[Federal Register Volume 74, Number 249 (Wednesday, December 30, 2009)]
[Notices]
[Pages 69169-69172]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-30927]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61233; File No. SR-NYSE-2009-111]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving the Proposed Rule Change, as Modified by Amendment No. 1, 
Amending NYSE Rule 123C To Modify the Procedures for Its Closing 
Process and Making Conforming Changes to NYSE Rules 13 and 15

December 23, 2009.

I. Introduction

    On November 9, 2009, the New York Stock Exchange LLC (``NYSE'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to modify the procedures for its closing process 
in Rule 123C and make conforming changes to NYSE Rules 13 
(``Definitions of Orders'') and Rule 15 (``Pre-Opening Indications''). 
The proposed rule change was published for comment in the Federal 
Register on November 17, 2009.\3\ On November 25, 2009, the Exchange 
filed Amendment No. 1 to the proposed rule change.\4\ The Commission 
received one comment letter on the proposal.\5\ This order approves the 
proposed rule change as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 60974 (November 9, 
2009), 74 FR 59299 (``Notice'').
    \4\ In Amendment No. 1, the Exchange proposes to correct an 
erroneous cross-reference in Exhibit 5. Because Amendment No. 1 is 
technical in nature, the Commission is not publishing it for 
comment.
    \5\ See Letter from John F. Neary, Managing Director, Morgan 
Stanley, to Elizabeth M. Murphy, Secretary, Commission, dated 
December 8, 2009 (``Morgan Stanley Letter'').
    While the Morgan Stanley Letter welcomed the incremental 
progress under the proposal with regard to transperancy, the 
commenter urged NYSE to adopt additional changes to the closing 
process, including mandating a final and absolute cutoff time for 
participation in the closing process and instituting a more 
transparent and accurate calculation of the real time closing 
imbalance feed.
    On December 18, 2009, NYSE responded to the Morgan Stanley 
letter. See Letter from Janet M. Kissane, Senior Vice President--
Legal & Corporate Secretary, NYSE Euronext, to Elizabeth M. Murphy, 
Secretary, Commission (``Response Letter''). In the Response Letter, 
NYSE noted that it took into consideration input provided by its 
diverse constituent base, including Morgan Stanley, in crafting the 
changes to the closing process, as well as accommodating the 
interests of diverse constituencies whose business models vary 
widely, and ensuring that changes are implemented in a way that 
minimizes the possibility of unintended consequences. NYSE stated 
that, given available development resources and the complexity of 
modern markets, it was hesitant to introduce a level of incremental 
change that could have broad-ranging and unforeseen consequences. 
NYSE noted further that, as it implements the changes to the closing 
process, it will continue to work with its varied constituency, 
including Morgan Stanley, to assess the operation of the closing 
process, with an eye toward any potential changes in the behavior of 
market participants and to identify further ways to enhance the 
efficiency and transparency of the Close.
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II. Description of the Proposal

    The Exchange seeks to amend NYSE Rule 123C to modify its closing 
process.\6\ Specifically, the Exchange proposes to amend NYSE Rule 123C 
to: (i) Extend the time for the entry of Market ``At-The-Close'' 
(``MOC'') and Limit ``At-The-Close'' (``LOC'') orders from 3:40 p.m. to 
3:45 p.m.; (ii) amend the procedures for the entry of MOC/LOC orders in 
response to imbalance publications and regulatory trading halts; (iii) 
change to the cancellation time for MOC/LOC orders to 3:58 p.m.; (iv) 
require only one mandatory imbalance publication; (v) rescind the 
provisions governing Expiration Friday Auxiliary Procedures for the 
Opening and Due Diligence Requirements; (vi) modify the dissemination 
of Order Imbalance Information pursuant to NYSE Rule 123C(6) to 
commence at 3:45

