[Federal Register Volume 73, Number 142 (Wednesday, July 23, 2008)]
[Notices]
[Pages 42853-42873]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-16823]
[[Page 42853]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58184; File No. SR-NYSE-2008-46]
Self-Regulatory Organizations; New York Stock Exchange, LLC;
Notice of Filing of Proposed Rule Change, as Modified by Amendment No.
1, To Create a New NYSE Market Model, With Certain Components To
Operate as a One-Year Pilot That Will Provide Market Participants With
Additional Abilities To Post Hidden Liquidity, Phase Out Specialists by
Creating a Designated Market Maker, and Enhance the Speed of Execution
Through Technological Enhancements
July 17, 2008.
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 June 12, 2008, 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, II,
and III below, which Items have been prepared by the Exchange. On July
15, 2008, the Exchange filed Amendment No. 1 to the proposed rule
change. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to establish a new market model (``New
Model'') to: (i) Provide market participants with additional abilities
to post hidden liquidity on Exchange systems; (ii) create a Designated
Market Maker (``DMM''), and phase out the NYSE specialist; and (iii)
enhance the speed of execution through technological enhancements and a
reduction in message traffic between Exchange systems and its DMMs.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NYSE 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. 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
With this rule filing, the Exchange is proposing to transform its
market structure and create the premier venue for price discovery,
liquidity, competitive quotes and price improvement. The instant
proposal is the core filing of a series of rule amendments \3\
submitted by the Exchange designed to move its market structure forward
in a very dynamic and competitive marketplace. For example, in April
2008, the Exchange expanded to all market participants the ability to
enter both displayed and non-displayed (reserve) trading interest in
NYSE's Display Book[supreg] (``Display Book''). Another important
aspect of the New Model will be enhancements to technology that will
greatly increase the speed of execution. The key elements of this
filing are: (1) The Redefinition of the Role of the Specialist and (2)
Priority and Parity.
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\3\ See SR-NYSE-2008-45, filed with the Commission on June 11,
2008 (proposal to amend NYSE Rule 98 to redefine Specialist
Operations at the NYSE); see also e-mail from Deanna G.W. Logan,
Associate General Counsel, NYSE to David Liu, Assistant Director,
Division of Trading and Markets (``Division''), Commission, dated
July 17, 2008 (making clarifying edits) (``July 17th e-mail'').
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Historically, the specialist was responsible for execution of all
orders coming into the Exchange, conducting auctions on the Floor, and
for maintaining an orderly market in assigned securities. To assist in
this function, the specialist had an order-by-order advance ``look'' at
activity in the Display Book. When the Exchange implemented its NYSE
HYBRID MARKET\SM\ (``Hybrid Market''),\4\ Exchange systems assumed the
function of matching and executing orders entered electronically,
although the specialist retained a first ``look'' at incoming orders.
The proposed rules redesign the role of the specialist to reflect more
accurately the market making function in the Hybrid Market environment
by creating a new category of market participant, DMM, and to eliminate
the ``specialist'' category.
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\4\ See Securities Exchange Act Release No. 53539 (March 22,
2006), 71 FR 16353 (March 31, 2006) (SR-NYSE-2004-05).
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In the New Model, DMMs will no longer function (as the specialist
did) as the ``broker-dealer of record'' for every order. The DMM will
not ``hold'' orders. Like specialists today, DMMs will be able to
generate orders through a DMM algorithm that interacts directly with
the Display Book. However, in the New Model, DMMs will be able to
commit additional liquidity in advance to fill incoming orders
(``Capital Commitment Schedule'' or ``CCS''). The CCS will create a
liquidity schedule at various price points where the DMM is willing to
interact with interest and provide price improvement to orders in the
Exchange's system.
The DMM will have affirmative responsibilities to the Exchange's
marketplace (including an obligation to provide quotes at the National
Best Bid and Offer (``NBBO'')). Balancing that equation of increased
market-making capabilities against affirmative responsibilities, the
DMM will be given more freedom to manage trading risks associated with
their responsibilities to the NYSE market.
As part of the redesign of its market, the NYSE proposes to amend
the logic related to share distribution among market participants
having trading interest at a price point upon execution of incoming
orders to create a model that rewards displayed orders that establish
the NYSE's best bid or Exchange best offer (collectively ``Exchange
BBO'' \5\). In the proposed New Model, orders or portions thereof that
establish priority, as more fully described below, will retain that
priority until the portion of the order that established priority is
exhausted. Where no one order has established priority, shares will be
distributed among all market participants on parity.
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\5\ The term ``Exchange BBO'' refers to the best bid or the best
offer on the NYSE. It should not be confused with the defined terms
``national best bid'' and ``national best offer'' as defined in Rule
600(b)(42) of Regulation NMS Rule 242.600(b)(42) under the Act.
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In this filing, the Exchange first describes the market model as it
currently exists and then describes the rules which implement the New
Model and any other required conforming rule amendments.
The NYSE intends to implement these changes in a phased approach
during third and fourth quarters of 2008.
Current Exchange Market
(a) Overview and Background
On March 22, 2006, the Commission approved amendments to Exchange
rules to establish the Hybrid Market. The Hybrid Market integrates in
one marketplace the best of both auction market and electronic trading.
The goal of the Hybrid Market was to combine the benefits of specialist
and Floor broker expertise with the speed,
[[Page 42854]]
certainty, and anonymity of electronic execution. It was designed to
offer maximum choice to customers in how to execute orders, while
preserving traditional trading procedures that historically served to
provide stable, liquid, and less volatile markets.
The Exchange continually reviews the operation of its market,
changes in the behavior of market participants and the general
environment of the securities markets in order to find ways to improve
the quality and competitiveness of its market. As a result of this
review, the Exchange introduced a number of enhancements to its Hybrid
Market aimed at improving the trading experience for market
participants.\6\
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\6\ See generally Securities Exchange Act Release Nos. 56599
(October 2, 2007), 72 FR 57622 (October 10, 2007) (SR-NYSE-2007-93)
(amending NYSE Rules 70 and 104 to reduce the requirement that a
Floor broker and specialist post 1,000 shares of displayed liquidity
at the Exchange best bid or offer in order to use the reserve
function); 56711 (October 26, 2007), 72 FR 62504 (November 5, 2007)
(SR-NYSE-2007-83) (amendment to NYSE Rule 104.10 to extend the
duration of the pilot program applicable to Conditional Transactions
as defined in Rule 104.10 to March 31, 2008 and to remove the active
securities limitation on Conditional Transactions); 56551 (September
27, 2007), 72 FR 56415 (October 3, 2007) (SR-NYSE-2007-82)
(amendments to NYSE Rule 124 to change the way in which the Exchange
prices and executes odd-lot order); 56370 (September 6, 2007), 72 FR
52188 (September 12, 2007) (SR-NYSE-2007-81) (amendment to NYSE Rule
104 to remove required price parameters for a specialist to provide
price improvement to an incoming order); 56209 (August 6, 2007), 72
FR 45290 (August 13, 2007) (SR-NYSE-2007-65) (amendment to 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); 56088 (July 18, 2007), 72 FR 40351 (SR-NYSE-2007-63) (July
24, 2007) (amendment to NYSE Rule 92 to permit specialists to trade
between the hours of 6 p.m. and 9:15 a.m. in any security in which
the specialist is registered, notwithstanding any open customer
orders on the Display Book); 55908 (June 14, 2007), 72 FR 34056
(June 20, 2007) (SR-NYSE-2007-54) (amendments to NYSE Rules 54 and
70 to allow member organizations to operate booth premises on the
Exchange Floor similar to Upstairs offices); 54820 (November 27,
2006), 71 FR 70824 (December 6, 2006) (SR-NYSE-2006-65) (amendment
to clarify certain definitions and systematic processing of certain
orders in the HybridMarket); and 54086 (June 30, 2006), 71 FR 38953
(July 10, 2006) (SR-NYSE-2006-24) (amendment to NYSE Rule 104(d)(i)
to conform the minimum display requirements for reserve interest for
specialists and Floor brokers such that specialists, like Floor
brokers, only be required to provide at least 1,000 shares displayed
interest at the bid and offer in order to have reserve interest on
that side of the quote).
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Today on the Exchange, customers who want execution speed and
certainty, with anonymity, can enter a variety of order types into
Exchange systems that will result in immediate and automatic executions
and/or price improvement for some or all of the order. Alternatively,
customers who value Floor broker expertise in the handling of their
orders can submit orders for execution in the traditional auction
process and/or participate electronically in automatic executions
through Floor broker agency interest files (``e-Quotes''). Specialists
on the Floor, meanwhile, have been given tools with which to offer
additional opportunities for price improvement; these tools include
various targeted quoting or trading messages based on the state of the
specialist's book and the market, including the ability to match better
prices of away market centers. In this way, a customer sending his or
her order to the Exchange today benefits from an expanded experience of
execution opportunities.
(b) Exchange Systems
All orders entered into Exchange systems are maintained in the
Display Book. Autoquote is a part of the Display Book that immediately
displays customer limit orders received on the Exchange.\7\ Autoquote
immediately updates the Exchange BBO when a new order improves the
Exchange quote.\8\ In addition, Autoquote updates the Exchange BBO when
an execution occurs to reflect a new Exchange BBO based on the orders
contained in the Display Book. Pursuant to Exchange Rule 60, Autoquote
is suspended when: (1) The specialist manually reports a block size
transaction that involves orders in the Display Book system; (2) the
specialist gaps the quote; \9\ or (3) when a Liquidity Replenishment
Point (``LRP'') is reached.\10\ When Autoquote is suspended due to a
manual report of a block trade that involves orders in the Display
Book,\11\ Autoquote resumes when the manual reporting is concluded.\12\
When Autoquote is suspended following a gap quote, Autoquote resumes
upon the report of a manual transaction or the publication of a non-
gapped quotation.\13\ When Autoquote is suspended because an LRP has
been reached, it resumes in no more than five seconds after the LRP is
reached.\14\ If the order that triggers the LRP is capable of trading
at a price beyond the LRP price, and would not create a locked or
crossed market if quoted, then Autoquote resumes upon the report of a
manual transaction or the publication of a new quote by the specialist,
but in any event in no more than ten seconds.\15\ Finally, if the order
is capable of trading at a price beyond the LRP price but would create
a locked or crossed market if quoted, then Autoquote would resume upon
a manual transaction or the publication of a new quote by the
specialist.\16\
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\7\ This system was developed to facilitate specialists'
compliance with the Commission's Limit Order Display Rule. See 17
CFR 242.604.
\8\ See NYSE Rule 60(e).
\9\ A specialist could cause a non-auto-executable quote by
gapping the quotation due to an order imbalance in accordance with
the policies and procedures of the Exchange. Gap quotes are used to
signal an imbalance so as to attract contra-side liquidity in an
attempt to mitigate volatility. The size of an imbalance suitable
for gapped quoting is at least 10,000 shares or a quantity of stock
having a value of $200,000 or more, although depending on the
trading characteristics of the security, the appropriate conditions
for gapped quoting could be higher. See NYSE Information Memo 04-27
(June 9, 2004). When the quotation is gapped, automatic executions
and Autoquote would be suspended, and the NYSE quote would be
identified as non-firm. Incoming orders and cancellations update the
Book electronically. Once a trade occurs or a non-gapped quote is
published, Autoquote and automatic execution resume.
\10\ LRPs are pre-determined price points that function as
``speed bumps'' to moderate volatility in a particular security,
improve price continuity, and foster market quality by temporarily
converting the electronic market to an auction market and permitting
new orders, the Crowd, or the specialist, to add liquidity. See also
NYSE Rules 60(e)(i) and 1000(a)(iv).
\11\ See NYSE Rule 1000(a)(v).
\12\ See NYSE Rule 60(e)(ii)(B).
\13\ See NYSE Rule 60(e)(ii)(A).
\14\ See NYSE Rule 60(e)(ii)(C).
\15\ See id.
\16\ See id.
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During the brief moment it takes a specialist to manually report a
transaction in a security, Autoquoting of the highest bid/lowest offer
is suspended in that stock.\17\ In addition, during that same period of
time, automatic executions against the interest that is published in
the NYSE quote at the Exchange BBO (``displayed'') are not
available.\18\ After the specialist has completed the report of the
transaction, Autoquote will resume immediately,\19\ and the NYSE
quotation will similarly again be available for automatic
executions.\20\
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\17\ See NYSE Rule 60(e)(i)(B).
\18\ See NYSE Rule 1000(a)(v).
\19\ See NYSE Rule 60(e)(ii)(B).
\20\ See NYSE Rule 1000(b).
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Currently all orders, except orders entered in securities that the
Exchange has designated as manually traded securities, entered into
Exchange systems \21\ are eligible for automatic and immediate
execution. The maximum order size eligible for automatic execution is
one million shares.
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\21\ There still remain certain securities traded on the
Exchange that are not designated to participate in automatic
execution pursuant to NYSE Rule.
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The Display Book is the Exchange's order execution system for round
lot orders \22\ entered on the Exchange by
[[Page 42855]]
participants. Display Book maintains a separate volume category for
Floor broker's interest, Off-Floor participant's (``Off-Floor'')
interest and specialist's interest.
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\22\ Currently, odd-lot orders do not enter the Exchange's
auction market but are executed systemically by Exchange systems
designated solely for odd-lot orders (the ``odd-lot System''). The
odd-lot System executes all odd-lot orders against the specialist as
the contra party. See NYSE Rule 124.
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Incoming marketable limit orders and market orders automatically
execute to the extent possible at the NBBO and then, if there is
insufficient liquidity available at the bid or offer, the remainder of
the order will execute automatically against available liquidity at
each price point (i.e., below the bid in the case of an order to sell
or above the offer in the case of an order to buy) in one continuous
transaction (``sweep''). The sweep ends when the order has reached its
total cumulative quantity, its limit price or when it hits an
intervening LRP. Posted liquidity, reserve liquidity, convert and
parity (``CAP'') liquidity, and specialist liquidity at each price
point are all liquidity available to execute against an order during a
sweep.
(c) Market Participants
(1) Specialists
A NYSE specialist is a market professional who manages the two-way
auction market trading in the specific securities he or she has been
assigned. He or she works for a specialist unit, which is an
independent company in the business of trading listed securities. The
specialist serves as the ``responsible broker or dealer'' on the
Exchange as that term is defined in Rule 600 of Regulation National
Market System (``Reg. NMS'').\23\ Pursuant to section (a)(2) of Rule
602,\24\ when NYSE Rule 60 was adopted, the specialist responsible for
each security available for quotation on the Exchange was designated as
the responsible broker or dealer.\25\ The specialist as designated
responsible broker or dealer is responsible, with respect to each
reported security, to collect all bids and offers, determine the
highest bid and lowest offer and quote and otherwise communicate to the
quotation vendors the same along with the quotation size for each
security.\26\
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\23\ See 17 CFR 242.600(a)(65)(i), which states that responsible
broker or dealer means, ``when used with respect to bid or offers
communicated on a national securities exchange, any member on such
national securities exchange who communicates to another member on
such national securities exchange, at the location (or locations) or
through the facility or facilities designated by such national
securities exchange for trading in an NMS security a bid or offer
for such NMS security, as either principal or agent; provided,
however, that, in the event two or more members of a national
securities exchange have communicated on or through such national
securities exchange bid or offers for an NMS security at the same
price, each such member shall be considered a responsible broker or
dealer for that bid or offer, subject to the rules of priority and
precedence then in effect on that national securities exchange; and
further provided, that for a bid or offer which is transmitted from
one member of a national securities exchange to another member who
undertakes to represent such bid or offer on such national
securities exchange as agent, only the last member who undertakes to
represent such bid or offer as agent shall be considered the
responsible broker or dealer for that bid or offer. * * *'' See also
NYSE Rule 60.
\24\ See 17 CFR 242.602(a)(2).
\25\ See NYSE Rule 60(a)(2), which provides that the ``term
`responsible broker or dealer' shall mean, with respect to any bid
or offer for any reported security made available by the Exchange to
quotation vendors, the specialist in such reported security, who
shall be the responsible broker or dealer to the extent of the
quotation size he specifies.''
