[Federal Register Volume 74, Number 111 (Thursday, June 11, 2009)]
[Notices]
[Pages 27854-27856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-13721]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60045; File No. SR-NYSE-2009-55]


Self-Regulatory Organizations; New York Stock Exchange LLC, 
Notice of Filing of a Proposed Rule Change Amending Rule 70.25 To 
Permit All Available Contra-side Liquidity To Trigger the Execution of 
a d-Quote

June 4, 2009.
    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 2, 2009, New York Stock Exchange LLC (``NYSE'' or the 
``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. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 70.25 to permit all available 
contra-side liquidity to trigger the execution of a d-Quote. The text 
of the proposed rule change is available at the Exchange, the 
Commission's Public Reference Room, and http://www.nyse.com.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those 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 parts of such statements.

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

1. Purpose
    The Exchange proposes to amend NYSE Rule 70.25(c)(iii) to provide 
that all available contra-side liquidity within the possible execution 
range of a d-Quote will be considered when determining whether to 
activate a d-Quote.\3\
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    \3\ The Exchange notes that parallel changes are proposed to be 
made to the rules of NYSE Amex LLC. See SR-NYSEAmex-2009-24.
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Background

    Rule 70.25 governs the entry, validation, and execution of bids and 
offers represented by a Floor broker on the Floor of the Exchange via 
agency interest files (``e-Quotes'') that include discretionary 
instructions as to size and/or price (``d-Quotes''). The discretionary 
instructions that a Floor broker may include with an e-Quote can relate 
to the price at which the d-Quote may trade and the number of shares to 
which the discretionary price instruction applies.
    Rule 70.25(c) provides that a Floor broker may designate the amount 
of his or her e-Quote to which discretionary pricing instructions 
apply. Floor brokers may also designate a minimum or maximum size of 
contra-side volume with which the Floor broker is willing to trade 
using discretionary pricing instructions. However, under current Rule 
70.25(c)(iii), Exchange systems currently look only at the contra-side 
displayed interest on the Display Book[supreg] \4\ (``Book'') to 
determine whether the contra-side volume is within the d-Quote's 
discretionary size range. Therefore, the displayed bid or offer must 
meet the minimum volume of the d-Quote before a d-Quote can be 
activated.
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    \4\ The Display Book system is an order management and execution 
facility. The Display Book system receives and displays orders to 
the DMMs, contains the Book, and provides a mechanism to execute and 
report transactions and publish 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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    For example, assuming the Exchange Best Bid and Offer (``BBO'') is 
.05 bid for 1,000 shares and offering 1,000 shares at .08, a d-Quote 
bidding for .05 with four cents of price discretion and a minimum share 
volume subject to such discretionary pricing instructions of 4,000 
shares would not be activated because the displayed offer of 1,000 
shares is not sufficient to fill the discretionary size instructions. 
Accordingly, that d-Quote would not trade.
    Similarly, the d-Quote would not be activated even if the Book has 
contra-side undisplayed interest that could meet both the discretionary 
pricing and volume instructions of the d-Quote. Taking the same example 
as above, if

[[Page 27855]]

Exchange systems have 3,000 shares offered at .09, which is not part of 
the displayed offer but is both within the discretionary pricing and 
volume instructions of the d-Quote (1,000 shares at the displayed offer 
at .08 plus 3,000 shares of contra-side volume at .09 meets the 4,000 
minimum size and price instruction of the d-Quote), the d-Quote would 
not trade. Or, if in addition to the 1,000 shares offered at .08 that 
is displayed, there is an additional 3,000 shares offered at .08 in 
reserve interest, notwithstanding that the displayed offer and reserve 
interest at the .08 price point would meet the discretionary volume 
instructions of the d-Quote, the d-Quote would not trade.
    The Exchange notes that decreasing the minimum discretionary size 
of the d-Quote would not permit the d-Quote to trade with the contra-
side liquidity because the discretionary pricing instructions of a d-
Quote are active only for that portion of an e-Quote that also has 
discretionary size instructions.\5\ For example, if a d-Quote for 1,000 
shares has a discretionary price range of .04 and a minimum volume of 
100 shares, in the above example, only those 100 shares would trade 
against the displayed offer. The remaining 900 shares would be treated 
as an e-Quote bid for .05 and would not be eligible to trade with the 
displayed offer or any other interest within the discretionary price 
instructions.
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    \5\ See Rule 70.25(a)(iv) (``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.'').
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Proposed Amendment

