[Federal Register Volume 72, Number 155 (Monday, August 13, 2007)]
[Notices]
[Pages 45290-45293]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-15724]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56209; File No. SR-NYSE-2007-65]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Rule 79A.30 (Miscellaneous Requirements on Stock Market 
Procedures)

August 6, 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 July 24, 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 been substantially prepared by the Exchange. 
The Exchange filed the proposed rule change as a ``non-controversial'' 
proposed rule change pursuant to section 19(b)(3)(A) \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).
    \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 is proposing to amend NYSE Rule 79A.30 to remove the 
requirement to obtain Floor Official approval before trading more than 
one or two dollars away from the last sale. The proposed amendment 
would preserve the requirement in situations: (i) Where such trades are 
initiated by a specialist in connection with certain manual 
transactions when the NYSE market is ``slow''; and (ii) where such 
trades are initiated by the specialist when reaching across the market 
when the market is ``fast.'' The filing also makes certain non-
substantive changes to the language of the rule in order to clarify 
existing provisions and procedures, and conforms the rule to changes in 
Exchange rules made subsequent to the last time NYSE Rule 79A.30 was 
amended.
    The text of the proposed rule change is available at the Exchange, 
the Commission's Public Reference Room, and http://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 received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NYSE has substantially 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 is proposing to amend NYSE Rule 79A.30 to remove the 
requirement that members obtain prior approval from an Exchange Floor 
Official for trades that are more than $1.00 from the last sale when 
such previous sale is under $20.00 per share, or more than $2.00 from 
the last sale when such previous sale is $20.00 per share or more. The 
requirement to obtain approval would continue to apply in situations 
where: (i) The market is ``slow'' \5\ and a proposed trade results from 
a pricing decision by the specialist in connection with such market 
events as, for example, the opening or reopening of trading, the 
resumption of trading after a gapped quotation has been published, the

[[Page 45291]]

