[Federal Register Volume 71, Number 140 (Friday, July 21, 2006)]
[Notices]
[Pages 41496-41502]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-11581]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54150; File No. SR-NYSE-2006-36]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto Relating to Exchange Rule 70 To Provide Floor Brokers With the 
Ability To Enter Discretionary Instructions and/or Pegging Instructions 
With Respect to Floor Broker Agency Interest Files (e-Quotes)

July 14, 2006.
    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 May 16, 2006, the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On June 
14, 2006, NYSE filed Amendment No. 1 to the proposed rule change.\3\ On 
July 11, 2006, NYSE filed Amendment No. 2 to the proposed rule 
change.\4\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, NYSE proposed additional changes and 
clarifications to the proposal.
    \4\ Amendment No. 2 supersedes and replaces the original 
proposed rule change and Amendment No. 1 in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Exchange Rule 70 to reflect that 
Floor brokers will have the ability to enter discretionary instructions 
(``d-Quotes'') with respect to their Floor broker agency interest files 
(``e-Quotes'') and that their e-Quotes and d-Quotes will be able to peg 
to the Exchange best bid and offer. The Exchange also proposes to amend 
NYSE Rules 70.20, 123(e), 104, and 1000. Below is the text of the 
proposed rule change, as amended. Proposed new language is italicized; 
proposed deletions are in brackets.
* * * * *
Bids and Offers
Rule 70
    .20 (a)(i) With respect to orders he or she is representing on the 
Floor, a Floor broker may place within the Display Book[supreg] 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). Broker agency interest files shall also be referred to as ``e-
Quotes\SM\''.
* * * * *
    (b) All Floor broker agency interest placed within files in the 
Display Book[supreg] system at the same price and on the same side 
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[supreg] system shall 
be entitled to precedence based on size.
* * * * *
    (j)(i) Floor broker agency interest placed within files may 
participate in the opening and closing trades in accordance with 
Exchange policies and procedures governing the open and close.
* * * * *
    (k) The ability of a Floor broker to have reserve interest will not 
be available during the open and during the close. During the close, a 
Floor broker's reserve interest, if any, will be added to the size of 
his or her displayed agency (``e-Quoted'') interest. 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.

.25 Discretionary Instructions for Bids and Offers Represented via 
Floor Broker Agency Interest Files (e-Quotes\SM\)

    (a)(i) A Floor broker may enter discretionary instructions as to 
size and/or price with respect to his or her e-Quotes (``discretionary 
e-Quotes'' or ``d-Quotes''). The discretionary instructions relate to 
the price at which the d-Quote may trade and the number of shares to 
which the discretionary price instructions apply.
    (ii) Discretionary instructions are active only when the e-Quote is 
at or

[[Page 41497]]

joins the existing Exchange best bid or best offer or would establish a 
new Exchange best bid or offer.
    (iii) Discretionary instructions are active only with respect to 
automatic executions. Discretionary instructions are not active with 
respect to the opening and closing transactions.
    (iv) Discretionary instructions will be applied only if all d-
Quoting prerequisites are met. Otherwise, the d-Quote will be handled 
as a regular e-Quote, notwithstanding the fact that the Floor broker 
has designated the e-Quote as a d-Quote. For example, to be considered 
a discretionary e-Quote, an e-Quote must have a discretionary price 
range.
    (v) The requirements for e-Quotes apply to d-Quotes, including the 
requirement that the Floor broker be in the Crowd.
    (vi) A Floor broker may have multiple d-Quotes, with different 
discretionary price and size limitations, on the same side of the 
market. Such multiple d-Quotes do not compete with each other for 
executions. Trading volume is allocated by Floor broker, not number of 
d-Quotes participating in an execution.
    (vii) Discretionary instructions apply to both displayed and 
reserve interest, including reserve interest that is excluded from the 
aggregate reserve size visible to the specialist on the Floor.
    (viii) Neither the specialist on the Floor nor the specialist 
system employing algorithms will have access to the discretionary 
instructions entered by Floor brokers with respect to their e-Quotes.

