

[Federal Register: December 20, 2005 (Volume 70, Number 243)]
[Notices]               
[Page 75519-75523]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20de05-96]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52954; File No. SR-NYSE-2005-87]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change and Amendment No. 1 Thereto Relating to the Pilot to Put 
Into Operation Phase 1 of the NYSE HYBRID MARKET \SM\

December 14, 2005.
    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 December 9, 2005, the New York Stock Exchange, Inc. (``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 the Exchange. On December 
13, 2005, the Exchange filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice and order to 
solicit comments on the proposed rule change, as amended, from 
interested persons and to approve the proposed rule change, as amended, 
on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Partial Amendment dated December 13, 2005 (``Amendment 
No. 1''). In Amendment No. 1, the Exchange submitted Exhibit 3 to 
the proposed rule change, which identified the securities that would 
be included in the Pilot, and corrected a typographical error.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing a pilot to put into operation Phase 1 of 
the NYSE HYBRID MARKET \SM\ (``Hybrid Market'') initiative, as proposed 
in SR-NYSE-2004-05 and amendments thereto (``Hybrid Market filings'') 
with respect to a group of securities trading on the Exchange 
(``Pilot'').\4\ In addition, the Pilot will implement certain system 
changes discussed in SR-NYSE-2005-57.\5\ This filing sets forth amended 
rules (previously described in the Hybrid Market filings) which would 
be operational during the Phase 1 pilot as well as certain new 
proposals, discussed herein. The text of the proposed rule change is 
available on NYSE's Web site (http://www.nyse.co), at the principal 

office of the Exchange, and at the Commission's Public Reference Room.
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    \4\ See Securities Exchange Act Release No. 50173 (August 10, 
2004), 69 FR 50407 (August 16, 2004) (Amendment No. 1 to SR-NYSE-
2004-05); Securities Exchange Act Release No. 50667 (November 15, 
2004), 69 FR 67980 (November 22, 2004) (Amendment Nos. 2 and 3 to 
SR-NYSE-2004-05) (The Exchange withdrew Amendment No. 4 and replaced 
it with Amendment No. 5); Securities Exchange Act Release No. 51906 
(June 22, 2005), 70 FR 37463 (June 29, 2005) (Amendment No. 5 to SR-
NYSE-2004-05). See also Amendment No. 6 to SR-NYSE-2004-05 
(September 16, 2005) and Amendment No. 7 to SR-NYSE-2004-05 (October 
10, 2005).
    \5\ See Securities Exchange Act Release No. 52362 (August 30, 
2005), 70 FR 53701 (September 9, 2005) (SR-NYSE-2005-57). While 
submitted as effective upon filing, the Exchange intended to 
implement these changes upon approval of the Hybrid Market filings 
by the Commission, if such approval is granted.
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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 Exchange 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 these statements may be examined at the places specified in 
Item III below. The Exchange 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
    The Exchange proposes a Pilot to put into operation Phase 1 of the 
Hybrid Market initiative with respect to a group of securities, known 
as Phase 1 \6\ Pilot securities (``Pilot securities''). The Pilot would 
commence following Commission approval of the Pilot, during the week of 
December 12, 2005 and would terminate the earlier of: (1) 90 calendar 
days from the date of Commission approval, if granted, or (2) 
Commission approval of the Exchange's Hybrid Market proposal, if 
granted.
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    \6\ See Securities Exchange Act Release No. 51906 (June 22, 
2005), 70 FR 37463 (June 29, 2005) (Amendment No. 5 to SR-NYSE-2004-
05).
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    Approximately 200 securities out of the 3,600 securities listed on 
the Exchange (approximately 5%) have been identified as Pilot 
securities and are listed on Exhibit 3 of the filing.\7\ In addition, 
the list of Pilot securities will be posted on the Exchange's Web site.
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    \7\ The NYSE selected the Pilot securities based on the 
following criteria: (1) Trading location so as to include in the 
Pilot securities from each room and post on the floor; (2) crowd 
participation so as to include securities that generally have crowd 
participation; (3) trading characteristics so as to include 
securities whose trading characteristics are typically less volatile 
to minimize the likelihood of disruptions during the systems 
testing; and (4) specialist firm so as to include each of the equity 
specialist firms on the floor. The Pilot securities represent 
approximately 10% of the average daily NYSE trading volume. 
Telephone call between Nancy Reich Jenkins, NYSE and Kelly Riley, 
SEC on December 14, 2005.
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    The Pilot will allow the Exchange to conduct real-time system and 
user testing of certain features of the Hybrid Market filings in order 
to be in a position to comply with the implementation of Regulation 
NMS.\8\
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    \8\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
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    The Exchange believes the Pilot will prove beneficial from both a 
technology and a training perspective. It will give the Exchange the 
opportunity to identify and address any system problems and to identify 
and incorporate beneficial system changes that become apparent as a 
result of usage in real time and under real market conditions. The 
ability to have such real time user interface will be invaluable, as it 
is impossible to accurately anticipate behavioral changes in a 
development or mock-trading

