71] Rule 123A.71) Orders of 
this type must also be further qualified by designating a limit price.
    If so instructed by the entering broker(s), percentage orders to 
buy will be converted into regular limit orders for transactions 
effected on ``minus'' or ``zero minus'' ticks. Conversely, if so 
instructed by the entering broker(s), percentage orders to sell will be 
converted into regular limit orders for transactions effected on 
``plus'' or ``zero plus'' ticks.
    If further instructed by the entering broker(s), as provided in 
Rule 123A.30, percentage orders to buy may be converted into regular 
limit orders for transactions on ``plus'' or ``zero plus'' ticks. 
Conversely, if so instructed by the entering broker(s), percentage 
orders to sell may be converted into regular limit orders for 
transactions on ``minus'' or ``zero minus'' ticks.
    (See also [] 2123A.30] Rule 123A.30.)
    (d) ``Immediate Execution or Cancel Election'' Percentage Orders-
The elected portion of a percentage order with this designation is to 
be executed immediately in whole or in part at the price of the 
electing transaction. Any elected portion not so executed shall be 
deemed cancelled, and shall revert to its status as an unelected 
percentage order and be subject to subsequent election or conversion.
    The converted portion of an immediate execution or cancel election 
percentage order that is convertible on a destabilizing tick (a ``CAP-
DI order'') and which is systemically delivered to the Display Book 
[reg] will be eligible to be automatically executed in accordance with, 
and to the extent provided by, Exchange Rules 1000-1004, consistent 
with the order's instructions.
* * * * *

Sell ``Plus''-Buy ``Minus'' Order

    A market order to sell ``plus'' is a market order to sell a stated 
amount of a stock provided that the price to be obtained is not lower 
than the last sale if the last sale was a ``plus'' or ``zero plus'' 
tick, and is not lower than the last sale plus the minimum fractional 
change in the stock if the last sale was a ``minus'' or ``zero minus'' 
tick. A limited price order to sell ``plus'' would have the additional 
restriction of stating the lowest price at which it could be executed.
    Sell ``plus'' limit orders and sell ``plus'' market orders 
designated for automatic execution that are systemically delivered to 
the Display Book [reg] will be eligible to be automatically executed in 
accordance with, and to the extent provided by, Exchange Rules 1000-
1004, consistent with the order's instructions.
    A market order to buy ``minus'' is a market order to buy a stated 
amount of a stock provided that the price to be obtained i[n]s not 
higher than the last sale if the last sale was a ``minus'' or ``zero 
minus'' tick, and is not higher than the last sale minus the minimum 
fractional change in the stock if the last sale was a ``plus'' or 
``zero plus'' tick. A limited price order to buy ``minus'' would have 
the additional restriction of stating the highest price at which it 
could be executed.
    Buy ``minus'' limit orders and buy ``minus'' market orders 
designated for automatic execution that are systemically delivered to 
the Display Book [reg] will be eligible to be automatically executed in 
accordance with, and to the extent provided by, Exchange Rules 1000-
1004, consistent with the order's instructions.

Stop Order

    A stop order to buy becomes a market order when a transaction in 
the security occurs at or above the stop price after the order is 
represented in the Trading Crowd. A stop order to sell becomes a market 
order when a transaction in the security occurs at or below the stop 
price after the order is represented in the Trading Crowd. Stop orders 
that are systemically delivered to the Display Book [reg] will be 
eligible to be automatically executed in accordance with, and to the 
extent provided by, Exchange Rules 1000-1004, consistent with the 
order's instructions.

Stop Limit Order

    A stop limit order to buy becomes a limit order executable at the 
limit price, or at a better price, if obtainable, when a transaction in 
the security occurs at or above the stop price after the order is 
represented in the Trading Crowd. A stop limit order to sell becomes a 
limit order executable at the limit price or at a better price, if 
obtainable, when a transaction in the security occurs at or below the 
stop price after the order is represented in the Trading Crowd. Stop 
limit orders that are systemically delivered to the Display Book [reg] 
will be eligible to be automatically executed in accordance with, and 
to the extent provided by, Exchange Rules 1000-1004, consistent with 
the order's instructions.
* * * * *
    (Remainder of rule unchanged)

ITS ``Trade-Throughs'' and ''Locked Markets''

Rule 15A

* * * * *
    Supplementary Material:
    .10 Nothing in paragraph (d)(2)(B) above is intended to discourage 
a locking member from electing to ship if the complaint requests him to 
do so.
    .20 The fact that a transaction may be cancelled or the price 
thereof may be adjusted pursuant to the provisions of paragraph (b)(2) 
of this Rule 15A, shall not have any effect, under the rules, on other 
transactions or the execution of orders not involved in the original 
transaction.
    .30 The provisions of this Rule 15A shall supersede the provisions 
of any other Exchange Rule which might be construed as being 
inconsistent with Rule 15A.
    .40 For the purposes of this Rule:
    i. the terms ``Exchange trade-through'' and ``Third participating 
market center trade-through'' do not include the situation where a 
member who initiates the purchase (sale) of an ITS security at a price 
which is higher (lower) than the price at which the security is being 
offered (bid) in another ITS participating market, sends 
contemporaneously through ITS to such ITS participating market a 
commitment to trade at such offer (bid) price or better and for at 
least the number of shares displayed with that market center's better-
priced offer (bid); and
    ii. a trade-through complaint sent in these circumstances is not 
valid, even if the commitment sent in satisfaction cancels or expires, 
and even if there is more stock behind the quote in the other market.
    .50 Where a better bid or offer is published by another ITS 
participating market center in which an automatic execution is 
immediately available or a published bid or offer is otherwise 
protected from a trade-through by Securities and Exchange Commission 
rule or ITS Plan, and the price associated with such published better 
bid or offer has not been systemically matched by the specialist, the 
Exchange will automatically route to such other market center a 
commitment to trade that satisfies such published bid or offer, unless 
the member entering the order indicates in such manner as required by 
the Exchange that it is contemporaneously satisfying the better

[[Page 37466]]

published bid or offer. If such commitment to trade is not filled or 
not filled in its entirety, the balance will be returned to the 
Exchange and handled consistent with the order's instructions, which 
includes automatic execution, if available. The order entry time 
associated with the returned portion of the order will be the time of 
its return, not the time the order was first entered with the Exchange.
    .60 Incoming commitments will not trade with any reserve or other 
non-displayed interest at the Exchange best bid or offer price and will 
not participate in sweeps as described in Rule 1000(b).
* * * * *

Rule 36

Communications Between Exchange and Members' Offices

    No member or member organization shall establish or maintain any 
telephonic or electronic communication between the Floor and any other 
location without the approval of the Exchange. The Exchange may to the 
extent not inconsistent with the Securities Exchange Act of 1934, as 
amended, deny, limit or revoke such approval whenever it determines, in 
accordance with the procedures set forth in Rule 475, that such 
communication is inconsistent with the public interest, the protection 
of investors or just and equitable principles of trade.
    Supplementary Material:
* * * * *
    .30 Specialist Post Wires-With the approval of the Exchange, a 
specialist unit may maintain a telephone line at its stock trading post 
location to the off-Floor offices of the specialist unit or the unit's 
clearing firm. A specialist unit may also maintain wired or wireless 
devices, such as computer terminals or laptops, to communicate during 
the day with the firm's off-Floor offices to the extent permitted via a 
wired telephone line and with the system employing the algorithms and 
with individual algorithms. The wired or wireless device will enable 
the specialist to activate or deactivate the system employing the 
algorithms or an individual algorithm or change such system's pre-set 
parameters. Such telephone connection, wired, or wireless device shall 
not be used for the purpose of transmitting to the Floor orders for the 
purchase or sale of securities, but may be used to enter options or 
futures hedging orders through the unit's off-Floor office or the 
unit's clearing firm, or through a member (on the floor) of an options 
or futures exchange. In addition, a specialist registered in an 
Investment Company Unit (as defined in Section 703.16 of the Listed 
Company Manual), or a Trust Issued Receipt (the ``receipt'') as that 
term is defined in Rule 1200 may use a telephone connection or order 
entry terminal at the specialist's post to enter a proprietary order in 
the Unit or receipt in another market center, in a Component Security 
of such a Unit or receipt, or in an options or futures contract related 
to such Unit or receipt, and may use the post telephone to obtain 
market information with respect to such Units, receipts, options, 
futures, or Component Securities. If the order in the Component 
Security of the Unit or receipt is to be executed on the Exchange, the 
order must be entered and executed in compliance with Exchange Rule 
112.20 and SEC Rule 11a2-2(T), and must be entered only for the purpose 
of hedging a position in the Unit or receipt.
    Each specialist firm shall certify in the time, frequency, and 
manner as prescribed by the Exchange that its wired or wireless device 
used to communicate with the system employing the firm's algorithms or 
an individual algorithm operates in accordance with all SEC and 
Exchange rules, policies, and procedures.
* * * * *

Dissemination of Quotations

Rule 60

* * * * *
    (e) Autoquoting of highest bid/lowest offer and automated 
adjustment of size of liquidity bid and offer. The Exchange will 
autoquote the NYSE's highest bid or lowest offer whenever a limit order 
is transmitted to the [specialist's book] Display Book[supreg] at a 
price higher (lower) than the previously disseminated highest (lowest) 
bid (offer). When the NYSE's highest bid or lowest offer has been 
traded within its entirety, the Exchange will autoquote a new bid or 
offer reflecting the total size of orders on the [specialist's book] 
Display Book[supreg] at the next highest (in the case of a bid) or 
lowest (in the case of an offer) price. The size of any liquidity bid 
or offer shall be systemically increased to reflect any additional 
limit orders transmitted to the [specialist's book] Display 
Book[supreg] at prices ranging from the liquidity bid or offer price to 
the highest bid (lowest offer). The size of any liquidity bid or offer 
shall be systematically decreased to reflect the execution of any limit 
orders on the specialist's [book] Display Book[supreg] at prices 
ranging from the liquidity bid or offer price to the highest bid 
(lowest offer). However, de minimis increases or decreases in the size 
of limit orders on the [book] Display Book[supreg], as determined by 
the specialist, will not result in automated augmenting or decrementing 
of the size of the liquidity bid or offer where such bid or offer 
continues to reflect the actual size of limit orders on the [book] 
Display Book[supreg].
    [In any instance where the specialist disseminates a proprietary 
bid (offer) of 100 shares on one side of the market, the bid or offer 
on that side of the market shall not be autoquoted. In such an 
instance, any better-priced limit orders received by the specialist 
shall be manually displayed, unless they are executed at a better price 
in a transaction being put together in the auction market at the time 
that the order is received.]
    (i) Autoquote will be suspended when (A) the specialist has gapped 
the quotation in accordance with Exchange policies and procedures, (B) 
a block-size transaction as defined in Rule 127 that involves orders on 
the Display Book[supreg] is being reported manually or (C) when a 
liquidity replenishment point (``LRP'') as defined in Exchange Rule 
1000 (a)(v) has been reached.
    (ii) (A) After the specialist has gapped the quotation, autoquote 
will resume with a manual transaction or the publication of a non-
gapped quotation.
    (B) Autoquote will resume immediately after the report of a block-
size transaction involving orders on the Display Book[supreg].
    (C) Autoquote will resume as soon as possible after a sweep LRP as 
defined in Exchange Rule 1000(a)(v)(A) has been reached, but in no more 
than five seconds, where the auto ex order that reached the sweep LRP 
is executed in full, or any unfilled balance of such order is not 
capable of trading at a price above (in the case of a buy order) or 
below (in the case of a sell order) the sweep LRP. Where the unfilled 
balance of an auto ex order is able to trade at a price above (below) 
the sweep LRP, but the price does not create a locked or crossed 
market, autoquote will resume upon a manual transaction or the 
publication of a new quote by the specialist, but in any event in no 
more than ten seconds. Where the unfilled balance of an auto ex order 
is able to trade at a price above (below) the sweep LRP and the price 
creates a locked or crossed market, autoquote will resume upon a manual 
transaction or the publication of a new quote by the specialist.
    (ii) Autoquote will resume as soon as possible after a momentum 
LRP, as defined in Exchange Rule 1000(a)(v)(B), is reached, but in no 
more than ten seconds, unless a locked or crossed

[[Page 37467]]

market exists. In such case, autoquote will resume upon a manual 
transaction.
* * * * *