(b) Price Discretion

    (i) A Floor broker may set a discretionary price range within the 
Exchange best bid and offer that specifies the prices at which they are 
willing to trade. This discretion will be used, as necessary, to 
initiate or participate in a trade with an incoming order capable of 
trading at a price within the discretionary price range.
    (ii) The minimum price range for a discretionary e-Quote is the 
minimum price variation set forth in Exchange Rule 62.
    (iii) Floor brokers may specify that price discretion applies to 
all or only a portion of their d-Quote. Price discretion is necessary 
for d-Quotes. Therefore, if price discretion is provided for only a 
portion of the d-Quote, the residual will be treated as an e-Quote.
    (iv) When price discretion is used, d-Quotes trade first from 
reserve volume, if any, and then from displayed volume.

(c) Discretionary Size

    (i) A Floor broker may designate the amount of his or her e-Quote 
volume to which discretionary price instructions shall apply.
    (ii) A Floor broker may designate a minimum and/or maximum size of 
contra-side volume with which it is willing to trade using 
discretionary price instructions.
    (iii) Only displayed interest will be used by Exchange systems to 
determine whether the size of contra-side volume is within the d-
Quote's discretionary size range. Contra-side reserve and other 
interest at the possible execution price will not be considered by 
Exchange systems when making this determination.
    (iv) Interest displayed by other market centers at the price at 
which a d-Quote may trade will not be considered by Exchange systems 
when determining if the d-Quote's minimum and/or maximum size range is 
met, unless the Floor broker designates that such away volume should be 
included in this determination.
    (v) An increase or reduction in the size associated with a 
particular price that brings the contra-side volume within a d-Quote's 
minimum or maximum discretionary size parameter, will trigger an 
execution of that d-Quote.
    (vi) Once the total amount of a Floor broker's discretionary volume 
has been executed, the d-Quote's discretionary price instructions will 
become inactive and the remainder of that d-Quote will be treated as an 
e-Quote.

(d) Executions of Discretionary e-Quotes

    (i) The goal of discretionary e-Quoting is to secure the largest 
execution for the d-Quote, using the least amount of price discretion. 
In so doing, d-Quotes may often improve the execution price of incoming 
orders. Conversely, if no discretion is necessary to accomplish a 
trade, none will be used.
    (A) Future executions that may occur, such as those resulting from 
the execution of elected contra-side CAP-DI orders, will not be 
considered in determining when, and to what extent, price discretion is 
necessary to accomplish a trade.
    (ii) Discretionary e-Quotes will automatically execute against a 
contra-side order that enters the Display Book [supreg] system if the 
order's price is within the discretionary price range and the order's 
size meets any minimum or maximum size requirements that have been set 
for the d-Quote.
     (iii) Discretionary e-Quotes from different Floor brokers on the 
same side of the market with the same price instructions trade on 
parity after interest entitled to priority is executed.
    (iv) Same-side d-Quotes from different Floor brokers compete for an 
execution, with the most aggressive price range (e.g. three cents vs. 
two cents) establishing the execution price. If an incoming order 
remains unfilled at that price, executions within the less aggressive 
price range may then occur.
    (v) Discretionary e-Quotes compete with same-side specialist 
algorithmic trading messages targeting incoming orders. If the price of 
d-Quotes and specialist trading messages are the same, the d-Quotes and 
the specialist messages will trade on parity.
    (vi) Discretionary e-Quotes from Floor brokers on opposite sides of 
the market will be able to trade with each other. The d-Quote that 
arrived at the Display Book[supreg] system last will use the most 
discretion necessary to effect a trade, except as provided below.
    (A) When a protected bid or offer, as defined in Section 
242.600(b)(57) of Regulation NMS (``Reg. NMS''), is published by 
another market center at a price that is better than the price at which 
contra-side d-Quotes would trade in accordance with (vi) above, the 
following applies:
    (1) the amount of discretion necessary to permit a trade on the 
Exchange consistent with the Order Protection Rule (Section 242.611 of 
Reg. NMS) (``OPR'') will be used; or
    (2) such portion of the appropriate d-Quote as is necessary will be 
automatically routed in accordance with OPR in order to permit a trade 
to occur on the Exchange.
    (vii) As with all executions on the Exchange, executions involving 
d-Quotes will comply with OPR.
    (viii) Discretionary e-Quotes may provide price improvement to and 
trade with an incoming contra-side specialist algorithmic trading 
message to ``hit bid/take offer,'' just as they can with any other 
marketable incoming interest.
    (ix) Discretionary e-Quotes may initiate sweeps in accordance with 
and to the extent provided by Exchange Rules 1000-1004, but only to the 
extent of their price and volume discretion. Discretionary e-Quotes may 
participate in sweeps initiated by other orders but, in such cases, 
their discretionary instructions are not active.
    (A) d-Quotes will not trade at a price that would trigger a 
liquidity replenishment point (``LRP'') as defined in Exchange Rule 
1000. Accordingly, a sweep involving a d-Quote will always stop at 
least one cent before an LRP price.

