

[Federal Register: March 31, 2006 (Volume 71, Number 62)]
[Notices]               
[Page 16353-16387]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31mr06-104]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53539; File No. SR-NYSE-2004-05]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving Proposed Rule Change and Amendment Nos. 1, 2, 3, and 5 
Thereto and Notice of Filing and Order Granting Accelerated Approval to 
Amendment Nos. 6, 7, and 8 to the Proposed Rule Change to Establish the 
Hybrid Market

March 22, 2006.
I. Introduction
II. Description of the Proposal
    A. Proposed Automated Market
    1. Automated Access to Display Book System
    2. Liquidity Available for Automatic Execution
    (a) Specialist Interest Filed and Reserve
    (b) Floor Broker Agency Interest File and Reserve
    3. Autoquote
    4. Automatic Executions
    (a) Priority, Parity, and Precedence
    (b) Automated Routing Away
    (c) Tick-Restricted Orders, Stop Orders, and Other Orders 
Eligible for Automatic Execution
    5. Availability of Direct+
    (a) Liquidity Replenishment Points
    (1) Sweep LRPs
    (2) MLRPs
    B. Role of the Specialists in the Hybrid Market
    1. Specialist Algorithms
    (a) Quoting Messages
    (b) Trading Messages
    (1) Specialists' Ability to Systematically Price Improve 
Incoming Orders
    (2) Specialists' Ability to Hit Bids or Take Offers
    2. Limitations on Members' Trading Because of Customers' 
Orders--NYSE Rule 92
    3. Policy for Communicating with the Specialist Algorithm
    4. Specialist Algorithm Record Requirements
    C. Proposal to Make Direct+ Permanent
    D. Auction Limit Orders and Auction Market Orders
    E. Other Changes
    1. Intermarket Sweep Order
    2. Record of Orders/Order Tracking
    3. NYSE Rule 91
    F. Hybrid Market Implementation Plan
    1. Phase 1--Floor Broker Agency Interest Files, Specialist 
Interest Files, and Systematic Integration of Priority, Parity, and 
Yielding Requirements

[[Page 16354]]

    2. Phase 2--API and Specialist Algorithms
    3. Phase 3--Automatic Routing of Orders, Elimination of Direct+ 
Restrictions, ``Slow'' Market Indicators, and Gap Quoting
    4. Phase 4--Floor Broker Reserve Features, Sweeps, LRPs, and New 
Order Types
    5. Phase 5--New Reporting Templates and Elimination of 
Suspensions of Autoquote and Automatic Executions
    G. Limited Hybrid Market Pilot
III. Summary of Comments and NYSE's Response
    A. Liquidity Available for Automatic Executions
    1. Specialist Interest File and Specialist Reserve
    (a) Specialists' Parity
    2. Floor Broker Agency Interest Files and Reserve
    B. Automatic Executions
    1. Sweeping the Display Book System
    2. Automated Routing to Other Markets
    C. Availability of Direct+ and Liquidity Replenishment Points
    D. Role of the Specialist in the Hybrid Market
    1. Specialist Algorithm
    2. Specialists' Ability to Systematically Price Improve Incoming 
Orders
    E. Auction Limit and Auction Market Orders
IV. Discussion
    A. Increased Access to Display Book System
    1. Liquidity Replenishment Points
    B. Autoquote
    C. Liquidity Available for Automatic Execution
    D. Automatic Executions
    E. Role of Specialist in the Hybrid Market
    1. Price Improvement
    2. Ability to Hit Bids or Take Offers
    3. NYSE Rule 92
    4. Communicating with the Specialist Algorithm
    F. Changes to the Auction Market and New Order Types
    G. Intermarket Sweep Order
    H. Implementation Plan
    I. Interpretive Issues
V. Accelerated Approval of Amendment Nos. 6, 7, and 8
VI. Solicitation of Comments on Amendment Nos. 6, 7, and 8
VII. Conclusion

I. Introduction

    On February 9, 2004, the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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 create a ``Hybrid Market'' by, 
among other things, increasing the availability of automatic executions 
in its existing automatic execution facility, NYSE Direct+[supreg] 
(``Direct+''), and providing a means for participation in the expanded 
automated market by its floor members.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    On August 2, 2004, NYSE filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission published the proposed rule change, as 
amended by Amendment No. 1, for comment in the Federal Register on 
August 16, 2004.\4\ On August 26, 2004, the Commission extended the 
public comment period with respect to the First Notice to September 22, 
2004.\5\ In response to the First Notice, the Commission received 17 
comment letters from 15 commenters.\6\
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    \3\ See Letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated July 30, 2004, and accompanying 
Form 19b-4, which replaced the original filing in its entirety 
(``Amendment No. 1'').
    \4\ See Securities Exchange Act Release No. 50173 (August 10, 
2004), 69 FR 50407 (``First Notice'').
    \5\ See Securities Exchange Act Release No. 50277, 69 FR 53759 
(September 2, 2004).
    \6\ See Letters from Eric D. Roiter, Senior Vice President and 
General Counsel, Fidelity Management & Research Company, dated 
August 10, 2004 (``Fidelity Letter I''); James L. Rothenberg, Esq., 
dated August 20, 2004 (``Rothenberg Letter''); Donald E. Weeden, 
dated August 31, 2004 (``Weeden Letter''); Thomas Peterffy, 
Chairman, and David M. Battan, Vice President, Interactive Brokers 
Group, dated September 7, 2004 (``IBG Letter I''); Jose L. Marques, 
PhD, Managing Member, Telic Management LLC, dated September 21, 2004 
(``Telic Letter''); Junius W. Peake, Monfort Distinguished Professor 
of Finance, Kenneth W. Monfort College of Business, University of 
Northern Colorado, dated September 22, 2004 (``Peake Letter I''); 
Ari Burstein, Associate Counsel, Investment Company Institute, dated 
September 22, 2004 (``ICI Letter I''); Kim Bang, President and Chief 
Executive Officer, Bloomberg Tradebook LLC, dated September 22, 2004 
(``Bloomberg Letter I''); Ellen L.S. Koplow, Executive Vice 
President and General Counsel, Ameritrade, Inc., dated September 22, 
2004 (``Ameritrade Letter''); Lisa M. Utasi, President, and Kimberly 
Unger, Executive Director, The Security Traders Association of New 
York, Inc., dated September 22, 2004 (``STANY Letter''); George W. 
Mann Jr., EVP & General Counsel, Boston Stock Exchange, dated 
September 22, 2004 (``BSE Letter''); Bruce Lisman, Bear, Stearns & 
Co. Inc., dated September 28, 2004 (``Bear Stearns Letter''); Donald 
D. Kittell, Executive Vice President, Securities Industry 
Association, dated October 1, 2004 (``SIA Letter I''); Edward J. 
Nicoll, Chief Executive Officer, Instinet Group, dated October 25, 
2004 (``Instinet Letter''); Eric D. Roiter, Senior Vice President 
and General Counsel, Fidelity Management & Research Company, dated 
October 26, 2004 (``Fidelity Letter II''); Philip Angelides, 
Treasurer, State of California, dated November 23, 2004 (``Angelides 
Letter''); and Eric D. Roiter, Senior Vice President and General 
Counsel, Fidelity Management & Research Company, dated December 8, 
2004 (``Fidelity Letter III'').
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    On November 8, 2004 and November 9, 2004, the Exchange filed 
Amendment Nos. 2 and 3, respectively.\7\ The Commission published the 
proposed rule change, as further amended by Amendment Nos. 2 and 3, for 
comment in the Federal Register on November 22, 2004.\8\ In response to 
the Second Notice, the Commission received nine comment letters from 
eight commenters.\9\
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    \7\ See Form 19b-4 dated November 8, 2004 (``Amendment No. 2'') 
and Partial Amendment dated November 9, 2004 (``Amendment No. 3'').
    \8\ See Securities Exchange Act Release No. 50667 (November 15, 
2004), 69 FR 67980 (``Second Notice'').
    \9\ See Letters from Gregory van Kipnis, Managing Partner, 
Invictus Partners, LLC, dated December 10, 2004 (``Invictus 
Letter''); Ari Burstein, Associate Counsel, Investment Company 
Institute, dated December 13, 2004 (``ICI Letter II''); Ann L. 
Vlcek, Vice President and Associate General Counsel, Securities 
Industry Association, dated December 13, 2004 (``SIA Letter II''); 
Thomas Peterffy, Chairman, and David M. Battan, Vice President, 
Interactive Brokers Group, dated December 14, 2004 (``IBG Letter 
II''); William R. Power, Member and Director, Chicago Board Options 
Exchange, Incorporated, dated December 21, 2004 (``Power Letter''); 
Marc L. Lipson, Associate Professor, Terry College of Business, The 
University of Georgia, dated January 4, 2005 (``Lipson Letter''); 
Edward S. Knight, The Nasdaq Stock Market, dated January 26, 2005 
(``Nasdaq Letter''); and George Rutherfurd, Consultant, dated March 
10, 2005 (``Rutherfurd Letter I'') and April 8, 2005 (``Rutherfurd 
Letter II'').
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    On June 17, 2005, the Exchange filed Amendment No. 5 to the 
proposed rule change.\10\ The Commission published the proposed rule 
change, as further amended by Amendment No. 5, for comment in the 
Federal Register on June 29, 2005.\11\ In response to the Third Notice, 
the Commission received six comment letters.\12\
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    \10\ See Form 19b-4 dated June 17, 2005 (``Amendment No. 5''). 
The Exchange submitted Amendment No. 4 to the proposed rule change 
on May 25, 2005, and subsequently withdrew Amendment No. 4 on June 
17, 2005.
    \11\ See Securities Exchange Act Release No. 51906 (June 22, 
2005), 70 FR 37463 (``Third Notice'').
    \12\ See Letters from George U. Sauter, Managing Director, The 
Vanguard Group, Inc., dated July 20, 2005 (``Vanguard Letter''); Ari 
Burstein, Associate Counsel, Investment Company Institute, dated 
July 20, 2005 (``ICI Letter III''); Donald D. Kittell, Executive 
Vice President, Securities Industry Association, dated July 20, 2005 
(``SIA Letter III''); George Rutherfurd, Consultant, dated July 20, 
2005 (``Rutherfurd Letter III''); Kim Bang, President and Chief 
Executive Officer, Bloomberg Tradebook LLC, dated July 28, 2005 
(``Bloomberg Letter II''); and Frank A. Torino, dated September 27, 
2005 (``Torino Letter'').
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    In total, the Commission received 43 comment letters on the amended 
proposal (including 32 comment letters with respect to the First, 
Second, and Third Notices).\13\ On September 21,

[[Page 16355]]

2005, the Exchange filed a response to the comment letters.\14\
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    \13\ See supra notes 6, 9, and 10. The Commission received a 
comment letter on Amendment No. 4, which was withdrawn by the 
Exchange. See Letter from Junius W. Peake, Monfort Distinguished 
Professor of Finance, Kenneth W. Monfort College of Business, 
University of Northern Colorado, dated June 17, 2005 (``Peake Letter 
II''). In addition, the Commission received three comment letters 
from the same commenter in response to Amendment Nos. 6 and 7. See 
Letters from George Rutherfurd, Consultant, dated November 1, 2005 
(``Rutherfurd Letter IV''), November 8, 2005 (``Rutherfurd Letter 
V''), and November 17, 2005 (``Rutherfurd Letter VI''). Finally, the 
Commission received seven other comment letters from two commenters. 
See Letters from Warran P. Meyers, President, Independent Broker 
Action Committee, Inc., dated December 7, 2005 (``IBAC Letter I''), 
February 2, 2006 (``IBAC Letter II''), and March 17, 2006 (``IBAC 
Letter III''), and George Rutherfurd, Consultant, dated December 11, 
2005 (``Rutherfurd Letter VII''), December 17, 2005 (``Rutherfurd 
Letter VIII''), February 1, 2006 (``Rutherfurd Letter IX''), and 
February 13, 2006 (``Rutherfurd Letter X'').
    \14\ See Letter from Mary Yeager, Assistant Secretary, NYSE, to 
Jonathan G. Katz, Secretary, Commission, dated September 21, 2005 
(``Response to Comments'').
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    On September 16, 2005, the Exchange filed Amendment No. 6 to the 
proposed rule change.\15\ In Amendment No. 6, the Exchange proposes to 
amend NYSE Rule 104 to state that specialists may only provide price 
improvement to incoming orders that are marketable. In addition, NYSE 
proposes to amend NYSE Rule 70.20 to limit the ability of interest in 
the floor broker agency interest file to trade on parity with orders in 
the customer limit order display book (``Book'') during a sweep.
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    \15\ See Form 19b-4 dated September 16, 2005 (``Amendment No. 
6'').
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    On October 11, 2005, the Exchange filed Amendment No. 7 to the 
proposed rule change.\16\ In Amendment No. 7, the Exchange made non-
substantive stylistic, conforming, and technical changes to certain 
Exchange rules governing the Hybrid Market. In Amendment No. 7, the 
Exchange also proposes to amend NYSE Rule 92 to reflect the operation 
of the specialist systems that employ algorithms to generate quoting 
and trading messages (``Specialist Algorithms''). Specifically, the 
Exchange proposes that the specialist would not be deemed to have 
``knowledge'' of a particular incoming order that is viewed by the 
Specialist Algorithm if the Specialist Algorithm is designed in a 
manner that prevents a quoting or trading message from being affected 
by a later incoming order. In addition, NYSE proposes in Amendment No. 
7 to amend NYSE Rule 13.30 and the definitions of stop and stop limit 
orders to reflect the automatic execution of elected stop and stop 
limit orders in the Display Book system.\17\
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    \16\ See Form 19b-4 dated October 11, 2005 (``Amendment No. 
7'').
    \17\ The Display Book system (``Display Book system'') is an 
order management and execution facility. The Display Book system 
receives and displays orders to the specialists, contains the Book, 
and provides a mechanism to execute and report transactions and 
publish the results to the Consolidated Tape. In addition, the 
Display Book system is connected to a variety of other Exchange 
systems for the purposes of comparison, surveillance, and reporting 
information to customers and other market data and national market 
systems, that is, the Intermarket Trading System, Consolidated Tape 
Association, Consolidated Quotation System, etc.
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    On March 14, 2006, the Exchange filed Amendment No. 8 \18\ to the 
proposed rule change. In Amendment No. 8, NYSE proposes to: (1) Amend 
proposed NYSE Rules 13 and 124 to specify that a round lot portion of a 
part of round lot (``PRL'') order is an ``Auto Ex Order'' \19\ and that 
the odd lot portion of a PRL order would be executed at the same price 
as the round lot portion of the PRL order and processed in the Odd-Lot 
Execution System; \20\ (2) amend proposed NYSE Rule 13 to reflect that 
stop orders and stop limit orders may still be represented manually by 
a floor broker in the trading ``Crowd;'' \21\ (3) amend the definition 
of immediate or cancel (``IOC'') order in proposed NYSE Rule 13 to: (a) 
Propose an IOC order that is designed to be in compliance with 
Regulation NMS; (b) specify that NYSE IOC orders would be eligible to 
be routed away during a sweep; and (c) eliminate the previously 
proposed changes to the treatment of commitments to trade received 
through the Intermarket Trading System (``ITS Commitments''); \22\ (4) 
amend its proposed definition of Intermarket Sweep order in proposed 
NYSE Rule 13 to specify that this type of order would be permitted to 
sweep the Display Book system, and the portion that was not executed 
would be immediately cancelled; (5) amend proposed NYSE Rule 36 to 
state that a specialist may only use a wired or wireless device that 
has been registered with the Exchange to communicate with the 
Specialist Algorithms and provide that specialist firms must create and 
maintain records of all messages generated by the Specialist Algorithm; 
(6) amend proposed NYSE Rule 60 to: (a) Set forth the instances during 
which Autoquote \23\ will update the quote even if automatic executions 
are not available; (b) set forth the instances during which Autoquote 
will update the quote when Autoquote and automatic execution are 
suspended and disseminate a 100 share quote in certain situations; and 
(c) propose to use an indicator when the NYSE quote is not available 
for automatic execution due to a gapped quotation or liquidity 
replenishment point (``LRP'') to signify that the NYSE quote is not 
firm; (7) amend proposed NYSE Rule 70.20 to: (a) Permit a floor broker 
to leave the Crowd without canceling its floor broker agency interest 
file \24\ to recharge its handheld device and (b) specify the 
procedures for entering interest in the floor broker agency interest 
file before the open; (8) amend proposed NYSE Rule 72 to specify the 
priority and parity rules for instances when there are shares remaining 
after a sweep that triggers an LRP; (9) amend NYSE Rule 76 to reflect 
that it would not apply to elected stop or stop limit orders other than 
those manually represented in the Crowd by a floor broker; (10) amend 
proposed NYSE Rule 104 to: (a) Permit specialists to manually layer 
dealer interest in the specialist interest file; (b) permit specialists 
to enter certain quoting messages when automatic executions and 
Autoquote are suspended; (c) amend the definition of ``meaningful 
amount'' for purposes of determining when a specialist could provide 
price improvement; and (d) require specialists to hire independent 
auditors to review their algorithms on an annual basis; (11) amend 
proposed NYSE Rule 123A.30 to: (a) Provide systematic conversion of 
elected or converted percentage orders that are converted on a 
destabilizing tick and that permit the specialist to trade on parity 
(``CAP-DI orders'') on the same side as a specialist when the 
specialist is bidding (offering) or trading and an automatic execution 
occurs against a specialist's proprietary interest and (b) clarify the 
execution of contra-side elected and converted CAP-DI orders; (12) 
amend proposed NYSE Rule 123F to codify that NYSE may execute an 
Auction Limit (``AL'') order or market order at a price that matches a 
better away market; (13) amend proposed NYSE Rule 1000 to: (a) Clarify 
that automatic executions will resume in the same manner as Autoquote; 
(b) prohibit short sale orders, except those for Regulation SHO \25\ 
pilot securities, from sweeping the Display Book system; (c) eliminate 
the provision that would have suspended the operation of Direct+ when 
an away market disseminates a better quote; (d) eliminate the proposal 
that would have permitted automatic executions to continue while the 
specialist reports a block trade until the quote decremented to 100 
shares; (e) specify the process for determining when a security that is 
priced at $300.00 or more would be eligible for automatic executions; 
(f) specify that automatic executions would be suspended on one side of 
the market when a bid (offer) is

[[Page 16356]]

outside the momentum LRP; \26\ (g) specify that any shares remaining 
after an execution in IOC orders, NYSE IOC orders, or Intermarket Sweep 
orders would be cancelled after sweeping the Display Book system; and 
(h) clarify that auto ex limit orders, except IOC orders, that are not 
able to be immediately executed due to a suspension of Direct+ would be 
placed in the Book; and (14) amend Rule 1001.
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    \18\ See Form 19b-4 dated March 14, 2006 (``Amendment No. 8'').
    \19\ See note 29 infra and accompanying text for a description 
of ``Auto Ex Order.''
    \20\ See note 34 infra.
    \21\ See note 46 infra and accompanying text for a description 
of ``Crowd.''
    \22\ Similarly, NYSE also proposes to eliminate previously 
proposed changes to the treatment of ITS Commitments in NYSE Rule 
15A.60.
    \23\ See note 58 infra and accompanying text for a description 
of Autoquote.
    \24\ See note 43 infra and accompanying text for a description 
of the floor broker agency interest file.
    \25\ See Securities Exchange Act Release No. 50103 (July 28, 
2004), 69 FR 48008 (August 6, 2004).
    \26\ See note infra and accompanying text for a description of 
momentum LRPs.
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    On December 14, 2005, the Commission approved on an accelerated 
basis a proposed rule change by the Exchange to implement and test 
certain proposed functions of the Hybrid Market, known as Phase 1 of 
the Hybrid Market, on a pilot basis (``Pilot'').\27\
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    \27\ See Securities Exchange Act Release No. 52954, 70 FR 75519 
(December 20, 2005). See also Third Notice, supra note 11, for a 
description of Phase 1 of the Hybrid Market implementation plan. The 
Commission notes that it received one comment letter opposing the 
implementation of the Pilot. See Letter from George Rutherfurd, 
Consultant, dated December 13, 2005. On February 21, 2006, the 
Exchange filed a proposed rule change pursuant to Section 
19(b)(3)(A) of the Act and Rule 19b-4(f)(5) thereunder to amend the 
manner in which CAP-DI orders convert in certain situations (``Pilot 
Amendment''). See Securities Exchange Act Release No. 53359 
(February 24, 2006), 71 FR 10736 (March 2, 2006). On March 13, 2006, 
the Exchange filed a proposed rule change pursuant to Section 
19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder to extend the 
Pilot until March 24, 2006 (``Pilot Extension''). See Securities 
Exchange Act Release No. 53487 (March 15, 2006), 71 FR 14278 (March 
21, 2006).
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    This order approves the proposed rule change, as amended by 
Amendment Nos. 1, 2, 3, 5, 6, 7, and 8. The Commission is also 
providing notice and soliciting comments on Amendment Nos. 6, 7, and 8 
to the proposed rule change.

II. Description of the Proposal

    Currently, NYSE is primarily a floor-based auction market. NYSE 
members operate on the NYSE floor, representing their customers' orders 
for execution in a largely manual environment. NYSE provides limited 
automated access to its market through its automatic execution 
facility, Direct+. According to NYSE, automatic executions represent 
approximately 11% of its market share volume, with the bulk of 
executions occurring manually in its floor-based auction.\28\ With this 
proposed rule change, NYSE has proposed to alter the way its market 
operates by allowing more orders to be executed automatically in 
Direct+. In essence, NYSE has proposed to move from a floor-based 
auction market with limited automated order interaction to a more 
automated market with limited floor-based auction market availability.
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    \28\ See NYSE Market Statistics (visited on March 9, 2006), 
http://www.nyse.com/Frameset.html?displayPage=/ marketinfo/

1022221393893.html (noting that Direct+ volume, for the year ended 
December 31, 2005, is 11.4% of NYSE volume).
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    To create its Hybrid Market, NYSE has proposed changes to its 
current Direct+ rules to make the system available to more order types 
and to limit the instances when automatic executions are not available. 
In addition, NYSE has proposed to permit its floor members to 
participate in its expanded automated market in an electronic fashion. 
Specifically, NYSE has proposed to permit specialists and floor brokers 
to electronically provide liquidity that would be available for 
automatic executions.
    In addition, NYSE has proposed changes to its auction market to 
accommodate those investors that wish to continue to have their orders 
exposed for price improvement. To this end, NYSE has proposed to create 
a new order type--the Auction Limit order, and to amend the way market 
orders are handled in the auction.

A. Proposed Automated Market

1. Automated Access To Display Book System
    Currently, Direct+ is only available, with respect to stocks, to 
designated marketable limit orders, without tick restrictions, of 1,099 
shares or less (``Auto Ex Orders'').\29\ In addition, multiple Auto Ex 
Orders are not allowed to be entered for the account of the same person 
within a 30-second time period from the entry of an initial Auto Ex 
Order.\30\ Auto Ex Orders trade only against interest reflected in the 
Exchange's published quotation--that is, the NYSE best bid or offer 
(``BBO''). Eligible limit orders are not required to be entered as Auto 
Ex Orders. Rather, the member organization entering the order (or its 
customer if enabled by the member organization) must make a specific 
designation to choose to enter an order into Direct+.
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    \29\ See NYSE Rules 13 and 1000. Orders in Investment Company 
Units (as defined in paragraph 703.16 of the Listed Company Manual), 
Trust Issued Receipts (as defined in NYSE Rule 1200), streetTRACKS 
Gold Shares (as defined in NYSE Rule 1300), or any product subject 
to the same rules as Investment Company Units (collectively 
``ETFs''), however, may be entered in a size greater than 1,099 
shares. See Securities Exchange Act Release No. 52160 (July 28, 
2005), 70 FR 44963 (August 4, 2005) (amending NYSE Rules 13 and 1005 
to eliminate the 10,000 share restriction and the 30-second order 
entry restriction for Auto Ex Orders in ETFs).
    \30\ See NYSE Rule 1005.
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    NYSE proposes to broaden access to Direct+ for stocks and ETFs.\31\ 
Specifically, NYSE has proposed to amend its Rule 13 to define an Auto 
Ex Order to include: (1) All marketable limit orders; \32\ (2) 
designated market orders; (3) designated IOC orders; \33\ (4) elected 
stop and stop limit orders that have been systematically delivered to 
the Display Book system; (5) buy minus, sell plus, and short sale 
orders systematically delivered to the Display Book system; (6) CAP-DI 
Orders; (7) the round lot portion of a PRL order; \34\ (8) orders that 
were initially eligible for automatic execution that have been 
cancelled and replaced with a subsequent Auto Ex Order; \35\ and (9) 
Intermarket Sweep orders.\36\ In addition,

[[Page 16357]]

NYSE proposes to eliminate the size restrictions for Auto Ex Orders and 
eliminate the 30-second order entry restriction.
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    \31\ See proposed NYSE Rule 1002.
    \32\ Marketable limit orders, i.e., limit orders to buy (sell) 
priced at or above (below) the best offer (bid) at the time the 
order is routed to the Display Book system, would no longer need to 
be designated as requesting an automatic execution in Direct+. All 
marketable limit orders would be automatically executed with or 
without designation. See proposed NYSE Rule 13. Non-marketable limit 
orders would be routed to the Display Book system, even if 
designated auto ex, and would be displayed as limit orders on the 
Book. See proposed NYSE Rule 1000(d)(v); see also Amendment No. 8. 
These booked orders would be available to participate in sweep 
transactions. When such orders become marketable, they would be 
included in the quote and could participate in automatic executions.
    \33\ NYSE proposes two types of IOC orders. See proposed NYSE 
Rule 13; see also Amendment No. 8. One would be for the purposes of 
Regulation NMS which would not be routed to away markets during a 
sweep. Instead, if an away market is disseminating a better 
protected bid or offer, the IOC order would be cancelled. The other 
type of IOC order, the NYSE IOC order, would allow NYSE to route 
portions to away markets to satisfy better protected bids or offers 
and would cancel once it was no longer able to receive an execution 
on NYSE. The Exchange also proposes to amend the definition of an 
IOC order to permit the entry of IOC orders before the opening of 
the Exchange for participation in the opening trade. If not executed 
as part of the opening trade, the order would be treated as 
cancelled.
    \34\ See proposed NYSE Rule 13; see also Amendment No. 8. Odd-
lot orders and odd-lot portions of PRLs would not be eligible for 
automatic execution in Direct+. The Exchange noted that, under NYSE 
Rule 124, odd-lot orders are received, processed, and executed by an 
Exchange system designated for such purpose with the specialist as 
the contra-party at the price of certain round-lot transactions 
(``Odd-Lot Execution System''). Accordingly, the Odd-Lot Execution 
System provides a type of automatic execution that is governed by 
NYSE Rule 124, not the rules governing Direct+. The Exchange also 
clarified in the Third Notice that when automatic executions are 
suspended, odd-lot executions also would be suspended to prevent 
odd-lots from trading at prices unrelated to round-lot orders in the 
same security and to provide consistency in the availability of 
automatic executions.
    \35\ Currently, the Display Book system changes an order that 
cancels and replaces an Auto Ex Order to a non-Auto Ex Order. Under 
the Hybrid Market, the Display Book system would no longer make this 
change, so that a cancel/replace order of an Auto Ex Order would now 
be eligible for automatic execution.
    \36\ A few order types would be ineligible for automatic 
execution, including CAP, ``opening only'' (OPG), ``limit on close'' 
(LOC), ``market on close'' (MOC), and ``basis'' (BAS) orders.
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2. Liquidity Available for Automatic Execution
    Currently, the Display Book system contains the Book, which is 
operated and represented by the specialist. The Book contains limit 
orders routed to NYSE though SuperDOT \37\ or left with the specialist 
by floor brokers for representation. The Display Book system also may 
reflect specialist quotes at the NYSE BBO. Auto Ex Orders interact with 
the interest displayed on the Display Book system at the NYSE BBO.
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    \37\ SuperDOT is an electronic order-routing system used by NYSE 
member firms to send market and limit orders to NYSE. SuperDOT is 
also referred to as DOT.
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    To further automate its market, NYSE has proposed to permit its 
floor members--that is, specialists and floor brokers--to place 
liquidity in the Display Book system at various prices, in newly-
created separate files that would be available for execution against 
incoming Auto Ex Orders. This would allow floor members and the 
investors they represent on the floor to more fully participate in 
automatic executions.
(a) Specialist Interest File and Reserve
    Specialists would have the ability to manually and systematically 
place in a separate file (``specialist interest file'') within the 
Display Book system their dealer interest at prices at or outside the 
Exchange BBO.\38\ NYSE intends the specialist interest file to assist 
the specialist, in an automated environment, to fulfill its obligations 
to provide capital, bridge temporary gaps in supply and demand, and 
dampen volatility. In addition, the specialist interest file would 
allow specialists to provide increased liquidity at prices at or 
outside the Exchange BBO, which could potentially improve the prices at 
which Auto Ex Orders are executed.\39\
---------------------------------------------------------------------------

    \38\ See proposed NYSE Rules 104(b)(i) and 104(c)(viii); see 
also Amendment No. 8 and Pilot.
    \39\ See Response to Comments, supra note 14.
---------------------------------------------------------------------------

    The Exchange also proposes to provide specialists with the ability 
to maintain undisplayed reserve interest on behalf of their dealer 
accounts at the Exchange BBO, provided that they display at least 2,000 
shares of dealer interest at that price on the same side of the market 
as the reserve.\40\ After an execution against a specialist's displayed 
bid (offer), if the specialist has reserve interest remaining at that 
best bid (offer), the amount of displayed interest would be 
automatically replenished by the specialist's reserve interest, if any, 
so that at least 2,000 shares of specialist interest is displayed (or 
whatever specialist interest remains at the best bid (offer), if less 
than 2,000 shares).\41\
---------------------------------------------------------------------------

    \40\ See proposed NYSE Rule 104(d)(i).
    \41\ See proposed NYSE Rule 104(d)(ii).
---------------------------------------------------------------------------

    Specialist interest at the Exchange BBO would be disseminated; 
specialist reserve and specialist interest away from the Exchange BBO 
ordinarily would not be disseminated. Each specialist, however, has the 
option to disseminate its interest away from the Exchange BBO via 
OpenBook \42\ or another Exchange data distribution channel.
---------------------------------------------------------------------------

    \42\ OpenBook is a compilation of limit order data for all NYSE 
traded securities that the Exchange provides to market data vendors, 
broker-dealers, private network providers, and other entities 
through a data feed. See Securities Exchange Act Release No. 44138 
(December 7, 2001), 66 FR 64895 (December 14, 2001).
---------------------------------------------------------------------------

