[Federal Register Volume 74, Number 211 (Tuesday, November 3, 2009)]
[Notices]
[Pages 56899-56902]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-26358]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60887; File No. SR-NYSEAmex-2009-76]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by NYSE Amex LLC Amending NYSE Amex Equities Rule 70 in Order To 
Update d-Quote Functionality and Provide for e-Quotes To Peg to the 
National Best Bid or Offer

October 27, 2009.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on October 26, 2009, NYSE Amex LLC (the ``Exchange'' or 
``NYSE Amex'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. 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\ 15 U.S.C. 78a.
    \3\ 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 NYSE Amex Equities Rule 70 in order 
to (1) update d-Quote functionality and (2) provide for e-Quotes to peg 
to the National best bid or offer 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
    In this filing, the Exchange proposes (1) to amend NYSE Amex 
Equities Rule 70.25 to permit d-Quotes to be active when their filed 
prices are not at the best bid or offer, and to provide for 
discretionary instructions that a d-Quote will execute only if a 
minimum trade size (``MTS'') requirement is met, and (2) to amend NYSE 
Amex Equities Rule 70.26 to provide for e-Quotes and d-Quotes to peg to 
the National best bid or offer (``NBBO'') rather than just the Exchange 
best bid or offer (``BBO'').\4\
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    \4\ The Exchange notes that parallel changes are proposed to be 
made to the rules of the New York Stock Exchange LLC. See SR-NYSE-
2009-106.
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Background
    Rule 70.25 governs the entry, validation, and execution of bids and 
offers represented electronically by a Floor broker on the Floor of the 
Exchange that include discretionary instructions as to size and/or 
price.\5\ The discretionary instructions that a Floor broker may 
include with an e-Quote can relate to the price range within which the 
e-Quote may trade and the number of shares to which the discretionary 
price instruction applies. D-Quote functionality is available for both 
displayed and reserve interest.
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    \5\ For purposes of these rules, floor broker agency interest 
files (that is, electronic bids or offers from the Floor) are 
referred to as ``e-Quotes''. E-quotes that include discretionary 
instructions are referred to a ``d-Quotes''.
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    In particular, Rule 70.25(a) provides that d-Quotes are eligible 
for execution only when they are at or join the existing Exchange BBO, 
would establish a new Exchange BBO, or at the opening and closing 
transactions. Under current rules, d-Quotes at or joining the Exchange 
BBO may be displayed or undisplayed interest. For example, under the 
current rule, if the Exchange BBO were .05 bid for 1,000 shares and 
offering 1,000 shares at .08, a d-Quote bidding for .04 with four cents 
of price discretion would not be eligible to trade with the prevailing 
offer because the filed price of the d-Quote is not at the

[[Page 56900]]