[[Page 41498]]

.26 Pegging for d-Quotes and e-Quotes

    (i) An e-Quote, other than a tick-sensitive e-Quote, may be set to 
provide that it will be available for execution at the Exchange best 
bid (for an e-Quote that represents a buy order) or at the Exchange 
best offer (for an e-Quote that represents a sell order) as the 
Exchange best bid or offer changes, so long as the Exchange best bid or 
offer is at or within the e-Quote's limit price.
    (ii) A d-Quote may also employ pegging.
    (iii) Pegging is only active when auto-quoting is active.
    (iv) Pegging e-Quotes and d-Quotes trade on parity with other 
interest at the Exchange best bid or offer after interest entitled to 
priority is executed.
    (v) Pegging is reactive. An e-Quote or d-Quote will not establish 
the Exchange best bid or best offer as a result of pegging.
    (vi) Price priority cannot be established by pegging, although 
existence of pegging instructions does not preclude an e-Quote or d-
Quote from having priority.
    (vii) Pegging e-Quotes and d-Quotes peg only to other non-pegging 
interest within the pegging range selected by the Floor broker.
    (viii) An e-Quote or d-Quote will not sustain the Exchange best bid 
or best offer as a result of pegging if there is no other non-pegged 
interest at that price and such price is not the e-Quote's or d-Quote's 
limit price.
    (A) If the lowest quotable price established by the Floor broker 
for a pegging e-Quote or d-Quote to buy is the Exchange best bid and 
all other interest at that price cancels or is executed, the pegging e-
Quote or d-Quote will remain displayed at that best bid price.
    (B) If the highest quotable price established by the Floor broker 
for a pegging e-Quote or d-Quote to sell is the Exchange best offer and 
all other interest at that price cancels or is executed, the pegging e-
Quote or d-Quote will remain displayed at that best offer price.
    (ix) A Floor broker may establish a price range for an e-Quote or 
d-Quote, beyond which the pegging function will not be available 
(``quote,'' ``ceiling'' and ``floor'' prices).
    (A) The ``quote price'' is the lowest price to which a buy e-Quote 
or d-Quote may peg or the highest price to which a sell e-Quote or d-
Quote may peg.
    (B) The ``ceiling price'' is the highest price to which a buy-side 
e-Quote or d-Quote may peg.
    (C) The ``floor price'' is the lowest price to which a sell-side e-
Quote or d-Quote may peg.
    (D) A quote, ceiling and floor price may be at a price other than 
the limit price of the order that is being e-Quoted or d-Quoted, but 
may not be inconsistent with the order's limit.
    (x) As long as the Exchange best bid is at or within the pegging 
price range selected by the Floor broker with respect to a buy-side e-
Quote or d-Quote, or the Exchange best offer is within the price range 
selected by the Floor broker with respect to a sell-side e-Quote or d-
Quote, the pegging e-Quote or d-Quote will join such best bid or best 
offer as it is auto quoted.
    (xi) If the Floor broker does not designate a pegging range, but 
has instructed that his or her e-Quote or d-Quote shall peg, the e-
Quote or d-Quote will peg to the Exchange best bid (offer) as long as 
such bid (offer) is within the limit of the order that is being e-
Quoted or d-Quoted.
    (xii) As an e-Quote or d-Quote pegs, its discretionary price range, 
if any, moves along with it, subject to any floor or ceiling price set 
by the Floor broker.
    (A) If the Exchange best bid is higher than the ceiling price of a 
pegging buy-side e-Quote or d-Quote, the e-Quote or d-Quote will remain 
at its quote price or the highest price at which there is other 
interest within its pegging price range, whichever is higher 
(consistent with the limit price of the order underlying the e-Quote or 
d-Quote).
    (B) If the Exchange best offer is lower than the floor price of a 
pegging sell-side e-Quote or d-Quote, the e-Quote or d-Quote will 
remain at its quote price or the lowest price at which there is other 
interest within its pegging price range, whichever is lower (consistent 
with the limit price of the order underlying the e-Quote or d-Quote).
    (C) If the Exchange best bid or best offer returns to a price 
within the pegging price range selected by the Floor broker, the e-
Quote or d-Quote will once again peg to the Exchange best bid or best 
offer.
    (xiii) A Floor broker may establish a minimum and/or maximum size 
of same-side volume to which his or her e-Quote or d-Quote will peg. 
Other pegging e-Quote or d-Quote volume will not be considered in 
determining whether the volume parameters set by the Floor broker have 
been met.
* * * * *
Dealings by Specialists
Rule 104
* * * * *
    (c)
* * * * *
    (ix) Specialist algorithmically-generated messages will compete 
with or trade along with same-side discretionary e-Quotes SM 
in the manner described in Exchange Rule 70.25.
* * * * *
Record of Orders
Rule 123
* * * * *
    (e) System Entry Required
* * * * *
    8. Any limit price, [and/or] stop price, discretionary price range, 
discretionary volume range, discretionary quote price, pegging ceiling 
price, pegging floor price and/or whether discretionary instructions 
are active in connection with interest displayed by other market 
centers;
* * * * *
    The Floor member must identify which orders or portions thereof are 
being made part of the Floor broker agency interest file and, with 
respect to such orders or portions thereof, what discretionary and/or 
pegging instructions, if any, have been assigned pursuant to such 
procedures as required by the Exchange.
* * * * *
NYSE Direct+[supreg]
Automatic Executions
Rule 1000
* * * * *
    (d)
* * * * *
    (D) After trading with the Exchange published best bid (offer), the 
unfilled balance of any incoming commitment to trade received through 
ITS shall be automatically cancelled, as described in Rule 13 
(definition of immediate or cancel order).
    (iii)(A) During a sweep, the residual shall trade with the orders 
on the Display Book[supreg] and any broker agency interest files and/or 
specialist 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''). A discretionary e-Quote shall 
participate in a sweep in accordance with and to the extent allowed by 
Exchange Rule 70.25(d)(ix).
* * * * *