[[Page 75520]]

environment. In addition, the Pilot will allow users to gain essential 
practical experience with the new systems and processes in a well-
modulated way.
    The Exchange anticipates that the Pilot will operate with minimal 
problems given the amount and degree of testing and training that has 
occurred to date. In addition, the Exchange plans to phase-in the 
Pilot, if approved, to allow for a controlled and moderated roll out of 
the new systems and capabilities.\9\
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    \9\ The NYSE intends to phase in the Pilot gradually, beginning 
with a single security on the first day of the Pilot and expanding 
gradually over the course of four weeks. The timing of the phase-in 
will be adjusted depending on the extent and significance of any 
technical or user interface problems that might arise. Telephone 
call between Nancy Reich Jenkins, NYSE and Kelly Riley, SEC on 
December 14, 2005.
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    There has been extensive testing of the approximately 15 Exchange 
systems impacted by the Pilot, individually and collectively, both in 
development and production environments. This testing occurred at all 
levels, including development testing, automation testing, SIAC 
testing, NYSE testing, integrated system testing and code reviews, 
production environment testing, fall-back and recovery testing, and 
regression and new functionality testing.
    In addition, there has been comprehensive training for both Floor 
brokers and specialists, individually and together in a mock trading 
environment. Training was conducted by the Exchange and was 
supplemented in most cases by firm-specific training conducted by 
member organizations for their employees. In addition, the Exchange 
training environment was made available to proprietary system vendors 
for their training sessions.
    Moreover, the Exchange intends to have available at all times 
during the Pilot two versions of the operating software--the new 
version that would be operational and the original, pre-Pilot version. 
If a problem develops during the Pilot, the Exchange will be able to 
revert to the pre-Pilot software within an average time of two minutes 
or less.
    Accordingly, the Exchange believes that the extensiveness of the 
testing and training, the phase-in approach and the fall-back 
capabilities provide significant assurances that the Pilot will operate 
as expected. However, in the event systems or other problems arise with 
the Pilot that adversely impact investors or impede the Exchange's 
ability to maintain a fair and orderly market, the Exchange will 
immediately terminate the Pilot in whole or in part, as appropriate, 
and return trading to current operations under current NYSE rules.

Phase 1 Pilot

    During the Pilot, the following rules and provisions of the Hybrid 
Market initiative as outlined in the Hybrid Market filings will be 
operational. To eliminate possible confusion as to what rule provisions 
apply to Pilot securities, the Exchange has identified those new or 
amended rules which will be operational during the Pilot with a ``P.'' 
Where part of a provision of a proposed Hybrid Market rule will be 
operational during the Pilot, but another part of the proposed rule 
will not, the Exchange has noted this in the attached rule text with 
the designation that the section is ``intentionally omitted.'' In 
addition, during the Pilot, all other Exchange rules apply to Pilot 
securities as they do today.

NYSE Direct+[reg] (Exchange Rules 1000-1005)

    During the Pilot, NYSE Direct+[supreg] (``Direct+'') will continue 
to operate as it does today under current Exchange Rules 1000-1005 and 
subject to the same availability, restrictions and conditions, as 
outlined in those rules.

