[Federal Register Volume 72, Number 104 (Thursday, May 31, 2007)]
[Notices]
[Pages 30410-30413]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-10404]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55804; File No. SR-NYSE-2007-21]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto 
Relating to Rule 92 (Limitations on Members' Trading Because of 
Customers' Orders)

May 23, 2007.
    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 February 23, 2007, 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 substantially prepared by NYSE. On 
May 22, 2007, NYSE submitted Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NYSE proposes to amend Rule 92 to permit, among other things, 
members or member organizations to trade ahead of a customer order if 
the purpose of the proprietary order is to execute, on a riskless 
principal basis, another order from a customer and to expand the 
consent provisions for trading along under Rule 92(b). The text of the 
proposed rule change is available at NYSE, the Commission's Public 
Reference Room, and www.nyse.com.

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 had 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 proposes to amend NYSE Rule 92 in order to permit 
member organizations to combine multiple orders into a single order and 
to route the order to the Display Book[supreg] for execution on a 
riskless principal basis via Exchange execution systems. In addition, 
the Exchange proposes to change the notification and consent provision 
of Rule 92(b) to permit customers to provide affirmative blanket 
consent, subject to certain requirements, rather than the current 
requirement that members and member organizations obtain and document 
consent for members to trade along with customer orders on an order-by-
order basis. Finally, the Exchange proposes adding an additional 
exemption to Rule 92 to permit a member organization in certain 
situations to enter Regulation NMS (``Reg. NMS'') intermarket sweep 
orders at the Exchange, subject to certain conditions, including that 
the firm yield its principal executions to any open customer orders 
that are required to be protected by Rule 92. The Exchange proposes 
these changes to harmonize Rule 92 with similar rules of the NASD and 
to address the changes to the marketplace because of the implementation 
of NYSE's Hybrid Market and Reg. NMS.

[[Page 30411]]