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

[[Page 41499]]

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
    Exchange Rule 70.20 was initially approved by the Commission on 
December 14, 2005,\5\ as part of a pilot permitting the implementation 
of Phase 1 of the NYSE HYBRID MARKETSM (``Hybrid Market'') 
and was permanently approved by the Commission on March 22, 2006.\6\
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    \5\ See Securities Exchange Act Release No. 52954 (December 14, 
2005), 70 FR 75519 (December 20, 2005).
    \6\ See Securities Exchange Act Release No. 53539 (March 22, 
2006), 71 FR 16353 (March 31, 2006).
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    In order to fully participate in the Hybrid Market, Floor brokers 
have been given the ability to electronically represent their 
customers' orders by placing their trading interest at or outside the 
Exchange best bid and offer in Floor broker agency interest files 
within the Display Book[reg] system \7\ (``NYSE e-
QuotesSM'' or ``e-Quotes'').\8\
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    \7\ The Display Book [reg] system (``Display Book'' 
or ``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.).
    \8\ See Exchange Rule 70.20.
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    The following proposed changes are being made to clarify certain of 
Rule 70.20's provisions in response to questions that have arisen since 
the rule has been in effect:
    1. Rule 70.20(a)(i): Duplicative language has been deleted.
    2. Rule 70.20(b): The phrase ``and on the same side'' has been 
added to clarify which orders trade on parity pursuant to this 
provision.
    3. Rule 70.20(j)(i): Reference to ``the close'' has been added to 
clarify that Floor broker agency interest files participate on the open 
and close in accordance with the policies and procedures of the 
Exchange.
    4. Rule 70.20(k): A sentence has been added to clarify how a Floor 
broker's reserve interest will be handled on the close.
    To further replicate in the Hybrid Market the manner in which Floor 
brokers utilize their judgment in quoting and trading on behalf of 
customers' orders today, the Exchange is proposing to provide Floor 
brokers with the ability to enter discretionary trading and/or pegging 
(discretionary quoting) instructions for their e-Quotes (``NYSE d-
QuotesSM'' or ``d-Quotes'').
    Discretionary instructions for e-Quotes and pegging will give Floor 
brokers additional tools to compete with other interest, including the 
specialists' algorithmic trading and quoting ability. These proposed 
discretionary features and pegging will facilitate the ability of Floor 
brokers to participate in trades that they would not be able to reach 
in the Hybrid Market.