[[Page 69170]]

p.m.; (vii) include additional information in both the pre-opening and 
pre-closing Order Imbalance Information data feeds; (viii) amend NYSE 
Rule 13 to create a conditional-instruction limit order type called the 
Closing Offset Order (``CO order''); (ix) delete the ``At the Close'' 
order type from NYSE Rule 13 and replace it with the specific 
definitions of MOC and LOC orders; and (x) codify the hierarchy of 
allocation of interest in the closing transaction in NYSE Rule 123(C). 
Similar changes are proposed to the rules of its affiliate, NYSE Amex 
LLC.\7\
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    \6\ Conforming changes related to the information disseminated 
prior to the opening transaction are also proposed.
    \7\ See SR-NYSEAmex-2009-81.
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    The Exchange stated in its filing that it seeks to build on changes 
it made earlier this year to simplify its closing procedures in order 
to provide customers with a more efficient closing process.\8\ The 
closing transaction on the Exchange continues to be a manual auction, 
which the Exchange believes facilitates greater price discovery and 
allows for the maximum interaction between market participants. While 
the Exchange currently provides DMM units with electronic tools to 
facilitate an efficient closing process, the Exchange believes that the 
proposed changes would maximize the use of those tools and allow for an 
even more efficient closing process.
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    \8\ See Notice, supra note 3, at pp. 59299-304 for a detailed 
description of the current closing process.
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Order Entry, Cancellation, Mandatory MOC/LOC Imbalance and 
Informational Imbalance Publications