    The Exchange proposes to amend Rule 70.25(c)(iii) to remove the 
restriction that only the displayed interest will be considered when 
determining whether the contra-side volume is within the discretionary 
pricing instructions of the d-Quote. The Exchange believes that all 
interest willing to trade at certain price points should be permitted 
to trade. Because Exchange systems have both displayed and undisplayed 
liquidity, considering only displayed contra-side liquidity does not 
take into account the true state of liquidity when determining whether 
to activate a d-Quote. The current rule therefore restricts which 
interest may be considered rather than allow willing interest to 
interact.
    As proposed, if all available contra-side volume within the 
discretionary price and size instructions of a d-Quote is considered, 
such d-Quote will trade against such contra-side liquidity in the same 
manner that a market order or a marketable limit order would execute 
against such available contra-side liquidity. For example, assuming 
that the Exchange BBO is still .05 bid for 1,000 shares and offering 
1,000 shares at .08, if a market order or marketable limit order to buy 
4,000 shares entered Exchange systems, such order would trade not only 
with the displayed offer of .08, but would also trade with any reserve 
interest that is better than the displayed offer (e.g., if there is 
non-displayed interest offered at .07), reserve interest at the price 
of the displayed offer, and if there is insufficient liquidity at the 
displayed offer price or better, the market order would sweep up the 
Book. Similarly, as proposed, if the d-Quote bid for .05 had four cents 
of price discretion for a minimum size of 4,000 shares, that d-Quote 
would interact with the market the same as a market order or a 
marketable limit order to buy 4,000 shares.
    The Exchange notes that the d-Quote functionality sought with this 
rule proposal provides Floor brokers with functionality similar to that 
previously available to Floor brokers. As permitted by former Rule 
123A.30(a), a CAP-DI order was the elected or converted portion of a 
percentage order that was convertible on a destabilizing tick and 
designated for immediate execution or cancel election. When elected, a 
CAP-DI order would have automatically executed against any contra-side 
volume available at the electing price and was eligible to participate 
in a sweep. The Rule 70.25(c)(iii) limitation that only displayed 
interest is considered when determining whether the contra-side volume 
meets the d-Quotes discretionary size instructions was added during a 
time when Floor brokers still had the ability to enter CAP-DI orders.
    In connection with the Next Generation Market Model, the Exchange 
eliminated CAP orders in part because the manner in which such orders 
were processed impeded the efficiency of the Book.\6\ Accordingly, 
Floor brokers no longer have the capability to enter an order into 
Exchange systems that would be elected at certain price points and then 
be eligible to trade with any available contra-side liquidity.
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    \6\ See Securities Exchange Act Release No. 58845 (Oct. 24, 
2008), 73 FR 64379 (Oct. 29, 2008) (SR-NYSE-2008-46).
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    The Exchange notes that, when it eliminated CAP orders, it did not 
have the technology to permit d-Quotes to fully replicate the 
functionality of a CAP order. Moreover, when d-Quote functionality was 
introduced in October 2006, the Exchange did not offer the ability to 
enter fully dark reserve interest. Since that time, the Exchange has 
added two new order types, the Minimum Display Reserve Order and the 
Non-Displayable Reserve Order.\7\ By restricting d-Quotes to be active 
only when the displayed interest meets the discretionary size 
instructions, d-Quotes are limited in their ability to interact with 
the type of liquidity that exists at the Exchange.
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    \7\ See id.
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    The Exchange therefore believes that the modernization of d-Quote 
functionality proposed in this rule filing enables willing interest to 
trade with all willing contra-side liquidity, including reserve 
interest, which will result in greater executed volume, better fill 
rates, new price improvement opportunities for incoming orders, and 
improved overall market quality. Additionally, the proposed 
functionality for d-Quotes is consistent with the initial purpose of 
providing Floor brokers with functionality to replicate the 
functionalities and characteristics that Floor brokers exercised in an 
auction-market model and to modernize such tools as the manner of 
trading at the Exchange evolves. As such, this enhancement does not 
expand functionality available to Floor brokers but merely restores 
functionality that previously existed, albeit in a slightly different 
format.
    The Exchange further believes that providing this improved 
functionality provides customers with a greater array of execution and 
representation choices when routing an order to the Exchange. For 
example, a customer currently can choose, among others, to: route an 
order directly to the Book electronically from an off-Floor location; 
Route an order to a Floor broker for the Floor broker to represent on 
the Floor of the Exchange; or, route an order to the New York Block 
Exchange (``NYBX Facility''), an Exchange facility that allows for the 
interaction of non-displayed liquidity with the aggregate of displayed 
and non-displayed liquidity on the Book.\8\ Each option provides 
different benefits for the customer. For example, routing an order 
directly to Exchange systems provides the benefit of an ultra low 
latency execution, which is particularly important for an 
algorithmically-driven trading strategy. Additionally, a customer may 
choose to use a Floor broker because that customer wants the benefit of 
that broker's expertise in managing complex orders, performing price 
discovery, and exercising discretion at the point of sale. Similarly,