Discretionary Trading Instructions

    In the mostly-manual pre-Hybrid Market, Floor brokers had an 
opportunity to make trading decisions with respect to arriving orders. 
In a more electronic trading environment, the Floor broker may not have 
that opportunity. While e-Quotes enable Floor brokers' customer 
interest to participate in automatic executions at the Exchange best 
bid and offer (``BBO'') and in sweeps, they do not initiate trades with 
incoming orders at prices better than the BBO. In other words, 
currently, e-Quotes do not provide Floor brokers with the means to 
express a price range within which they are willing to actively trade. 
Thus, the proposed changes will provide Floor brokers with the ability 
not only to quote in an attempt to draw interest, but, at the same 
time, initiate trades with contra-side interest able to trade at prices 
at or within the BBO. By using d-Quotes, a Floor broker may set a 
discretionary price range and a discretionary size range. Discretionary 
size can apply to the amount of an e-Quote to which discretionary 
instructions apply and/or to the amount of contra-side volume with 
which the d-Quote is willing to trade, as described below. 
Discretionary instructions are only active when the e-Quote is at the 
BBO. Neither the specialist on the Floor nor the specialist system 
employing algorithms will have access to the discretionary instructions 
entered by the Floor broker.

Price Discretion

    Discretionary instructions for e-Quotes will allow Floor brokers to 
set a price range for their d-Quotes within which they are willing to 
initiate or participate in a trade. This discretion will be used, as 
necessary, to initiate or participate in a trade with an incoming order 
capable of trading at a price within the discretionary range. 
Discretionary price instructions may apply to all or part of a d-Quote.
    For example, the BBO is .05 bid, offered at .10. A Floor broker 
enters a d-Quote at .10, with price discretion of .04. A limit order to 
buy at .06 enters the market. The d-Quote will use its four cents of 
price discretion and initiate a trade at .06.
    When a d-Quote is competing with same-side quoted or trading 
interest (i.e., displayed interest at the BBO, other d-Quotes, or a 
same-side specialist algorithmic trading message, such as to provide 
price improvement), if the d-Quote can get a larger allocation by 
providing an additional penny (or more) of price improvement and the 
discretionary instructions permit the d-Quote to trade at that price, 
it will do so.

Volume Discretion

    Floor brokers may designate that discretionary instructions apply 
only to a portion of their e-Quote. For example, a Floor broker may 
specify that only 20,000 shares of a 50,000-share e-Quote may use price 
discretion. The remaining 30,000-shares would be handled as a regular 
e-Quote, i.e., one without discretionary instructions.
    Floor brokers who use e-Quoting price discretion may also set a 
minimum and/or maximum size limit with respect to the size of contra-
side interest with which it is willing to trade using price discretion. 
This allows for more specific order management by preventing the d-
Quote from trading with opposite side interest that the Floor broker 
has judged to be too little or too great in the context of the order or 
orders he or she is managing.
    For example, the BBO is .05 bid, offered at .10. A Floor broker e-
Quotes stock at .10, with price discretion of .04 and minimum/maximum 
volume discretion of 1,000/10,000 shares. A limit order to buy 500 
shares at .06 enters the market. No trade will occur, even though a 
trade at .06 is within the d-Quote's price discretion range, because 
the incoming order size is below the d-Quote's minimum discretionary 
volume size. A new best bid of .06 will be auto-quoted. An order to buy 
1,500 shares at .06 enters the market. The d-Quote will initiate a 
transaction, selling 2,000 shares at .06, as the size available to 
trade at .06 is now within the d-Quote's discretionary volume 
parameters. Similarly, a sufficient reduction in the size of a bid or 
offer that was previously larger than the maximum discretionary volume 
will trigger an execution of a discretionary d-Quote.

[[Page 41500]]

    Only published contra-side volume is considered when determining 
whether such volume is within the d-Quote's discretionary volume range. 
Reserve and other interest at the possible execution price is not 
considered, as it is not displayed. Interest displayed by other market 
centers at the price at which a d-Quote may trade is not considered 
when determining if the minimum volume range is met, unless the Floor 
broker electronically designates that such away volume should be 
included in this determination.