NYSE Floor Broker Agency Interest Files [reg] (Exchange Rule 
70.20(a)-(l)(P))

    During the Pilot, the Exchange is proposing to activate the Floor 
broker agency file to permit brokers to enter their interest at or 
outside the best bid and offer in Pilot securities (also referred to as 
``e-Quoting''). The following sections of proposed Exchange Rule 70.20, 
described in the Hybrid Market filings, would apply during the Pilot:
     70.20(a)(i)(ii)
     70.20(b)
     70.20(c)(i)-(iv): Floor brokers will be able to populate 
the reserve file but it will be visible to the specialist in this phase
     70.20(e)
     70.20(f)
     70.20(i)-(l)
     70.30
    During the Pilot, the following sections of proposed Rule 70.20 
would not apply:
     Rule 70.20(d)(i)-(ii): Sweep functionality
     Rule 70.20(g)-(h): Feature permitting brokers to exclude 
their interest from the aggregate information available to the 
specialist
    The above sections that are not applicable during the Pilot are 
intentionally omitted from the proposed rule text.
    In the event that a proprietary vendor system has not been 
activated or vender systems or Exchange systems that have been 
activated otherwise become unavailable, a Floor broker who is unable to 
enter his or her own Floor broker agency interest has the following 
options:
    (i) Request a specialist to enter the agency interest on behalf of 
the Floor broker who is unable to enter it for himself or herself;
    (ii) Send an order through SuperDot; [reg] \10\
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    \10\ SuperDot [reg] is an electronic order-routing 
system used by NYSE member firms to send market and limit orders to 
the NYSE.
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    (iii) Send a CAP-DI order \11\ to the specialist;
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    \11\ See Exchange Rule 123A.30. The CAP-DI order guides the 
specialist to represent the order to ensure that the elected or 
converted portion goes along with the market, by not initiating a 
significant price change or lagging behind the market. CAP-DI orders 
are subject to a number of restrictions intended to minimize the 
specialist's discretion in handling such orders. Elected and 
converted CAP-DI orders that are not executed revert to CAP-DI 
status.
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    (iv) Trade manually in the Crowd, as is done today;
    (v) Ask another Floor broker to represent the order through his or 
her agency interest file; or
    (vi) Send an order for Direct+ execution.

Rule 70.20(f)(P)

    The Hybrid Market filings described proposed rule 70.20(f) which 
requires cancellation of agency interest files when the broker leaves 
the Crowd. In connection with the Pilot, the Exchange proposes to amend 
this provision to clarify that a Floor broker may leave the Crowd 
without canceling his or her agency interest files in order to recharge 
his or her handheld device. See proposed Exchange Rule 70.20(f)(P).

NYSE Specialist Interest Files \SM\ (Exchange Rule 104(c)(P))

    During the Pilot, specialists will be able to manually layer their 
interest at and outside the best bid and offer, which will give 
specialists' bids and offers persistent standing (also referred to as 
s-Quotes). See Exchange Rule 104(c)(P). This means that if the 
specialist bids/offers at a price that is not the best bid/offer, but 
layers its interest below/above such best bid/offer, the specialist's 
interest will remain in the specialist interest file and be available 
to be displayed as the best bid/offer should better bids/offers be 
exhausted. The Hybrid Market filings discuss the specialists' ability 
to do this systemically via algorithmically generated messages sent via 
the NYSE Specialist API \SM\ (``API''). During the Pilot, however, 
specialists will not be

[[Page 75521]]

able to use systems employing algorithms to generate messages to bid, 
offer, or trade via the API. Accordingly, for the purposes of the 
Pilot, the Exchange is proposing a new rule to provide specialists with 
the ability to manually layer interest at and outside the Exchange best 
bid and offer. See proposed Exchange Rule 104(c)(P).
    During the Pilot, specialists will not be able to disseminate NYSE 
Specialist Files \SM\ via NYSE OPENBOOK [reg] or other 
Exchange data distribution channels.
    During the Pilot, specialists will not be able to have systems 
using algorithms to send messages via the API to layer their interest 
or to otherwise trade or quote, nor will the specialist's reserve 
capability be operational. Therefore, proposed Exchange Rules 104(b)-
(h) will not be in effect.