\26\ See NYSE Rule 60(c) and 17 CFR 242.602(b)(1). Today, these
functions are done by the Exchange Autoquote system.
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In addition to being the responsible broker dealer, NYSE Rule 104
governs specialist dealings in the market. Specialists' transactions
for their own account are subject to specific expectations of
performance. These include a specialist's affirmative and negative
obligations. Pursuant to these obligations, specialists have a duty to
ensure that their principal transactions are designed to contribute to
the maintenance of price continuity with reasonable depth.
The affirmative obligation requires a registered specialist to
maintain adequate minimum capital based on his or her registered
securities and use said capital to engage in a course of dealings for
his or her own account to assist in the maintenance, so far as
practicable, of a fair and orderly market.\27\ Thus pursuant to the
affirmative obligations, registered dealers on primary exchanges are
required to commit the dealer's capital in their registered securities
in order to maintain a fair and orderly market.
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\27\ See 17 CFR 240.11b-1.
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The negative obligation, which is part of NYSE Rule 104, requires
that specialists allow public orders to be executed against each other
without undue dealer intervention and that specialists not deal in a
manner that is inconsistent with the overall objective of maintaining a
fair and orderly market. Specifically, NYSE Rule 104(a) provides:
No specialist shall effect on the Exchange purchases or sales of
any security in which such specialist is registered, for any account
in which he, his member organization or any other member, allied
member, or approved person, (unless an exemption with respect to
such approved person is in effect pursuant to Rule 98) in such
organization or officer or employee thereof is directly or
indirectly interested, unless such dealings are reasonably necessary
to permit such specialist to maintain a fair and orderly market, or
to act as an odd-lot dealer in such security.
To assist specialists in meeting their obligations, they have the
ability to manually and systematically place in a separate file
(``specialist interest file'' or ``s-Quotes'') within the Display Book
system their dealer interest at prices at or outside the Exchange
BBO.\28\ Specialists further have the ability to maintain reserve
interest on behalf of their dealer accounts at the Exchange BBO,
provided that they display at least one round lot at that price on the
same side of the market as the reserve.\29\ After an execution against
a specialist's displayed bid (offer), if the specialist has reserve
interest remaining at that bid (offer), the amount of displayed
interest is automatically replenished from the specialist's reserve
interest, if any, so that at least one round lot of specialist interest
is displayed.\30\ Specialist interest at the Exchange BBO is included
in the Exchange quote; displayable specialist interest away from the
Exchange BBO is currently included in NYSE OpenBook[supreg]
(``OpenBook'').\31\
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\28\ See NYSE Rules 104(b)(i) and 104(c)(viii).
\29\ See NYSE Rule 104(d)(i). When discussed herein, the term
``displayable'' shall mean that portion of non-marketable interest
that would be published as, or as part of, the Exchange BBO. The
term ``displayed interest'' includes that part of an order that is
published as, or as part of, the Exchange BBO.
\30\ See NYSE Rule 104(d)(ii).
\31\ OpenBook is a compilation of limit order data for all NYSE
traded securities that the Exchange provides to market data vendors,
broker-dealers, private network providers, and other entities
through a data feed. See Securities Exchange Act Release No. 44138
(December 7, 2001), 66 FR 64895 (December 14, 2001) (SR-NYSE-2001-
42). See also July 17th e-mail, supra note 3.
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Further, in their capacity as dealer for their assigned securities,
specialists maintain systems that use proprietary algorithms, based on
predetermined parameters, to electronically participate in the Exchange
electronic market (``Specialist Algorithm''). The Specialist Algorithm
communicates with the Display Book system via an Exchange-owned
external application programming interface (``API''). The Specialist
Algorithm is intended to replicate electronically some of the
activities specialists are permitted to engage in on the Floor in the
auction market, and to facilitate specialists' ability to fulfill their
obligations to maintain a fair and orderly market.
The Specialist Algorithm receives information via the API,
including information about orders entering NYSE systems, before that
information is
[[Page 42856]]
available to other market participants.\32\ NYSE systems enforce the
proper sequencing of incoming orders and algorithmically-generated
messages.\33\ The Specialist Algorithm and the specialists on the Floor
do not have the ability to affect the arrival of orders at the Display
Book system, or the sequence in which orders and algorithmically-
generated messages are processed by the Display Book system.\34\ The
Specialist Algorithm, however, is able to generate certain specified
quoting and trading messages based on the information it receives
through the API. Once an algorithmic message has been generated, it
cannot be stopped, changed, or cancelled on its way to the Display Book
system.
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\32\ The Specialist Algorithm has access to the following
information: (1) Specialist dealer position; (2) quotes; (3)
information about orders in the Display Book system such as limit
orders, percentage orders (``state of the book''); (4) any publicly
available information the specialist firm chooses to supply to the
algorithm, such as the Consolidated Quote stream; and (5) incoming
orders as they are entering NYSE systems. The Specialist Algorithm
does not have access to: (1) Information identifying the firms
entering orders, customer information, or an order's clearing
broker; (2) floor broker agency interest files or aggregate floor
broker agency interest available at each price; or (3) order
cancellations, except for cancel and replace orders. See NYSE Rule
104(c)(ii).
\33\ See NYSE Rule 104(b)(iii)(A).
\34\ See NYSE Rule 104(b)(iii)(B).
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The Display Book system does not accept algorithmically-generated
messages from the Specialist Algorithm when automatic executions are
unavailable, except in certain specified situations.\35\ Specifically,
when automatic executions are suspended, but Autoquote is active, the
Display Book system accepts algorithmically-generated messages from the
Specialist Algorithm to generate a bid or offer that improves the
Exchange BBO or supplements the size of the existing BBO.\36\
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\35\ See NYSE Rule 104(c)(vi).
\36\ See NYSE Rule 104(c)(vi)(i).
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In addition, when Autoquote and automatic executions are suspended,
the Display Book system: (1) Processes algorithmically-generated
messages to layer specialist interest outside the published Exchange
quotation; and (2) permits specialists to manually layer specialist
interest at prices within a previously established locking or crossing
quotation.\37\
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\37\ See NYSE Rule 104(c)(vi)(ii).
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Display Book does not process algorithmically-generated messages
from the Specialist Algorithm during the time a block size transaction
involving orders in the Display Book system is being manually
reported.\38\ Algorithmically-generated messages are systemically
blocked from creating a locked or crossed market \39\ and would have to
comply with all Commission and NYSE rules, policies and procedures
governing specialist proprietary trading.\40\
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\38\ See NYSE Rule 104(c)(v).
\39\ See NYSE Rule 104(c)(iv).
\40\ See NYSE Rule 104(c)(iii).
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In general, specialists can generate two categories of messages:
quoting messages and trading messages. Quoting messages allow the
Specialist Algorithm to: (1) Supplement the size of the existing
Exchange BBO; (2) place within the Display Book system specialist
reserve interest at the Exchange BBO; \41\ (3) layer within the Display
Book system specialist interest at varying prices outside the Exchange
BBO; (4) establish the Exchange BBO; and (5) withdraw previously
established specialist interest at the Exchange BBO.\42\ Quoting
messages do not interact with the order that preceded it. In addition,
specialists are systemically blocked from generating a quoting message
that moves their quote away from the inside market only until after the
order it is reacting to is processed.
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\41\ See NYSE Rule 104(d).
\42\ See NYSE Rule 104(b)(i)(A)-(E).
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Trading messages allow the specialist to: (1) Provide ``additional
specialist volume'' to partially or completely fill an order at the
Exchange BBO or at a sweep price; (2) match better bids and offers
published by other market centers where automatic executions are
immediately available; (3) provide price improvement to an order,
subject to the conditions outlined below; and (4) trade with the
Exchange published quotation--that is, ``hit bids'' or ``take offers.''
\43\ Trading messages generated in response to an incoming order do not
guarantee that the specialist interacts with that order or that the
specialist has priority in trading with that order.\44\ Specialist
interest may not trade with the order identified by the algorithmic
message because the specialist's message did not arrive at the Display
Book in time or the specialist has to yield to off-Floor orders in
Display Book which cancels the specialist interest.\45\ Moreover, even
when the specialist sets the NBBO and no off-Floor interest is present,
a specialist may still not receive priority because of an intervening
Floor clearing event which causes the specialist to lose priority.\46\
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\43\ See NYSE Rule 104(b)(i)(F)-(I).
\44\ See NYSE Rule 104(c)(i)(C).
\45\ See NYSE Rule 104(c)(i)(D).
\46\ A Floor clearing event is any intervening transaction or an
update of the NYSE quote.
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The Specialist Algorithm further allows the specialists, on behalf
of their dealer accounts, to electronically provide price improvement
to all or part of a marketable incoming order provided the specialist
is represented in a ``meaningful amount'' \47\ in the bid with respect
to price improvement provided to an incoming sell order, or in the
offer with respect to price improvement provided to an incoming buy
order. Price improvement by the specialist benefits the incoming order
and CAP-DI orders \48\ entered on the Exchange because marketable CAP-
DI orders are systemically converted to allow these orders to
participate on parity with the specialist when the specialist is price
improving an incoming order.\49\
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\47\ See NYSE Rule 104(e)(ii) which provides that ``meaningful
amount'' shall constitute at least ten round-lots for the 100 most
active securities on the Exchange, based on average daily volume,
and at least five round-lots for all other securities on the
Exchange. A list of the 100 most active securities on the Exchange
is disseminated quarterly, or more frequently, as determined by the
Exchange. Specialists cannot provide price improvement to an
incoming order that is not marketable (i.e., those orders that would
establish a new best bid or best offer), and the specialist cannot
trade with such an order until the new bid or offer is publicly
disseminated.
\48\ This type of CAP order provides that the elected or
converted portion of the percentage order that is convertible on a
destabilizing tick and designated immediate execution or cancel
election. See NYSE Rules 13 and 123A.30(a).
\49\ See NYSE Rule 123A.30(a)(iii).
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Specialists' messages to trade with the Exchange published quote
must include information that indicates the quote has been publicly
disseminated.\50\ In addition, to ensure that a specialist's
algorithmic message to trade with the Exchange published quotation does
not possess any speed advantage in reaching the Display Book system,
Exchange systems process such messages in a manner that gives
specialists and other market participants a similar opportunity to
trade with the Exchange's published quotation, by delaying the
processing of this type of trading message from the Specialist
Algorithm.\51\
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\50\ See NYSE Rule 104(c)(i)(A).
\51\ See NYSE Rule 104(b)(iii)(B). Based upon the average
transit time from the Common Message Switch (``CMS'') system to the
Display Book system, the Exchange determines the appropriate amount
of time to delay the processing of algorithmic messages to trade
with the Exchange published quotation. The delay parameter is
adjusted periodically to account for changes to the average transit
time resulting from capacity and other upgrades to Exchange systems.
---------------------------------------------------------------------------
In addition to systemic restraints on the specialist's ability to
trade with the published bid and offer, the specialist is required
pursuant to NYSE Rule 104 to re-enter liquidity on the opposite side of
the market when he or she effects a transaction for their own account
to
[[Page 42857]]
establish or increase a position and reaches across the market to trade
as the contra-side to the Exchange published bid or offer
(``Conditional Transaction'').
Conditional Transactions may have additional re-entry obligations
pursuant to the rule. Specifically, pursuant to NYSE Rule
104.10(6)(iii), ``appropriate'' re-entry means ``re-entry on the
opposite side of the market at or before the price participation point
or the `PPP.' '' \52\ Depending on the type of Conditional Transaction,
a specialist's obligation to re-enter may be immediate or subject to
the same re-entry conditions of Non-Conditional Transactions. \53\
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\52\ NSYE Rule 104.10(6)(iii)(a) provides that the PPP
identifies the price at or before which a specialist is expected to
re-enter the market after effecting a Conditional Transaction. PPPs
are only minimum guidelines and compliance with them does not
guarantee that a specialist is meeting its obligations.
\53\ NYSE Rule 104.10(6)(iii)(c) requires immediate re-entry
following a Conditional Transaction that is:
(I) A purchase that (1) reaches across the market to trade with
an Exchange published offer that is above the last differently
priced trade on the Exchange and above the last differently priced
published offer on the Exchange, (2) is 10,000 shares or more or has
a market value of $200,000 or more, and (3) exceeds 50% of the
published offer size.
(II) A sale that (1) reaches across the market to trade with an
Exchange published bid that is below the last differently priced
trade on the Exchange and below the last differently priced
published bid on the Exchange, (2) is 10,000 shares or more or has a
market value of $200,000 or more, and (3) exceeds 50% of the
published bid size.
(III) Each trade at a separate price in a Sweep is viewed as a
transaction with the published bid or offer for the purpose of
subparagraphs (6)(iii)(c)(I) and (6)(iii)(c)(II) above.
---------------------------------------------------------------------------
Pursuant to current NYSE Rule 104.10(6)(iv) Conditional
Transactions that involve:
(a) A specialist's purchase from the Exchange published offer that
is priced above the last differently-priced trade on the Exchange or
above the last differently-priced published offer on the Exchange; and
(b) A specialist's sale to the Exchange published bid that is
priced below the last differently-priced trade on the Exchange or below
the last differently-priced published bid on the Exchange.
(c) Re-entry obligations following transactions defined in
subparagraphs (6)(iv)(a) and (6)(iv)(b) above are the same as for Non-
Conditional Transactions pursuant to subparagraph (5)(i)(a)(II)(c)
above.
NYSE Rule 104.10 (5)(i)(a)(II)(c) provides:
Re-entry Obligation Following Non-Conditional Transactions--The
specialist's obligation to maintain a fair and orderly market may
require re-entry on the opposite side of the market trend after
effecting one or more Non-Conditional Transactions. Such re-entry
transactions should be commensurate with the size of the Non-
Conditional Transactions and the immediate and anticipated needs of the
market.
(2) Floor Brokers
Floor brokers are individuals that execute orders to buy or sell
securities on behalf of a customer pursuant to instructions provided by
the customer. Sometimes a Floor broker may represent his or her firm's
proprietary account.\54\
---------------------------------------------------------------------------
\54\ NYSE Rule 112, entitled ``Orders initiated `Off the Floor'
'' is one of the Exchange rules codifying the provisions of Section
11(a) of the Act and Commission Rule 11a-1 promulgated thereunder.
In substance, these rules provide that no member or member
organization, while on ``the Floor'' of the Exchange, may initiate a
transaction in any security admitted to trading on the Exchange for
an account in which they have a beneficial interest or over which
they are entitled to exercise discretion, unless subject to an
exception. The purpose of this rule and the securities laws upon
which it is based is to eliminate the advantage at the point of sale
that member organizations traditionally have been deemed to have
possessed by virtue of their presence on the trading floor and
adjacent surroundings. See also Exchange Rules 90 and 108.
---------------------------------------------------------------------------
(A) Floor Broker Interest
Floor brokers are permitted to represent electronically the orders
they hold by including these orders in a separate file (``Floor broker
agency interest file,'' also referred to as ``e-QuotesSM'')
within the Display Book system at multiple price points on either side
of the market.\55\ e-Quotes enable Floor brokers' customer interest to
participate in automatic executions at the Exchange BBO and in sweeps.
Floor brokers are permitted to place liquidity electronically at or
outside the Exchange BBO. Floor brokers are not permitted to enter in
the Floor broker agency interest files any interest that restricts the
specialist's ability to trade on parity with the Floor broker agency
interest file.\56\
---------------------------------------------------------------------------
\55\ See NYSE Rule 70.20(a)(i).
\56\ See NYSE Rule 70.20(a)(i) and NYSE Rule 108(a). Parity
describes an equal allotment, so far as practicable, of shares among
the participants eligible to participate in an execution.