Pegging

    In the Hybrid Market, a Floor broker needs to be represented in the 
BBO in order to participate in automatic executions. The e-Quotes 
provide Floor brokers with the mechanism to be part of the quote. 
However, in a more automated environment, the BBO may change rapidly 
and the e-Quoting process, as it currently exists, may not be 
sufficient to enable Floor brokers to stay with a quickly changing 
quote. The proposed pegging function will allow Floor brokers to keep 
their interest in the quote, even as the quote moves. Floor brokers 
will be able to designate a range to which their e-Quotes and d-Quotes 
will peg and, as long as the BBO is within that range, the e-Quote and 
d-Quote will be included. Buy side e-Quotes and d-Quotes will peg to 
the best bid, and sell side e-Quotes and d-Quotes will peg to the best 
offer.
    In addition, pegging e-Quotes and d-Quotes may set a minimum and/or 
maximum size of same-side volume to which his or her e-Quote or d-Quote 
will peg. Pegging e-Quotes and d-Quotes may set a ``quote price'' 
specifying the lowest price to which a buy-side e-Quote or d-Quote may 
peg and the highest price to which a sell-side e-Quote or d-Quote may 
peg. A ``ceiling price'' may be set to establish the highest price to 
which a buy-side e-Quote or d-Quote may peg, and a ``floor price'' may 
be set to establish the lowest price to which a sell-side e-Quote or d-
Quote may peg. The quote, ceiling and floor prices must be at or within 
the limit price of the order being e-Quoted or d-Quoted.
    A pegging d-Quote's price discretion range will move along with the 
d-Quote as it pegs.
    Pegging is a separate type of discretionary instruction and may 
occur with e-Quotes and/or with d-Quotes using discretionary price 
instructions.

Example

    A Floor broker is representing an order to buy 4,000 shares of XYZ 
with a limit of .97, not-held.\9\ He decides to electronically 
represent this order as a d-Quote, with a quote price of .92 and with 
price discretion of .02, in the hope of obtaining a better execution 
price for his customer. This means that the Floor broker is willing to 
participate in an execution at the following prices: .92, .93 and .94. 
Further, he has decided to display 1,000 shares, with 3,000 in reserve. 
In addition, the Floor broker has decided to have this order peg, with 
minimum and maximum volume sizes of 500 and 8,000 shares respectively. 
The Floor broker has set the ceiling price at .97. This means that as 
long as the Exchange best bid is a minimum of 500 shares and no more 
than 8,000 shares, the d-Quote would peg to any Exchange best bid at or 
between .92 and .97
---------------------------------------------------------------------------

    \9\ A ``not held'' order is a market or limit order that gives 
the Floor broker both time and price discretion to attempt to get 
the best possible price for the customer.
---------------------------------------------------------------------------

    The Exchange best bid becomes 2,000 shares bid for .94. As this is 
within the minimum and maximum pegging size range, the order will peg 
to the .94 bid, increasing the displayed size at that price to 3,000 
shares (2,000 shares that established that price and the d-Quote's 
displayed 1,000 shares). The Exchange best bid then becomes 300 shares 
bid for .95. The d-Quote will not peg to that best bid, as its size is 
below the minimum pegging size designated by the Floor broker. If an 
additional 400 shares is added to the best bid as a result of other 
interest at that price, the d-Quote will peg to it, increasing the 
displayed size to 1,700 shares. Similarly, if the displayed volume at 
.95 increased from 300 shares to 10,000 shares (instead of 700 shares), 
the d-Quote would not peg to that price, as 10,000 shares is more than 
the maximum pegging size selected by the Floor broker (which was 8,000 
shares, as noted above). Again, if the displayed volume at .95 
decreases to 6,000 shares, for example, as a result of a trade at that 
price, the d-Quote will peg to the .95 bid, as the displayed volume 
size is now lower than the maximum selected by the Floor broker. 7,000 
shares will be bid at .95, with the d-Quote's 3,000 shares in reserve.
    As the d-Quote pegs, it continues to be able to use its price 
discretion of .02 to effect a trade. Accordingly, if 7,000 shares is 
bid at .95, comprised of 6,000 shares of other interest and 1,000 
shares of the d-Quote (with 3,000 shares of the d-Quote in reserve at 
.95) and the Exchange best offer is .97 for 1,700 shares, the d-Quote 
will initiate an execution, trading 1,700 shares at .97. The d-Quote's 
reserve size will be decremented by the amount of the trade, leaving 
1,300 shares to buy in reserve, with 1,000 shares displayed. The best 
bid continues to be .95, so the d-Quote remains pegged at that price. 
The displayed volume at .95 continues to be 7,000 shares, including the 
displayed portion of the d-Quote (1,000 shares).

