[Federal Register Volume 75, Number 6 (Monday, January 11, 2010)]
[Notices]
[Pages 1438-1439]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-191]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61275; File No. SR-NYSE-2009-112]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving a Proposed Rule Change Rescinding Information Memoranda 04-27 
and 07-66 and Issuing a New Information Memo Concerning the Exchange's 
Gap Quote Policy

January 4, 2010.

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 rescind NYSE Information Memoranda 04-27 and 
07-66 and issue a new Information Memo that provides updated parameters 
for, and guidance on the application of, the Exchange's Gap Quote 
Policy (the ``Policy''). In order to ensure an orderly transition to 
usage of the new parameters, the Exchange has proposed that these 
changes be made operative ten business days after the date of this 
order. The proposed rule change was published for comment in the 
Federal Register on December 1, 2009.\3\ The Commission received no 
comment letters on the proposal. This order approves the proposed rule 
change.
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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. 61048 (November 23, 
2009), 74 FR 62863 (``Notice'').
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II. Description of the Proposal \4\
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    \4\ For a full description of the proposal, including an 
overview of the history of the Policy and a detailed description of 
the current terms of the Policy, see id.
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    The purpose of the Policy is to provide public notice of order 
imbalances for securities, facilitate price discovery, and minimize 
short-term price dislocation, by allowing for the entry of offsetting 
orders or the cancellation of orders on the side of an imbalance.
    An order imbalance may occur when the Exchange receives a sudden 
influx of orders for a particular security on the same side of the 
market within a short time interval, or when one or more large-size 
orders for a security are entered, and there is insufficient offsetting 
interest. When an imbalance exists that the Designated Market Maker 
(``DMM'') determines would cause a significant price dislocation, the 
Policy provides that the DMM should widen the spread between the bid 
and offer--a process known as ``gapping the quote.'' The use of a gap 
quote signals the existence of the imbalance to the market in order to 
attract contra-side liquidity and mitigate volatility.
    The proposed Information Memo includes a summary of the options 
available to a DMM when publishing a gap quote. In this situation, a 
DMM may: (1) Trade out of the gap quote by executing contra side 
interest against the imbalance (allowing for any cancellations); (2) 
update the gap quote, in consultation with a senior-level Floor 
Official; or (3) request an order imbalance trading halt in the 
security at issue, in consultation with a senior-level Floor Official.
    Under the proposal, the volume requirement for implementing a gap 
quote would be reduced from at least 10,000 shares to at least 5,000 
shares, and the value requirement for implementing a gap quote would be 
reduced from $200,000 or more to $100,000 or more. If either 
requirement is met, the DMM may implement a gap quote if it determines 
the imbalance would cause a significant price dislocation. In addition, 
the Exchange has proposed to clarify the factors DMMs consider when 
setting the price of the gap quote. Finally, the Exchange has proposed 
to clarify certain aspects of the Policy and make other technical or 
non-substantive changes.

A. Reduced Minimum Size and Value Requirements

    The Exchange has proposed to reduce the minimum size and value 
requirements for the use of a gap quote under the Policy to at least 
5,000 shares or a market value of $100,000 or more. The Exchange 
believes that these lower thresholds better reflect current market 
conditions. In addition to reducing the quantitative requirements for 
implementing a gap quote, the Exchange has proposed to add language 
clarifying that, notwithstanding meeting the minimum size or value 
requirement, an imbalance must also be anticipated to cause a 
significant price dislocation in the stock at issue in order to justify 
a gap quote. The Exchange believes it is important to emphasize that 
whether a gap quote is appropriate depends on the characteristics of a 
security as much as on the Policy's minimum requirements.

B. Setting the Price of the Gap Quote

    The current Information Memo instructs DMMs to set the price of a 
gap quote ``at the price at which the DMM believes the stock would 
trade if no contra side interest developed or no cancellations 
occurred[.]'' The Exchange has instead proposed that the DMM should 
publish the gap quote at the price where the DMM ``reasonably 
anticipates'' the stock would trade if no contra side interest 
developed or no cancellations occurred, which the Exchange believes 
helps clarify the guidance.
    The Exchange has also proposed to clarify that the Policy still 
requires a DMM to take into account, ``to the extent known,'' 
executable orders, e-Quotes and verbal interest in the Crowd (on the 
side of the market opposite the imbalance) at prices better than the 
price set by the DMM as the side of the gap quote opposite the 
imbalance when making his or her pricing determination. If the 
imbalance is known to be limited as to price, the DMM should not set 
the gap quote higher than that limit price.
    The Exchange also has proposed to add a provision reminding the 
DMMs that, at the time they publish a gap quote, they should set the 
price of the gap quote such that it is likely to result in a trade of 
at least the minimum size of 5,000 shares or $100,000 in value, thus 
clearing all, or a substantial portion of, the imbalance.

