[Federal Register Volume 70, Number 174 (Friday, September 9, 2005)]
[Notices]
[Pages 53701-53704]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4920]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52362; File No. SR-NYSE-2005-57]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Automating the Execution of Elected Stop Orders and CAP-DI Orders and 
Converted CAP-DI Orders

August 30, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on August 10, 2005, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
proposed rule change has been filed by the Exchange as effecting a 
change in an existing order-entry or trading system pursuant to Section 
19(b)(3)(A)(iii) of the Act,\3\ and Rule 19b-4(f)(5) \4\ thereunder, 
which renders the proposal effective upon filing with the Commission. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(5).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to systematize certain functions that are 
currently performed manually regarding the execution of elected stop 
orders and CAP-DI (convert and parity-destabilizing, immediate or 
cancel) orders and converted CAP-DI orders. The Exchange represents 
that the rules regarding the election and execution of CAP-DI and stop 
orders and conversion and execution of CAP-DI orders remain the same.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The Exchange is filing this proposed amendment to systematize 
certain functions that are currently performed manually regarding the 
execution of elected stop orders and CAP-DI orders and converted CAP-DI 
orders.
    The rules regarding the election and execution of CAP-DI and stop 
orders and the conversion and execution of CAP-DI orders remain the 
same.

[[Page 53702]]

    The Display Book[supreg] (``Display Book'' or ``Book'') is the 
Exchange system that will handle the functions described below. The 
Display Book is an order management and execution facility that 
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.).

Background

    Exchange Rules 13 and 123A.30 describe percentage orders, including 
CAP-DI orders, and the manner in which they are elected or converted 
and executed.
    A percentage order \5\ is a limited price order placed on the 
Display Book to buy or sell fifty percent of the volume of specified 
stock within a specified limit price after the order's entry. A 
percentage order becomes a ``live'' order capable of execution in one 
of two ways: (i) All or part of the percentage order is ``elected'' as 
a limit order when an Exchange trade occurs in the specified security 
at the percentage order's limit price or better; or (ii) all or part of 
a CAP order is ``converted'' into a limit order by the specialist, to 
make a bid or offer or to participate directly in a trade.
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    \5\ For background on percentage orders and amendments to Rule 
123A.30, See Securities Exchange Act Release Nos. 40722 (Nov. 30, 
1998), 63 FR 67966 (SR-NYSE-97-09) (Dec. 9, 1998); 39009 (Sept. 3, 
1997), 62 FR 47715 (September 10, 1997) (SR-NYSE-96-16); 24505 (May 
22, 1987), 52 FR 20484 (June 1, 1987) (SR-NYSE-85-1); and 47614 
(April 2, 2003), 68 FR 17140 (April 8, 2003) (SR-NYSE-2002-55).
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    A ``D'' notation on a CAP order instructs the specialist that the 
order may be converted to participate in destabilizing transactions or 
to bid/offer in a destabilizing manner. The specialist may also convert 
the order to participate in stabilizing transactions or to bid/offer in 
a stabilizing manner.
    An ``I'' notation on a CAP order stands for ``immediate execution 
or cancel'' and instructs the specialist to cancel an elected portion 
of the percentage order that is not executed immediately at the price 
of the electing transaction or better. Any elected portion that is not 
immediately executed reverts to its status as a percentage order, 
subject to subsequent election or conversion.
    The CAP-DI order guides the specialist to represent the order to 
ensure that the elected or converted portion goes along with the 
market, by not initiating a significant price change or lagging behind 
the market. CAP-DI orders are subject to a number of restrictions 
intended to minimize the specialist's discretion in handling such 
orders.\6\ Elected and converted CAP-DI orders that are not executed 
revert to CAP-DI status.
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    \6\ Securities Exchange Act Release No. 24505 (May 22, 1987), 52 
FR 20484 (June 1, 1987) (SR-NYSE-85-1) (approving amendment to NYSE 
Rule 123A.30 permitting conversion of percentage orders on 
destabilizing ticks under certain restrictions).
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    Exchange Rule 13 defines two types of stop orders: stop limit 
orders and stop orders. 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. Once elected, stop limit orders remain as limit orders on the 
Book if not executed immediately.
    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 market. 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 market. Once elected, stop market 
orders are executed.
    Executions of elected or converted CAP-DI orders do not result in 
further elections of CAP-DI orders on the same side of the market. 
Executions of elected stop orders can elect CAP-DI orders at the same 
or better price. Executions of elected stop orders can also elect stop 
orders at other prices.
    Automatic executions and auction market transactions systemically 
elect CAP-DI and stop orders. The size of the electing trade elects the 
same amount from each CAP-DI and stop order electable by that trade. 
For example, if 500 shares trade and two marketable CAP-DI orders and 
one marketable stop limit order are electable, 500 shares of each order 
are elected. However, today, once systemically elected, CAP-DI and stop 
orders must be manually executed and reported by the specialist. 
Similarly, specialists must manually execute and report converted CAP-
DI orders. The specialist determines the number of shares converted on 
a CAP-DI order to quote or trade based on instructions from the 
entering broker.
    Moreover, Exchange Rule 123A.30 provides that the specialist can 
trade on parity with elected or converted CAP-DI orders as long as the 
specialist does not trade for its own account in an amount in excess of 
that which each CAP-DI order would receive. Based on the example above, 
the specialist would have been able to trade 500 shares for his or her 
own account.
    Exchange Rule 123A.40 provides, in part, that a specialist may be a 
party to the election of a stop order only: (i) when his or her bid or 
offer has the effect of bettering the market, when he guarantees that 
the stop order will be executed at the same price as the electing sale, 
and with Floor Official approval if the transaction is more than 0.10 
point away from the prior transaction; or (ii) when the specialist 
purchases or sells stock for his or her own account solely for the 
purpose of facilitating completion of a member's order at a single-
price, where the depth of the current bid or offer is not sufficient to 
do so. When the specialist is acting in this manner, he or she shall 
not be required to guarantee that the stop order will be executed at 
the same price as the electing sale.
    The changes proposed below, which will systematize the execution 
and reporting of elected CAP-DI and stop orders and converted CAP-DI 
orders, will result in enhanced audit trail information, and reduce 
specialists' data entry workload and the associated chances for error. 
Existing Exchange rules governing the election and execution of CAP-DI 
and stop orders and the conversion and execution of converted CAP-DI 
orders remain unchanged, and the rules regarding execution of these 
orders will be incorporated into the Display Book to ensure appropriate 
executions.