General Principles Covering Discretionary e-Quotes and Pegging

    The following describes in more detail the general principles 
governing d-Quotes (i.e., an e-Quote with discretionary trading and/or 
pegging instructions):
     Discretionary instructions relate to the price at which 
the d-Quote may trade and the number of shares to which the 
discretionary price instructions apply.
     The goal of discretionary trading is to secure the largest 
execution for the d-Quote, using the least amount of price discretion. 
In so doing, d-Quotes may often improve the execution price of incoming 
orders. Conversely, if no discretion is necessary to accomplish a 
trade, none will be used.
     Discretionary instructions are only active when the d-
Quote is at the BBO.
     Neither the specialist on the Floor nor the specialist 
system employing algorithms will have access to the discretionary 
instructions entered by the Floor broker.
     Specialists will not have the ability to enter 
discretionary trading or pegging instructions on behalf of a Floor 
broker.
     The minimum price range for a d-Quote is the minimum price 
variation set forth in Rule 62.
     The requirements for e-Quoting apply to the d-Quote, 
including the requirement that the Floor broker be in the Crowd.
     Discretionary instructions apply to displayed and reserve 
size, including reserve interest that is excluded from the aggregate 
volume visible to the specialist on the Floor.
     When price discretion is used, d-Quotes trade first from 
reserve volume, if any, and then from displayed volume.
     Once the total amount of a Floor broker's discretionary 
volume has been executed, the d-Quote's price instructions will become 
inactive and the remainder of that d-Quote will be treated as an e-
Quote.
     Discretionary instructions are only applicable to 
automatic executions; they are not utilized in manual transactions.
     Discretionary instructions may be entered for all e-
Quotes, however, these instructions are only active when the e-Quote is 
at or joins the existing

[[Page 41501]]