Priority, Parity, and Yielding: Exchange Rules 70.20(b)(P), 72(c)-
(g)(P), 104.10(6)(i)(C)P, 108(a)(P)

    During the Pilot, the systemic programming of priority, parity and 
yielding, as proposed by the Hybrid Market filings, other than the 
yielding requirements for additional specialist interest, will be 
operational. As a result, the following rules will apply during the 
Pilot: 70.20(b)(P), 72(c)-(g)(P), 104.10(6)(i)(C)(P), and 108(a)(P).
    The most substantive change that will apply to trading in Pilot 
securities will be that Floor brokers will lose their current ability 
to object to the specialist trading on parity with their orders unless 
the specialist is manually trading with them in the Crowd. However, a 
Floor broker's use of an e-Quote implicitly suggests his or her 
agreement that the specialist can be on parity with his or her orders. 
A Floor broker who does not want to permit the specialist to trade on 
parity with his or her orders may send the order through 
SuperDot,[reg] enter a Direct+ order, or hit a bid/take an 
offer.
    A Floor broker who is manually bidding or offering (i.e., not 
through his or her agency interest file) will not be able to 
participate in an execution involving e-Quotes and/or s-Quotes or, as 
today, in Direct+ executions.

Other Exchange Rules

    During the Pilot, the following rules, as amended in the Hybrid 
Market filings would apply to Pilot securities: Exchange Rules 
60(e)(P), 117P, 122P, 123(e)P, and 132B(a)(D)(P).

Pilot Trading Example

    The Exchange quotation is 20.05 bid, offered at 20.07, 3,000 x 300. 
The bid consists of: 1,000 shares of book interest, which arrived first 
and has priority; 1,000 shares of broker agency interest comprised of 
two brokers' bids for 500 shares each at 20.07, and 1,000 shares of 
specialist interest. A market order to sell 3,000 shares arrives and 
trades with the 20.05 bid, as follows: 3,000 shares trade and this is 
reported by the specialist via the Smart Report Template and the system 
assigns the contra-parties as follows: 1,000 shares of book interest 
trade first (priority), and the remaining 2,000 shares are split 
equally (1,000 shares each) between the floor broker agency interest 
files and specialist interest file, as they are on parity.

Automatic Execution of CAP-DI Orders and Stop Orders

    Currently, when a trade occurs, the Exchange's system notifies the 
specialist if any CAP-DI or stop orders have been elected by such 
trade. The specialist has to then determine if there is any liquidity 
against which the elected orders (or portions thereof) can trade. If 
so, the specialist manually executes and reports trades involving the 
elected volume.
    The Commission recently published an Exchange filing that provides 
that elected stop and CAP-DI volume will be automatically executed \12\ 
to the extent that contra-side interest is available to trade with the 
elected orders.\13\ These executions will be automatically reported, 
including the relevant information regarding participants to the 
execution (See Exchange Rule 123A.30, discussed below). Elected CAP-DI 
volume unable to trade will automatically revert to CAP-DI status, and 
elected stop limit orders unable to trade will become a limit order on 
the Display Book. Elected stop orders will be executed in the same 
manner as any market order. The rules regarding the election and 
execution of CAP-DI and stop orders remain the same. The implementation 
of this process will commence with the Pilot.
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    \12\ This automatic execution will not be done through NYSE 
Direct+, but rather a different system. Therefore, such execution is 
not subject to the volume limitations of the Direct+ rules.
    \13\ See supra note 5.
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    In connection with the Pilot, the Exchange is proposing changes to 
Rule 76 to clarify that elected stop and stop limit orders are exempt 
from the requirement that a member expose the order for possible price 
improvement before crossing it.
    In addition, the Exchange is proposing amendments to Rule 13 with 
respect to stop and stop limit orders. Certain of these changes were 
proposed in the Hybrid Market filings. With respect to the Pilot, the 
Exchange is proposing additional changes to Rule 13 to add language 
that provides for the possibility of manual representation of stop and 
stop limit orders in the Crowd.

Converted CAP-DI Orders and Direct+

    In addition, commencing with the Pilot, converted CAP-DI orders 
will be systemically represented to enable them to participate in NYSE 
Direct+[reg] executions under current Rules 1000-1005.\14\
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    \14\ See id.
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Automation of Parity Between Specialist and Elected CAP-DI Orders

    Exchange Rule 123A.30 provides that a Floor broker may permit a 
specialist to trade on parity with CAP-DI orders. The rule currently 
provides that if a specialist is on parity with one or more CAP-DI 
orders, at no time may the specialist participate for its own account 
in an amount in excess of that which each CAP-DI order would receive, 
except that the specialist may participate for its own account to an 
extent greater than any particular CAP-DI order where the size 
specified on such order has been satisfied. A specialist trading on 
parity with a CAP-DI order remains subject to the limitations in 
Exchange Rule 104.10 as to transactions for his or her own account 
effected on destabilizing ticks.
    Commencing with the Pilot, the Exchange will systemically ensure 
that the specialist's participation when trading along with CAP-DI 
orders is in accordance with the parity requirements of Rule 123A.30. 
The system will assign the proper number of shares to the specialist 
and CAP-DI orders. The Exchange filed \15\ this change for immediate 
effectiveness pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 
19b-4(f)(5) \17\ thereunder.
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    \15\ See id.
    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(5).
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Automatic Conversions of CAP-DI Orders