    The Exchange proposes to amend NYSE Rule 123C to require electronic 
entry of all MOC and LOC orders, including those entered to offset 
imbalances.\9\ The Exchange stated that electronic entry of MOC and LOC 
interest would obviate the need to have imbalance publications at both 
3:40 p.m. and 3:50 p.m. because the DMM would not have to manually keep 
track of the MOC/LOC interest; rather, Exchange systems would track the 
electronically entered MOC/LOC interest, which the Exchange believes 
would allow its systems to disseminate imbalance information to all 
market participants in a more accurate and timely fashion. In addition, 
according to the Exchange, its customers have expressed that in the 
current trading environment two imbalance publications ten minutes 
apart are not useful. Accordingly, the Exchange proposes to modify the 
order information available prior to the closing transaction and amend 
NYSE Rule 123C to provide for a single imbalance publication as soon as 
practicable after 3:45 p.m., to be referred to as the ``Mandatory MOC/
LOC Imbalance Publication'' (herein ``Mandatory MOC/LOC Imbalance''), 
when there is an imbalance: (i) Of 50,000 shares or more; or (ii) of 
less than 50,000 shares that is deemed to be ``significant'' (i.e., 
significant in relation to the average daily volume of the 
security).\10\ The last sale price at 3:45 p.m. would serve as the 
basis for the Mandatory MOC/LOC Imbalance.
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    \9\ In the event a Floor broker's handheld device malfunctions, 
the DMM should assist the Floor broker by entering or cancelling 
MOC/LOC orders on the Floor broker's behalf. DMMs perform this 
administrative function on a best efforts basis. See NYSE 
Information Memos 09-26 (June 18, 2009); NYSE Member Education 
Bulletin 05-24 (December 9, 2005).
    \10\ See proposed NYSE Rule 123C(1)(d) and (4).
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    The proposal retains the current ability to publish an 
Informational Imbalance of any size. The Exchange seeks to extend the 
time for the publication of such imbalance from 3:40 p.m. until 3:45 
p.m. in order to provide a mechanism for an imbalance publication prior 
to any Mandatory MOC/LOC Imbalance if the DMM, in consultation with a 
Floor Official or qualified NYSE Euronext employee as defined in 
Supplementary Material .10 of NYSE Rule 46, deems that such imbalance 
publication is warranted for the security. In extending the time to 
3:45 p.m., the proposed rule would provide that a Mandatory MOC/LOC 
Imbalance or ``no imbalance'' notice must occur as soon as possible 
after 3:45 p.m.\11\
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    \11\ See proposed NYSE Rule 123C(1)(b) and (4).
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    The proposed new rule would further explicitly state that the entry 
of MOC/LOC orders in response to a Mandatory MOC/LOC Imbalance after 
3:45 p.m. may be entered only to offset the published imbalance.\12\ In 
the case of a ``no imbalance'' notification, no offsetting MOC/LOC 
interest could be entered at all after 3:45 p.m.\13\
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    \12\ See proposed NYSE Rule 123C(2)(b)(i).
    \13\ See proposed NYSE Rule 123C(2)(b)(ii).
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    The Exchange's proposal also allows customers to cancel or reduce 
MOC/LOC orders only in cases of legitimate errors \14\ between 3:45 
p.m. and 3:58 p.m.\15\ After 3:58 p.m., cancellations or reductions in 
the size of MOC/LOC orders, even in the event of legitimate error, 
would not be permitted.\16\
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    \14\ Pursuant to proposed NYSE Rule 123C(1)(c), a legitimate 
error is defined to be an error in any term of an MOC or LOC order, 
such as price, number of shares, side of the transaction (buy or 
sell) or identification of the security.
    \15\ See proposed NYSE Rule 123C(3) (Cancellation of MOC and LOC 
orders). The Exchange anticipates that DMMs will have sufficient 
time to perform the requisite calculations for the closing 
transaction while affording customers the ability to cancel or 
reduce in size an MOC/LOC order until 3:58 p.m.
    \16\ The Exchange could temporarily suspend the prohibitions on 
canceling or reducing an MOC or LOC order if there is an extreme 
order imbalance at or near the close. See proposed NYSE Rule 
123C(9).
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    The Exchange further proposes to create a CO order type, which 
would provide all market participants an additional method to offset an 
order imbalance at the close. The CO order would not be guaranteed to 
participate in the closing transaction. CO orders would only be 
eligible to participate in the closing transaction when there is an 
imbalance of orders to be executed on the opposite side of the market 
from the CO order and there is no other interest remaining to trade at 
the closing price. CO orders must yield to all other eligible interest.
    Unlike MOC/LOC orders, CO orders could be entered on any side of 
the market at anytime prior to the close.\17\ CO orders would not be 
included in the calculation of the Mandatory MOC/LOC Imbalance and 
Informational Imbalance. Consistent with the cancellation requirements 
for MOC and LOC orders, a CO order could be cancelled or reduced for 
any reason up to 3:45 p.m. Between 3:45 p.m. and 3:58 p.m., a CO order 
could be canceled or reduced only in the case of a legitimate error. 
After 3:58 p.m., a CO order, like MOC/LOC orders, could not be 
cancelled or reduced for any reason.
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    \17\ See proposed NYSE Rule 123C(2)(b)(iv).
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    CO orders would be eligible to participate in the closing 
transaction only to offset an imbalance and could not add to or flip 
the imbalance. If there is an imbalance at the close and the price of 
the closing transaction is at or within the limit of the CO order, the 
CO order would be eligible to participate in the closing transaction, 
subject to strict time priority of receipt in Exchange systems among 
such eligible CO orders and after yielding to all other interest in the 
closing execution, including MOCs, marketable LOCs, ``G'' orders, DMM 
interest, and at-priced LOCs. CO orders deemed eligible to participate 
in the close would be executed at the price of the closing transaction. 
If the number of shares represented by CO orders is larger than the 
number of shares required to offset the imbalance, Exchange systems 
would execute only those shares of CO orders required to complete the 
execution of the imbalance in full based on the time priority of 
receipt in Exchange systems of the CO orders. CO orders therefore would 
not be allowed to swing an imbalance to the opposite side of the 
market.

[[Page 69171]]

Modifications to Order Imbalance Information Data Feed Prior to the 
Closing and Opening Transaction