Riskless Principal Transactions
    NYSE Rule 92 generally prohibits members or member organizations 
from trading on a proprietary basis ahead of, or along with, customer 
orders that are executable at the same price as the proprietary 
order.\4\ The rule contains several exceptions that make it permissible 
for a member or member organization to enter a proprietary order while 
representing a customer order that could be executed at the same price, 
so long as it is not for an account of an individual investor and the 
customer has provided express permission (referred to herein as a 
``Rule 92(b) proprietary order'').\5\
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    \4\ For the purposes of this rule filing and NYSE Rule 92, the 
terms proprietary order and principal order have the same meaning.
    \5\ In general, these are transactions in which the member or 
member organization is: (1) Liquidating a position held in a 
proprietary facilitation account and the customer's order is for 
10,000 shares or more; (2) creating a bona fide hedge; (3) modifying 
an existing hedge; or (4) engaging in a bona fide arbitrage or risk 
arbitrage transaction.
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    The Exchange's proposed amendment would add a new subsection to 
Rule 92 that would permit riskless transactions for the purpose of 
facilitating the execution, on a riskless principal basis, of one or 
more customer orders. The proposed rule defines a riskless principal 
transaction as one in which a member or member organization, after 
having received one or more orders to buy (sell) a security, purchases 
(sells) the security as principal at the same price to satisfy the 
order(s) to buy (sell). Under the rule, the member would be required to 
give the customer the same price it received, exclusive of any markup 
or markdown, commission or commission equivalent, or other fee.
    The proposed amendment seeks to harmonize the rules of NYSE with 
similar rules of the NASD, in particular, the NASD's so-called Manning 
Rule, which permits riskless principal orders as an exception to the 
rule prohibiting trading ahead of customer market and limit orders on 
the NASDAQ market.\6\ The Manning Rule is an interpretation of NASD 
customer protection rules, which, like NYSE Rule 92, generally prohibit 
firms from executing proprietary orders ahead of customer orders that 
could be executed at the same price. The Exchange states that the 
Manning exception was adopted to permit NASD broker/dealers to manage 
their order flow more efficiently; instead of executing a group of like 
customer orders individually, the rule permits market makers to 
aggregate like customer orders, execute a single trade as principal in 
the market in place of those orders, and then allocate shares back to 
the customers within 60 seconds of receiving a report on the riskless 
principal trade and at the same price as the riskless principal trade, 
exclusive of any markup or markdown, commission or commission 
equivalent, or other fee. Currently, NYSE has no equivalent exception 
to Rule 92 to permit more efficient riskless principal trading on NYSE. 
The proposed amendment adapts the riskless principal requirements of 
the Manning Rule described above, and integrates those requirements 
into the existing requirements of NYSE Rule 92, as follows.
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    \6\ See NASD Rule 2111 and IM-2110-2.
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    The Exchange proposes adopting the underlying order requirements of 
the Manning Rule for riskless principal transactions at the Exchange. 
Accordingly, the Exchange proposes that a riskless principal 
transaction can be effected on behalf of any customer order, regardless 
of whether from an institutional account or an individual investor. The 
Exchange believes that adopting the riskless principal transaction 
requirements of the Manning Rule will ensure that the marketplace will 
run efficiently and will enable member organizations to both comply 
with their Reg. NMS requirements and meet best execution requirements 
for customers.
    Further requirements for proposed riskless principal transactions 
include that the receipt time reference for the underlying order would 
have to be before the execution report time reference of the riskless 
principal transaction. Within 60 seconds of receiving an execution 
report from NYSE on the riskless principal transaction, members or 
member organizations would be required to allocate to the accounts 
represented in the riskless principal transaction the same price at 
which the order was executed on NYSE, exclusive of any markup or 
markdown, commission equivalent, or other fee.
    In addition, under the proposed amendment, firms would be permitted 
to aggregate only orders whose order types and instructions (including 
tick restrictions) permit such aggregation. The Exchange believes that 
such aggregating meets the standards set forth in the Commission's July 
18, 2005 letter to the Securities Industry Association (``SIA''),\7\ in 
which the Commission granted a riskless principal exemption from Rule 
10a-1 under the Act to permit a broker-dealer to fill customer orders 
without complying with the ``tick'' provisions of the Rule, in certain 
situations and subject to certain conditions, as set forth in the 
letter.
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    \7\See letter to Ira Hammerman, Senior Vice President and 
General Counsel, SIA, from James A. Brigagliano, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated July 
18, 2005 (available at www.sec.gov/divisions/marketreg/mr-noaction/sia071805.htm).
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    Firms would need to disclose to customers the method by which the 
firm would allocate the shares bought or sold in the riskless principal 
transaction (e.g., strict time priority, precedence based on size, 
etc.), and would be required to allocate shares in accordance with that 
method. Such method must be fair and reasonable, be consistently 
applied, and not unfairly discriminate against any particular class of 
accounts or types of orders. The Exchange would not require a specific 
allocation methodology, but would require that the chosen method be 
adequately disclosed to customers and be consistent with rules 
governing parity of orders.
    The Exchange would require member organizations to keep certain 
books and records in connection with riskless principal transactions. 
In particular, when executing riskless principal transactions, firms 
would be required to submit order execution reports to the Exchange's 
Front End Systemic Capture database linking the execution of the 
riskless principal order on the Exchange to the specific underlying 
orders. The information that will be provided must be sufficient for 
both member firms and the Exchange to reconstruct in a time-sequenced 
manner all orders, including allocations to the underlying orders, with 
respect to which a member organization is claiming the riskless 
principal exception.
    As with the Manning Rule, in allocating riskless principal 
transactions, if the riskless principal transaction includes Rule 92(b) 
proprietary orders, orders from customers that have consented to trade 
along with Rule 92(b) proprietary orders, and orders from customers 
that either have not or cannot consent (for example, an individual 
investor with an order of less than 10,000 shares) to the member firm 
trading along with those orders, the Rule 92(b) proprietary orders and 
any customer orders that have consented to trading along with such 
proprietary orders must yield to the non-consenting customer orders.
Customer Consent Under Rule 92(b)
    The Exchange further proposes amending the requirements surrounding 
the obtaining of customer consent to trade along with customer not-held 
orders. Under current Rule 92(b), the Exchange requires that a customer 
provide express permission, including an understanding of the relative 
price

