[Federal Register Volume 71, Number 161 (Monday, August 21, 2006)]
[Notices]
[Pages 48569-48571]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-13726]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54316; File No. SR-NYSE-2006-59]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Specialists Hitting Bids and/or Taking Offers 
Algorithmically on a Temporary Basis Until Phase II of the Hybrid 
Market Is Fully Implemented

 August 15, 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 August 8, 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 and 
II below, which Items have been prepared by the Exchange. NYSE filed 
the proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ 
and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposed rule 
change 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).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NYSE proposes to amend Exchange Rule 104 (Dealings by Specialists) 
with respect to the specialists' ability to establish systems employing 
algorithms to send messages via a connection to the Display Book[reg] 
for the purpose of quoting or executing trades systemically. The text 
of the proposed rule change is available on the Exchange's Web site 
(http://www.nyse.com), at the Exchange's Office of the Secretary, and 
at the Commission's Public Reference Room.

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

    In its filing with the Commission, the 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
    Through the NYSE Hybrid Market SM initiative,\5\ the 
Exchange is permitting specialists to establish electronic connections 
to the Display Book[reg] system \6\ (``Display Book''). Specialists 
will have electronic access to certain information which will permit 
them to make a range of specified quoting and trading decisions based 
on that information via the Display Book connection. Specifically, the 
amendments to Rule 104 (Dealings by Specialists) pursuant to the NYSE 
Hybrid Market SM provide specialists with the ability to 
implement systems that use proprietary algorithms based on 
predetermined parameters to electronically participate in the Hybrid 
Market SM (``Specialist Algorithm''). The Specialist 
Algorithm is designed to communicate with the Display Book via an 
Exchange-owned external application program interface (``API'').
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    \5\ See Securities Exchange Act Release No. 53539 (March 22, 
2006), 71 FR 16353 (March 31, 2006).
    \6\ The Display Book system is an order management and execution 
facility. It receives and displays orders to the specialist, 
contains the orders received by the specialist (the ``Book''), and 
provides a mechanism to execute and report transactions to the 
Consolidated Tape.
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    As approved in the Hybrid Market initiative, the Specialist 
Algorithm is permitted to send messages to the Display Book via the API 
to quote or trade on behalf of the specialist's proprietary interest. 
The Specialist Algorithm will generate these quoting or trading 
messages in reaction to specific types of information it will have 
access to. This information includes specialist dealer position, 
existing quotes, publicly available information the specialist chooses 
to supply to the algorithm, incoming orders as they are entering 
Exchange systems, and information about orders on the Display Book such 
as limit orders, percentage orders, stop orders, and auction limit and 
auction market orders. This latter information stream is known as 
``state of the book'' information.
    The Exchange has continued to discuss Hybrid Market features with 
its members and advisory committees. Based on these discussions, the 
Exchange has effected selective changes to certain aspects of the 
Hybrid Market,

[[Page 48570]]

to produce a trading venue that best addresses the various needs of the 
Exchange members and customers.
    On June 20, 2006, the Exchange filed a proposed rule change \7\ 
with the Commission that was effective upon filing to amend Rule 
104(b). That proposal added Rule 104(b)(i) to permit specialists to 
send quoting messages via the API in all securities without the 
specialists having access to information about incoming orders as they 
are entering Exchange systems. That proposal also specified that Rule 
104(b)(i) would be superseded when Phase II of the Hybrid Market is 
fully implemented.
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    \7\ See Securities Exchange Act Release No. 54024 (June 21, 
2006), 71 FR 124 (June 28, 2006).
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    In this current filing, the Exchange seeks to amend current Rule 
104(b)(i) to renumber it as Rule 104(aa)(i) and to clarify that the 
specialists will have the ability to send quoting messages as described 
above without the need for Exchange authorization.
    In addition, the Exchange seeks to further amend Rule 104 to add a 
new section (aa)(ii), to permit specialists to algorithmically execute 
transactions against the Exchange's best bid or offer (``Hit Bid/Take 
Offer'') in any security. As with the quoting messages governed by Rule 
104(aa)(i), the API will not have information about incoming orders as 
such orders are entering Exchange systems. Pursuant to Rule 104(c), 
specialist messages to trade with the Exchange published quote must 
include a code identifying the reason for the algorithmic action, the 
unique identifier of the order to which the algorithmically-generated 
message is reacting (if any), the unique identifier of the order 
immediately preceding the generation of the algorithmically-generated 
message and any other information the Exchange may require. Hit Bid/
Take Offer messages will be processed by the Display Book in such a 
manner that a specialist's algorithmic message to trade with the 
Exchange published quotation does not possess any speed advantage in 
reaching the Display Book by delaying the processing of this type of 
trading message from the Specialist Algorithm.\8\
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    \8\ See Securities and Exchange Act Release No. 53539 (March 22, 
2006), 71 FR 16353 (March 31, 2006). Based upon the average transit 
time from the Exchange Common Message Switch (CMS) system to the 
Display Book system, the Exchange would determine the appropriate 
amount of time to delay the processing of algorithmic messages to 
trade with the Exchange published quotation. The delay parameter 
would be adjusted periodically to account for changes to the average 
transit time resulting from capacity and other upgrades to Exchange 
systems.
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    The proposed amendments discussed in this filing will be superseded 
with the Exchange Rule 104 amendments, as previously approved in the 
NYSE Hybrid Market \SM\ initiative, when Phase II of Hybrid Market \SM\ 
is fully implemented. All other provisions of Rule 104 remain in 
effect, including but not limited to, provisions governing 
stabilization and the specialist's negative obligation.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \9\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \10\ in particular, in that it 
is 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.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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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 does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
by its terms, become operative for 30 days from the date on which it 
was filed, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest, it 
has become effective pursuant to Section 19(b)(3)(A) of the Act \11\ 
and Rule 19b-4(f)(6) thereunder.\12 \
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally may 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) \13\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay and designate the proposed 
rule change immediately operative upon filing. The Commission believes 
that waiver of the 30-day operative delay is consistent with the 
protection of investors and the public interest because it would allow 
specialists to begin testing their APIs. Accordingly, the Commission 
designates the proposal to be effective and operative upon filing with 
the Commission.\14\
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    \13\ 17 CFR 240.19b-4(f)(6)(iii).
    \14\ 14 For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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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-2006-59 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-2006-59. 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

[[Page 48571]]

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-2006-59 and should be submitted on or before September 11, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-13726 Filed 8-18-06; 8:45 am]
BILLING CODE 8010-01-P