    The Exchange further proposes to modify the Order Imbalance data 
feed disseminated prior to the closing transaction. Pursuant to 
proposed NYSE Rule 123C(6)(a)(iii), the Order Imbalance data feed would 
be disseminated approximately every five seconds between 3:45 pm and 
4:00 pm. Moreover, the Exchange proposes to expand the order 
information included in the Order Imbalance Information data feed. 
Currently, the pre-closing Order Imbalance Information data feed 
includes the: (i) Reference price; (ii) MOC/LOC imbalance and the side 
of the market; (iii) d-Quotes and all other e-Quotes containing pegging 
instructions eligible to participate in the closing transaction; and 
(iv) MOC/LOC paired quantity at reference price. The proposed new data 
feed would also additionally include (i) CO orders on the opposite side 
of the imbalance and (ii) at-priced LOC interest eligible to offset the 
imbalance.
    The proposed Order Imbalance Information data feed prior to the 
closing transaction would also make available two new data fields. The 
proposed new data fields would provide subscribers with a snap shot of 
the prices at which interest eligible to participate in the closing 
transaction would be executed in full against contra interest at the 
time data feed is disseminated. It would also provide subscribers with 
the price at which closing-only interest (i.e., MOC orders, marketable 
LOC orders, and CO orders on the opposite side of the imbalance) may be 
executed in full and the price at which orders in the Display Book 
(e.g., Minimum Display Reserve Orders, Floor broker reserve e-Quotes 
not designated to be excluded from the aggregated agency interest 
information available to the DMM, d-Quotes pegged e-Quotes,\18\ and 
Stop orders) would be executed in full. Only those CO orders on the 
opposite side of the imbalance would be included in the calculation of 
the new data fields. If the price at which all closing orders in the 
Display Book would be executed in full is at or between the quote, then 
both data fields indicating imbalance information would publish the 
price at which the closing-only interest (i.e., MOC orders, marketable 
LOC orders, and CO orders) could be executed in full.
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    \18\ d-Quotes and pegged e-Quotes included in this new data 
field of the Order Imbalance Information data feed would be included 
at the price indicated on the order as the base price to be used to 
calculate the range of discretion and not at prices within their 
discretionary pricing instructions.
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    Similarly the Exchange proposes to conform the pre-opening Order 
Imbalance Information data feed to provide its market participants with 
more information prior to the opening transaction. As such, the pre-
opening Order Imbalance Information data feed would include the price 
at which all the interest eligible to participate in the opening 
transaction may be executed in full.\19\ The Exchange does not propose 
to modify the time periods pursuant to NYSE Rule 15 when the pre-
opening Order Imbalance data feed is disseminated. Moreover, the 
calculation of the reference price would also remain the same.
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    \19\ See Proposed NYSE Rule 15.
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Execution of the Closing Transaction

    The Exchange proposes to maintain its current execution logic and 
to codify the hierarchy of allocation logic applied to interest 
participating in the closing transaction. Proposed NYSE Rule 123C(7) 
would list all the interest that must be executed or cancelled as part 
of the closing transaction and the hierarchy of the interest that may 
be used to offset the closing imbalance. This codification would now 
also incorporate the new proposed CO order type into the closing 
transaction as the last interest eligible to participate in the closing 
transaction to offset an imbalance.

Trading Halts

    The Exchange further proposes to amend NYSE Rule 123C to define 
``trading halt'' as a halt in trading in any security pursuant to the 
provisions of NYSE Rule 123D (``Trading Halt'').\20\ Under the 
proposal, when a Trading Halt is in effect at 3:45 p.m., a Mandatory 
MOC/LOC Imbalance would be published as close to the resumption of 
trading as possible if the Trading Halt is lifted prior to the close of 
trading. In this event, MOC/LOC orders could be entered to offset the 
published imbalance. If the Trading Halt is not lifted, the entry of 
MOC/LOC interest, including offsetting interest, would be prohibited.
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    \20\ See proposed NYSE Rule 123C(1)(f).
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    Where a Trading Halt occurs in a security after a Mandatory MOC/LOC 
Imbalance is published, MOC/LOC orders could be entered to offset the 
published imbalance.\21\ Where a Trading Halt occurs after 3:45 p.m. 
and there is no Mandatory MOC/LOC Imbalance in the security, the entry 
of MOC/LOC interest would not be allowed.\22\
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    \21\ See proposed NYSE Rule 123C(2)(c)(i).
    \22\ See proposed NYSE Rule 123C(2)(c)(iii).
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    Unlike MOC/LOC orders, the entry of CO orders on both sides of the 
market would be permitted when a Trading Halt occurs in a security, but 
is lifted prior to the close of trading in the security. Because CO 
orders are the interest of last resort in the closing transaction, 
entry of such orders is not restricted to offsetting the Mandatory MOC/
LOC Imbalance.