    Current Exchange Rule 123A.30 also provides that specialists have 
the ability, subject to certain restrictions noted in the rule, to 
convert CAP-DI orders to participate in transactions or to bid or 
offer, without an electing trade.
    Proposed Exchange Rule 123A.30(a)(P) \18\ provides in part that the 
elected or converted portion of a ``percentage order that is 
convertible on a destabilizing tick and designated

[[Page 75522]]

immediate execution or cancel election'' (``CAP-DI order'') may be 
automatically executed. An elected or converted CAP-DI order on the 
same side of the market as an automatically executed electing order may 
participate in a transaction at the bid (offer) price if there is 
volume associated with the bid (offer) remaining after the electing 
order is filled in its entirety. An elected or converted CAP-DI order 
on the contra-side of the market as an automatically executed electing 
order may participate in a transaction at the bid (offer) price if 
there is volume remaining in the electing order.
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    \18\ This rule is parallel to amendments made to Rule 123A.30. 
See Securities Exchange Act Release No. 51906 (June 22, 2005), 70 FR 
37463 (June 29, 2005) (Amendment No. 5 to SR-NYSE-2004-05).
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    In addition, the Exchange is proposing to add new section (iv)(P) 
to proposed Exchange Rule 123A.30(a)(P) to provide that when a 
specialist is bidding or offering and an automatic execution occurs 
with such bid/offer, marketable CAP-DI orders on the Display 
Book[supreg] on the same side as the specialist's interest will be 
automatically actively converted to participate in this execution, with 
the system assigning the proper number of shares to the specialist and 
CAP-DI orders, as discussed above. This will allow CAP-DI orders to 
better participate in executions.
    However, in certain instances, an automatic conversion of 
marketable CAP-DI orders will not occur even though the specialist is 
trading for its own account. This will occur where the execution that 
included automatically converted CAP-DI orders elects a contra-side 
stop or stop limit order. In this situation, pursuant to current 
Exchange Rule 123A.40, the specialist, as party to the election of the 
stop order, owes such elected stop order an execution at the same price 
as the specialist traded. The execution of such stop orders, in which 
the specialist is the contra-party, may be manual \19\ or 
automatic,\20\ depending upon whether any specialist interest remains 
at the execution price. In either situation, marketable CAP-DI interest 
at that price will not be automatically converted to participate along 
with the specialist. However, the specialist will be alerted to the 
fact there are CAP-DI orders on the Display Book[supreg] capable of 
trading so that he or she can take appropriate action.
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    \19\ If there is no specialist interest remaining in the bid/
offer, and the specialist must guarantee an execution to the stop 
order at the electing price pursuant to Rule 123A.40, the specialist 
must do a manual transaction to guarantee that the stop order 
receives the same price as the specialist.
    \20\ If there is specialist interest remaining in the bid/offer 
and the specialist must guarantee an execution to the stop order at 
the electing price pursuant to Rule 123A.40, the Display Book system 
will automatically execute the remaining specialist interest against 
the elected stop order at the same price the specialist traded.
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2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b)(5) of the Act \21\ in that it is 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 Exchange believes that the proposed rule change, as amended, is 
also designed to support the principles of Section 11A(a)(1) of the Act 
\22\ in that it seeks to assure economically efficient execution of 
securities transactions, make it practicable for brokers to execute 
investors' orders in the best market and provide an opportunity for 
investors' orders to be executed without the participation of a dealer.
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    \21\ 15 U.S.C. 78f(b)(5).
    \22\ 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, as 
amended, 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

    See the SEC's Web site (http://www.sec.gov) for the comment letters 

received on the Hybrid Market initiative and a copy of the Exchange's 
response to the letters.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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 rule-comments@sec.gov. Please include 

File Number SR-NYSE-2005-87 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NYSE-2005-87. 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. Copies of such 
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-NYSE-2005-87 and should be submitted on or before 
January 10, 2006.