Exchange BBO or would establish a new Exchange BBO.
     Multiple same-side d-Quotes from different Floor brokers 
will compete for an execution with the most aggressive price range 
(e.g., three cents vs. two cents) establishing the execution price. If 
the incoming order remains unfilled at that price, executions within 
the less aggressive price range may occur.
     d-Quotes with the same discretionary price instructions on 
the same side will trade on parity, after any interest entitled to 
priority.
     d-Quotes on opposite sides of the market will be able to 
trade with each other. The d-Quote that arrived last will use the most 
discretion, if necessary, to effect a trade.
     d-Quotes will compete with same-side specialist 
algorithmic trading messages targeting incoming orders. If the price of 
d-Quotes and the trading messages are the same, the d-Quotes and the 
specialist messages will trade on parity.
     If a d-Quote is competing with same-side quoted or trading 
interest, including a same-side specialist algorithmic trading message 
(i.e., to provide price improvement) and the d-Quote can get a larger 
allocation by providing an additional penny of price improvement (or 
other applicable minimum price variation), generally, it will do so.
     d-Quotes may price improve and trade with an incoming 
contra-side specialist algorithmically-generated message to ``hit bid/
take offer,'' just as they can with any other marketable incoming 
interest.
     d-Quotes may initiate sweeps, but only to the extent of 
their price and volume discretion. d-Quotes may participate in sweeps 
initiated by other orders, but their discretionary instructions will 
not be active.
     A sweep involving a d-Quote will always stop at least one 
cent (or other applicable minimum price variation) before a liquidity 
replenishment point is reached.
     Executions involving d-Quotes will comply with the 
Regulation NMS Order Protection Rule (``OPR'').\10\
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    \10\ See 17 CFR 242.611.
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     When a better price is displayed by an away market and 
such price is in the middle of contra-side d-Quotes, the amount of 
price discretion extended to a participating d-Quote will be adjusted 
to permit a trade consistent with Reg. NMS OPR requirements.
     Discretionary instructions will be applied only if all d-
Quoting prerequisites are met. Otherwise, the d-Quote will be handled 
as a regular e-Quote, notwithstanding the fact that the Floor broker 
has designated the e-Quote as a d-Quote.
     When price discretion is used, d-Quotes trade first from 
reserve volume, then from published volume. When no price discretion is 
used, the e-Quote's published volume trades first.
     Floor brokers may specify that price discretion applies to 
all or only a portion of their d-Quote. Price discretion is necessary 
for d-Quotes. Therefore, if price discretion is provided for only a 
portion of the d-Quote, the residual will be treated as an e-Quote.
     Floor brokers may have more than one e-Quote/d-Quote per 
side and price. Trading volume is allocated by broker, not e-Quote/d-
Quote, in accordance with Exchange rules.
     Pegging e-Quotes and d-Quotes may set a ``quote price'' 
specifying the lowest price to which a buy-side e-Quote or d-Quote may 
peg and the highest price to which a sell-side e-Quote or d-Quote may 
peg. A ``ceiling price'' may be set to establish the highest price to 
which a buy-side e-Quote or d-Quote may peg, and a ``floor price'' may 
be set to establish the lowest price to which a sell-side e-Quote or d-
Quote may peg. The quote, ceiling, and floor prices must be at or 
within the limit price of the order being e-Quoted or d-Quoted.
     Pegging will not establish a new BBO and it will not 
generally sustain a BBO when there is no other interest at that price. 
If the BBO is the lowest quotable price established by the Floor broker 
for a pegging buy-side e-Quote or d-Quote or the highest quotable price 
established by the Floor broker for a sell-side pegging e-Quote or d-
Quote and all other interest at that price cancels or is executed, the 
pegging e-Quote or d-Quote will remain displayed at such BBO.
     Pegging will only occur at prices within the pegging price 
range designated by the Floor broker.
     Pegging applies to the entire e-Quote/d-Quote volume.
     Pegging is reactive and moves in both directions.
     Pegging e-Quotes and d-Quotes peg only to other non-
pegging interest within the pegging range selected by the Floor broker.
     Pegging is available only when auto-quoting is on.
     Price priority cannot be established by pegging, although 
the existence of pegging instructions does not preclude an e-Quote or a 
d-Quote from having priority.
     Pegging e-Quotes and d-Quotes trade on parity with other 
interest on the same side at the Exchange best bid or offer after 
interest entitled to priority.
     Discretionary trading and pegging is not available for 
tick-sensitive e-Quotes.
     An e-Quote may have either or both discretionary trading 
and pegging instructions.
     As an e-Quote or d-Quote pegs, its discretionary price 
range, if any, moves along with it, subject to any floor or ceiling 
price set by the Floor broker.
     Pegging e-Quotes and d-Quotes may establish a minimum and/
or maximum size of same-side volume to which it will peg. Other pegging 
e-Quote or d-Quote volume will not be considered in determining whether 
the volume parameters set by the Floor broker have been met.

Other Rule Changes

Rule 104
    Rule 104(c)(ix) has been amended to reflect that a specialist's 
algorithmically-generated messages will compete with or trade along 
with same side d-Quote as described in NYSE Rule 70.25.
Rule 123
    Exchange Rule 123(e)(8) which requires the entry of certain order 
information into the Exchange's Front End Systemic Capture (FESC'') 
system before such order can be represented, has been amended to add 
certain required terms regarding e-Quotes and d-Quotes.
Rule 1000
    Rule 1000(d)(iii) which governs sweeps has been amended to reflect 
that d-Quotes will participate in sweeps in the manner described in 
NYSE Rule 70.25(d)(ix).

Implementation Plans

    At present, the Exchange plans to implement proposed Rules 70.25 
and 70.26 as part of Phase 3 of the Hybrid Market. The Exchange will 
consult with the Commission with respect to any change to this 
implementation plan.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) of the Act \11\ because it is designed to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b)(5).

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[[Page 41502]]

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. The Exchange has received one comment letter 
on the proposed rule change and will respond to it after the comment 
period has concluded.

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 self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NYSE-2006-36 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2006-36. 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-2006-36 and should be submitted on or before August 
11, 2006.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-11581 Filed 7-20-06; 8:45 am]
BILLING CODE 8010-01-P