Systemic Execution of Elected CAP-DI and Stop Orders

    Currently, when a trade occurs, the system notifies the specialist 
what, if any, CAP-DI and stop orders have been elected by such trade. 
The specialist must then determine if there is any liquidity against 
which the elected orders (or portions thereof) can trade. If so, the 
specialist will manually execute and report a trade involving the 
elected CAP-DI and/or stop volume. The Exchange proposes to systematize 
this process, by having the Book automatically execute elected CAP-DI 
and stop volume to the extent possible. The Book will also 
automatically report such execution, including the relevant information 
regarding participants to the execution. Elected CAP-DI volume unable 
to trade will automatically revert

[[Page 53703]]

to CAP-DI status and elected stop limit volume unable to trade will 
become a limit order on the Book. Elected stop market volume will be 
executed in the same manner as any market order. Additionally, where 
the specialist was a party to the election of stop orders, the elected 
stop orders will be systemically executed at the election price against 
the specialist.
    Examples--CAP order is systemically elected based on the size of 
the last sale and then systemically executed up to the available contra 
size, at the last sale price:
    1. The quote is 20.05 bid, offered at 20.07, 9,000 x 9,000. A CAP-
DI order arrives to buy 10,000 shares at 20.15. A limit order arrives 
to buy 2,500 shares at 20.07 and is executed at the offer price, 20.07. 
As a result of the 2,500-share execution of the limit order, 2,500 
shares of the CAP-DI order are elected and systemically executed at the 
last sale price, 20.07. 7,500 shares remain on the CAP-DI order and the 
market is autoquoted 20.05 bid, offered at 20.07, 9,000 x 4,000.
    2. The quote is 20.05 bid, offered at 20.07, 1,000 x 1,000. A CAP-
DI order arrives to buy 10,000 shares at 20.15. A limit order arrives 
to sell 1,500 shares at 20.05 and is executed at the bid price, 20.05. 
As a result of the 1,000-share execution, 1,000 shares of the CAP-DI 
order are elected. However, only 500 shares of the 1,000 shares elected 
are able to trade, as only 500 shares of contra-side interest (the 
stock offered) remains. The CAP-DI order systemically buys the 500 
shares and the remaining 500 shares elected revert to unelected status. 
9,500 shares remain on the CAP-DI order and the market is autoquoted 
20.04 bid (the next best bid on the Book), offered at 20.07, 2,000 (the 
size associated with the bid) x 1,000.
    3. The quote is 20.05 bid, offered at 20.07, 1,000 x 1,000. A stop 
order arrives to buy 1,000 shares at 20.05. A limit order arrives to 
sell 1,500 shares at 20.05 and is executed at the bid price, 20.05. As 
a result of the 1,000-share execution, 1,000 shares of the stop order 
are elected. However, only 500 shares of the 1,000 shares elected are 
able to trade, as only 500 shares of contra-side interest (the stock 
offered) remains. The stop order systemically buys the 500 shares and 
the remaining 500 shares elected revert to a market order and will 
trade at the next best price, 20.07. The market is autoquoted 20.04 bid 
(the next best bid on the Book), offered at 20.07, 2,000 (the size 
associated with the bid) x 500 (after 500 shares of the stop order are 
executed as a market order at 20.07).