---------------------------------------------------------------------------
Floor broker agency interest placed in the Display Book becomes
part of the quotation when the price point is at or becomes the
Exchange BBO. All floor broker agency interest files in the Display
Book system at the same price and on the same side of the market are on
parity. However, an e-Quote that establishes the Exchange BBO is
entitled to priority.\57\ No Floor broker agency interest placed within
files in the Display Book system is entitled to precedence based on
size.\58\ Floor broker agency interest within the Display Book can be
automatically executed pursuant to Exchange Rules 1000-1004.\59\
---------------------------------------------------------------------------
\57\ See NYSE Rule 70.20(b). Priority describes the entitlement
to receive an allotment of shares before other executable interest
at the price point for one trade because the bid (offer) established
the Exchange BBO. A specialist bid or offer entitled to priority
must yield to Off-Floor participant limit orders on the Display Book
at the same price. In manual executions, an order may also be
entitled to receive an allotment of shares when that order is for a
number of shares greater than all other interest eligible to be
executed at the price. In those instances, the order has precedence
and may be executed before other executable interest at the price
point. See NYSE Rule 72(d).
\58\ Id.
\59\ See NYSE Rule 70.20(c)(i).
---------------------------------------------------------------------------
Floor brokers also maintain non-displayed interest (reserve) at the
Exchange BBO provided that a minimum of one round lot \60\ of the Floor
broker's agency interest is displayed at that price.\61\ If an
execution at the Exchange BBO does not completely execute the Floor
broker's interest at that price, the displayed interest is
automatically replenished from the Floor broker's reserve interest, if
any, so that at least one round lot is displayed.\62\ The Floor broker
reserve interest is not included in the NYSE quote. Floor broker agency
interest away from the BBO is not displayed in Open Book or other
Exchange data distribution channels. In order for Floor brokers'
reserve interest not to be visible to the specialists, a Floor broker
must designate his or her reserve interest as ``Do Not Display''
(``DND'') interest.
---------------------------------------------------------------------------
\60\ Generally, one round lot is 100 shares; however, there are
securities on the Exchange that have units of trading of less than
100 shares.
\61\ See NYSE Rule 70.20(c)(ii).
\62\ See NYSE Rule 70.20(c)(iii).
---------------------------------------------------------------------------
An incoming automatically-executing order will trade first with the
displayed bid (offer). Where there is insufficient displayed volume to
fill the order, it will trade next with a Reserve Order and Floor
broker reserve interest, if any, and then any specialist reserve
interest as more fully discussed below.\63\
---------------------------------------------------------------------------
\63\ See NYSE Rule 70.20(c)(iv).
---------------------------------------------------------------------------
Floor broker agency interest participates in the opening and
closing trades subject to Exchange rules.\64\ Specialists are able to
see the aggregate number of shares of all Floor broker agency interest
files at each price.\65\ A Floor broker may exclude all of his or her
Floor broker agency interest from the aggregate information available
to the specialist.\66\
---------------------------------------------------------------------------
\64\ See NYSE Rule 70.20(j)(i) and (ii).
\65\ See NYSE Rule 70.20(g).
\66\ See id.
---------------------------------------------------------------------------
Floor broker agency interest excluded from the aggregated Floor
broker agency interest information available to the specialist
participates in automatic and manual executions.\67\ Exchange systems
[[Page 42858]]
include such excluded interest in the aggregated agency interest
displayed to the specialist only during the execution of a manual
trade. This information is maintained in the template used by a
specialist to execute trades in the Display Book. As such, aggregate
Floor broker agency interest visible to the specialist will include
agency interest designated to be excluded from the aggregate Floor
broker agency interest file. Consequently, NYSE Rule 70.20 \68\
prohibits specialists, trading assistants and anyone acting on their
behalf from using the Display Book to access information about Floor
broker agency interest excluded from the aggregated agency interest
other than in situations where there is a reasonable expectation on the
part of such specialist, trading assistant or other person acting on
their behalf that a transaction will take place imminently for which
such agency interest information is necessary to effect such
transaction.\69\
---------------------------------------------------------------------------
\67\ See NYSE Rule 70.20(h).
\68\ See NYSE Rule 70.20(h)(ii).
\69\ A pattern and practice of specialists' accessing reserve
order information without trading may constitute a violation of NYSE
Rule 70.20.
---------------------------------------------------------------------------
Floor brokers may also provide discretionary instructions for e-
Quotes related to price and size (i.e., the number of shares to which
the discretionary price instructions apply) (``discretionary e-Quotes''
or ``d-Quotes''). The discretion is used, as necessary, to initiate or
participate in a trade with an incoming order capable of trading at a
price within the discretionary range.\70\
---------------------------------------------------------------------------
\70\ See NYSE Rule 70.25(a)(i).
---------------------------------------------------------------------------
Discretionary instructions are applicable only to automatic
executions; they cannot be utilized in manual transactions and they are
not applicable to opening and closing transactions.\71\ Discretionary
instructions may be entered for all e-Quotes; however, these
instructions are active only when the e-Quote is at or would establish
the BBO.\72\ Discretionary instructions will be applied only if all d-
Quoting prerequisites are met. Otherwise, the d-Quote will be handled
as a regular e-Quote, notwithstanding the fact that the Floor broker
has designated the e-Quote as a d-Quote.\73\ Discretionary instructions
apply to displayed and reserve size, including reserve interest that is
excluded from the aggregate volume visible to the specialist on the
Floor.\74\ The specialist on the Floor and the specialist system
employing algorithms are both unable to access the discretionary
instructions entered by Floor brokers with respect to their d-
Quotes.\75\
---------------------------------------------------------------------------
\71\ See NYSE Rule 70.25(a)(iii).
\72\ See NYSE Rule 70.25(a)(ii).
\73\ See NYSE Rule 70.25 (a)(iv).
\74\ See NYSE Rule 70.25(a)(vii).
\75\ See NYSE Rule 70.25(a)(viii).
---------------------------------------------------------------------------
(B) Price Discretion
Discretionary instructions as to price allow Floor brokers to set a
price range \76\ within which the Floor broker is willing to initiate
or participate in a trade. The price range must be included on any d-
Quote. Therefore, if the price discretion is set for only a portion of
the d-Quote, the residual will be treated as an e-Quote.\77\ Executions
of d-Quotes employing price discretion trade first from reserve volume,
if any, and then from displayed volume.\78\
---------------------------------------------------------------------------
\76\ See NYSE Rule 70.25(b)(i). The minimum price range for a d-
Quote is the minimum price variation set forth in NYSE Rule 62.
\77\ See NYSE Rule 70.25(b)(iii).
\78\ See NYSE Rule 70.25(b)(iv).
---------------------------------------------------------------------------
(C) Size Discretion
Floor brokers may designate the amount of the e-Quote volume to
which price discretion applies.\79\ For example, a Floor broker may
specify that only 20,000 shares of a 50,000-share e-Quote employ price
discretion. The remaining 30,000-shares are handled as a regular e-
Quote, i.e., one without discretionary price instructions. This allows
for more specific order management.
---------------------------------------------------------------------------
\79\ See NYSE Rule 70.25(c)(i).
---------------------------------------------------------------------------
A Floor broker may set a minimum and/or maximum size limit with
respect to the size of the contra-side interest with which it is
willing to trade using price discretion.\80\ Exchange systems will
review NYSE published or quoted contra-side volume only in considering
whether the volume is within the d-Quote's discretionary volume range.
This prevents the d-Quote from trading with opposite side interest that
the Floor broker has judged to be too little or too great in the
context of the order or orders he or she is managing. Reserve and other
interest at the possible execution price is not considered by Exchange
systems.\81\ Interest displayed by other market centers at the price at
which a d-Quote may trade is not considered when determining whether
the minimum volume range is met, unless the Floor broker electronically
designates that such away volume should be included in the
determination.\82\ An increase or reduction in the size associated with
a particular price that brings the contra-side volume within a d-
Quote's minimum or maximum discretionary size parameter, will trigger
an execution of that d-Quote.\83\ Once the total amount of a Floor
broker's discretionary volume has been executed, the remainder of the
e-Quote may not employ price discretion when trading.\84\
---------------------------------------------------------------------------
\80\ See NYSE Rule 70.25(c)(ii).
\81\ See NYSE Rule 70.25(c)(iii).
\82\ See NYSE Rule 70.25(c)(iv).
\83\ See NYSE Rule 70.25(c)(v).
\84\ See NYSE Rule 70.25(c)(vi).
---------------------------------------------------------------------------
(D) Discretionary Executions
The goal of discretionary instructions for e-Quotes is to secure
the largest execution for the d-Quote, using the least amount of price
discretion. Thus, d-Quotes may often improve the execution price of
incoming orders. Conversely, if no discretion is necessary to
accomplish a trade, none will be used.\85\ d-Quotes automatically
execute against an incoming contra-side order if the order's price is
within the discretionary price range and meets any size requirements
that have been set for the d-Quote.\86\
---------------------------------------------------------------------------
\85\ See NYSE Rule 70.25(d)(i).
\86\ See NYSE Rule 70.25(d)(i)(A)(ii).
---------------------------------------------------------------------------
All d-Quotes from different Floor brokers on the same side of the
market with the same price instructions trade on parity after interest
entitled to priority is executed.\87\ Multiple same-side d-Quotes from
different Floor brokers compete for an execution with the most
aggressive price range (e.g. three cents vs. two cents) establishing
the execution price. If the incoming order remains unfilled at that
price, executions within the less aggressive price range may occur.\88\
d-Quotes also compete with same-side specialist algorithmic trading
messages targeting incoming orders. If the price of d-Quotes and
specialist trading messages are the same, the d-Quotes and the
specialist messages trade on parity.\89\
---------------------------------------------------------------------------
\87\ See NYSE Rule 70.25(d)(i)(A)(iii).
\88\ See NYSE Rule 70.25(d)(i)(A)(iv).
\89\ See NYSE Rule 70.25(d)(i)(A)(v).
---------------------------------------------------------------------------
d-Quotes from Floor brokers on opposite sides of the market may
trade with each other. The d-Quote that arrives at the Display Book
last will use the most discretion necessary to effect a trade, subject
to NYSE rules and Rule 611 of Reg. NMS.\90\ d-Quotes may provide price
improvement to and trade with an incoming contra-side specialist
algorithmic trading message to ``hit bid/take offer,'' just as they can
with any other marketable incoming interest.\91\
---------------------------------------------------------------------------
\90\ See NYSE Rule 70.25(d)(i)(A)(vi) and 17 CFR 242.611.
\91\ See NYSE Rule 70.25(d)(i)(A)(viii).
---------------------------------------------------------------------------
d-Quotes may initiate sweeps in accordance with and to the extent
provided by NYSE Rules, but only to the extent of their price and
volume discretion.\92\ d-Quotes may participate
[[Page 42859]]
in sweeps initiated by other orders but, in such cases, their
discretionary instructions are not active. d-Quotes will not trade at a
price that would trigger an LRP. Thus a sweep involving a d-Quote will
always stop at least one cent before an LRP price.\93\
---------------------------------------------------------------------------
\92\ See NYSE Rules 1000-1004. See also NYSE Rule
70.25(d)(i)(A)(ix).
\93\ See NYSE Rule 70.25(d)(ix)(A).
---------------------------------------------------------------------------
Floor brokers further possess a ``pegging function'' for e-Quotes
and d-Quotes, which allows the Floor broker to keep his or her interest
in the quote, even as the quote moves. Pegging is a separate type of
discretionary instruction and may occur with e-Quotes and/or with d-
Quotes using discretionary price instructions. Pegging e-Quotes and d-
Quotes peg only to other non-pegging interest within the pegging range
selected by the Floor broker. This functionality is only available when
auto-quoting is on. Pegging functionality is reactive and does not
establish a new BBO price. It will not generally serve as the BBO price
when there is no other interest at that price. Pegging will occur only
at prices within the pegging price range designated by the Floor
broker.\94\ Pegging functionality allows the Floor broker interest to
be included in the Exchange BBO as it is systemically updated subject
to the price that the Floor broker designated as the lowest or highest
price he or she is willing to trade. The Floor broker's interest will
move with the Exchange BBO within the designated range and any
discretionary instructions associated with that interest will continue
to be applied as long as it is within the Floor broker's designated
price range. Buy side e-Quotes will peg to the best bid, and sell side
e-Quotes will peg to the best offer.
---------------------------------------------------------------------------
\94\ See NYSE Rule 70.26(vii).
---------------------------------------------------------------------------
A Floor broker using pegging e-Quotes and d-Quotes may set a
minimum and/or maximum size of same-side volume to which his or her e-
Quote or d-Quote will peg. Pegging instructions apply to the entire e-
Quote/d-Quote volume. An e-Quote may have either or both discretionary
trading and pegging instructions. Pegging and discretionary
instructions are known only to the Floor broker. Specialists do not
have access to a Floor broker's pegging and discretionary instructions.
(E) CAP-DI Order
Pursuant to NYSE Rule 13, Floor brokers are permitted to submit CAP
liquidity to the Display Book in order to have customer orders trade
along with the market and with the specialist proprietary transactions.
The type of CAP order used by the Floor broker is the CAP-DI order.
NYSE Rule 123A.30(a) provides that a CAP-DI order is the elected or
converted portion of a percentage order that is convertible on a
destabilizing tick and designated immediate execution or cancel
election. A CAP-DI order may be automatically executed and may
participate in a sweep. Marketable CAP-DI orders are automatically
converted and trade along with specialist proprietary executions. CAP-
DI orders participate in sweeps. Specifically, when an automatically
executing order is sweeping the Display Book on the same side as the
CAP-DI orders, such CAP-DI orders will be elected at each execution
price that is part of the sweep. To the extent that the order sweeping
the book has additional volume, the elected same-side CAP-DI orders
will not participate in a transaction at the executing price; rather,
Exchange Systems will automatically and systemically un-elect the CAP-
DI orders in accordance with its terms. If at the last execution price
that is part of the sweep, the sweeping order is filled or unable to
continue executing, and there is volume remaining on the Display Book
or from contra-side elected CAP-DI orders, then the same-side CAP-DI
orders may participate in the final transaction. CAP-DI orders on the
contra-side of an automatically executing order sweeping the Display
Book are also elected at each execution price that is part of the sweep
and participate at each of the execution prices if there is volume
available on the Display Book or from CAP-DI orders on the same side of
the market as the sweeping order.
(3) Off-Floor Participants
Off-Floor participants may submit any valid order type as defined
in Exchange Rules. Orders entered on the Exchange by Off-Floor
participants are maintained on the Display Book in a separate file from
Floor broker agency interest, passively converted CAP orders and
specialist interest. These orders are aggregated at each price point
and sequenced in time priority of receipt. Off-Floor participants have
the ability to submit Reserve Orders pursuant to NYSE Rule 13. Interest
represented through Reserve Orders trade according to Exchange rules
governing priority and parity.\95\ A Reserve Order must include the
specific amount of shares that is designated for display when the order
is eligible to be quoted (i.e., the ``displayable'' portion). A Reserve
Order must display a minimum of one round lot. Reserve Orders have the
ability to automatically replenish the displayable amount of interest
at the Exchange BBO when trades reduce or exhaust such displayable
interest. This provides Exchange customers the flexibility to replenish
liquidity that is in keeping with the market need at the specific time
and at that price point. When the displayable size of a Reserve Order
is replenished from reserve, the replenished displayable quantity is
assigned a time sequence based on the time it is replenished. The
remaining original displayed quantity, if any, retains its original
time sequence.
---------------------------------------------------------------------------
\95\ Reserve Orders will also be subject to Federal securities
regulations, including the order entry requirements of Section 11(a)
of the Act.
---------------------------------------------------------------------------
As with reserve interest in a Floor broker's agency interest file
not designated DND, information on Reserve Orders entered directly into
Exchange systems is made available to the specialist only in the
aggregate at each price point for the express purpose of the specialist
effecting a manual execution. The reserve interest is not distinguished
from other interest available to be executed at a specific price point.
Rather, Exchange systems display to the specialist the total number of
shares available for execution at the price point and include reserve
interest in the total number. In this manner such reserve interest is
available for trades that take place on the Floor of the Exchange that
will not be conducted automatically. Such trades take place at the
opening and close of the Exchange, during the trading day in situations
involving auction market transactions that are not automatic trades,
and in certain specific trading situations, such as trades conducted
when a LRP is reached after an automatic execution or in a ``gap''
quote situation.
Off-Floor participants' interest that is not designated as reserve
interest is included in the Exchange quote. Off-Floor participants'
interest away from the Exchange BBO not designated as reserve interest
is automatically disseminated via OpenBook and other Exchange data
distribution channels.
