[Federal Register Volume 72, Number 110 (Friday, June 8, 2007)]
[Notices]
[Pages 31868-31871]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-11079]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55852; File No. SR-NYSE-2007-47]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Exchange Rules 103A and 103B

June 4, 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 May 22, 2007, 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

[[Page 31869]]

been substantially prepared by the Exchange. The Exchange has 
designated the proposed rule change as ``non-controversial'' under 
Section 19(b)(3)(A)(iii) \3\ of the Act and Rule 19b-4(f)(6) 
thereunder,\4\ 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)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes a moratorium on the administration of the 
Specialist Performance Evaluation Questionnaire (``SPEQ'') pursuant to 
Exchange rule 103A and the use of the SPEQ pursuant to Rule 103B. In 
addition, the Exchange proposes that the use of SuperDot turnaround for 
orders received (``Order Reports'') and responses to administrative 
messages (``Administrative Responses'') not be used as objective 
measures in the assessment of specialist performance during the 
moratorium. The Exchange further proposes that the SPEQ and Order 
Reports/Administrative Responses no longer serve as criteria for a 
specialist performance improvement action during the moratorium.
    The text of the proposed rule changes 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. The 
text of these statements may be examined at the places specified in 
Item IV below. NYSE 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 an immediate moratorium on the administration 
and use of the SPEQ and Order Reports/Administrative Responses to 
commence on the date of publication in the Federal Register of the 
formal submission of the Rule 19b-4 filing by the NYSE to the 
Commission to amend Exchange Rules 103A and 103B and ending no later 
than December 31, 2007 (``Moratorium''). In addition, the Exchange 
proposes that the use of Order Reports/Administrative Responses not be 
used as objective measures in the assessment of specialist performance 
during the Moratorium pursuant to Exchange Rule 103B or used as 
criteria for a specialist performance improvement action pursuant to 
Exchange Rule 103A.
SPEQ
    Pursuant to Exchange Rule 103A, on a quarterly basis, the Exchange 
distributes a twenty question survey known as the SPEQ to eligible 
Floor brokers \5\ to evaluate specialist performance during the quarter 
immediately prior to the distribution of the SPEQ. Initially, this 
subjective feedback provided critical information to assist the 
Exchange in maintaining the quality of the NYSE market.
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    \5\ The Exchange believed that conscientious participation in 
the SPEQ process was a critical element in the Exchange's program 
for evaluating the overall performance of its specialists. All 
eligible Floor brokers are required to participate in the process 
and evaluate from one to three specialist units each quarter. Floor 
brokers are selected to participate in the SPEQ process based on 
broker badge data submitted in accordance with audit trail 
requirements. Brokers who intentionally fail or refuse to 
participate in the SPEQ process may be subject to disciplinary 
action, including the imposition of a summary fine pursuant to 
Exchange Rule 476A.
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    However, the current SPEQ no longer adequately allows the Floor 
broker to assess the electronic interaction between the specialist and 
the Floor broker. The Hybrid Market provided Floor brokers and 
specialists with electronic trading tools that have resulted in less 
personal and verbal contact between Floor brokers and specialists. 
Currently approximately 90% of the transactions executed on the 
Exchange are done through electronic executions.
    In addition, the dramatic increase in transparency with respect to 
the Display Book through, among other things, Exchange initiatives like 
Exchange OPENBOOKTM \6\ (``OPENBOOK'') has decreased the 
need for the Floor broker to obtain market information verbally from 
the specialist. This increased transparency gives all market 
participants, both on and off the Floor, a greater ability to see and 
react to market changes.
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    \6\ OPENBOOK Online Database is an Exchange online service that 
allows subscribers to view the contents of the specialist book for 
any stock at any given point in the day, or over a period of time. 
Results are returned in an Excel spreadsheet. OPENBOOK Online 
Database is a historical database with data stored online for a 12-
month period.
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    The questions on the SPEQ do not take into account the operation of 
the electronic tools available in the Hybrid Market. The SPEQ does not 
provide Floor brokers with a means to evaluate specialist performance 
under the current market model. As a result of the more electronic 
interaction between Floor brokers and specialists, Floor brokers are 
unable to assess specialist performance using the current SPEQ.
    The questions posed to the Floor brokers on the SPEQ require Floor 
brokers to opine on the specialists' ability to offer single price 
executions and specialists' ability to provide notification to Floor 
brokers of market changes in particular stocks. In the current Hybrid 
Market, specialists are unable to offer single price executions and the 
relative speed of executions makes it virtually impossible for 
specialist to notify brokers of changes in a particular security.
    Given the above, the SPEQ no longer serves as a meaningful measure 
of specialist performance. As such, the Exchange proposes an immediate 
Moratorium on the administration and use of the SPEQ in order to 
provide the Exchange with an opportunity to review its entire 
specialist allocation policy.