{Below Best] Bids [-] and [Above Best] Offers

Rule 70

    When a bid is clearly established, no bid or offer at a lower price 
shall be made. When an offer is clearly established, no offer or bid at 
a higher price shall be made.
    All bids made and accepted, and all offers made and accepted, in 
accordance with Exchange Rules [45 to 86] shall be binding.
    Supplementary Material:
    .10 Any bid (offer) systemically delivered to the Display 
Book[supreg] which is made at the same or higher (lower) price of the 
prevailing offer (bid) shall result in an automatic execution 
[transaction at the offer price in an amount equal to the lesser of the 
bid or offer. The same principle shall apply when an offer is made at 
the same or lower price as the bid.] in accordance with, and to the 
extent provided by, Exchange Rules 1000-1004.
    .20 (a)(i) A Floor broker may place within the Display Book[reg] 
system broker agency interest files at multiple price points on both 
sides of the market at or outside the Exchange best bid and offer with 
respect to each security trading in the location(s) comprising the 
Crowd such Floor broker is a part of with respect to orders he or she 
is representing on the Floor, except that the agency interest files 
shall not include any customer interest that restricts the specialist's 
ability to be on parity pursuant to Exchange Rules 104.10(6)(i)(C) and 
108(a).
    (ii) The requirement that a Floor broker be in the Crowd in order 
to have agency interest files does not apply to orders governed by 
Section 11(a)(1)(G) of the Securities Exchange Act of 1934 ( ``G'' 
orders).
    (b) All Floor broker agency interest placed within files in the 
Display Book[reg] system at the same price shall be on parity with each 
other, except agency interest that establishes the Exchange best bid or 
offer shall be entitled to priority in accordance with Exchange Rule 
72. No Floor broker agency interest placed within files in the Display 
Book[reg] system shall be entitled to precedence based on size.
    (c) (i) Floor broker agency interest placed within files shall 
become part of the quotation when it is at or becomes the Exchange best 
bid or offer and shall be executed in accordance with Exchange Rule 72.
    (ii) A Floor broker shall have the ability to maintain undisplayed 
reserve interest at the Exchange best bid and offer provided that a 
minimum of 1,000 shares of the broker's agency interest is displayed at 
that price.
    (iii) After an execution involving a Floor broker's agency interest 
at the Exchange best bid or offer that does not exhaust the broker's 
interest at that price, the displayed interest will be automatically 
replenished from his or her reserve interest, if any, so that at least 
1,000 shares of the broker's interest (or whatever amount remains, if 
less than 1,000 shares) is displayed.
    (iv) An automatically executing order will trade first with the 
displayed bid (offer) and if there is insufficient displayed volume to 
fill the order, will trade next with reserve interest, if any. All 
reserve interest will trade on parity.
    (d) A Floor broker's agency interest not at the Exchange best bid 
or offer shall be on parity with orders on the Display Book,[reg] and 
the specialist layered interest file at that price if executed as part 
of a sweep in accordance with, and to the extent provided by, Exchange 
Rules 1000-1004.
    (e) A Floor broker may trade on behalf of his or her orders as part 
of the Crowd at the same price and on the same side of the market as 
his or her agency interest placed within files only to the extent that 
the volume traded in the Crowd is not included in the agency interest 
files.
    (f) A Floor broker's agency interest files must be cancelled when 
he or she leaves the Crowd. Failure to do so is a violation of Exchange 
rules. If the Floor broker leaves the Crowd without canceling his or 
her agency interest files and one or more executions occur with the 
agency interest, the Floor broker shall be held to such executions.
    (g) The aggregate number of shares of agency interest in the files 
at each price shall be made available to the specialist. A Floor broker 
has discretion to exclude his or her agency interest from the 
aggregated agency interest information available to the specialist.
    (h) Broker agency interest excluded from the aggregated agency 
interest information available to the specialist is able to participate 
in automatic executions, but will not participate in a manual execution 
unless the broker representing this interest verbally trades on its 
behalf as part of the Crowd. Interest excluded from the aggregated 
agency information may trade at a price that is inferior to the price 
of such manual transaction.
    (i) The Floor broker is the executing broker for transactions 
involving his or her agency interest files.
    (j) Floor broker agency interest placed within files may 
participate in the opening trade in accordance with Exchange policies 
and procedures governing the open.
    (k) The ability of a Floor broker to have reserve interest will not 
be available during the open and during the close. The ability of a 
Floor broker to exclude volume from aggregated agency interest 
information available to the specialist will not be available during 
the open. Floor broker agency interest excluded from the aggregate 
agency interest information available to the specialist will not 
participate in the close.
    (l) Nothing in this rule shall be interpreted as modifying or 
relieving the Floor broker from his or her agency obligations and 
required compliance with all SEC and Exchange rules, policies and 
procedures.
    .30 Definition of Crowd A Floor broker will be considered to be in 
a Crowd if he or she is present at one of five contiguous panels at any 
one post where securities are traded.

Priority and Precedence of Bids and Offers

Rule 72

    I. Bids. Where bids are made at the same price, the priority and 
precedence shall be determined as follows:
    Priority of first bid
    (a) Except as provided in paragraph (b) below, when a bid is 
clearly established as the first made at a particular price, the maker 
shall be entitled to priority and shall have precedence on the next 
sale at that price, up to the number of shares of stock or principal 
amount of bonds specified in the bid, irrespective of the number of 
shares of stock or principal amount of bonds specified in such bid.
* * * * *
    Precedence of bids equaling or exceeding amount offered
    (c) When no bid is entitled to priority under paragraph (a) hereof, 
(or when a bid entitled to priority or precedence has been filled and a 
balance of the offer remains unfilled), all bids for a number of shares 
of stock or principal amount of bonds equaling or exceeding the number 
of shares of stock or principal amount of bonds in the offer or 
balance, shall be on [a] parity and entitled to precedence over bids 
for less than the number of shares of stock or principal amount of 
bonds in such offer or balance, subject to the condition that, with 
respect to bids made as part of the auction market if it is possible to 
determine clearly the order of time in which the bids so entitled to 
precedence

[[Page 37468]]

were made, such bids shall be filled in that order except that no bids 
in Floor broker agency interest files or specialist layered interest 
files shall be entitled to precedence.
    Precedence of bids for amounts less than amount offered
    (d) When no bid is entitled to priority under paragraph (a) hereof 
(or when a bid entitled to priority or precedence has been filled and a 
balance of the offer remains unfilled) and no bid has been made for a 
number of shares of stock or principal amount of bonds equaling or 
exceeding the number of shares of stock or principal amount of bonds in 
the offer or balance, the bid for the largest number of shares of stock 
or greatest principal amount of bonds shall have precedence, subject to 
the condition that, with respect to bids made as part of the auction 
market if two or more such bids for the same number of shares of stock 
or principal amount of bonds have been made, and it is possible to 
determine clearly the order of time in which they were made, such bids 
shall be filled in that order except that no bids in Floor broker 
agency interest files or specialist layered interest files shall be 
entitled to precedence.
    Simultaneous bids
    (e) When bids are made simultaneously, or when it is impossible to 
determine clearly the order of time in which they were made, with 
respect to bids made as part of the auction market, all such bids shall 
be on [a] parity subject only to precedence based on the size of the 
bid under the provisions of paragraphs [(b)] (c) and [(c)] (d) 
hereof[.], except that no bids in Floor broker agency interest files or 
specialist layered interest files shall be entitled to precedence.
    Sale or cancellation removes bids from Floor
    (f) [Except as provided in .50 below, a] A sale or the cancellation 
of an entire bid or offer entitled to priority shall remove all bids 
from the Floor except that if the number of shares of stock or 
principal amount of bonds offered exceeds the number of shares or 
principal amount specified in the bid having priority or precedence, a 
sale of the unfilled balance to other bidders shall be governed by the 
provisions of these Rules as though no sales had been made to the 
bidders having priority or precedence.
    Subsequent bids
    (g) After bids have been removed from the Floor under the 
provisions of paragraph [(e)] (f) hereof, priority and precedence shall 
be determined, in accordance with these Rules, by subsequent bids.
* * * * *
    Transfer of priority, parity and precedence
    (i) A bid may be transferred from one member to another and, as 
long as that bid is continued for the same account, it shall retain the 
same priority, parity and precedence it had at the time it was 
transferred.
    II. Offers. Where offers are at the same price the priority, parity 
and precedence shall be determined in the same manner as specified in 
the case of bids. An offer may be transferred from one member to 
another and, as long as that offer is continued for the same account, 
it shall retain the same priority, parity and precedence it had at the 
time it was transferred.
    III. Sale or Cancellation of a Bid or Offer Entitled to Priority 
``Clears the Floor''
    Following a sale[,] or the cancellation of a bid or offer that had 
been entitled to priority pursuant to this rule, all bids and offers 
previously entered are deemed to be re-entered and are on parity with 
each other. For example, assume that the market in XYZ is 0.20 bid for 
5000 shares, with 5000 shares offered at 0.25. On the bid side of the 
market, Broker A is bidding for 1000 shares and has priority. Brokers 
B, C, D, and E are each bidding for 1000 shares, with B being ahead of 
C, C being ahead of D, and D being ahead of E. On the offer side of the 
market, Broker F is offering 1000 shares and has priority. Brokers G, 
H, I, and J are each offering 1000 shares, with G being ahead of H, H 
being ahead of I, and I being ahead of J. Broker K enters the Crowd and 
sells 1000 shares to Broker A's bid of 0.20. The market then becomes 
0.20 bid for 4000 shares, with 5000 offered at 0.25. Brokers B, C, D, 
and E are now on parity on the bid side of the market, and Brokers F, 
G, H, I, and J are now on parity on the offer side of the market.
    Supplementary Material:
    .10 Precedence of bids and offers.--The following examples explain 
the operations of Rule 72 in connection with auction market 
transactions.
* * * * *
    (Remainder of rule unchanged)

Miscellaneous Requirements on Stock and Bond Market Procedures

Rule 79A

    Supplementary Material:
    .10 Request to make better bid or offer.--When any Floor broker 
does not bid or offer at the limit of an order which is better than the 
currently quoted price in the security and is requested by his 
principal to bid or offer at such limit, he shall do so.
    .15 With respect to limit orders received by specialists, each 
specialist shall publish immediately (i.e., as soon as practicable, 
which under normal market conditions means no later than 30 seconds 
from time of receipt) a bid or offer that reflects[;]:
    (i) the price and full size of each customer limit order that is at 
a price that would improve the specialist's bid or offer in such 
security; and
    (ii) the full size of each limit order that
    (A) is priced equal to the specialist's bid or offer for such 
security;
    (B) is priced equal to the national best bid or offer; and
    (C) represents more than a de minimis change (i.e., more than 10 
percent) in relation to the size associated with the Exchange's bid or 
offer.
    [Each specialist shall keep active at all times the quotation 
processing facilities (known as ``Quote Assist'') provided by the 
Exchange. A specialist may deactivate the quotation processing 
facilities as to a stock or a group of stocks provided that Floor 
Official approval is obtained. Such approval to deactivate Quote Assist 
must be obtained no later than three minutes from the time of 
deactivation.]
    Limit orders received by the specialist that improve the Exchange 
then-current bid or offer or change the size of the Exchange bid or 
offer, other than de minimis increases or decreases, shall be 
autoquoted in accordance with Exchange Rule 60(e). The opening trade or 
opening quotation in each security activates the autoquote facility and 
thereafter, each specialist shall keep active at all times the 
autoquote facility provided by the Exchange, except that a specialist 
may cause the deactivation of the autoquote facility by gapping the 
quote in accordance with the policies and procedures of the Exchange. 
Autoquoting will also be automatically suspended when a block-size 
transaction as defined in Rule 127 that involves orders on the Display 
Book[supreg] being reported manually and a liquidity replenishment 
point, as defined in Exchange Rule 1000(a)(v), is reached.
    The requirements with respect to specialists' display of limit 
orders shall not apply to any customer limit order that is[;]:
    (1) executed upon receipt of the order;
    (2) placed by a customer who expressly requests, either at the time 
the order is placed or prior thereto pursuant to an individually 
negotiated agreement with respect to such customer's orders, that the 
order not be displayed;
    (3) an odd-lot order;
    (4) delivered immediately upon receipt to an exchange or 
association-sponsored system or an electronic communications network 
that complies

[[Page 37469]]

with the requirements of Securities and Exchange Commission Rule 11Ac1-
1 (c) (5) (ii) under the Securities Exchange Act with respect to that 
order;
    (5) delivered immediately upon receipt to another exchange member 
or over-the-counter market maker that complies with the requirements of 
Securities and Exchange Commission Rule 11Ac1-4 under the Securities 
Exchange Act with respect to that order;
    (6) an ``all or none'' order;
    (7) a limit order to buy at a price significantly above the current 
offer or a limit order to sell at a price significantly below the 
current bid that is handled in compliance with Exchange procedures 
regarding such orders[;] (``too marketable limit orders''); or
    (8) an order that is handled in compliance with Exchange procedures 
regarding gap quoting or block crosses at significant premiums or 
discounts from the last sale.
* * * * *
    (Remainder of rule unchanged)

Limitations on Members' Trading Because of Customers' Orders

Rule 92

    (a) Except as provided in this Rule, no member or member 
organization shall cause the entry of an order to buy (sell) any 
Exchange-listed security for any account in which such member or member 
organization or any approved person thereof is directly or indirectly 
interested (a ``proprietary order''), if the person responsible for the 
entry of such order has knowledge of any particular unexecuted 
customer's order to buy (sell) such security which could be executed at 
the same price.
* * * * *
    (c) The provisions of this Rule shall not apply to:
    (1) any purchase or sale of any security in an amount of less than 
the unit of trading made by an odd-lot dealer to offset odd-lot orders 
for customers;
    (2) any purchase or sale of any security upon terms for delivery 
other than those specified in such unexecuted market or limited price 
order;
    (3) transactions by a member or member organization acting in the 
capacity of a specialist or[f] market maker in a security listed on the 
Exchange otherwise than on the Exchange; [and]
    (4) transactions made to correct bona fide errors[.]; and
    (5) algorithmically-generated messages for the specialist account 
in accordance with the provisions of Exchange Rule 104.
* * * * *
    (Remainder of rule unchanged)

Dealings by Specialists

Rule 104

* * * * *
    [(b) Specialists shall have the ability to establish an external 
quote application interface (``Quote API'') which utilizes proprietary 
algorithms that allow the specialist, on behalf of the dealer account, 
to systematically update the Exchange published bid or offer within the 
Display Book[reg] system in Investment Company Units (as defined in 
paragraph 703.16 of the Listed Company Manual), or Trust Issued 
Receipts (as defined in Rule 1200). Nothing in this rule shall be 
interpreted as modifying or relieving the specialist from his or her 
obligations and required compliance with all Exchange rules, policies 
and procedures.]
    (b) Specialists shall have the ability to establish an external 
quote application programmed interface (``API''), which will allow the 
specialist, on behalf of the dealer account, to send algorithmically-
generated messages to the Display Book[reg] system to electronically 
quote and trade.
    (i) In reaction to information, including but not limited to, an 
incoming order as it is entering NYSE systems, the system employing the 
algorithm may generate messages for any of the following quoting or 
trading actions, provided such algorithmically-generated trading 
messages are in reaction to only one order at a time, and only as such 
order is entering the system:
    Quoting Messages:
    (A) supplement the size of the existing Exchange published best bid 
or offer;
    (B) place within the Display Book[reg] system specialist reserve 
interest at the Exchange published best bid and offer as described in 
(d) below;
    (C) layer within the Display Book[reg] system specialist interest 
at varying prices outside the published Exchange quotation 
(``specialist layered interest'');
    (D) establish the Exchange best bid and offer; and
    (E) withdraw previously established specialist interest at the 
Exchange best bid and offer.
    Trading Messages:
    (F) provide additional specialist volume to partially or completely 
fill an order at the Exchange published best bid or offer;
    (G) match better bids and offers published by other market centers 
where automatic executions are immediately available;
    (H) provide price improvement to an order subject to the conditions 
set forth in (e) below; and
    (I) trade with the Exchange published best bid or offer.
    (ii) Exchange systems shall:
    (A) enforce the proper sequencing of incoming orders and 
algorithmically-generated messages; and
    (B) ensure that algorithmic messages to trade with the Exchange 
published best bid or offer are processed by the Display Book[reg] in 
such a manner that specialists and other market participants have a 
similar opportunity to trade with the published quotation.
    (c)(i) All algorithmic messages delivered via the API must include 
a code identifying the reason for the algorithmic action, the unique 
identifier of the order to which the algorithmic message is reacting, 
(if any), the unique identifier of the order immediately preceding the 
generation of the algorithmic message and any other information the 
Exchange may require. In addition,
    (A) Algorithmic messages to trade with the Exchange published best 
bid or offer, as provided in (b)(i)(I) above, must include the unique 
identifier for the publicly-disseminated Exchange best bid or offer to 
which the algorithmic message is reacting.
    (B) The Exchange will designate the reason codes, unique 
identifiers for orders and quotations and the format of any other 
required information for use in algorithmically-generated messages.
    (C) Identification of a particular order and/or quotation in an 
algorithmic message does not guarantee that the specialist will trade 
with that order or quotation or that the specialist has priority in 
trading with that order or quotation.
    (D) The Exchange will automatically cancel algorithmic messages 
that are unable to interact with the order or quotation identified by 
the message where the reason code and the proposed algorithmic action 
are inconsistent, where the message activity would create a locked or 
crossed market, where the identifiers described above in (c) are not 
designated, and in other similar situations.
    (ii) The API will not have access to the following types of 
information:
    (A) Information which identifies the firms entering orders, 
customer information, or an order's clearing broker;
    (B) Floor broker agency interest files or aggregate Floor broker 
agency interest available at each price; or
    (C) cancellation of an order, except for cancel and replace orders.