(4) Execution of Bids and Offers
Exchange executions are governed by its rules of priority, parity,
and precedence.\96\ These rules dictate which order or quote is able to
execute against an incoming order and the allotment of shares, if more
than one order or quote is at the BBO. Generally, the first bid (offer)
at the BBO has priority to execute against the next incoming order.\97\
Once
[[Page 42860]]
a trade occurs with the bid (offer) that has priority, other bids
(offers) at that price (including any remaining interest from the bid
(offer) that had priority) generally trade on parity, meaning they
split evenly with the remainder of the incoming order, up to the size
of their own order.\98\ A specialist must always yield priority to the
Off-Floor participant orders entered on the Display Book.\99\ The
allotment of shares is also dependent on whether execution is at the
BBO or if it is outside the BBO.
---------------------------------------------------------------------------
\96\ See NYSE Rules 72, 104, and 108.
\97\ See NYSE Rule 72 I(a). A bid (offer) that establishes the
Exchange BBO is entitled to priority at that price for one trade,
except a specialist bid or offer entitled to priority must yield to
limit orders on the Book at the same price.
\98\ See NYSE Rule 72 III. When bid (offers) are on parity,
Exchange rules dictate that in certain circumstances, a particular
participant is guaranteed a portion of an order based on the size of
its bid (offer), i.e., precedence based on size. See NYSE Rule 72
I(c).
\99\ See NYSE Rule 92.
---------------------------------------------------------------------------
Under current Exchange rules, the first bid or offer made at a
particular price is entitled to priority at that price.\100\ Once a
trade occurs with a bid or offer that has priority, other bids or
offers at that price representing Off-Floor Participant orders (DOT
orders) and Floor broker agency interest files (i.e., e-Quotes and d-
Quotes) trade on parity. Specialist interest (s-Quotes) yields to DOT
orders; once DOT orders are satisfied, s-Quotes trade on parity with e-
Quotes and d-Quotes.
---------------------------------------------------------------------------
\100\ See NYSE Rule 72 I(a) through (g). While a priority bid or
offer may be established it is usually broken by a ``Floor
clearing'' event. ``Floor clearing'' events include a trade or an
update of the NYSE quote. After such an event, all bid and offers at
the price are on parity.
---------------------------------------------------------------------------
For example, assume that immediately following a Floor clearing
event, the bid on the Exchange is $20.05 for 1,000 shares, consisting
of a DOT order of 300 shares, Floor broker agency interest file (e-
Quote) volume of 400 shares representing interest of two Floor brokers
for 200 shares each, and specialist interest of 300 shares. This is all
displayed interest, i.e., there is no reserve interest involved. There
is no priority as all bids were reentered following the Floor clearing
event. An incoming market order to sell 400 shares is executed against
the DOT bid and the e-Quotes since the specialist interest (s-Quote)
must yield to DOT interest. If the incoming order had been for 800
shares, the DOT orders and Floor broker interest would be executed in
full and the specialist would receive 100 shares.
The displayable portion of the Reserve Order interest is executed
first in accordance with the above rules governing priority and parity.
Once all displayable interest, including DOT orders, e-Quotes, d-Quotes
and s-Quotes that are quoted at the Exchange BBO has been traded, any
remainder of an incoming order is executed against any reserve, i.e.,
non-displayable interest at the Exchange BBO. Such non-displayable
interest trades on parity except that specialist reserve interest at
the Exchange BBO yields to all Reserve Orders and CAP orders. Outside
the Exchange BBO, e-Quotes and d-Quotes trades with all interest
represented by DOT orders, including DOT Reserve Orders, both
displayable (i.e., the interest that will be published if such interest
becomes the Exchange best bid or offer) and non-displayable, on parity.
Reserve interest represented by s-Quotes outside the Exchange BBO
yields to reserve interest represented by Reserve Orders and CAP
orders. Within DOT orders, interest that would be displayable is
allocated on a time priority basis. After displayable DOT order
interest is completely executed, any remaining shares are allocated to
eligible non-displayable Reserve Order interest in time priority.
Interest represented by a Floor broker is allocated equally among the
Floor broker's customers without regard to whether that interest was
displayable or non-displayable.
To illustrate how this works for a trade at the quote, assume the
same scenario as above, but in addition to the displayed interest of
1,000 shares, there is reserve interest for the DOT order of 600
shares, 400 for each Floor broker (total of 800 shares) and 700 shares
for the specialist for a total of 2,100 shares in reserve. An incoming
order to sell 2,500 shares would be executed as follows: 1,000 shares
trade with the displayed bid and is allocated 300 shares to the DOT
order, 200 shares to each Floor broker (400 shares total), and 300
shares to the specialist, leaving 1,500 shares to be executed. The
1,500 remaining shares execute against the reserve portion of the DOT
Reserve Order (600 shares), and 400 shares of reserve interest for each
of the Floor brokers and 100 shares for the specialist.
When the amount of shares contained in an incoming order are
greater than the shares at the Exchange BBO and trigger a sweep to
execute the order, orders on the Display Book outside the Exchange BBO
at each price point trade on parity at each successive price during the
sweep. Specialist interest may participate in the sweep at each
successive price point provided such interest participates after Off-
Floor participant limit orders on the Display Book are satisfied at
each successive price point. Specialist interest participating in the
sweep trades on parity with any remaining Floor broker agency interest
at each successive price point.
A trade outside the quote will occur when the displayed and reserve
interest volume at the Exchange BBO is not sufficient to completely
fill the incoming contra side order. Assume the bid on the Exchange is
$20.05 for 1,000 shares, consisting of a DOT order of 300 shares, Floor
broker agency interest file (e-Quote) volume of 400 shares representing
interest of two Floor brokers for 200 shares each, and specialist
interest of 300 shares. In addition to the displayed interest of 1,000
shares, there is reserve interest for the DOT order of 600 shares, 400
for each Floor broker (total of 800 shares) and 700 shares for the
specialist for a total of 2,100 shares in reserve. The incoming order
to sell is for 4,800 shares, thus out-sizing the displayed and non-
displayed interest at the bid by 1,700 shares. At the next bid price of
20.03, there are 400 shares of a DOT Reserve Order, of which 100 shares
are displayable, three Floor brokers using the reserve function bidding
for 400 shares each, with 100 shares displayable and 300 shares in
reserve and 1,000 shares of specialist interest, 100 shares displayable
and 900 shares in reserve. After the execution at the bid price of
20.05, the execution of the remaining 1,700 shares at 20.03 would be as
follows: 400 shares each to the DOT Reserve Order and the Floor
brokers, since they trade on parity with each other outside the
Exchange best bid (offer) for a total of 1,600 shares; 100 shares to
the specialist, since the DOT Reserve Order was executed in full.
If there had been additional volume in the DOT Reserve Order of 100
shares, the specialist would not have traded at all.
Proposed New Market Model
(a) Overview and Background
The Exchange believes that in order to adapt to the current
equities market environment, its trading model must be modified to
allow all participants the ability to compete efficiently consistent
with the participant's respective responsibilities to the market.
As the Hybrid Market has evolved, the more electronic market has
fundamentally altered the NYSE's traditional trading environment, in
which price discovery took place largely and almost exclusively on the
Floor of the Exchange in the form of face-to-face interactions among
brokers and specialists. As these interactions have diminished, the
perceived time and place advantage of the Floor has diminished as well.
In particular, information that once was exclusive to the Floor--in
particular, the most up-to-
[[Page 42861]]
date quotes, available interest and last sale prices--is now widely
available off the Floor through electronic means. At the same time,
increasingly fragmented trading in NYSE-listed securities--a byproduct
of sophisticated algorithmic trading and Regulation NMS--has lessened
the importance to traders of so-called ``market color'' from the Floor;
in an era where no one trading venue can claim dominance of market
share and mostly automated trading, specialists and Floor broker no
longer glean a heightened sense of the market in a particular security
based on the ``open outcry'' of participants at the point of sale on
the Floor or based on the observation over the course of a day or days
of the activity at the particular post where a security trades.
Competition from other market centers and growth of alternative
trading systems, coupled with increased internalization by broker-
dealers, has challenged the dominance of the trading post as the
centralized locus of orders in a particular security. Among other
things, the rapid dissemination of consolidated quote and trade
information and real-time updates of the Exchange limit order book has
increased exponentially the amount and accuracy of available
information and the speed with which it is disseminated. The immense
increase in electronic executions on the Exchange and the general
explosion of the use of smart routing engines by market participants of
all types, especially ``upstairs'' traders, also has had a huge impact
on the perceived informational advantages once enjoyed by Floor brokers
and specialists. Automatic executions and quote updates occur without
audible notice and with such rapidity that even those present at the
trading post are virtually unable to process the information manually.
Indeed, it could be argued that the informational advantage has shifted
``upstairs'' where orders are now first ``shopped'' within a firm and
then to others before being sent to the Floor for execution and, even
then, is likely to be sent in pieces to multiple markets. These trends
have also been influenced by the reduction of displayed interest across
equity market centers resulting from the reduction of quote increments
to pennies and in some instances sub-pennies (for securities that trade
below a dollar). Further compounding the trends is the ever increasing
proliferation of competing electronic trading venues.
In the face of these challenges, the NYSE is proposing to adopt its
New Model, which will provide a more robust trading model on the Floor
while preserving the existing framework for trading and some of the key
responsibilities of its market participants that make the NYSE unique.
In so doing, the Exchange seeks to strike a balance among market
participants that retains a role for liquidity providers responsible
for maintaining fair and orderly markets, agents on the Floor, and Off-
Floor participants. The Exchange believes that the proposed changes
will improve market quality in the form of tighter spreads, greater
liquidity and opportunities for price improvement.
(b) Changes to Exchange Systems
One of the key changes in the New Model will be enhancing the
Exchange's technology. Among other things, the Exchange proposes to
enhance its Display Book to incorporate the majority of execution logic
and to assume primary responsibility for tracking the liquidity
available at each specified price point. In the New Model, incoming
orders to buy and sell will continue to be available for automatic
quoting and immediate and automatic execution. Unlike today, however,
NYSE systems will also automatically review the liquidity available on
the Display Book for execution and then access the necessary liquidity
to consummate trades. To do this, the Exchange is proposing to replace
its specialists with a new participant--the DMM--who will make
available a pre-determined pool of liquidity that Exchange systems can
access to execute orders. In so doing, the Exchange expects to increase
the speed of automatic executions. It is also anticipated that
modifications to the Exchange systems will further speed executions by
reducing the number of trading messages, which should ultimately reduce
latency within Exchange systems.
(c) Updating the Roles of the Various Exchange Market Participants
As it updates its technology to reflect the New Model's mode of
trading, the Exchange is also changing the roles of the various market
participant groups who use that technology to reflect new patterns of
trading and new obligations. The most significant change will be the
phasing out of the NYSE's specialist system and the adoption of a
designated market maker structure. But in addition, the Exchange is
also making changes to the role of, and tools available to, the Floor
broker, and is also giving new tools to Off-Floor participants that
will enable them to participate in the market more directly. These
changes are described in more detail below.
(1) Designated Market Makers
(A) Overview
The Exchange believes that its new market model requires a new
market maker \101\ with the ability (and affirmative obligation) to
contribute liquidity in a security by trading competitively for its
dealer account. The Exchange therefore proposes to phase out the
existing specialist system and to establish in place of the specialists
Designated Market Makers who will be employees of Designated Market
Maker Units (``DMM Units'').\102\
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\101\ The term ``market maker'' shall have the same meaning as
that term in section (3)(a)(38) of the Act. See e-mail from Deanna
G. W. Logan, Associate General Counsel, NYSE to David Liu, Assistant
Director, Division, Commission, dated July 16, 2008 (making
clarifying edits) (``July 16th e-mail'').
\102\ As of October 15, 2008, pursuant to proposed Rule
104(f)(iv) DMMs will be designated as ``market makers'' on the
Exchange for purposes of the Act. See July 16th e-mail, supra note
101.
---------------------------------------------------------------------------
Although the specialist system has served a central role in
equities trading at the NYSE for well over a century, specialist
trading is, by nature, well-suited to manual trading, and less suitable
for electronic trading. As a result, although specialists were able to
provide a strong stabilizing influence when all or most trading was
manual, that influence has waned as the markets have evolved toward
mostly or fully automatic trading. And while the Exchange continues to
believe that there is value to having a designated person assigned to
maintain an orderly market in its listed securities, the Exchange
nevertheless recognizes that the existing scheme of rules and
obligations governing specialists can unduly hamstring them in an
electronic market and prevent them from easily fulfilling their
appointed role.
To address this new reality, DMM Units will be given tools and
opportunities that are not available to specialists currently, but that
are more commensurate with trading in electronic markets. At the same
time, the Exchange will preserve several aspects of the specialist
system that are beneficial to the market and the investing public. For
example, like the specialist system, and in contrast to the competitive
market maker structure, each NYSE-listed security will be assigned to a
single DMM Unit, but unlike the specialist system, each DMM will have a
minimum quoting requirement in its assigned securities, and DMM Units
who do not meet the minimum quoting requirement will be ineligible to
participate in the process to receive additional securities. Through
this combination of carrot (exclusivity) and stick (minimum quoting
[[Page 42862]]
requirement), the Exchange believes that it can ensure greater depth
and liquidity, and consequently, better prices for customers, in its
listed securities.
Current NYSE Rule 104 will be amended and renamed 104T as described
further below and will be operative and effective until October 14,
2008. Thereafter, the Exchange proposes a new Rule 104 that will be
effective October 15, 2008.
(B) DMMs and DMM Units Approved by the Exchange
The Exchange intends to require, in new Rule 103, that member
organizations who want to operate a DMM Unit file an application in
writing and be approved by the Exchange prior to operating a DMM Unit.
Accordingly, the Exchange is proposing to amend NYSE Rule 2 to include
definitions of ``Designated Market Maker'' (``DMM'') and ``Designated
Market Maker Unit.'' The application and approval requirement would be
waived for existing NYSE specialist firms that decide to create a DMM
Unit.\103\
---------------------------------------------------------------------------
\103\ See Proposed NYSE Rule 103(b)(ii).
---------------------------------------------------------------------------
In deciding whether to approve an application, the Exchange will
consider, among other things, the member organization's market making
ability, the capital that the member is willing or able to make
available for market making and such other factors as the Exchange
deems appropriate.\104\
---------------------------------------------------------------------------
\104\ See Proposed NYSE Rule 103(a).
---------------------------------------------------------------------------
DMMs employed by DMM Units to work on the Floor of the Exchange
will be required to be approved and registered with the Exchange. In
order to obtain such approval, applicants will need to submit an
application to NYSE Regulation, Inc., which will assess an applicant's
regulatory fitness, and successfully complete a qualifications
examination prescribed by the Exchange. Once approved and registered as
a DMM, such individual may conduct business only on behalf of the DMM
Unit in which he or she is employed.
A DMM Unit may also employ individuals who may be called upon to
act as a Relief DMM. A Relief DMM may be called upon to act as a DMM in
one of its securities for an entire business day.\105\ In such
instances the Relief DMM is required to have net liquid assets of
$150,000.\106\ A Relief DMM that is called upon to act as a Relief DMM
for less than the entire business day, usually for lunch periods, etc.
has no such requirement; however, dealings effected by such Relief DMM
while relieving the regular DMM must be made for the account of the
regular DMM whom he or she is relieving.\107\
---------------------------------------------------------------------------
\105\ See Proposed NYSE Rule 103(f).
\106\ See Proposed NYSE Rules 104T.24 and 103.21.
\107\ Id.
---------------------------------------------------------------------------
As with existing specialist firms, individuals who are currently
employed by specialist member organizations as specialists and relief
specialists will be automatically approved and registered as DMMs and
Relief DMMs.\108\
---------------------------------------------------------------------------
\108\ See Proposed NYSE Rules 103(c)(ii) and (f)(iii).
---------------------------------------------------------------------------
In addition, pursuant to proposed NYSE Rule104(j), a Floor Governor
will have the ability to designate an individual to be a Temporary DMM.