Objective Measures

    The Exchange further requests that during the Moratorium, 
allocations of newly listed securities on the Exchange continue to be 
based on the objective measures identified in Exchange Rule 103B,\7\ 
with the exception of SuperDot turnaround for orders received and 
response to administrative messages.
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    \7\ Pursuant to Exchange Rule 103B, specialist dealer 
performance is measured in terms of participation (TTV); 
stabilization; capital utilization, which is the degree to which the 
specialist unit uses its own capital in relation to the total dollar 
value of trading in the unit's stocks; and near neighbor analysis, 
which is a measure of specialist performance and market quality 
comparing performance in a stock to performance of stocks that have 
similar market characteristics. Additional objective measures 
pursuant to Exchange Rule 103B are those measures included in 
Exchange Rule 103A which are: (a) Timeliness of regular openings; 
(b) promptness in seeking Floor official approval of a non-
regulatory delayed opening; (c) timeliness of DOT turnaround; and 
(d) response to administrative messages.
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    As a result of the Hybrid Market, SuperDot turnaround for orders 
received and response to administrative messages no longer provide 
meaningful objective standards to evaluate specialist performance. 
Specifically, in the current more electronic Hybrid Market, orders 
received by Exchange systems that are marketable upon entry are 
eligible to be immediately and

[[Page 31870]]

automatically executed by Exchange systems. As such, SuperDot 
turnaround no longer provides a meaningful objective measure of a 
specialist's performance. The Exchange therefore seeks to remove 
SuperDot turnaround as an objective measure of specialist performance 
during the Moratorium.
    Furthermore, in the current Hybrid Market the Exchange system 
automatically responds to the majority of the administrative messages. 
Today, there are two administrative messages that require a manual 
response from specialists. These are messages that require the 
specialist to provide status information on market orders and stop 
orders. With regard to requests for the status of stop orders, the 
specialists are no longer capable of providing this information. In 
December 2006, following Commission approval,\8\ the Exchange changed 
its stop order handling process. Stop orders are no longer visible to 
the part of the NYSE Display Book[supreg] that the specialist ``sees.'' 
When a transaction on the Exchange results in the election of a stop 
order that had been received prior to such transaction, the elected 
stop order is sent as a market order \9\ to the Display Book and the 
specialist's system employing algorithms where it is handled in the 
same way as any other market order. The specialist therefore is unable 
to provide any information regarding the status of stop orders.
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    \8\ See Securities Exchange Act Release No. 54820 (November 27, 
2006), 71 FR 70824 (December 6, 2006) (SR-NYSE-2006-65).
    \9\ As used herein, the term ``market order'' refers to market 
orders that are not designated as ``auction market orders.''
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    Currently, market orders are eligible to receive immediate and 
automatic execution on the Exchange. The immediate and automatic 
execution of market orders eliminates the need for the specialists to 
respond to the administrative request for the status of market orders. 
In practice, a customer that submits a market order will likely receive 
a report of execution before the administrative message requesting the 
status of the market order has been printed and read by the specialist.
    The Exchange anticipates that this change will have a minimal 
impact on its customers. In the past few years, the average number of 
administrative messages received on a daily basis has steadily 
declined. The Exchange believes that immediate and automatic execution 
of orders will virtually eliminate administrative messages that require 
a manual response from a specialist. As a result, a specialist's 
ability to respond to administrative messages no longer provides a 
meaningful measure of specialists' performance during the Moratorium. 
The Exchange therefore seeks to remove the response to administrative 
messages as a measure of specialist performance during the Moratorium.
    Given that SuperDot turnaround and responses to administrative 
messages no longer provide significant objective measures of 
specialists' performance in the Hybrid Market, the Exchange seeks to 
suspend the use of both measures as criteria used to access 
specialists' performance during the Moratorium.