[[Page 37470]]

    (iii) Algorithmic messages must comply with all SEC and Exchange 
rules, policies and procedures governing specialist proprietary 
trading.
    (iv) Algorithmic messages must not create a locked or crossed 
market, as defined in Exchange Rule 15A.
    (v) The Display Book[supreg] will not process algorithmic messages 
during the time a block-size transaction (as defined in Rule 127) 
involving orders on the Display Book[supreg] is being reported pursuant 
to manual reporting.
    (vi) The Display Book[supreg] will not process algorithmic messages 
when automatic executions are suspended, except that when automatic 
executions are suspended but autoquote is available, the Display 
Book[supreg] will process algorithmic messages to generate a bid or 
offer that improves the Exchange best bid or offer or supplements the 
size of an existing best bid or offer.
    (vii) The Display Book[supreg] shall not process algorithmic 
messages from the API that will trigger the automatic execution of an 
auction limit or a market order not designated for automatic execution 
pursuant to Rule 123F or that will result in such order's execution 
with an existing contra-side specialist bid or offer. However, the 
Display Book[supreg] will process algorithmic messages to provide price 
improvement to auction limit and market orders not designated for 
automatic execution in accordance with the price improvement parameters 
described in (e).
    (d)(i) Specialists shall have the ability to maintain undisplayed 
reserve interest on behalf of the dealer account at the Exchange best 
bid and offer provided at least 2,000 shares of dealer interest is 
displayed at that price.
    (ii) After an execution involving specialist interest at the 
Exchange best bid or offer that does not exhaust the specialist's 
interest at that price, the specialist's displayed interest will be 
automatically replenished from the reserve interest, if any, so that at 
least 2,000 shares of specialist interest (or whatever amount remains 
if less than 2,000 shares) is displayed.
    (iii) Specialist reserve interest will be on parity with Floor 
broker agency file reserve interest and, like it, shall yield to all 
other displayed interest eligible to trade at the Exchange bid or offer 
(See Rule 70.20(c)).
    (e)(i) Specialist may provide algorithmic price improvement to all 
or part of an incoming order including an auction limit order and a 
market order not designated for automatic execution provided:
    (A) The specialist is represented in the bid with respect to price 
improvement provided to an incoming sell order and in the offer with 
respect to price improvement provided to an incoming buy order; and
    (B) Where the quotation spread is three-five cents, the price 
improvement to be supplied by the specialist is at least two cents; or
    (C) Where the quotation spread is more than five cents, the price 
improvement to be supplied by the specialist is at least three cents; 
or
    (D) Where the quotation spread is two cents, the price improvement 
to be supplied by the specialist is one cent.
    (f)(i) Each specialist firm shall maintain an electronic log of all 
algorithmic events, including the date and time of each algorithmic 
message and such other information as the Exchange shall designate. 
Such log shall be maintained in accordance with SEC and Exchange rules 
regarding books and records and shall be capable of being provided to 
the Exchange upon request, in such time and in such format as the 
Exchange shall designate.
    (ii) Each specialist firm shall notify the Exchange in writing, 
within such time as the Exchange shall designate, whenever the system 
employing an algorithm or an individual algorithm is not operating and 
the time, cause, and duration of such non-operation.
    (g) During the day, specialists on the Floor may interact with the 
system employing the firm's algorithms or an individual algorithm with 
respect to the securities they are trading by:
    (i) Activating or deactivating the firm's algorithms from a group 
of pre-set algorithms made available by the specialist firm, or
    (ii) Adjusting the firm's pre-set parameters guiding algorithm 
decision-making.
    (h) Each specialist firm shall certify in the time, frequency, and 
manner as prescribed by the Exchange, that the system employing its 
algorithms and all algorithms operate in accordance with all SEC and 
Exchange rules, policies and procedures.
    Supplementary Material

Functions of Specialists

    .10 Regular Specialists
* * * * *
    (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:
* * * * *
    (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 [c]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. However, this provision shall not apply 
to automatic executions involving the specialist dealer account.
* * * * *
    (Remainder of rule unchanged)

Rule 108

On Parity

    (a) No bid or offer made by a member or made on an order for stock 
originated by a member while on the Floor to establish or increase a 
position in such stock for an account in which such member has an 
interest shall be entitled to parity with a bid or offer made on an 
order originated off the Floor, except that such a bid or offer shall 
be entitled to parity with a bid or offer made on an order originated 
off the Floor and being executed pursuant to Section 11(a)(1)(G) of the 
Act and Rule 11a1-1(T) thereunder. The foregoing shall not apply to 
specialists, unless at 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.

On Precedence Based on Size

    (b) No bid or offer made by a member or made on an order for stock 
originated by a member while on the Floor to establish or increase a 
position in such stock for an account in which such member has an 
interest shall be entitled to precedence based on size over a bid or 
offer made on an order originated off the Floor, except that such a bid 
or offer shall be entitled to precedence based on size over a bid or 
offer made on an order originated off the Floor and being executed 
pursuant to Section 11(a)(1)(G) of the Act and Rule 11a1-1(T) 
thereunder.
* * * * *
    (Remainder of rule unchanged)

[[Page 37471]]

Disclosure of Specialists' Orders

Rule 115

    A member acting as a specialist may disclose any information in 
regard to the order entrusted to the specialist:
    (i) for the purpose of demonstrating the methods of trading to 
visitors to the Floor;
    (ii) to other market centers in order to facilitate the operation 
of ITS or any other Application of the System; and
    (iii) while acting in a market making capacity, to provide 
information about buying or selling interest in the market, including 
aggregated buying or selling interest contained in Floor broker agency 
interest files other than interest the broker has chosen to exclude 
from the aggregated buying and selling interest in response to an 
inquiry from a member conducting a market probe in the normal course of 
business. Information regarding stop orders may be provided if the 
specialist has a reasonable basis to believe that the member intends to 
trade the security at a price at which stop orders would be relevant. A 
specialist shall make information available in a fair and impartial 
manner to any member while on the Floor. A specialist shall not 
disclose the identity of any buyer or seller represented on [his] the 
Display Book[reg] [book] if expressly requested not to do so by the 
broker who entered the order with the specialist.
* * * * *
    (Remainder of rule unchanged)

Orders of Members To Be in Writing

Rule 117

    No member on the Floor shall make any bid, offer or transaction for 
or on behalf of another member except pursuant to a written or 
electronically recorded order. If a member to whom an order has been 
entrusted leaves the Crowd without actually transferring the order to 
another member, the order shall not be represented in the market during 
his or her absence, except with respect to any portion of his or her 
agency interest file that was not cancelled before the member left the 
Crowd, notwithstanding that such failure to cancel an agency interest 
file is a violation of Exchange rules.
    Supplementary Material:
    .10 Absence from Crowd.--When a member keeps an order in his or her 
possession and leaves the Crowd in which dealings in the security are 
conducted, the member is not entitled during his or her absence to have 
any bid, offer or transaction made in such security on his or her 
behalf or to have dealings in the security held up until he or she is 
summoned to the Crowd, except that the member shall be held to any 
executions involving his or her agency interest files. To insure 
representation of an order in the market during his or her absence, a 
member must therefore actually turn the order over to another member 
who will undertake to remain in the Crowd. If a member keeps the order 
in his or her possession and during his or her absence from the Crowd 
the security sells at or through the limit of his or her order, the 
member will be deemed to have missed the market.
* * * * *
    (Remainder of rule unchanged)

Record of Orders

Rule 123

* * * * *
    (e) System Entry Required
    Except as provided in paragraphs .21 and .22 below, no Floor member 
may represent or execute an order on the Floor of the Exchange or place 
an agency interest file within the Display Book[reg] system unless the 
details of the order and the agency interest file have been first 
recorded in an electronic system on the Floor. Any member organization 
proprietary system used to record the details of the order and agency 
interest file must be capable of transmitting these details to a 
designated Exchange data base within such time frame as the Exchange 
may prescribe.
    The details of each order required to be recorded shall include the 
following data elements, any changes in the terms of the order and 
cancellations, in such form as the Exchange may from time to time 
prescribe:
    1. Symbol;
    2. Clearing member organization;
    3. Order identifier that uniquely identifies the order;
    4. Identification of member or member organization recording order 
details;
    5. Number of shares or quantity of security;
    6. Side of market;
    7. Designation as market, auto ex market, limit, stop, stop limit, 
auction limit, or intermarket sweep order;
    8. Any limit price and/or stop price;
    9. Time in force;
    10. Designation as held or not held;
    11. Any special conditions;
    12. System-generated time of recording order details, modification 
of terms of order or cancellation of order; and
    13. Such other information as the Exchange may from time to time 
require.
    The Floor member must identify which orders or portions thereof are 
being made part of the Floor broker agency interest file pursuant to 
such procedures as required by the Exchange.
* * * * *
    (Remainder of rule unchanged)

Miscellaneous Requirements

Rule 123A

* * * * *
    .30 A specialist may accept one or more percentage orders.--
* * * * *
    (a) The elected or converted portion of a ``percentage order that 
is convertible on a destabilizing tick and designated immediate 
execution or cancel election'' (``CAP-DI order'') may be automatically 
executed and may participate in a sweep.
    (i) An elected or converted CAP-DI order on the same side of the 
market as an automatically executed electing order may participate in a 
transaction at the bid (offer) price if there is volume associated with 
the bid (offer) remaining after the electing order is filled in its 
entirety. An elected or converted CAP-DI order on the same side of the 
market as an automatically executed electing order that sweeps the 
Display Book[reg] will participate in a transaction at the sweep clean-
up price if there is volume remaining on the Display Book(r) or from 
contra-side elected CAP-DI orders at that price.
    (ii) An elected or converted CAP-DI order on the contra-side of the 
market as an automatically executed electing order may participate in a 
transaction at the bid (offer) price and the sweep clean-up price, if 
any.
    (iii) When a specialist is providing price improvement to an order 
pursuant to Rule 104(e), marketable CAP-DI orders on the Display 
Book[reg] will be automatically converted to participate in this 
execution in accordance with this rule.
* * * * *
    (Remainder of rule unchanged)

Order Handling--Auction Limit Orders and Market Orders

Rule 123F

    (a) Auction Limit Orders
    (i) An auction limit order will be automatically executed or routed 
to another market pursuant to Rule 15A.50 upon entry if there is a 
minimum variation quotation on the Exchange at the time the order 
reaches the Display Book[reg] or a better bid (offer) is displayed by 
another ITS participating market center in which an automatic execution 
is immediately available and such better

[[Page 37472]]

bid (offer) creates a minimum variation market compared with the 
Exchange best offer (bid).
    (ii) If not executed upon entry, an auction limit order to buy with 
a limit price that is at or above the Exchange best offer when it 
reaches the Display Book[reg] shall be autoquoted the minimum variation 
better than the Exchange best bid at the time and an auction limit 
order to sell with a limit price that is at or below the Exchange best 
bid when it reaches the Display Book[reg] shall be autoquoted the 
minimum variation better than the Exchange best offer at that time, 
thereby becoming the new published Exchange best bid or offer.
    The size associated with a subsequent auction limit order to buy 
with a limit price that is at or above the Exchange best offer when it 
reaches the Display Book[reg] and market orders to buy will be added to 
the bid. The size associated with a subsequent auction limit order to 
sell with a limit price that is at or below the Exchange best bid when 
it reaches the Display Book[reg] and market orders to sell will be 
added to the offer.
    (iii) The following events shall cause auction limit orders to 
automatically execute in accordance with and to the extent provided by 
Rules 1000-1004:
    (A) The arrival of a subsequent order on the same side of the 
market capable of trading at a price better than the auction limit 
order is bidding (offering);
    (B) the execution of an order on the same side of the market as an 
auction limit order that exhausts some or all of the contra-side volume 
available in the Exchange quotation;
    (C) the cancellation of some or all of the contra-side volume, or a 
change in the price of the contra-side of the quotation that would 
enable an execution of the auction limit order with price improvement; 
or
    (D) the auction limit order that has not been executed within 15 
seconds after it reaches the Display Book[reg].
    (iv) An auction limit order may be executed at a price inferior to 
the market price prevailing at the time it was entered.
    (b) Market Orders
    (i) A market order designated for automatic execution will be 
automatically executed in accordance with and to the extent provided by 
Exchange Rules 1000-1004.
    (ii) A market order not designated for automatic execution but 
delivered systemically to the Display Book[reg] will be automatically 
executed or routed to another market pursuant to Rule 15A.50 upon entry 
if there is a minimum variation quotation on the Exchange at the time 
the order reaches the Display Book[reg] or a better bid (offer) is 
displayed by another ITS participating market center in which an 
automatic execution is immediately available and such bid (offer) 
creates a minimum variation market compared with the Exchange best 
offer (bid).
    (iii) If not executed upon entry, such market order to buy shall be 
autoquoted the minimum variation better than the Exchange best bid and 
such market order to sell shall be quoted the minimum variation better 
than the Exchange best offer at that time, thereby becoming the new 
Exchange best bid or offer.
    The size associated with a subsequent market order and/or auction 
limit order (consistent with the order's limit) to buy (sell) will be 
added to the bid (offer).
    (iv) The following events shall cause market orders to 
automatically execute in accordance with, and to the extent provided by 
Rules 1000-1004:
    (A) the arrival of a subsequent order on the same side of the 
market capable of trading at a better price than such market order is 
bidding (offering);
    (B) the execution of an order on the same side of the market as 
such market order, that exhausts some or all of the contra-side volume 
available in the Exchange quotation;
    (C) the cancellation of some or all of the contra-side volume, or a 
change in the price of the contra-side of the quotation that would 
enable an execution of the market order with price improvement; or
    (D) the market order has not been executed within 15 seconds after 
it reaches the Display Book[reg].
    (v) A market order may be executed at a price inferior to the 
market price prevailing at the time it was entered.