(b) Floor Broker Agency Interest File and Reserve
    Floor brokers, similarly, would be permitted to represent 
electronically the orders they hold by including these orders in a 
separate file (``floor broker agency interest file'') within the 
Display Book system.\43\ Floor brokers would be permitted to place 
liquidity electronically at or outside the Exchange BBO. In addition, 
floor broker agency interest files would be allowed to participate in 
the opening trade.\44\ Floor brokers would not be permitted to enter in 
the floor broker agency interest files any interest that restricts the 
specialist's ability to trade on parity with the floor broker agency 
interest file.\45\
---------------------------------------------------------------------------

    \43\ See proposed NYSE Rule 70.20(a)(i).
    \44\ See proposed NYSE Rule 70.20(j)(i). Floor broker agency 
interest entered before the open could participate in the opening 
trade on parity with the Book in accordance with Exchange policies 
that govern the open.
    \45\ See proposed NYSE Rule 70.20(a)(i).
---------------------------------------------------------------------------

    A floor broker would be required to be in close physical proximity 
to the post for the security--that is, in the Crowd \46\ --while it has 
orders in its floor broker agency interest file.\47\ NYSE would require 
that a floor broker's agency interest file be cancelled when the floor 
broker leaves the Crowd.\48\ If the floor broker nevertheless leaves 
the Crowd without canceling its agency interest files, and one or more 
executions occur with its agency interest, the floor broker would be 
held to such executions.\49\
---------------------------------------------------------------------------

    \46\ See proposed NYSE Rule 70.30. The Exchange proposes to 
define a Crowd as being any five contiguous panels at any one post 
where securities are traded. A floor broker would be considered to 
be in the Crowd if it is physically present at one of the five 
contiguous panels. However, the requirement that a floor broker be 
in the Crowd to have agency interest files would not apply to orders 
governed by section 11(a)(1)(G) of the Act (``G'' orders), 15 U.S.C. 
78k(a)(1)(G). See proposed NYSE Rule 70.20(a)(ii).
    \47\ A floor broker could enter interest in its agency interest 
file prior to the open regardless of its location on the floor, but 
would have to be in the Crowd at the open to participate in the 
opening trade. Any agency interest entered prior to the open would 
have to be cancelled before the open, if the floor broker is not in 
the Crowd. See proposed NYSE Rule 70.20(j)(ii); see also Amendment 
No. 8.
    \48\ See proposed NYSE Rule 70.20(f). However, a floor broker 
could leave the Crowd to recharge its handheld device without 
canceling its interest. See id. See also Amendment No. 8.
    \49\ See proposed NYSE Rule 70.20(f).
---------------------------------------------------------------------------

    Because the floor broker agency interest file is part of the 
Display Book system and because of the specialist's obligation to 
maintain a fair and orderly market, the Exchange proposes to allow the 
specialist ordinarily to see the aggregate number of shares of all 
floor broker agency interest files at each price.\50\ A floor broker, 
however, would have the option to exclude all of its floor broker 
agency interest file from the information available to the 
specialist.\51\ A floor broker's ability to exclude volume from the 
aggregate agency interest information available to the specialist would 
not be available during the open.\52\ Floor broker agency interest 
excluded from the aggregated agency interest information available to 
the specialist would be able to participate in automatic executions, 
but would not participate in a manual execution unless the floor broker 
represents the interest manually.\53\ Furthermore, floor broker agency 
interest that has been excluded from the aggregate information 
available to the specialist would not participate in the closing 
trade.\54\
---------------------------------------------------------------------------

    \50\ See proposed NYSE Rule 70.20(g). Specialists would not be 
able to see individual orders represented in the floor broker agency 
interest file.
    \51\ See id.
    \52\ See proposed NYSE Rule 70.20(k).
    \53\ See proposed NYSE Rule 70.20(h).
    \54\ See proposed NYSE Rule 70.20(k).
---------------------------------------------------------------------------

    The Exchange proposes to permit floor brokers to maintain 
undisplayed reserve interest at the Exchange BBO provided that a 
minimum of 1,000 shares of the floor broker's agency interest is 
displayed at that price.\55\ If an execution at the Exchange BBO occurs 
that does not exhaust the broker's interest at that price, the 
displayed interest would be automatically replenished from the floor 
broker's reserve interest, if any, so that at least 1,000 shares (or 
whatever amount remains, if less than 1,000 shares) is displayed.\56\ 
There would be no reserve capability for floor broker agency

[[Page 16358]]

interest entered into the files during the open and close.\57\
---------------------------------------------------------------------------

    \55\ See proposed NYSE Rule 70.20(c)(ii).
    \56\ See proposed NYSE Rule 70.20(c)(iii).
    \57\ See proposed NYSE Rule 70.20(k).
---------------------------------------------------------------------------

    The floor broker agency interest file at the Exchange BBO, except 
reserve, would be disseminated. Floor broker agency interest away from 
the BBO would not be displayed in OpenBook or other Exchange data 
distribution channel.
3. Autoquote
    Autoquote is part of the Display Book system that immediately 
displays customer limit orders received on the Exchange.\58\ Autoquote 
immediately updates the NYSE BBO when a customer limit order is 
received by NYSE that improves the NYSE quote.\59\ In addition, 
Autoquote updates the NYSE BBO when an execution occurs to reflect a 
new NYSE BBO from interest held in the Display Book system. The 
Exchange proposes to amend its Rule 60 to modify the circumstances 
under which Autoquote would be suspended.
---------------------------------------------------------------------------

    \58\ This system was developed to facilitate specialists' 
compliance with the Commission's Limit Order Display Rule. See 17 
CFR 242.604.
    \59\ NYSE Rule 60(e).
---------------------------------------------------------------------------

    Specifically, Autoquote would be suspended in three circumstances: 
(1) When the specialist manually reports a block size transaction that 
involves orders in the Display Book system; (2) when the specialist 
gaps the quote; \60\ or (3) when a LRP is reached.\61\ When Autoquote 
is suspended due to a manual report of a block trade that involves 
orders in the Display Book system,\62\ Autoquote would resume when the 
manual reporting is concluded.\63\ When Autoquote is suspended 
following a gap quote, Autoquote would resume upon the report of a 
manual transaction or the publication of a non-gapped quotation.\64\
---------------------------------------------------------------------------

    \60\ See note 139 infra, for a description of gapped quotations.
    \61\ See proposed NYSE Rule 60(e)(i). See Section II(A)(5)(a) 
infra, and proposed NYSE Rule 1000(a)(iv) for a description of LRPs.
    \62\ See proposed NYSE Rule 1000(a)(v). See Section II(A)(5) 
infra.
    \63\ See proposed NYSE Rule 60(e)(ii)(B).
    \64\ See proposed NYSE Rule 60(e)(ii)(A).
---------------------------------------------------------------------------

    When Autoquote is suspended by an LRP that is reached by an Auto Ex 
Order that sweeps to the LRP price,\65\ and if the Auto Ex Order is 
filled or if its unfilled balance is not capable of trading at a price 
beyond the sweep LRP price, then Autoquote would resume in no more than 
five seconds after the LRP is reached.\66\ If the Auto Ex Order is 
capable of trading at a price beyond the LRP price, and would not 
create a locked or crossed market if quoted, then Autoquote would 
resume upon the report of a manual transaction or the publication of a 
new quote by the specialist, but in any event in no more than ten 
seconds.\67\ Finally, if the Auto Ex Order is capable of trading at a 
price beyond the LRP price but would create a locked or crossed market 
if quoted, then Autoquote would resume upon a manual transaction or the 
publication of a new quote by the specialist.\68\
---------------------------------------------------------------------------

    \65\ See Section II(A)(5)(a)(1) infra.
    \66\ See proposed NYSE Rule 60(e)(ii)(C).
    \67\ See id.
    \68\ See id. In Amendment No. 8, the Exchange represented that 
it would implement an alert for specialists to facilitate their 
compliance with the Commission's Limit Order Display Rule, 17 CFR 
242.604.
---------------------------------------------------------------------------

    When Autoquote is suspended by a momentum LRP (``MLRP''),\69\ 
Autoquote would resume in no more than ten seconds unless the Auto Ex 
Order would create a locked or crossed market.\70\ If a locked or 
crossed market exists, Autoquote would resume once a manual transaction 
is reported.\71\
---------------------------------------------------------------------------

    \69\ See Section II(A)(5)(a)(2) infra.
    \70\ See proposed NYSE Rule 60(e)(iii).
    \71\ See id. See also note 68 supra.
---------------------------------------------------------------------------

    Autoquote would update the quote in the following situations even 
though automatic executions are not available. First, when the Exchange 
best bid (offer) is outside a MLRP, and such MLRP has not yet been 
reached, the Exchange would permit Autoquote to continue to operate, 
while automatic executions are not available.\72\ Second, NYSE would 
keep Autoquote active when an order or a cancellation of an order 
arrives that would not result in a locked or crossed market in a 
security priced at $300 or more that has been determined to be 
ineligible for automatic execution (``high-priced security'') \73\ or a 
manual execution takes place in such security.\74\ Third, if there is a 
cancellation of the Exchange best bid (offer) in a high-priced security 
when the market in such security is internally locked or crossed, and 
autoquoting of the next best bid (offer) would create a locked or 
crossed market on the Exchange, NYSE would automatically generate a 
quote of 100 shares at the bid (offer) price that existed at the time 
of the cancellation.\75\
---------------------------------------------------------------------------

    \72\ See proposed NYSE rule 60(e)(iv)(a); see also Amendment No. 
8.
    \73\ See note 142 infra and accompanying text on the definition 
of high-priced security.
    \74\ See proposed NYSE rule 60(e)(iv)(b)(i); see also Amendment 
No. 8.
    \75\ See proposed NYSE rule 60(e)(iv)(b)(ii); see also Amendment 
No. 8.
---------------------------------------------------------------------------

    Finally, in the following situations, the Exchange would update its 
quote even though Autoquote is suspended due to an LRP or a gapped 
quotation, and automatic executions are not available: (1) If part of 
the existing Exchange best bid (offer) cancels, the Exchange would use 
Autoquote to update its quote to reflect the remaining volume;\76\ (2) 
if the entire existing Exchange best bid (offer) cancels, the Exchange 
would automatically generate a quote of 100 shares at the bid (offer) 
price that existed at the time of the cancellation;\77\ or (3) if there 
is a cancellation of the Exchange best bid (offer) when the market is 
internally locked or crossed, and autoquoting of the next best bid 
(offer) would create a locked or crossed market on the Exchange, NYSE 
would automatically generate a quote of 100 shares at the bid (offer) 
price that existed at the time of the cancellation.\78\
---------------------------------------------------------------------------

    \76\ See proposed NYSE rule 60(e)(iv)(c)(i); see also Amendment 
No. 8.
    \77\ See proposed NYSE rule 60(e)(iv)(c)(ii); see also Amendment 
No. 8.
    \78\ See proposed NYSE rule 60(e)(iv)(c)(iii); see also 
Amendment No. 8.
---------------------------------------------------------------------------

4. Automatic Executions
    Currently, an Auto Ex Order equal to or greater than the size of 
the Exchange's BBO trades with the entire published bid or offer,\79\ 
and a new bid or offer is then published. If any shares of an Auto Ex 
Order remain available for execution after it trades with the published 
quote, the remaining shares are routed to the floor and represented in 
the auction market.\80\ Auto Ex Orders that cannot be immediately 
executed are placed in the Book and represented as limit orders in the 
auction market.\81\ When the national best bid or offer (``NBBO'') is 
disseminated by another market and an Auto Ex Order is delivered to the 
specialist, it must either match the better price displayed by the 
other market or send an ITS Commitment to the other market.\82\
---------------------------------------------------------------------------

    \79\ See NYSE Rule 1000(a).
    \80\ See NYSE Rule 1001(b).
    \81\ See NYSE Rule 1000.
    \82\ See NYSE Rule 15A.
---------------------------------------------------------------------------

    As proposed, Auto Ex Orders would execute against interest at the 
Exchange BBO including displayed interest and reserve.\83\ Once an Auto 
Ex Order trades with interest at the BBO, NYSE proposes to permit Auto 
Ex Orders, except ITS Commitments, to automatically ``sweep'' the 
Display Book system by trading with liquidity that is outside the BBO. 
Specifically, after exhausting the volume at the BBO, the shares of the 
Auto Ex Order that remain (the ``residual'') would trade with existing 
orders in the Book, floor broker agency interest files, and the 
specialist interest file, until the Auto Ex Order is executed, its 
limit price, if any, is

[[Page 16359]]

reached, or a LRP is reached, whichever occurs first.\84\
---------------------------------------------------------------------------

    \83\ See proposed NYSE Rule 1000(d).
    \84\ See proposed NYSE Rule 1000(d)(ii)(A)-(D).
---------------------------------------------------------------------------

    During a sweep, the residual would trade with the orders in the 
Display Book system, floor broker agency interest, and any specialist 
interest capable of execution, at a single price (the ``clean-up 
price''), such that any price improvement is given to the orders and 
interest in the Display Book system rather than the Auto Ex Order.\85\ 
Accordingly, orders in the Book, floor broker agency interest, and any 
specialist interest capable of trading with the residual would receive 
the clean-up price.\86\ Any specialist interest that remains at the 
clean-up price after the residual has traded would be automatically 
cancelled by the Exchange.\87\
---------------------------------------------------------------------------

    \85\ See proposed NYSE Rule 1000(d)(iii)(A).
    \86\ See proposed NYSE Rule 1000(d)(iii)(B).
    \87\ See proposed NYSE Rule 1000(d)(iii)(C)(ii).
---------------------------------------------------------------------------

    Any residual remaining after the sweep would become a bid (offer) 
at the order's limit price, if any, or the LRP price, whichever is 
lower (higher).\88\ If the residual can execute at the price at which 
it is bidding (offering), it would have priority for one trade over 
other interest at that price.\89\ If the residual executes at a 
different price--within the parameters of its limit, if any--it would 
trade on parity.\90\ If an Auto Ex Order is designated IOC, any 
unfilled balance remaining after the sweep would be automatically 
cancelled.\91\
---------------------------------------------------------------------------

    \88\ See proposed NYSE Rule 1000(d)(iv).
    \89\ See proposed NYSE Rule 72(j); see also Amendment No. 8.
    \90\ See id.
    \91\ See proposed NYSE Rule 1000(d)(iv).
---------------------------------------------------------------------------

    Current NYSE Rule 1001(a)(iv) provides that the specialist shall be 
the contra party for any automatic execution of an Auto Ex Order where 
the interest reflected in the published bid or offer is no longer 
available. This obligation exists regardless of the tick associated 
with the automatic execution. NYSE Rule 104, however, restricts the 
specialist's ability to purchase stock on direct plus ticks or sell 
stock on direct minus ticks. As part of its initial proposal 
establishing Direct+, the Exchange sought and received Commission 
approval of an interpretation of NYSE Rule 104 that provides that any 
instance in which the specialist is effecting such a direct tick 
transaction only because it has been required to assume the contra-side 
of an automatic execution shall be deemed to be a ``neutral'' 
transaction for purposes of NYSE Rule 104, and shall not be deemed a 
violation of the Exchange rule.\92\ The Exchange requests that the 
Commission extend this interpretation to its Hybrid Market proposal.
---------------------------------------------------------------------------

    \92\ See note 203 infra.
---------------------------------------------------------------------------

    Automatic executions of Auto Ex Orders may elect stop orders, stop 
limit orders, and percentage orders electable at the price of such 
executions.\93\ Currently, any stop orders so elected are executed 
pursuant to Exchange auction market procedures and are not guaranteed 
an execution at the same price as subsequent automatic executions of 
Auto Ex Orders.\94\ The Exchange previously sought and the Commission 
approved an interpretation \95\ that, for the purposes of NYSE Rule 
123A, the specialist is not required to fill any stop orders elected by 
an execution of an Auto Ex Order at the price of the electing sale in 
any instance where the specialist was required by NYSE Rule 1001(a)(iv) 
to take the contra-side of a Direct+ execution. NYSE proposes to retain 
this interpretation.
---------------------------------------------------------------------------

    \93\ See NYSE Rule 1004.
    \94\ See id.
    \95\ See note 203 infra.
---------------------------------------------------------------------------

(a) Priority, Parity, and Precedence
    NYSE executions are governed by its rules of priority, parity, and 
precedence.\96\ These rules dictate which order or quote is able to 
execute against an incoming order and the allotment of shares, if more 
than one order or quote is at the BBO. Generally, the first bid (offer) 
at the BBO has priority to execute against the next incoming order.\97\ 
Once a trade occurs with the bid (offer) that has priority, other bids 
(offers) at that price (including any remaining interest from the bid 
(offer) that had priority) generally trade on parity, meaning they 
split evenly the remainder of the incoming order, up to the size of 
their own order.\98\
---------------------------------------------------------------------------

    \96\ See NYSE Rules 72, 104, and 108.
    \97\ See NYSE Rule 72 I(a). A bid (offer) that establishes the 
Exchange BBO is entitled to priority at that price for one trade, 
except a specialist bid or offer entitled to priority must yield to 
limit orders on the Book at the same price.
    \98\ See NYSE Rule 72 III. When bids (offers) are on parity, 
Exchange rules dictate that in certain circumstances, a particular 
participant is guaranteed a portion of an order based on the size of 
its bid (offer), i.e., precedence based on size. See NYSE Rule 72 
I(c).
---------------------------------------------------------------------------

    A specialist must always yield priority to the orders it represents 
on the Book,\99\ and today is limited somewhat in its ability to trade 
with orders represented by floor brokers. Specifically, when the 
specialist is decreasing or liquidating its dealer position, the 
specialist is entitled to trade on parity with orders represented by 
floor brokers, unless the floor broker (or its customer) requests that 
the specialist refrain from trading along with the order the floor 
broker represents.\100\ When a specialist is establishing or increasing 
its dealer position, NYSE Rule 108 states that the specialist is not 
``entitled'' to parity with orders represented on the floor. According 
to NYSE, it has interpreted this rule to permit specialist trading on 
parity when establishing or increasing a position if the specialist is 
granted permission from the floor broker (or its customer) to do 
so.\101\
---------------------------------------------------------------------------

    \99\ See NYSE Rule 92.
    \100\ See NYSE Rule 104.10(6)(i)(C).
    \101\ See NYSE Information Memo 05-81 (October 26, 2005) 
(interpreting NYSE Rule 108(a) as permitting a specialist to be on 
parity with orders in the Crowd when the specialist is establishing 
or increasing its position, provided that the brokers representing 
orders in the Crowd permit the specialist to trade along with them 
by not objecting to such participation). See Securities Exchange Act 
Release No. 53208 (February 2, 2006), 71 FR 6804 (February 9, 2006).
---------------------------------------------------------------------------

    In its Hybrid Market, the Exchange proposes to amend its rules that 
govern priority, parity, and precedence with respect to interest placed 
in the Display Book system. Generally, an incoming Auto Ex Order would 
trade first with the displayed bid (offer) that established the 
BBO.\102\ If the Auto Ex Order is of greater size than the bid (offer) 
that has priority, the remaining balance of the Auto Ex Order would 
trade with other displayed interest at the BBO.\103\ The additional 
displayed interest would trade on parity.\104\ Thereafter, if the Auto 
Ex Order has size remaining to be executed, it would then execute 
against undisplayed specialist or floor broker reserve at the BBO, 
which would trade on parity.\105\
---------------------------------------------------------------------------

    \102\ See proposed NYSE Rule 1000(d)(i). If the specialist 
establishes the BBO, however, it would have to yield to all interest 
in the Book.
    \103\ See proposed NYSE Rule 1000(d)(ii). As noted above, floor 
brokers would not be permitted to enter interest into its floor 
broker agency interest files that restricts the specialist's ability 
to trade on parity. In addition, specialists would not be permitted 
to trade on parity until orders in the Book at the same price are 
executed in full.
    \104\ See proposed NYSE Rule 1001(a)(i).
    \105\ See proposed NYSE Rules 1000(d)(ii)(A), 70.20(c)(iv), and 
104(d)(iii).
---------------------------------------------------------------------------

    The Exchange proposes that all floor broker agency interest files 
at the same price be on parity with each other, except a floor broker 
agency interest file that establishes the BBO would be entitled to 
priority in accordance with NYSE Rule 72.\106\ Finally, with respect to 
transactions against the published bid or offer, no published bid or 
offer may claim precedence based on size with respect to executions 
against Auto Ex Orders.\107\
---------------------------------------------------------------------------

    \106\ See proposed NYSE Rule 70.20(b).
    \107\ See proposed NYSE Rule 1001(b). This reflects the current 
NYSE Rule 1001(c), which is proposed in this filing to be renumbered 
as NYSE Rule 1001(b).

---------------------------------------------------------------------------

[[Page 16360]]

    In Amendment No. 6, the Exchange proposes to amend NYSE Rule 
70.20(d)(i) to provide that, during a sweep, the amount of floor broker 
agency interest that would have been displayed had the clean-up price 
become the Exchange BBO would trade on parity with displayed interest 
(i.e., orders on the Book) at that price.\108\ The amount of any floor 
broker agency interest that would have been placed in the broker's 
reserve, however, would yield to displayed interest.\109\
---------------------------------------------------------------------------

    \108\ As noted earlier, floor broker agency interest would not 
be disseminated unless at the Exchange's BBO.
    \109\ See proposed NYSE Rule 70.20(d)(ii). Floor brokers would 
have to indicate when entering interest in the floor broker agency 
interest file the amount that would be displayed and the amount that 
would be placed in reserve if the price becomes the BBO.
---------------------------------------------------------------------------

    The Exchange proposes that interest reflected in the specialist 
interest file would be entitled to trade on parity with interest in the 
floor broker agency interest file, regardless of whether the specialist 
is increasing or decreasing its position, but, in all cases, specialist 
interest would have to yield to orders in the Book. Specifically, 
during a sweep, if no orders remain on the Book capable of trading at 
the clean-up price, specialist interest could trade and would be on 
parity with floor broker interest at that price.\110\ During a sweep, 
neither the specialist interest file nor the floor broker agency 
interest file could claim precedence based on size.\111\
---------------------------------------------------------------------------

    \110\ See proposed NYSE Rule 1000(d)(iii)(C)(i).
    \111\ See proposed NYSE Rule 72 I(c)-(e).
---------------------------------------------------------------------------

    The Exchange also proposes to modify NYSE Rule 72 III to add that a 
cancellation of an entire bid or offer entitled to priority under the 
rule would clear the floor, after which all bids and offers would be 
deemed to be re-entered and on parity.\112\ The Exchange believes this 
amendment is warranted because a cancellation of a bid or offer that 
was entitled to priority has the same effect as a trade.
---------------------------------------------------------------------------

    \112\ Currently, a transaction ``clears the floor,'' after which 
all bids and offers are deemed resubmitted simultaneously and are on 
parity, except that specialists must yield to limit orders on the 
Book. Cancellation of part of an order retains priority for the 
uncancelled portion of such order. However, canceling an order and 
replacing it with a larger order would result in a loss of priority 
for the original order.
---------------------------------------------------------------------------

    To summarize, the following describes the sequence of execution 
against an incoming Auto Ex Order in the Hybrid Market:

Interest at Exchange BBO

    An incoming Auto Ex Order would first trade with displayed interest 
at the Exchange BBO. Within this category, the order of execution would 
be:
     First, interest that clearly establishes the BBO would be 
entitled to priority at that price for one trade, except that 
specialist interest that clearly established the BBO would yield to all 
later-arriving limit orders at the BBO on the Book. If there are no 
limit orders on the Book at the BBO, specialist interest that clearly 
established the BBO would be entitled to priority over the floor broker 
agency interest file for one trade.
     Second, all other displayed interest at the BBO would 
trade on parity, except that specialist interest displayed at the BBO 
could not trade until all limit orders on the Book at the BBO are 
filled. If there are no limit orders on the Book at the BBO, specialist 
interest displayed at that price would trade on parity with the floor 
broker agency interest files displayed at the BBO. A specialist's 
ability to trade on parity with the floor broker agency interest files 
would not be restricted by the specialist's proprietary position (i.e., 
the specialist would trade on parity whether establishing/increasing or 
liquidating/decreasing its position).\113\
---------------------------------------------------------------------------

    \113\ However, NYSE Rule 104 would continue to restrict a 
specialist's ability to trade on parity.
---------------------------------------------------------------------------

     Third, reserve interest (i.e., non-displayed interest) of 
the specialist or floor broker at the BBO would trade on parity. 
Additional specialist interest (i.e., other non-displayed interest 
generated by the Specialist Algorithm) at the BBO would trade only if 
no other interest exists at the BBO.\114\
---------------------------------------------------------------------------

    \114\ See infra Section II(B)(1) for a description of this 
``additional specialist interest.''
---------------------------------------------------------------------------

Interest Outside Exchange BBO That Participates in a Sweep

     Orders on the Book outside the Exchange BBO would trade at 
the clean-up price on parity with the amount of floor broker agency 
interest that would have been displayed had the clean-up price become 
the Exchange BBO. The amount of any floor broker agency interest that 
would have been placed in the broker's reserve would yield to displayed 
interest.
     Specialist interest would participate in the sweep 
provided there are no limit orders on the Book remaining at the clean-
up price. Specialist interest participating in the sweep would trade on 
parity with any remaining floor broker agency interest at the clean-up 
price.
(b) Automated Routing Away
    In the case of all orders submitted to the Exchange electronically, 
except for certain IOC orders, ITS Commitments, and Intermarket Sweep 
orders, where a better bid or offer is published by another ITS 
participating market center in which an automatic execution is 
available, or a published bid or offer is otherwise protected from a 
trade-through by Commission rule or the Intermarket Trading System 
plan, and the specialist has not systematically matched the price 
associated with that better bid or offer, the Exchange would 
automatically route to such other market center a commitment to trade 
that satisfies that published bid or offer, unless the member entering 
the order indicates that it has contemporaneously satisfied the better 
published bid or offer.\115\ If the commitment to trade is not filled 
or not filled in its entirety, the balance would be returned to the 
Exchange and handled consistent with the order's instructions, which 
includes automatic execution, if available.\116\ The order entry time 
associated with this returned portion of the order would be the time of 
its return, not the time the order was first entered on the 
Exchange.\117\ With respect to the operation of sweeps, automated bids 
(offers) published by away markets that are better than the clean-up 
price would be satisfied in their entirety unless the order is an IOC 
order \118\ or an Intermarket Sweep order.\119\
---------------------------------------------------------------------------

    \115\ See proposed NYSE Rule 15A.50
    \116\ See id.
    \117\ See id.
    \118\ In such case, the IOC order would be cancelled by NYSE to 
prevent trading through the away market.
    \119\ See proposed NYSE Rule 1000(d)(III)(D) and Rule 600(b)(30) 
of Regulation NMS, 17 CFR 242.600(b)(30).
---------------------------------------------------------------------------

(c) Tick-Restricted Orders, Stop Orders, and Other Orders Eligible for 
Automatic Execution
    Tick-restricted orders in the Display Book system would be filled 
electronically and participate in automatic executions and sweeps as 
their ticks and limits, if any, allow.\120\ Specifically, buy sweeps 
would cause short sales and sell plus orders to be executed above the 
offer, while sell sweeps would cause buy minus orders to be executed 
below the bid. Sell short orders, other than those involving Regulation 
SHO pilot securities, would not sweep the Display Book system after 
automatically executing against the bid,

[[Page 16361]]

as the sweep transaction would occur on a minus tick.\121\
---------------------------------------------------------------------------

    \120\ Specifically, the Exchange proposes in NYSE Rule 13 that 
sell ``plus'' limit orders, buy ``minus'' limit orders, sell 
``plus'' market orders, and by ``minus'' market orders designated 
for automatic execution that are systematically delivered to the 
Display Book system be eligible to be automatically executed in 
accordance with NYSE Rules 1000-1004.
    \121\ See proposed NYSE Rule 1000(d)(iii)(E); see also Amendment 
No. 8.
---------------------------------------------------------------------------

    Under the proposal, stop orders (including stop limit orders) on 
the Display Book system would be electronically elected and may 
participate in automatic executions.\122\ Elected stop orders on the 
same side of the market as the Auto Ex Order could trade at the 
electing bid (offer) price after the Auto Ex Order is filled to the 
extent that there is volume available.\123\ In addition, an execution 
at the clean-up price could also elect stop orders. Elected stop orders 
on the same side of the market as a sweeping Auto Ex Order could trade 
at the clean-up price after the Auto Ex Order is filled to the extent 
that there is volume available.\124\
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    \122\ See proposed NYSE Rule 13.
    \123\ Elected stop orders on the contra side of the market of 
the Auto Ex Order could trade with the Auto Ex Order at the electing 
bid (offer) price after interest in the Display Book system at such 
price has been filled to the extent that there is volume available 
from the Auto Ex Order.
    \124\ Elected stop orders on the contra side of the market of 
the Auto Ex Order could trade with the Auto Ex Order at the clean-up 
price after interest in the Display Book system at such price has 
been filled to the extent that there is volume available from the 
Auto Ex Order.
---------------------------------------------------------------------------

    Furthermore, under proposed amendments to NYSE Rule 123A, the 
elected or converted portion of a CAP-DI order could be automatically 
executed and participate in a sweep. An elected or converted CAP-DI 
order on the same side of the market as an automatically executed 
electing order could 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.\125\ An elected or 
converted CAP-DI order on the same side of the market as an 
automatically executed electing order that sweeps the Display Book 
system could also participate in a transaction at the clean-up price if 
there is volume remaining on the Display Book system or from contra-
side elected CAP-DI orders at that price.\126\ Furthermore, an elected 
or converted CAP-DI order on the contra-side of the market of an 
automatically executed electing order could execute against the Auto Ex 
Order at the electing price if there is volume remaining after the Auto 
Ex Order executes against interest in the Display Book system at the 
bid (offer) price.\127\ An elected or converted CAP-DI order on the 
contra-side of the market of an automatically executed electing order 
that sweeps the Display Book system could execute against the Auto Ex 
Order at the clean-up price if there is volume remaining from the Auto 
Ex Order, from contra-side elected CAP-DI orders, or other interest at 
that price.\128\ Finally, when a specialist is bidding (offering) or 
trading and an automatic execution occurs against such specialist 
proprietary interest, marketable CAP-DI orders on the same side as the 
specialist's interest would be automatically converted to participate 
in such execution.\129\ If the execution elects a contra-side stop or 
stop limit order and the specialist is required to execute the elected 
stop or stop limit order, then CAP-DI orders on the same side of the 
market as the specialist would be automatically converted to 
participate in the execution of the stop or stop limit orders.\130\
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    \125\ See proposed NYSE Rule 123A.30(a)(i).
    \126\ See id.
    \127\ See proposed NYSE Rule 123A.30(a)(ii); see also Amendment 
No. 8.
    \128\ See proposed NYSE Rule 123A.30(a)(ii); see also Amendment 
No. 8.
    \129\ See proposed NYSE Rule 123A.30(a)(iii); see also Pilot 
Amendment.
    \130\ See id.
---------------------------------------------------------------------------

