[Federal Register Volume 72, Number 114 (Thursday, June 14, 2007)]
[Notices]
[Pages 32927-32929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-11442]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55883]


Order Exempting Certain Print Protection Transactions From Rule 
611 of Regulation NMS Under the Securities Exchange Act of 1934

June 8, 2007.

I. Introduction

    Pursuant to Rule 611(d) \1\ of Regulation NMS \2\ under the 
Securities Exchange Act of 1934 (``Exchange Act''), the Securities and 
Exchange Commission (``Commission''), by order, may exempt from the 
provisions of Rule

[[Page 32928]]

611 of Regulation NMS (``Rule 611'' or ``Rule''), either 
unconditionally or on specified terms and conditions, any person, 
security, transaction, quotation, or order, or any class or classes of 
persons, securities, quotations, or orders, if the Commission 
determines that such exemption is necessary or appropriate in the 
public interest, and is consistent with the protection of investors.\3\ 
As discussed below, the Commission is exempting from Rule 611(a) 
certain transactions that offer print protection to displayed customer 
orders when trades are reported at prices inferior to such orders. The 
exemption is designed to promote efficiency and the best execution of 
investor orders by allowing trading centers to offer beneficial 
executions to their customers that have offered liquidity that is 
immediately and automatically accessible in the public markets, without 
the trading centers incurring additional costs to meet the requirements 
of Rule 611(a).
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    \1\ 17 CFR 242.611(d).
    \2\ 17 CFR 242.600 et seq.
    \3\ See also 15 U.S.C. 78mm(a)(1) (providing general authority 
for the Commission to grant exemptions from provisions of the 
Exchange Act and rules thereunder).
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II. Background

    The Commission adopted Regulation NMS in June 2005.\4\ Rule 611 
addresses intermarket trade-throughs of displayed quotations in NMS 
stocks. Rule 611(a)(1) requires a trading center to establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to prevent trade-throughs on that trading center of 
protected quotations in NMS stocks that do not fall within an exception 
set forth in the Rule. Rule 611(b)(6) provides an exception for a 
trade-through transaction effected by a trading center that 
simultaneously routes an intermarket sweep order (``ISO'') to execute 
against the full displayed size of any protected quotation in the NMS 
stock that was traded through. Rule 611(b)(5) provides an exception for 
a trade-through transaction that is an execution of an ISO. Finally, 
Rule 611(c) requires that the trading center, broker, or dealer 
responsible for the routing of an ISO take reasonable steps to 
establish that such order meets the definition of an ISO in Rule 
600(b)(30).\5\
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    \4\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
    \5\ 17 CFR 242.600(b)(30).
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    The Trading Committee of the Securities Industry and Financial 
Markets Association (``SIFMA'') has requested that the Commission 
exempt certain print protection transactions from Rule 611(a).\6\ 
According to the SIFMA Exemption Request, print protection is the 
mechanism through which broker-dealers may elect to execute a displayed 
order at a price that is better than a reported trade in the same 
security on a different market.\7\ The ability of broker-dealers to 
offer print protection to orders will become more difficult under Rule 
611 when the price of the print protection transaction is inferior to 
one or more protected quotations at the time of execution. The SIFMA 
Exemption Request asserts that, absent an exemption, broker-dealers 
will not be able to provide print protection to orders in these 
circumstances.
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    \6\ Letter to Nancy M. Morris, Secretary, Commission, from Jerry 
O'Connell, Chairman, SIFMA Trading Committee, dated May 1, 2007 
(``SIFMA Exemption Request'').
    \7\ Id. at 2.
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    As an example, the SIFMA Exemption Request supposes that Firm A 
represents an order to buy 1000 shares at $49.90, and it is displayed 
on Automated Trading Center X, which currently shows a top-of-book 
(``TOB'') protected bid of $50 for 1000 shares. Automated Trading 
Center Y shows a TOB protected bid of $49.80 for 1000 shares. A broker-
dealer wants to sell 2000 shares, and it sends an ISO to sweep the TOB 
protected quotes across the automated trading centers. The 1000 shares 
at $50 at Automated Trading Center X are filled, and the 1000 shares at 
$49.80 at Automated Trading Center Y are filled. In contrast, the order 
represented by Firm A and displayed on Automated Trading Center X does 
not receive a fill, even though its $49.90 price is better than the 
$49.80 order executed by Automated Trading Center Y, because the $49.80 
quote was the TOB in Automated Trading Center Y. Firm A wants to 
provide print protection for its customer and execute the displayed 
order but, depending on the new national best protected bid and offer, 
filling the order at $49.90 may violate Rule 611.
    When customer orders contribute to price discovery by being 
displayed in whole or in part, SIFMA believes that broker-dealers 
should be allowed to elect to execute these orders for their customers 
without violating Rule 611.\8\ It asserts that the requested exemption 
will promote greater price discovery in the securities markets by 
encouraging the display of limit orders. The requested exemption would 
be available for a broker-dealer that offers its customers print 
protection to use at the broker-dealers' election, and broker-dealers 
would not be required to provide print protection.
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    \8\ Id. at 4.
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III. Discussion