Odd-Lot Orders

Rule 124

* * * * *
    Supplementary Material:
* * * * *
    .50 [The odd-lot portion of PRL (part of round lot) orders will be 
executed at the same price as the round lot portion and will be 
processed through the round lot system.] A part of round lot (PRL) 
order shall be automatically executed in accordance with, and to the 
extent provided by, Exchange Rules 1000-1004.
* * * * *
    .80 Odd-lot executions will be suspended when automatic executions 
pursuant to Exchange Rules 1000-1004 are suspended. Odd-lot executions 
will resume when automatic executions pursuant to Exchange Rules 1000-
1004 resume.
* * * * *
    (Remainder of rule unchanged)
    Rule 132B (a) Procedures
    Order Tracking Requirements
    1. With respect to any security listed on the New York Stock 
Exchange except bonds, each member and member organization shall:
    A. immediately following receipt or origination of an order, record 
each item of information described in paragraph (b) of this Rule that 
applies to such order, and record any additional information described 
in paragraph (b) of this Rule that applies to such order immediately 
after such information is received or becomes available; and
    B. immediately following the transmission of an order to another 
member, or from one department to another within the same member 
organization, record each item of information described in paragraph 
(c) of this Rule that applies with respect to such transmission; and
    C. immediately following the modification or cancellation of an 
order, record each item of information described in paragraph (d) of 
this Rule that applies with respect to such modification or 
cancellation.
    D. identify which orders or portions thereof are being made part of 
the Floor broker agency interest file pursuant to such procedures as 
required by the Exchange.
    2. Each required record of the time of an event shall be expressed 
in terms of hours, minutes, and seconds.
    3. Each member or member organization shall, by the end of each 
business day, record each item of information required to be recorded 
under this Rule in such electronic form as is prescribed by the 
Exchange from time to time.
    4. Maintaining and Preserving Records
    [(]A.[)] Each member and member organization shall maintain and 
preserve records of the information required to be recorded under this 
Rule for the period of time and accessibility specified in SEC Rule 
17a-4(b).
    [(]B.[)] The records required to be maintained and preserved under 
this Rule may be immediately produced or reproduced on ``micrographic 
media'' as defined in SEC Rule 17a-4(f)(1)(i) or by means of 
``electronic storage media'' as defined in SEC Rule 17a-4(f)(1)(ii) 
that meet the conditions set forth in SEC Rule 17a-4(f) and be 
maintained and preserved for the required time in that form.
    (b) Order Origination and Receipt

[[Page 37473]]

    Unless otherwise indicated, the following order information must be 
recorded under this Rule when an order is received or originated:
    1. an order identifier meeting such parameters as may be prescribed 
by the Exchange assigned to the order by the member or member 
organization that uniquely identifies the order for the date it was 
received;
    2. the identification symbol assigned by the Exchange to the 
security to which the order applies;
    3. the market participant symbol assigned by the Exchange to the 
member or member organization;
    4. the identification of any department or the identification 
number of any terminal where an order is received directly from a 
customer;
    5. where the order is originated by a member or member 
organization, the identification of the department (if appropriate) of 
the member that originates the order;
    6. the number of shares to which the order applies;
    7. the designation of the order as a buy or sell order;
    8. the designation of the order as a short sale order;
    9. the designation of the order as a market order, auto ex market 
order, limit order, stop order or stop limit order, auction limit, or 
intermarket sweep order;
    10. any limit and/or stop price prescribed in the order;
    11. the date on which the order expires, and, if the time in force 
is less than one day, the time when the order expires;
    12. the time limit during which the order is in force;
    13. any request by a customer that an order not be displayed 
pursuant to Rule 11Acl-4(c) under the Securities Exchange Act of 1934;
    14. special handling requests, specified by the Exchange for 
purposes of this Rule;
    15. the date and time the order is originated or received by a 
Member or member organization; and
    16. the type of account, i.e., retail, wholesale, employee, 
proprietary, or any other type of account designated by the Exchange, 
for which the order is submitted.
* * * * *
    (Remainder of rule unchanged)

NYSE Direct+[reg]

Automatic Executions [of Limit Orders Against Orders Reflected in NYSE 
Published Quotation]

Rule 1000

    (a) [Only straight limit orders without tick restrictions are 
eligible for entry as auto ex orders. Auto ex orders to buy shall be 
priced at or above the price of the published NYSE offer. Auto ex 
orders to sell shall be priced at or below the price of the NYSE bid.] 
An auto ex order shall receive an immediate, automatic execution 
against orders reflected in the Exchange['s] published quotation, 
orders on the Display Book[reg], Floor broker agency file interest and 
specialist interest, in accordance with, and to the extent provided by 
these rules and shall be immediately reported as [NYSE] Exchange 
transactions, unless:
    (i) The [NYSE's] Exchange published quotation is in the non-firm 
quote mode;
    [(ii) the execution price would be more than five cents away from 
the last reported transaction price in the subject security on the 
Exchange];
    [(iii)] (ii) with respect to a single-sided auto ex order, a better 
[price exists] bid or offer is published in another ITS participating 
market center where an automatic execution is immediately available or 
where such better bid or offer is protected from a trade-through by 
Securities and Exchange Commission rule or ITS Plan and the price of 
such better bid or offer has not been systemically matched on the 
Exchange, unless the member has entered an intermarket sweep order as 
defined in Rule 13;
    [(iv) with respect to a single-sided auto ex order, the NYSE's 
published bid or offer is 100 shares;]
    [(v) a transaction outside the NYSE's published bid or offer 
pursuant to Rule 127 is in the process of being completed, in which 
case the specialist should publish a bid and/or offer that is more than 
five cents away from the last reported transaction price in the subject 
security on the Exchange];
    [(vi)] (iii) trading in the subject security has been halted; [.]
    (iv) the specialist has gapped the quotation in accordance with the 
policies and procedures of the Exchange;
    (v) a liquidity replenishment point has been reached. A liquidity 
replenishment point (``LRP'') is reached when:
    (A) During a sweep described in (b) below, a buy order would be 
executed at a price above a minimum of five cents from the Exchange 
best offer, rounded to the nearest five-cent increment or a sell order 
would be executed at a price below a minimum of five cents from the 
Exchange best bid, rounded to the nearest five-cent increment, or
    (B) an automatic execution reaches a momentum liquidity 
replenishment point (``MLRP'') or an automatic execution would result 
in a transaction at a price on that side of the market outside a MLRP 
range.
    (i) A MLRP range is calculated based on high and low transaction 
prices on the Exchange in a subject security within the prior 30-
seconds;
    (ii) The greater of twenty-five cents or 1% of the security's price 
(rounded to the nearest cent) on the Exchange is added to the 
security's lowest price in a rolling 30-second period; the same amount 
is subtracted from its highest price within the same period;
    (iii) If there is no transaction on the Exchange within 30-seconds, 
the MLRP range will be based off the last transaction on the Exchange.
    (vi) a block-size transaction as defined in Rule 127 that involves 
orders on the Display Book[supreg] is being reported manually; or
    (vii) the order is for a security whose price on the Exchange is 
$300.00 or more.
    (b)(i) Auto ex orders to buy shall trade with the Exchange 
published best offer. Auto ex orders to sell shall trade with the 
Exchange published best bid.
    (ii) Where the volume associated with the Exchange published best 
bid (offer) is insufficient to fill an auto ex order in its entirety, 
other than an incoming commitment to trade received through ITS, the 
unfilled balance of such order (the ``residual'') shall trade with 
available contra-side interest in the following order:
    (A) reserve interest at the Exchange published best bid (offer);
    (B) additional specialist volume at the Exchange published best bid 
(offer); and
    (C) if a residual remains, it shall then ``sweep the Display Book 
[reg]'' as set forth in (iii) below, until it is executed in full, its 
limit price, if any, is reached, or a liquidity replenishment point is 
reached, whichever occurs first.
    (D) After trading with the Exchange published best bid (offer), the 
unfilled balance of any incoming commitment to trade received through 
ITS or any unfilled balance of such commitment to trade shall be 
automatically cancelled.
    (iii) (A) During a sweep, the residual shall trade with the orders 
on the Display Book[reg] and any broker agency interest files and/or 
specialist layered interest file capable of execution in accordance 
with Exchange rules, at a single price, such price being the best price 
at which such orders and files can trade with the residual to the 
extent possible, (``clean-up price'').
    (B) Orders on the Display Book,[reg] Floor broker agency interest, 
and any specialist layered interest capable of trading with the 
residual shall receive the clean-up price.

[[Page 37474]]

    (C) Any specialist layered interest that remains after the residual 
has traded at the clean-up price will be cancelled automatically by the 
Exchange.
    (D) Where a bid or offer published by another ITS participating 
market center in which an automatic execution is immediately available 
is better than the sweep clean-up price or where such better bid or 
offer is protected from a trade-through by Securities and Exchange 
Commission rule or ITS Plan, the portion of the sweeping residual that 
satisfies the size of such better priced bid or offer will be 
automatically routed as a commitment to trade to the ITS participating 
market center publishing such better bid or offer.
    (iv) Any residual remaining after the sweep described in (ii) above 
shall be bid (offered) at the order's limit price, if any, or the LRP 
whichever is lower, unless the order is designated immediate or cancel, 
in which case the residual shall be automatically cancelled.
    [Auto ex orders that cannot be immediately executed shall be 
displayed as limit orders in the auction market. An auto ex order equal 
to or greater than the size of the NYSE's published bid or offer shall 
trade against the entire published bid or offer, and a new bid or offer 
shall be published pursuant to Rule 60(e). The unfilled balance of the 
auto ex order shall be displayed as a limit order in the auction 
market.]
    [During a pilot program in 2003, NYSE Direct+ shall not be 
available in the following five stocks: American Express (AXP), Pfizer 
(PFE), International Business Machines (IBM), Goldman Sachs (GS), and 
Citigroup (C). The Exchange will announce in advance to its membership 
the time the pilot will run.]

Execution of Auto Ex Orders

Rule 1001

    (a) Subject to Rule 1000, auto ex orders shall be executed 
automatically and immediately reported. The contra side of the 
execution shall be [orders reflected in the Exchange's published 
quotation], as follows:
    (i) the first contra side bid or offer at a particular price shall 
be entitled to time priority, but after a trade clears the Floor, all 
bids and offers at such price shall be on parity with each other;
    (ii) all bids or offers on parity shall receive a split of 
executions in accordance with Exchange Rule 72;
    (iii) the [specialist shall be responsible for assigning] 
assignment of the number of shares to each contra side bidder and 
offeror as appropriate, in accordance with Exchange Rule 72, with 
respect to each automatic execution of an auto ex order shall be done 
automatically by the Display Book[reg] system;
    (iv) the specialist shall be the contra party to any automatic 
execution of an auto ex order where interest reflected in the published 
quotation against which the auto ex order was executed is no longer 
available, except with respect to transactions occurring with the Floor 
broker agency interest files;
    [(v) a universal contra shall be reported as the contra to each 
automatic execution of an auto ex order.]
    [(b) If the depth of the published bid or offer is not sufficient 
to fill an auto ex order in its entirety, the unfilled balance of the 
order shall be routed to the Floor and shall be displayed in the 
auction market.]
    [(c)] (b) No published bid or offer shall be entitled to claim 
precedence based on size with respect to executions against auto ex 
orders.

Availability of Automatic Execution Feature

Rule 1002

    [Orders designated as ``a] Auto ex[''] orders in a particular 
stock, Investment Company Unit (as defined in paragraph 703.16 of the 
Listed Company Manual), or Trust Issued Receipt (as defined in Rule 
1200) shall be eligible to receive an automatic execution if entered 
after the Exchange has disseminated a published bid or offer, until the 
close of regular trading on the Exchange in such security, Investment 
Company Unit or Trust Issued Receipt [3:59 p.m. for stocks and Trust 
Issued Receipts, or 4:14 p.m. for Investment Company Units, or within 
one minute of any other closing time of the Exchange's floor market]. 
[Orders designated as ``a] Auto ex[''] orders in a particular [stock] 
security, Trust Issued Receipt, or Investment Company Unit that are 
entered prior to the dissemination of a bid or offer [or after 3:59 
p.m. for stocks and Trust Issued Receipts, after 4:14 p.m. for 
Investment Company Units or within one minute of any other closing 
time,] shall be [displayed as limit orders] handled as non-auto-ex 
market or limit orders [in the auction market] except that an incoming 
commitment to trade received through ITS will be cancelled.

Application of Tick Tests

Rule 1003

    If a transaction has been agreed upon in the auction market, and an 
automatic execution involving auto ex orders is reported at a different 
price before the auction market transaction is reported, any tick test 
applicable to such auction market transaction shall be based on the 
last reported trade on the Exchange prior to such execution of auto ex 
orders except that this provision does not apply to any security that 
is part of the Securities and Exchange Commission's Regulation SHO 
Pilot.

Election of Stop Orders and Percentage Orders

Rule 1004

    Automatic executions of auto ex orders shall elect stop orders, 
stop limit orders and percentage orders electable at the price of such 
executions. Any stop orders so elected shall be automatically executed 
pursuant to [the] Exchange['s auction market procedures] rules, and 
shall not be guaranteed an execution at the same price as subsequent 
automatic executions of auto ex orders.