Exchange best bid. Accordingly, notwithstanding that the pricing 
instructions of the d-Quote indicate that the customer is willing to 
trade with the available contra-side interest, that d-Quote would not 
trade.
    In addition, Rule 70.25(d)(ii) currently provides that, once it has 
been activated, a d-Quote will automatically execute against a contra-
side order if the contra-side order's price is within the discretionary 
pricing instructions and the contra-side order's size meets any minimum 
or maximum size requirements that have been set for the d-Quote. Thus, 
for example, if the minimum size requirement for a d-Quote is 10,000 
shares and an incoming contra-side order meets both the discretionary 
pricing instructions of the d-Quote and the 10,000 share minimum size 
requirement (and the d-quote is eligible for execution under Rule 
70.25(a)), that incoming order will trade with the d-Quote. Notably, 
however, if there is other interest on the same side as the d-Quote 
that can trade with the incoming order, the d-Quote may in the end 
receive an execution that is less than its trade size minimum 
threshold, because the d-quote would share the execution with other 
executable interest at the same price pursuant to applicable parity 
rules.\6\
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    \6\ See Rule 72.
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    Rule 70.26 provides for the entry, validation, and execution of an 
e-Quote that remains available for execution at the Exchange BBO as the 
Exchange BBO moves. In an automated trading environment, pegging e-
Quotes and d-Quotes permit Floor brokers to keep their interest in the 
quote, even as the quote moves. Floor brokers are able to designate a 
range of prices within which their e-Quotes and d-Quotes will peg and, 
as long as the Exchange BBO is within that range, the e-Quote and d-
Quote will be included in the quote.
Proposed Amendments
D-Quotes Active When Their Filed Price Is Not at the Exchange BBO
    The Exchange proposes to amend Rule 70.25(a)(ii) to provide that d-
Quote instructions will not need to wait for the d-Quote's filed price 
to be at the Exchange BBO before they activate. By removing references 
to specific points when a d-Quote is active, i.e., when its filed price 
is or becomes the Exchange BBO, d-Quotes will be active and available 
to execute whenever incoming interest satisfies the discretionary 
instructions, without regard to the filed price of the e-Quote.\7\
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    \7\ The Exchange will continue to provide functionality to allow 
brokers to designate d-quotes that may participate on the open and 
the close.
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    For example, as proposed, if the Exchange BBO were .05 bid for 
1,000 shares and offering 1,000 shares at .08, a d-Quote filed at a .04 
bid with four cents of price discretion would be eligible to execute 
against the offer, notwithstanding that the d-Quote was not filed at 
the Exchange best bid. Similarly, if an incoming sell order at .07 were 
to arrive, that d-Quote would be eligible to exercise discretion to 
execute at .07, between the spread. Under the proposed functionality, a 
d-Quote could also exercise discretion in a sweep outside the Exchange 
BBO. For example, assuming the same Exchange BBO, a d-Quote filed at a 
.03 bid for 1,000 shares with one cent of price discretion will trade 
with an incoming large sell order that sweeps through the .05 Exchange 
best bid. In such case, the incoming sell order would trade first with 
the displayed best bid at .05 and then with any undisplayed interest at 
.05. It would then move to the next available price point in the sweep. 
Thus, for example, assume there are 1,000 shares of the incoming order 
remaining to sell after exhausting all interest at .05; assume also 
that at .04 there is displayable interest bidding for 400 shares and 
reserve interest bidding for 600 shares. In that case, the incoming 
sell order would be allocated first to the 400 shares displayable at 
.04. The remaining 600 shares of sell interest would then be allocated 
on parity between the d-Quote, exercising one cent of price discretion, 
and the remaining reserve interest at .04, with each participant 
receiving an execution of 300 shares. If there were no interest bidding 
at .04, the d-Quote would exercise discretion and trade at .04, thus 
dampening the sweep and providing price improvement to the incoming 
order.
    The Exchange proposes to add clarifying language to Rule 
70.25(a)(i) to provide that d-Quotes that exercise discretion will be 
considered non-displayable interest for purposes of Rule 72. The 
Exchange also proposes amending Rule 70.25(d)(i) (as proposed Rule 
70.25(e)(i)) to provide that d-Quotes that execute between the Exchange 
best bid or offer will execute the largest amount of shares using the 
least amount of discretion necessary and that d-Quotes outside the 
quote will execute at their maximum discretion.
    The proposed d-Quote functionality would provide Floor brokers with 
functionality that is similar to functionality that was previously 
available to Floor brokers when the New York Stock Exchange LLC 
(``NYSE'') operated a manual auction. In particular, in the manual 
market and in the NYSE's Hybrid Market, NYSE Rule 123A.30 permitted 
brokers to enter percentage orders with CAP (convert and parity) 
instructions. A subset of CAP orders, the CAP-DI order, was the elected 
or converted portion of a percentage order that was convertible on a 
destabilizing tick (the ``D'' in ``CAP-DI'') and designated for 
immediate execution or cancel election (the ``I'' in ``CAP-DI''). 
Neither CAP nor CAP-DI orders were displayed interest. When elected, a 
CAP-DI order would automatically execute against any contra-side volume 
available at the electing price and was eligible to participate in a 
sweep or between the spread. The CAP-DI order did not have to be at the 
NYSE best bid or offer before it could be elected and executed at or 
through the NYSE BBO.
    In connection with the Next Generation Market Model, the NYSE 
eliminated CAP orders in part because the manner in which such orders 
were processed impeded the efficiency of the NYSE's Display 
Book[supreg] system.\8\ As a consequence of the elimination of CAP 
orders, Floor brokers thereafter had only a limited ability to enter an 
order into Exchange systems that would be elected for execution at a 
price point other than the Exchange best bid or offer.
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    \8\ See Securities Exchange Act Release No. 58845 (Oct. 24, 
2008), 73 FR 64379 (Oct. 29, 2008) (SR-NYSE-2008-46). 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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    When it eliminated CAP orders, the NYSE did not have the technology 
that would permit d-Quotes to fully replicate the functionality of a 
CAP order. The proposed changes would now permit brokers to replicate 
the CAP functionality, including the ability to execute in sweeps 
outside the Exchange BBO or between the spread. The Exchange believes 
this is an important tool for brokers and will assist them in more 
effectively representing their customers' orders.
    Separately, the Exchange notes that the proposed functionality 
would allow d-Quotes to interact with order types that did not exist 
when d-Quotes were first introduced, and which they are

