[Federal Register Volume 73, Number 153 (Thursday, August 7, 2008)]
[Notices]
[Pages 46122-46124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-18153]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58268; File No. SR-NYSE-2008-67]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Reduce the Order Flow Sent to the Specialist Application Programmed 
Interface

July 30, 2008.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 29, 2008, New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by NYSE. NYSE filed the 
proposed rule change pursuant to section 19(b)(3)(A) of the Act \3\ and 
Rule 19b-4(f)(6) thereunder,\4\ which renders it effective upon filing 
with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NYSE proposes to reduce the order flow sent to the Specialist 
Application Programmed Interface (``Specialist APISM'' or ``SAPI''). 
The text of the proposed rule change is available at NYSE, the 
Commission's Public Reference Room, and http://www.nyse.com.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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. NYSE has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1.Purpose
    NYSE proposes to reduce the information that is made available to 
specialists with respect to orders as they enter Exchange systems. The 
reduction of order information provided to the specialist is the 
Exchange's way of gradually transitioning the specialists into their 
new role as Designated Market Makers (``DMMs'').\5\ The DMM on the 
Exchange will ultimately not be provided any order by order information 
as of the complete implementation of the Exchange's enhancements to its 
trading model.\6\
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    \5\ See generally Securities Exchange Act Release No. 58184 
(July 17, 2008), 73 FR 42853 (July 23, 2008) (SR-NYSE-2008-46).
    \6\ Id.
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Background
    Pursuant to NYSE Rule 104, Exchange specialists in their capacity 
as dealers for their assigned securities, maintain systems that use 
proprietary algorithms, based on predetermined parameters, to 
electronically participate in the Exchange market (``Specialist 
Algorithm''). The Specialist Algorithm communicates with the NYSE 
Display Book[supreg] system \7\ via an Exchange-owned external 
application program interface (the ``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 the specialists' ability to fulfill their 
obligation to maintain a fair and orderly market.
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    \7\ The Display Book[supreg] system is an order management and 
execution facility. The Display Book system receives and displays 
orders to the specialists, contains the Book, and provides a 
mechanism to execute and report transactions and publish the results 
to the Consolidated Tape. The Display Book system is connected to a 
number of other Exchange systems for the purposes of comparison, 
surveillance, and reporting information to customers and other 
market data and national market systems.
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    Specialist Algorithms may generate quoting and trading messages as 
prescribed by Exchange Rule 104(b)(i). To that end, the Specialist 
Algorithm receives information via the API,\8\

[[Page 46123]]