    Stop orders and CAP-DI orders could be elected at the same time by 
automatic executions and sweeps. If there is insufficient volume to 
fill the elected orders, stop orders could be executed first as they 
become market or marketable limit orders upon their election, whereas 
the elected portion of CAP-DI orders would revert to CAP-DI status if 
it is unable to trade. Elected CAP-DI orders are on parity with each 
other, which could affect the sequence in which elected stop and CAP-DI 
orders would trade.\131\
---------------------------------------------------------------------------

    \131\ See NYSE Rule 123A.30.
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5. Availability of Direct+
    Current Exchange rules provide that automatic executions are 
available from the time the Exchange disseminates a published bid or 
offer until 3:59 p.m. for stocks and Trust Issued Receipts, or 4:14 
p.m. for Investment Company Units, or within one minute of any other 
closing time of the Exchange's floor market.\132\ Auto Ex Orders 
entered prior to the dissemination of a bid or offer or after 3:59 
p.m./4:14 p.m. or within one minute of any other closing time, are 
handled in the auction market. The Exchange proposes to extend the 
availability of automatic executions through the close of regular 
trading for a particular product (e.g., 4 p.m./4:15 p.m.).\133\
---------------------------------------------------------------------------

    \132\ See NYSE Rule 1002.
    \133\ See proposed NYSE Rule 1002.
---------------------------------------------------------------------------

    Currently, Direct+ is not available during the trading day at the 
following times: (1) When the NYSE published quotation is in the non-
firm quote mode; (2) when the execution price would be more than five 
cents away from the last reported transaction price in the subject 
security on the Exchange; (3) when a better price exists in another ITS 
participating market center; (4) when NYSE's published bid or offer is 
100 shares (on the side the order would be executed against); (5) when 
a block size transaction outside NYSE's published bid or offer pursuant 
to NYSE Rule 127 is in the process of being completed, in which case 
the specialist should publish a bid and/or offer that is more than five 
cents away from the last reported transaction price in the subject 
security on the Exchange; \134\ or (6) when trading in the subject 
security has been halted.\135\
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    \134\ On January 17, 2006, the Exchange filed a proposed rule 
change seeking to amend the procedure for suspending automatic 
execution in connection with a block size transaction. See Form 19b-
4 dated January 17, 2006 (SR-NYSE-2006-01). The Exchange proposes to 
require specialists to publish a 100 x 100 share market quote that 
reflects the last reported transaction in connection with a block 
size transaction.
    \135\ See NYSE Rule 100(a)(i)-(vi).
---------------------------------------------------------------------------

    NYSE proposes to limit the instances when Direct+ is 
unavailable.\136\ Specifically, pursuant to proposed NYSE Rule 
1000(a),\137\ automatic executions in Direct+ would not occur when: (1) 
The NYSE published quotation is in non-firm quote mode; (2) trading in 
a security has been halted; \138\ (3) the quote is gapped in accordance 
with Exchange procedures; \139\ (4) trading on the Exchange reaches a 
LRP; (5) a block size transaction, as defined in NYSE Rule 127.10,\140\ 
that involves

[[Page 16362]]

orders in the Display Book system is being manually reported; \141\ or 
(6) an Auto Ex Order is entered for a security whose closing price (or 
the closing bid price if there were no transactions on the previous 
trading day) on the Exchange is $300 or more.\142\ Direct+ would be 
unavailable on both sides of the market in these situations.\143\ NYSE 
proposes to disseminate an indicator to alert investors when automatic 
executions are not available against its quote. In addition, when 
automatic executions are not available due to a LRP or gapped 
quotation, NYSE would disseminate an indicator to signify that the NYSE 
quotation is not firm.\144\ In any instance where the automatic 
execution feature is not available, Auto Ex Orders would be directed to 
the Exchange's auction market for representation.\145\
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    \136\ In Amendment No. 8, NYSE proposes to remove its previously 
proposed rule that would have made Direct+ unavailable when a better 
price was published by an away market. As noted above, NYSE proposes 
to automatically route orders, except Intermarket Sweep orders and 
certain IOC orders, to ITS participant markets that make automatic 
execution immediately available and are protected from trade 
throughs, unless the specialist matches the better price.
    \137\ See proposed NYSE Rule 1000(a)(i)-(vi).
    \138\ No executions, either automatic or manual, would be 
possible on the Exchange when trading has been halted.
    \139\ A specialist could cause a non-auto-executable quote by 
gapping the quotation due to an order imbalance in accordance with 
the policies and procedures of the Exchange. Gap quotes are used to 
signal an imbalance so as to attract contra-side liquidity in an 
attempt to mitigate volatility. The size of an imbalance suitable 
for gapped quoting is at least 10,000 shares or a quantity of stock 
having a value of $200,000 or more, although depending on the 
trading characteristics of the security, the appropriate conditions 
for gapped quoting could be higher. See NYSE Information Memo 04-27 
(June 9, 2004).
    When the quotation is gapped, automatic executions and Autoquote 
would be suspended, and the NYSE quote would be identified as non-
firm. Incoming orders and cancellations would update the Book 
electronically. Once a trade occurs or a non-gapped quote is 
published, Autoquote and automatic execution would resume.
    \140\ NYSE Rule 127.10 defines a ``block'' size as at least 
10,000 shares or a quantity of stock having a market value of 
$200,000 or more, whichever is less. See Amendment No. 8.
    \141\ The Exchange originally proposed to permit automatic 
executions to continue while a block size transaction was manually 
reported until the bid (offer) decremented to 100 shares. In 
Amendment No. 8, NYSE proposes to suspend both Autoquote and 
automatic executions as soon as the report template is opened by the 
specialist to report a block size transaction that involves orders 
on the Display Book system. See proposed NYSE Rule 60(e)(ii)(B) and 
NYSE Rule 1000(a)(v).
    \142\ See proposed NYSE Rule 1000(a)(vi); see also Amendment No. 
8. In addition, in Amendment No. 8, NYSE proposes to suspend 
automatic executions for such securities on both sides of the 
market.
    \143\ Automatic executions would be suspended on only one side 
of the market when an execution at the NYSE quote would trigger the 
MLRP. See proposed NYSE Rule 1000(c). See also proposed NYSE Rule 
60(e)(iv)(a).
    \144\ See proposed NYSE Rule 60(c)(2)(b); see also Amendment No. 
8.
    \145\ See NYSE Rule 1000(d)(v).
---------------------------------------------------------------------------

(a) Liquidity Replenishment Points
    The Exchange proposes LRPs as pre-determined price points that 
would halt automatic executions for varying periods of time depending 
on the price and remaining size, if any, of an Auto Ex Order. LRPs may 
be triggered by a sweep or electronic trading that results in rapid 
price movement over a short period. A LRP converts the electronic 
market to an auction market on a temporary basis, with the intent of 
moderating volatility in the security by affording an opportunity for 
new orders, the Crowd, and the specialist to add liquidity. The 
Exchange proposes two LRPs--a price-based or sweep LRP and a momentum 
LRP.
(1) Sweep LRPs
    The sweep LRP price would be set at the nearest five-cent increment 
outside the Exchange BBO, rounded away to the next nearest nickel.\146\ 
When a sweep LRP is reached, the sweeping order would trade at that 
price to the extent of the volume available at that price. If there is 
a residual remaining after a sweep that has triggered an LRP, it would 
be bid (offered) at the LRP price, unless the order is NYSE IOC, IOC or 
Intermarket Sweep, in which case it would be cancelled.\147\
---------------------------------------------------------------------------

    \146\ See proposed NYSE Rule 1000(a)(iv)(A).
    \147\ See proposed NYSE Rule 1000(d)(iv). If an Auto Ex Order 
sweeps to its limit price and has residual remaining at the price, 
the residual would be bid (offered) at its limit price.
---------------------------------------------------------------------------

    Automatic executions and Autoquote would then be suspended, but 
incoming orders and cancellations would continue to be reflected 
automatically in the Display Book system, although new incoming orders 
would not be displayed.\148\ However, if a displayed bid (offer) 
cancels, a new bid (offer) would be autoquoted.\149\
---------------------------------------------------------------------------

    \148\ See Second Notice, supra note . According to the Exchange, 
the Display Book system has the ability to accept incoming orders 
and cancellations when automatic executions and Autoquote are 
suspended; however, only the specialist would be able to view this 
information. These incoming orders and cancellations are held in the 
Display Book system in the sequence that they are received, until 
Autoquote and automatic executions are available.
    \149\ See proposed NYSE Rule 60(e)(iv)(c); see also Amendment 
No. 8.
---------------------------------------------------------------------------

    Under the proposal, automatic executions and Autoquote would resume 
in no more than five seconds when the sweeping order is filled in its 
entirety (i.e., no residual exists), when the residual is cancelled 
(i.e., the sweeping order is IOC), or when the residual is not capable 
of trading at a price above (in the case of a buy order) or below (in 
the case of a sell order) the sweep LRP (that is, when the residual has 
a limit price equal to the LRP).\150\ Automatic executions and 
Autoquote would resume in no more than 10 seconds when the residual is 
able to trade at a price above (below) the sweep LRP, but that price 
would not create a locked or crossed market.\151\ Automatic executions 
and Autoquote would resume earlier if the specialist has manually 
traded or quoted the market before 10 seconds have elapsed. NYSE 
expects the specialist to quote or trade before 10 seconds have 
elapsed, unless an imbalance exists, a trade is being put together in 
the Crowd, or market conditions otherwise prevent such actions from 
occurring.
---------------------------------------------------------------------------

    \150\ See proposed NYSE Rules 60(e)(ii)(C) and 1000(b); see also 
Amendment No. 8.
    \151\ See id.
---------------------------------------------------------------------------

    Finally, where a residual is able to trade at a price above (below) 
the sweep LRP, and that price would create a locked or crossed market, 
or when a locked or crossed market results from the entry of orders or 
cancellations during the 5- and 10-second periods described above, 
automatic executions and Autoquote would resume with a manual trade or 
the publication of a new quote by the specialist.\152\ In this 
circumstance, there is no maximum time period after which automatic 
executions and Autoquote would automatically resume.\153\ If the 
locking or crossing residual order cancels, automatic executions and 
Autoquote would resume within the relevant 5- or 10-second timeframe 
described above, unless a manual trade or quote occurs before 
then.\154\ If the displayed bid (offer) on the contra-side of the 
locking or crossing residual order cancels, a new bid (offer) would be 
autoquoted.
---------------------------------------------------------------------------

    \152\ See proposed NYSE Rules 60(e)(ii)(C) and 1000(b).
    \153\ Specialists would still be required to immediately display 
customer limit orders. See Rule 604 of Regulation NMS, 17 CFR 
242.604. See also proposed NYSE Rule 60(e)(ii)(C) and 60(e)(iii).
    \154\ See Second Notice, supra note 8.
---------------------------------------------------------------------------

(2) MLRPs
    The momentum LRP would be triggered by a specified price movement 
over a specified period during a trading session. The Exchange is 
proposing a LRP based on price movement over a period of time because 
it is concerned that excessive volatility could arise in situations 
other than electronic sweeps. MLRPs are designed to limit the amount of 
price change that can occur within a 30-second time period to the 
greater of 25 cents or 1% of the security price (rounded to the nearest 
cent).
    The MLRP range at any time may be calculated as follows. First, the 
low MLRP range is calculated by taking the high transaction price of 
the security within the prior 30 seconds and subtracting the greater of 
(a) 25 cents or (b) 1% of the security's price (rounded to the nearest 
cent).\155\ Next, the high MLRP range is calculated by taking the low 
transaction price of the security within the prior 30 seconds and 
adding the greater of (a) 25 cents or (b) 1% of the security's price 
(rounded to the nearest cent).\156\ For example, assume that during the 
prior 30 seconds, the high transaction price is $20.15, the low 
transaction price is $19.92, and the last sale price was $20.15. The 
low MLRP range would be $19.90, calculated by subtracting $0.25 ($0.25 
is greater than 1% of the security's price) from the high transaction 
price of $20.15. The high MLRP range would be $20.17, calculated by 
adding $0.25 to the low transaction price of $19.92. The MLRP

[[Page 16363]]

range could change based on an event (e.g., a new trade) or the passage 
of time.
---------------------------------------------------------------------------

    \155\ See proposed NYSE rule 1000(a)(iv)(B)(ii).
    \156\ See id.
---------------------------------------------------------------------------

    If there was no transaction on the Exchange within 30 seconds, the 
MLRP range would be based off the last transaction on the 
Exchange.\157\ For example, if the last sale price was $20.15 and no 
transactions have occurred within the prior 30 seconds, the low MLRP 
range would be $19.90 and the high MLRP range would be $20.40. 
Automatic executions could occur at prices at or within the MLRP range. 
Automatic executions that would occur at prices outside the MLRP range 
would cause the suspension of automatic executions and Autoquote. An 
Auto Ex Order that reaches the MLRP price would trade at that price to 
the extent possible, and thereafter automatic executions and Autoquote 
would be suspended.\158\ The Display Book system would be automatically 
updated by incoming orders and cancellations, although new incoming 
orders would not be displayed.\159\
---------------------------------------------------------------------------

    \157\ See proposed NYSE rule 1000(a)(iv)(B)(iii).
    \158\ See proposed NYSE Rule 1000(a)(iv)(B).
    \159\ See Second Notice, supra note 8. See also supra note 148.
---------------------------------------------------------------------------

    Once automatic executions and Autoquote have been suspended due to 
a MLRP, they generally would resume in no more than 10 seconds.\160\ 
The Exchange expects, similar to a sweep LRP, that the specialist will 
trade or requote the stock in less than 10 seconds unless conditions in 
the stock prevent this. Where incoming orders and cancellations cause a 
locked or crossed market, Autoquote and automatic executions would 
resume upon a manual transaction.\161\
---------------------------------------------------------------------------

    \160\ See proposed NYSE Rules 60(e)(iii) and 1000(b); see also 
Amendment No. 8.
    \161\ See id.
---------------------------------------------------------------------------

    In addition, if the NYSE published bid or offer is at a price 
beyond the MLRP range, automatic executions on that side of the market 
would be suspended because an automatic execution could not occur at 
that price.\162\ This is the only instance when automatic executions 
would be suspended on one side of the market. Autoquote would continue, 
and orders and cancellations would update the Display Book system.\163\ 
Automatic executions would resume when a bid or offer within the MLRP 
range is autoquoted or the MLRP range changes as a result of the moving 
30-second timeframe.\164\
---------------------------------------------------------------------------

    \162\ see proposed NYSE Rule 1000(c); see also Amendment No. 8.
    \163\ See supra note 148.
    \164\ See id.
---------------------------------------------------------------------------

B. Role of the Specialist in the Hybrid Market

1. Specialist Algorithms
    The Exchange proposes to allow specialists to participate 
automatically in the Hybrid Market and replicate the performance of 
certain specialist privileges and obligations in an electronic way. For 
instance, specialists would be permitted to establish electronic 
connections to the Display Book system that would provide them with 
access to certain information before other market participants, and be 
permitted to make a range of specified quoting and trading decisions 
based on that information.
    Specifically, the Exchange proposes to provide specialists with the 
ability to implement systems that use proprietary algorithms, based on 
predetermined parameters, to electronically participate in the Hybrid 
Market (``Specialist Algorithm'').\165\ The Specialist Algorithm would 
communicate with the Display Book system via an Exchange-owned external 
application program interface (``API'').\166\ The Specialist Algorithm 
is intended to replicate electronically some of the activities 
specialists are permitted to engage in on the floor in the auction 
market, and to facilitate specialists' ability to fulfill their 
obligations to maintain a fair and orderly market.
---------------------------------------------------------------------------

    \165\ See proposed NYSE Rule 104(b).
    \166\ In Amendment No. 8, the Exchange clarified that 
specialists would develop Specialist Algorithms to communicate with 
the Display Book system via the API.
---------------------------------------------------------------------------

    The Specialist Algorithm would receive information via the API, 
including information about orders entering NYSE systems, before that 
information is available to other market participants.\167\ NYSE 
systems would enforce the proper sequencing of incoming orders and 
algorithmically-generated messages.\168\ The Specialist Algorithm and 
the specialists on the floor would not have the ability to affect the 
arrival of orders at the Display Book system, or the sequence in which 
orders and algorithmically-generated messages are processed by the 
Display Book system.\169\ The Specialist Algorithm, however, would be 
able to generate certain specified quoting and trading messages based 
on the information it receives through the API. Once an algorithmic 
message has been generated, it cannot be stopped, changed, or cancelled 
on its way to the Display Book system.
---------------------------------------------------------------------------

    \167\ The Specialist Algorithm would have access to the 
following information: (1) Specialist dealer position; (2) quotes; 
(3) information about orders in the Display Book system such as 
limit orders, percentage orders, stop orders, and AL orders and 
market orders not designated for automatic execution (``AM orders'') 
(``state of the book''); (4) any publicly available information the 
specialist firm chooses to supply to the algorithm, such as the 
Consolidated Quote stream; and (5) incoming orders as they are 
entering NYSE systems. The Specialist Algorithm would not have 
access to the following types of information: (1) Information 
identifying the firms entering orders, customer information, or an 
order's clearing broker; (2) floor broker agency interest files or 
aggregate floor broker agency interest available at each price; or 
(3) order cancellations, except for cancel and replace orders. See 
proposed NYSE rule 104(c)(ii).
    \168\ See proposed NYSE Rule 104(b)(ii)(A).
    \169\ See proposed NYSE Rule 104(b)(ii)(B).
---------------------------------------------------------------------------

    The Display Book system would not accept algorithmically-generated 
messages from the Specialist Algorithm when automatic executions are 
unavailable except in certain specified situations.\170\ Specifically, 
when automatic executions are suspended, but Autoquote is active, the 
Display Book system would accept algorithmically-generated messages 
from the Specialist Algorithm to generate a bid or offer that improves 
the Exchange BBO or supplements the size of the existing BBO.\171\
---------------------------------------------------------------------------

    \170\ See proposed NYSE Rule 104(c)(vi).
    \171\ See proposed NYSE Rule 104(c)(vi)(i); See also Amendment 
No. 8.
---------------------------------------------------------------------------

    In addition, when Autoquote and automatic executions are suspended, 
the Display Book system would: (1) Process algorithmically-generated 
messages to layer specialist interest outside the published Exchange 
quotation and (2) permit specialists to manually layer specialist 
interest at prices within a previously established locking or crossing 
quotation.\172\
---------------------------------------------------------------------------

    \172\ See proposed NYSE Rule 104(c)(vi)(ii) and 104(c)(viii); 
See also Amendment No. 8.
---------------------------------------------------------------------------

    Furthermore, the Display Book system would not process 
algorithmically-generated messages from the Specialist Algorithm during 
the time a block size transaction involving orders in the Display Book 
system is being manually reported \173\ or when the messages would 
trigger the automatic execution of an AL order or an AM order, or would 
result in such order's execution with an existing contra-side 
specialist bid or offer.\174\ However, the Display Book system would 
process algorithmically-generated messages from the Specialist 
Algorithm to provide price improvement to AL and AM orders in 
accordance with the price improvement parameters described below.\175\ 
Algorithmically generated messages would not be permitted to create a

[[Page 16364]]

locked or crossed market \176\ and would have to comply with all SEC 
and NYSE rules, policies, and procedures governing specialist 
proprietary trading.\177\
---------------------------------------------------------------------------

    \173\ See proposed NYSE Rule 104(c)(v).
    \174\ See proposed NYSE Rule 104(c)(vii) and infra Section 
II(D).
    \175\ See proposed NYSE Rule 104(c)(vii).
    \176\ See proposed NYSE Rule 104(c)(iv).
    \177\ See proposed NYSE Rule 104(c)(iii). NYSE has represented 
that prior to the rollout of the third phase of the Hybrid Market, 
it will develop guidance to clarify how it expects specialists to 
comply with the NYSE Rule 104 in the Hybrid Market. Telephone call 
between Catherine R. Kinney, President and Co-Chief Operating 
Officer, NYSE Group, Inc. and Richard G. Ketchum, Chief Regulatory 
Officer, NYSE Regulation, Inc., and Kelly M. Riley, Assistant 
Director, Division, SEC, on March 22, 2006. See also Amendment No. 
8.
---------------------------------------------------------------------------

(a) Quoting Messages
    The Exchange proposes to allow the Specialist Algorithm to generate 
quoting messages to: (1) Supplement the size of the existing Exchange 
BBO; (2) place within the Display Book system specialist reserve 
interest at the Exchange BBO; (3) layer within the Display Book system 
specialist interest at varying prices outside the Exchange BBO; \178\ 
(4) establish the Exchange BBO; and (5) withdraw previously established 
specialist interest at the Exchange BBO.\179\
---------------------------------------------------------------------------

    \178\ In Amendment No. 8, NYSE proposes to permit specialists to 
manually place interest in the specialist interest files at and 
outside the BBO. Such interest would remain in the Display Book 
system until it is traded with or cancelled. See proposed NYSE Rule 
104(c)(viii); see also Pilot.
    \179\ See proposed NYSE Rule 104(b)(i)(A)-(E).
---------------------------------------------------------------------------

    A quoting message would not be able to interact with the order that 
preceded it. In addition, the Specialist Algorithm could move its quote 
away from the inside market only after the order it is reacting to has 
been processed.
(b) Trading Messages
    The Exchange proposes to allow the Specialist Algorithm to generate 
trading messages to: (1) Provide ``additional specialist volume'' to 
partially or completely fill an order at the Exchange BBO; \180\ (2) 
match better bids and offers published by other market centers where 
automatic executions are immediately available; (3) provide price 
improvement to an order, subject to the conditions outlined below; and 
(4) trade with the Exchange published quotation `` that is, ``hit 
bids'' or ``take offers.'' \181\
---------------------------------------------------------------------------

    \180\ Specialists could supply additional trading volume at the 
BBO beyond the amount in the specialist's reserve, if any. The 
Exchange proposes to amend NYSE Rule 104 to provide that this 
additional volume, which is not part of the reserve and which is not 
displayed, could complete an order, thereby providing a single-
priced execution, or partially fill the remainder of the order. See 
proposed NYSE Rule 104(b)(i)(F). Additional specialist volume would 
yield to displayed and reserve interest.
    \181\ See proposed NYSE Rule 104(b)(i)(F)-(I).
---------------------------------------------------------------------------

    The generation of algorithmic messages to trade in response to a 
particular order does not guarantee that the specialist would be able 
to interact with that order or that the specialist has priority in 
trading with that order.\182\ For example, specialist interest may not 
trade with the order identified by the algorithmic message because the 
specialist's message did not arrive in the Display Book system in time 
or the specialist has to yield to the Book. Such interest would be 
automatically cancelled.\183\
---------------------------------------------------------------------------

    \182\ See proposed NYSE Rule 104(c)(i)(C).
    \183\ See proposed NYSE Rule 104(c)(i)(D).
---------------------------------------------------------------------------

(1) Specialists' Ability To Systematically Price Improve Incoming 
Orders
    The Specialist Algorithm would enable specialists, on behalf of 
their dealer accounts, to electronically provide price improvement to 
all or part of a marketable incoming order, including an AL order or AM 
order,\184\ provided the following conditions are met: (i) The 
specialist is represented in a ``meaningful amount'' in the bid with 
respect to price improvement provided to an incoming sell order, or in 
the offer with respect to price improvement provided to an incoming buy 
order; and (ii) the price improvement provided by the specialist is (a) 
at least three cents where the quotation spread is more than five 
cents, (b) at least two cents where the quotation spread is three, 
four, or five cents, or (c) one cent where the quotation spread is two 
cents.\185\ NYSE proposes to define the term ``meaningful amount'' as 
at least 1,000 shares for the 100 most active securities on the 
Exchange based on average daily volume and at least 500 shares for all 
other securities on the Exchange.\186\ Specialist systematic price 
improvement would only be available for incoming orders that are 
marketable (i.e., that can trade with the published bid or offer).\187\ 
In addition, the Exchange proposes to amend NYSE Rule 123A.30 to 
provide for systematic conversion of marketable CAP-DI orders 
previously entered with the specialist to allow these orders to 
participate on parity with the specialist when the specialist is price 
improving an incoming order.\188\
---------------------------------------------------------------------------

    \184\ Specialist Algorithms could price improve AL orders and AM 
orders, consistent with the requirements noted above, by generating 
a message to trade with the AL or AM order before it is processed by 
the Display Book system, or executing the AL or AM order at its 
quoted price once the order has been processed by the Display Book 
system. Algorithmic messages that would trigger the automatic 
execution of AL or AM orders or that would result in such orders 
trading with the specialist's existing contra-side bid or offer 
would be prohibited. See proposed NYSE Rule 104(c)(vii).
    \185\ See proposed NYSE Rule 104(e)(i)(A)-(D).
    \186\ See proposed NYSE Rule 104(e)(ii); see also Amendment No. 
8. NYSE would disseminate a list of the 100 most active securities 
on a quarterly basis, or more frequently as the Exchange may 
determine from time to time. See proposed NYSE Rule 104(e)(ii).
    \187\ See proposed NYSE Rule 104(e)(i). With respect to incoming 
orders that are not marketable (i.e., those orders that would 
establish a new best bid or best offer), the specialist could not 
trade with such order until the new bid or offer is publicly 
disseminated.
    \188\ See proposed NYSE Rule 123A.30(a)(iii).
---------------------------------------------------------------------------

(2) Specialists' Ability To Hit Bids or Take Offers
    Specialists' messages to trade with the Exchange published quote 
must include information that indicates the quote has been publicly 
disseminated.\189\ In addition, to ensure that a specialist's 
algorithmic message to trade with the Exchange published quotation does 
not possess any speed advantage in reaching the Display Book system, 
Exchange systems would process such messages in a manner that gives 
specialists and other market participants a similar opportunity to 
trade with the Exchange's published quotation, by delaying the 
processing of this type of trading message from the Specialist 
Algorithm.\190\
---------------------------------------------------------------------------

    \189\ See proposed NYSE Rule 104(c)(i)(A).
    \190\ See proposed NYSE Rule 104(b)(ii). Based upon the average 
transit time from the Common Message Switch (CMS) system to the 
Display Book system, the Exchange would determine the appropriate 
amount of time to delay the processing of algorithmic messages to 
trade with the Exchange published quotation. The delay parameter 
would be adjusted periodically to account for changes to the average 
transit time resulting from capacity and other upgrades to Exchange 
systems. See Third Notice, supra note 11.
---------------------------------------------------------------------------

2. Limitations on Members' Trading Because of Customers' Orders--NYSE 
Rule 92
    NYSE Rule 92(a) generally prohibits members from causing the entry 
of an order to buy (sell) any Exchange-listed security for any account 
in which such member is directly or indirectly interested, if the 
person responsible for entering such order has knowledge of any 
particular unexecuted customer's order to buy (sell) such security 
which could be executed at the same price. The Exchange has proposed to 
amend NYSE Rule 92 to reflect the operation of the Specialist 
Algorithm.
    Specifically, NYSE proposes that the specialist would not be deemed 
to have knowledge about a particular incoming order that is viewed by 
the Specialist Algorithm until such incoming order is ``processed'' by 
the Specialist Algorithm.\191\ According to the Exchange, there may be 
times when the Specialist Algorithm could ``possess'' more than one 
order at the same time.