[[Page 30412]]

and size of allocated execution reports, before permitting execution of 
one of the specified proprietary orders under that rule that could be 
executed at the same price as the customer's order. The Exchange has 
interpreted this provision to require that consent to trade along be 
obtained and documented on an order-by-order basis.
    As the Exchange has transitioned to the Hybrid Market, with its 
greater prevalence of automated executions and rapid pace of order 
execution, and with the implementation of Reg. NMS, the Exchange has 
concluded that the current order-by-order consent rule and attendant 
documentation requirements have become outmoded and can operate to 
impede market efficiencies. Moreover, the order-by-order consent 
requirement for trading along in Rule 92 is inconsistent with other 
similar situations where firms are permitted to obtain a general or 
``blanket'' approval to trade along with not-held customer orders, 
provided they are accompanied by appropriate disclosures.\8\
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    \8\ See, e.g., Information Memo 05-52 (requiring member firms to 
provide periodic affirmative notice regarding their practice in 
trading for their proprietary accounts while in possession of 
customer VWAP orders); see also Information Memo 05-81 (deeming 
customers to consent to their Floor brokers' decision to permit a 
specialist to trade on parity with their orders, provided that the 
Floor broker has adequately disclosed to the customer as to the 
broker's regular practice in this regard).
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    The Exchange accordingly is proposing to modify the consent 
requirement of NYSE Rule 92(b) to eliminate the order-by-order consent 
and instead provide that customers may give ``blanket'' affirmative 
written consent for a member firm to trade along provided that: (i) the 
customer has received adequate prior affirmative notice of the fact 
that the member or member organization may trade along with its orders, 
including a disclosure of the method by which the member organization 
will allocate shares to the customer's order and a disclosure relating 
to the allocation methodology for riskless principal transactions that 
include both a Rule 92(b) proprietary order and an order from a 
customer that has not consented to trade along with a Rule 92(b) 
proprietary order; (ii) the customer affirmatively consents prior to 
such trading by the member or member organization; and (iii) the member 
or member organization's trading along is permitted under one of the 
exceptions contained in NYSE Rule 92.
    The Exchange believes that this proposed consent requirement would 
provide the same level of investor protection as the current consent 
requirement because both standards require disclosures and consent 
before a member organization can enter a Rule 92(b) proprietary order. 
However, by eliminating the order-by-order consent, the Exchange 
believes that the proposed consent requirement would reduce the burden 
associated with obtaining consent in advance of each transaction, thus 
permitting member organizations to trade in the faster environment of 
today's marketplace without having to pause before each trade to obtain 
consent.
    The Exchange proposes that member organizations can document such 
affirmative consent either by (i) a signed writing from the customer 
that acknowledges the disclosures, including that a customer can opt-
out on an order-by-order basis, and provides consent; or (ii) 
documenting consent that was provided orally, provided that written 
disclosures were provided to the customer before obtaining the oral 
consent and the member organization provides written notice to the 
customer documenting that oral consent. Once a customer has provided 
affirmative written consent and so long as firms continue to provide 
written disclosures on a periodic basis, member organizations will not 
need to renew such affirmative consent.
    The Exchange further proposes expanding the class of investors that 
may consent to a Rule 92(b) proprietary order. Under the Manning Rule, 
the NASD permits customers that meet the NASD's definition of an 
institutional account and individual customers with orders of 10,000 
shares or more, unless such orders are less than $100,000 in value, to 
consent to trade along with a member's proprietary order. In contrast, 
the current Rule 92 bars both individual investors and institutional 
investors with orders of less than 10,000 shares from consenting to a 
member or member organization from trading along with their orders. To 
harmonize this portion of the rules, the Exchange proposes amending the 
class of investors that can consent to a member or member organization 
trading along with a customer order to include all institutional 
investors, regardless of the size of the order, and individual 
investors with orders of 10,000 shares or more, unless such orders are 
less than $100,000 in value. To ensure consistency, the Exchange 
proposes to incorporate, for purposes of Rule 92 only, NASD's 
definition of an ``institutional account,'' \9\ and therefore proposes 
adding that definition to the supplementary material to Rule 92.
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    \9\ See NASD Rule 3110(c)(4).
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    Customers would retain the ability to ``opt-out'' on a trade-by-
trade basis or to modify the instructions obtained under blanket 
consent, since the customer always has the option to submit an order 
with an instruction that the member or member organization not trade 
along or alter the terms for trading along with the order. The Exchange 
would require members and member organizations to periodically disclose 
this to customers as well.
    Once a customer provides such ``blanket'' consent, a member or 
member organization may trade on a proprietary basis along with a 
customer order that is executable at the same price as a proprietary 
order that meets the exceptions set forth in Rule 92(b). A member or 
member organization may seek to include a Rule 92(b) proprietary order 
with a proposed Rule 92(c) riskless principal order. In such case, even 
though a single order is transmitted to the Exchange, the order would 
include both riskless and risk elements, and therefore would no longer 
be a pure riskless principal transaction. For purposes of parity, 
Exchange systems will recognize the riskless principal order as an 
agency order, regardless of whether the order includes any Rule 92(b) 
proprietary orders. However, when allocating the underlying orders, 
Rule 92(b) proprietary orders and any customer orders that have 
consented to the Rule 92(b) proprietary orders must yield to customer 
orders that have not or cannot consent to a Rule 92(b) proprietary 
order. This allocation methodology must be disclosed to customers that 
consent to trade along with Rule 92(b) proprietary orders. If the 
riskless principal transaction represents only agency orders and does 
not include any proprietary orders, regular allocation of the 
underlying orders would apply.
Exemption for Reg. NMS-Compliant Intermarket Sweep Orders
    The Exchange also proposes amending Rule 92 to add an exemption so 
that, when facilitating a customer order that would otherwise require 
the firm to either violate Rule 92 or trade through protected 
quotations, member organizations can comply with their Reg. NMS 
obligation without also violating Rule 92. Under the current rule, if a 
member organization is required to route intermarket sweep orders as 
principal to execute against the full displayed size of any protected 
quotation in a security (``ISO''), for example, when facilitating a 
customer order at a price inferior to the national best bid or offer or 
other protected quotations and in compliance with