[[Page 56901]]

unable to easily interact with under the current rules. In particular, 
when d-Quote functionality was introduced in October 2006, the Exchange 
did not offer the ability to enter fully dark reserve interest at, 
outside or between the Exchange BBO. Since that time, however, the 
Exchange has added two new order types, the Minimum Display Reserve 
Order and the Non-Displayable Reserve Order.\9\ Because d-Quotes 
currently become active only when the filed price of the d-Quote is at 
or becomes the Exchange best bid or offer, d-Quotes are therefore 
limited in their ability to interact with the type of liquidity that 
now trades at the Exchange. For example, if the Exchange BBO were .05 
bid for 1,000 shares and 1,000 shares offered at .10, there may be 
reserve sell interest available at .08, which is between the spread. A 
d-Quote bidding .04 cents with four cents of price discretion would now 
be eligible to execute against that reserve interest. The d-Quote 
functionality proposed in this rule filing therefore would enable 
willing interest to trade with all willing contra-side liquidity, 
including reserve interest. In this way, the proposed changes will 
allow the brokers' tools to keep pace with the ways in which trading on 
the Exchange has evolved.
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    \9\ See id. In addition, to reflect that the contra-side 
liquidity for d-Quotes may be reserve interest that is already in 
Exchange systems, the Exchange proposes to change references in Rule 
70.25 to ``incoming orders'' to refer instead to ``interest.''
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Minimum Trade Size (MTS) Instruction for d-Quotes
    The Exchange proposes to add a new subsection to Rule 70.25 to 
provide that a Floor broker may include additional discretionary 
instructions with a d-Quote that such d-Quote will execute only if the 
designated MTS is met. The proposed MTS functionality for d-Quotes is 
similar to the approved functionality in the New York Block Exchange 
facility (``NYBX'').\10\ Currently, d-Quotes may include instructions 
of a minimum size requirement that would trigger discretionary pricing, 
but such requirement would not guarantee a minimum execution size.
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    \10\ Under NYSE Rule 1600(c)(3)(B)(ii), orders entered into NYBX 
may include a minimum triggering volume (``MTV'') instruction. An 
order in NYBX with an MTV will execute only if there is contra-side 
interest available to meet the MTV. Similar to the proposed MTS 
functionality for d-Quotes, if the MTV for an NYBX order is not met, 
the NYBX order will not execute.
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    As proposed here, Floor brokers will be able to include an 
additional discretionary instruction that the d-Quote will not execute 
if the MTS is not met. For example, as proposed, if the minimum size 
requirement for a d-Quote is 10,000 shares and an incoming contra-side 
order meets both the discretionary pricing instructions of the d-Quote 
and the 10,000 share minimum size requirement, that incoming order will 
trigger the d-Quote. If the Floor broker also includes an MTS 
instruction of 10,000 shares and there is other competing interest on 
the same side as the d-Quote, that d-Quote will not execute if the d-
Quote would not receive an execution of at least 10,000 shares. 
Therefore, if the amount of an execution that would be allocated to a 
d-Quote is less than the MTS quantity, the d-Quote will not be eligible 
to participate in the execution and will not compete with other same-
side interest from other Floor brokers. Additionally, MTS instructions 
will not be active at the open or close.
    NYSE Amex Equities Rule 70.25(a)(vi) provides that same-side d-
Quotes from the same Floor broker do not compete with each other for 
executions allocated to that Floor broker, as they would if from 
different Floor brokers, when the d-Quote with the most aggressive 
price range executes first. The Exchange proposes to add to Rule 70.25 
that when a Floor broker designates an MTS for a d-Quote, such d-Quote 
may compete with other same-side d-Quotes from the same Floor broker by 
improving the price if necessary to satisfy its MTS. For example, if a 
Floor broker has three d-Quotes bidding for 1,000 shares at the same 
price, and none of those d-Quotes has an MTS, an incoming sell order 
for 1,000 shares will be allocated equally to all three of the d-
Quotes. In contrast, if a Floor broker has three d-Quotes bidding for 