[[Page 16365]]

In addition, there could be times when a permissible algorithmic 
message has been generated, but before such message has been processed 
by the Display Book system, the Specialist Algorithm has ``read'' or 
``is reading'' a new incoming order. This new order could be priced at 
the same price as the algorithmically-generated order or otherwise be 
able to trade with the order to which the algorithmic message reacted, 
but, as a result of proper time sequencing within the Display Book 
system, the algorithmic message would be processed before the new 
incoming order. NYSE has proposed to amend Rule 92 to provide that, if 
the Specialist Algorithm is designed and operated in a manner that 
prevents a quoting or trading message generated in response to an order 
from being affected by the receipt of a subsequent order, then for 
purposes of Rule 92, the specialist would not be deemed to have 
knowledge of the subsequent order.\192\
---------------------------------------------------------------------------

    \191\ See proposed NYSE Rule 92.15. See also Amendment No. 7.
    \192\ See id.
---------------------------------------------------------------------------

3. Policy for Communicating With the Specialist Algorithm
    NYSE proposes to permit specialists on the floor to control the 
Specialist Algorithms.\193\ For example, specialists could activate or 
deactivate the firm's algorithms or adjust the firm's pre-set 
parameters that guide an algorithm's decision-making.\194\ Specialists 
would not, however, have the ability to prevent the processing by the 
Display Book system of an algorithmically-generated message. NYSE 
proposes to allow specialists to interact with the Specialist Algorithm 
via a wired or wireless device that has been registered with the 
Exchange, such as a computer terminal or laptop. Each specialist firm 
would be required to certify, in the time, frequency, and manner 
prescribed by the Exchange, that such wired or wireless devices operate 
in accordance with all SEC and Exchange rules, policies, and 
procedures.\195\ In addition, specialists would be required to create 
and maintain records of all messages generated by the firm's wired or 
wireless devices.\196\
---------------------------------------------------------------------------

    \193\ See proposed NYSE Rule 36.30.
    \194\ See id. See also proposed NYSE Rule 104(g).
    \195\ See proposed NYSE Rule 36.30; see also Amendment No. 8.
    \196\ See id.
---------------------------------------------------------------------------

4. Specialist Algorithm Record Requirements
    Every algorithmically-generated message generated by the Specialist 
Algorithm would have to include a code identifying the reason for the 
algorithmic action (e.g., ``match ITS,'' ``price improvement,'' ``hit 
bid,'' etc.), the unique identifiers of the order to which the 
algorithmically-generated message is reacting (if any), the order 
immediately preceding the generation of the algorithmically-generated 
message, and any other information the Exchange may require.\197\ The 
Exchange would automatically cancel algorithmically-generated messages 
that are unable to interact with the order or quotation identified by 
the message, where the reason code and the proposed algorithmic action 
are inconsistent, where message activity would create a locked or 
crossed market, where the identifiers described above are not included, 
and in other similar situations.\198\
    Furthermore, the Exchange would require that each specialist firm 
maintain an electronic log of all algorithmically-generated messages, 
including the date and time of each algorithmically-generated message 
and such other information as the Exchange shall designate.\199\ Such 
log would have to be maintained in accordance with SEC and Exchange 
rules regarding books and records, and be capable of being provided to 
the Exchange upon request, in such time and in such format as the 
Exchange shall designate.\200\ In addition, each specialist firm would 
be required to notify the Exchange in writing, within such time as the 
Exchange shall designate, whenever its Specialist Algorithm or an 
individual algorithm is not operating and the time, cause, and duration 
of such non-operation.\201\ Finally, each specialist would be required 
to have an independent third party auditor review, on an annual basis, 
all Specialist Algorithms to ensure that they operate in accordance 
with all SEC and Exchange rules, policies, and procedures.\202\
---------------------------------------------------------------------------

    \197\ See proposed NYSE Rule 104(c)(i).
    \198\ See proposed NYSE Rule 104(c)(i)(D).
    \199\ See proposed NYSE Rule 104(f)(i). NYSE Rule 132A requires 
members and member firms to synchronize the business clocks they use 
to record dates and times of any event the Exchange requires to an 
Exchange-designated time source.
    \200\ See id.
    \201\ See proposed NYSE Rule 104(f)(ii)
    \202\ The Exchange would have the right to request originals and 
copies of any report, notes, analysis, documents, and similar types 
of materials prepared by the independent auditor. See proposed NYSE 
Rule 104(h); see also Amendment No. 8.
---------------------------------------------------------------------------

C. Proposal To Make Direct+ Permanent

    Direct+ was originally approved as a one-year pilot program ending 
on December 21, 2001.\203\ The pilot was subsequently extended for five 
additional one-year periods, and is currently scheduled to end on 
December 23, 2006.\204\ The Exchange proposes to make Direct+ 
permanent.\205\
---------------------------------------------------------------------------

    \203\ See Securities Exchange Act Release No. 43767 (December 
22, 2000), 66 FR 834 (January 4, 2001).
    \204\ See Securities Exchange Act Release Nos. 45331 (January 
24, 2002), 67 FR 5024 (February 1, 2002); 46906 (November 25, 2002), 
67 FR 72260 (December 4, 2002); 48772 (November 12, 2003), 68 FR 
65756 (November 21, 2003); 50828 (December 9, 2004), 69 FR 75579 
(December 17, 2004); and 53014 (December 22, 2005), 70 FR 77228 
(December 29, 2005).
    \205\ This would also have the effect of superseding four 
filings that have been approved by the Commission during the Direct+ 
pilot, which were made part of the pilot. See Securities Exchange 
Act Release Nos. 47024 (December 18, 2002), 67 FR 79217 (December 
27, 2002); 47353 (February 12, 2003), 68 FR 8318 (February 20, 
2003); 47463 (March 7, 2003), 68 FR 12122 (March 13, 2003); and 
47614 (April 2, 2003), 68 FR 17140 (April 8, 2003).
---------------------------------------------------------------------------

D. Auction Limit Orders and Auction Market Orders

    While NYSE has proposed to significantly increase the availability 
of Direct+, it would still retain its auction market on the floor. 
Investors would be able to submit orders to floor brokers for 
representation on the floor (or in the electronic market if the floor 
broker sends this interest to the floor broker agency interest file). 
Investors also would be able to submit certain order types 
electronically through DOT that would be represented by the specialist 
to seek price improvement opportunities.
    Specifically, NYSE has proposed one new order type--AL orders, and 
has proposed to amend its rules governing the execution of market 
orders that are not designated as auto ex eligible, i.e., AM 
orders.\206\ Specialists would represent these orders in the auction 
market, where the Crowd or Auto Ex Orders could offer an opportunity 
for execution at a price better than the Exchange BBO, while retaining 
as a backup the possibility of automatic execution in case the floor is 
unable to offer price improvement promptly.
---------------------------------------------------------------------------

    \206\ See proposed NYSE Rule 13.
---------------------------------------------------------------------------

    Under the proposal, AL and AM orders would be automatically 
executed when they arrive at the Display Book system if the Exchange 
quotation is at the minimum variation of one cent.\207\ Where a better 
bid (offer) is published by another ITS participating market center in 
which an automatic execution is immediately available and such better 
bid (offer) creates a minimum variation market compared with the 
Exchange best offer (bid), an AL or AM order (or the requisite portion 
thereof) would be automatically routed to such other market center for 
execution, unless the

[[Page 16366]]

specialist matches the price of the better away offer (bid).\208\
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    \207\ See proposed NYSE Rule 123F(a)(i)(A) and (b)(ii)(A).
    \208\ See proposed NYSE Rule 123F(a)(i)(B) and (b)(ii)(B).
---------------------------------------------------------------------------

    If not automatically executed or routed away upon entry, AM orders 
to buy and AL orders to buy with a limit price that is at or above the 
Exchange best offer when they reach the Display Book system would be 
autoquoted the minimum variation better than the Exchange best bid, 
thereby becoming the Exchange best bid.\209\ Similarly, AM orders to 
sell and AL orders to sell with a limit price that is at or below the 
Exchange best bid when they reach the Display Book system would be 
autoquoted the minimum variation better than the Exchange best offer, 
thereby becoming the Exchange best offer.\210\ The size associated with 
the bid or offer would be the size of the AL or AM order.\211\ The size 
of subsequent AL and AM orders on the same side of the market would be 
aggregated in the bid (offer) and executed based on time priority, 
consistent with AL orders' limit prices.\212\
---------------------------------------------------------------------------

    \209\ See proposed NYSE Rule 123F(a)(ii) and (b)(iii).
    \210\ See id.
    \211\ See id.
    \212\ See id.
---------------------------------------------------------------------------

    An AL or AM order could miss the market while attempting to obtain 
price improvement,\213\ but according to the Exchange, electronic 
representation should limit that possibility. Once on the Book, an AL 
or AM order could participate in any execution, including automatic 
executions and sweeps. Furthermore, if an AL or AM order has not been 
executed within 15 seconds after reaching the Display Book system, it 
would automatically execute (i.e., buy orders would execute against the 
displayed offer, and sell orders would execute against the displayed 
bid),\214\ provided Autoquote and automatic executions are 
available.\215\ In addition, three events would cause automatic 
execution of an AL or AM order before 15 seconds has elapsed. The three 
events are: (i) The arrival of a subsequent order at a better price on 
the same side of the market as an AL or AM order; (ii) the execution of 
an order on the same side of the market as an AL or AM order that 
exhausts some or all of the displayed contra-side volume available in 
the Exchange quotation; and (iii) the cancellation of some or all of 
the displayed contra-side volume, or the improvement of the displayed 
contra-side price that creates a minimum variation market or allows 
execution of the AL or AM order with price improvement.\216\ In these 
situations, the order causing the AL or AM order to automatically 
execute would trade first.\217\ If a trade that causes an automatic 
execution of an AL or AM order also elects stop orders and CAP-DI 
orders, the AL and AM orders would execute first because they are 
executable at the time of entry (but seek an opportunity for price 
improvement), and CAP-DI and stop orders would execute after the AL and 
AM orders because they are contingent orders that are not executable 
until elected.
---------------------------------------------------------------------------

    \213\ See proposed NYSE Rule 123F(a)(iv) and (b)(v).
    \214\ See proposed NYSE Rule 123F(a)(iii)(D) and (b)(iv)(D).
    \215\ If another market displays a price better than the AL or 
AM orders, the Exchange would execute the AL or AM order at a price 
(consistent with the AL order's limit) that matches the immediately 
accessible better away quote. See proposed NYSE Rule 123F(a)(i)(C) 
and (b)(ii)(C); see also Amendment No. 8.
    \216\ See proposed NYSE Rule 123F(a)(iii)(A)-(C) and (b)(iv)(A)-
(C).
    \217\ As noted above, a Specialist Algorithm trading message 
cannot cause the automatic execution of an AL or AM order. See 
proposed NYSE Rule 104(c)(vii).
---------------------------------------------------------------------------

    An AL order to buy with a limit price that is not at or above the 
Exchange best offer when it reaches the Book or an AL order to sell 
with a limit price that is not at or below the Exchange best bid when 
it reaches the Book, would be displayed on the Book at its limit 
price.\218\ An AL order that is unable to automatically execute because 
of its limit price would be handled as a regular limit order.\219\
---------------------------------------------------------------------------

    \218\ See proposed NYSE Rule 123F(a)(v).
    \219\ See id.
---------------------------------------------------------------------------

E. Other Changes

1. Intermarket Sweep Order
    To implement the requirements of Regulation NMS,\220\ the Exchange 
proposes to amend NYSE Rule 13 to adopt another new order type--the 
Intermarket Sweep order. An Intermarket Sweep order would be a limit 
order designated for automatic execution in a particular security that 
meets the following requirements: (1) It is identified as an 
Intermarket Sweep order in the manner prescribed by the Exchange; and 
(2) simultaneously with the routing of the Intermarket Sweep order to 
the Exchange, one or more additional limit orders, as necessary, are 
routed to execute against the full displayed size of any protected bids 
(offers).\221\ These additional routed orders would have to be marked 
as intermarket sweep orders. Intermarket Sweep orders would be 
automatically executed upon receipt against the displayed bid (offer) 
and would then sweep the Display Book system. Any portion not executed 
would be immediately and automatically cancelled. Intermarket Sweep 
orders would be identified as such on the Consolidated Tape.
---------------------------------------------------------------------------

    \220\ 17 CFR 242.600(b)(30).
    \221\ See proposed NYSE Rule 13.
---------------------------------------------------------------------------

2. Record of Orders/Order Tracking
    The Exchange proposes in NYSE Rule 123(e) that no order may be 
represented for execution on the floor or placed in a floor broker 
agency interest file within the Display Book system unless certain 
details of the order and the floor broker agency interest file have 
been first recorded in an electronic system on the floor. Furthermore, 
the floor member would have to identify which orders or portions 
thereof are being made part of the floor broker agency interest file. 
Since NYSE Rule 123(e)(7) provides that the type of order be designated 
and recorded, the Exchange proposes that AL orders and auto ex market 
orders be added to this rule.
    NYSE Rule 132B prescribes requirements and procedures with respect 
to orders in any security listed on the Exchange received or originated 
by a member. It requires a member to immediately record data elements 
as detailed in the rule. If an order is transmitted to another member 
or is transmitted to another department of the same member, or is 
modified or cancelled, information detailed in the rule must be 
recorded. Additionally, the recipient of the order must record the 
order details as provided in the rule.
    The Exchange proposes similar changes to NYSE Rule 132B(b)(9) with 
regard to the designation of an order as in proposed NYSE Rule 
123(e)(7). Furthermore, NYSE Rule 132B(a)(1)(D) is proposed to be 
amended to require that members and member organizations identify which 
orders or portions thereof are being made part of the floor broker 
agency interest file pursuant to such procedures as required by the 
Exchange. This would conform NYSE Rule 132B with changes made to NYSE 
Rule 123(e).
3. NYSE Rule 91
    NYSE Rule 91 includes transaction confirmation requirements in 
instances in which the specialist participates in a transaction as both 
principal and agent. The Exchange sought and received Commission 
approval \222\ of its interpretation that NYSE Rule 91 does not apply 
where the specialist is the contra-party to an automatic execution, as 
the specialist does not accept an Auto Ex Order for execution or act as 
agent in the execution of such order. NYSE

[[Page 16367]]

proposes to extend this interpretation to its Hybrid Market.
---------------------------------------------------------------------------

    \222\ See supra note 203.
---------------------------------------------------------------------------

F. Hybrid Market Implementation Plan

    The Exchange proposes to implement the Hybrid Market in five phases 
over a period of months.\223\ The Exchange believes that this would 
help ensure proper functioning of the Exchange, specialists, floor 
brokers, vendor-based systems, and Hybrid Market-related 
functionalities, and would promote the seamless integration of Hybrid 
Market facilities into the marketplace. In addition, the phased 
implementation plan would provide time for market participants to 
become familiar with the different functions and features, so that they 
would be adequately prepared to employ them properly once the Hybrid 
Market is fully functional. Within each phase, the various functions 
that would become operational during that phase would be made available 
over a period of several weeks.
---------------------------------------------------------------------------

    \223\ See Amendment No. 8. In Amendment No. 8, the Exchange 
modified the implementation plan by moving: (1) Floor brokers' 
ability to exclude their interest in the floor broker agency 
interest file from the aggregate information available to the 
specialist from Phase 2 to Phase 4; (2) the ability of floor brokers 
to hide their reserve interest from the specialist from Phase 2 to 
Phase 4; (3) the specialist's ability to disseminate information 
regarding its layered interest via OpenBook or another Exchange data 
distribution channel from Phase 2 to Phase 4; (4) the availability 
of sweeps, LRPs, and AL/AM orders from Phase 3 to Phase 4; (5) the 
availability of Intermarket Sweep orders and use of indicators to 
identify executions involving an Intermarket Sweep order from Phase 
3 to Phase 4; and (6) the implementation of new Display Book system 
templates and programming that will eliminate the suspension of 
Autoquote and automatic executions from Phase 4 to Phase 5, and by 
adding: (1) The specialist's ability to manually enter reserve 
interest to Phase 4 and (2) the availability of IOC (consistent with 
Regulation NMS) orders for automatic executions to Phase 4.
---------------------------------------------------------------------------

    In Amendment No. 8, the Exchange committed to provide notice to its 
members and others using its facilities, through information memoranda 
and its Web site, of the specific rules that would be effective during 
each phase.
1. Phase 1--Floor Broker Agency Interest Files, Specialist Interest 
Files, and Systematic Integration of Priority, Parity, and Yielding 
Requirements
    During the first phase of implementation, the Exchange contemplates 
activating the floor broker agency interest file to permit floor 
brokers to enter their interest at or outside the BBO. This would 
enable floor brokers to gain experience using this tool. Floor brokers 
would be able to populate the reserve file; however, the reserve file 
would be visible to the specialist in this phase. The feature 
permitting floor brokers to exclude their interest from the aggregate 
information available to the specialist would not be available in this 
phase; the Exchange contemplates making the exclusion feature 
operational in Phase 4. In addition, commencing in Phase 4, floor 
broker reserve interest would not be visible to the specialist if 
chosen as an option by the floor broker.
    Specialists would be able to manually layer their interest at and 
outside the BBO during the first phase. However, they would not be able 
to disseminate this information via OpenBook or another Exchange data 
distribution channel until Phase 4. The API would not be activated 
during Phase 1; accordingly, specialists would not be able to use 
Specialist Algorithms to layer their interest or to otherwise trade or 
quote, nor would the specialists' reserve capability be operational.
    During Phase 1, the systematic programming of priority, parity, and 
yielding requirements, other than the yielding requirements for 
additional specialist interest, would be completed, enabling ``G'' 
order interest to be included in the floor broker agency files and to 
be handled by the Display Book system. Other system changes would be 
made to enhance systematic reporting of transactions and associated 
audit trail, such as eliminating specialist responsibility for 
allocation of volume in automatic executions.\224\ Finally, the 
Exchange would implement the automation of CAP-DI orders and stop or 
stop limit orders.
---------------------------------------------------------------------------

    \224\ See NYSE Rule 1001(a)(3).
---------------------------------------------------------------------------

    During Phase 1, Direct+ would continue to operate as it does under 
the current rules and would be subject to the same restrictions and 
availability as set forth in NYSE Rules 1000--1005. Accordingly, the 
Exchange anticipates that most trading would continue to be effected in 
the auction market, subject to the same rules and conditions as trading 
on the Exchange today. The Exchange began testing the Phase 1 functions 
for 168 securities in the Pilot.\225\ Upon approval of the Hybrid 
Market, the Exchange would implement Phase 1 for all its 
securities.\226\
---------------------------------------------------------------------------

    \225\ See Pilot. See Section II(G), supra, for a discussion of 
the Pilot.
    \226\ See Amendment No. 8.
---------------------------------------------------------------------------

2. Phase 2--API and Specialist Algorithms
    Phase 2 would see the introduction of the API and Specialist 
Algorithm. During this phase, the specialist's systematic trading and 
quoting abilities would become operational. For example, the specialist 
would be able to provide algorithmic price improvement pursuant to the 
formula described in the proposal, regardless of the size of the 
incoming order. Algorithmic trading with the bid and offer, algorithmic 
ability to make new bids and offers and to withdraw previously made 
bids and offers, to add size to an existing bid and offer, to match 
better bids and offers away, and to layer specialist interest at prices 
outside the BBO, would also be available. Specialist reserve file 
capability and the yielding requirements for additional specialist 
interest would become operational during this phase.
    As in Phase 1, Direct+ would continue to operate according to the 
same restrictions and availability as set forth in NYSE Rules 1000-1005 
today, and the Exchange anticipates that most trading would continue to 
be effected in the auction market.
3. Phase 3--Automatic Routing of Orders, Elimination of Direct+ 
Restrictions, ``Slow'' Market Indicators, and Gap Quoting
    During Phase 3, the following changes would be implemented:
     Automatic routing of orders to automated markets posting 
better bids and offers in accordance with Regulation NMS;
     Availability of NYSE IOC orders for automatic executions;
     Use of indicators to identify quotations that are not 
immediately available for automatic executions;
     Implementation of gap quoting procedures;
     Elimination of size restrictions for automatic executions;
     Elimination of 30-second restriction on the entry of Auto 
Ex Orders from the same person;
     Availability of automatic executions through the close;
     Elimination of Direct+ availability only to straight limit 
orders;
     Elimination of Direct+ suspensions due to price (i.e., a 
trade at a price that would be more than five cents from the last trade 
in the stock on the Exchange);
     Elimination of Direct+ suspensions due to size (i.e., a 
100-share published bid or offer);
     Conversion of marketable limit orders automatically to 
Auto Ex Orders; and
     Automatic executions of designated market orders.
    Not all of these features would be made available at the same time 
during this phase, but instead would be made available in all 
securities over a period of time.
4. Phase 4--Floor Broker Reserve Features, Sweeps, LRPs, and New Order 
Types
    Phase 4 would implement the following:

[[Page 16368]]

     Use of indicators to identify an execution involving an 
Intermarket Sweep order;
     Floor brokers' ability to exclude interest, including 
reserve, from the aggregate information available to the specialist;
     Sweep functionality for automatic executions;
     Activation of LRPs (both sweep and momentum), and the 
publication via OpenBook or another Exchange data distribution channel 
of the most restrictive LRP;
     Availability of new order types--AL and AM orders and 
Intermarket Sweep orders;
     Specialists' ability to disseminate their layered interest 
via OpenBook or another Exchange data distribution channel;
     Specialists' ability to manually enter reserve interest; 
and
     Availability of IOC orders for automatic executions.
5. Phase 5--New Reporting Templates and Elimination of Suspensions of 
Autoquote and Automatic Executions
    In Phase 5, NYSE proposes to implement the new Display Book system 
templates and programming that would eliminate the suspension of 
Autoquote and automatic executions.

G. Limited Hybrid Market Pilot

    As noted earlier, the Commission approved the testing of certain 
functions the Hybrid Market on December 14, 2005, on a limited basis 
and for a pilot period expiring on March 24, 2006.\227\ The Pilot 
implemented testing, with respect to a limited group of securities, the 
specialist interest files, the floor broker agency interest files, and 
the priority, parity, and yielding rules as proposed in the Hybrid 
Market.\228\
---------------------------------------------------------------------------

    \227\ See Pilot Extension, supra note 27.
    \228\ See also Pilot Amendment, supra note 27.
---------------------------------------------------------------------------

    Specifically, the Pilot allows specialists to manually layer their 
proprietary trading interest outside the NYSE BBO into the Display Book 
system.\229\ Specialists' proprietary interest remains in the Display 
Book system until cancelled or executed. The Pilot also allows floor 
brokers to electronically represent their customers' orders in the 
floor broker agency interest files.\230\ Floor brokers could enter 
interest in the floor broker agency interest files directly either at 
the BBO or outside the BBO and could enter reserve size at the BBO so 
long as 1,000 shares are displayed. In addition, the Pilot automates 
the priority, parity, and yielding rules. The Pilot permits specialists 
to trade on parity with orders represented by floor brokers when 
specialists are increasing or decreasing their position and eliminates 
floor brokers' ability to object to specialist parity. Finally, the 
Pilot implemented the automation of CAP-DI orders and stop orders.\231\
---------------------------------------------------------------------------

    \229\ Prior to the Pilot, specialists could only manually place 
their proprietary trading interest at the NYSE BBO.
    \230\ Prior to the Pilot, floor brokers could only enter their 
customers' orders in the Display Book system through the specialist.
    \231\ In Amendment No. 8, the Exchange represented that it has 
not encountered any systematic difficulties in connection with the 
Pilot.
---------------------------------------------------------------------------

III. Summary of Comments and NYSE's Response

    The Commission received a total of 43 comment letters on the Hybrid 
Market proposal.\232\ In addition to the amendments filed by the 
Exchange that addressed many questions raised in the comment letters, 
NYSE also filed the Response to Comments to address other specific 
concerns raised in the comment letters.\233\
---------------------------------------------------------------------------

    \232\ See supra notes 6, 9, 12, and 13.
    \233\ See Response to Comments, supra note 14.
---------------------------------------------------------------------------

    A few commenters supported the NYSE's proposal to create a Hybrid 
Market.\234\ Several commenters generally supported further automation 
of the NYSE market,\235\ and some of these commenters claimed that the 
Exchange had not gone far enough to create the automated mar ket that 
Exchange users desire.\236\ A few commenters expressed dissatisfaction 
with the proposal.\237\ Some of these commenters believed that the 
Exchange failed to create a genuine hybrid market that would blend 
floor-based and screen-based trading, that the proposed market did not 
provide for any true inter-market competition, and that it gave 
preferential treatment to specialists and/or floor brokers.\238\
---------------------------------------------------------------------------

    \234\ See IBG Letter II, Invictus Letter, and Power Letter.
    \235\ See, e.g., Ameritrade Letter, IBG Letters I and II, ICI 
Letters I, II, and III, SIA Letters I, II and III, STANY Letter, 
Telic Letter, and Vanguard Letter. However, one commenter suggested 
that while the proposal could turn out well for liquid stocks, the 
Exchange should consider separate and distinct rules for illiquid 
securities. See Bear Stearns Letter.
    \236\ See, e.g., ICI Letters I and III and Telic Letter.
    \237\ See, e.g., Bloomberg Letters I and II, IBAC Letters I, II, 
and III, Peake Letter I, Rutherfurd Letters I, II, III, IV, V, VI, 
VII, VIII, IX, and X, Telic Letter, Torino Letter, and Weeden 
Letter. See also Fidelity Letter III (urging the Commission to 
consider a study indicating that NYSE's Hybrid Market would be a 
substantially more costly trading environment than that of fully 
electronic markets). However, see also Lipson Letter (stating that 
the data does not justify Fidelity Letter III's conclusion).
    \238\ See, e.g., Bloomberg Letter I, IBAC Letters I and II, 
Rutherfurd Letters I, III, and V, Telic Letter, Weeden Letter. In 
particular, one of these commenters argued that specialists and 
floor brokers in the proposed Hybrid Market should not be able to 
charge floor brokerage commission on any orders that are executed 
automatically in the Display Book system and not by the specialist 
or floor broker personally. See Rutherfurd Letter I. Another 
commenter was concerned that NYSE's ultimate plans would be to move 
past any true ``hybrid'' and phase out the auction market entirely, 
which the commenter believed would disadvantage the investing public 
that relies on the face-to-face interaction on the floor to achieve 
the best prices. See IBAC Letters I and II.
---------------------------------------------------------------------------

    Initially, most commenters had questions about the rules that the 
Exchange had proposed. Specifically, in response to the First Notice, a 
majority of commenters requested that NYSE provide more details and 
specific trading examples showing how the Hybrid Market proposal would 
work.\239\ Several commenters raised specific issues. For example, 
several commenters on the First Notice questioned how the LRPs would 
work,\240\ how specialists would participate in the Hybrid Market,\241\ 
how the floor broker agency interest file would interact with orders on 
the Book,\242\ and how AL and AM orders would be handled.\243\ In 
addition, several commenters requested more detail on automatic 
execution.\244\ Specifically, commenters requested detail on how the 
priority and parity rules would operate with the specialist interest 
file and floor broker agency interest file,\245\ and the instances when 
automatic executions would not be available.\246\
---------------------------------------------------------------------------

    \239\ See, e.g., Ameritrade Letter, Angelides Letter, Bear 
Stearns Letter, Bloomberg Letter I, BSE Letter, Fidelity Letters I 
and II, IBG Letter I, ICI Letter I, Instinet Letter, Peake Letter, 
SIA Letter I, STANY Letter, and Telic Letter. After the Second and 
Third Notices, a few commenters continued to believe that the 
proposal did not fairly and accurately describe exactly what the 
NYSE intended, and still had explicit questions relating to the 
Hybrid Market. See also Bloomberg Letter II, IBAC Letters I and II, 
and Rutherfurd Letters I, II, III, and V.
    \240\ See IBG Letter I and ICI Letter I. The Commission notes 
that NYSE did not specifically define the parameters of its MLRP in 
the First Notice.
    \241\ See IBG Letter I and ICI Letter I.
    \242\ See IBG Letter I and ICI Letter I.
    \243\ See IBG Letter I.
    \244\ See BSE Letter, Fidelity Letter I, and STANY Letter.
    \245\ See Fidelity Letter I, SIA Letter I, and STANY Letter.
    \246\ See BSE Letter, Instinet Letter, and STANY Letter.
---------------------------------------------------------------------------

    Several commenters also questioned how the Hybrid Market would 
interact with other markets. For example, one commenter questioned 
whether ITS would be capable of handling NYSE's increased interaction 
with ``away markets'' and whether the Exchange had a contingency plan 
to ensure that adequate linkages will be in place to accommodate the 
enhancement to

[[Page 16369]]

Direct+.\247\ Other commenters questioned how the Hybrid Market would 
operate in compliance with the ITS trade-through rule or the then-
proposed Regulation NMS.\248\
---------------------------------------------------------------------------

    \247\ See, e.g., STANY Letter. See also Ameritrade Letter 
(voicing concern that Direct+ and ITS would fall short of today's 
technological standards and create a slow, automated trading 
environment for listed securities).
    \248\ See, e.g., Ameritrade Letter, Bloomberg Letters I and II, 
BSE Letter, Fidelity Letters I and II, and SIA Letter I. See note 
and accompanying text for a complete discussion of the comments on 
this issue.
---------------------------------------------------------------------------

    The Exchange responded to the initial comments in its Amendment 
Nos. 2 and 3, which the Commission published as the Second Notice.\249\ 
In addition to providing more detail on its proposal, NYSE submitted 
detailed trading examples to demonstrate how its proposed Hybrid Market 
would operate.\250\ Soon after the Second Notice was published, the 
Commission reproposed its Regulation NMS.\251\ Commenters generally 
asked the Commission to refrain from acting on NYSE's proposal until it 
had made a decision on Regulation NMS to allow commenters to consider 
the operation of the Hybrid Market in conjunction with Regulation 
NMS.\252\ Several commenters, however, raised specific concerns about 
NYSE's proposal as described in the Second Notice. For example, 
commenters questioned whether it would be appropriate to allow 
undisplayed floor broker interest to trade on parity with displayed 
orders on the Book,\253\ whether it would be appropriate to allow 
specialists to have access to non-public information about incoming 
orders,\254\ and whether the sweep functionality would result in less 
favorable executions of customer orders.\255\
---------------------------------------------------------------------------

    \249\ See note 8, supra.
    \250\ The Commission published these trading examples as Exhibit 
A to the Second Notice.
    \251\ See Securities Exchange Act Release No. 50870 (December 
16, 2004), 69 FR 77424 (December 27, 2004).
    \252\ See, e.g., ICI Letter III, Nasdaq Letter, and SIA Letters 
II and III. See also Ameritrade Letter. A few commenters also urged 
the Commission to examine the Hybrid Market proposal alongside 
Regulation NMS. See, e.g., Angelides Letter, Fidelity Letter II, 
Nasdaq Letter, and SIA Letters I, II and III.
    \253\ See Rutherfurd Letter II and Invictus Letter.
    \254\ See Rutherfurd Letter II, Invictus Letter, and ICI Letter 
II.
    \255\ See Rutherfurd Letter II. See also Bloomberg Letters I and 
II.
---------------------------------------------------------------------------

    After the Third Notice, certain commenters continued to question 
several aspects of the proposal that they believed raised investor 
fairness and logistical issues.\256\ Some of these commenters 
encouraged the Exchange to modify its proposal to give priority to 
investor orders and to encourage the display of limit orders.\257\
---------------------------------------------------------------------------

    \256\ See, e.g., IBAC Letters I and II (arguing that the 
Commission should reject the Hybrid Market proposal because it lacks 
the statutorily required information on possible impacts on 
competition and because the proposal would indeed impair competition 
and unfairly discriminate against floor brokers and investors), ICI 
Letter III, Rutherfurd Letters IV, V, VI, VII, VIII, IX, and X, and 
Vanguard Letter.
    \257\ See, e.g., ICI Letter III and Vanguard Letter.
---------------------------------------------------------------------------

    A number of commenters emphasized the significance of NYSE's 
proposal.\258\ In fact, one commenter stated that NYSE's proposal was 
``among the most significant SRO rule changes that the Commission has 
had to evaluate for quite some time.'' \259\ Although the same 
commenter favored a quick approval and implementation of the 
proposal,\260\ other commenters cautioned the Commission to proceed 
slowly in considering the NYSE's rule change, to give the industry and 
investors an opportunity to gain a full understanding of the proposal's 
effect.\261\ Some commenters believed that Direct+ should be subject to 
a pilot program or have a phase-in period so that there would be an 
opportunity to review the impact of the proposed changes before they 
become a permanent fixture of the equities markets.\262\
---------------------------------------------------------------------------

    \258\ See Fidelity Letter I, IBG Letter I, and Weeden Letter.
    \259\ See IBG Letter I.
    \260\ See IBG Letter II.
    \261\ See, e.g., Angelides Letter, Bear Stearns Letter, SIA 
Letter I, and Weeden Letter. A few commenters believed that the 
Commission should hold a public hearing on the proposal. See, e.g., 
Angelides Letter, Fidelity Letter I, IBAC Letter II, and STANY 
Letter.
    \262\ See, e.g., Bear Stearns Letter, Invictus Letter, SIA 
Letter III, and STANY Letter.
---------------------------------------------------------------------------

    In its response, the Exchange stated that the proposed enhancements 
to Direct+ were responsive to customer requests for greater electronic 
access to the liquidity on the Exchange. The Exchange believed that 
this, along with the new opportunities for price improvement via AL and 
AM orders, would make for a better market, would encourage the display 
of liquidity, and would allow customers to access this liquidity in the 
manner that best suits their needs. In response to commenters' concerns 
over the implementation of the Hybrid Market, the Exchange proposed, in 
the Third Notice, to launch the Hybrid Market proposal in phases. The 
Exchange believes this phased implementation should help ensure the 
proper functioning of market participants' Hybrid Market-related 
systems, promote the integration of Hybrid Market facilities into the 
marketplace, and allow market participants adequate time to become 
familiar with the features of the Hybrid Market.\263\
---------------------------------------------------------------------------

    \263\ In addition, as noted above, the Exchange implemented a 
limited pilot to begin testing some of its Hybrid Market systems and 
to give its floor members an opportunity to utilize its 
functionality in live trading. See discussion of the Pilot in 
Section II(G), supra.
---------------------------------------------------------------------------

A. Liquidity Available for Automatic Executions

    Several commenters argued that off-floor participants should be 
able to place liquidity on the Display Book system without the use of a 
floor member.\264\ Two commenters argued that the NYSE's proposal 
failed to provide any material inducement to non-NYSE liquidity 
providers to participate in the Hybrid Market.\265\ One of these 
commenters stated that the proposal would ``perpetuate asymmetric 
information between specialists, floor brokers and customers that only 
serves to discourage competing liquidity providers * * *'' from 
providing better prices and more liquidity.\266\
---------------------------------------------------------------------------

    \264\ See Rutherfurd Letters I and V, ICI Letter III, and 
Vanguard Letter. But see ICI Letter II (noting that it did not 
object to the Exchange providing floor brokers with the ability to 
represent their customers as they do today).
    \265\ See Telic Letter and Weeden Letter.
    \266\ See Telic Letter.
---------------------------------------------------------------------------

1. Specialist Interest File and Specialist Reserve
    As discussed earlier, specialists would have the ability to 
manually and systematically place in the Display Book their dealer 
interest at prices at or outside the Exchange BBO.\267\ In addition, a 
specialist would be able to maintain undisplayed reserve interest on 
behalf of its dealer account at the Exchange BBO, provided that the 
specialist displayed at least 2,000 shares at that price on the same 
side of the market.\268\ Specialist interest at the Exchange BBO would 
be disseminated; specialist reserve would not be disseminated. In 
addition, specialist interest away from the Exchange BBO could be 
disseminated, at the option of the specialist, via the NYSE's OpenBook 
data feed.
---------------------------------------------------------------------------

    \267\ See proposed NYSE Rule 104(b)(i) and 104(c)(viii).
    \268\ See proposed NYSE Rule 104(d)(i).
---------------------------------------------------------------------------

    Many comments questioned the appropriateness of creating an 
undisplayed interest file for those market participants that have a 
time and place advantage relative to the rest of the marketplace.\269\ 
One commenter advised that the Exchange either continually monitor the 
specialist's dealer position in real time to preclude unlawful trading 
activity or require the specialist interest file to yield to all orders 
in all instances.\270\
---------------------------------------------------------------------------

    \269\ See, e.g., Bloomberg Letters I and II, Rutherfurd Letters 
I, III and V, and SIA Letter I.
    \270\ See Rutherfurd Letter I.