    The Commission has decided to exempt trading centers from the 
requirement in Rule 611(a) to establish, maintain, and enforce written 
policies and procedures that are reasonably designed to prevent trade-
throughs when the transaction that constituted the trade-through is the 
execution of an order that meets the following terms and conditions 
(``Print Protection Transaction''):
    (1) The order is displayed in whole or in part by an automated 
trading center (as defined in Rule 600(b)(4) of Regulation NMS) that 
directly displays protected quotations (as defined in Rule 600(b)(57) 
of Regulation NMS);
    (2) After the order is displayed, a transaction (``Triggering 
Transaction'') is reported pursuant to a transaction reporting plan (as 
defined in Rule 600(b)(32) of Regulation NMS) at a price that is 
inferior to the price of the displayed order;
    (3) The Triggering Transaction is reported as qualifying for the 
exception for ISOs in paragraphs (b)(5) or (b)(6) of Rule 611;
    (4) The trading center executes the order promptly after the 
Triggering Transaction is reported;
    (5) The contra side of the execution of the order is provided by a 
broker-dealer who has responsibility for the order;
    (6) The size of the transaction does not exceed the total of the 
displayed size and reserve size of the order displayed on the automated 
trading center; and
    (7) The trading center establishes, maintains, and enforces written 
policies and procedures that are reasonably designed to assure 
compliance with the terms of this exemption, and the trading center 
regularly surveils to ascertain the effectiveness of such policies and 
procedures and takes prompt action to remedy deficiencies in them.
    The exemption applies only to the execution of the Print Protection 
Transaction itself. It does not, for example, apply to any trades 
executed by the trading center that are connected with the Print 
Protection Transaction.
    The Commission believes that an exemption for Print Protection 
Transactions will promote efficiency and the best execution of investor 
orders.\9\ The exemption will allow trading centers to execute Print

[[Page 32929]]

Protection Transactions without a requirement to prevent trade-throughs 
of the current protected quotations or to qualify for one of the 
exceptions in Rule 611(b). It thereby will minimize the expense 
incurred by trading centers to offer beneficial transactions to 
customers when such customers have contributed to public price 
discovery by displaying trading interest at a price and offering 
immediately accessible liquidity at such price.
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    \9\ See Exchange Act Section 11A(a)(1)(C)(i) and (iv) (assuring 
efficient execution of securities transactions and the 
practicability of executing investors' orders in the best market are 
two of the primary objectives for the national market system).
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    Promoting the display of customer limit orders and public price 
discovery were primary objectives of Rule 611.\10\ The trade-through 
protection of Rule 611, however, is limited to the best bids and offers 
(``BBOs'') displayed by automated trading centers. The Commission did 
not adopt a proposal to extend trade-through protection to certain 
``depth-of-book'' quotations outside a trading center's BBOs, but noted 
that a number of commenters believed that enhanced order interaction 
with depth-of-book quotations would likely result even if the proposal 
were not adopted.\11\ These commenters asserted that competition and 
best execution responsibilities would lead market participants to 
voluntarily access depth-of-book quotations in addition to quotations 
at BBOs. The Commission noted that such a competition-driven outcome 
would benefit investors and the markets in general.\12\
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    \10\ See, e.g., NMS Adopting Release, 70 FR at 37501.
    \11\ NMS Adopting Release, 70 FR at 37530.
    \12\ Id.
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    Print protection offered by trading centers is an additional 
competition-driven factor that can improve the execution of depth-of-
book quotations and thereby promote price discovery. The Commission 
therefore believes that the exemption is fully consistent with the 
policies of Rule 611. The terms of the exemption are designed to 
achieve this goal. The customer's order must be displayed in whole or 
in part by an automated trading center that displays protected 
quotations. An automated trading center is required to offer immediate 
and automatic access to its displayed quotations, including both the 
displayed size and any reserve (i.e., undisplayed) size of such 
quotations.\13\ The size of a Print Protection Transaction cannot 
exceed the total of the displayed size and reserve size of the 
customer's order. Given that those who seek to trade in large size 
often are unwilling to display the full extent of their trading 
interest because of the risk of causing an adverse price movement, the 
Commission believes it is appropriate to allow Print Protection 
Transactions to protect both displayed size and reserve size of 
customer orders. As a result, customers will be rewarded for displaying 
some of their trading interest at a particular price, while also 
providing immediately available liquidity at such price that is 
undisplayed.\14\ Finally, the trading center must execute the Print 
Protection Transaction promptly after the Triggering Transaction, the 
contra side of the execution of the order must be provided by a broker-
dealer who has responsibility for the order, and the Triggering 
Transaction must be identified as qualifying for the ISO exceptions in 
paragraphs (b)(5) or (b)(6) of Rule 611. These exceptions indicate that 
ISOs were routed to execute against all protected quotations with 
prices superior to the price of the Triggering Transaction, but may not 
have satisfied the full extent of the customer's order. If they did 
not, the trading center will be allowed to offer print protection and 
give the customer's order a beneficial execution.
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    \13\ See Rule 600(b)(4)(i) (automated trading center must be 
capable of displaying automated quotations); Rule 600(b)(3)(ii) 
(automated quotation must be immediately and automatically 
accessible); Regulation NMS Adopting Release, 70 FR at 37534 n. 313 
(automated quotation ``must be immediately and automatically 
accessible up to its full size, which will include both the 
displayed and reserve size of the quotation'').
    \14\ See NMS Adopting Release, 70 FR at 37514 (noting common use 
of ``pinging'' orders--marketable orders with sizes greater than 
displayed size that seek to access both displayed and reserve 
liquidity at automated trading centers).
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    For the foregoing reasons, the Commission finds that granting the 
foregoing exemption is necessary and appropriate in the public 
interest, and is consistent with the protection of investors.

IV. Conclusion

    It is hereby ordered, pursuant to Rule 611(d) of Regulation NMS, 
that trading centers shall be exempt from the requirement in Rule 
611(a) to establish, maintain, and enforce written policies and 
procedures that are reasonably designed to prevent trade-throughs when 
the transaction that constituted the trade-through qualifies as an 
Print Protection Transaction, as defined above.

    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)(82).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-11442 Filed 6-13-07; 8:45 am]
BILLING CODE 8010-01-P