IV. Commission's Finding and Order Granting Accelerated Approval of the 
Proposed Rule Change

    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\ Specifically, the Commission finds that approval of the 
proposed rule change is consistent with Section 6(b)(5) of the Act 
because the proposal is 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.
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    \23\ In approving 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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    With this proposed rule change, the Exchange has requested 
temporary

[[Page 75523]]

approval by the Commission of certain features of its Hybrid Market, so 
that it may begin live systems testing in a limited group of stocks. 
According to the Exchange, this Pilot is necessary so that the Exchange 
can maintain its planned implementation schedule for the Hybrid Market 
and meet the Regulation NMS compliance dates.\24\ The Commission 
recognizes that certain of the processes that NYSE has proposed to 
begin testing have generated comment in the Hybrid Market filings. The 
Commission wishes to emphasize that it continues to review the larger 
Hybrid Market filings, including the processes included in this 
Pilot.\25\ The Commission is considering all of the comments submitted 
in response to the Hybrid Market filings and has not reached a decision 
on whether they should be approved or disapproved. The Commission, 
however, believes that due to the limited nature of the Pilot and its 
short duration, that it is consistent with the Act to allow NYSE to 
begin testing its new systems with this Pilot.
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    \24\ NYSE has represented that it has proposed the Hybrid Market 
with the intent that it will entitle NYSE quotations to protection 
under Rule 611 as well as to comply with its obligations under this 
rule. The compliance date for certain rules adopted under Regulation 
NMS is June 29, 2006. 17 CFR 242.611.
    \25\ The Commission notes that the scope of the Pilot is 
extremely limited. This Pilot is intended to enable NYSE to 
technologically test certain features of its Hybrid Market proposal. 
Other significant features of the Hybrid Market proposal, such as 
the expansion of Direct+ and the ability of specialists to 
electronically interact with the Display Book, are not included in 
this Pilot. The NYSE represented that it expects to be able to use 
the results of the systems testing in evaluating and addressing any 
technology issues related to its Hybrid Market proposal that become 
apparent.
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    The NYSE explained in its filing that it has tested these functions 
extensively but that it needs to test them in an actual trading 
environment to ensure that they operate as intended. Accordingly, NYSE 
represented that it does not anticipate any significant problems 
arising from the Pilot. However, NYSE will immediately terminate the 
Pilot, in whole or in part, as appropriate, should any systems or other 
problems arise that adversely impact the protection of investors or 
impede its ability to maintain a fair and orderly market, and return 
trading to its current operations under current NYSE rules.\26\
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    \26\ The Exchange stated that it would be able to revert back to 
pre-Pilot operations within an average of two minutes or less. The 
Exchange will notify the public via its Web site if the Pilot is 
terminated in whole or in part. In addition, the Exchange will 
notify floor members at the post if the Pilot is terminated in whole 
or in part.
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    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\27\ for approving the proposed rule change prior to the 
thirtieth day after the date of publication of the notice in the 
Federal Register. The Pilot, which as discussed above is limited in 
scope and duration, will allow the NYSE to conduct real-time system and 
user testing of certain features of the proposed Hybrid Market. 
According to NYSE, such testing should be beneficial from both a 
technology and a training perspective. Although preliminary steps have 
been taken--the NYSE has provided training for both Floor brokers and 
specialists, many member organizations also provided firm-specific 
training for their employees, and proprietary system vendors were able 
to utilize the NYSE trading environment for their training sessions--
the Pilot should give the Exchange the opportunity, in advance of the 
compliance date of Regulation NMS, to identify and address any system 
problems with these particular rules under the proposed Hybrid Market. 
Further, the Pilot should allow users to gain essential practical 
experience with the new systems and processes. Therefore, the 
Commission finds that immediate implementation of the Pilot, which is 
limited in both scope and duration, should permit NYSE to remain on 
schedule to implement the Hybrid Market filings, if approved by the 
Commission so that it may meet the Regulation NMS compliance dates.
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    \27\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NYSE-2005-87), as amended, is hereby 
approved on an accelerated basis until March 14, 2006 or the Commission 
otherwise acts on the Hybrid Market filings.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 05-24251 Filed 12-19-05; 8:45 am]

BILLING CODE 8010-01-P