---------------------------------------------------------------------------

[[Page 16370]]

    The Exchange responded that it believes that the specialist 
interest file would allow specialists to provide value by committing 
capital and layering the Display Book system outside the BBO. According 
to NYSE, such interest would benefit the marketplace by increasing 
liquidity at prices outside the BBO, bridging temporary gaps in supply 
and demand, dampening volatility, and potentially improving clean-up 
prices. Additionally, the Exchange noted that specialists would have 
the option to display all of their specialist interest file away from 
the BBO in the aggregate price/volume information disseminated via NYSE 
OpenBook.
(a) Specialists' Parity
    The Exchange also has proposed to amend its Rule 108 to provide 
that the specialist interest file would be entitled to trade on parity 
with interest in the floor broker agency interest files regardless of 
whether the specialist is increasing or decreasing its position. 
Specialist interest would, however, continue to yield to orders on the 
Book. Three commenters opposed these proposed changes to NYSE Rule 
108.\271\ Two believed that placing specialist proprietary trading on 
parity with investors' orders would misalign the interests of 
participants on the Exchange and likely contribute to the 
ineffectiveness of the Hybrid Market.\272\ The other commenter 
considered this change to be a contravention of the specialists' 
negative obligation to trade only when reasonably necessary to maintain 
a fair and orderly market.\273\ According to this commenter, specialist 
parity acquisitions would amount to unnecessary dealer intervention 
because there would be no market ``necessity'' for the specialist to 
effect proprietary trades in these situations, where public orders 
could otherwise fully satisfy contra-side interest.\274\
---------------------------------------------------------------------------

    \271\ See IBAC Letters I and II, ICI Letter III, and Rutherfurd 
Letters III, IV, V, VI, VII, VIII, IX, and X. Two of these 
commenters also challenged NYSE's interpretation of NYSE Rule 108 
that provides that specialists can trade on parity with orders in 
the Crowd when establishing or increasing their position, provided 
that the floor broker or its customer does not object. See, e.g., 
IBAC Letter I and Rutherfurd Letters III, IV, V, VI, VII, VIII, IX, 
and X.
    \272\ See IBAC Letters I (also contending that it would increase 
volatility in the market) and II and ICI Letter III.
    \273\ See Rutherfurd Letters III, IV, V, VI, VII, VIII, IX, and 
X. According to the commenter, since Section 11A of the Act promotes 
the objective of public order interaction without dealer 
intervention, specialist parity acquisitions would constitute an 
example of unnecessary dealer intervention and could not be 
reconciled with Section 11A. See Rutherfurd Letter III. See also 
IBAC Letter I.
    \274\ See Rutherfurd Letters III, IV, V, VI, VII, VIII, IX, and 
X.
---------------------------------------------------------------------------

    In response, the Exchange noted that, under current practice, floor 
brokers in the Crowd may permit the specialist to be on parity with 
their orders. The Exchange stated its belief that parity provides an 
incentive for specialists to participate in the price discovery process 
at the point of sale, and has the beneficial effects of dampening 
volatility and lowering execution costs for investors. In response to 
the concern that a specialist trading on parity when establishing or 
increasing its position could be inconsistent with the negative 
obligation, the Exchange clarified that the general negative obligation 
incorporated into NYSE Rule 104.10 would continue to apply to all 
specialist trading on the NYSE.\275\
---------------------------------------------------------------------------

    \275\ See also note infra and accompanying text.
---------------------------------------------------------------------------

2. Floor Broker Agency Interest Files and Reserve
    NYSE proposes to permit floor brokers to participate in the Hybrid 
Market by allowing them to systematically provide liquidity at varying 
prices at or outside the BBO with respect to orders the broker is 
representing, but only while standing in the Crowd.\276\ While a floor 
broker's agency interest, except reserve, would be displayed as part of 
the quotation when it is at the BBO, floor broker agency interest 
outside of the BBO would not be displayed. NYSE proposes to allow floor 
broker agency interest to trade on parity with the specialist interest 
file,\277\ and in many cases, with orders on the Book.
---------------------------------------------------------------------------

    \276\ However, as noted earlier, a floor broker would be 
permitted to leave the Crowd without canceling its agency interest 
files to recharge its handheld device. See proposed NYSE Rule 
70.20(f).
    \277\ The specialist interest file would only trade on parity 
with the floor broker agency interest file when there are no orders 
on the Book executable at a particular price.
---------------------------------------------------------------------------

    The Commission received one comment letter criticizing the 
requirement that floor brokers be physically present in the Crowd to 
place interest in its floor broker agency interest file.\278\ Most of 
the other comments regarding floor broker agency interest file focused 
on the Exchange's proposal to not require the display of such interest 
that is outside of the BBO while providing this interest with the 
ability to trade on parity with displayed interest.\279\ Specifically, 
several commenters questioned the fairness of allowing non-displayed 
floor broker agency interest to trade on parity with disclosed orders 
on the Book.\280\ Some commenters argued that this practice would be 
inconsistent with the Exchange's goal of providing incentives to place 
limit orders on the Exchange, and predicted that investors would be 
reluctant to place limit orders on the Book knowing that they might not 
be fully rewarded for displaying those orders.\281\
---------------------------------------------------------------------------

    \278\ See Invictus Letter. This commenter believed that the 
proposed requirement that a floor broker agency interest file be 
cancelled when the floor broker leaves the Crowd and the proposed 
definition of a Crowd would be at odds with the direction of 
technology, greater speed, productivity, and liquidity. Because 
floor brokers are equipped with hand held computers and can act in a 
virtual capacity at any post where they have customer interest 
files, this commenter believed that limiting them to a distance of 
five contiguous panels at the same post would be arbitrary and 
unnecessarily restrictive and would put customers who use 
independent floor brokers at a disadvantage. In response to this 
criticism, the Exchange explained that, like the current floor today 
where a floor broker has to be in the Crowd to participate in the 
auction, the floor broker agency interest file was designed to allow 
the floor broker to continue participation in the auction, but in an 
automatic execution environment. In addition, the Exchange believes 
that the range of five contiguous panels in the proposed definition 
of a Crowd represents the appropriate range of proximity to enable 
brokers to also participate in the auction market. Furthermore, the 
Exchange pointed out that, if a floor broker must leave the Crowd 
and therefore cancel its agency interest file, the broker could 
ensure that its customers' orders are still represented in that 
Crowd by sending such orders to the specialist, sending the orders 
to Direct+ via its handheld devices for automatic execution, or 
transferring the orders to another member for representation in the 
Crowd. In Amendment No. 8, NYSE proposes to limit this restriction 
by allowing a floor broker to leave the Crowd to recharge a handheld 
device without canceling its agency interest file.
    \279\ See, e.g., Bloomberg Letters I and II, ICI Letters I, II, 
and III, Rutherfurd Letters I, II, III, and V, SIA Letter I, STANY 
Letter, and Vanguard Letter.
    \280\ See, e.g., Bloomberg Letters I and II, ICI Letters I, II, 
and III, Rutherfurd Letters I, II, III, and V, SIA Letter I, STANY 
Letter, and Vanguard Letter.
    While supporting the NYSE's proposal to have the floor broker's 
undisplayed reserve interest at the BBO yield to displayed interest 
at that price, one commenter questioned why the Exchange did not 
extend this concept to its execution priorities at other levels of 
the book. See ICI Letter II.
    \281\ See, e.g., ICI Letters II and III, Rutherfurd Letters II 
and V, STANY Letter, and Vanguard Letter.
---------------------------------------------------------------------------

    Commenters also expressed the opinion that the proposal appeared to 
be designed to preserve the time and place advantages that floor 
members currently enjoy over public investors.\282\ For example, one 
commenter believed that, by authorizing this parity structure, the 
Exchange would be affording the floor broker agency interest file with 
three major execution advantages over orders on the Book: (1) Floor 
broker agency interest entered later in time could deny an execution to 
public limit orders

[[Page 16371]]

entered earlier in time; \283\ (2) floor broker agency interest would 
often be entitled to superior parity splits with the Book, since the 
proposed parity structure would treat the Book as only one bidder 
(irrespective of the number of orders on the Book, the aggregate number 
of shares, and their times of entry); \284\ and (3) floor brokers would 
enjoy an informational and order entry advantage that will allow them 
to ``see'' the orders on the Book and make trading decisions by 
entering floor broker agency interest.\285\
---------------------------------------------------------------------------

    \282\ See, e.g., Bloomberg Letters I and II, ICI Letters I, II, 
and III, Rutherfurd Letters I, II, and III, and SIA Letter I.
    \283\ See Rutherfurd Letters III and V. This commenter believed 
that the proposal would allow floor brokers to enter interest in 
reaction to their knowledge of public orders on the Book, and 
thereby supersede the clearly established price/time priority of 
such public limit orders. The commenter believed this to be 
fundamentally unfair to public investors and unknown in other major 
securities markets. See Rutherfurd Letter V.
    \284\ This commenter believed that the Exchange's examples do 
not reveal the fact that the Book would be deemed to be only one 
``bidder'' regardless of how many individual orders are on the Book 
at the same price, while every broker who enters an agency interest 
file would be considered a separate ``bidder.'' See Rutherfurd 
Letter V. This commenter believed that, if the floor broker agency 
interest file is permitted to compete directly with the price/time 
priority of the Book, it should be treated as only one bidder. See 
Rutherfurd Letter I.
    \285\ See Rutherfurd Letters I, III, and V (also claiming that 
Amendment No. 6 failed to address the floor brokers' informational 
advantage in placing orders and their advantage in being able to 
supersede the price/time priority of orders on the Book and in being 
treated as a separate ``bidders,'' whereas limit orders on the Book 
would be treated as one ``bidder''). The commenter also argued that 
the principal beneficiary of the clean up methodology would be 
undisplayed floor broker agency interest files, which could be 
entered on the Display Book with knowledge of, and in relation to, 
the limit orders on the Book to take advantage of possible sweep 
executions.
---------------------------------------------------------------------------

    Accordingly, commenters insisted that for a floor broker agency 
interest file to be on parity with other orders at its price, a broker 
should be required to display orders placed in their agency interest 
file in the same manner as at the BBO.\286\ If the Exchange believes 
that floor brokers' agency interest should be undisplayed, commenters 
argued that those orders should not be provided parity with fully-
displayed orders on the Book.\287\
---------------------------------------------------------------------------

    \286\ See, e.g., ICI Letters I, II and III, Rutherfurd Letters I 
and II, SIA Letter I, and Vanguard Letter.
    \287\ See, e.g., ICI Letters I, II and III (recommending that 
the Exchange provide execution priority on the same level as fully 
displayed investors' orders only to the portion of those orders 
represented by the floor brokers that are displayed). See also SIA 
Letter I.
---------------------------------------------------------------------------

    One commenter suggested that the Exchange give qualified customers 
the option either to give their agency interest to a floor broker or 
enter it directly in the Display Book system themselves.\288\ 
Similarly, with respect to a floor broker's ability to place 
undisplayed reserve interest at the BBO, two commenters suggested that 
the Exchange provide investors with a similar reserve feature where 
investors would have the direct ability to conceal a portion of their 
orders at the BBO, and not be required to do so solely through the use 
of a floor broker.\289\ One of these commenters argued that this aspect 
of the proposal would not support economically efficient executions or 
the ability of investors to interact directly, and thus would be 
inconsistent with the principles of section 11A under the Act.\290\
---------------------------------------------------------------------------

    \288\ See Rutherfurd Letters I and III.
    \289\ See, e.g., ICI Letters I and III and Vanguard Letter.
    \290\ See Vanguard Letter.
---------------------------------------------------------------------------

    In general support of the floor broker agency interest file, the 
Exchange stated that this feature would allow customers both to take 
advantage of floor broker knowledge and trading expertise, as well as 
the efficiencies of automatic executions. The Exchange believes that 
floor brokers would be able to use the interest file to effectively 
represent interest that their customers do not wish to display, and, 
simultaneously, permit this interest to be accessed by incoming orders 
and participate in automatic executions and sweeps.
    Furthermore, in addressing comments that undisplayed floor broker 
agency interest should not trade on parity with displayed orders on the 
Book, the Exchange proposed in Amendment No. 6 to revise the standing 
of orders on the Book and floor broker agency interest during a sweep. 
Specifically, the Exchange proposes to revise NYSE Rule 70 to provide 
that during a sweep, the amount of floor broker agency interest that 
would have been displayed had there been a new quote at the clean-up 
price would trade on parity with displayed interest, e.g. orders on the 
Book, at that price. The amount of any floor broker agency interest 
that would have been placed in the broker's reserve would yield to 
displayed interest. The Exchange believes that this amendment is 
consistent with the concept that displayed interest at each price point 
would execute before non-displayed interest at the same price point and 
the corollary principle that non-displayed interest at a better price 
would trade ahead of displayed interest at a worse price, while taking 
into account the fact that during a sweep there is no opportunity for 
floor broker agency interest at the clean-up price to be displayed 
before an execution that occurs at that price.\291\
---------------------------------------------------------------------------

    \291\ However, see Rutherfurd Letter V. This commenter argued 
that the NYSE's revision in Amendment No. 6 to the standing of floor 
broker agency interest during a sweep would be ineffective (i.e., no 
one would be aware of the floor broker agency interest file except 
for the floor broker since the interest would not actually be 
displayed prior to a sweep transaction). Accordingly, the commenter 
believed that the amendment would not attract liquidity or solve the 
problems of unfairness to the Book, since investors with orders on 
the Book would still have no information about interest in the floor 
broker agency interest files.
---------------------------------------------------------------------------

    With respect to suggestions that the floor broker agency interest 
file would provide floor brokers with some form of advantage over 
public customers, the Exchange emphasized that floor brokers would only 
have access to information pertaining to their own agency interest, and 
no access to other broker's files. Similarly, the Exchange proposed 
that neither specialists on the floor nor the Specialist Algorithms 
would have access to any information about specific orders in floor 
broker agency interest files.\292\ Under the proposal, specialists 
would only be able to view the total aggregated broker agency interest 
at each price, except for any interest a broker has elected to not 
disclose to the specialist.
---------------------------------------------------------------------------

    \292\ Only the specialist on the floor would have access to 
limited information pertaining to interest in the files. The 
specialist would not know the number of customer orders behind such 
volume, who the orders are for, which brokers represent the orders, 
or the limit prices for such orders. See Response to Comments, supra 
note 14.
---------------------------------------------------------------------------

    Furthermore, in response to comments questioning the reserve 
feature of the floor broker agency interest file and whether it would 
grant too much advantage to floor brokers,\293\ the Exchange argued 
that the existence of reserve interest would not be unique to the 
Exchange, and that electronic order books in other markets have a 
reserve functionality at all price levels, not just the BBO.\294\ In 
the Hybrid Market, the Exchange believes that the reserve functionality 
would allow floor brokers to use their skills to determine the best way 
to represent their customers' interests, whether that be through the 
display of some or all of the customer order. Furthermore, the Exchange 
believes that the reserve feature would benefit the marketplace as a 
whole by providing liquidity and dampening price volatility. Since 
reserve interest would yield to

[[Page 16372]]

displayed interest at the Exchange BBO, but would participate in 
automatic executions at that price provided there is sufficient contra-
side liquidity, the Exchange believes that reserve interest would 
benefit incoming orders by providing more liquidity at the BBO, yet 
without disadvantaging displayed interest at the BBO. The Exchange 
believes that it would be unable to attract and aggregate liquidity as 
effectively if a reserve feature was not offered, as it is in other 
competing market centers. In response to comments that investors should 
have a similar feature to directly enter interest in reserve, the 
Exchange represents that the reserve feature would be available to all 
investors through floor brokers. Customers seeking to participate in 
the reserve interest file would be able to do so by sending their 
orders to floor brokers with appropriate instructions as to how they 
want their orders handled. The Exchange believes that creating a 
reserve feature exclusively for on-floor participants would provide an 
incentive for participating in price discovery at the point of sale, 
and would allow differentiation from typical electronic communication 
network (ECN) functionality.
---------------------------------------------------------------------------

    \293\ See, e.g., Bloomberg Letters I and II, ICI Letter III, 
Rutherfurd Letter I, SIA Letter I, and Vanguard Letter.
    \294\ However, see Rutherfurd Letter V. This commenter argues 
that markets with reserve features are, for the most part, non-
primary, non-price discovery markets whose lack of transparency does 
not materially impact the overall price discovery process. However, 
the commenter believes that the critical distinction between other 
markets that have reserve features and the NYSE's proposed Hybrid 
Market is that there is not a similar concept of ``parity'' in those 
markets (e.g., a trader cannot enter a reserve order in those 
markets that will supersede the price/time priority of a previously 
entered order).
---------------------------------------------------------------------------

B. Automatic Executions

1. Sweeping the Display Book System
    With respect to sweeps, two commenters noted that incoming 
investors' orders that sweep the Display Book system would be executed 
at a clean-up price, which could be inferior to other prices placed in 
the Display Book system.\295\ Specifically, one commenter believed that 
the proposed sweep methodology would result in executions less 
favorable to investors than that of the current floor auction, which 
allows floor brokers with a large order to trade at intervening price 
levels instead of only a clean-up price.\296\ The other commenter 
questioned whether the Exchange's proposal would be consistent with 
best execution requirements of brokers.\297\
---------------------------------------------------------------------------

    \295\ See, e.g., Bloomberg Letters I and II and Rutherfurd 
Letters I, III, and V (declaring that the sweep clean up price 
methodology would be a benefit only to those trade initiators who 
seek such a price; otherwise, there is significant economic 
dislocation for them with respect to the traditional pricing of 
large orders that cannot be filled at published bid or offer 
prices).
    \296\ See Rutherfurd Letter I.
    \297\ See Bloomberg Letters I and II.
---------------------------------------------------------------------------

    Two commenters also suggested that the proposed sweep function 
should be considered in relation to the pilot program in Regulation 
SHO, e.g. the effect a sell short sweep order would have under the 
pilot where consecutive bids were hit.\298\ In Amendment No. 8, the 
Exchange proposes in NYSE Rule 1000(d)(iii)(E) to clarify that during a 
sweep, sell short orders, other than those involving Regulation SHO 
pilot securities, would have to comply with the conditions outlined in 
the SEC's Short Sale Rule, Rule 10a-1, and NYSE Rule 440B.
---------------------------------------------------------------------------

    \298\ See Rothenberg Letter and SIA Letter I.
---------------------------------------------------------------------------

2. Automated Routing to Other Markets
    Initially, a number of commenters generally believed that the 
proposal would allow limit orders to be swept on NYSE at prices that 
are inferior to prices immediately available at other markets.\299\ In 
addition, some commenters initially believed that the proposal did not 
clearly indicate how a specialist would be able to match the NBBO on an 
away market, and noted that there did not appear to be a minimum size 
requirement for specialists to match away markets. Specifically, some 
commenters thought that the NYSE specialist could program its systems 
to automatically put up a pre-emptive 100 share bid or offer to match 
the NBBO at any given time on any other market, and thus would not be 
obligated to send trades to another market.\300\
---------------------------------------------------------------------------

    \299\ See, e.g., Ameritrade Letter, Bloomberg Letters I and II, 
Fidelity Letters I and II, and SIA Letter I.
    \300\ See, e.g., Bloomberg Letters I and II, Fidelity Letter I, 
SIA Letter I.
---------------------------------------------------------------------------

    In addressing these comments, the Exchange emphasized in its Second 
Notice and Response to Comments that the proposed Hybrid Market would 
operate in full conformity with all SEC rules, including Regulation 
NMS. In response to specific comments that the specialist in the Hybrid 
Market proposal could trade through better prices on another market 
center below the NBBO, the Exchange stressed in the Second Notice that 
the operation of sweeps, including the automatic electronic routing of 
orders to the market centers displaying better priced bids and offers, 
would be consistent with the fundamental tenet of the ITS trade-through 
rule and Regulation NMS--that the best bids and offers published by 
other market centers are entitled to protection. The Exchange 
represented that best bids (offers) published by away markets that are 
better than a clean-up price would be satisfied in their entirety. The 
Exchange further represented that, as today, best bids and offers in 
these markets (i.e., ``top of the book'') would be entitled to price 
protection in the Hybrid Market.\301\ The Exchange disagreed with 
comments suggesting that it should also provide price protection at 
intervening price levels, and argues that while intermarket price-time 
priority has been extensively debated, it has not been viewed to be in 
the best interest of the national market system.
---------------------------------------------------------------------------

    \301\ As discussed earlier, except for IOC and Intermarket Sweep 
orders, NYSE proposes to automatically route portions of an Auto Ex 
Order that would satisfy a protected quote of an away market, unless 
the specialist matches the better published price.
---------------------------------------------------------------------------

    Furthermore, the Exchange pointed out that a specialist already has 
the option of matching a better published bid or offer rather than 
shipping an order to that bid or offer. The Exchange believes that the 
proposed rules would simply make this process more efficient by 
permitting the specialist to electronically match or ship. During the 
sweep, a commitment to trade that satisfies the full amount of any 
better bid or offer that is published as the best bid or offer by 
another market center would be auto-routed to such market (if a 
prohibited trade-through would otherwise occur), which the Exchange 
argues is consistent with the ITS trade-through rule and Regulation 
NMS.

C. Availability of Direct+ and Liquidity Replenishment Points

    Two commenters supported NYSE's proposal to remove order size and 
time entry restrictions in Direct+.\302\ Commenters, however, requested 
more detail on when automatic executions would not be available.\303\ 
Specifically, many commenters requested after the First Notice that the 
Exchange supply additional details and examples regarding the operation 
of LRPs, including the determination and dissemination of the LRP to 
the public, the frequency of triggering a LRP, and the specific 
parameters of a MLRP.\304\ Some commenters questioned whether LRPs 
would be too restrictive or even necessary to dampen volatility, and 
expressed concern over the length of time LRPs could stop automatic 
execution in the Hybrid Market.\305\ Commenters suggested that the 
Exchange reexamine the rules governing halts and resumption of trading 
to ensure that the LRP parameters are realistic.\306\ After the Third 
Notice, one

[[Page 16373]]

commenter asserted that market volatility should not be artificially 
limited through the mechanism of LRPs, but that investors should be 
free to place, and interact with, orders at all price points without 
unnecessary market center intervention.\307\ Another commenter 
expressed concern about the priority of order execution coming out of 
an LRP.\308\ This commenter wondered if an order that caused the price 
of a security to reach an LRP would be denied priority coming out of 
the LRP.
---------------------------------------------------------------------------

    \302\ See Rutherfurd Letter III and STANY Letter.
    \303\ See, e.g., BSE Letter, Instinet Letter, SIA Letter I, and 
STANY Letter.
    \304\ See, e.g., Ameritrade Letter, Bear Stearns Letter, BSE 
Letter, IBG Letter I, ICI Letters I and II, SIA Letter I, and STANY 
Letter.
    \305\ See, e.g., Ameritrade Letter, Bear Stearns Letter, ICI 
Letters I and II, and SIA Letter I. See also SIA Letter III and 
Vanguard Letter. One of these commenters thought that the parameters 
of the MLRP could be too restrictive for very liquid stocks. See ICI 
Letter II.
    \306\ See, e.g., Ameritrade Letter, ICI Letters I, and Vanguard 
Letter.
    \307\ See Vanguard Letter.
    \308\ See SIA Letter III.
---------------------------------------------------------------------------

    The Exchange described LRPs as pre-determined price points at which 
electronic trading would briefly convert to auction market trading. 
With respect to MLRPs, the Exchange believed that excessive volatility 
could occur in situations other than electronic sweeps and thus 
proposed a LRP based on price movement over a period of time. The 
Exchange also described in the Second and Third Notices the specific 
parameters of MLRPs, and clarified that automatic executions could 
occur within the MLRP range.
    In addressing commenters' concerns over the use of LRPs in the 
Hybrid Market, the Exchange stated that it believes that LRPs would 
promote reasonable price continuity and foster market quality. When a 
LRP converts the market exclusively to an auction market on a temporary 
basis, the Exchange believes this would provide an opportunity to 
moderate volatility by permitting new orders, as well as Crowd and 
specialist interest, to add liquidity. Furthermore, the Exchange 
represented that the LRP parameters were selected by the Exchange after 
careful evaluation and discussions with market participants, and have 
been designed to limit automatic executions infrequently. According to 
the Exchange, when reached, LRPs would allow buyers and sellers to 
react to fast-changing market conditions and provide an opportunity for 
orders to interact with Crowd interest not encompassed in the broker 
agency interest file and with specialist interest, enabling the auction 
market to supplement liquidity and lower volatility. In addition, to 
respond to commenters' requests for more details on LRPs, the Exchange 
provided additional discussion and examples in the Second Notice, and 
also set out the timeframes within which automatic executions and 
Autoquote would resume after a LRP is reached.
    Similar to the concerns expressed over LRPs, many commenters also 
generally questioned the particular methods and frequency of 
suspensions of automatic executions in the Hybrid Market.\309\ For 
instance, a few commenters requested that the Exchange provide more 
information on how often the Exchange could preclude investors from 
obtaining an automated sweep of the Display Book and the timeframes 
within which the security would remain in an auction capacity or 
``slow'' mode.\310\ Like the comments relating to LRPs, commenters 
suggested that the proposed rules regarding halts and resumption of 
trading be examined to ensure that they are structured in a manner to 
permit the least amount of disruption as possible.\311\ One commenter 
questioned whether NYSE would be considered reopening its market for 
purposes of Regulation NMS each time a LRP is reached or a specialist 
has gapped the quote.\312\
---------------------------------------------------------------------------

    \309\ See, e.g., Ameritrade Letter, Bloomberg Letters I and II, 
BSE Letter, Fidelity Letter I, ICI Letter I, Instinet Letter, SIA 
Letter I, and STANY Letter.
    \310\ See, e.g., Fidelity Letter I, and SIA Letter I.
    \311\ See, e.g., ICI Letter III and Vanguard Letter.
    More specifically, several commenters also expressed concern 
over the suspension of automatic execution when the specialist has 
gapped the quote. See BSE Letter, ICI Letter I, Nasdaq Letter, and 
SIA Letter III. In justifying the specialist's use of gapped quotes, 
the Exchange explained in the Second Notice that gap quotes would be 
used by specialists in response to trading scenarios in which price 
dislocation is expected, such as a sudden influx of orders on one 
side of the market, one or more large-size orders with no off-
setting interest, or when a member proposes to effect a one-sided 
block size transaction or a cross at a significant premium or 
discount to the prevailing market. In an attempt to mitigate 
volatility, specialists would use gap quotes to signal the potential 
price movement so as to attract contra-side liquidity. The Exchange 
also clarified in the Second Notice that, when the quotation is 
gapped, automatic executions and Autoquote would be suspended, 
although incoming orders and cancellations would update the Book 
electronically. Furthermore, the Exchange explained that better 
priced orders would be taken into account in the transaction 
resulting from the gapped quotation and that Floor Officials would 
oversee the gap quote process, including its duration.
    \312\ See Nasdaq Letter. The Commission notes that turning off 
automatic executions, for example, for a gap quoting situation, the 
triggering of a LRP, or the reporting of a block size transaction, 
would not in and of itself halt trading and thus trigger a reopening 
pursuant to Rule 611(b)(3) of Regulation NMS. See Securities 
Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 
2005).
---------------------------------------------------------------------------

    In response to these comments, the Exchange represented that 
Autoquote and automatic executions would be suspended infrequently and 
only in certain limited circumstances, such as when trading on the 
Exchange reaches a LRP, when the quote is gapped in accordance with 
Exchange procedures, when trading in a security has been halted, when 
the quote is not firm, or when a block size transaction involving 
orders in the Display Book system is manually reported.\313\ The 
Exchange believes that suspension of Autoquote and automatic executions 
to report block trades is necessary to protect customer orders on the 
Book and facilitate orderly executions in limited ``breakout'' 
situations and during the reporting of a block size transaction.
---------------------------------------------------------------------------

    \313\ Autoquote and automatic executions would resume when the 
manual reporting is concluded.
---------------------------------------------------------------------------

    The Exchange will disseminate a systematic indication, consistent 
with Regulation NMS, when automatic executions against its published 
quotation are unavailable. In addition, in situations when automatic 
executions are suspended due to a gapped quote or LRP, NYSE will notify 
members by way of an indicator that the NYSE quotation is not firm.
    The Exchange represented that once the Hybrid Market is 
implemented, all other instances of manual reporting \314\ would not 
suspend Autoquote and automatic executions, and the quote would 
automatically update to reflect the entry of better bids and offers and 
cancellations. Finally, in the Second Notice, the Exchange represented, 
based on its original proposal which proposed to suspend automatic 
executions and Autoquote more frequently, that it expected Autoquote 
and automatic executions to be available at least 99.7% of the 
time.\315\
---------------------------------------------------------------------------