resumption of trading in the security following the triggering of a 
Liquidity Replenishment Point[reg] (``LRP''), or when the specialist is 
arranging the closing transaction in a stock; or (ii) the market is 
``fast'' and the specialist as dealer is manually reaching across the 
market.\6\ The Exchange states that the amendment addresses changes in 
the marketplace that have resulted from the implementation of the 
NYSE's Hybrid Market[reg].
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    \5\ For purposes of the rule, the NYSE will be considered to be 
a slow market when displaying a bid or offer (or both) that is not 
entitled to protection of Rule 611 under Regulation NMS.
    \6\ When reaching across the market to hit the bid or take the 
offer, the specialist must engage the report template in the Display 
Book, ensure that the bid/offer price is correct, enter the amount 
of the specialist interest, and hit the done key.
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    NYSE Rule 79A.30, in its original form, predates the federal 
securities laws. It was initially aimed at preventing undue price 
dislocation by the specialist at the opening but gradually was extended 
to all trades significantly away from the last sale.\7\ This 
requirement had merit in the manual auction market, particularly when 
the market was both more centralized and less transparent than it is 
today, but as the market has evolved toward decentralized and 
transparent trading, the rule has lost some of its original purpose and 
utility.
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    \7\ The rule was extended in 1945 to all transactions more than 
$2.00 from the last sale, and, in 1970, to groups of related 
transactions that would move the stock price more than $2.00. The 
$1.00 parameter for stocks trading under $20.00 per share was added 
in 1979.
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    For example, the rule functioned in part as a safeguard against 
market manipulation by specialists and brokers, and also controlled 
price volatility, by requiring a Floor Official who was not party to 
the transaction to review and approve all proposed transactions that 
exceeded the rule's parameters before they were published to the 
consolidated tape. This ensured that specialists were maintaining 
appropriate price continuity and depth, and that Floor brokers were not 
transacting in the Crowd at unduly wide variations from the last sale.
    As a result of changes in the market in recent years, particularly 
the decentralization of control of pricing decisions away from the 
specialist and Floor broker, and the greater availability to all market 
participants of timely trade and quote information, the Exchange 
believes that NYSE Rule 79A.30 is no longer either necessary or viable 
in its present form. In particular, since the implementation of Phase 
III of the NYSE Hybrid Market[supreg], the Exchange has observed that 
the process of obtaining prior Floor Official approval for transactions 
one or two points away from the last sale does not add meaningful value 
in the context of electronic trading, for two reasons: (i) Automated 
quoting and the entry of orders for automatic execution do not permit 
time for the involvement of Floor Officials before automated executions 
occur; and (ii) the greater availability of information in the market 
obviates much of the protection that such approval was designed to 
provide, in any event.\8\
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    \8\ Notwithstanding this, NYSE Regulation has continued 
conducting Rule 79A.30 surveillance, identifying situations where 
the one or two point parameter was exceeded without Floor Official 
approval. The NYSE has observed that many of the exceptions 
generated relate to the automated execution of electronic interest 
where it would not have been possible for the individual violating 
the rule to have sought approval for the transaction because either 
they entered their order from off the floor, or from on the floor 
but at a distance from the point of sale.
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    Regarding the time required to obtain approval, the Exchange notes 
that requiring Floor Official approval for automated trades would, in 
effect, turn fast markets slow while a specialist or Floor broker 
requested approval and a Floor Official considered the request. This 
delay could impact the ability of a market participant to receive the 
best execution possible.
    At the same time, the Exchange believes that there is less need for 
such approval in the modern market because of the wide commercial 
availability of real-time trading data, through such products as NYSE 
Open Book[supreg] \9\ and similar products provided by other market 
centers that trade NYSE-listed securities (e.g., NYSE Arca, the Nasdaq 
Market Center, and BATS). Before such tools existed, a party entering 
an order that might trade outside the one or two point parameter had 
little or no direct way to evaluate the likely price impact of such an 
order. Consequently, the rule provided for a Floor Official to certify 
that the price movement was warranted from his or her neutral 
perspective (that is, based upon information available to the Floor 
Official but not necessarily to the party entering or representing the 
order in question). In contrast, in electronic markets there is 
significantly more information available in near real-time, and so 
customers engaging in electronic trading can more readily assess the 
impact of their actions before they enter an order for automatic 
execution or representation on the Floor, and can adjust their actions 
as necessary.
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    \9\ NYSE Open Book is provided by the NYSE to vendors in two 
modes. The first displays the depth of the market refreshed every 
five seconds. The second displays the depth of the market in real 
time. The monthly subscription price of the former is $50, and the 
monthly subscription price of the latter is $60. NYSE Open Book 
discloses limit order interest at the price at the best bid and 
offer and at prices below the best bid and above the best offer. It 
does not include broker reserve interest, convert and parity orders 
(``CAP orders''), or stop orders.
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    The Exchange reaches the same conclusion with respect to manual 
auction market trading in the Crowd between brokers or between the 
specialist and a broker. This is both because of the improved, widely-
available real-time market information noted above and because in such 
situations, the transactions are ultimately subject to the business 
scrutiny of the upstairs trader who entered the order and who generally 
has access to the same information as the broker or specialist and 
therefore can determine the appropriateness (or inappropriateness) of 
the pricing decision. The Exchange believes that this business scrutiny 
has added teeth as well, since the upstairs customer who believes the 
price variation was unreasonable could demand price adjustment in the 
form of a difference check \10\ or, where the specialist is the agent, 
could refuse the execution altogether.\11\
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    \10\ See Exchange Rule 134(d).20.
    \11\ See Exchange Rule 91 and Supplementary Materials.
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    Notwithstanding this general conclusion, the Exchange believes that 
the restrictions in NYSE Rule 79A.30 continue to be useful in certain 
situations including: (i) Where the market is slow and the specialist 
is making a unilateral pricing decision not on an agency basis (e.g., 
at openings, reopenings and the close; when the quotation has been 
gapped; and when an LRP has been reached and the market is locked or 
crossed and the specialist trades out of the situation); and (ii) when 
the market is fast and the specialist as dealer is reaching across the 
market. The Exchange believes that in these situations, there is 
continuing merit in requiring Floor Official approval for trades that 
are more than $1.00 from the last sale when such previous sale is under 
$20.00 per share, or more than $2.00 from the last sale when such 
previous sale is $20.00 per share or more, since independent evaluation 
and prior approval by a Floor Official of such pricing decisions will 
ensure that specialists continue to make fair and orderly markets in 
situations where a significant imbalance between supply and demand is 
being addressed.
    The Exchange notes in addition that the proposed rule change would 
shift the timing of the approval. Whereas currently Floor Official 
approval may be obtained after the trade takes place but before it is 
published to the consolidated tape, the proposed rule change would 
require that the specialist