In the event of an emergency, such as the absence of the DMM, or when
the volume of business in the particular stock or stocks is so great
that it cannot be handled by the DMMs without assistance, a Floor
Governor may authorize a member of the Exchange who is not registered
as a DMM in such stock or stocks, to act as Temporary DMM for that day
only.
A Temporary DMM that substitutes for a DMM when no DMM is present,
is expected to assume the obligations and responsibilities of a DMM for
the maintenance of the market.
A member who acts as a temporary DMM by such authority is required
to file a report showing (a) the name of the stock or stocks in which
he or she so acted, (b) the name of the regular DMM, (c) the time of
day when he or she so acted, and (d) the name of the Floor Governor who
authorized the arrangement with Division of Market Surveillance of NYSE
Regulation, Inc., at the end of the day.
Pursuant to proposed NYSE Rule 104(j), a Floor Governor will not
give such authority for the purpose of permitting a member not
registered as DMM habitually to relieve another DMM at lunch periods,
etc.
(C) DMMs Not Responsible Broker-Dealer for All Orders
The Exchange proposes to amend the provision in Exchange rules that
makes specialists the ``responsible broker-dealer'' for purposes of
Limit Order Display and other obligations under both the Act and
regulations promulgated thereunder.
Under NYSE Rule 60, specialists are currently solely responsible
for quoting the highest bids and lowest offers on the Exchange for all
reported securities. This rule is appropriate in a manual trading
environment, where the specialist post was the primary locus for
trading in securities and where the specialist oversaw the reporting of
all executions.
Because of automation, the rule makes less sense today. Among other
things, market participants who are not specialists post their interest
electronically in the form of DOT orders and/or e-Quotes (broker agency
interest files), and Exchange systems process and publish that interest
automatically. When there is an execution against the published quote,
Exchange systems report the execution, and allocate the executed shares
to the various participants automatically. In a manual market, the
specialist was solely responsible for quoting the highest bids and
lowest offers on the Exchange for all reported securities. The
Exchange's quote today now includes the Floor broker's agency interest,
specialist interest and electronically entered interest of off-Floor
Participants. More importantly, all interest in Exchange systems and
included in the quote is identifiable by the Exchange's systems.
Given this change from how interest was processed in a manual
environment, the notion that the specialist (or the new DMM) is the
sole responsible broker-dealer is obsolete, but not harmlessly so. In
particular, because various obligations either attach or do not attach
based on whether a participant is designated as the responsible broker-
dealer, designating the specialist (or DMM) as the ``responsible broker
dealer'' can lead to unintentionally placing an obligation on a nominal
participant while relieving the logically responsible participant of
that same obligation.
To address these limitations, the NYSE is proposing to amend NYSE
Rule 60 to reflect that the member or member organization entering a
bid or offer in a security is the ``responsible broker-dealer'' to the
extent of such bid or offer.\109\ The Exchange also proposes to
eliminate the phrase ``on the Floor'' which refers to a ``responsible
broker or dealer'' for the purposes of meeting obligations under Reg.
NMS, since the Exchange believes all broker-dealer members and member
organizations
[[Page 42863]]
bear these responsibilities. In addition, the Exchange proposes to
amend the rule to reflect that the Exchange rather than the specialist
or DMM disseminates quotations to vendors.
---------------------------------------------------------------------------
\109\ See 17 CFR 240.11Ac1-1. For ease of reference, relevant
text of Section 11A(c)(1) of the Act and Rule 11Ac1-1 thereunder was
included as part of the rule text preceding NYSE Rule 60. Similarly,
the text of Section 11(a)(1) of the Act and Rules 11a-1 through
11a2-2 was also included as text preceding Exchange Rule 90. Insofar
as it is not the general practice of the Exchange to include federal
securities laws and rules in its rule book, the Exchange proposes to
delete them from its rule book. Moreover, since the federal
securities laws and rules are now readily available through any
number of sources, the Exchange has determined that it is no longer
necessary to include the aforementioned text as part of NYSE Rule 60
and NYSE Rule 90.
---------------------------------------------------------------------------
The Exchange also proposes to remove subsection (a)(iv) from
Exchange Rule 1001, which provides that ``the specialist shall be the
contra party to any automatic execution where interest reflected in the
published quotation against which the automatically executing order was
executed is no longer available.'' This rule was adopted to address an
anomaly of the Exchange's systems that no longer exists. Specifically,
at the time the rule was adopted, Exchange systems were programmed such
that where the identity of the interest for an automatically executing
order was unknown, the specialist would automatically be assigned as
the contra party for that trade, even where interest from other market
participants was reflected in the published quotation. Since the
Exchange systems are now capable of accurately identifying each
participant whose interest is reflected in the published quote and who
should be held responsible to be the contra party for the automatically
executing order, the Exchange believes it is no longer necessary that
the market maker in the security shoulder the burden of being the
contra party to un-reconciled executions. Similarly, NYSE Rule
123B(b)(2)(B) is proposed for deletion reflecting the fact that reports
of executions are handled by Exchange systems and are no longer sent by
specialists, and will not be sent by DMMs.
(D) DMMs Retain the Specialists' Affirmative Obligation
As noted above, although the Exchange does not intend to impose
undue obligations on DMMs as responsible broker-dealers, the Exchange
intends to preserve the requirement that a DMM has an affirmative
obligation to the quality of the markets in securities assigned to it.
The function of a member acting as a DMM on the Floor of the Exchange
includes the maintenance, in so far as reasonably practicable, of a
fair and orderly market on the Exchange in the stocks in which he or
she is so acting.\110\ The maintenance of a fair and orderly market
implies the maintenance of price continuity with reasonable depth, to
the extent possible consistent with the ability of participants to use
reserve orders, and the minimizing of the effects of temporary
disparity between supply and demand.\111\ In connection with the
maintenance of a fair and orderly market, it is commonly desirable that
a member acting as DMM engage to a reasonable degree under existing
circumstances in dealings for the DMM's own account when lack of price
continuity, lack of depth, or disparity between supply and demand
exists or is reasonably to be anticipated.\112\
---------------------------------------------------------------------------
\110\ See Proposed NYSE Rule 104(f)(ii).
\111\ Id.
\112\ Id.
---------------------------------------------------------------------------
In addition, DMM Units will be required to maintain adequate
minimum capital \113\ based on its registered securities, and will be
required to use their capital to engage in a course of dealings for
their own accounts to assist in the maintenance, so far as practicable,
of a fair and orderly market. Transactions on the Exchange by a DMM for
the DMM Unit's account are to be effected in a reasonable and orderly
manner in relation to the condition of the general market and the
market in the particular stock.\114\ To support this requirement, the
Exchange will continue to provide depth guidelines \115\ for each
security.
---------------------------------------------------------------------------
\113\ Capital requirements are identical to the current capital
requirements computed in accordance with Rule 15c3-1 and current
NYSE Rule 104. In this filing the Exchange seeks to move the
placement of these requirements into proposed NYSE Rule 103.
\114\ See Proposed NYSE Rule 104(g)(i).
\115\ Currently, the Exchange provides each security with a
daily depth guideline and depth sequence size that reflects its
individual trading characteristics including intra-day price
volatility. Depth sequence sizes over which depth is calculated and
the depth guidelines against which the calculated depth movements
are compared are dynamically updated each day for each symbol based
on the symbol's recent trading characteristics. These
characteristics include: Its previous NYSE closing price; its NYSE
adjusted volume; and its intra-day consolidated high/low range.
Systemic calculations of these values occur each day and are used in
the creation of a formulaic individualized depth guideline and depth
sequence size that is unique for each security. The Exchange
proposes to provide DMMs with the same information pursuant to
proposed NYSE Rule 104(f)(iii).
---------------------------------------------------------------------------
DMMs will further be required to maintain displayed bids and offers
at the NBBO for a certain percentage of the trading day in assigned
securities. Specifically, with respect to maintaining a continuous two-
sided quote with reasonable size, DMMs must maintain a bid or offer at
the National Best Bid and National Best Offer (``inside'') for
securities in which the DMM is registered at a prescribed level based
on the average daily volume of the security.\116\ Securities that have
a consolidated average daily volume of less than one million shares per
calendar month are defined as Less Active Securities and securities
that have a consolidated average daily volume of equal to or greater
than one million shares per calendar month are defined as More Active
Securities.\117\
---------------------------------------------------------------------------
\116\ The Exchange intends to formally file with the Commission
a proposal to modify the method by which the Exchange allocates and
reallocates securities to specialist units; see July 17th e-mail,
supra note 3.
\117\ See Proposed NYSE Rule 104(a)(1)(A).
---------------------------------------------------------------------------
For Less Active Securities, a DMM Unit must maintain a bid or an
offer at the NBBO for at least 10% of the trading day during a calendar
month. For More Active Securities, a DMM Unit must maintain a bid or an
offer at the NBBO for at least 5% or more of the trading day during a
calendar month. DMM Units will be expected to satisfy the quoting
requirement for both volume categories in their assigned securities.
Time at the inside is calculated as the average of the percentage
of time the DMM has a bid or offer at the inside. For example, if a DMM
maintains a quote at the National Best Bid for 6% of the trading day
and a quote at the National Best Offer for 4% of the trading day, then
the average of these times is 5%. The Exchange will determine whether a
DMM Unit has met its quoting requirements on a month-by-month basis by
calculating:
(1) The ``Daily NBB Quoting Percentage'' by determining the
percentage of time a DMM Unit has at least one round lot of
displayed interest in an Exchange bid at the National Best Bid
during each Trading Day for a calendar month;
(2) the ``Daily NBO Quoting Percentage'' by determining the
percentage of time a DMM unit has at least one round lot of
displayed interest in an Exchange offer at the National Best Offer
during each Trading Day for a calendar month;
(3) the ``Average Daily NBBO Quoting Percentage'' for each
Trading Day by summing the ``Daily NBB Quoting Percentage'' and the
``Daily NBO Quoting Percentage'' then dividing such sum by two;
(4) the ``Monthly Average NBBO Quoting Percentage'' for each
security by summing the security's ``Average Daily NBBO Quoting
Percentages'' for each Trading Day in a calendar month then dividing
the resulting sum by the total number of Trading Days in such
calendar month; and
(5) for the total Less Active Securities (More Active
Securities) assigned to a DMM unit, the Exchange will determine the
``Aggregate Monthly Average NBBO Quoting Percentage'' by summing the
Monthly Average NBBO Quoting Percentages for each Less Active
Security (More Active Security) assigned to a DMM unit, then
dividing such sum by the total number of Less Active Securities
(More Active Securities) assigned to such DMM Unit.
Below is an example of a quoting requirement calculation. For
purposes of this example, it is assumed that DMM Unit 1 has two
assigned securities, A
[[Page 42864]]
and B, and that there were 5 trading days in the selected calendar
month.
The Average Daily NBBO for a DMM Unit is calculated for each
security by summing the daily NBB and NBO of each security for that day
and dividing that number by two:
----------------------------------------------------------------------------------------------------------------
Calculation average daily NBBO Average daily
Trading days NBB NBO for DMM Unit 1 NBBO
----------------------------------------------------------------------------------------------------------------
Security A
----------------------------------------------------------------------------------------------------------------
T1........................... 4% 6% 4% + 6% = 10% divided by 2 = 5%.. 5%
T2........................... 3% 5% 3% + 5% = 8% divided by 2 = 4%... 4%
T3........................... 4% 4% 4% + 4% = 8% divided by 2 = 4%... 4%
T4........................... 6% 8% 6% + 8% = 14% divided by 2 = 7%.. 7%
T5........................... 5% 5% 5% + 5% = 10% divided by 2 = 5%.. 5%
----------------------------------------------------------------------------------------------------------------
Security B
----------------------------------------------------------------------------------------------------------------
T1........................... 5% 7% 5% + 7% = 12% divided by 2 = 6%.. 6%
T2........................... 4% 6% 4% + 6% = 10% divided by 2 = 5%.. 5%
T3........................... 6% 8% 6% + 8% = 14% divided by 2 = 7%.. 7%
T4........................... 7% 9% 7% + 9% = 16% divided by 2 = 8%.. 8%
T5........................... 9% 9% 9% + 9% = 18% divided by 2 = 9%.. 9%
----------------------------------------------------------------------------------------------------------------
The monthly average NBBO quoting percentage for a DMM Unit for each
security is then calculated by summing the security's average Daily
NBBO Quoting Percentages for all the Trading Days of the calendar month
and then dividing the resulting total by the number of Trading Days in
the calendar month (in this instance 5).
----------------------------------------------------------------------------------------------------------------
Average daily NBBO Calculation monthly Monthly
------------------------------------------------------------------------ average NBBO for DMM Unit Average
T1 T2 T3 T4 T5 1 NBBO
----------------------------------------------------------------------------------------------------------------
Security A
----------------------------------------------------------------------------------------------------------------
5%................. 4% 4% 7% 5% 5% + 4% + 4% + 7% + 5% = 5%
25% divided by 5 = 5%.
----------------------------------------------------------------------------------------------------------------
Security B
----------------------------------------------------------------------------------------------------------------
6%................. 5% 7% 8% 9% 6% + 5% + 7% + 8% + 9% = 7%
35% divided by 5 = 7%.
----------------------------------------------------------------------------------------------------------------
The Aggregate Monthly Average NBBO Quoting Percentage for a DMM
Unit is determined by summing the Monthly Average NBBO for each
security and then dividing such sum by the total number of securities.
------------------------------------------------------------------------
Aggregate Monthly Average for Specialist Unit 1
-------------------------------------------------------------------------
Monthly Average NBBO Security A + Monthly Average NBBO Security B
divided by 2
5% + 7% = 12% divided by 2 = 6% Aggregate Monthly Average
------------------------------------------------------------------------
Reserve or other hidden orders entered by the DMM will not be
included in the inside quote calculations.\118\
---------------------------------------------------------------------------
\118\ See July 17th e-mail, supra note 3.
---------------------------------------------------------------------------
The Exchange further proposes that DMMs retain the re-entry
requirements currently imposed on specialists contained in NYSE
Rule104. As such, DMMs effecting Neutral, Non-Conditional and
Conditional transactions will still be required to re-enter liquidity
on the opposite side of the market depending on the type of transaction
executed by the DMM.\119\
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\119\ See supra notes 52 and 53. DMMs will be subject to the
same requirements currently imposed on specialists pursuant to
proposed NYSE Rule 104(g)(i)(A). Currently Conditional Transactions
operate as a separate pilot, through this filing the Exchange seeks
to incorporate those provisions into the New Model pilot through
proposed NYSE Rule 104(g)(i)(A); see July 17th e-mail, supra note 3.
---------------------------------------------------------------------------
(E) DMMs Will Not See Public Customer Order Information Before Other
Market Participants
In a significant departure from the existing specialist system,
DMMs will be required to meet all of the above requirements without the
benefit of access to order by order information. The Exchange proposes
to gradually decrease the orders provided to the DMM over time as the
Exchange completes the required modifications to technology.\120\ Upon
completion of the modifications to Exchange technology, the DMM will no
longer receive any order by order information. The decrease in the flow
of order information to the specialists will begin in July 2008, with
the DMM no longer receiving order by order information by October 15,
2008.
---------------------------------------------------------------------------
\120\ The Exchange will propose in a separate filing to the
Commission to reduce the order by order information sent to the DMM
prior to the implementation of the changes sought herein. Pursuant
to the proposal to be filed, the specialist's system employing
algorithms will only have access to orders entering NYSE systems
that are market orders or are limit orders that are priced at the
current NYSE quote, in between the current NYSE quote or are at a
price that goes through the opposite sid of the current NYSE quote.
---------------------------------------------------------------------------
The DMM Unit's system employing algorithms will have access to
information with respect to orders entered on the Exchange, Floor
Broker agency interest files or reserve interest, to the extent such
information is made publicly available. DMM unit algorithms will
receive the same information with respect to orders
[[Page 42865]]
entered on the Exchange, Floor Broker agency interest files or reserve
interest as is disseminated to the public by the Exchange and shall
receive such information no sooner than it is available to other market
participants.
Although the DMM will no longer receive order by order information,
there will continue to be certain times when human interaction is
essential to market quality and maintaining a fair and orderly market.