[Orders May Not Be Broken Into Smaller Amounts]

[Rule 1005

    An auto ex order for any account in which the same person is 
directly or indirectly interested may only be entered at intervals of 
no less than 30 seconds between entry of each such order in a stock, 
Investment Company Unit (as defined in paragraph 703.16 of the Listed 
Company Manual), or Trust Issued Receipt (as defined in Rule 1200), 
unless the orders are entered by means of separate order entry 
terminals, and the member or member organization responsible for entry 
of the orders to the Floor has procedures in place to monitor 
compliance with the separate terminal requirement.]
* * * * *

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 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
    SR-NYSE-2004-05 and Amendment Nos. 1, 2, and 3 thereto\11\ propose

[[Page 37475]]

enhancements to the operation of NYSE DIRECT+[reg] (``Direct+''), the 
Exchange's electronic execution facility, and amendments to other 
Exchange rules. Together with this Amendment No. 5, these proposals 
create a unique, integrated market--a hybrid market--that uses 
technology to improve the speed and efficiency of the auction, while 
preserving the advantages of human knowledge and expertise that are 
central to the Exchange market. By increasing the array of available 
trading choices, the Hybrid Market benefits all customers, from the 
smallest investors to the largest institutions.
---------------------------------------------------------------------------

    \11\ See supra notes 5 and 8.
---------------------------------------------------------------------------

    The proposed enhancements to Direct+ offer immediate execution with 
speed, certainty and anonymity at the Exchange best bid and offer 
without restrictions on order size or order frequency, to the extent of 
the displayed volume associated with such bid and offer. The unfilled 
portion of the automatically executing order, if any, trades with any 
reserve interest and additional specialist volume at the Exchange best 
bid or offer, and, if still not filled, sweeps existing orders on the 
Display Book[reg]\12\ (the `` Display Book'' or ``book'') and Floor 
broker agency interest files and specialist interest files to the 
extent permitted, until it is filled, its limit price (if any) is 
reached or a NYSE Liquidity Replenishment PointSM (``LRP'') 
is reached.
---------------------------------------------------------------------------

    \12\ The Display Book is an order management and execution 
facility. The Display Book receives and displays orders to the 
specialist and provides a mechanism to execute and report 
transactions and publish the results to the Consolidated Tape. In 
addition, the Display Book is connected to a variety of other 
Exchange systems for the purposes of comparison, surveillance, and 
reporting information to customers and other market data and 
national market systems (i.e. the Intermarket Trading System, 
Consolidated Tape Association, Consolidated Quotation System, etc.).
---------------------------------------------------------------------------

    LRPs are pre-determined price points at which the Hybrid Market 
briefly converts to auction market trading only. LRPs may be triggered 
by a sweep or electronic trading that results in rapid price movement 
over a short period. A LRP converts the Hybrid Market to an auction 
market only on a temporary basis, in order to moderate volatility by 
affording an opportunity for new orders and Crowd and specialist 
interest to add liquidity. This promotes reasonable continuity and 
fosters the market quality that is a hallmark of the Exchange.
    While offering the important benefits of automatic execution, the 
Exchange Hybrid Market preserves the best aspects of the agency 
auction. It combines the benefits of specialist and Floor broker 
expertise with the speed, certainty, and anonymity of electronic 
execution to create a market system offering maximum choice to 
customers without eliminating time-tested trading procedures that have 
proven immensely successful in providing stable, liquid, and less 
volatile markets.
    Interaction between Floor brokers and specialists serves as a 
catalyst to trading, and both functions are integral to the success of 
the market. Specialists and Floor brokers will continue to perform 
their vital functions in the Hybrid Market through the use of Floor 
broker agency interest files, specialist layered interest files, and 
specialist algorithmic interaction with orders. As such, both 
``electronically-'' and ``manually-'' executed orders will benefit from 
the value added by specialists in committing capital and providing 
depth to the market in response to customer demands, and the 
competition among orders represented by Floor brokers in the Crowd. 
This will result in the reduced volatility, stable prices, and fair and 
orderly markets that are a hallmark of the Exchange.
    The Hybrid Market ensures that the opportunity for price 
improvement available in auction market trading continues and is 
extended to automatic executions. Proposed new orders types--auction 
limit orders and market orders not designated for automatic execution 
(``auction market orders'')--specifically incorporate an opportunity 
for price improvement. In addition, customers may seek price 
improvement through the use of Floor brokers, who can access the 
liquidity represented by orders on the Display Book, specialist dealer 
interest, and the Crowd. The ability of specialists to provide 
algorithmic price improvement,\13\ the sweep functionality, and the 
ability of Floor broker agency interest files to participate in 
automatic executions provide a price improvement opportunity regardless 
of the execution format.
---------------------------------------------------------------------------

    \13\ It should be noted that the Exchange intends to provide 
Floor brokers with the ability to provide electronic price 
improvement via a discretionary order type. This will be the subject 
of a separate filing.
---------------------------------------------------------------------------

    The proposed rules incorporate functionalities to enable 
specialists and Floor brokers to participate in automatic executions 
and sweeps. These functionalities, the NYSE Specialist APISM 
(i.e., systems that employ algorithms to make trading and quoting 
decisions on behalf of the specialist), NYSE Specialist Interest Files 
SM, and NYSE Floor Broker Agency Interest 
FilesSM, are described in previous amendments. Aspects of 
their operation are clarified or modified as described below.
    All of the proposed functionalities are required to operate in a 
manner consistent with Commission and Exchange rules governing trading 
by members and member organizations. For example, Exchange Rule 104(a) 
prohibits specialists from effecting purchases or sales in any 
specialty security ``unless such dealings are reasonably necessary to 
permit such specialist to maintain a fair and orderly market* * *'' The 
``reasonable necessity'' requirement is defined in Exchange Rule 
104.10, which sets forth standards by which the market necessity of 
specialist trading can be determined. These rules will continue to 
apply to specialist trading in the Hybrid Market. The ability of 
specialists to algorithmically quote and trade pursuant to defined 
parameters, layer interest, and maintain a reserve file at the best bid 
and offer, as described in these amendments, is consistent with these 
requirements. They are merely tools to enable specialists to 
participate in automatic executions and allow them to replicate 
electronically that which they do today. All specialist trading, 
whether ``electronic'' or ``manual,'' must satisfy the requirements 
governing specialist proprietary trading.
    The proposals discussed in these amendments will make for better 
markets to the benefit of all. They encourage displaying liquidity, 
which will result in narrower spreads and deeper markets and allow 
customers to access this liquidity in whatever way best suits their 
needs. As such, the Exchange's hybrid proposal ensures the continuation 
of the stable, liquid markets for which the Exchange is known.

Specialist Reserve and Additional Specialist Volume--Exchange Rule 
104(d)

    Specialists provide significant value to the market, committing 
capital to narrow quotes, add liquidity, and stabilize prices. To 
assist specialists in this effort and to enable them to comply more 
readily with their market-making responsibilities, the proposed rules 
provide specialists with the ability to implement external application 
programmed interfaces (``API''), which transmit to the Display Book 
messages generated by a system employing pre-set proprietary algorithms 
to quote or trade on behalf of their dealer accounts only in certain, 
limited ways. By allowing specialists to do electronically that which 
they are able to do manually today, specialists will provide value and 
liquidity in the Hybrid Market.
    The previous amendments provide that the systems employing 
algorithms

[[Page 37476]]

may send messages through the API to, among other things, supplement 
the size of an existing Exchange best bid and offer, layer specialist 
interest at prices outside the best bid and offer, and provide a 
single-priced execution at the best bid and offer. The proposed rules 
were silent as to the specialists' ability to maintain non-displayed or 
``reserve'' interest at the best bid and offer.
    Proposed Exchange Rule 104 has been amended to provide that 
specialists may, but are not required to, have non-displayed 
``reserve'' interest at the best bid and offer. As with Floor broker 
reserve interest described in the previous amendments, the specialist 
must have a minimum amount of interest displayed at the best bid or 
offer in order to have reserve interest on that side of the quote. For 
specialists, this minimum amount is 2,000 shares. Like broker reserve 
interest, specialist reserve interest yields to displayed interest. 
Similarly, after an execution, if specialist interest remains at the 
best bid or offer, the amount of such displayed interest will be 
replenished by the specialist's reserve interest, if any, so that at 
least a minimum of 2,000 shares of specialist interest is displayed (or 
whatever specialist interest remains at the best bid or offer, if less 
than 2,000 shares).
    Automatic executions trade first with all displayed interest at the 
best bid or offer, in accordance with Exchange Rule 72. If not filled 
by the displayed interest, the order automatically executes against the 
non-displayed specialist and Floor broker reserve interest, which 
participate on parity.
    Specialists may also supply additional trading volume at the best 
bid or offer price beyond the amount in the specialist's reserve, if 
any. In previous amendments, this was referred to as completing an 
order to provide a single price execution and required that the 
specialist buy (sell) the entire amount remaining on an order. Rule 104 
is amended to provide that this additional volume, which is not part of 
the reserve and which is not displayed, may complete an order, thereby 
providing a single-priced execution, or partially fill the remainder of 
the order. Additional specialist volume yields to displayed and reserve 
interest.
    For example, if 5,000 shares of an automatically executing sell 
order remains unfilled after trading with the displayed volume at the 
Exchange best bid and any reserve interest at that price, the 
specialist can buy all or some of the 5,000 shares at the same price. 
If the specialist buys less than the full size remaining, it will sweep 
the orders on the Display Book and Floor broker agency and specialist 
interest files to the extent permitted, until filled, its limit, if 
any, is reached or a LRP is triggered, whichever comes first, as 
described in previous amendments.
    It is appropriate to permit specialists to inject additional 
liquidity at the best bid or offer price without requiring them to fill 
the entire order because this additional specialist interest does not 
trade until all displayed and reserve interest at such bid or offer is 
exhausted. As there is no other interest at that price available to 
trade other than the specialist's interest, the specialist should be 
able to trade in any amount with the order, provided the trading is 
otherwise consistent with Exchange rules governing specialist 
proprietary trading.
    As noted in previous amendments, automatic executions involving 
reserve interest and any additional specialist volume will print to the 
Tape separately from the automatic execution of displayed interest at 
the best bid or offer.

Specialists' Algorithms--Exchange Rules 104, 92 and 36

    The previous amendments describe the various types of actions 
permitted by specialist systems employing algorithms. This amendment 
clarifies those provisions and proposes changes to them, as follows. 
Permissible algorithmic actions are limited in scope and restricted by 
rules governing specialist proprietary trading.
    During the day, specialists on the Floor will be able to interact 
with the systems employing algorithms in the securities they are 
trading to manage their risk. They may do this by selecting to activate 
or deactivate algorithms from a group of pre-set algorithms made 
available by the specialist's firm or by adjusting the parameters that 
guide an algorithm's decision-making. However, specialists will not 
have the ability to affect the processing of algorithmically generated 
messages by the Display Book. NYSE Rule 104(g) has been amended to 
reflect this. Specialists will be able to interact with the algorithms 
via a wired or wireless device, such as a computer terminal or laptop. 
This wired or wireless device will be able to communicate with the 
specialist's off-Floor office to the same extent as is permitted today 
via a telephone line, as set forth in Exchange Rule 36.30.\14\ In 
addition, this wired or wireless device will be able to communicate 
with the firm's algorithms to implement the Floor specialist's 
decisions to activate or deactivate an algorithm or change an 
algorithm's pre-set parameters. Each specialist firm shall be required 
to certify in the time, frequency, and manner prescribed by the 
Exchange that such wired or wireless devices operate in accordance with 
all SEC and Exchange rules, policies, and procedures.
---------------------------------------------------------------------------

    \14\ NYSE Rule 36.30 provides that ``with the approval of the 
Exchange, a specialist unit may maintain a telephone line at its 
stock trading post location to the off-Floor offices of the 
specialist unit or the unit's clearing firm. Such telephone 
connection shall not be used for the purpose of transmitting to the 
Floor orders for the purchase or sale of securities, but may be used 
to enter options or futures hedging orders through the unit's off-
Floor office or the unit's clearing firm, or through a member (on 
the floor) of an options or futures exchange. In addition, a 
specialist registered in an * * *(ETF)* * * may use a telephone 
connection or order entry terminal at the specialists' post to enter 
a proprietary order in the * * *(ETF) in another market center, in a 
Component security of such * * *(ETF) or in an options or futures 
contract related to such* * * (ETF) and may use the post telephone 
to obtain market information with respect to such * * *(ETFs), 
options, futures, or Component Securities. If the order in the 
Component Security of the * * *(ETF) is to be executed on the 
Exchange, the order must be entered and executed in compliance with 
Exchange Rule 112.20 and SEC Rule 11a2-2(T), and must be entered 
only for the purpose of hedging a position in the * * *(ETF).''
---------------------------------------------------------------------------

    Specialist systems employing algorithms are permitted to send 
messages to the Display Book via the API to quote or trade only in 
reaction to specified types of information. Previous amendments 
described that such systems would employ a minimum of two algorithms 
with access to different types of information (i.e., one would not have 
direct access to incoming orders as they are entering Exchange systems) 
and prescribed different permissible quoting and/or trading functions 
for each algorithm. This has been amended to provide that a specialist 
may maintain a system that employs one or more algorithms, all of which 
can have access to the same information and operate as described below.
    Algorithms will have access to the following information:
     specialist dealer position;
     quotes;
     information about orders on the Display Book such as limit 
orders, percentage orders, stop orders, and auction limit and auction 
market orders (``state of the book'');
     any publicly available information the specialist firm 
chooses to supply to the algorithm, such as the Consolidated Quote 
stream; and
     incoming orders as they are entering NYSE systems.
    Algorithms:
     will not have access to information identifying the firms 
entering orders, customer information, or an order's clearing broker;