Performance Improvement Actions

    Similarly, during the Moratorium, the Exchange seeks to suspend the 
use of the SPEQ and Order Reports/Administrative Reports as criteria 
for the implementation of a performance improvement action pursuant to 
Exchange Rule 103A. Exchange Rule 103A(b) provides that:

    The Market Performance Committee shall initiate a Performance 
Improvement Action (except in highly unusual or extenuating 
circumstances, involving factors beyond the control of a particular 
specialist unit, as determined by formal vote of the Committee) in 
any case where a specialist unit's performance falls below such 
standards as are specified in the Supplementary Material to this 
rule. The objective of a Performance Improvement Action shall be to 
improve a specialist unit's performance where the unit has exhibited 
one or more significant weaknesses, or has exhibited an overall 
pattern of weak performance that indicates the need for general 
improvement.

    The SPEQ and Order Reports/Administrative Reports are two criteria 
included in the standards specified in Exchange Rule 103A Supplementary 
Material. Given that SPEQ and Order Reports/Administrative Reports no 
longer provide significant objective measures of specialists' 
performance in the Hybrid Market, the Exchange seeks to suspend the use 
of both measures as criteria for the implementation of a performance 
improvement action during the Moratorium.

Creation of a New Process

    During the Moratorium, the Exchange will analyze how specialists 
function in the Hybrid market in order to determine which objective 
standards accurately assess and measure the specialists' performance of 
its market-making function. Using newly identified objective measures, 
the Exchange will formally submit a proposal to the Commission, no 
later than August 1, 2007, to amend Exchange rules that govern the 
allocation of securities to specialist firms and other related rules.
    The Exchange believes that the use of objective measures will 
provide for a more significant comparison of specialist performance. It 
is anticipated that the use of more objective and detailed measures 
will promote healthy competition between specialists firms and 
ultimately result in better market-making for Exchange customers.
2. Statutory Basis
    The Exchange believes that the basis under the Act for this 
proposed rule change is the requirement under Section 6(b)(5) \10\ that 
an Exchange have rules that are designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest. The proposed 
rule change also is designed to support the principles of Section 
11A(a)(1) \11\ 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)(5).
    \11\ 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 would 
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 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) become operative for 30 
days after the date of filing, or such shorter time as the Commission 
may designate if consistent with the protection of investors and the 
public interest, the proposed rule change has become effective pursuant 
to Section 19(b)(3)(A) of the Act \12\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become

[[Page 31871]]

operative prior to 30 days after the date of filing.\14\ However, Rule 
19b-4(f)(6)(iii) \15\ 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 satisfied the five-day prefiling 
requirement.\16\ In addition, the Exchange has requested that the 
Commission waive the 30-day pre-operative delay and designate the 
proposed rule change to become operative upon filing.
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    \14\ 17 CFR 240.19b-4(f)(6)(iii).
    \15\ Id.
    \16\ Id.
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because it would allow the Exchange to immediately implement this 
proposal and thus the Exchange would not need to rely on factors that 
no longer provide significant objective measures of specialists' 
performance in the Hybrid Market. The Commission notes that the 
Exchange expects to file a proposed rule change under Section 19(b) of 
the Act \17\ by August 1, 2007, which would amend Exchange rules that 
govern the allocation of securities to specialist firms and other 
related rules. The Commission designates the proposal to become 
effective and operative upon filing.\18\
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    \17\ 15 U.S.C. 78s(b).
    \18\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the impact of the proposed rule on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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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 the furtherance of the purposes of the Act.

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-2007-47 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-2007-47. 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 available publicly. All submissions should refer to File Number 
SR-NYSE-2007-47 and should be submitted on or before June 29, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-11079 Filed 6-7-07; 8:45 am]
BILLING CODE 8010-01-P