Specifically, the Exchange contemplates human interaction during
opening and re-opening transactions, closing transactions, block
transactions, gap quote situations and when trading reaches LRPs that
would lock or cross the market, and thus requires a market maker.\121\
DMMs will be responsible for choosing the price \122\ and the
executions of the orders at that price during those specific
situations.
---------------------------------------------------------------------------
\121\ See Proposed NYSE Rule 104(a)(2)-(5).
\122\ In an opening and reopening trade, Display Book will
verify that all interest that must be executed in the opening or
reopening can be executed at the price chosen by the DMM. If all the
interest that must be executed in the transaction cannot be executed
at that price, the Display Book will block the execution. In
addition, when executing blocks (10,000 shares or more or value of
$200,000 or more), trading out of a gap quote situation or an LRP
that locks or crossed the market, the Display Book may adjust the
execution price if there is enough interest on the Display Book to
complete the transaction at a better price.
---------------------------------------------------------------------------
(F) DMMs Will Not Retain the Specialists' Negative Obligation
Given that after October 15, 2008, DMMs will not have access to
information on an order by order basis the Exchange further proposes
that DMMs not be subject to the negative obligation that currently
applies to specialists. The U.S. equities markets have entered a
uniquely competitive phase that involves many players--upstairs
liquidity providers, multiple OTC dealers, crossing networks and
Alternative Trading Systems, and even other national and regional
exchanges, which compete through Unlisted Trading Privileges (``UTP'')
and dual listings. Generally, the Exchange favors this kind of robust
competition, which is exactly the type of competitive landscape that
Congress envisioned when it overhauled financial market regulation in
1975 and gave the Commission the flexibility to define dealer
obligations.\123\ However, at the same time, the Exchange believes
strongly that the changing market environment requires participants and
regulators to re-examine and discard outmoded ways of thinking about
trading and the markets. In particular, as the market has evolved, the
Exchange has consistently argued that these changes in the marketplace
warrant changes in the scope of the dealer obligation. The increased
use of computer application and communication technology makes it
difficult, if not impossible for any one market participant to have a
time-and-place advantage over any other market participants. At the
same time, the fragmentation of liquidity among multiple markets--and
the algorithmic tools available to process and manage order flow across
multiple markets--often means that the direction and extent of
movements in Exchange-listed securities is influenced not by the market
maker in the primary market, but by the increases in the average daily
trading volume off the Floor, and by trading decisions made away from
the Floor.
---------------------------------------------------------------------------
\123\ In 1975, Congress eliminated the negative obligation
clause from Section 11(b) in connection with the 1975 amendments to
the Act. See Securities Acts Amendments of 1975 (``1975
Amendments''), Public Law No. 94-29, 89 Stat. 97. At that time
Congress gave the Commission the flexibility to define dealer
obligations for both exchange members and over-the-counter market
makers. In making the changes, Congress noted that changes in the
marketplace might warrant changes in the scope of the dealer
obligation:
It might well be that with active competition among market
makers and the elimination of trading advantages specialists now
enjoy, such a restriction on specialists' dealings would become
unnecessary. Because trading patterns and market making behavior in
the context of a national market system cannot now be predicted, it
appears appropriate to expand the Commission's rulemaking authority
in this area so that the Commission may define responsibilities and
restrict activities of specialists in response to changing market
conditions S. Rep. No. 94-75, at 100 (1975).
---------------------------------------------------------------------------
The transformation of the equities markets in the United States
have led the Exchange to conclude that the so-called negative
obligation no longer makes sense, and should finally be eliminated
entirely. It is an outmoded vestige of trading in a wholly different
market environment and is unnecessary. Among other things, the negative
obligation arose as a check on specialists, who were, as noted above,
at the center of substantially all of the activity in a given security.
In that environment, it made sense to require the specialist not to
trade for his or her own account unless reasonably necessary to
maintain depth of market or continuity of prices. By contrast, a
hallmark of modern markets has been the increased dissemination of
market information. The result has been a radical increase in market
transparency, which gives all market participants, both on and off the
Floor, a greater ability to see and react to market changes.
Given the market environment and the elimination of the control of
order information by the proposed DMM, the Exchange believes that the
imposition of a negative obligation on DMMs is unnecessary.
Accordingly, the Exchange is proposing that beginning October 15, 2008,
DMMs no longer be deemed to be the agent for orders on the Display
Book.
Given that there would no longer be an agency function for the DMM,
the Exchange is further proposing to rescind NYSE Rule 92(d)(6)
(specialist after hours trading when there are unexecuted orders on the
Display Book) as being inconsistent with the proposed responsibilities
of the DMM. Moreover, the provisions of NYSE Rule 92 no longer apply to
the DMM in general as DMMs will not be members that have knowledge of
unexecuted customer orders.\124\
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\124\ It is for this reason that the Exchange further proposes
to delete NYSE Rule 104.10(5)(c)(II)(ii) and 104.10(5)(c)(II)(iii)
that restrict the specialist's ability to effect principal purchases
of a specialty security in another market center based on the
concept of the specialist as a ``holder'' of orders. The Exchange
further proposes to delete the last sentence of NYSE Rule 127(d)(3)
because it too restricts trading based on the premise that the
specialist is the ``holder'' of orders. DMMs will no longer serve
this function and thus the Exchange proposes to delete the sentence
from NYSE Rule 127(d)(3) that reads as follows:
As provided in Rule 92, the specialist may not retain any stock
for his or her own account obtained at a price at which he or she
holds executable, but unfilled, orders.
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The Exchange further proposes to rescind NYSE Rule 92.15 because
DMM algorithms will no longer receive order by order information before
the order is posted to the Display Book and therefore will be incapable
of generating quoting or trading messages based on knowledge of an
incoming order. As such this provision of NYSE Rule 92 is unnecessary
as it relates to DMM trading. The Exchange notes that the DMM algorithm
will receive ``Book State'' information, which is the same information
that is available to other market participants that subscribe to NYSE
market data feeds, and shows aggregated displayed interest at various
price points.
Notwithstanding that DMMs will not be agents for orders in Display
Book, DMMs will continue to facilitate manual transactions on the
Exchange. When DMMs are facilitating manual transactions, Exchange
systems will provide DMMs the total volume of all orders eligible to
participate (i.e., not including Non-displayed Reserve Orders and
aggregated Floor broker agency interest designated DND) in the
transaction. Those orders will be aggregated by the Exchange system and
[[Page 42866]]
shown to DMMs as available interest eligible to participate in the
manual execution. With this tool, DMMs will have the necessary
information to appropriately price the opening (re-opening)
transaction, the closing transaction and trade out of GAP quote and LRP
locking and crossing the market situations. DMMs will not have access
to such information on an order by order basis as Exchange specialists
do today.
(G) DMMs Interest for Quoting and Trading
Although DMMs will no longer be restricted by a negative
obligation, DMMs will be responsible to commit capital in order to add
liquidity to the market when there is little or no liquidity, bridging
the gap between supply/demand by purchasing when no one else is buying
or selling when no one else is selling as part of their responsibility
to maintain a fair and orderly market.
To assist DMMs in meeting their market making responsibilities,
DMMs will be permitted to maintain systems that employ algorithms to
make trading and quoting decisions (``DMM Interest'') on behalf of each
DMM.
DMM Interest will be permitted to: (i) Supplement the size of the
existing Exchange BBO; (ii) maintain displayed and non-displayed DMM
Interest, as described more fully below; (iii) layer interest at
varying prices outside the Exchange BBO; (iv) partially or completely
fill an order at the Exchange BBO or at a sweep price; (v) trade at and
through the Exchange BBO; (vi) trade in a sweep transaction; (vii)
provide price improvement; and (viii) match better bids and offers
published by other market centers where automatic executions are
immediately available.
Exchange systems will prevent DMM Interest from executing against
itself, i.e., executing wash trades. The Display Book will ignore any
DMM Interest on the opposite side of the arriving marketable DMM
Interest and exclude such DMM Interest from the trade. Further, to
prevent the excluded DMM Interest from rebidding through the last sale,
Exchange systems will cancel the DMM Interest that was excluded in the
execution.
DMM Interest will be capable of trading at and through the Exchange
BBO in a sweep trade. In those instances where arriving DMM Interest
will be priced and sized such that it is able to trade at and then
through the Exchange BBO and the only interest represented in the
Exchange BBO is DMM Interest, the arriving DMM Interest is incapable of
trading because that would constitute a wash sale. In those instances,
Exchange systems will once again exclude the DMM Interest at the
Exchange BBO and proceed to sweep the Display Book at prices through
the excluded DMM Interest. Exchange systems will then cancel the DMM
Interest that was excluded and re-quote the new best interest.
(H) DMMs Capital Commitment Schedule
In addition to DMM Interest, DMMs will be permitted to transmit to
the Display Book additional liquidity that the DMM is committed to
provide at specific price points. This liquidity, known as the DMM
Capital Commitment Schedule (``CCS''), will provide the Display Book
with the amount of shares that the DMM is willing to trade at price
points outside, at and inside the Exchange BBO. CCS is separate and
distinct from the DMM Interest. DMM algorithms will be enabled to send
the Exchange this schedule of additional non-displayed trading
interest. The Exchange anticipates that this will create increased
opportunities for price improvement on the Exchange.
CCS interest can be accessed by the Exchange's systems in two ways,
depending on whether an incoming order is between the spread, or at the
NYSE BBO. When an order is entered, the Exchange's system will review
all the liquidity available on the Display Book including CCS interest
and will determine the price at which the full size of the order can be
satisfied (the ``completion price''). Exchange systems determine the
completion price by calculating the unfilled volume of the contra side
order (i.e., the volume of the contra side order that exceeds the
volume available to execute against it that is then present in the
Exchange bid or offer) and reviewing the additional displayed and non-
displayed interest available in the Display Book, which may be at more
than one price point, including the CCS interest submitted by the DMM
unit that is available at the completion price if the CCS interest were
to participate at the completion price, and any protected bids or
offers on markets other than the Exchange (``away interest'') to
determine the price at which the remaining volume of the contra side
order can be executed in full.
Exchange systems will then review the amount of liquidity offered
by the CCS to determine if the number of shares provided via the DMM's
CCS at the completion price is less than the number of CCS shares
provided at the next different price that has interest that is one
minimum price variation (``MPV'') (as that term is defined in Exchange
Rule 62 \125\) or more higher (in the case of an order to sell) or at
the next different price that has interest that is one MPV or more
lower (in the case of an order to buy) (hereinafter collectively
referred to as ``better price''). If the volume of CCS interest that
would be accessed is the same at the completion price and the better
price, the CCS interest will participate at the completion price with
CCS interest yielding to any other interest in Exchange systems at the
completion price.
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\125\ Pursuant to NYSE Rule 62, the minimum price variation is
currently one cent ($0.01) except that with respect to equity
securities trading on the Exchange at a price of $100,000 or
greater, the minimum price variation shall be ten cents ($0.10).
---------------------------------------------------------------------------
If the number of shares that would be allocated to the DMM CCS
interest at the better price is more than the number of shares that
would be allocated to the DMM's CCS interest at the completion price,
then the order will be executed at the better price with CCS interest
yielding to any other interest in Exchange systems at the better price.
Any remaining balance of the incoming order will be executed at the
completion price against displayable and non-displayable interest
pursuant to NYSE Rule 72.
A DMM's CCS interest may only participate once in the execution of
an incoming order. As such, CCS interest that may exist at the
completion price is ineligible to trade with any remaining balance of
the incoming order if the DMM's CCS interest was included in the
execution of any portion of such order at the better price.
Any DMM interest included in the displayed quantity and non-
displayed quantity will be executed pursuant to NYSE Rule 72.
For example, an order to sell 100,000 at the market is entered into
Exchange systems. The bid price is $50.02. The Display Book has the
following available interest:
[[Page 42867]]
----------------------------------------------------------------------------------------------------------------
Displayable Reserve
Price interest interest \126\ CCS
----------------------------------------------------------------------------------------------------------------
$50.02......................................................... 5,000 10,000 10,000
$50.01......................................................... 5,000 20,000 15,000
$49.99......................................................... 10,000 10,000 25,000
$49.98......................................................... 5,000 20,000 15,000
----------------------------------------------------------------------------------------------------------------
The system has determined that the completion price based on the
available liquidity \127\ will be $49.98. At the completion price of
$49.98 the DMM's CCS interest is 15,000 shares; however, at the better
price of $49.99 the DMM's CCS interest is 25,000 shares. Exchange
systems will therefore, execute 15,000 shares of the sell order at the
bid price of $50.02, representing the 5,000 shares available from
displayable interest and 10,000 shares available from reserve interest.
The displayable and reserve interest totaling 25,000 will be executed
the price of $50.01. At the price of $49.99 Exchange systems will
execute the 20,000 shares of the displayable and reserve interest and
the 25,000 shares of CCS interest. The remaining 15,000 will be
executed at the completion price of $49.98, representing 5,000 shares
from the displayable interest and 10,000 shares from the reserve
interest. In allowing CCS to participate in this manner, the incoming
buy order receives price improvement on 25,000 shares of its order by
executing that amount at the better price of $49.99.
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\126\ These quantities assume there is no DMM interest
represented in the aggregate reserve quantity available on the
Display Book. If there were such DMM interest, that interest would
be able to trade irrespective of where the DMM's CCS interest
trades. The example further assumes that there is no better priced
interest at another market center. In the event there is interest
available at other market centers that is a ``protected quotation''
as provided in Reg. NMS, Exchange systems will ship orders to
satisfy the Exchange's obligations with respect to such protected
quotations. See generally, Rule 611 of Reg. NMS.
\127\ The available liquidity is determined by adding the sum of
15,000 shares of displayed and non-displayed interest at the price
point of $50.02, the sum of the 25,000 shares of displayed and non-
displayed interest at the price point of $50.01, the sum of the
20,000 shares of displayed and non-displayed at the price point of
$49.99 and the sum of the 25,000 shares of displayed and non-
displayed at the price point of $49.98 and the CCS interest at
$49.98 for a total of 100,000 shares.
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In the event the number of shares to be allocated to the DMM's CCS
Interest at the better price is less than the number of shares to be
allocated to the DMM's CCS Interest at the completion price, then the
DMM CCS Interest will participate at the completion price with CCS
interest yielding to any other interest in Exchange systems at the
completion price. For example, an order to sell 100,000 shares at the
market is entered into Exchange systems. The bid price is $50.02. The
available liquidity on the Display Book however, is now as follows:
---------------------------------------------------------------------------
\128\ These quantities assume there is no DMM interest
represented in the aggregate reserve quantity available on the
Display Book. If there were such DMM interest, that interest would
be able to trade irrespective of where the DMM's CCS interest
trades.
----------------------------------------------------------------------------------------------------------------
Displayable Reserve
Price interest interest \128\ CCS
----------------------------------------------------------------------------------------------------------------
$50.02......................................................... 5,000 10,000 10,000
$50.01......................................................... 5,000 10,000 15,000
$49.99......................................................... 10,000 10,000 15,000
$49.98......................................................... 5,000 20,000 25,000
----------------------------------------------------------------------------------------------------------------
In this example, the CCS Interest will be executed at the
completion price of $49.98 because it is greater than the CCS interest
available at $49.99. Exchange systems will execute 15,000 shares of the
order at the bid price of $50.02 (5,000 shares displayable interest and
10,000 shares reserve interest). An additional 15,000 shares will be
executed at $50.01 (5,000 shares displayable interest and 10,000 shares
reserve interest). The 20,000 shares of displayable and reserve
interest will be executed at $49.99. The remaining portion of the sell
order (50,000 shares) will be executed against the 50,000 shares (5,000
shares displayable interest, 20,000 shares reserve interest and 25,000
CCS interest) available at the price of $49.98. In this case, the CCS
model allows the incoming sell order to be filled at the price of
$49.98 through the available CCS interest at that price, whereas,
without CCS interest, part of the order would have received a price
inferior to $49.98.