Rescission of Expiration Friday Auxiliary Procedures for the Opening 
and Due Diligence Requirements

    The Exchange proposes to rescind the provisions governing 
``Expiration Friday Auxiliary Procedures for the Opening.'' According 
to the Exchange, the provisions governing Expiration Friday were 
created to facilitate a fair and orderly opening transaction in light 
of the additional order flow on Expiration Fridays. Because Exchange 
systems now allow the DMM to accommodate for such fluctuations in 
volume, the Exchange believes that these provisions are unnecessary. 
The order marking provisions were an accommodation to member 
organizations whose systems were unable to electronically affix the 
designation, and the Exchange states that all of its member 
organizations are capable of affixing appropriate order designations.
    The Exchange further seeks to make the provisions of NYSE Rule 123C 
govern solely Market and Limit ``on the Close'' Policy. Therefore, the 
Exchange proposes to delete the ``Due Diligence Requirements'' from 
this rule as they are redundant with the provisions codified in NYSE 
Rule 405.

III. Discussion and Commission Findings

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\23\ In particular, it is consistent with Section 6(b)(5) of 
the Act,\24\ which requires, among other things, that the rules of a 
national securities exchange be 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, and

[[Page 69172]]

not be designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers. The Commission also finds that the 
proposed rule change as amended is consistent with the provisions of 
Section 6(b)(8) of the Act,\25\ which requires that the rules of an 
exchange not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
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    \23\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \24\ 15 U.S.C. 78f(b)(5).
    \25\ 15 U.S.C. 78f(b)(8).
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    The electronic entry of MOC/LOC interest should increase the 
efficiency of NYSE's market and permit accurate information to be 
disseminated to market participants more quickly. The modification of 
the procedures for the entry of MOC/LOC orders in response to imbalance 
publications and regulatory trading halts should likewise improve 
transparency and efficiency.
    In connection with the change from two imbalance publications to 
one, the Commission notes the Exchange's representation that its 
customers have expressed that two imbalance publications ten minutes 
apart in the current electronic environment are unnecessary. Moving the 
cut-off time for the entry of MOC/LOC orders from 3:40 p.m. to 3:45 
p.m. should allow Exchange participants additional control of the 
handling of their orders to be executed in the closing transaction and 
additional participation in active markets.
    In connection with the postponing of the cancellation time for MOC 
and LOC orders to 3:58 p.m, the Commission notes the Exchange's 
representations that, with the proposed requirement that all MOC/LOC 
orders be entered electronically, Exchange systems will keep track of 
the available interest thus making it more readily available for the 
DMM and that systemic tracking of MOC/LOC interest makes it entirely 
feasible for the DMM to review in two minutes the interest eligible to 
participate in the closing transaction and facilitate the execution of 
the closing transaction.
    The creation of the CO order provides an additional source of 
liquidity to offset an imbalance going into the closing transaction, 
and thus should increase the greater efficiency of the closing process.
    The Commission believes that these proposed modifications are 
consistent with the Act because, taken as a whole, they should enhance 
the efficiency and transparency of the closing transaction and provide 
customers with a more accurate depiction of market conditions prior to 
the closing transaction, and therefore allow them to make better-
informed trading decisions.
    The Commission believes that the remainder of the proposed changes, 
including the codification of the hierarchy of the allocation of 
interest in the closing, the clarification of the definition of MOC and 
LOC orders, the inclusion of additional information in the Order 
Imbalance Information data feeds, and the rescission of the provisions 
governing Expiration Friday Auxiliary Procedures for the Opening and 
Due Diligence Requirements are either non-substantive or non-
controversial in nature, while enhancing the transparency of NYSE's 
market at the close, and therefore are consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change, as amended (SR-NYSE-2009-111), 
be, and it hereby is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-30927 Filed 12-29-09; 8:45 am]
BILLING CODE 8011-01-P