including information about orders entering Exchange systems before 
that information is available to other market participants. Specialist 
Algorithms are only provided a copy of one order at a time and must 
process and respond to each order prior to Exchange systems providing 
any subsequent order information. Exchange systems enforce the proper 
sequencing of incoming orders and messages generated by the Specialist 
Algorithm in response to this information. Once an algorithmic message 
is generated, it cannot be stopped, changed, or cancelled on its way to 
the Display Book system.
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    \8\ Exchange systems provide specialist algorithms with 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) 
incoming orders as they are entering NYSE systems; and (5) 
information with respect to odd-lot executions to which the 
specialist was the contra-side. In addition, a specialist firm may 
supply its algorithm with any publicly available information the 
specialist firm chooses. 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).
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Proposal To Reduce Order Information Provided to the Specialist 
Algorithm
    As discussed above, the evolution of the Exchange's market model 
will phase out the specialist's role and create a DMM. The DMM will be 
a market maker with the ability to trade competitively for its dealer 
account. As such, the Exchange has proposed that the DMM be on parity 
with other market participants in the execution of market interest in 
most automatic trading situations. Recognizing, that in order for the 
DMM to compete on a more equal footing with other market participants, 
the DMM should not have access to order information not available to 
the other market participants; the Exchange will no longer provide the 
DMM Algorithm with a copy of order by order information traditionally 
provided to the specialist.
    In order to gradually transition specialists into their new DMM 
role, the Exchange proposes to modify its systems so that the current 
Specialist Algorithm will no longer receive a copy of all orders prior 
to display. Instead, Exchange systems will provide in certain 
securities, as explained further below, copies of the following types 
of orders to the Specialist Algorithm: (i) Market orders; (ii) buy 
limit orders priced at the NYSE bid price or sell limit orders priced 
at the NYSE offer price; (iii) limit orders priced in between the NYSE 
bid price and the NYSE offer price; and (iv) limit orders that are 
priced at or through the opposite side quote (i.e., below the bid in 
the case of an order to sell or at or above the offer in the case of an 
order to buy).
    For example, if the NYSE is quoted at $10.05 bid and $10.10 offer, 
Exchange systems will provide the Specialist Algorithm with copies of 
the following:
    i. All market orders;
    ii. Buy orders priced at $10.05;
    iii. Sell orders priced at $10.10;
    iv. All buy and sell Limit orders priced at $10.06, $10.07, $10.08 
and $10.09;
    v. Buy orders priced at $10.10 or greater; and
    vi. Sell orders priced at $10.05 or lower.
    The Exchange will commence the reduction of the order information 
provided to the Specialist Algorithm in two securities. After a period 
of monitoring Exchange system operation, the Exchange will 
progressively implement the reduction in additional securities.\9\ It 
is anticipated that this will result in a reduction of approximately 
75% of orders provided to the Specialist Algorithm in those securities 
where the order reduction is operational. Specialist Algorithms will 
still be restricted to responding to one order at a time, and the 
sequencing of order information and responses will continue to be 
enforced by Exchange systems. When the new market model is fully 
implemented,\10\ DMMs will not receive a copy of orders prior to the 
order being published to Exchange systems.
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    \9\ Ultimately, the Exchange anticipates that the reduction of 
order information will operate in all securities traded on the 
Floor.
    \10\ Subject to Securities and Exchange Commission approval, the 
Exchange anticipates that DMMs will begin to trade on parity in the 
third quarter of 2008, and that the complete removal of order by 
order information to the DMM will commence in the fourth quarter of 
2008.
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    The Exchange believes that the reduction of order flow information 
to the current Specialist Algorithm will not adversely affect the 
quality of Exchange markets. Specialists will still be required to meet 
their affirmative obligations to maintain fair and orderly markets in 
their assigned securities.
2. Statutory Basis
    The basis under the Act \11\ for this proposed rule change is the 
requirement under sections 6(b)(5) of the Act \12\ that an Exchange 
have rules that are designed to promote just and equitable principles 
of trade, to foster cooperation and coordination with persons engaged 
in regulating, clearing settling, processing information with respect 
to, and facilitating transactions in securities, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest. The proposed rule change is designed to support the 
principles of section 11A(a)(1) \13\ in that it seeks to assure 
economically efficient execution of securities transactions and fair 
competition among Exchange market participants.
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    \11\ 15 U.S.C. 78(a).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NYSE 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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6) thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\16\ 
However, Rule 19b-4(f)(6)(iii) \17\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay so that the proposal may 
become operative immediately upon filing. The Exchange believes the 
waiver of this period will allow it to immediately foster competition 
by continuing the ability of all market participants to compete on a 
more equal basis. The Commission believes that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest. The Commission hereby

[[Page 46124]]

grants the Exchange's request and designates the proposal as operative 
upon filing.\18\
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    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
NYSE has complied with this requirement.
    \17\ Id.
    \18\ For purposes only of waiving the 30-day operative delay of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File No. SRVNYSE-2008-67 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, Station Place, 100 F Street, NE., Washington, 
DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2008-67. 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, on official business 
days between the hours of 10 a.m. and 3 p.m. Copies of such filing also 
will be available for inspection and copying at the principal office of 
NYSE. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NYSE-2008-67 and should be submitted on or before August 28, 2008.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-18153 Filed 8-6-08; 8:45 am]
BILLING CODE 8010-01-P