A DMM's CCS interest inside the Exchange BBO will be accessed by
Exchange systems to provide price improvement to incoming orders and to
match better-priced bids and offers if available on away market
centers. DMMs will not be required to be represented in the bid or the
offer in order to provide price improvement interest.
Pursuant to proposed NYSE Rule 1000(e), CCS interest may trade
inside the Exchange BBO with interest arriving in the Exchange market
that: (i) Will be eligible to trade at or through the Exchange BBO;
(ii) will be eligible to trade at the price of interest in Exchange
systems representing non displayable reserve interest of Reserve Orders
and Floor broker agency interest files reserve interest (``hidden
interest''); or (iii) will be eligible to route to away market interest
for execution if the total volume of CCS interest, plus d-Quote
interest in Floor broker agency interest files, plus any interest
represented by hidden interest would be sufficient to fully complete
the arriving interest at a price inside the Exchange BBO. The Display
Book will determine the price point inside the Exchange BBO at which
the maximum volume of CCS interest will trade, taking into account the
volume, if any, available from d-Quotes and hidden interest. The
arriving interest will then be executed at that price, with all
interest (CCS, d-Quote, non-displayed reserve interest) trading on
parity.\129\ Any reserve interest of the DMM that is also eligible to
trade at the price inside the Exchange BBO at which the CCS interest
will participate will be aggregated with the DMM's CCS interest at that
price when the trade execution is allocated.\130\ In this manner, an
incoming order may be executed at
[[Page 42868]]
multiple price points in between the quote against d-quotes, Non-
Displayed Reserve interest of all participants and CCS interest.
However, CCS interest may only participate once if more than one
execution is required to fill the order.
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\129\ An explanation of how the parity allocation of executions
will be accomplished is provided in the text of subsection (d)(2) of
Proposed New Market Model Section.
\130\ See July 16th e-mail, supra note 101.
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(2) Floor Brokers
Along with rules addressed to DMMs, the Exchange is proposing
changes to existing rules that apply to Floor brokers.
(A) Elimination of Percentage Orders
The Exchange proposes to amend NYSE Rule 13 and to delete NYSE
Rules 70.25(d)(i)(A), 123A.30 and 1000(d)(2)(D) to rescind percentage
orders as an acceptable order type on the Exchange. As a result of
these proposed amendments, Floor brokers will no longer be permitted to
enter CAP-DI orders. In place of this order type, the Exchange intends
to provide Floor brokers access to algorithmic technology that will
replicate the trading strategy achieved by the use of CAP-DI orders
through the Floor broker's handheld electronic device.
The Exchange believes that this change is necessary to improve the
efficiency of the Display Book. The current processing of CAP-DI orders
impedes the efficiency of the Display Book for a number of reasons.
Among other things, CAP-DI orders require the system to monitor and
calculate many variables including when the CAP-DI order is eligible
for conversion and execution; for each individual execution the system
must calculate the number of shares the CAP-DI order is entitled to act
dynamically update the remaining quantity of the order until the CAP-DI
order is executed in full. Moreover, because CAP-DI orders are now
executed in tandem with executions for the specialist account the
system is also required to monitor and calculate this information for
additional executions.
In addition, system efficiency is affected by the fact that CAP-DI
orders may be passively converted. The process of passively converting
CAP-DI orders impedes the specialist's ability to function efficiently
in an automated market because the specialist must manually complete
the passive conversion. The increase in the speed of trading and the
delay inherent in requiring the DMM to manually passively convert CAP-
DI orders is inconsistent with the Exchange's proposed more electronic
model.
(B) d-Quote Trading with Non-Marketable IOC Orders and at the Open and
Close
The Exchange further proposes to amend NYSE Rule 70 to enhance the
functionality of the Floor broker d-Quote to increase the liquidity
available for executions on the Exchange. Specifically, the Exchange
proposes to allow d-Quotes to partially or completely fill a non-
marketable immediate or cancel order (``IOC'') which includes NYSE IOC,
Reg. NMS IOC and an Inter-market Sweep Order (``ISO'') \131\ that are
within the d-Quotes discretionary range.\132\
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\131\ See NYSE Rule 13. By their definition, these order types
are never quoted but must be automatically executed. Any remaining
unfilled portion is immediately and automatically cancelled. Non-
marketable IOC orders are immediately and automatically cancelled.
\132\ See Proposed NYSE Rule 70.25(d)(ix).
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In allowing the d-Quote to interact with a non-marketable IOC, the
Exchange seeks to provide the IOC an opportunity to receive a partial
or complete execution. In instances where the d-Quote only partially
completes the order, the remaining portion of the non-marketable IOC
will be automatically and immediately cancelled.
To further increase the liquidity available at the opening and
closing transaction, the Exchange additionally proposes to amend NYSE
Rule 70.25(a)(ii) to allow d-Quotes to be active in the opening and
closing transactions which will allow a d-Quote to execute up to its
maximum amount of discretion.
(C) Floor Broker Interest Published to OpenBook
The Exchange proposes to have Floor broker interest not designated
DND published to OpenBook system at every price point. The displayable
portions of Floor broker interest designated DND will only be included
in OpenBook when such interest is at the Exchange BBO. Floor broker
agency interest employing Non-Displayed Reserve functionality, as
described further below, will not be included in OpenBook. The Exchange
believes that including this interest in OpenBook will benefit
customers by providing its customers with a fuller view of the
liquidity available on the Exchange.
(d) Changes to NYSE Order Types and Order Processing
(1) Additional Undisplayed Liquidity
Floor brokers, Off-Floor participants and DMMs will continue to
have the ability to maintain reserve liquidity on the Exchange;
however, the NYSE proposes to modify each participant's ability to
provide reserve interest. As a threshold matter, the Exchange intends
to amend NYSE Rule 13 to refer to all undisplayed Off-Floor interest as
``Reserve Orders.'' Within that broad category, the Exchange proposes
to create two types of reserve interest, ``Minimum Display'' and ``Non-
Displayed Reserve.'' \133\
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\133\ Through this filing, the Exchange proposes to make
permanent NYSE Rule 13 governing Reserve Orders. The Exchange
further proposes conforming amendments in proposed NYSE Rules 70(e)
and 104 to provide Floor brokers and DMMs with equivalent
functionality.
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(A) Minimum Display Orders
``Minimum Display Order'' would require that a portion of the
shares in the order, a minimum of one round lot, be designated for
display and the Exchange would provide Floor brokers and DMMs with
equivalent functionality (collectively ``Minimum Display Interest'').
Each time a Minimum Display Reserve Order is replenished from reserve
interest, a new time-stamp is created for the replenished portion of
that Minimum Display Reserve Order, while the remaining reserve
interest retains the time-stamp of its original entry.
Minimum Display Interest will participate in manual executions.
Exchange systems will include all Minimum Display interest in the
aggregate order information available for execution at a price point
when the DMM facilitates a manual transaction. The Minimum Display
Interest will not be identifiable but will be included, where eligible,
in any resulting execution.
The Exchange further proposes that the aggregate interest of
Minimum Display Interest be included in the aggregate interest
available to be seen by the DMM in order to provide information about
orders available in Exchange systems for response to a Floor broker's
market probe request pursuant to NYSE Rule 115.
Currently, during a manual execution, Floor broker DND reserve
interest that has a displayed quantity and Reserve Orders pursuant to
NYSE Rule 13 are included in the aggregated order information displayed
to the specialist only during manual executions (e.g., the opening and
closing trade on the Exchange, resuming trades after a LRP is reached,
or during a gap quote situation). Pursuant to Exchange Rule
70.20(h),\134\ access to the Display Book
[[Page 42869]]
system for information on reserve interest is only for the purpose of
effecting transactions that are reasonably imminent. The Exchange
proposes to amend NYSE Rules 13, 70.20 and 115 to include as eligible
information a DMM may provide, all Minimum Display Order Interest in
response to a Floor broker's market probe request. Specifically, the
Exchange proposes to amend NYSE Rules 13 and 115 to specifically state
that the aggregate interest of the proposed ``Minimum Display Order''
will be included in the information disseminated pursuant to NYSE Rule
115.
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\134\ NYSE Rule 70.20(h)(ii) provides, ``Specialists, trading
assistant and anyone acting on their behalf are prohibited from
using the Display Book system to access information about Floor
broker agency interest excluded from the aggregated agency interest
other than for the purpose of effecting transactions that are
reasonably imminent where such Floor broker agency interest
information is necessary to effect such transaction.''
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Pursuant to NYSE Rule 115(iii) a specialist may provide information
about orders contained in the Display Book, referred to also as a
market probe, ``* * * to provide information about buying or selling
interest in the market, including aggregated buying or selling interest
contained in Floor broker agency interest files other than interest the
broker has chosen to exclude from the aggregated buying and selling
interest in response to an inquiry from a member conducting a market
probe in the normal course of business.''
The Exchange further proposes to amend NYSE Rule 70.20(h)(ii) to
remove the prohibition against specialist's ability to provide
information about Floor broker reserve interest. The Exchange proposes
that all Floor broker interest not designated DND be included in the
information eligible for dissemination pursuant to NYSE Rule 115.
(B) Non-Displayed Reserve Orders
In addition to Minimum Display Interest, the Exchange further
proposes to provide all market participants with the ability to
maintain completely non-displayed interest. This proposed type of
reserve interest for all market participants will not have any of the
order designated for display. The Exchange proposes to create the
``Non-Displayed Reserve Order'' for Off-Floor participants and provide
Floor brokers and DMMs with equivalent functionality.
Non-Displayed Reserve Orders will not be included in the
information available to the DMM for manual execution.
Floor brokers may also utilize Non-Display Reserve functionality to
enter reserve interest. If the Floor broker uses this functionality,
there is no interest displayed in the published quotation, but the
interest will be eligible for manual executions because the DMM has the
ability to view the Floor broker agency interest in the aggregate.
Floor broker agency interest file reserve interest may also be
designated as ``Do Not Display'' (``DND''), meaning such interest will
not be available to the DMM for manual executions. As such, Non-
Displayed Reserve Order and Floor broker Non-Display functionality
designated DND will not participate at the open or the close, during a
gap quote situation or when a manual execution is required to trade out
of an LRP that locks or crosses the market. Therefore, these types of
interest may be executed at an inferior price, and will not be
protected in any manual trade--at the choice of the customer.
DMM interest employing Non-Displayed Reserve functionality will,
however, be eligible to participate in a manual transaction.
Off-Floor participants that want to have non-displayed liquidity
participate in a manual transaction will be required to send a Minimum
Display Order. Similarly, Floor brokers that choose to have non-
displayed liquidity participate in a manual transactions must not
designate such interest DND.
(2) Execution of Bids and Offers
The Exchange believes that the changes proposed herein create a
market model where all participants have the ability to compete. As
such, the Exchange proposes to amend NYSE Rule 72 to provide to all
market participants the ability to receive executions on an equal basis
(``parity'') with other interest available at that price.\135\
Individual Floor brokers and the DMM registered in the security shall
each constitute a single market participant. All Off-Floor orders
entered in Exchange systems at the Exchange BBO shall together
constitute a single market participant (``Off-Floor Participant'') for
the purpose of share allocation. Specifically, unlike the current
specialists, who must yield to all off Floor interest, DMM Interest at
any price point will no longer be restricted in its ability to receive
shares during an execution and no longer would be required to yield to
any Off-Floor interest.
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\135\ The amendments proposed herein apply only to round-lot
executions. Odd-lot executions will continue to be executed in the
Odd-lot system and priced pursuant NYSE Rule 124. The DMM will act
as the contra to all odd-lot executions as specialists do currently.
The Exchange also proposes to delete NYSE Rule 123A.22 as it is no
longer applicable because odd-lot orders are automatically executed
in the Odd-lot system. In addition, conforming amendments are
proposed to NYSE Rule 70.20 (a) to remove text pertaining to
restrictions on a specialist's ability to trade on parity. In
addition, the Exchange proposes to remove text in NYSE Rule 70.20(b)
that refers to precedence based on size. The Exchange also proposes
conforming amendments to NYSE Rule 108 subparagraphs (a) and (b) to
remove language that discusses restrictions to parity and precedence
based on size.
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(A) Priority and Parity for Setting Interest
Proposed NYSE Rule 72 would modify the concept of priority to
provide that where there is more than one bidder (offerer)
participating in an execution and one of the bids (offers) was
established as the first made at a particular price and such bid or
offer is the only interest when such price is or becomes the best bid
or offer published by the Exchange (the ``Setting Interest''), that the
displayed portion of such Setting Interest is entitled to priority. In
order to qualify as Setting Interest, it must have been the only \136\
interest quoted at a price. Only the quoted (i.e., displayed) portion
of the Setting Interest is entitled to priority (``Priority
Interest'').
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\136\ If, at the time of quoting, Non-Displayed Reserve Orders
or Floor broker and DMM interest employing Non-Displayed Reserve
Functionality exist at the price point along with a single order or
quote that has a published quantity, the single order will be deemed
to be a setting order even if the Hiden Reserve Orders and Floor
broker and DMM interest employing Hiden Reserve Functionality
arrived first. In addition, if prior to quoting, there are two
orders at the price point and one of those orders cancels, the
remaining order that is the only interest quoted at the price is
conspired the Setting Interest. see Proposed Rule 72(a)(ii); see
also July 17th e-mail, supra note 3.
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Exchange systems will be responsible for share allocation and thus
will create interest files for each market participant.
Exchange systems will allocate the first 15% of any execution (a
minimum of one round lot) \137\ at that price to the Priority Interest.
For the remainder of that execution, Setting Interest will receive
executions on parity with other interest available at that price.
Exchange systems will repeat the allocation logic for the Setting
Interest until the Priority Interest is completely executed. Any
remaining non Priority Interest of the Setting Interest will be
executed on parity.
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\137\ All allocations will be done on a round lot basis. If 15%
would result in the Priority Interest receiving a mixed lot,
Exchange systems will round up to the nearest round lot.
---------------------------------------------------------------------------
The Exchange proposes to have Priority Interest retain its standing
even if the Exchange BBO moves away from the price point. For example,
assume that the DMM is established as the Setting Interest at $30.05
bid. A sell order is executed against the DMM's Priority Interest at
$30.05 that does not completely execute the DMM's Priority
[[Page 42870]]
Interest. The Exchange best bid then moves to $30.07. If the Exchange
best bid again becomes $30.05 on that day, the remaining portion of the
DMM's Priority Interest will again receive the first 15% of any
subsequent execution at the $30.05 bid until the DMM's Priority
Interest is executed or cancelled, trading in the stock is halted or
the trading session ends.
Partial cancellations will count first against the non Priority
interest of any Setting Interest. All allocations to the Setting
Interest will be decremented from the Priority Interest first whether
the allocation is based on priority or parity. Setting Interest may be
executed on parity with no priority allocation if the quote moves to a
better price point and thereafter an incoming order exceeds the shares
available for execution at the newly established Exchange BBO. In those
instances, the Setting Interest will be executed on parity and the
Priority Interest will be decremented first. For, example, assume that
Customer X is established as the Setting Interest at a bid of $30.05. A
sell order is executed against Customer X's Priority Interest at $30.05
that does not completely execute Customer X's Priority Interest. The
Exchange best bid then moves to $30.07. A subsequent sell order is
entered into Exchange systems to execute against the $30.07 bid that
exceeds the number of shares available for execution at the $30.07 bid.
There is bid interest at the price of $30.06. In order to complete the
execution of the sell order, Exchange systems will execute the
remainder of the order against all the available interest at the bid
prices of $30.06 and $30.05. Customer X's Priority Interest will be
executed with all other available interest at $30.05 on parity as if
there was no Setting Interest.
Where there is more than one bidder (offerer) participating in an
execution and none of the bids (offers) was established as the Setting
Interest at a particular price, the shares will be allocated on parity.
(B) Priority and Parity in the Absence of Setting Interest
Where there is no Setting Interest, Exchange systems will divide
the size of the executing order by the number of participants. The
total number of shares to be allocated to each participant will be
distributed equally among the participants where possible. Within the
single Off-Floor Participant, shares executed will be allocated in
order of time priority of receipt of Off-Floor Participant Interest
into Exchange systems. Executions will be allocated in round-lots. In
the event the number of shares to be executed at the price point is
insufficient to allocate round lots to all the participants eligible to
receive an execution at the price point, the Exchange systems will
create an allocation wheel of the eligible participants at the price
point and the available shares will be distributed to the participants
in turn.