C. Other Clarifications and Technical or Non-Substantive Changes

    The Exchange has also proposed several additional changes. A 
complete list of these changes is set forth in the Notice.\5\ Among 
these changes are the following:
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    \5\ See id. at 62865-66.
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     The Exchange has proposed to add language to the 
Information Memo clarifying the DMM's responsibilities when 
implementing a gap quote. DMMs must balance the need for accurate price 
discovery with the need to attract contra side interest and trade out 
of the gap quote as soon as possible. In doing so, the DMM should, in 
consultation with a senior-level Floor Official, consider updating the 
gap quote after initial publication if doing so is necessary to attract 
sufficient contra side interest.
     The Exchange has proposed to add language reminding 
members and member organizations that the gap quote procedures may not 
be initiated after

[[Page 1439]]

trading has closed. Instead, where there is a significant imbalance in 
a security at the close of trading, members and member organizations 
should use the procedures provided under Exchange Rule 123C(8) when 
attempting to mitigate the imbalance.
     The Information Memo currently includes an example 
illustrating implementation of a gap quote following an influx of 
orders from the Floor. The Exchange has proposed to add an example to 
the Information Memo which illustrates how the Policy works when the 
imbalance results in a liquidity replenishment point being reached.\6\
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    \6\ See NYSE Rule 1000(a)(iv).
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     Finally, because DMMs no longer act as agent for orders on 
the Display Book under the rules of NYSE's New Market Model,\7\ the 
proposed Information Memo would clarify that a DMM who fails to follow 
the Policy would not be in violation the Order Display rule \8\ and/or 
the Firm Quote rule \9\ under Regulation NMS, but could be liable under 
NYSE Rules for a failure to maintain a fair and orderly market or a 
failure to observe high standards of commercial honor and just and 
equitable principles of trade.\10\
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    \7\ In October 2008, the Commission approved NYSE's proposal to 
eliminate specialists and introduce DMMs. See Securities Exchange 
Act Release No. 58845 (October 24, 2008), 73 FR 64379 (October 29, 
2008) (SR-NYSE-2008-46).
    \8\ See 17 CFR 242.604.
    \9\ See 17 CFR 242.602.
    \10\ See NYSE Rules 104(a), 104(f) and 2010.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\11\ In 
particular, it is consistent with Section 6(b)(5) of the Act,\12\ 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. The proposed rule change also 
supports the principles of Section 11A(a)(1) \13\ of the Act in that it 
seeks to ensure the economically efficient execution of securities 
transactions and fair competition among brokers and dealers and among 
exchange markets.
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    \11\ 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).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78k-1(a)(1).
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    The Exchange stated in the proposal that it believes the current 
volume and value requirements are too high in light of current market 
conditions. Recent trends in market activity have driven down both 
average trade sizes and average stock prices. As a result, the current 
volume and value requirements are met less frequently than they once 
were, and there are fewer occasions on which a DMM may use gap quotes 
to facilitate price discovery and minimize short-term price 
dislocation. The Exchange stated in its proposal that, based on its 
analysis of historical market conditions, the proposal to lower the gap 
quote volume and value requirements will permit an increased use of gap 
quotes, which it believed would be appropriate for current market 
conditions. In addition, the Exchange did not believe that lowering the 
requirements would cause an increase in the use of gap quotes to such a 
degree that would negatively impact the quality of the Exchange's 
market. The revised volume and value requirements should provide 
greater transparency and efficiency and additional reductions in 
volatility, consistent with the purpose of the Policy.
    The Commission believes that the remaining aspects of the proposed 
rule change set forth in the Notice are either technical or non-
substantive in nature, or are clarifications of the existing gap quote 
policy, and therefore are consistent with the Act.
    The Commission notes that the Exchange represented in the Notice 
that it has reasonable policies and procedures to surveil DMMs' use of 
gap quotes and to detect the potential misuse of gap quotes in 
violation of Exchange rules and Federal securities laws. Such 
surveillance should provide the Exchange with information that will be 
helpful in assessing the effects of an increased number of gap quotes 
on the Exchange's market.
    In light of the foregoing, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-NYSE-2009-112) be, and it 
hereby is, approved.
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    \14\ 15 U.S.C. 78s(b)(2).
    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-191 Filed 1-8-10; 8:45 am]
BILLING CODE 8011-01-P