[[Page 37477]]

     will not have access to order cancellations, except for 
cancel and replace orders;
     will not be able to delay the arrival of orders at the 
Display Book;
     will not be able to affect the sequence of orders and 
messages arriving at the Display Book; and
     will not have access to Floor broker agency interest files 
or aggregate Floor broker agency interest available at each price.
    NYSE systems will ensure that incoming orders and algorithmic 
messages are processed at the Display Book in their proper sequence. 
The book will not process an algorithmic message until the order 
immediately preceding the generation of such message has been 
processed. The Exchange notes that the specialist algorithm would not 
be permitted to execute against incoming orders unless providing price 
improvement or supplementing size. In addition, the specialist 
algorithm would not be permitted to change its existing quote in 
response to an incoming order. The specialist algorithm would, however, 
be permitted to change the quote, as the specialist is permitted to do 
manually today, once the incoming order is processed. In addition, as 
described below, algorithmic messages will be required to include 
certain codes and identifiers for each permissible action. Algorithmic 
messages without such required information or with codes and 
identifiers that are inconsistent with the message's quoting or trading 
action will be cancelled.
    As discussed in these amendments, systems employing algorithms will 
only be able to ``read'' and react to one incoming order at a time. 
That order will be processed by the Display Book before any algorithmic 
message in reaction to such order is processed. While there may be 
times when a system employing an algorithm could ``possess'' more than 
one order at the same time, the system will only be able to process, 
i.e. ``read'' and react, to only one order at a time, in the sequence 
in which orders were entered. In addition, there may be times when a 
permissible algorithmic message has been generated but, before such 
message has been processed by the Display Book, the system employing 
the algorithm has ``read'' or ``is reading'' a new order. This new 
order may be better priced than the algorithmically generated order or 
otherwise be able to trade with the order to which the algorithmic 
message reacted but, as a result of proper time sequencing, which will 
be enforced by the Display Book, the algorithmic message will be 
processed before such new order. Further, once an algorithmic message 
has been generated, it cannot be stopped, changed, or cancelled on its 
way to the book.
    Examples:
    1. At 10:01:0001, a customer market order to buy is received by the 
specialist system employing algorithms (Order 1). At 10:001:0002, the 
system employing algorithms receives a customer market order to sell 
(Order 2). At 10:01:0003, the system ``reads'' Order 1 and at 
10:01:0004 algorithmically generates a message to trade with (sell to) 
Order 1 (the market buy order). At 10:001:0005, the system generates an 
algorithmic message to trade with (buy from) Order 2 (the market sell 
order). At 10:01:0006, the Display Book executes Order 1 (the market 
buy order) against the specialist's sell interest. At 10:01:0007, the 
Display Book executes Order 2 (the market sell order) against the 
specialist's buy interest. Although both the customer buy and customer 
sell orders are in the specialist's system at the same time, the system 
processes each order in sequence, ``reading'' and ``reacting'' to Order 
1 first before ``reading'' and reacting to Order 2. The algorithmically 
generated message in reaction to Order 1 cannot be changed or cancelled 
after the specialist's system ``reads'' Order 2.
    2. The Exchange quotation is 20.04 x 20.06. At 10:01:0001, a 
customer market order to buy is received by the specialist system 
employing algorithms (Order 1). At 10:001:0002, the system ``reads'' 
Order 1 and algorithmically generates a message to trade with (sell to) 
Order 1 at 20.05. At 10:01:0003, before the algorithmic message to 
trade with Order 1 has been processed by the Display Book, the 
specialist's system employing algorithms receives a customer market 
order to sell (Order 2). At 10:01:0004, the Display Book executes Order 
1 (the market buy order) against the specialist's sell interest at a 
price of 20.05. At 10:01:0005, the Display Book executes Order 2 
against the Exchange bid, at a price of 20.04.\15\
---------------------------------------------------------------------------

    \15\ Specialist algorithmic price improvement is discussed in 
more detail below.
---------------------------------------------------------------------------

    Based on the information noted above, including an incoming order, 
specialist systems may algorithmically generate messages to quote or 
trade, as follows:
    Quoting messages:
     supplement the size of the existing Exchange published 
best bid or offer;
     place within the Display Book system specialist reserve 
interest at the Exchange published best bid and offer;
     layer within the Display Book system specialist interest 
at varying prices outside the published Exchange quotation;
     establish the Exchange best bid and offer; and
     withdraw previously established specialist interest at the 
Exchange best bid and offer.
    A quoting message would not interact with the order that preceded 
it. A specialist algorithm may, however, based on information about the 
preceding incoming order, decide to move its quote away from the inside 
market after the preceding order has been processed.
    Trading messages:
     provide additional specialist volume to partially or 
completely fill an order at the Exchange published best bid or offer;
     match better bids and offers published by other market 
centers where automatic executions are immediately available;
     provide price improvement to an order subject to the 
conditions outlined below; and
     trade with the Exchange published quotation (``hit bids or 
take offers'').
    To ensure that an algorithmic message to trade with the Exchange 
published quotation does not possess any informational advantage with 
respect an incoming order before the incoming order is processed by the 
Display Book, an algorithmic message to trade with the Exchange 
published bid or offer must include, among other things, information 
designated by the Exchange to indicate that such bid or offer has been 
publicly disseminated, as well as information identifying the order 
immediately preceding the generation of such algorithmic message. 
Without these identifiers, the algorithmic message will not be 
processed.
    Additionally, to ensure that an algorithmic message to trade with 
the Exchange published quotation does not possess any speed advantage 
in reaching the Display Book, Exchange systems will make certain that 
such messages are processed by the book in a manner that gives 
specialists and other market participants a similar opportunity to 
trade with the Exchange's published quotation. Based upon the average 
transit time from the Common Message Switch (CMS) \16\ system to the 
Display Book, the Exchange will determine the appropriate amount of 
time to delay the processing of algorithmic messages to trade with the 
Exchange published

[[Page 37478]]

quotation. The delay parameter will be adjusted periodically to account 
for changes to the average transit time resulting from capacity and 
other upgrades to Exchange systems.
---------------------------------------------------------------------------

    \16\ CMS is a store-and-forward message-switching application 
that connects member firms to Exchange systems. CMS validates and 
routes orders from member firms to the SuperDot [reg] system and 
into the Display Book [reg] system, which then processes them. 
Algorithmic messages will be delivered to the Display Book via a 
different set of Exchange systems.
---------------------------------------------------------------------------

    For example, a buy order arrives at the Exchange with a limit price 
that is better than the existing best bid, but which is not auto-
executable, as its limit is below the existing Exchange best offer. 
This will become the Exchange's new best bid. The specialist's system 
employing algorithms ``reads'' this buy order and generates a message 
to trade with it (i.e., hit the bid). In order for this message to be 
processed by the Display Book, the message must include a reason code 
(e.g. ``trade with bid''), the designated identifier for the order 
immediately preceding the generation of the algorithmic message, and 
the designated identifier of the newly-quoted bid. The Display Book 
will not process this algorithmic message until a designated period of 
time has elapsed, to ensure that the specialist does not have a time 
advantage in the routing of its trading message to the book. The same 
scenario would apply to an offer to sell where the limit is above the 
Exchange best bid.
    Every algorithmic message delivered via the API must include a code 
identifying the reason for the algorithmic action (e.g. ``match ITS,'' 
``price improvement,'' ``hit bid,'' etc.), the unique identifiers of 
the order to which the algorithm is reacting (where the message is in 
reaction to an order), the order immediately preceding the generation 
of the algorithmic message, and any other information the Exchange may 
require. In addition, as noted above, algorithmic messages to trade 
with the Exchange published bid or offer must also include the unique 
designated identifier for the quote to which the algorithm is reacting. 
The Exchange will designate the reason codes, unique identifiers for 
orders and quotes, and the format of any other required information for 
use by the algorithms.
    Identification of a particular order or quote by the algorithmic 
message does not guarantee that the specialist will be able to trade 
with that order or quote, or that the specialist has priority in 
trading with that order or quote. The Exchange will automatically 
cancel algorithmic messages that are unable to interact with the order 
or quote identified by the message, where the reason code and the 
proposed algorithmic action are inconsistent, where the identifiers 
described above are not included, and in other similar situations.
    Algorithmic trading and quoting must comply with SEC and Exchange 
rules, policies, and procedures regarding specialist stabilization and 
market maintenance requirements. Algorithmic quoting messages must not 
create a locked or crossed market, as defined in Exchange Rule 15A, and 
the Exchange will cancel any such algorithmic messages.
    As noted in previous amendments, the Display Book will not accept 
algorithmic messages when automatic executions are unavailable. 
Proposed Rule 104 is amended to provide that the Display Book will 
accept algorithmic quoting messages to generate a bid or offer that 
improves the Exchange best bid or offer or supplements the size of an 
existing best bid or offer in the infrequent situations when automatic 
executions are suspended, but autoquote is active. This benefits the 
market by permitting an opportunity for the specialist to provide 
liquidity and/or narrow the quote. These situations include:
    (i) when the Exchange published quote is such that a NYSE Momentum 
LRPSM (``MLRP'') will be triggered by a trade at the bid or offer (see 
infra); or
    (ii) an order in a high-priced security arrives.\17\
---------------------------------------------------------------------------

    \17\ Previous amendments define a ``high-priced security'' as 
one priced above $300. The availability of automatic executions in 
high-priced securities is discussed infra.
---------------------------------------------------------------------------

    In summary, specialists would have the ability to view information 
about an incoming order before it is publicly disseminated and, subject 
to specific limitations and conditions, directly interact with the 
Display Book on behalf of its dealer account based on such information.

Algorithmic Price Improvement

    Previous amendments described the ability of specialists to 
algorithmically provide price improvement to incoming orders and set 
forth parameters for such price improvement. This amendment modifies 
these parameters.\18\ Proposed Rule 104(e) is amended to provide that 
specialists may price improve all or part of an incoming order, as 
follows:
---------------------------------------------------------------------------

    \18\ Amendment No. 2 provided: ``The algorithms will enable the 
specialists on behalf of the dealer account to electronically 
provide price improvement to automatic executions, provided the 
following conditions are met: (i) the quotation spread is at least 
three cents; (ii) the specialist is represented in the published bid 
or offer in a meaningful amount: the lesser of 10,000 shares or 20% 
of the respective bid (offer) size; (iii) the order receiving price 
improvement is of ``retail'' order size, i.e., 2,000 shares or less 
and the specialist fills the order; and (iv) the price improvement 
provided by the specialist is (a) at least .02 where the quote 
spread is .03-.05, (b) at least .03 where the quote spread is 
.06-.10, (c) at least .04 where the quote spread is .11-.20, and (d) 
at least .05 where the quote spread is more than .20.'' As noted 
above, this filing amends these parameters.
---------------------------------------------------------------------------

    (i) The specialist is represented in the bid if buying and the 
offer if selling; and
    (ii) where the quotation spread is three-five cents, algorithms 
must provide price improvement of at least two cents; or
    (iii) where the quotation spread is more than five cents, 
algorithms must provide price improvement of at least three cents; or
    (iv) where the quotation spread is two cents, algorithms must 
provide price improvement of one cent.
    Examples:
    (1) If the Exchange quotation is 20.10-20.15, and the specialist is 
represented in both the bid and offer, the algorithm can provide price 
improvement by buying at 20.12, and selling at 20.13.
    (2) If the Exchange quotation is 20.10-20.16, and the specialist is 
represented in both the bid and the offer, the algorithm can buy at 
20.13 and sell at 20.13.
    (3) If the Exchange quotation is 20.10-20.12, and the specialist is 
represented in both the bid and the offer, the algorithm can buy at 
20.11 and sell at 20.11.
    The Exchange is proposing these parameters in an attempt to balance 
the goals of preserving incentives for the limit orders on the Display 
Book to establish the best price and of encouraging price improvement 
for incoming orders. The Exchange believes that the benefit of 
providing meaningful price improvement to incoming orders under such 
circumstances would outweigh the potential disincentives to post 
aggressive limit orders. The Exchange notes that, under the proposed 
changes to NYSE Rule 104, specialists would be permitted to 
algorithmically provide price improvement of only one cent in the 
relatively frequent situation in liquid stocks when the quotation 
spread is two cents. The ability of the specialist algorithm to provide 
price improvement of one cent when the quotation spread is two cents is 
consistent with federal securities laws and Exchange rules. In 
addition, it is useful to note that the Exchange intends to provide 
Floor brokers with the ability to provide electronic price improvement 
via a discretionary order type. This will be the subject of a separate 
filing.
    Algorithms may price improve NYSE Auction Limit OrdersSM 
(``AL orders'') and NYSE Auction Market OrdersSM (``AM 
orders''), consistent with the requirements noted above, by generating 
a message to trade with the AL or AM order before it is processed by 
the Display Book, or executing the AL or

[[Page 37479]]

AM order at its quoted price once the order has been processed by the 
Display Book. Algorithmic messages that will trigger the automatic 
execution of AL or AM orders or that will result in such orders trading 
with the specialist's existing contra-side bid or offer are prohibited.

Priority, Parity, Precedence and Yielding--Exchange Rule 108

    Current Exchange Rules 72, 104, and 108 require that specialists, 
when trading for their proprietary accounts, yield to limit orders on 
the Display Book and, when establishing or increasing a position, to 
orders represented in the Crowd, unless, under current practice, the 
broker permits the specialist to be on parity. In addition, when 
liquidating or decreasing a position, specialists must yield to the 
Crowd upon the request of a customer. With respect to limit orders on 
the Display Book, the specialist must always yield even when the 
specialist clearly has established the Exchange best bid or offer.\19\ 
Unlike specialists, other market participants are rewarded for 
establishing the best bid or offer, receiving trading priority in all 
circumstances at that price for one trade and parity for subsequent 
trades.
---------------------------------------------------------------------------

    \19\ Specialists establishing the best bid or offer are entitled 
to priority over the Crowd for one trade.
---------------------------------------------------------------------------