[[Page 27856]]

a customer may choose to route an order to NYBX in order to include 
more flexible instructions in the order. For example, an order entered 
in the NYBX Facility can include a minimum triggering volume (``MTV'') 
instruction, which would require that the Book have sufficient contra-
side liquidity before the order in NYBX attempts to execute. No 
execution of an NYBX order will be attempted if the MTV is not met.
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    \8\ See Rule 1600.
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    The Exchange believes that the proposed d-Quote functionality is 
similar to how orders in the NYBX Facility are treated, in that orders 
in that facility do not require the Exchange contra-side liquidity to 
be at the Exchange BBO before the NYBX order is triggered for 
execution. Therefore, the benefit from this proposed d-Quote 
functionality is already available in another form to customers via the 
NYBX Facility. By modernizing d-Quote functionality, the Exchange is 
therefore not only replacing functionality that was previously 
eliminated, but is also providing customers who elect to use a Floor 
broker with functionality that is already available in another format, 
thereby meeting the diverse needs of all customers.
2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Act \9\ which requires the rules of an exchange to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system 
and, in general, to protect investors and the public interest. The 
proposed rule change also is designed to support the principles of 
Section 11A(a)(1) \10\ of the Act in that it seeks to assure fair 
competition among brokers and dealers and among exchange markets and 
the practicability of brokers executing investor's orders in the best 
market. The Exchange believes that permitting d-Quotes to consider all 
available contra-side liquidity when determining whether the 
discretionary size range of the d-Quote has been met meets such goals 
because it ensures that customer orders eligible to trade will execute 
against willing contra-side liquidity.
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    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change 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

    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 the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The Exchange has requested accelerated approval of this proposed 
rule change prior to the 30th day after the date of publication of the 
notice in the Federal Register. The Commission is considering granting 
accelerated approval of the proposed rule change at the end of a 21-day 
comment period.

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-2009-55 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2009-55. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of 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 publicly available. All 
submissions should refer to File Number SR-NYSE-2009-55 and should be 
submitted on or before July 2, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-13721 Filed 6-10-09; 8:45 am]
BILLING CODE 8010-01-P