1,000 shares at the same price, and one of those d-Quotes has an MTS of 
1,000 shares, an incoming sell order for 1,000 shares will be allocated 
in its entirety to the d-Quote with the MTS instruction if that d-Quote 
has a more aggressive price than the competing d-Quotes. If the d-Quote 
with the MTS instruction does not have a more aggressive range of 
discretionary price instructions than the competing d-Quotes, that d-
Quote will not participate because the MTS will not be met and the 
incoming 1,000 share sell order will be allocated to the other two d-
Quotes.
Pegging to the NBBO
    The Exchange proposes to amend Rule 70.26 to provide that pegging 
e-Quotes and d-Quotes will now peg to the NBBO, rather than the 
Exchange BBO. As noted above, currently, pegging e-Quotes and d-Quotes 
are activated at the Exchange BBO, and move when the Exchange BBO 
moves. Under current rules, pegging e-Quotes and d-Quotes cannot be the 
sole interest at the Exchange BBO, but must peg to other non-pegging 
interest at the Exchange BBO. Accordingly, under current rules and 
functionality, pegging e-Quotes are unable to set the Exchange BBO.
    The Exchange proposes that instead of pegging to the Exchange BBO, 
pegging e-Quotes and d-Quotes would peg to the NBBO. As a result, a 
pegging e-Quote or d-Quote may set the Exchange BBO, even if there is 
no other displayed bid or offer at the Exchange at that price. 
Accordingly, because such pegging e-Quotes or d-Quotes may now be the 
setting interest at the Exchange BBO, the Exchange proposes to amend 
Rule 70.26(vi) to provide that pegging e-Quotes or d-Quotes may be 
entitled to priority if such e-Quote or d-Quote sets the Exchange BBO. 
For example, if the Exchange best bid is .05, and the National best bid 
is .06, a pegging e-Quote will quote at the Exchange at .06, as 
interest pegged to the NBBO. That pegging e-Quote will therefore be the 
new Exchange best bid. If it is the only interest at that price when it 
becomes the Exchange BBO, it will be entitled to priority pursuant to 
Rule 72.
    Except for the ability to become the Exchange BBO and be entitled 
to priority, as proposed, the functionality of pegging e-Quotes and d-
Quotes would not otherwise change. For example, similar to the current 
rule, if the NBBO moves, the pegging e-Quote or d-Quote will move to 
follow the NBBO, provided that the NBBO is in the price range of the 
pegging e-Quote or d-Quote. In addition, a pegging e-Quote or d-Quote 
will never set the NBBO.
    The Exchange believes that the proposed change to the pegging e-
Quote and d-Quote functionality supports the goals of a national market 
system by providing additional liquidity at the NBBO and tightening 
spreads on the Exchange to the NBBO. This functionality therefore 
protects investors by aiding in the goal of executing investors' orders 
in the best market.
2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Act \11\ 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

[[Page 56902]]

principles of Section 11A(a)(1) \12\ 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 investors' orders 
in the best market. The Exchange believes that the updates to Floor 
broker functionality meet such goals because it ensures that customer 
orders eligible to trade will execute against willing contra-side 
liquidity. In particular, d-Quotes that are active outside the Exchange 
BBO provide Floor brokers with functionality to replace the now defunct 
CAP-DI functionality and permit d-Quotes to better participate in 
sweeps or to execute against reserve interest. The addition of the MTS 
instruction provides investors with the ability to ensure that an 
execution will not be fragmented and therefore will promote larger-
sized executions. In addition, the Exchange believes that the proposed 
change to provide for e-Quotes and d-Quotes to peg to the NBBO ensures 
that investors' orders will be executed in the best market because more 
liquidity will be available at the NBBO.
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    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 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 Exchange 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-NYSEAmex-2009-76 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEAmex-2009-76. 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 the filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEAmex-2009-76 and should 
be submitted on or before November 24, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-26358 Filed 11-2-09; 8:45 am]
BILLING CODE 8011-01-P