    Currently, NYSE Rule 108 prohibits the specialist from trading for 
its proprietary account on parity with the Crowd in situations where 
the specialist is establishing or increasing its position. The Exchange 
proposes to amend NYSE Rule 108 to eliminate that restriction and 
provide that specialists would be entitled to parity with orders 
represented in the Crowd and agency interest files when establishing or 
increasing its position. Other limitations on specialist proprietary 
trading when establishing or increasing its position, set forth in NYSE 
Rule 104, including Rule 104.10(5)(i)(A-C), would continue to apply. 
The proposed change to NYSE Rule 108 would increase the instances in 
which the specialist would be entitled to trade along with public 
customers. While this represents a shift from the overall scheme of 
priorities on the Exchange Floor, the Exchange believes that the 
proposed change, on balance, would benefit the market by encouraging 
specialists to add depth and liquidity to the market by initiating 
proprietary transactions on the Floor of the Exchange and comports with 
existing practice on the Floor where brokers may voluntarily allow 
specialists to be on parity with them. A separate filing reflecting 
this practice will be made shortly.
    The rules regarding priority, parity, precedence, and yielding 
among orders automatically executing on the Exchange are as follows:
     Exchange Rule 72 applies to automatic executions, unless 
otherwise provided;
     An order that establishes the Exchange best bid or offer 
is entitled to priority at that price for one trade, except a 
specialist bid or offer entitled to priority must yield to limit orders 
on the book;
     Displayed interest at the Exchange best bid and offer 
always trades first, after the order that established such best bid or 
offer, but ahead of any reserve and additional specialist interest. All 
displayed interest (other than displayed interest entitled to priority) 
is on parity, except that specialist displayed interest yields to limit 
orders on the book;
     Specialists and brokers may maintain non-displayed reserve 
interest at the best bid or offer, provided brokers display a minimum 
of 1,000 shares at that price, and specialists display a minimum of 
2,000 shares at that price;
     All reserve interest trades on parity;
     Additional specialist volume, which is not displayed and 
not included in the reserve, yields to all displayed and all reserve 
interest; and
     No published bid or offer is entitled to claim precedence 
based on size with respect to automatic executions (current Exchange 
Rule 1001(c), which has been re-lettered as Rule 1001(b)), and no 
electronic interest is entitled to precedence based on size.
    In addition, Exchange Rule 108 is amended to reflect that a 
specialist may not be on parity with the Crowd when establishing or 
increasing its position, if a customer requests and such request is 
entered as a term of the order in appropriate Exchange systems. 
Exchange Rule 70.20(a)(i) is amended to provide that in instances where 
a customer does not want the specialist to be on parity, such orders 
may not be entered in Floor broker agency interest files.
    The combination of proposals discussed in these amendments--
displayed interest always trades first other than specialist displayed 
interest, which yields to limit orders on the book; minimum display 
requirements for specialists and brokers in order to have reserve 
interest; limit orders on the book receiving the ``clean-up'' price 
during a sweep; and the opportunity for price improvement provided by 
auction limit and auction market orders--provide a significant 
incentive to market participants to display orders. The resulting 
tighter spreads and more liquid market is a significant benefit.
    Examples:
    The following scenario applies to all of the examples below:
    The Exchange quotation is 20.10-20.15 (5,000 x 8,000). The 
following interest arrives, in order: The specialist algorithm bids 
20.11 for 4,000 shares (thereby establishing the best bid); one Floor 
broker bids 20.11 for 1,000 shares, with 3,000 shares in reserve; a 
limit order arrives on the book to buy 4,000 shares at 20.11; and a 
CAP-DI order arrives to buy 20,000 shares at 20.20.
    An auto-ex market order to buy 1,000 shares arrives and is 
automatically executed at 20.15. This transaction clears the Floor and 
all bids are deemed re-entered simultaneously. The market is autoquoted 
20.11-20.15 (9,000 x 7,000), with 3,000 shares in reserve at 20.11.
    (1) Specialist Yields to the Book and Broker Agency Interest:
    An auto-ex order to sell 3,000 shares at 20.11 (or an auto-ex 
market order) arrives. The broker and the book are on parity and 1,000 
shares from the broker and 2,000 shares from the book are executed. 
(The broker displayed interest trades along with the displayed limit 
order interest on the book. The undisplayed reserve interest does not 
trade). The specialist does not participate, as 2,000 shares remain 
unexecuted on the limit order on the book. The specialist must yield to 
limit orders on the book even though the specialist's bid for 4,000 
shares arrived before the limit order and established the best bid 
price. The CAP order does not participate, as there is no more sell 
liquidity at 20.11.
    (2) Price Improvement:
    If the specialist algorithm determined to provide price improvement 
to the 3,000-share auto-ex sell order, buying at 20.13 (two cents 
better than best bid of 20.11 and therefore consistent with the price 
improvement parameters), the CAP-DI order would be automatically 
converted (see discussion on CAP-DI orders, below). The specialist and 
the CAP-DI order would each buy 1,500 shares.
    (3) Trade with Contra-Side of Quote:
    If a sell order arrives at 20.14, which improves the 20.15 offer, 
the specialist algorithm cannot generate a message to trade with this 
order until it is quoted as the new best offer, as the algorithmic 
message must include the identifier of the new quote, among other 
information, in order to be processed. In addition, the algorithmic 
message will be delayed by a time factor that places

[[Page 37480]]

the specialist on a par with broker and off-Floor electronic access.
    (4) Parity with Reserve:
    If the specialist also had 3,000 shares to buy in a reserve file 
(permissible because the specialist has at least 2,000 shares displayed 
at the best bid), and an auto-ex market order arrives to sell 11,000 
shares:
    (a) All displayed interest trades before any reserve interest, so 
the specialist buys 4,000 shares, the broker buys 1,000 shares and the 
book buys 4,000 shares;
    (b) The specialist reserve and broker reserve split the 2,000 
shares remaining on the order to sell, each purchasing 1,000 shares.
    (c) If the specialist had displayed less than 2,000 shares, the 
specialist would not have been able to have any reserve interest, so 
the broker reserve interest would buy the remaining 2,000 shares from 
the sell order.
    (d) If the specialist provided additional volume to facilitate a 
single-priced execution or to partially fill the order, such volume 
would yield to all displayed and reserve interest.
    (e) If there was no reserve interest and no additional specialist 
volume and the sell market order was unfilled, it would sweep the book 
until executed or a LRP is triggered. If it had been a sell limit 
order, it would sweep until filled, its limit was reached or a LRP was 
triggered.

Record Requirements and Specialist Algorithms

    Previous amendments state that algorithmic messages reacting to 
incoming orders must identify the specific order to which the algorithm 
is responding. As discussed above, proposed Rule 104(c) is amended to 
require that each algorithmic message must also include a code 
identifying the reason for the algorithmic action, the unique 
identifier of the order to which the algorithm is reacting (if any), 
the unique identifier of the last order that the algorithm had access 
to before generating the message, and any other information the 
Exchange may require. In addition, algorithmic actions in response to a 
quotation must also include the unique identifier for the quote to 
which the algorithm is reacting. The Exchange will designate the reason 
codes, unique identifiers for orders and quotes, and the format of any 
other required information for use by the algorithms.
    Exchange Rule 132A requires members and member organizations to 
synchronize the business clocks used to record the date and time of any 
event that the Exchange requires to be recorded, with reference to a 
time source as designated by the Exchange. NYSE Rule 132A also requires 
that members maintain the synchronization of this equipment in 
conformity with procedures prescribed by the Exchange. Proposed 
Exchange Rule 104(f)(i) requires specialists to record information 
regarding algorithmic messages as designated by the Exchange, including 
the date and time of each algorithmic action. As such, Exchange Rule 
132A applies to the algorithms. Further, proposed Exchange Rule 
104(f)(i) requires that specialists maintain an electronic log of all 
algorithmic actions in accordance with Exchange and Commission Rules 
and that the data and documentation shall be made available to the 
Exchange upon request, and in a format as designated by the Exchange.
    Proposed Exchange Rule 104(f)(ii) requires that specialists notify 
the Exchange in writing within such time as the Exchange shall 
designate, whenever an algorithm is not operating and the time, cause, 
and duration of such non-operation.
    Proposed Exchange Rule 104(h) provides that algorithms shall be 
certified in the manner and frequency designated by the Exchange.

Dissemination of Specialist Interest

    Previous amendments provide that specialist interest not at the 
Exchange best bid or offer will not be disseminated. This amendment 
clarifies that specialists may choose to have their interest at prices 
away from the Exchange best bid or offer included in information 
disseminated via NYSE OPENBOOK[reg] or another Exchange data 
distribution channel.

NYSE Floor Broker Agency Interest FileSM--Exchange Rule 
70.20

    Previous amendments describe NYSE Floor Brokers Agency Interest 
FilesSM, which will enable Floor brokers to electronically 
represent agency interest at various prices at or outside the Exchange 
quote with respect to orders they are handling. This functionality 
allows customers to reap the benefits of Floor broker knowledge and 
trading expertise combined with the efficiencies of automatic 
executions.
    Proposed Rule 70.20(b) has been amended to clarify that all 
interest at the same price in the agency interest files is on parity 
with each other, unless entitled to priority in accordance with 
Exchange Rule 72, and that none is entitled to invoke precedence based 
on size.
    Proposed Rule 70.20(c)(iv) has been amended to provide that Floor 
brokers may enter interest at various prices in their agency interest 
files regardless of their location prior to the opening of the 
Exchange, for participation in the opening trade, with respect to the 
orders they have received, provided they have complied with the 
requirements of Exchange Rule 123(e).\20\ There will be no reserve 
capability for broker agency interest entered into the files before the 
open, and brokers will not have the option to exclude such interest 
from the specialist before and during the open. Broker agency interest 
entered into files before the open may participate in the opening trade 
on parity with the book, as the Crowd does today, in accordance with 
the policies and procedures governing the open. However, brokers must 
be in the Crowd at the open in order to participate, and any file 
interest entered prior to the open in securities that are not part of 
such Crowd must be cancelled. After the open, the reserve capability 
and the ability of brokers to exclude agency interest from the 
aggregate agency interest information available to the specialist will 
be available.
---------------------------------------------------------------------------

    \20\ Exchange Rule 123(e) (Records of Orders) requires that all 
orders in any security traded on the Exchange be entered into an 
electronic system (``Front-End Systemic Capture'' or ``FESC'') 
before they can be represented in the Exchange market.
---------------------------------------------------------------------------

    Similarly, the broker reserve file will not be available at the 
close. Broker agency interest files will participate at the close on 
parity with the book, as the Crowd does today; however, broker agency 
interest that has been excluded from the aggregate information 
available to the specialist will not participate in the close.
    Proposed Exchange Rule 70.20 has been amended to clarify that 
brokers are permitted to have agency interest files at multiple price 
points on both sides of the market in all securities trading within the 
area constituting the Crowd, provided the broker has orders in such 
securities and has complied with the requirements of Exchange Rule 
123(e).
    Proposed Rule 70.20(i) clarifies that a Floor broker whose agency 
interest participates in an execution will be deemed to be the 
executing broker for that transaction.

Transactions that ``Clear the Floor''--Exchange Rule 72 (III)

    This amendment also proposes to modify Exchange Rule 72 (III). The 
rule currently provides that a transaction ``clears the Floor,'' after 
which all bids and offers are deemed resubmitted simultaneously and are 
on parity, except that specialists must yield to limit orders on the 
book. The rule is amended to add that a cancellation of an entire bid 
or offer entitled to priority

[[Page 37481]]

under the rule \21\ clears the Floor, after which all bids and offers 
are deemed to be re-entered and are on parity. This amendment is 
warranted because a cancellation of a bid or offer that was entitled to 
priority has the same effect as a trade.
---------------------------------------------------------------------------

    \21\ Cancellation of part of an order retains priority for the 
uncancelled portion of such order. However, canceling an order and 
replacing it with a larger order would result in a loss of priority 
for the original order.
---------------------------------------------------------------------------

``G'' Order Interest in Floor Broker Agency Interest Files--Exchange 
Rule 70.20(a)

    This is to clarify that the provisions regarding priority, parity, 
and yielding will be incorporated into the programming of the 
Exchange's systems governing automatic executions and interest files. 
This includes yielding requirements for ``G'' orders, which are 
proprietary orders represented pursuant to Section 11(a)(1)(G) of the 
Act.\22\ Accordingly, proposed Exchange Rule 70.20(a) is amended to 
permit ``G'' order interest to be included in Floor broker agency 
interest files.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78k(a)(1)(G).
---------------------------------------------------------------------------

Availability of Direct+--Exchange Rule 1002

    Exchange Rule 1002 currently provides that automatic executions in 
securities and Trust Issued Receipts (defined in Exchange Rule 1200) 
are available until 3:59 p.m. and in Investment Company Units (as 
defined in paragraph 703.16 of the Listed Company Manual) until 4:14 
p.m., or until one minute of any other closing time of the Exchange's 
Floor market.
    Rule 1002 is proposed to be amended to provide that automatic 
executions continue to be available through the close of regular 
trading for that product (e.g., 4:00 p.m. / 4:15 p.m.). Extending 
automatic executions through the close will contribute to more 
efficient closes and provide customer choice during a significant part 
of the trading day.

NYSE Auction Limit Orders SM (``AL'') and NYSE Auction 
Market OrdersSM (``AM'')--Exchange Rule 123F

    Previous amendments describe two new order types--AL and AM orders. 
These orders provide customers with an opportunity for price 
improvement while retaining the possibility of automatic execution in 
the event the specialist is unable to obtain price improvement for the 
order within a reasonable period.
    This amendment clarifies that Exchange systems may execute AL and 
AM orders at a price (consistent with the AL order's limit) that 
matches immediately accessible better away bids or offers.
    For example, the NYSE quote is 20.15 bid, offered at 20.20. Another 
market is posting the national best offer of 20.18. An AL order to 
sell, limited to a price of 20.10 arrives. This AL order will be 
automatically offered at 20.19, one penny better than the Exchange best 
offer existing at the time the AL order arrived. The NYSE quote is now 
20.15 bid, offered at 20.19. An order arrives on the Exchange to buy at 
a limit of 20.19. The order will automatically execute against the AL 
order at a price of 20.18, providing price improvement to the limit 
order and matching the better offer away.
    In addition, the Exchange is clarifying the sequence in which 
orders will execute when a trade causes an automatic execution of an AL 
or AM order and also elects stop orders and CAP-DI (convert and parity 
percentage) orders. The AL or AM would be executed first, followed by 
stop orders and CAP-DI orders. AL and AM orders execute first because 
they are executable at the time of entry but seek an opportunity for 
price improvement. Unlike AL and AM orders, CAP-DI and stop orders are 
contingent orders, not executable until elected. As such, it is more 
appropriate for AL and market orders not designated for automatic 
execution to be executed first.\23\
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    \23\ Amendment No. 2 described the execution order of CAP-DI and 
stop orders elected by automatic executions. See supra note 7.
---------------------------------------------------------------------------

Immediate or Cancel Orders--Exchange Rule 13

    In previous amendments, the Exchange proposed to define an 
Immediate or Cancel (``IOC'') order as a: ``market or limited price 
order designated immediate or cancel is to be executed to the extent 
possible as soon as such order is represented in the Trading Crowd or 
automatically executed in accordance with, and to the extent provided 
by, Exchange Rules 1000-1004, and the portion not so executed is to be 
treated as cancelled.''
    The above definition is amended to provide that IOC orders would be 
able to be entered before the Exchange opens for participation in the 
opening trade. Once the stock has opened, an IOC order that is not 
executed on the opening will be treated as cancelled.

Intermarket Sweep Order--Exchange Rule 13

    Consistent with Commission Rule 600(6)(30) of Regulation NMS,\24\ 
the Exchange proposes to amend Rule 13 to adopt a new order type--an 
intermarket sweep order. An intermarket sweep order is a limit order 
designated for automatic execution, that meets the following 
requirements: (1) the limit order is identified as part of an 
intermarket sweep in the manner prescribed by the Exchange, and (2) 
simultaneously with the routing of the intermarket sweep order to the 
Exchange, one or more additional intermarket sweep orders are routed by 
the entering party to execute against the full displayed size of all 
other protected bids (offers) in that security. These additional orders 
must be marked as intermarket sweep orders. The Exchange will 
automatically execute an intermarket sweep order on its receipt. In 
addition, the Exchange proposes that the customer may designate an 
intermarket sweep order sent to the Exchange as IOC.
---------------------------------------------------------------------------

    \24\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 17 CFR 200, 201, 230, 240, 242, 249, and 270.
---------------------------------------------------------------------------

    The Exchange intends to identify Tape prints involving intermarket 
sweep orders to reflect that such transaction did not trade through 
better bids and offers published by other markets that were entitled to 
trade-through protection.