[[Page 45292]]

obtain approval prior to transactions. The Exchange believes this shift 
is consistent with the underlying concern in the rule of ensuring that 
there are not undue price dislocations in a stock.
    The Exchange also notes that its proposal to remove the requirement 
of prior Floor Official approval for most trading as specified under 
Rule 79A.30 would remove a restriction on the Exchange that does not 
exist for other automated market centers, thus removing the current 
undue competitive restraint that application of the rule to automated 
trading on the Exchange implies, but would retain certain benefits of 
the existing rule.
    In connection with the substantive amendment, the Exchange is 
proposing to make certain additional conforming amendments to Rule 
79A.30. Among other things, the Exchange is proposing to delete the 
last two paragraphs in the rule, which address situations where a Floor 
broker is driving the price change in an effort to execute block size 
interest. Since the proposed amendment would permit such trading 
without Floor Official approval, the Exchange believes that the 
language in the two paragraphs is no longer necessary.
    The Exchange further proposes to amend Rule 79A.30 to clarify that 
prior Floor Official for one- and two-point sales as required under the 
proposed amendment would continue not to apply to inactively traded 
stocks.\12\ The current text of Rule 79A.30 on its face applies only to 
``stocks at the active Posts,'' which is an anachronistic reference to 
inactively-traded stocks. It derived from the fact that stocks that 
were very inactively traded used to be handled at the Exchange Floor's 
Post 30, often referred to as the ``inactive Post.'' Some years ago, 
these very thinly traded securities were moved to a Panel at one of the 
active Posts, and so the reference in the rule to ``active Posts'' 
became unclear. Accordingly, the proposed amendment would delete the 
reference to ``active posts'' and would insert language that clearly 
states that neither paragraph (a) nor (b) of the proposed amendment 
applies to inactively traded securities. The Exchange states that this 
would not effect a substantive change to the current rule.
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    \12\ For the period January 1 through May 31, 2007, 181 thinly 
traded or inactive securities traded at Post 4 Panels L, M, and N 
and include 96 nonconvertible preferred stocks (61 one hundred-share 
units and 35 ten-share units) and 85 structured products. As to 
their trading characteristics, these 181 inactive securities had an 
average of six and a half million shares outstanding (the minimum 
was 1,600 shares, the median was 11.4 million shares, and the 
maximum was 81 million shares) and an average daily trading volume 
of 4,000 shares (the minimum was 3 shares, the median was 4,000 
shares, and the maximum was 44,100 shares).
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    The Exchange further proposes to delete the reference to NYSE Rule 
123A.40 in paragraph (a) of the rule. Rule 123A.40, which governs the 
handling of stop orders, was amended in relation to the Hybrid Market. 
In the Hybrid Market, specialists no longer see accumulating stop order 
volume and the related electing process and are, therefore, not 
responsible for manually processing elected stop orders. Instead, an 
elected stop order becomes a market order upon election and is eligible 
for automated execution without Floor Official approval. Accordingly, 
the Exchange believes that the reference to Rule 123A.40 in Rule 79A.30 
is outdated and should be deleted.
    Finally, with respect to paragraph (c) of the rule, which governs 
the requirements for reporting a one or two point sale to the 
consolidated tape, the Exchange believes that the requirement to report 
a one or two point sale as ``sold'' would be rendered moot by the 
proposed amendment. Those markers are intended to signal to the market 
that a trade was reported to the consolidated tape late and out of 
sequence with subsequent trades. Since, as proposed for amendment, the 
rule would require that Floor Official approval be obtained before a 
trade outside the parameters of the rule is effected, there would no 
longer be a lag time between the execution of a one and two point sale 
and the related report to the consolidated tape. Accordingly, one and 
two point sales that occur after the Opening would no longer need to be 
reported to the consolidated tape as late to the consolidated tape and 
out of sequence, unless the report to the consolidated tape was 
accidentally not made at the time of execution. The NYSE notes that one 
and two point sales which occur on the Opening would continue to be 
marked ``OPD,'' which means ``opened.''
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\13\ in general, and furthers the 
objectives of section 6(b)(5) of the Act,\14\ in particular, because 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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    \13\ 15 U.S.C. 78f(b).
    \14\ 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 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 Exchange has designated the proposed rule change as one 
that does not: (i) Significantly affect the protection of investors or 
the public interest; (ii) impose any significant burden on competition; 
or (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 
\15\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing.\17\ 
However, Rule 19b-4(f)(6)(iii) 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 pre-filing requirement of Rule 19b-4(f)6)(iii). In addition, the 
Exchange has requested that the Commission waive the 30-day operative 
delay and designate the proposed rule change operative upon filing. 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 remove an impediment to Hybrid 
Market trading without delay. Therefore, the Commission designates the 
proposal operative upon filing.\18\
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    \17\ 17 CFR 240.19b-4(f)(6)(iii).
    \18\ For purposes only of waiving the operative delay of this 
proposal, 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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    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

[[Page 45293]]

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-2007-65 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-2007-65. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. 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-2007-65 and should be 
submitted on or before September 4, 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. E7-15724 Filed 8-10-07; 8:45 am]
BILLING CODE 8010-01-P