    \314\ For example, trades occurring within the Crowd or between 
the Crowd and the specialist, as either agent or dealer, are 
reported manually.
    \315\ One commenter argued that automatic executions should be 
available 100% of the time because it is during times when news is 
disseminated or when there is an imbalance or when there is a fast 
market that its customers need certainty of execution. See 
Ameritrade Letter. See also ICI Letter I.
---------------------------------------------------------------------------

D. Role of the Specialist in the Hybrid Market

1. Specialist Algorithm
    The Exchange proposes to allow specialists to participate 
automatically in the Hybrid Market by capturing many specialist 
functions and replicating certain specialist privileges in an 
electronic environment. As discussed earlier, specialists would be 
permitted to establish Specialist Algorithms to send specific quoting 
and trading messages via the API to the Display Book system.
    After the First Notice, the Commission received a number of 
comments questioning the operation of the Specialist Algorithm in the 
Hybrid Market, including its ability to generate quoting and trading 
messages on behalf of the specialist's dealer account and the sequence 
of priority and parity rules with respect to the specialist interest 
file and incoming orders.\316\ Although one

[[Page 16374]]

commenter appeared to support the amendments to NYSE Rule 104 that 
describe the Specialist Algorithm,\317\ several of the comments raised 
issues of fairness and transparency in the operation of the Specialist 
Algorithm.\318\ Specifically, commenters opposed allowing the 
Specialist Algorithm to ``read'' certain information before other 
market participants and to interact with incoming orders and quotes on 
the Display Book system based on that information.\319\ Two commenters 
questioned whether the operation of the Specialist Algorithm was 
consistent with the specialist's negative and affirmative 
obligations.\320\ One of these commenters opposed providing only the 
specialists with the ability to trade algorithmically with incoming 
orders and believed it would greatly increase the specialists' speed 
advantage and tilt the playing field toward the specialists and away 
from the investing public.\321\ These two commenters also viewed as 
ineffective the Exchange's proposal to delay the processing of 
algorithmic messages (based on the average transit time from the CMS) 
to give specialists and other market participants a similar opportunity 
to trade with the Exchange's published quotation.\322\
---------------------------------------------------------------------------

    \316\ See, e.g., Bloomberg Letter I, BSE Letter, IBG Letter I, 
ICI Letter I, Peake Letter I, SIA Letter I, STANY Letter, and Telic 
Letter. See also Rutherfurd Letter III (advising after the Third 
Notice in response to NYSE's proposed change to its Rule 92 that the 
Exchange should program its system so that the specialist's dealer 
orders can never be executed ahead of a public limit order that is 
executable at the same price of the proposed specialist trade).
    \317\ See Invictus Letter (stating that proposed NYSE Rule 104 
appears constructive as a potential risk management tool and may 
speed the process of providing liquidity by specialists). However, 
this commenter expressed a concern over the potential of piercing 
the information barrier, whereby the data, within the computers 
running the algorithms and the staff monitoring the books across all 
the specialists within a firm, could be communicated outside the 
Exchange and be seen by upstairs traders or other business units 
affiliated with the specialists. This commenter believed that there 
should be an affirmative statement from the Exchange concerning this 
prohibition. In Amendment No. 8, NYSE clarified that its current 
information barrier rules would prevent a specialist firm from 
sharing information with its affiliated business units. 
Specifically, the Exchange represented that pursuant to NYSE Rule 
104(i), Specialist Algorithms would have to be designed to comply 
with all Exchange rules, policies, and procedures, including NYSE 
Rule 98, which requires the existence of information barriers 
between the specialist operations and other business operations in 
situations where the specialist is part of an integrated firm.
    \318\ See, e.g., IBAC Letters I and II, ICI Letters I, II, and 
III, Rutherfurd Letters I, III, V, and IX, SIA Letters I and III, 
and Vanguard Letter.
    \319\ See, e.g., IBAC Letter I, ICI Letters I, II (recommending 
that the Hybrid Market proposal be amended to make this information 
available to investors as well), and III, Rutherfurd Letters I, III, 
and V, SIA Letters I and III, and Vanguard Letter.
    \320\ See IBAC Letter I and Rutherfurd Letters I, III, and V.
    \321\ See IBAC Letters I (questioning the effectiveness of 
NYSE's solution that floor brokers will be able to mitigate the 
impact of specialist algorithmic trading by entering bids and offers 
into the floor broker agency interest file) and II.
    \322\ See IBAC Letter I and Rutherfurd Letter V.
---------------------------------------------------------------------------

    In support of the API and the Specialist Algorithm, the Exchange 
asserted that specialists provide significant value to the market: They 
commit capital to narrow quotes, add liquidity, and stabilize 
prices.\323\ The Exchange maintained that its proposed rules provide 
specialists with the ability to transmit to the Display Book system 
algorithmic messages to quote or trade on behalf of their dealer 
accounts so that they are able to fulfill their market making 
obligations once electronic trading increases. According to the 
Exchange, this algorithmically-based trading and quoting would be 
permissible only in certain, limited ways that preclude the opportunity 
for abuse. By allowing specialists to do electronically that which they 
are able to do manually today, the Exchange believes that specialists 
would be able to continue to provide value and liquidity in the Hybrid 
Market.
---------------------------------------------------------------------------

    \323\ The Exchange represented that currently specialists 
provide approximately 9% of total volume, approximately 80% of which 
is stabilizing in nature. See Response to Comments, supra note 14.
---------------------------------------------------------------------------

    In addressing comments that the specialist's ability to access 
certain information and then algorithmically trade and quote based on 
that information would give the specialist an unfair informational 
advantage over other market participants, the Exchange said that 
specialists would need to engage in algorithmic trading to effectively 
participate in the Hybrid Market and continue to fulfill their market 
making obligations in an efficient and effective manner. The Exchange 
contends that, without this ability, specialists in an automated 
environment would be unable to ensure that there is appropriate price 
continuity and depth, in which price movements are accompanied by 
appropriate volume, and that unreasonable price variations between 
trades are avoided. The Exchange stressed that the Specialist Algorithm 
would not be privy to any more or different information than 
specialists currently have today.\324\ In the Hybrid Market, the 
Specialist Algorithm would be required to function according to new 
NYSE rules and take predetermined actions before an order arrives at 
the Display Book system. To do this effectively, the Specialist 
Algorithm would need to take into account the size and price of an 
incoming order to determine the appropriate algorithmic action.\325\ 
According to the Exchange, specialists' algorithmic trading would be 
strictly controlled and limited to relatively few circumstances as 
detailed in NYSE Rule 104. The Exchange represents that the 
requirements detailed in NYSE Rule 104(b)-(h) for algorithmic trading 
would be enforced systematically, and, in some ways, would be more 
restrictive than current auction market rules.\326\
---------------------------------------------------------------------------

    \324\ In response to commenters that argued that specialists 
would have an informational advantage over other market participants 
due to their ability to see floor broker agency interest files, the 
Exchange clarified that specialists would only be able to view the 
total aggregated floor broker agency interest at each price, except 
for any interest a broker has elected not to have disclosed to the 
specialist. The Exchange argued that specialists need to know the 
amount of buy and sell interest at each price to fulfill their 
obligation to maintain a fair and orderly market and to determine 
appropriate prices in manual trading situations, such as after a 
quote is gapped or when a LRP has been reached. The Exchange 
maintains that specialists would thus not be given an advantage over 
other market participants, as commenters may believe (See ICI Letter 
II). Moreover, the Exchange emphasized that a broker can elect to 
exclude its agency interest from the aggregate disclosed to the 
specialist without jeopardizing such interest from participating in 
automatic executions.
    \325\ For example, to fulfill their obligations, specialists 
today have knowledge of incoming orders, as well as CAP and stop 
orders. See Response to Comments, supra note 14.
    \326\ See also note infra and accompanying text.
---------------------------------------------------------------------------

    For example, to ensure that an algorithmically-generated message to 
trade with the Exchange published quotation (i.e., to hit a bid or take 
an offer) does not have an advantage--since the specialist's system 
would be aware of an incoming order that would change the BBO before 
such new bid or offer is publicly disseminated--the processing of the 
specialist's algorithmically-generated message would be delayed so as 
to give all market participants a comparable opportunity to trade with 
such bid or offer. This would be accomplished by delaying processing of 
the algorithmically-generated message for a period based upon the 
average transit time from the system to the Display Book system. 
According to the Exchange, the delay parameter would be adjusted 
periodically to account for changes to the average transit time 
resulting from capacity and other upgrades to Exchange systems.
    In addition, per proposed NYSE Rule 104(b)(ii), neither the 
specialist on the floor nor the messages generated by the Algorithms 
would have the ability to affect the order in which algorithmically-
generated messages and incoming orders are processed by the Display 
Book system. In correcting one commenter's impression that orders would 
have to go through the

[[Page 16375]]

specialist's trading system before they are sent to the book for 
processing,\327\ the Exchange clarified that an incoming order would 
not be delayed in its arrival at, or processing by, the Display Book. A 
copy of the order would go to the specialist's system, and the actual 
order would continue on its path to the Display Book for processing.
---------------------------------------------------------------------------

    \327\ See, e.g., SIA Letter III.
---------------------------------------------------------------------------

    With regard to commenters' recommendation that the Exchange 
aggressively monitor the Specialist Algorithm to preclude unlawful 
trading activity, the Exchange pointed out that algorithmically-
generated messages would provide improved audit trail data for NYSE 
Regulation, since detailed information regarding such messages and the 
systems within which they operate would be captured systematically. In 
addition, the rules would require specialists to produce information 
and documentation regarding their systems that should assist NYSE's 
oversight of specialists' algorithmic trading.\328\ To ensure that the 
specialists' ability to trade algorithmically is consistent with the 
expectations of market participants, the Exchange also plans to 
establish a committee composed of representatives of the various 
Exchange constituencies that would review the functioning of the Hybrid 
Market based upon experience and data, including specialist trading 
data.\329\
---------------------------------------------------------------------------

    \328\ For example, proposed Exchange Rule 104(f)(ii) requires 
that specialists notify the Exchange in writing within such time as 
the Exchange shall designate, whenever an algorithm is not operating 
and the time, cause, and duration of such non-operation.
    \329\ One commenter viewed this aspect of the proposal as a 
``positive step.'' See SIA Letter III.
---------------------------------------------------------------------------

2. Specialists' Ability To Systematically Price Improve Incoming Orders
    Commenters objected to the specialists' ability, on behalf of their 
dealer accounts, to provide price improvement electronically to all or 
part of a marketable incoming order.\330\ These commenters believed 
that the specialists' ability to ``see'' information before others and 
price improve is fundamentally unfair to other market participants and 
a disincentive to displaying limit orders.\331\ One of these commenters 
claimed that the algorithmic price improvement functionality would 
provide the specialist with a unique proprietary trading opportunity 
and would be inconsistent with the specialist's negative 
obligation.\332\ This commenter also believed the requirement that the 
specialist be represented in the quote for a minimum of 1000 shares to 
price improve would be ineffective, and suggested that the Exchange 
restrict the specialist to providing algorithmic price improvement only 
when the incoming order would otherwise trade against the specialist's 
bid or offer.\333\ In addition, two commenters urged the Exchange to 
provide floor brokers with the functionality to provide price 
improvement electronically in the current proposal, rather than in a 
later filing, to promptly level the playing field between specialists 
and investors.\334\
---------------------------------------------------------------------------

    \330\ See, e.g., IBAC Letters I and II, ICI Letter III, 
Rutherfurd Letters I, III, and V, and Vanguard Letter.
    \331\ See, e.g., IBAC Letter I, ICI Letters II and III (claiming 
that their members are much more likely not to post orders on the 
Exchange due to the ability of specialist to electronically interact 
with orders through this mechanism), Rutherfurd Letters I, III, and 
V (asserting that the specialist algorithmic price improvement to 
incoming Auto Ex Orders that would otherwise be automatically 
executed against the contra-side bid or offer has no net public 
benefit and discourages the placement of public limit orders on 
Book), and Vanguard Letter (arguing that if the specialist is 
willing to provide liquidity at a price that is better than the BBO, 
then the specialist should be required to display that liquidity).
    \332\ See Rutherfurd Letter V (stating that NYSE's approach 
transforms the specialist from the trader of last resort to the only 
one who can trade in the first place).
    \333\ See Rutherfurd Letter V.
    \334\ See IBAC Letters I and II (urging the Commission to not 
approve the Hybrid Market proposal until this functionality is 
provided to floor brokers) and ICI Letter III.
---------------------------------------------------------------------------

    The Exchange represented that throughout the process of formulating 
rules governing specialist-provided price improvement, the Exchange has 
sought to balance the benefit this would provide to incoming customer 
orders with the interests of customers who have displayed orders at 
prices inferior (albeit by as little as one cent) to that at which the 
specialist would be willing to trade, or who would like a similar 
opportunity to trade with incoming orders. Although comments have 
criticized the algorithmic price improvement of one cent as ``penny-
jumping,'' \335\ the Exchange believes that the ability of the 
specialist to provide price improvement of one cent when the quotation 
spread is two cents provides a meaningful benefit to the incoming 
order, and is consistent with Federal securities laws and Exchange 
rules, which permit any market participant to bid, offer, or trade one 
cent (i.e., the minimum variation) better than an existing bid or 
offer.
---------------------------------------------------------------------------

    \335\ See, e.g., Rutherfurd Letter III.
---------------------------------------------------------------------------

    In response to comments that other market participants should also 
have the ability to systematically price improve or trade with incoming 
orders, the Exchange indicated that it is in the process of developing 
the means by which floor brokers would have the ability to do this 
through a discretionary price capability. In addition, the Exchange 
proposes to automatically convert CAP-DI orders that are able to trade 
along with the specialist at the improved price, so that these orders 
can participate in that execution. The Exchange believes that the 
opportunity for price improvement is an important factor in market 
quality and a hallmark of the Exchange, and thus seeks to preserve this 
important feature in the Hybrid Market.

E. Auction Limit and Auction Market Orders

    Under NYSE's proposal, AL and AM orders would automate the 
opportunity for investors to seek potential price improvement of a 
penny or better. The Exchange describes AL and AM orders as market and 
marketable limit orders that would be exposed to the auction and 
electronic market and would have the possibility of price improvement. 
These orders would automatically execute if: (1) The order is not 
executed within 15 seconds; or (2) a quoting or trading action triggers 
automatic execution before the 15-second period times out.
    After the First Notice, a few commenters had specific questions 
regarding how AL and AM orders would be processed and handled.\336\ 
These commenters requested clarification and examples relating to the 
execution of these orders and how they would interact with existing 
order types, the time priority of these orders when an incoming order 
triggers their execution, and which participants could trade with these 
orders. After the Second and Third Notices, another commenter, who 
supported the current NYSE methodology of price improvement resulting 
from order competition in the auction market, asserted that the 
proposed 15-second exposure procedure for price improvement of AL and 
AM orders would likely result in less price improvement, a risk of 
price disimprovement, and a greater prospect of orders not even being 
executed.\337\
---------------------------------------------------------------------------

    \336\ See BSE Letter, IBG Letter I, SIA Letter I, and STANY 
Letter.
    \337\ See Rutherfurd Letters I, III (stating that, given the 
prospect of inferior pricing, NYSE's proposal effectively gives the 
specialist an illegal ``not held'' order, and renders it virtually 
impossible for broker-dealers with ``best execution'' 
responsibilities to seek price improvement on the Exchange), and V 
(stating that AL and AM orders can be executed at worse prices 
because later arriving orders could exhaust contra-side liquidity, a 
result unknown in today's physical auction).
---------------------------------------------------------------------------

    In addressing the need for more details, NYSE provided an extensive

[[Page 16376]]

discussion in the Second Notice on AL and AM orders, including how they 
would be electronically executed when they arrive at the Display Book 
if the Exchange quotation is at the minimum variation, or routed away 
to another market center if that market center is publishing the 
national best bid (offer) and it causes a minimum variation with the 
Exchange's best offer (bid). The Exchange also clarified that if AL and 
AM orders are not automatically executed or routed away upon entry, 
they would be quoted at a price to attract liquidity (a penny better 
than the Exchange best bid or offer, as applicable) while retaining 
their limit price. Furthermore, the Exchange clarified in the Second 
Notice the three events that would cause automatic execution of an AL 
or AM order before 15 seconds has elapsed,\338\ and also provided 
detailed examples of how AL and AM orders would function in the Hybrid 
Market.
---------------------------------------------------------------------------

    \338\ The three events are: (i) The arrival of a subsequent 
order at a better price on the same side of the market as an AL or 
AM order; (ii) the execution of an order on the same side of the 
market as an AL or AM order that exhausts some or all of the 
displayed contra-side volume available in the Exchange quotation; 
and (iii) the cancellation of some or all of the displayed contra-
side volume, or the improvement of the displayed contra-side price, 
creating a minimum variation market or allowing execution of the AL 
or AM order with price improvement. See proposed NYSE Rule 123F.
---------------------------------------------------------------------------

IV. Discussion

    After careful review, 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 and, in particular, with the requirements of 
section 6(b) of the Act.\339\ Specifically, the Commission finds that 
approval of the proposed rule change, as amended, is consistent with 
section 6(b)(5) of the Act \340\ in that 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. The Commission also finds that the proposed rule change is 
consistent with section 6(b)(8) of the Act,\341\ which prohibits an 
exchange's rules from imposing a burden on competition that is not 
necessary or appropriate in furtherance of the Act. The Commission 
believes that the proposed rule change, as amended, is also consistent 
with section 11A(a)(1)(C) of the Act,\342\ in which Congress found that 
it is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure: 
(1) Economically efficient execution of securities transactions; (2) 
fair competition among brokers and dealers and among exchange markets, 
and between exchange markets, and markets other than exchange markets; 
(3) the availability to brokers, dealers, and investors of information 
with respect to quotations and transactions in securities; (4) the 
practicability of brokers executing investors' orders in the best 
market; and (5) an opportunity for investors' orders to be executed 
without the participation of a dealer.
---------------------------------------------------------------------------

    \339\ 15 U.S.C. 78f(b). In approving this proposal, the 
Commission has considered the proposed rules' impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \340\ 15 U.S.C. 78f(b)(5).
    \341\ 15 U.S.C. 78f(b)(8).
    \342\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

    The adoption of Hybrid Market proposal may fundamentally change the 
Exchange's current market structure from a floor-based auction market 
with an emphasis on human contact, to a predominantly electronic market 
with limited human intervention. Today, the vast majority of orders 
sent to NYSE for execution are handled manually by NYSE floor members--
specialists and floor brokers. Specialists represent orders that are 
electronically submitted to the Exchange via DOT or left with them for 
representation by floor brokers. Floor brokers receive their own 
customers' orders at their booths on the floor that are delivered 
electronically or by telephone. These floor members represent each 
order individually in the market, ascertaining the current market by 
seeking contra-side liquidity.
    Trading on NYSE may be considerably different once the Hybrid 
Market proposal is implemented. Orders that currently are represented 
individually are more likely to be executed automatically without human 
intervention.\343\ While NYSE has proposed to move to a more automated 
model, it also seeks to retain substantive roles for its floor members. 
Specialists will be permitted to perform many of their obligations to 
maintain a fair and orderly market electronically, while floor brokers 
will be able to represent their customer orders electronically. To 
create the Hybrid Market, the Exchange has proposed significant changes 
to its rules and systems to alter the way specialists, floor brokers, 
and customers would participate and interact.
---------------------------------------------------------------------------

    \343\ Several commenters generally supported NYSE's move to a 
more automated trading model. See, e.g., Ameritrade Letter, IBG 
Letters I and II, ICI Letters I, II, and III, SIA Letters I, II, and 
III, STANY Letter, Telic Letter, and Vanguard Letter.
---------------------------------------------------------------------------

    As discussed more fully below, the Commission finds that the Hybrid 
Market proposal, by allowing greater electronic access to liquidity on 
NYSE, should help perfect the mechanism of a free and open market. The 
Hybrid Market proposal should provide investors with a more efficient 
mechanism to have their orders executed on the Exchange. The Commission 
also finds that the Hybrid Market should facilitate securities 
transactions by providing investors with faster access to the trading 
interest reflected in NYSE's published quotation, as well as interest 
away from the Exchange BBO.\344\ Finally, the Commission finds that the 
Hybrid Market could enhance the opportunity for a customer's order to 
be executed without dealer participation, consistent with the goals of 
the Act.
---------------------------------------------------------------------------

    \344\ The Commission notes that, while it believes the proposed 
rule change, as amended, is consistent with the requirements of the 
Act, the Commission makes no determination whether the Hybrid Market 
would satisfy the ``automated trading center'' definition in Rule 
600(b)(4) of Regulation NMS. See Securities Exchange Act Release No. 
51808 (June 9, 2005), 70 FR 37496 (June 29, 2005).
---------------------------------------------------------------------------

A. Increased Access to Display Book System

    Under the proposal, a wide range of additional order types could be 
entered into Direct+ for automatic execution. For example, all 
marketable limit orders, designated market orders, designated IOC 
orders (including ITS Commitments), and Intermarket Sweep orders, would 
be able to receive automatic execution against interest placed in the 
Display Book system. In addition, for the first time, Auto Ex Orders 
would have the ability, within certain limits, to sweep interest 
outside the Exchange BBO. The proposal also would eliminate the size 
and the 30-second order entry restrictions that currently limit 
automated access to the Exchange's quote via Direct+. The Commission 
finds that the availability of automatic executions for a much wider 
range of order types, the ability of Auto Ex Orders to sweep the NYSE 
depth-of-book, and the elimination of the size and timing restrictions 
for Auto Ex Orders, are consistent with the requirements of the Act. 
Specifically, the Commission believes that providing more instantaneous 
access to liquidity on the Display Book system should facilitate the 
efficient execution of orders on the Exchange and potentially could 
enhance the ability of executions to occur without the participation of 
a dealer.
    In addition to broadening the scope of automatic executions, NYSE 
has proposed to limit the instances when Direct+ would not be 
available.

[[Page 16377]]

Currently, under NYSE rules, Direct+ is unavailable under many 
circumstances. Some of these reflect the needs of NYSE's current market 
structure, which is largely a manual auction on the floor. For example, 
specialists have broad discretion to disable Direct+ by publishing 100 
share quotes and manually reporting floor transactions.\345\ When 
Direct+ is disabled, Auto Ex Orders are directed to the specialist for 
manual handling in the auction. In addition, NYSE Rule 1000 permits 
Direct+ to be turned off if a block size transaction away from the NYSE 
BBO is in the process of being completed on the floor.\346\ In such 
instances, the specialist publishes a quote that is five cents away 
from the last reported sale, and this has the effect of disabling 
Direct+.\347\ Further, NYSE Rule 1000 permits Direct+ to be turned off 
if the NYSE quote is not firm, the execution price would be more than 
five cents away from the last reported transaction price, a better 
price exists in another ITS market, or trading has been halted.\348\
---------------------------------------------------------------------------

    \345\ See NYSE Rule 1000(iv).
    \346\ See NYSE Rule 1000(v).
    \347\ In a separate proposal, the Exchange is proposing to 
require specialists to publish a 100 x 100 share market quote that 
reflects the last reported transaction in connection with a block 
size transaction. See supra note 134.
    \348\ See NYSE Rule 1000.
---------------------------------------------------------------------------

    Under the proposal, Direct+ would be unavailable only when: (1) The 
NYSE quote is not firm; (2) trading has been halted; (3) the specialist 
has gapped the quotation in accordance with Exchange procedures; (4) 
trading has reached a LRP; (5) a block size transaction involving 
orders in the Display Book system is being manually reported; or (6) an 
Auto Ex Order is entered for a high-priced security. The Commission 
believes that these proposed changes should ensure that automatic 
executions are more readily available on NYSE than they are today.
    Further, the Commission believes the proposal should provide 
specialists with less discretion to disengage Direct+ than they have 
today. This reduced specialist discretion both should help ensure that 
automated executions are more widely available on NYSE and help 
alleviate concerns that specialists might manipulate the automated/non-
automated status of NYSE for their own benefit. Specifically, 
specialists would only be permitted in two instances to actively 
disengage Direct+: (1) By gapping the NYSE quotation and (2) by 
manually reporting block size transactions that involve orders on the 
Display Book system. NYSE believes that the specialist, when faced with 
a substantial order imbalance, may need the ability to attempt to 
attract additional liquidity in a controlled environment without 
automatic executions. NYSE has sought to ensure that specialists do not 
frequently enter gapped quotations for the purpose of disabling Direct+ 
by requiring that when a specialist gaps the quote, it must follow 
certain procedures and consult with floor officials.\349\ Specialists 
will also be permitted to disengage Direct+ when manually reporting a 
block size transaction that involves orders on the Display Book system. 
The Commission believes that this limited ability to disengage Direct+ 
could be necessary due to the practical difficulties of integrating 
orders on the Book into large transactions on the floor.
---------------------------------------------------------------------------

    \349\ See NYSE Information Memo 04-27. The Commission notes that 
NYSE must update this information memo to reflect that automatic 
executions on both sides of the market will be suspended once the 
quote is gapped.
---------------------------------------------------------------------------

    The Commission also believes that the other limited instances when 
Direct+ will not be available are reasonable. High-priced securities 
would be ineligible to participate in automatic executions because they 
are thinly traded and, according to the Exchange, customers would 
obtain better representation if transactions in these securities are 
handled in the manual auction market. Finally, when trading is halted 
or when the NYSE quotation is not firm, no execution, automatic or 
manual, would be available.
    The Commission notes that when Direct+ is disengaged, whether due 
to an LRP or any of the other events that cause the NYSE market to 
revert to a manual market, the NYSE quote would not be an ``automated 
quotation,'' and thus not entitled to protection under Rule 611 of 
Regulation NMS.\350\ When this occurs, NYSE also would be required to 
immediately identify its quotation as a manual quotation if it is to be 
considered an ``automated trading center'' for purposes of Regulation 
NMS.\351\ In addition, when the NYSE quotation is not available for 
automatic execution because of a LRP or gapped quotation, NYSE would 
identify such quotes as non-firm. The Commission believes that these 
requirements may provide an incentive to NYSE to keep the frequency and 
length of the unavailability of automatic executions to a minimum.
---------------------------------------------------------------------------

    \350\ 17 CFR 242.611.
    \351\ See 17 CFR 242.600(b)(4)(iii).
---------------------------------------------------------------------------

1. Liquidity Replenishment Points
    Under the proposal, when trading on the Exchange reaches a LRP, 
automatic executions would be unavailable and the Hybrid Market would 
temporarily revert to an auction market. NYSE has proposed two types of 
LRPs: (1) The sweep LRP and (2) MLRP. As discussed in Section II(A)(5) 
above, the sweep LRP price would be set at the nearest five-cent 
increment outside the NYSE BBO, rounded to the next nickel. The MLRP 
price would be calculated by adding the greater of $.25 or 1% of the 
security's price to its lowest price within a rolling 30-second period 
and subtracting that amount from the security's highest price within 
the same time period. In the event that there is no transaction in a 
security within the 30-second period, the MLRP would be based on the 
last transaction on the Exchange.
    Initially, commenters questioned the specifics of LRPs, including 
whether they were too restrictive and whether they were necessary.\352\ 
After NYSE proposed the parameters for MLRP, one commenter questioned 
whether the parameters would cause frequent suspension of Autoquote and 
automatic execution.\353\ Another commenter believed that market 
volatility should not be artificially limited and that LRPs are too 
restrictive for active securities.\354\
---------------------------------------------------------------------------

    \352\ See, e.g., Ameritrade Letter, Bear Stearns Letter, BSE 
Letter, IBG Letter I, ICI Letters I and II, SIA Letter I, and STANY 
Letter.
    \353\ See ICI Letter II.
    \354\ See Vanguard Letter.
---------------------------------------------------------------------------

    According to NYSE, the LRPs are intended to moderate volatility, 
which may increase when the Hybrid Market is implemented and a larger 
portion of NYSE trades are executed electronically. NYSE believes that 
reverting to a manual market in times of volatility will enhance the 
quality of executions in its market.
    As noted above, the Commission believes that the increased 
availability of automated executions should facilitate the efficient 
execution of orders on the Exchange and enhance the opportunity for 
executions to occur without the participation of a dealer. NYSE 
believes, however, that precluding automatic executions under certain 
circumstances--such as where market volatility has triggered an LRP--
will provide its customers with better executions by fully utilizing 
the expertise of its floor members. In the Commission's view, this type 
of hybrid market model is consistent with the requirements of the Act, 
and, as such, is within the realm of judgments generally left to the 
discretion of individual markets. Creating a new market model also has 
the potential to foster intermarket competition. Accordingly, the 
Commission finds that NYSE's use of LRPs in the context of its Hybrid

[[Page 16378]]

Market is consistent with the requirements of the Act.