CAP-DI Orders--Exchange Rule 123A.30

    Exchange Rule 123A.30 provides that specialists have the ability, 
subject to certain restrictions noted in the rule, to convert CAP-DI 
orders to participate in transactions or to bid or offer without an 
electing trade.
    Rule 123A.30 is proposed to be amended to provide that when a 
specialist algorithmically price improves an order in accordance with 
the provisions of proposed Rule 104(e), any CAP-DI orders that have 
been entered and that are capable of trading at that price will be 
automatically converted and will trade along with the specialist in 
accordance with Exchange rules governing executions of converted CAP-DI 
orders.

Momentum LRP (``MLRP'')--Exchange Rule 1000(a)(v)(B)

    Proposed Exchange Rule 1000(a)(v)(B) is amended to clarify the 
operation of MLRPs. Automatic executions may occur at prices at or 
within the MLRP range. Automatic executions that could occur at prices 
outside the MLRP range would cause the suspension of Direct+, as 
described in the previous amendments. The MLRP range is calculated by 
adding the greater of twenty-five cents or 1% of a security's

[[Page 37482]]

price \25\ to its lowest price within a rolling 30-second period and 
subtracting that amount from its highest price within the same period. 
Where there are no trades within a 30-second period, the last sale 
price will be used in calculating the MLRP.
---------------------------------------------------------------------------

    \25\ When calculating 1% of a security's price, the result will 
be rounded to the nearest cent using usual rounding conventions. For 
example, if a security is trading at $26.49, and 1% of its price is 
calculated, this would be rounded down to 0.26. If a security is 
trading at $26.53, and 1% of its price is calculated, this would be 
rounded up to 0.27.
---------------------------------------------------------------------------

Odd-Lot Orders--Exchange Rule 124.80

    Exchange Rule 124 provides that odd-lot orders shall be received, 
processed, and executed by means of the Exchange system designated for 
such purpose. Odd-lot orders are executed by this system with the 
specialist as the contra-party at the price of certain round-lot 
transactions, as set forth in the rule. As such, the odd-lot execution 
system provides a type of automatic execution, but odd-lot trading is 
governed by Exchange Rule 124, not the rules governing Direct+. For 
this reason, prior amendments provide that odd-lot orders are 
ineligible for automatic execution via Direct+.
    This amendment clarifies that when automatic executions are 
suspended, odd-lot executions also will be suspended. This will prevent 
odd lots from trading at prices unrelated to round-lot orders in the 
same security and will provide consistency in the availability of 
automatic executions.

Autoquoting--Exchange Rule 79A.15

    Exchange Rule 79A.15 governs limit order display and provides for 
the autoquoting of limit orders in accordance with the rule. The rule 
also describes the way in which the Exchange autoquote facility is 
activated.
    Previous amendments provide that the Exchange shall activate the 
autoquote facility in each security by initiating a NYSE 
LIQUIDITYQUOTE.[reg] Rule 79A.15 is proposed to be amended to clarify 
that the opening trade or opening quotation, rather than a liquidity 
quote, activates the autoquote facility. This will ensure that 
autoquoting for each security is operational with the opening of the 
Exchange market.

Availability of Automatic Executions on Only One Side of the Market

    This is to clarify that in the following situation, automatic 
executions will be available on only one side of the market: when the 
Exchange published quote is such that a NYSE MLRP will be triggered by 
a trade at the bid or offer.
    For example, the market is 20.05 bid, offered at 20.10, the last 
sale is 20.08, and the MLRP range is 19.80-20.09 (based on high and low 
trades within the operative 30-second period). A trade could take place 
at the bid price because it falls within the MLRP, but a trade cannot 
take place at the offer price (20.10) because it falls outside the MLRP 
range. As a result, automatic executions would be suspended on the 
offer side, but continue on the bid side. However, autoquoting would 
continue, and orders and cancellations will update the book.\26\
---------------------------------------------------------------------------

    \26\ See Amendment No. 2, supra note 7.
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Availability of Automatic Executions in High-Priced Securities

    Previous amendments defined a high-priced security as one priced 
above $300 and noted that automatic executions would not be available 
for high-priced securities. This amendment clarifies that automatic 
executions will be unavailable in such securities priced at $300 or 
more. If the price of a security dips below $300 during the trading 
day, automatic executions continue to be unavailable that day. If the 
security closes below $300, automatic executions will be available the 
next trading day, even if the price during that day rises to $300 or 
above.

Incoming Commitments to Trade--Exchange Rule 15A.60

    Previous amendments provide that an auto ex order trades against 
the displayed interest in the quote and any reserve interest at the bid 
or offer price, before sweeping. Proposed Rule 15A.60 is amended to 
clarify that incoming commitments to trade from other market centers 
will trade only with the displayed bid or offer. Incoming commitments 
will not trade with any reserve interest at the bid or offer price, or 
additional specialist volume and will not participate in sweeps.

Record of Orders/Order Tracking--Rules 123(e) and 132B

    Rule 123(e) provides that an order may not be represented for 
execution on the Floor or placed within an agency interest file within 
the Display Book[supreg] system, as proposed in previous amendments, 
unless certain details of the order and the agency interest file have 
been first recorded in an electronic system on the Floor.
    Rule 123(e)(7) provides that the type of order be designated: 
market, limit, stop, and stop limit. Previous amendments provided that 
auction limit be added to this list. This amendment proposes to provide 
that an auto ex market order be added to the rule.
    Rule 132B prescribes requirements and procedures with respect to 
orders in any security listed on the Exchange received or originated by 
a member. It requires a member to immediately record data elements as 
detailed in the rule. If an order is transmitted to another member or 
is transmitted to another department of the same member, or is modified 
or cancelled, information detailed in the rule must be recorded. 
Additionally, the recipient of the order must record the order details 
as provided in the rule.
    Similar changes to Rule 132B(b)(9) with regard to the designation 
of an order are proposed. Similarly, Rule 132B(a)(1)(D) is proposed to 
be amended to require that member and member organizations must 
identify which orders or portions thereof are being made part of the 
agency interest file pursuant to such procedures as required by the 
Exchange. This conforms Rule 132B with a change made in previous 
amendments to Rule 123(e).
    Conclusion
    In these rule amendments, including this Amendment No. 5, the 
Exchange has proposed significant changes to its systems that seek to 
more fully integrate the auction market with automatic trading, 
including changes that facilitate the participation of the specialist 
in the Hybrid Market. The Exchange has attempted to enable many of the 
functions that the specialist performs on the Floor to be conducted in 
the Hybrid Market. For example, specialists would establish electronic 
connections to the Display Book that ``see'' certain limited 
information before other market participants, and the specialist would 
be permitted to make a range of specified quoting and trading decisions 
based on that information designed to permit the specialist to supply 
greater depth and liquidity to the market. In particular, specialists 
could provide price improvement to incoming orders in a similar manner 
as they do today on the Floor.\27\
---------------------------------------------------------------------------

    \27\ As noted above, the Exchange intends to provide Floor 
brokers with the ability to provide electronic price improvement via 
a discretionary order type.
---------------------------------------------------------------------------

    In addition, the Exchange proposes to modify the ability of the 
specialist to trade for its own account by amending NYSE Rule 108 to 
permit the specialist to trade electronically on parity with the Crowd 
and Floor Broker agency interest files when establishing or increasing 
its position in a way not currently permitted by Rule 108, but which

[[Page 37483]]

comports with existing practice on the Floor where brokers may 
voluntarily allow specialists to be on parity with them. The Exchange 
believes that this change would provide incentives for the specialist 
to actively participate in the Hybrid Market, which should increase 
liquidity and reduce volatility.
    The Exchange recognizes that the Hybrid Market represents a 
significant change to the operation of its market by providing greater 
electronic access and executions within the context of the continuing 
benefits of the auction market. The Exchange also recognizes that views 
of various market participants may differ on how the ideal market 
should operate as a business matter. Nevertheless, the Exchange 
believes that the rules proposed for the Hybrid Market comply with the 
Act and the rules and regulations thereunder.

Hybrid Market Implementation Plan

    The Exchange proposes to implement the changes described in these 
amendments in four phases over a period of months leading into the 
spring of 2006. This will help ensure proper functioning of Exchange, 
specialist, broker and vendor-based systems, and hybrid-related 
functionalities, and will promote the seamless integration of hybrid 
facilities into the market place. In addition, this phased 
implementation plan will provide time for market participants to become 
familiar with the different functions and features, so that they will 
be adequately prepared to employ them properly once the Hybrid Market 
is fully functional. Within each of the four phases, the various 
functions that will become operational during that phase will be made 
available over a period of several weeks.

Phase 1--Broker Agency Interest Files, Specialist Interest Files, 
Systemic Integration of Priority, Parity and Yielding Requirements

    During the first phase of Hybrid Market implementation, the 
Exchange contemplates activating the Floor broker agency file to permit 
brokers to enter their interest at or outside the best bid and offer. 
This will enable brokers to gain experience using this tool. Brokers 
will be able to populate the reserve file, but it will be visible to 
the specialist in this phase. The feature permitting brokers to exclude 
their interest from the aggregate information available to the 
specialist will not be available in the phase. As noted below, the 
Exchange contemplates making the exclusion feature operational in Phase 
2. In addition, commencing in Phase 2, broker reserve interest will not 
be visible to the specialist if chosen as an option by the broker.
    Specialists will be able to manually layer their interest at and 
outside the best bid and offer during the first phase. However, they 
will not be able to disseminate this information via NYSE 
OPENBOOK[supreg] or another Exchange data distribution channel until 
Phase 2, as noted below. The API will not be activated during Phase 1; 
so specialists will not be able to use algorithms to layer their 
interest or to otherwise trade or quote, nor will the specialist's 
reserve capability be operational.
    During Phase 1, the systemic programming of priority, parity, and 
yielding requirements, as proposed by these amendments, other than the 
yielding requirements for additional specialist interest, will be 
completed, enabling ``G'' order interest to be included in Floor broker 
agency files and to be handled by the book. Lastly, other system 
changes will be made to enhance systemic reporting of transactions and 
associated audit trail, such as eliminating specialist responsibility 
for allocation of volume in automatic executions (current Exchange Rule 
1001(a)(3)).
    During Phase 1, Direct+ will continue to operate as it does under 
the current rules and will be subject to the same restrictions and 
availability as set forth in Exchange Rules 1000-1005. Accordingly, the 
Exchange anticipates that most trading will continue to be effected in 
the auction market, subject to the same rules and conditions as trading 
on the Exchange today.

Phase 2--Specialist API and Reserve Files

    Phase 2 will see the introduction of the specialist API and 
algorithmic functionalities for the specialists. During this phase, the 
specialist's systemic trading and quoting abilities, as described in 
these amendments, will become operational. For example, the specialist 
will be able to provide algorithmic price improvement pursuant to the 
formula described in these amendments regardless of the size of the 
incoming order. Algorithmic trading with the bid and offer, algorithmic 
ability to make new bids and offers and to withdraw previously made 
bids and offers, to add size to an existing bid and offer, to match 
better bids and offers away, to layer specialist interest at prices 
outside the best bid and offer, and to add size to the bid and offer 
will also be available. Reserve file capability and the yielding 
requirements for additional specialist interest will become operational 
during this phase. In addition, specialists will be able to disseminate 
information regarding their layered interest via NYSE OPENBOOK[supreg] 
or another Exchange data distribution channel. Specialist algorithmic 
interaction with auction limit and auction market orders will not yet 
be available. It is anticipated that this feature will become 
operational in Phase 3 when these new order types are introduced.
    Brokers' reserve files and their ability to exclude their interest 
from the aggregate information available to the specialist will become 
operational during this phase and will no longer be visible to the 
specialist, if that option is chosen by the broker.
    As in Phase 1, Direct+ will continue to operate according to the 
same restrictions and availability as set forth in Exchange Rules 1000-
1005 today, and the Exchange anticipates that most trading will 
continue to be effected in the auction market.

Phase 3--Automatic Routing of Orders, Elimination of Direct+ 
Restrictions, Sweeps, LRPs, New Order Types, ``Slow'' Market 
Indicators, Gap Quoting

    During Phase 3, most of the remaining changes discussed in these 
amendments will be capable of implementation:
     Automatic routing of orders to markets posting better bids 
and offers;
     Implementation of the sweep functionality for automatic 
executions;
     Activation of LRPs (both sweep and momentum), and the 
publication via NYSE OPENBOOK[supreg] or another Exchange data 
distribution channel of the most restrictive LRP;
     Availability of new order types--auction limit and auction 
market orders, and intermarket sweep orders;
     Availability of IOC orders for automatic executions;
     Use of indicators to identify quotations that are not 
immediately available for automatic executions;
     Use of indicators to identify an execution involving an 
intermarket sweep order;
     Implementation of gap quoting consistent with these 
amendments;
     Elimination of size restrictions for automatic executions;
     Elimination of 30-second restriction on the entry of auto 
ex orders on orders from the same person;
     Availability of automatic executions through the close;
     Elimination of Direct+ availability only to straight limit 
orders;
     Elimination of Direct+ suspensions due to price (i.e., a 
trade at a price that would be more than five cents from the last trade 
in the stock on the Exchange);
     Elimination of Direct+ suspensions due to size (i.e., a 
100-share published bid or offer);

[[Page 37484]]

     Conversion of marketable limit orders automatically to 
auto ex orders; and
     Automatic executions of market orders so designated (i.e., 
an ``NX'' market order).
    In addition, the ability of specialists to have algorithmic 
interaction with auction limit and auction market orders will become 
operational.
    Not all of these features will be made available at the same time 
during this phase, and they will be made available in all securities 
over a period of time.

Phase 4--New Reporting Templates, Elimination of Suspensions of 
Autoquote and Automatic Executions

    Finally, Phase 4 will see the implementation of new reporting 
templates and the elimination of the suspension of autoquoting and 
automatic executions (when the bid or offer decrements to 100 shares), 
except as otherwise provided in these amendments.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under section 6(b)(5) \28\ 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) \29\ 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.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78f(b)(5).
    \29\ 15 U.S.C. 78k-1(a)(1).
---------------------------------------------------------------------------

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

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

Change Received From Members, Participants or Others

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

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, as amended by Amendment No. 5, 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-2004-05 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NYSE-2004-05. 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 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 available publicly. All submissions should refer to 
File Number SR-NYSE-2004-05 and should be submitted on or before July 
20, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-3386 Filed 6-28-05; 8:45 am]
BILLING CODE 8010-01-P