[[Page 30413]]

Rules 600(b)(30)(ii) and 611(b)(6) of Reg. NMS,\10\ the ISO could 
violate Rule 92 by trading ahead of or along with open customer orders.
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    \10\ 17 CFR 242.600(b)(30)(ii) and 17 CFR 242.611(b)(6).
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    The proposed exemption provides that when routing ISOs, the member 
organization must yield its principal executions to any open customer 
orders that are required to be protected by Rule 92 and capable of 
accepting the fill. As defined in Rule 92(a), customer orders that are 
required to be protected are those open customer orders that are known 
to the member organization before entry of the ISO. In addition, the 
proposed exemption would require that if a firm executes an ISO to 
facilitate a customer order at a price inferior to one or more 
protected quotations, that customer must consent to not receiving the 
better price obtained by the ISO(s) or the firm must yield its 
principal execution to that customer.\11\ For purposes of this 
amendment, the Exchange further proposes adopting the definitions of 
Reg. NMS in connection with the terms ``protected quotation'' and 
``intermarket sweep order.'' \12\
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    \11\ Telephone conversation between Clare F. Saperstein, 
Principal Rule Counsel, Market Surveillance, NYSE, and Theodore S. 
Venuti, Attorney, Division, Commission, on May 23, 2007.
    \12\ See 17 CFR 242.600(b)(7) and (30).
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2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \13\ 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 national market system, and in general, to protect investors 
and the public interest.
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    \13\ 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 
result in 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

    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 NYSE 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-2007-21 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NYSE-2007-21. 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 NYSE. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make publicly available. All submissions should refer to File Number 
SR-NYSE-2007-21 and should be submitted on or before June 21, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-10404 Filed 5-30-07; 8:45 am]
BILLING CODE 8010-01-P