B. Autoquote

    NYSE has proposed to disengage its Autoquote system in three 
specified instances. Specifically, Autoquote would not be available 
when the specialist gaps the quote, when the specialist is manually 
reporting a block size transaction that includes orders in the Display 
Book system, or when an LRP has been reached. The Commission believes 
that it is consistent with the requirements of the Act to disengage 
Autoquote for limited periods to accommodate these specific activities 
in the auction market. For example, in the circumstances when the quote 
is gapped or an LRP is reached, the Commission believes that Autoquote 
may be disengaged to permit the specialist to more effectively fulfill 
its obligation to maintain a fair and orderly market by controlling the 
NYSE quote during limited periods of significant market activity. 
Accordingly, the Commission finds that the proposed provisions relating 
to Autoquote are consistent with requirements of the Act.\355\
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    \355\ The Commission notes that the display of customer limit 
orders is governed by the Limit Order Display Rule, 17 CFR 242.604, 
and that even if Autoquote is disengaged, specialists may be 
required to display such orders in compliance with this rule. The 
Exchange represented that it would notify specialists after an LRP 
has disengaged Autoquote to alert specialists of their obligations 
under the Limit Order Display Rule.
---------------------------------------------------------------------------

C. Liquidity Available for Automatic Execution

    As discussed in Section II(A) above, NYSE proposes to allow its 
floor members to post liquidity in the Display Book system 
electronically, so that it is available for automatic executions. 
Specifically, NYSE proposes to create two new files within the Display 
Book system--the specialist interest file and the floor broker agency 
interest file. Specialists and floor brokers would be allowed to place 
liquidity within these new files in the Display Book system at the 
Exchange BBO or outside the Exchange BBO. The liquidity within these 
interest files would not be disseminated, unless it is priced at the 
Exchange BBO.\356\
---------------------------------------------------------------------------

    \356\ Specialists could elect to disseminate their interest via 
NYSE OpenBook. The specialist would be able to view aggregate floor 
broker interest at each price level, unless the floor broker elects 
to exclude its interest from the specialist's view.
---------------------------------------------------------------------------

    In addition, specialists and floor brokers could enter reserve size 
at the Exchange BBO. This interest would not be disseminated and would 
trade after all displayed interest at the BBO has been filled. 
Specialists would be required to display at least 2,000 shares at the 
BBO to enter reserve size, and floor brokers would be required to 
display 1,000 shares. The Display Book system will automatically 
replenish specialist interest files and floor broker agency interest 
files to the minimum displayed amounts, unless there is insufficient 
reserve size to display the minimums. In such cases, the entire amount 
of reserve will be added to the displayed size.
    The proposed specialist interest file and proposed floor broker 
agency interest file generated several comments. Generally, commenters 
raised several broad issues related to the ability of specialists to 
see interest in the floor broker agency interest files, the lack of 
display of both reserve interest and floor broker agency interest away 
from the BBO, and NYSE's requirement that floor brokers remain in the 
``Crowd'' when utilizing the floor broker interest file.\357\ 
Specifically, a number of commenters questioned the lack of 
transparency of the floor broker agency interest file, given that floor 
broker interest would not be publicly disseminated unless it were at 
the NYSE BBO.\358\ These commenters argued that the floor broker agency 
interest file, if not displayed, should not be entitled to trade on 
parity with displayed orders on the Book.\359\
---------------------------------------------------------------------------

    \357\ As discussed further below, the specialist interest file 
and the floor broker agency interest file generated comments 
regarding the priority and parity rules that would be implemented 
for these files.
    \358\ See, e.g., Bloomberg Letters I and II, ICI Letters I, II, 
and III, Rutherfurd Letters I, II, III, and V, SIA Letter I, and 
STANY Letter. See also Vanguard Letter.
    \359\ For a complete description of the parity issues, see infra 
Section IV(D).
---------------------------------------------------------------------------

    The Commission finds that NYSE's proposal to allow floor brokers 
and specialists to electronically participate in the Hybrid Market is 
consistent with the requirements of the Act. This capability could 
increase the liquidity available for automatic executions on NYSE. 
Moreover, including the interest of these floor members and their 
customers in the Hybrid Market electronically could improve the prices 
at which Auto Ex Orders that sweep the Display Book system may execute. 
In addition, the proposal should allow customers of floor brokers to 
more effectively participate in an electronic trading environment.
    The Commission also finds that making floor broker agency interest 
information available to specialists is consistent with the 
requirements of the Act. In the Hybrid Market, specialists would 
continue to have the obligation to conduct the auction on the floor. 
Thus, to ensure that all interest is represented in an auction, the 
Commission believes that a specialist would need full information about 
the liquidity available and the prices at which such liquidity is 
available. The availability of this information also may assist 
specialists in maintaining a fair and orderly market under NYSE Rule 
104 and Rule 11b-1 under the Act. Further, floor brokers that do not 
want specialists to have information about their interest have the 
discretion to exclude their interest from the aggregate information 
available to specialists if they believe that doing so is in the best 
interest of their customers. The Commission also notes that Specialist 
Algorithms would not be able to view or make quoting or trading 
decisions based on interest in the floor broker agency file that is not 
publicly available.\360\
---------------------------------------------------------------------------

    \360\ See proposed NYSE Rule 104(c)(ii).
---------------------------------------------------------------------------

    The Commission further finds that the floor broker reserve function 
is consistent with the requirements of the Act as it could provide 
floor brokers with greater flexibility in handling and working large 
customer orders. In particular, the reserve function could prove useful 
to institutions that wish to minimize the market impact of their large 
orders. Furthermore, allowing floor brokers to place interest in 
reserve could increase participation on NYSE, which might enhance the 
depth and liquidity of NYSE's market. The Commission also believes that 
it is consistent with the requirements of the Act to allow specialists 
to place reserve interest in the Display Book system as it too could 
increase the liquidity available for execution at the Exchange BBO.
    Two commenters suggested that NYSE allow investors to place 
reserve, or undisplayed, interest in the Display Book system.\361\ One 
of these commenters argued that depriving investors of this ability 
would be inconsistent with the principles set forth in section 11A of 
the Act.\362\ The Commission believes that the decision to limit the 
availability of reserve orders to specialists and floor brokers, under 
the conditions proposed by NYSE, is within the realm of judgments 
generally left to the discretion of an individual market and is 
consistent with the requirements of the Act. In addition, this aspect 
of the Hybrid Market is similar to how the NYSE market operates today, 
as investors today must use a floor member to represent their 
undisplayed interest on the Exchange.
---------------------------------------------------------------------------

    \361\ See ICI Letters I and II and Vanguard Letter.
    \362\ See Vanguard Letter.

---------------------------------------------------------------------------

[[Page 16379]]

    The Commission notes that two features of NYSE's proposal to allow 
undisplayed reserve interest should help ensure that market 
participants continue to have an incentive to display quotes or orders 
on NYSE: (1) Specialists and floor brokers must display a minimum 
number of shares at the BBO to have undisplayed reserve interest; and 
(2) displayed interest will have priority over all undisplayed reserve 
interest. The Commission believes that, taken together, these 
requirements could promote additional depth at the Exchange BBO, while 
preserving incentives for investors to display limit orders. 
Accordingly, the Commission finds that NYSE's proposal to allow floor 
brokers and specialists to have undisplayed reserve in the Display Book 
system is consistent with the requirements of the Act.
    NYSE also proposes to require floor brokers to be in the ``Crowd'' 
when the floor broker maintains interest in the floor broker agency 
interest file. NYSE defines a ``Crowd'' as any five contiguous panels 
at any one trading post. It would be a violation of Exchange Rules for 
a floor broker to leave the Crowd without canceling its interest in the 
file,\363\ but if this occurs, the floor broker nevertheless would be 
held to any resulting executions. One commenter believed that limiting 
the Crowd to five contiguous panels is arbitrary and unnecessarily 
restrictive.\364\
---------------------------------------------------------------------------

    \363\ The floor brokers would be permitted to leave the Crowd to 
recharge its handheld device. See proposed NYSE Rule 70.20(f).
    \364\ See Invictus Letter.
---------------------------------------------------------------------------

    The Commission believes that the requirement that a floor broker be 
present while representing orders in the Display Book system is within 
the realm of judgments generally left to the discretion of an 
individual market and is consistent with the requirements of the Act. 
NYSE has proposed to create a Hybrid Market that combines a manual 
auction market on the floor with an electronic market. The Commission 
notes that NYSE currently requires floor brokers to be present in the 
Crowd to represent their customer orders in the auction market.\365\ 
NYSE stated that it believes five contiguous panels is the appropriate 
range of proximity to enable floor brokers to electronically 
participate in the Hybrid Market and, at the same time, physically 
participate in the auction component of the Hybrid Market. Under these 
circumstances, the Commission believes that it is reasonable for NYSE 
to require floor brokers to be available to actively represent their 
customers, even when their customers' interest is in the Display Book 
system, by requiring floor brokers to be present in the Crowd.
---------------------------------------------------------------------------

    \365\ See, e.g., NYSE Rule 117.10.
---------------------------------------------------------------------------

D. Automatic Executions

    Under the proposal, Auto Ex Orders would execute against interest 
in the Display Book system, including the Book, floor broker agency 
interest files, and specialist interest files. Auto Ex Orders would 
first execute against interest at the Exchange BBO. Once interest at 
the Exchange BBO is exhausted, an Auto Ex Order would trade with 
interest outside the Exchange BBO, automatically sweeping the Display 
Book system, until it is: (1) Executed; (2) its limit price, if any, is 
reached; or (3) a LRP is reached, whichever occurs first. During a 
sweep, the residual would trade at the clean-up price.
    The Commission notes that the ability to sweep the NYSE Display 
Book system is a significant expansion of the availability of automatic 
executions on the Exchange. Currently, Auto Ex Orders that are for a 
size greater than the Exchange BBO trade automatically with the BBO, 
and then the residual is routed to the specialist for manual handling. 
The Commission believes that the ability to automatically execute 
against the depth of interest on the NYSE Display Book system should 
enhance the speed of executions and facilitate more efficient 
transactions on the Exchange.
    Several commenters raised concerns about the rules NYSE proposed 
governing how automatic executions would occur against interest in the 
Display Book system. In particular, commenters raised concerns about 
how the rules of priority, parity, and precedence would apply with 
regard to interest in the Display Book system.\366\
---------------------------------------------------------------------------

    \366\ See, e.g., Bloomberg Letters I and II, IBAC Letters I and 
II, IBG Letter I, ICI Letters I, II, and III, Rutherfurd Letters I, 
II, III, IV, V, VI, VII, VIII, IX, and X, SIA Letter I, STANY 
Letter, and Vanguard Letter.
---------------------------------------------------------------------------

    Currently, executions on the Exchange are governed by NYSE Rules 
72, 104, and 108. When more than one market participant is bidding or 
offering the best price, these rules detail which participant(s) have 
the right to fill the order--either entirely, or a certain percentage 
of it--before anyone else. As a general rule, the first person to quote 
the price at which the security is ultimately traded is entitled to 
``priority''--the right to fill the order before anyone else.\367\ 
``Parity,'' on the other hand, means that none of the market 
participants competing to fill the order has rights over any other 
based on quoting the best price first.\368\ Generally, in a situation 
of this kind, participation in the order must be divided pro rata among 
the crowd participants who simultaneously bid to fill the order at the 
best price. To create incentives for market participants to provide 
liquidity, current Exchange rules may permit certain participants to 
trade ahead of others who are on parity if they are quoting in size. 
(This is known as ``precedence based on size.'')\369\
---------------------------------------------------------------------------

    \367\ See NYSE Rule 72(a).
    \368\ See NYSE Rule 72(e).
    \369\ See NYSE Rule 72(c) and (d).
---------------------------------------------------------------------------

    Specialists are subject to additional restrictions on their ability 
to trade for their own accounts, given their special position in the 
marketplace. Specifically, specialists, as agents for orders on the 
Book, are required to yield to orders on the Book.\370\ Today, 
specialists also are limited, pursuant to NYSE Rules 104 and 108, when 
trading for their own accounts along with orders represented by floor 
brokers. NYSE Rules 72 and 104 provide that when a specialist is 
decreasing or liquidating its position, the specialist is entitled to 
parity unless requested by a floor broker, on behalf of its customer, 
to yield. NYSE Rule 108 provides that a specialist is not entitled to 
parity when increasing or establishing its position, but, according to 
NYSE, it has interpreted this rule as permitting the specialist to 
trade on parity when increasing its position, so long as the floor 
broker consents.\371\
---------------------------------------------------------------------------

    \370\ See NYSE Rule 92.
    \371\ See supra note 101.
---------------------------------------------------------------------------

    NYSE proposes certain changes to its rules of priority, parity, and 
precedence. For example, NYSE proposes that the interest in the floor 
broker agency interest file and specialist interest file trade on 
parity once all interest in the Book has been satisfied, with neither 
entitled to priority. To accomplish this, NYSE would prohibit a floor 
broker from placing any interest in its agency interest file that would 
restrict the ability of the specialist to trade on parity. In other 
words, specialists would be entitled to trade on parity with orders 
represented by floor brokers in the floor broker agency interest file, 
and floor brokers would not be able to object to such specialist 
trading.\372\ The Exchange also proposes to eliminate the regulatory 
distinction, in this context, between situations where the specialist 
is increasing or decreasing its position.
---------------------------------------------------------------------------

    \372\ If the floor broker does not want the specialist to trade 
on parity with its customer, it could place its customer's order on 
the Book.
---------------------------------------------------------------------------

    In addition, NYSE proposes to permit the floor broker agency 
interest file to trade on parity with orders in the Book

[[Page 16380]]

to the extent that neither is entitled to priority. At the BBO, floor 
broker agency interest that is displayed would trade on parity with 
interest in the Book. During sweeps, floor broker agency interest that 
is designated as eligible for display if the price moves to the BBO 
would be permitted to trade on parity with the Book. Floor broker 
agency interest that would not be displayed even if at the BBO (i.e., 
reserve interest) would not be entitled to trade on parity with the 
Book during a sweep at the clean-up price.
    These proposed changes generated several comments. For example, 
three commenters believed that NYSE should not allow specialists to 
trade on parity with the floor broker agency interest file when 
specialists are increasing or establishing their position.\373\ One 
commenter argued that allowing specialists to trade on parity with the 
floor broker agency interest file would be inconsistent with the 
specialists' negative obligation, as well as section 11A of the Act, 
which encourages order interaction without the participation of a 
dealer.\374\ Other commenters raised concerns about the ability of 
undisplayed floor broker interest outside the BBO to trade on parity 
during sweeps with displayed orders on the Book.\375\ For example, some 
commenters argued that permitting floor brokers to conceal their 
interest from other market participants, while allowing this 
undisplayed interest to trade on parity with displayed interest, would 
provide a disincentive for investors to place limit orders on the Book, 
since investors would not be rewarded for taking the risk to display 
their orders.\376\
---------------------------------------------------------------------------

    \373\ See IBAC Letters I and II, ICI Letter III and Rutherfurd 
Letters III, IV, V, VI, VII, VIII, IX, and X.
    \374\ See Rutherfurd Letters III, IV, V, VI, VII, VIII, IX, and 
X. See also IBAC Letter I.
    \375\ See, e.g., Bloomberg Letters I and II, ICI Letters I, II, 
and III, Rutherfurd Letters I, II, III, and V, SIA Letter I, STANY 
Letter, and Vanguard Letter.
    \376\ See, e.g., ICI Letters II and III, Rutherfurd Letters II 
and V, STANY Letter, and Vanguard Letter.
---------------------------------------------------------------------------

    The Commission's standard for reviewing trading rules filed by 
exchanges is based on whether the rules are consistent with the 
requirements of the Act, such as provisions that require that market 
participants be treated fairly and provisions that limit the role of 
specialists.\377\ The Commission also reviews trading rules to see if 
the rules discriminate in favor of some members over others, or in 
favor of members over public customers.\378\ Trading rules also must 
promote fair and orderly markets, as well as the specified goals of the 
national market system.\379\
---------------------------------------------------------------------------

    \377\ See, e.g., 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78k.
    \378\ 15 U.S.C. 78f(b)(5).
    \379\ 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

    The Commission finds that NYSE's proposal to permit specialists to 
trade on parity with the floor broker agency interest after interest on 
the Book has been exhausted is consistent with the requirements of the 
Act. The Commission notes that specialists will continue to be 
restricted in their ability to trade pursuant to section 11(b) and Rule 
11b-1 of the Act,\380\ and NYSE Rule 104. The Commission expects and 
the Exchange represented that it expects the Specialist Algorithms to 
be programmed and operated in a manner to ensure that specialist 
proprietary trading is conducted consistent with section 11(b) of the 
Act,\381\ Rule 11b-1, and NYSE Rule 104.
---------------------------------------------------------------------------

    \380\ 17 CFR 240.11b-1(a)(2). In light of these changes, the 
Commission expects the Exchange to update its surveillance 
procedures and the specialist firms to update their compliance 
programs to ensure that specialist trading is conducted in a manner 
that is consistent with the requirements of the Act and NYSE rules.
    \381\ 15 U.S.C. 78k(b).
---------------------------------------------------------------------------

    In accordance with SEC Rule 11b-1, NYSE Rule 104 restricts the 
specialist's ability to trade for its own account. SEC Rule 11b-1 
provides that exchanges may permit members to register as specialists 
so long as their rules include, among other things, ``provisions 
restricting [the specialist's] dealings so far as practicable to those 
reasonably necessary to permit [it] to maintain a fair and orderly 
market * * *'' NYSE Rule 104 specifically prohibits a specialist from 
dealing in its own account ``unless such dealings are reasonably 
necessary to permit such specialist to maintain a fair and orderly 
market * * *'' Currently, the specialist makes the determination as to 
whether its proprietary transactions are reasonably necessary based on 
the anticipated needs of the market and the conditions of the market at 
the time the transaction is effected. As proposed, the specialist may 
not have access to all of the information that it has today regarding 
the condition of the market at the time of sale. Specifically, the 
specialist may not, and the Specialist Algorithm will not, have access 
to information regarding floor broker reserve at the BBO or floor 
broker agency interest outside of the BBO. Accordingly, the Commission 
must consider the application of the restrictions in SEC Rule 11b-1 and 
NYSE Rule 104 to the specialist's proprietary trading in the Hybrid 
Market.
    In the Hybrid Market, specialists will remain obligated to 
determine whether their proprietary trades are reasonably necessary to 
maintain a fair and orderly market. The specialist will be expected to 
actively monitor, both personally and through the Specialist Algorithm, 
whether the interest placed in the specialist interest file remains 
appropriate in light of current market conditions and the specialist's 
obligations under NYSE Rule 104, and to make appropriate adjustments. 
Nonetheless, the Commission recognizes that the role of the specialist 
in the more automated Hybrid Market will be somewhat different from its 
traditional role on the Exchange floor. Specifically, the specialist 
will participate in automatic executions that occur against proprietary 
interest previously placed in the specialist interest file. The 
Commission also recognizes that, in the Hybrid Market, the specialist 
will not individually handle each trade that occurs on the Exchange, 
and may not necessarily know of--personally or algorithmically--other 
trading interest available in the market prior to an execution for its 
proprietary account. The specialist may not, and the Specialist 
Algorithm will not, know whether there is floor broker reserve interest 
available at the BBO, or floor broker agency interest available outside 
the BBO. Accordingly, the specialist must make decisions whether to add 
orders to the specialist interest file without knowing the full extent 
of other trading interest available in the market, and consequently may 
trade on parity with other available floor broker interest.
    As noted above, the Exchange believes that providing specialists 
parity with floor broker agency interest will incent specialists to 
participate in the price discovery process at the point of sale and 
thus dampen volatility and lower execution costs for investors. The 
Exchange also believes that withholding information about floor broker 
reserve interest at the BBO, and floor broker agency interest outside 
the BBO, from the Specialist Algorithm--and in some cases from the 
specialist himself--will allow floor brokers to more effectively 
represent their customer orders, and thus further incent liquidity and 
dampen price volatility in the Hybrid Market.
    Although the Commission recognizes that these features may inhibit 
somewhat the ability of specialists to assess the condition of the 
market to comply with their ongoing negative obligations under SEC Rule 
11b-1 and NYSE Rule 104, the potential benefits these features may 
bring to the quality of the Hybrid Market justify the risks of

[[Page 16381]]

unnecessary specialist trading. The specialist must design its 
Specialist Algorithm to support a fair and orderly market, which 
includes varying its position in light of the anticipated needs of the 
market. The specialist also must adjust the operation of the Specialist 
Algorithm to the extent it becomes aware of changes in the market that 
would render its operation inconsistent with its obligation. However, 
the Commission recognizes that the specialist may, and the Specialist 
Algorithm will, have less than full information about the floor broker 
interest. So long as the specialist has programmed the Specialist 
Algorithm, taking into account and including as inputs all relevant 
factors available to the Specialist Algorithm, in a manner designed to 
support a fair and orderly market, and the specialist has made 
adjustments to the operation of the Specialist Algorithm based on its 
knowledge of market information, the Commission believes the specialist 
could trade on parity with floor broker interest consistent with its 
obligations under SEC Rule 11b-1 and NYSE Rule 104 in the Hybrid 
Market.\382\
---------------------------------------------------------------------------

    \382\ NYSE has represented that prior to the rollout of the 
third phase of the Hybrid Market, it will develop guidance to 
clarify how it expects specialists to comply with the NYSE Rule 104 
in the Hybrid Market. Telephone call between Catherine R. Kinney, 
President and Co-Chief Operating Officer, NYSE Group, Inc., and 
Richard G. Ketchum, Chief Regulatory Officer, NYSE Regulation, Inc., 
and Kelly M. Riley, Assistant Director, Division, SEC, on March 22, 
2006. See also Amendment No. 8. The Commission believes that 
specific guidance is necessary to help assure that specialists can 
effectively program the algorithms to trade in compliance with the 
negative obligation.
---------------------------------------------------------------------------

    In addition, the Commission finds that NYSE's proposal to permit 
interest in the floor broker agency interest files to trade on parity 
with orders in the Book, subject to certain limitations, is consistent 
with the requirements of the Act. NYSE appears to have sought to 
balance the incentives for placing interest in the Book against the 
ability of floor brokers to effectively represent their customers. The 
proposal limits the ability of interests in the floor broker agency 
interest files outside the BBO to trade on parity with orders in the 
Book by requiring floor brokers to designate the amount of interest 
that would be displayed if the price becomes the Exchange BBO, and 
permitting only that amount to trade on parity. The Commission believes 
that providing floor brokers with this additional incentive to place 
liquidity in the Display Book system could allow them to more 
effectively represent their customer orders, without materially 
reducing the incentives to display liquidity on the Book.
    The Commission believes that exchanges have a degree of 
flexibility, in their judgment, to determine the methods of non-
discretionary order interaction on their markets so long as the 
requirements of the Act are met. Accordingly, the Commission believes 
that NYSE's proposed changes to its rules of priority, parity and 
precedence are consistent with the requirements of the Act.

E. Role of Specialist in the Hybrid Market

    To preserve a meaningful role for the specialist, NYSE has proposed 
to permit specialists to participate electronically in the Hybrid 
Market and replicate certain existing specialist privileges in an 
electronic manner. For example, NYSE has proposed to provide 
specialists with access to certain information about incoming orders 
before they are processed by the Display Book system.\383\ This 
information would be transmitted to the specialist via the API. Based 
on this and other information, specialists would use the Specialist 
Algorithms to generate quoting or trading messages, which would be 
transmitted to the Display Book system via the API. The Specialist 
Algorithm would be able to make limited quoting and trading decisions 
in response to incoming orders, such as to provide price improvement, 
improve the Exchange BBO, or supply size to fill the incoming order at 
the Exchange BBO.
---------------------------------------------------------------------------

    \383\ See supra note 167.
---------------------------------------------------------------------------

    The proposal to create Specialist Algorithms generated several 
comments. Five commenters believed that it would be unfair for the 
Specialist Algorithms to view information prior to other market 
participants and for the specialist to act on that information.\384\ 
These commenters believed that other market participants should be 
given the same opportunity.\385\ For instance, one commenter viewed as 
one-sided NYSE's proposal to provide specialists with the ability to 
algorithmically trade with incoming orders while providing no similar 
tool for floor brokers, and believed this would thwart, rather than 
foster, fair competition.\386\ Another commenter was concerned that the 
information barriers within a specialist firm could be breached, 
resulting in the dissemination of non-public information outside the 
Exchange, including upstairs traders or other business units affiliated 
with the specialist firm.\387\ This commenter believed that the 
Exchange should affirmatively state a prohibition against such sharing 
of information.
---------------------------------------------------------------------------

    \384\ See IBAC Letter I, ICI Letters I, II, and III, Rutherfurd 
Letters I, III, and V, SIA Letters I and III, and Vanguard Letter. 
See also IBAC Letter II.
    \385\ See id.
    \386\ See IBAC Letters I and II. See also ICI Letter III.
    \387\ See Invictus Letter.
---------------------------------------------------------------------------

    Specialists will continue to be required to perform their 
obligations to maintain a fair and orderly market.\388\ For example, 
pursuant to NYSE Rule 104, specialists will continue to be required to 
trade for their own account when there is a lack of price continuity, 
depth, or a disparity between supply and demand. In addition, 
specialists will continue to oversee the auction market and play an 
active role when large transactions are routed to the NYSE floor for 
execution. To enable specialists to effectively perform these 
functions, NYSE has proposed to replicate some of the existing 
specialist privileges--including an informational advantage--in an 
electronic manner. As discussed below, the Commission finds that NYSE 
has sufficiently limited the specialists' informational advantage so 
that, in light of the specialists' ongoing duties and obligations to 
the market, the proposal is consistent with the requirements of the 
Act.
---------------------------------------------------------------------------

    \388\ See also Section IV(D), supra, for a discussion on the 
application of SEC Rule 11b-1 and NYSE Rule 104 in the Hybrid 
Market.
---------------------------------------------------------------------------

1. Price Improvement
    Under the proposal, the specialist could program its algorithm to 
offer price improvement to incoming orders under certain circumstances. 
The amount of price improvement would vary, depending on the spread. 
For example, price improvement must be at least three cents when the 
spread is more than five cents, at least two cents when the spread is 
three cents to five cents, and one cent when the spread is two cents. 
To offer electronic price improvement, the specialist must be 
represented in the bid or offer in a meaningful amount, which NYSE 
would define as a minimum of 1,000 shares for the most 100 active 
stocks on the Exchange and 500 shares for all other stocks on the 
Exchange.\389\
---------------------------------------------------------------------------

    \389\ The Exchange would determine the 100 most active stocks 
based on the average daily volume and would provide notice to its 
members on a quarterly basis, or more frequently as the Exchange 
from time to time shall determine. See proposed NYSE Rule 
104(e)(ii).
---------------------------------------------------------------------------

    Commenters objected to the ability of a specialist to provide price 
improvement electronically to all or part

[[Page 16382]]

of a marketable incoming order.\390\ One commenter believed that the 
specialist's ability to provide algorithmic price improvement would not 
be as fair of a process as price improvement resulting from genuine 
order competition in the auction market which can be verified by other 
market participants at the point of sale.\391\ Two commenters insisted 
that the Exchange supplement its proposal to grant floor brokers with a 
similar ability to provide electronic price improvement to orders.\392\ 
Another commenter believed that if the specialist is willing to improve 
the NYSE BBO, the specialist should display that price in its 
quote.\393\
---------------------------------------------------------------------------

    \390\ See, e.g., IBAC Letters I and II, ICI Letter III, 
Rutherfurd Letters I, III, and V, and Vanguard Letter.
    \391\ See Rutherfurd Letter III.
    \392\ See IBAC Letters I and II and ICI Letter III.
    \393\ See Vanguard Letter.
---------------------------------------------------------------------------

    The Commission believes that the ability of specialists to offer 
price improvement to incoming orders is consistent with the 
requirements of the Act. The Commission notes that NYSE specialists 
today are permitted to provide price improvement to incoming orders in 
the auction market. With this proposal, NYSE is providing specialists 
with the ability to continue to offer price improvement in an 
electronic environment, but only if the specialists satisfy certain 
conditions. As noted above, specialists would be required to be 
meaningfully represented in the BBO and to provide a minimum amount of 
price improvement. The Commission also notes that Specialist Algorithms 
could only offer price improvement to incoming marketable orders; 
incoming orders that would improve the Exchange BBO would be quoted as 
the new BBO. The Commission believes that permitting specialists to 
algorithmically price improve marketable orders by certain minimum 
amounts could increase the quality of its electronic market, and that 
the condition that specialists be meaningfully represented in the bid 
or offer might enhance depth and liquidity at the NYSE BBO.
2. Ability To Hit Bids or Take Offers
    In addition to offering price improvement to incoming marketable 
orders, Specialist Algorithms could also generate trading messages that 
would trade with the Exchange BBO. The Commission notes that NYSE has 
proposed to implement safeguards that prohibit the Specialist 
Algorithms from obtaining a time advantage over the public, by delaying 
the processing of algorithmic messages to trade with the Exchange BBO. 
The Commission believes that the capability of the Specialist 
Algorithms to hit bids or take offers is designed to assure specialists 
are on a level playing field with other market participants with 
respect to their ability to interact with the Exchange BBO, and is 
consistent with the requirements of the Act. Further, the Commission 
notes that capability of the Specialist Algorithms to hit bids or take 
offers must be consistent with their obligations under NYSE Rule 104 
and Rule 11b-1 under the Act.
3. NYSE Rule 92
    NYSE Rule 92 reflects the fundamental tenet of agency law that an 
agent must place its customer's interest ahead of its own proprietary 
interest. In essence, Rule 92 prohibits an NYSE member from buying or 
selling for its own account an Exchange-listed security when it knows 
that it is holding a customer order that is executable at the same or 
better price. NYSE has proposed to clarify when the Specialist 
Algorithms would be deemed to have knowledge of an incoming order. 
Specifically, NYSE has proposed that the Specialist Algorithm would not 
be deemed to have knowledge of an incoming order, for purposes of Rule 
92, if the Specialist Algorithm is designed and operated in a manner 
that prevents its handling of an incoming order from being affected by 
the receipt of subsequent orders in the same security. NYSE believes 
that this amendment is necessary because there could be situations 
where the Specialist Algorithms generate a quoting or trading message, 
and before the Display Book system can process the message, the 
Specialist Algorithms receive and process information about a 
subsequent incoming order that is at the same or better price. The 
Commission believes that the proposed amendment to Rule 92 is 
consistent with the requirements of the Act, and should maintain the 
same level of protection for customer orders in an electronic 
environment as exists today in a manual environment.
4. Communicating With the Specialist Algorithm
    NYSE proposes to allow specialists to interact with the Specialist 
Algorithms through a wired or wireless device that has been registered 
with NYSE, such as a computer terminal or laptop, to activate or 
deactivate a particular algorithm or adjust its parameters. NYSE also 
proposes that specialist firms be required to create and maintain 
records of all messages generated by the firms' wired or wireless 
devices. The Commission believes that providing specialists with this 
functionality would enhance their ability to function in an electronic 
environment, and is consistent with the requirements of the Act. In 
this regard, the Commission expects the Exchange to implement adequate 
surveillance procedures and to engage in ongoing monitoring of the 
wired and wireless devices to ensure that they are being used in a 
manner consistent with the NYSE's rules, and the securities laws and 
rules. NYSE is also requiring that specialists have an independent 
third party auditor review on an annual basis the Specialist Algorithms 
to ensure that they operate in accordance with all SEC and Exchange 
rules, policies, and procedures. The Commission notes that the Exchange 
has the responsibility under the Act to enforce compliance with the 
Federal securities law and NYSE rules.\394\ The Commission expects NYSE 
to review any reports, notes, analysis, documents and similar types of 
materials from such independent auditing as part of the Exchange's 
surveillance procedures.
---------------------------------------------------------------------------

    \394\ See also note and Sections 6(b)(1) of the Act, 15 U.S.C. 
78f(b)(1), and 19(g)(1) of the Act, 15 U.S.C. 78s(g)(1).
---------------------------------------------------------------------------

F. Changes to the Auction Market and New Order Types

    As part of the Hybrid Market, the Exchange has also proposed to 
modify its auction market. Specifically, the Exchange is proposing a 
new order type--the AL order--and changes to the way market orders (AM 
orders) are handled on the floor to accommodate investors who wish to 
have their orders exposed for price improvement. Under the proposal, AL 
orders and AM orders would be automatically executed when the Exchange 
quotation is at the minimum variation of one cent. Otherwise, these 
orders would be placed in the Display Book system for an opportunity to 
receive a better price than the Exchange BBO. If an AL order or an AM 
order has not been executed after 15 seconds, it would be automatically 
executed at the prevailing bid or offer, provided that automatic 
executions are available. In addition, certain events could cause an AL 
order or an AM order to automatically execute prior to the 15-second 
period.
    NYSE's proposal to adopt the AL order and the AM order would offer 
customers the option to seek price improvement for their orders in a 
more rapidly-moving Hybrid Market. The Commission believes that these 
features could improve execution quality for those customers who do not 
seek an immediate execution, and generally increase the depth and 
liquidity of NYSE's market. The Commission

[[Page 16383]]

believes the decision by NYSE to provide investors with the ability to 
place AL and AM orders is within its discretion and consistent with the 
requirements of the Act.