On each trading day, the allocation wheel for each security is set
to begin with the participant whose interest is entered or retained
first on a time basis. Thereafter, participants are added to the wheel
as their interest joins existing interest at a particular price point.
If a participant cancels his, her or its interest and then rejoins,
that participant joins as the last position on the wheel at that time.
Thus, if Display Book has displayed two bids from Off-Floor
Participants for a total volume of 200 shares, the DMM and three Floor
brokers are bidding at the same time for 100 shares each, Exchange
systems will divide an execution among the participants as explained
below.
------------------------------------------------------------------------
Order 1 100 shares & Order
2 100 shares Book participant
------------------------------------------------------------------------
DMM 100 shares......................... Participant A.
Floor Broker 1 100 shares.............. Participant B.
Floor Broker 2 100 shares.............. Participant C.
Floor Broker 3 100 shares.............. Participant D.
------------------------------------------------------------------------
In instances where the shares to be executed are insufficient to
split among Participants, the distribution of shares will be executed
serially. For example, a market order for 300 shares to sell entered in
Exchange systems will allocate 100 shares to Book Participant Order
1, Participant A and Participant B. Subsequently, another
order to sell 300 shares at the same price is received by Exchange
systems. Those shares will be allocated to Participant C, Participant
D, and Order 2 Book Participant.
Non-Displayed Interest at price points between the Exchange BBO
will also trade on parity. Thus non-marketable orders that are priced
in between the Exchange BBO will be eligible to be executed against all
non-displayed interest in Exchange systems at those price points. The
total number of shares to be allocated will be distributed based on
parity.
The Exchange further proposes to change its overall allocation
logic to require that for all executions, at the Exchange BBO or
outside the Exchange BBO, the displayable bids (offers) shall trade
first with orders to sell (buy). In the event that all displayable
interest is completely executed at the price point and there is non-
displayable interest available for execution at that price point, the
remainder of the incoming order will be executed against the non-
displayable bids (offers) at the price point. The non-displayable bids
(offers) will trade on parity with the orders to sell (buy) at the
price point.
(e) Additional Amendments
In addition to the substantive amendments discussed above, the
Exchange proposes to make certain conforming amendments. Where
applicable, the word ``specialist'' is proposed to be changed to
``DMM,'' ``specialty stock'' changed to ``registered security'' and
related conforming changes throughout the NYSE Rulebook.
The Exchange further proposes to amend NYSE Rule 7 to delete the
term ``Exchange Ticket'' and define the Exchange BBO as the best bid
and offer disseminated by the Exchange to the Consolidated Quotation
System.
Conforming amendments are proposed to NYSE Rule 35 in order to
remove rule text that refers to ``tickets'' for entrance on the Floor
and clarify that such entrance is subject to Exchange approval.
In NYSE Rule 46A ``Executive Floor Governors'' the Exchange
proposes to change the word ``consist'' to ``comprise'' in order to
provide greater clarity in the rule. The Exchange further proposes to
amend the rule to allow supervising DMMs to serve in the capacity of an
Executive Floor Governor.
Conforming amendments are proposed for NYSE Rule 52 in order to
clarify that pre-opening indications are disseminated pursuant to NYSE
Rule 15 (``Pre-Opening Indications'').
The Exchange proposes to amend NYSE Rule 60 (``Dissemination of
Quotations'') to include the appropriate names for the divisions of the
Exchange, include modified vocabulary, remove language relating to
``liquidity bid'' and ``liquidity ``offer'' from paragraphs (d) and
(e), and reflect the accurate citations for the federal securities laws
referenced therein. For example, the Exchange proposes to amend
references to ``reported security'' to use the term ``NMS security.''
In addition, references to Rule 11Ac1-1 will be amended to refer to
Rule 602 under Reg. NMS. A reference to the Exchange's Market
Surveillance Division is proposed to be amended to refer to NYSE
Regulation, Inc.\138\ In addition, the Exchange proposes to make clear
the role of Initiating Officials in the review of market conditions
when a security is in
[[Page 42871]]
``non-firm mode.''\139\ Further, NYSE Rule 60 clarifies the role of
Initiating Officials when the Exchange quotation is not available for
automatic execution.
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\138\ The Exchange has proposed similar conforming amendments to
NYSE Rules 36 and 460.
\139\ See July 17th e-mail, supra note 3.
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NYSE Rule 79A.15(6) is proposed for deletion as ``all or none''
orders are no longer valid order types on the Exchange. Similarly, NYSE
Rule 104A.20 (Specialists exchanging names) and 104A.30 (Specialists
``stopping'' stock on book) are proposed for deletion. These provisions
relate to practices that were utilized when the Exchange had a system
of competing specialists. Neither of these practices currently occurs
on the Exchange.
The Exchange further proposes to amend NYSE Rules 61, 118.30, 122,
123B, 123C, 902, 904 and 906 to reflect that orders are entered on the
Exchange or transmitted to the Display Book rather than presented to
the specialist.
NYSE Rule 63.10 will be amended to remove the phrase ``in the hands
of the specialist and odd-lot dealers,'' as that phrase no longer
accurately reflects the Exchanges current more electronic trading
environment. Similarly, NYSE Rule 79A.15 (``Miscellaneous Requirements
on Stock Market Procedures'') will be amended to substitute the phrase
``Exchange BBO'' for ``specialist's bid or offer'' and to make
conforming changes. The Exchange further proposes to delete the
procedures described in NYSE Rule 79A.20, as the procedure described is
no longer used. The Exchange proposes to amend current NYSE Rule 70
(``Bids and Offers'') to have the title more accurately reflect the
subject matter of the rule. As such, it is proposed that NYSE Rule 70
be titled ``Execution of Floor Broker Interest.'' The Exchange further
proposed to move the first two paragraphs of NYSE Rule 70 and Rule
70.10 to NYSE Rule 71 (``Precedence of Highest Bid and Lowest Offer'')
as the Exchange believes the subject matter in those paragraphs
(establishing bids and offers) is more properly addressed in that rule.
NYSE Rule 85 ``Cabinet Securities'' is proposed for deletion as the
Exchange no longer has securities dealings by means of cabinets.
Conforming changes are proposed to NYSE Rule 123A.71 to change the
word ``specialist'' to ``members.'' NYSE Rule 123A.72 is proposed for
deletion because that rule served only to make NYSE Rule 123A.71
applicable to Floor brokers and the proposed amendment to NYSE Rule
123A.71 makes it unnecessary.
The Exchange further proposes to delete Supplementary Material .22
of NYSE Rule 123A as there are no longer odd-lot brokers operating on
the Exchange. NYSE Rule 123A.25 (``Standard Machine Order Forms'') is
also proposed for deletion as it is no longer applicable in the current
automated trading environment. Moreover, NYSE Rules 123D subparagraph
(1) and 299A subparagraph (2) are also proposed for deletion because
DMMs will, similar to current specialists, not be allowed to ``stop''
stock.\140\
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\140\ See July 16th e-mail, supra note 101.
---------------------------------------------------------------------------
The Exchange further proposes to amend NYSE Rule 91 (``Taking or
Supplying Securities Named In Order'') to delete Supplementary Material
.20, because the Exchange will no longer have specialists. NYSE Rule
91.20 under Supplementary Material provides for the executions as
principal of orders for accounts carried or serviced by specialist
organizations. The Exchange does not propose to allow DMM units to
carry or service customer accounts and therefore this portion of the
rule is proposed for deletion.
In addition to designating current Rule 104 as Rule 104T and making
conforming changes, the Exchange proposes a number of clarifications to
describe changes to the text of the Rule. In Rule 104(b)(iii)(B), the
exchange proposes to replace ``published best bid or offer'' with the
defined term ``BBO,'' when referring to the Exchange published best bid
or offer. Similarly, the Exchange proposes to replace ``best bid and
offer'' with ``BBO'' in Rule 104(c)(viii). In NYSE Rule 104T (b)(i) and
(d)(i), the Exchange proposes to clarify that DMMs may have reserve
interest at the Exchange best bid or offer by substituting the word
``or'' for ``and'' in the phrase ``Exchange best bid and offer.''
Conforming amendments to sections (9) (a) and (b) of Rule 440G
(Transactions in Stocks and Warrants for the Accounts of Members,
Allied Members and Member Organizations) are proposed.
Conforming amendments are proposed to NYSE Rule 1000 in order to
reflect that the order size eligibility, on the Exchange is up to a
maximum of 6,500,000 shares.
(f) Implementation Schedule
The proposed amendments herein require the Exchange to make
significant modifications to Exchange systems. Such modifications must
be done over time. The Exchange therefore proposes that amendments
approved herein be implemented over time pursuant to the schedule
outlined below.
(1) Non-Pilot Rules
The Exchange proposes that upon Commission approval of the instant
filing, that the amendments to NYSE Rules 13 be permanent rules of the
Exchange. Specifically, the establishment of Reserve Order types on the
Exchange and the rescission of CAP orders as viable order types on the
Exchange would be approved established as permanent changes to the NYSE
rulebook. Similarly, all conforming changes to other Exchange rules to
all Floor brokers and DMMs to use equivalent reserve order
functionality are established as permanent changes to the NYSE
rulebook.
In addition, the Exchange proposes that amendments to NYSE Rules 2
and 103 establishing the DMMs and DMM units be also approved as
permanent changes to the NYSE rulebook.
The Exchange further proposes that upon Commission approval of the
instant filing that amendments to NYSE Rule 70 that: (i) Allow for the
publication of Floor broker interest to Open Book; (ii) provide for the
availability for additional liquidity on the Exchange by allowing d-
Quote instructions to be active during the open and close; and (iii)
offer additional opportunities for price improvement by allowing d-
Quotes to trade with non-marketable IOC orders be approved as a
permanent change to the NYSE rulebook.
(2) Pilot Rules
The Exchange further proposes to commence the New Model Pilot,
subject to Commission approval, at which time, proposed NYSE Rule 72
and proposed NYSE Rule 104T will become effective.\141\ The New Model
Pilot will operate for a period of approximately one year and will be
scheduled to end on September 1, 2009 or such earlier time as the
Commission may determine to make the New Model Pilot rules permanent.
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\141\ Proposed NYSE Rule 104T will operate until October 14,
2008.
---------------------------------------------------------------------------
During the operation of the New Model Pilot, all market
participants will have the ability to receive executions on an equal
basis (``parity'')\142\ with other interest available at that price. It
is anticipated that until October 14, 2008, DMMs will still receive
order information about orders that are at or between the Exchange
quote. DMMs must abide by their affirmative
[[Page 42872]]
obligations, meeting his or her requirements to maintain displayed bids
and offers at the NBBO and re-enter liquidity pursuant to NYSE Rule
104T. Beginning October 15, 2008, DMMs will no longer be subject to a
negative obligation.
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\142\ ``Parity'' refers to the allocation of shares in an
execution on an equal basis among all participants to a transaction.
A fuller description of parity is included in subsection (d)(2) of
Proposed New Market Model.
---------------------------------------------------------------------------
Commencing on October 15, 2008, NYSE Rule 104T will cease operation
and new NYSE Rule 104 will supersede it. As of October 15, 2008 the DMM
will no longer receive any order by order information. DMMs will then
be permitted to transmit CCS interest to the Display Book to trade at
price points outside, at, and inside the Exchange BBO. The new Rule 104
and the portions of Rule 1000 relating to CCS interest of DMMs are
subject to the Pilot that is scheduled to run until September 1, 2009.
During the operation of the New Model Pilot, the Exchange is
committed to providing the Commission's Division of Trading and Markets
and the Office of Economic Analysis with statistics related to market
quality, trading activity, and sample statistics as requested by the
Commission.
(g) Conclusion
The Exchange believes that the New Model will allow the Exchange to
further enhance the speed of execution currently enjoyed by Exchange
customers in the current more electronic trading environment on the
Floor while providing the additional anonymity of execution sought by
market participants.
The Exchange believes that the proposed modifications will provide
a trading environment where market participants are competing on more
equal footing relative to their responsibilities to the market. In
providing certain functionality to one market participant and not
another the Exchange acknowledges the reality that a level playing
field is not created by treating unlike participants the same. DMMs,
Floor brokers and Off-Floor participants do not have the same
responsibilities to the market.
A DMM's ability to trade is constrained by his or her
responsibility to cushion market volatility and to replenish liquidity
when the DMM trades for his or her own account to establish or increase
a position by reaching across the market to trade with the Exchange's
published bid or offer. Similarly the Floor broker is constrained in
his or her ability to trade for his or her account at the point of sale
pursuant SEC Rule 11(a) described above. None of these responsibilities
is imposed on the Off-Floor participant. Off-Floor participants are
therefore able to trade unfettered by the constraints of market
responsibilities.
However, DMMs, Floor brokers and Off-Floor participants have access
to the same market information, although in certain instances Off-Floor
participants may be privy to information available about an order that
is being ``shopped'' off the Floor. Moreover, armed with equal
information, in certain instances more than DMMs and Floor brokers, the
Off-Floor participant uses a computer program for entering orders that
employs an algorithm to decide the venue, timing, price, or even the
final quantity of the orders to be sent to the market center for
execution. In this manner, Off-Floor participants are able to break up
a large trade into several smaller trades to manage their risk by
having little to no market impact. The Exchange submits that a
significant portion of executions on equities markets are the result of
the use of algorithms.
The Exchange further submits that the proposed New Model will allow
the Exchange to continue to provide a quality market that maintains a
competitive market maker responsible for providing liquidity to the
market when there is a recognized need for additional liquidity. DMMs
will bridge the gap between supply/demand by purchasing when no one
else is buying or selling when no one else is selling and by overall
maintaining a fair and orderly market.
The New Model will allow the Exchange to maintain the element of
human judgment that is particularly valuable in less liquid securities,
at openings (re-openings), closings, and in order to trade out of Gap
quote and LRP situations that would lock and cross the market. The
Exchange further believes that the New Model will allow the Exchange to
continue to make quality markets in securities during times of
uncertainty, such as when an earnings surprise, news, or an outside
event leads to market volatility and/or instability. In these
situations, DMMs will act as a liquidity provider to reduce volatility,
thus stabilizing prices, and maintaining a fair and orderly market that
is the hallmark of the NYSE.
2. Statutory Basis
NYSE believes that the proposed rule change is consistent with
Section 6(b) of the Act \143\ in general, and the requirement in
Section 6(b)(5) of the Act,\144\ in particular, that the rules of an
exchange be, among other things, 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 Exchange
believes the proposed rule change is consistent with these principles
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.
The Exchange further believes that the proposed New Model will increase
the speed and efficiency of automatic execution on the NYSE and create
a trading environment where market participants compete more equally.
---------------------------------------------------------------------------
\143\ 15 U.S.C 78f(b).
\144\ 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 proposed amendments reflect significant changes to the
structure of the Exchange's market. As such, there have been numerous
valuable discussions with Exchange customers, members, and member
organizations concerning the concepts underlying these proposals.
Specifically, there have been discussions concerning the structure and
functioning of the new market model received from various
constituencies of the Exchange. For example, current specialists and
specialist member organizations commented on the nature of the duties
and responsibilities of the DMM in the new model through a review of
the current duties and responsibilities of today's specialists. This
resulted in several suggestions that were made part of proposed Rules
104 with respect to duties and obligations of DMMs, Rule 72 with
respect to parity allocation of executions and amendments to Rule 1000
with respect to the functioning of the Capital Commitment Schedule
interest to be entered by DMMs. Customers of the Exchange provided
input on the proposed revisions to the Reserve Orders (Rule 13) and
parity allocation of executions. In certain instances, member
organizations have provided written comment to draft rule text. Where
necessary, those comments
[[Page 42873]]
have been addressed in modifications to the original proposal.
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-2008-46 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2008-46. 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 offices 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-2008-46 and should be
submitted on or before August 13, 2008.
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\145\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\145\
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-16823 Filed 7-22-08; 8:45 am]
BILLING CODE 8010-01-P