Systemic Handling of CAP-DI Order Converted to a Bid or Offer

    Exchange Rule 123A.30 permits specialists to, among other things, 
convert a CAP-DI order on a stabilizing or destabilizing tick to make a 
bid or offer in accordance with the parameters set forth in the rule. 
After conversion to a bid or offer, the CAP-DI order is able to 
participate in automatic executions in accordance with and to the 
extent provided by Exchange Rules 1000--1005.
    Today, Exchange Rule 1001(a)(iii) provides, with respect to each 
automatic execution that includes specialist or Crowd orders, that the 
specialist is responsible for assigning the appropriate number of 
shares to each contra-side participant in accordance with Exchange Rule 
72. This is because the Display Book does not have the contra-side 
information for these participants until it is manually entered by the 
specialist. This also applies to converted CAP-DI orders. The 
conversion is currently done manually by the specialist and the system 
does not incorporate any of the order information until it is entered 
by the specialist upon an execution.
    The Exchange proposes to systemically capture converted CAP-DI 
order information to enable the systemic reporting of automatic 
executions involving converted CAP-DI volume. The system will do this 
by creating a limit order on the Book (``a child order'') which will be 
systemically linked for identification purposes to the original CAP-DI 
order (``the parent order''). The child order will be systemically 
decremented as executions occur with it.\7\ As noted above, none of the 
rules governing the specialist's ability to convert CAP-DI orders or 
the way in which they trade are proposed to be amended.
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    \7\ Telephone call between Kelly Riley, Assistant Director, 
Division of Market Regulation, SEC and Jeffrey Rosenstrock, 
Principal Rule Counsel, NYSE on August 29, 2005.
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Automation of Parity Between Specialist and Elected CAP-DI Orders

    As noted above, Exchange Rule 123A.30 \8\ provides that a Floor 
broker may permit a specialist to trade on parity with CAP-DI orders. 
The rule currently provides that if a specialist is on parity with one 
or more CAP-DI orders, at no time may the specialist participate for 
its own account in an amount in excess of what each CAP-DI order would 
receive, except that the specialist may participate for its own account 
to an extent greater than any particular CAP-DI order where the size 
specified on such order has been satisfied. A specialist on parity with 
a CAP-DI order remains subject to the limitations in Exchange Rule 
104.10 as to transactions for his or her own account effected on 
destabilizing ticks.
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    \8\ Rule 123A.30 is proposed to be amended in the hybrid market 
filing to provide that when a specialist algorithmically price 
improves an order, 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. See 
Securities Exchange Act Release No. 51906 (June 22, 2005), 70 FR 
37463 (June 29, 2005) (Amendment No. 5 to SR-NYSE-2004-05).
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    For example, assume the market in XYZ stock is 20.10 bid, offered 
at 20.13, 50,000 x 40,000, with the offer consisting of three CAP-DI 
sell orders of 10,000 shares each that the specialist had converted to 
trade at 20.13 and added 10,000 shares of interest for his or her own 
account. If a buyer for 36,000 shares enters the Crowd to trade with 
the offer, the specialist must split executions equally among them 
(9,000 for each of the three CAP-DI orders and the specialist receives 
9,000 shares since he or she is on parity).
    Now, assume the market in XYZ stock is 20.10 bid, offered at 20.13, 
50,000 x 42,000,\9\ with the offer consisting of three CAP-DI sell 
orders of 10,000 shares each that the specialist had converted to trade 
at 20.13 and added 12,000 shares of interest for his or her own 
account. If a buyer for 42,000 shares enters the Crowd to trade with 
the offer, the specialist must split executions equally among them 
(10,000 for each of the three CAP-DI orders in order to fully satisfy 
them), and the specialist receives 12,000 shares since he or she is on 
parity and there are 2,000 additional shares left over after satisfying 
the three CAP orders (10,000 shares each) and the specialist account 
for 10,000 shares.
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    \9\ Telephone call between Kelly Riley, Assistant Director, 
Division of Market Regulation, SEC and Jeffrey Rosenstrock, 
Principal Rule Counsel, NYSE on August 30, 2005.
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    The Exchange proposes to automate the specialist's participation in 
these situations, so that the system assigns the proper number of 
shares to the specialist when trading along with elected CAP-DI orders.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\10\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\11\ in particular, in that it 
is designed to promote just and equitable principles of trade, to 
foster cooperation

[[Page 53704]]

and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transaction in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
in general, to protect investors and the public interest. The Exchange 
asserts that the proposed rule change also is designed to support the 
principles of Section 11A(a)(1) of the Act \12\ in that it seeks to 
assure economically efficient execution of securities transactions, 
make it practicable for brokers to execute investors' orders in the 
best market, and provide an opportunity for investors' orders to be 
executed without the participation of a dealer.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

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

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

    Because the foregoing proposed rule change effects a change in an 
existing order entry or trading system that (i) does not significantly 
affect the protection of investors or the public interest; (ii) does 
not impose any significant burden on competition; and (iii) does not 
have the effect of limiting access to or availability of the system, it 
has become effective pursuant to Section 19(b)(3)(A)(iii) of the 
Act,\13\ and Rule 19b-4(f)(5) \14\ thereunder.
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    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \14\ 17 CFR 240.19b-4(f)(5).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.\15\
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    \15\ See Section 19(b)(3)(C) of the Act, 15 U.S.C. 78s(b)(3)(C).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NYSE-2005-57 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-2005-57. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section. 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-2005-57 and should be submitted on or before 
September 30, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-4920 Filed 9-8-05; 8:45 am]
BILLING CODE 8010-01-P