G. Intermarket Sweep Order

    To implement the requirements of Rule 600(b)(30) of Regulation 
NMS,\395\ the Exchange proposes to amend NYSE Rule 13 to adopt a new 
order type--an Intermarket Sweep order. As proposed, an Intermarket 
Sweep order would be a limit order designated for automatic execution 
in a particular security that meets the following requirements: (1) It 
is identified as an intermarket sweep in the manner prescribed by the 
Exchange; and (2) simultaneously with the routing of the Intermarket 
Sweep order to the Exchange, one or more additional limit orders, as 
necessary, are routed to execute against the full displayed size of any 
protected bids (offers) in the case of a limit order to sell (buy), 
with a price that is superior to the limit price of the limit order 
identified as an Intermarket Sweep order. These additional routed 
orders must be identified as Intermarket Sweep orders. An Intermarket 
Sweep order would be immediately and automatically executed against the 
displayed bid (offer) up to its full size in accordance with and to the 
extent provided by NYSE Rules 1000 through 1004, and would then sweep 
the Display Book system, as provided in NYSE Rule 1000(d)(iii), with 
the portion not so executed to be immediately and automatically 
cancelled. The Commission believes that NYSE's proposed definition of 
Intermarket Sweep order is designed, among other things, to meet the 
requirements of Regulation NMS,\396\ and to perfect the mechanism of a 
free and open market and a national market system and to protect 
investors and the public interest, and thus, is consistent with the 
requirements of the Act.
---------------------------------------------------------------------------

    \395\ 17 CFR 242.600(b)(30).
    \396\ An Intermarket Sweep order would allow market participants 
to simultaneously route orders to multiple markets at multiple price 
points. An Intermarket Sweep order is defined in Regulation NMS as 
``a limit order for an NMS stock that meets the following 
requirements: (i) When routed to a trading center, the limit order 
is identified as an intermarket sweep order; and (ii) simultaneously 
with the routing of the limit order identified as an intermarket 
sweep order, one or more additional limit orders, as necessary, are 
routed to execute against the full displayed size of any protected 
bid, in the case of a limit order to sell, or the full displayed 
size of any protected offer, in the case of a limit order to buy, 
for the NMS stock with a price that is superior to the limit price 
of the limit order identified as an intermarket sweep order. These 
additional routed orders also must be marked as intermarket sweep 
orders.'' See id.
---------------------------------------------------------------------------

H. Implementation Plan

    NYSE proposed to implement the Hybrid Market in four stages over a 
period of months, to allow its members to familiarize themselves with 
these functionalities and to perform tests on its systems. As noted 
above, the Pilot implemented testing of the initial stage of the Hybrid 
Market on a temporary basis. The Commission believes that the staggered 
implementation would allow a gradual transition from the current 
auction market model to the Hybrid Market.\397\ Further, the Commission 
believes that the implementation plan would provide NYSE the 
opportunity to test the changes to its systems. The Commission believes 
that the proposed implementation plan is consistent with the 
requirements of the Act. Due to the phased implementation of the Hybrid 
Market, NYSE represented that it will provide Information Memoranda to 
its members and update its online rulebook and Web site accordingly 
during each phase. The Commission believes that the Information 
Memoranda and web site updates should provide NYSE members with 
reasonable notice of and clarification on which rules or portions 
thereof will be effective during a particular implementation phase of 
the Hybrid Market.
---------------------------------------------------------------------------

    \397\ If there is any delay in the implementation plan, the 
Commission expects the Exchange to consider whether additional rule 
changes would need to be filed with the Commission.
---------------------------------------------------------------------------

I. Interpretive Issues

    The Exchange has requested that the Commission extend its previous 
approval of certain interpretations of NYSE rules as they relate to 
automatic executions that occur with specialists pursuant to NYSE Rule 
1001(a)(iv).\398\ Specifically, pursuant to NYSE Rule 1001(a)(iv), 
specialists are required to take the contra side of an automatic 
execution against the published quotation, even if the specialist's 
interest was not part of such quotations. This requirement to take the 
contra side of certain automatic executions may be inconsistent with 
other NYSE rules or may lead to additional obligations by the 
specialist. Accordingly, NYSE requested and the Commission approved the 
following interpretations.
---------------------------------------------------------------------------

    \398\ See note supra.
---------------------------------------------------------------------------

    1. NYSE Rule 123A.40. The specialist would not be required to fill 
any stop orders elected by the execution of an Auto Ex Order at the 
price of the electing sale in any instance where the specialist was 
required by NYSE Rule 1001(a)(iv) to take the contra side of the 
automatic execution.
    2. NYSE Rule 91. Because the specialist does not accept an Auto Ex 
Order for execution or act as agent for such order, the transaction 
confirmation requirements for NYSE Rule 91 would not apply in any 
instance where the specialist is the contra party to an automatic 
execution.
    3. NYSE Rule 104. NYSE Rule 104 contains the specialist's 
affirmative and negative obligations, and restricts the specialist's 
ability to purchase stock on direct plus ticks or see on direct minus 
ticks. The Exchange proposed that any instance in which the specialist 
is effecting a direct tick transaction only because he or she has been 
required to assume the contra side of an automatic execution pursuant 
to NYSE Rule 1001(a)(iv) shall be deemed a ``neutral'' transaction for 
purposes of NYSE Rule 104 and shall be deemed not a violation of the 
rule. According to the Exchange, it believes this interpretation was 
appropriate because the specialist is not setting the price, but is 
simply being required to trade at a price set by other market 
participants.
    The Commission finds that these interpretations are consistent with 
the requirements of the Act because they would allow the specialist to 
provide liquidity in certain situations without triggering other rules 
or obligations. As noted above, the Commission previously approved 
these interpretations in the approval of Direct+.\399\ The Commission 
believes that they should promote just and equitable principles of 
trade and protect investors and the public interest because they should 
assist in the execution of Auto Ex Orders.
---------------------------------------------------------------------------

    \399\ See note 203 supra.
---------------------------------------------------------------------------

V. Accelerated Approval of Amendment Nos. 6, 7, and 8

    As set forth below, the Commission finds good cause to approve 
Amendment Nos. 6, 7, and 8 to the proposed rule change, as amended, 
prior to the thirtieth day after the amendments are published for 
comment in the Federal Register pursuant to section 19(b)(2) of the 
Act.
    In Amendment No. 6, NYSE proposes to amend the rules that would 
allow specialists to provide price improvement to incoming orders. 
Specifically, NYSE proposed to reinstate the requirement that the 
specialist be represented in the bid (offer) in order to provide price 
improvement.\400\ In

[[Page 16384]]

Amendment No. 6, NYSE proposed to require specialists to be represented 
in the bid (offer) in a ``meaningful amount,'' which it proposes to 
define as a minimum of 1,000 shares for most securities. The Commission 
notes that NYSE proposes to further amend this provision in Amendment 
No. 8, as described below. Finally, the Exchange amended Rule 104 to 
state that specialists may only provide price improvement to incoming 
orders that are marketable.
---------------------------------------------------------------------------

    \400\ In the Second Notice, NYSE proposed to require specialists 
to be represented in the bid (offer) by the lesser of 10,000 shares 
or twenty percent of the size of the market on the side which the 
transaction would take place. In the Third Notice, NYSE proposed to 
eliminate this requirement to be represented in the bid (offer).
---------------------------------------------------------------------------

    The Commission finds good cause to accelerate approval of these 
changes prior to the thirtieth day after publication in the Federal 
Register. The Commission finds that prohibiting specialists from 
providing price improvement to non-marketable orders should provide 
investors with more current information regarding the prices at which 
other investors are willing to trade.
    In Amendment No. 6, NYSE also proposes to limit the ability of 
interest in the floor broker agency interest file to trade on parity 
with orders on the Book outside of the Exchange BBO. Specifically, 
floor brokers would be required to designate the size that it would 
display should a price outside of the BBO move to the BBO. The size 
designated for display would be permitted to trade on parity with 
orders on the Book during a sweep at the clean-up price. The size 
designated to be placed in reserve (i.e., remain undisplayed) would 
yield to displayed interest.
    The Commission finds good cause to accelerate approval of this 
change prior to the thirtieth day after publication in the Federal 
Register because the proposed change limits the ability of undisplayed 
interest to trade with displayed interest, which should enhance the 
execution of orders displayed on the Book, and may provide incentives 
to floor brokers to increase the size of interest eligible for display.
    In Amendment No. 7, NYSE proposes to modify to its proposed changes 
to its Rule 92. Specifically, NYSE proposes to define when a specialist 
has knowledge for purposes of the rule in the context of the Specialist 
Algorithm. Specifically, a specialist would not be deemed to have 
knowledge of an order that is received while the Specialist Algorithm 
is transmitting a quoting or trading message based on the knowledge of 
an earlier order, if the Specialist Algorithm is designed and operated 
in a manner that prevents a quoting or trading message from being 
affected by the knowledge of the later order.
    The Commission finds good cause to accelerate approval of this 
change prior to the thirtieth day after publication in the Federal 
Register because it better defines the scope of knowledge for purposes 
of the Specialist Algorithm. The Commission believes that the change is 
narrowly tailored to this specific circumstance to ensure that 
specialists cannot trade for their own accounts when they have 
knowledge of an order.
    In addition, NYSE proposes to amend its Rule 13.30 and the 
definition of stop orders to reflect that elected stop orders in the 
Display Book system would be eligible for automatic execution in 
Direct+.\401\ This change conforms NYSE's Hybrid Market proposal to 
changes proposed by NYSE in an earlier filing.\402\ Accordingly, the 
Commission finds good cause to accelerate approval of this change 
because it updates NYSE's proposal to make it consistent with 
previously filed rule changes. Finally, NYSE proposes to amend its rule 
text to correct typographical errors, reflect other rule changes that 
have been approved by the Commission, and further clarify its rules. 
For example, NYSE modified its definition of All or None Order in its 
Rule 13 to reflect current NYSE rule text, amended other definitions to 
reflect new citations to Regulation NMS, and amended NYSE Rule 60(e) to 
clarify that Autoquote will automatically update the NYSE BBO to 
reflect floor broker agency interest and specialist interest as well as 
non-marketable limit orders. The Commission finds good cause to 
accelerate approval of these changes prior to the thirtieth day after 
publication in the Federal Register because they better clarify the 
NYSE's rules, which should assist members' ability to comply with their 
requirements, and assist investors in understanding their application 
and scope.
---------------------------------------------------------------------------

    \401\ The Commission notes that NYSE proposed further changes to 
these rules and NYSE Rule 76 regarding stop orders in Amendment No. 
8.
    \402\ See Securities Exchange Act Release No. 52362 (August 30, 
2005), 70 FR 53701 (September 9, 2005).
---------------------------------------------------------------------------

    Finally, in Amendment No. 8, NYSE proposes to: (1) Amend proposed 
NYSE Rules 13 and 124 to specify that a round lot portion of a PRL 
order is an Auto Ex Order and that the odd lot portion of a PRL order 
would be executed in the Odd Lot Execution System at the same price as 
the round lot portion of the PRL; (2) amend proposed NYSE Rule 13 to 
reflect that stop orders and stop limit orders may still be represented 
manually by a floor broker in the Crowd; (3) amend the definition of 
IOC order in proposed NYSE Rule 13 to: (a) Propose an IOC order that is 
designed to be in compliance with Regulation NMS; (b) specify that NYSE 
IOC orders would be eligible to be routed away during a sweep; and (c) 
eliminate the previously proposed changes to the treatment of ITS 
Commitments; \403\ (4) amend the definition of Intermarket Sweep order 
in proposed NYSE Rule 13 to permit such order to sweep the Display Book 
system and then immediately cancel any portion remaining unexecuted; 
(5) amend proposed NYSE Rule 36 to state that a specialist may only use 
a wired or wireless device that has been registered with the Exchange 
to communicate with the Specialist Algorithms and provide that 
specialist firms must create and maintain records of all messages 
generated by the Specialist Algorithm; (6) amend proposed NYSE Rule 60 
to: (a) Set forth the instances during which Autoquote will update the 
quote even if automatic executions are not available; (b) set forth the 
instances during which Autoquote will update the quote when Autoquote 
and automatic execution are suspended and disseminate a 100 share quote 
in certain situations; and (c) propose to use an indicator when the 
NYSE quote is not available for automatic execution due to a gapped 
quotation or LRP to signify that the NYSE quote is not firm; (7) amend 
proposed NYSE Rule 70.20 to: (a) Permit a floor broker to leave the 
Crowd without canceling its floor broker agency interest file to 
recharge its handheld device and (b) specify the procedures for 
entering interest in the floor broker agency interest file before the 
open; (8) amend proposed NYSE Rule 72 to specify the priority and 
parity rules for instances when there are shares remaining after a 
sweep that triggers an LRP; (9) amend NYSE Rule 76 to reflect that it 
would not apply to elected stop or stop limit orders other than those 
manually represented in the Crowd by a floor broker; (10) amend 
proposed NYSE Rule 104 to: (a) Permit specialists to manually layer 
proprietary interest in the specialist interest file; (b) permit 
specialists to enter certain quoting messages when automatic executions 
and Autoquote are suspended; (c) amend the definition of ``meaningful 
amount'' for purposes of determining when a specialist could provide 
price improvement; and (d) require specialists to hire independent 
auditors to review their algorithms on an annual basis; (11) amend 
proposed NYSE Rule 123A.30 to: (a) Provide

[[Page 16385]]

systematic conversion of CAP-DI orders on the same side as a specialist 
when the specialist is bidding (offering) or trading and an automatic 
execution occurs against the specialist's proprietary interest and (b) 
clarify the execution of contra-side elected and converted CAP-DI 
orders; (12) amend proposed NYSE Rule 123F to codify that NYSE may 
execute an AL order or AM order at a price that matches a better away 
market; (13) amend proposed NYSE Rule 1000 to: (a) Clarify that 
automatic executions will resume in the same manner as Autoquote; (b) 
prohibit short sale orders, except those for Regulation SHO pilot 
securities, from sweeping the Display Book system; (c) eliminate the 
provision that would have suspended the operation of Direct+ when an 
away market disseminates a better quote; (d) eliminate the proposal 
that would have permitted automatic executions to continue while the 
specialist reports a block trade until the quote decremented to 100 
shares; (e) specify the process for determining when a high-priced 
security would be eligible for automatic executions; (f) specify that 
automatic executions would be suspended on one side of the market when 
a bid (offer) is outside the MLRP; (g) specify that any shares 
remaining after an execution in IOC orders, NYSE IOC orders, or 
Intermarket Sweep orders would be cancelled after sweeping the Display 
Book system; and (h) clarify that auto ex limit orders, except IOC 
orders, that are not able to be immediately executed due to a 
suspension of Direct+ would be placed in the Book; and (14) amend Rule 
1001.
---------------------------------------------------------------------------

    \403\ See also note 22 supra.
---------------------------------------------------------------------------

    The Commission finds good cause to accelerate approval of these 
changes prior to the thirtieth day after publication in the Federal 
Register for the reasons discussed below. The Commission notes that 
many of the changes proposed in Amendment No. 8 were previously 
disclosed in earlier amendments and notices and the Pilot. The 
Exchange, in Amendment No. 8, merely proposes to codify these 
requirements in its rules, which the Commission believes should ensure 
that market participants are fully apprised on how the Hybrid Market 
would operate and ensure that NYSE rules are complete. Specifically, 
NYSE proposes the following changes, which were published in one of the 
three Hybrid Market notices or the Pilot.
    1. NYSE proposes to amend proposed NYSE Rules 13 and 124 to reflect 
the execution of PRL orders, which was discussed in both the Second and 
Third Notices. In the Second Notice, NYSE proposed to amend NYSE Rule 
124 to reflect that the round lot portion of a PRL order would be 
automatically executed in Direct+. In Amendment No. 8, NYSE proposes to 
make a conforming change to NYSE Rule 13. In the Third Notice, NYSE 
represented that the odd lot portions of PRL orders would be executed 
in the Odd-Lot Execution System. In Amendment No. 8, NYSE proposes to 
reflect this language in its Rule 124 and to state that the odd lot 
portion of a PRL would be executed at the same price as the round lot 
portion.
    2. NYSE proposes to amend its Rules 60(e)(iv)(a) and 1000(c) to 
specify that when the NYSE bid (offer) is outside the MLRP range and 
such MLRP has not yet been reached, automatic executions on that side 
of the market would not be available but Autoquote would remain active. 
NYSE discussed this aspect of the Hybrid Market in its Third Notice.
    3. NYSE proposes to add language to its Rule 1000(b) to provide 
that automatic executions would resume in the same manner as Autoquote 
as set forth in proposed NYSE Rule 60(e). This process was discussed in 
the Second Notice.
    4. NYSE proposes to specify in its Rule 70.20(j) that a floor 
broker may enter interest in its floor broker agency interest file 
prior to the open regardless of its location on the floor. The floor 
broker, however, must be in the Crowd at the open in order to 
participate. NYSE discussed this provision in the Third Notice.
    5. NYSE proposes to amend its Rule 123F to codify that NYSE may 
execute an AL order or AM order at a price that matches a better away 
market. NYSE originally proposed this function in the Third Notice.
    6. NYSE proposes to amend NYSE Rule 1000 to provide that short sale 
orders must comply with Commission Rule 10a-1 and Exchange Rule 440B, 
which would prohibit short sale orders, other than orders for those 
securities included in the Regulation SHO pilot, from sweeping the 
Display Book system. The NYSE proposed this restriction in the Second 
Notice.
    7. Proposed NYSE Rule 13--Stop and Stop Limit Orders. In Amendment 
No. 8, NYSE proposes to permit floor brokers to continue to represent 
stop and stop limit orders in the Crowd. NYSE originally proposed this 
change in the Pilot. The Commission finds good cause to accelerate 
approval of this change because it could provide investors with an 
additional means to have their orders represented on NYSE and is 
consistent with NYSE's current rule.
    8. NYSE proposes to amend its Rule 104 to allow specialists to 
manually place interest in the specialist interest file to ensure that 
the specialist would be able to place its interest in the Display Book 
system if its algorithm is not operating. NYSE originally proposed this 
provision in the Pilot. The Commission finds good cause to accelerate 
approval of this change because it should ensure that specialists can 
continue to participate in the Hybrid Market and fulfill their 
obligations to maintain a fair and orderly market.
    9. NYSE proposes to amend NYSE Rule 76 to provide that its 
requirements would not apply to elected stop or stop limit orders other 
than those represented in the Crowd. NYSE originally proposed this 
change in the Pilot. The Commission finds good cause to accelerate 
approval of this change because it reflects the change NYSE proposes 
with regard to the automatic execution of elected stop and stop limit 
orders in the Display Book system.
    The Commission also finds good cause to accelerate approval of the 
other changes proposed in Amendment No. 8 for the reasons discussed 
below.
    10. Proposed NYSE Rule 13. Definition of IOC. In Amendment No. 8, 
NYSE proposes to amend its definition of IOC order. As originally 
proposed, NYSE defined two types of IOC orders--one that would sweep 
the Display Book system after trading with interest at the BBO and 
could be routed to away markets if such away market is displaying a 
better price (this order would now be called a NYSE IOC order), and ITS 
Commitments that would only trade with interest displayed at the BBO. 
In Amendment No. 8, NYSE proposes to remove its proposed changes 
relating to ITS Commitments because its current rule needs to remain in 
effect in order to comply with the provisions of the ITS Plan.\404\ 
NYSE also proposes to allow another type of IOC order to be entered on 
the Exchange for purposes of Regulation NMS. This type of IOC order 
would be permitted to sweep the Display Book system but would not be 
routed to away markets if such away market displays a price better than 
the NYSE BBO or sweep clean up price. In such circumstances, the IOC 
order (or residual if a portion is executed at the NYSE BBO) would be 
cancelled. The Commission finds good cause to accelerate approval of 
this change because it would provide investors with a means to 
immediately access NYSE liquidity without relying on NYSE to access 
away markets' liquidity, and is

[[Page 16386]]

designed to be consistent with Regulation NMS.
---------------------------------------------------------------------------

    \404\ See also note 22 supra.
---------------------------------------------------------------------------

    11. Proposed NYSE Rule 13. Definition of Intermarket Sweep Order. 
In Amendment No. 8, NYSE proposes to amend its definition of 
Intermarket Sweep Order to provide that this type of order may sweep 
the Display Book system but would not be routed to away markets that 
display a better quote. In such circumstances, the Intermarket Sweep 
would be cancelled. The Commission finds good cause to accelerate 
approval of this change because it is designed to be consistent with 
Regulation NMS.
    12. Proposed NYSE Rule 36. In Amendment No. 8, NYSE proposes to 
amend its Rule 36 relating to the means by which specialists on the 
floor can communicate with their Specialist Algorithms. NYSE had 
originally proposed language to amend its Rule 36 in the Third Notice. 
In Amendment No. 8, NYSE limits the types of communications that may be 
transmitted over a wired or wireless device and limits where the 
communications can be sent to ensure that these communications are 
consistent with NYSE's current telephone policy. The Commission finds 
good cause to accelerate approval of this change because it allows NYSE 
to control the ability of specialists on the floor to communicate off 
the floor. NYSE also proposes that specialist firms create and maintain 
records of all messages generated by the firms' wired or wireless 
devices. The Commission finds good cause to accelerate approval of this 
requirement because it codifies in the rules the specialist firms' 
recordkeeping obligations to comply with Exchange and SEC rules.
    13. Proposed NYSE Rule 60. In Amendment No. 8, the NYSE proposes 
several changes. First, NYSE proposes to identify quotations that are 
disseminated when automatic executions and Autoquote are suspended by a 
LRP or gapped quotation as non-firm. The Commission finds good cause to 
accelerate approval of this change because it will provide investors 
with more accurate information about the state of the NYSE quotation. 
Next, NYSE proposes to update the quote in high-priced securities even 
though automatic executions are not available. First, NYSE would keep 
Autoquote active when an order or a cancellation of an order arrives 
that would not result in a locked or crossed market in a high-priced 
security or a manual execution takes place in such security. Second, if 
there is a cancellation of the Exchange best bid (offer) in a high-
priced security when the market in such security is internally locked 
or crossed, and autoquoting of the next best bid (offer) would create a 
locked or crossed market on the Exchange, NYSE would automatically 
generate a quote of 100 shares at the bid (offer) price that existed at 
the time of the cancellation. The Commission finds good cause to 
accelerate approval of this change because it would provide investors 
with additional quotation data in high-priced securities. Finally, the 
Exchange proposes to update its quote in the following situations even 
though Autoquote is suspended due to an LRP or a gapped quotation, and 
automatic executions are not available: (1) If part of the existing 
Exchange best bid (offer) cancels, the Exchange would use Autoquote to 
update its quote to reflect the remaining volume; (2) if the entire 
existing Exchange best bid (offer) cancels, the Exchange would 
automatically generate a quote of 100 shares at the bid (offer) price 
that existed at the time of the cancellation; or (3) if there is a 
cancellation of the Exchange best bid (offer) when the market is 
internally locked or crossed, and autoquoting of the next best bid 
(offer) would create a locked or crossed market on the Exchange, NYSE 
would automatically generate a quote of 100 shares at the bid (offer) 
price that existed at the time of the cancellation. The Commission 
finds good cause to accelerate approval of this change because it would 
provide investors with additional quotation data during the time when 
Autoquote and automatic executions are otherwise suspended and would 
alert investors that a previously disseminated quotation had been 
cancelled.
    14. Proposed NYSE Rule 70.20. NYSE proposes to permit floor brokers 
to leave the Crowd for short periods of time to recharge their handheld 
devices. The Commission finds good cause to accelerate approval of this 
change because it reflects a reasonable accommodation to allow floor 
brokers to ensure that their equipment is operable while permitting 
them to continue to represent their customers.
    15. Proposed NYSE Rule 72. In Amendment No. 8, NYSE proposes to 
specify the priority and parity of residual shares when a LRP has been 
triggered. The Commission finds good cause to accelerate approval of 
this change because it provides specificity to the execution of orders 
during these limited situations and is generally consistent with the 
Exchange's current rules.
    16. Proposed NYSE Rule 104. In Amendment No. 8, NYSE proposes to 
make several changes to its Rule 104. First, NYSE proposes to amend 
what it would consider to be a ``meaningful amount'' of shares that a 
specialist must be represented in the BBO for purposes to determining 
when a specialist can provide price improvement to an incoming order. 
Specifically, NYSE proposes to define a ``meaningful amount'' as at 
least 1,000 shares for the 100 most active securities on the Exchange, 
based on the average daily volume, and at least 500 shares for all 
other securities. NYSE would disseminate, at least quarterly, the list 
of the 100 most active securities. In Amendment No. 8, NYSE proposes to 
set the minimum number of shares for all securities rather than its 
previous proposal, which was not specific as to all securities. The 
Commission believes that having the minimums set forth in the rule for 
all securities should ensure that specialists can comply with the 
rule's requirements and ensure that all market participants are aware 
of the instances when a specialist would be allowed to price improve 
incoming marketable orders. Accordingly, the Commission finds good 
cause to accelerate approval of this change. Second, NYSE proposes to 
permit specialists to enter certain quoting messages when automatic 
executions and Autoquote are suspended. Specifically, specialists would 
be permitted to enter quotes that are outside of the Exchange's BBO, 
and manually enter quotes at prices that are within a previously-
established locking or crossing quotation. The Commission finds good 
cause to accelerate approval of this change because it could enable 
specialists to add liquidity in preparation for the after-market and 
assist specialists in satisfying their obligation to make markets with 
appropriate depth and price continuity. Finally, NYSE proposes to 
require specialists to hire independent third party auditors to review 
their algorithms on an annual basis to ensure that the algorithms are 
operating in accordance with Federal securities laws and NYSE rules. 
The Commission finds good cause to accelerate approval of this change 
because it could assist specialists and the Exchange in monitoring the 
operation of the Specialist Algorithms.\405\
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    \405\ See Section IV(E)(4), supra.
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    17. Proposed NYSE 123A.30. In Amendment No. 8, NYSE proposes to 
provide for the systematic conversion of marketable CAP-DI orders on 
the same side as a specialist when a specialist quotes or trades and an 
automatic execution occurs against the specialist's

[[Page 16387]]

proprietary interest. The Commission finds good cause to accelerate 
approval of this change because it should ensure the proper execution 
of CAP-DI orders when the specialist is trading. In addition, NYSE 
added language to its rule to specify the manner of execution of 
contra-side elected and converted CAP-DI orders when an automatic 
execution occurs against the Exchange BBO and when an Auto Ex Order 
sweeps the Display Book system. The Commission finds good cause to 
accelerate approval of this change because it clarifies in the NYSE 
rules how executions of contra-side CAP-DI orders occur.
    18. Proposed NYSE Rule 1000. In Amendment No. 8, NYSE proposes to 
make several changes to its Rule 1000. First, NYSE proposes to 
eliminate the provision that would have suspended automatic executions 
when another market disseminated a better quotation. The Commission 
finds good cause to accelerate approval of this change because this 
provision was inconsistent with NYSE's proposal to immediately route 
orders to markets that display quotes better than NYSE's displayed 
quote. Second, NYSE is eliminating its proposal to allow automatic 
executions to continue while the specialist manually reports a block 
trade that involves orders on the Display Book system until the NYSE 
quote decremented to 100 shares. NYSE proposes to suspend automatic 
executions as soon as the reporting of the block transaction begins. 
The Commission finds good cause to accelerate approval of this change 
because when the specialist manually reports a block trade that 
involves orders on the Display Book system, the NYSE quotation is not 
updated to reflect new quotations, orders, or cancellations. Since the 
NYSE quote that is disseminated when a block trade that involves orders 
on the Display Book system is manually reported may not reflect the 
current state of the market, the Commission believes it is appropriate 
in that situation for the Exchange to discontinue automatic executions. 
Third, NYSE proposes to amend the process for determining when a high-
priced security would be eligible for automatic execution. 
Specifically, NYSE proposes to look at the closing price of a security 
(or if the security did not trade during the day, then the closing 
bid), and if the closing price/closing bid is $300.00 or more, then 
automatic executions would not be available on the next trading day on 
either side of the market. The Commission finds good cause to 
accelerate approval of this change because it better defines the 
process by which NYSE would determine the availability of automatic 
executions for high-priced securities. Fourth, NYSE proposes to specify 
in its rule that any shares remaining after the execution of an IOC, 
NYSE IOC or Intermarket Sweep order would be cancelled. The Commission 
finds good cause to accelerate approval of this change because it 
codifies the handling of these types of orders in the NYSE rules. 
Fifth, NYSE proposes to amend NYSE Rule 1000 to clarify that certain 
Auto Ex Orders that are not able to be automatically executed due to 
the suspension of automatic executions would be placed on the Book. The 
Commission finds good cause to accelerate approval of this change 
because it provides specificity in NYSE rules regarding how orders 
would be handled.
    19. Proposed NYSE Rule 1001. In Amendment No. 8, NYSE proposes to 
eliminate language that it had originally proposed in its Rule 1001(iv) 
to clarify instead in NYSE Rule 70.20(f) that the floor broker would be 
held to all executions involving its agency interest files, including 
interest that the floor broker does not cancel when leaving the Crowd. 
The Commission finds good cause to accelerate approval of this change 
because floor brokers would be responsible for executions against 
interest in their files and would be responsible for ensuring that 
their files reflect accurate information. Accordingly, there is no need 
for the additional language originally proposed by NYSE to Rule 
1001(iv).

VI. Solicitation of Comments on Amendment Nos. 6, 7, and 8

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment Nos. 6, 7, and 8, including whether such 
amendments are 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-2004-05 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2004-05. 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-2004-05 and should be submitted on or before April 
21, 2006.

VII. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with sections 6(b)(5) of the Act \406\ and 6(b)(8) 
of the Act.\407\
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    \406\ 15 U.S.C. 78f(b)(5).
    \407\ 15 U.S.C. 78f(b)(8).
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    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\408\ that the proposed rule change (SR-NYSE-2004-05) and Amendment 
Nos. 1, 2, 3, and 5 are approved, and that Amendment Nos. 6, 7, and 8 
thereto are approved on an accelerated basis.
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    \408\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. 06-3012 Filed 3-30-06; 8:45 am]

BILLING CODE 8010-01-P
