

[Federal Register: September 28, 2006 (Volume 71, Number 188)]
[Notices]               
[Page 57011-57017]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28se06-98]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54504; File No. SR-NYSE-2006-76]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Relating To Exchange Rule 
104.10 (``Dealings by Specialists'')

September 26, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 22, 2006 the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change is an amendment to the specialist 
stabilization requirements set forth in NYSE Rule 104.10 (``Dealings by 
Specialists''). The Exchange seeks to implement certain changes as a 
pilot. The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in [brackets].

Bids and Offers

Rule 70.
* * * * *
* * * Supplementary Material
* * * * *
    .20 (a)(i) With respect to orders he or she is representing on the 
Floor, a Floor broker may place within the Display Book[supreg] system 
broker agency interest files at multiple price points on both sides of 
the market at or outside the Exchange best bid and offer with respect 
to each security trading in the location(s) comprising the Crowd such 
Floor broker is a part of with respect to orders he or she is 
representing on the Floor, except that the agency interest files shall 
not include any customer interest that restricts the specialist's 
ability to be on parity pursuant to Exchange Rules 104.10[(6)(i)(C)] 
(5)(i)(a)(I)(d) and 108(a).
* * * * *

Dealings by Specialists

Rule 104
* * * * *
Supplementary Material:

Functions of Specialists

    .10 Regular specialists.--Any member who expects to act regularly 
as specialist in any listed stock and to solicit orders therein must be 
registered as a regular specialist.
* * * * *
    (5)(i) Transactions on the Exchange by a specialist for [his] the 
specialist's [own] account [of a member acting as specialist] are to be 
effected in a reasonable and orderly manner in relation to the 
condition of the general market, the market in the particular stock and 
the adequacy of the specialist's position to the immediate and 
reasonably anticipated needs of the round-lot and the odd-lot market.
    (a) The following types of transactions [to establish or increase a 
position are not to be effected except] are permitted when they are 
reasonably necessary to render the specialist's position adequate to 
such markets' needs:
    (I) Neutral Transactions
    (a) Definition--A neutral transaction is a purchase or sale by 
which a specialist liquidates or decreases a position.
    (b) Neutral Transactions may be made without restriction as to 
price.
    (c) Re-Entry Obligation Following Neutral Transactions--The 
specialist's obligation to maintain a fair and orderly market may 
require re-entry on the opposite side of the market trend after 
effecting one or more Neutral Transactions. Such re-entry transactions 
should be in accordance with the immediate and anticipated needs of the 
market.
    (d) Neutral Transactions must yield parity to, and may not claim 
precedence based on size over, a customer order in the Crowd upon the 
request of the member representing such order, where such request has 
been documented as a term of the order, to the extent of the volume of 
such order that has been included in the quote prior to the 
transaction.
    (e) The requirements contained in (5)(i)(a)(I)(d) above shall not 
apply to automatic executions involving the specialist dealer account.
    (II) Non-Conditional Transactions
    (a) Definition--A non-conditional transaction is a specialist's bid 
or purchase and offer or sale, that establishes or increases a 
position, other than a transaction that reaches across the market to 
trade with the Exchange bid or offer.
    (b) Non-Conditional Transactions may be made without restriction as 
to price in order to:
    (i) Match another market's better bid or offer price;
    (ii) Bring the price of a security into parity with an underlying 
or related security or asset;
    (iii) Add size to an independently established bid or offer on the 
Exchange;
    (iv) Purchase at the published bid price on the Exchange;
    (v) Sell at the published offer price on the Exchange;
    (vi) Purchase or sell at a price between the Exchange published bid 
and published offer;
    (vii) Purchase below the published bid or sell above the published 
offer on the Exchange;
    (c) Re-entry Obligation Following Non-Conditional Transactions--The 
specialist's obligation to maintain a fair and orderly market may 
require re-entry on the opposite side of the market trend after 
effecting one or more Non-Conditional Transactions. Such re-entry 
transactions should be commensurate with the size of the Non-
Conditional

[[Page 57012]]

Transactions and the immediate and anticipated needs of the market.
    (b)(I) The following types of transactions by a specialist for the 
specialist's account to establish or increase a position are not to be 
effected except when, with the approval of a Floor Official, the 
transactions are reasonably necessary to render the specialist's 
position adequate to the immediate and reasonably anticipated needs of 
the round-lot and the odd-lot market and the specialist reoffers or 
rebids where necessary after effecting such transaction:
    [(A)](a) A purchase at a price above the last trade price on the 
Exchange [sale in the same session:];
    (b) A sale at a price below the last trade price on the Exchange; 
[(B)](c) the purchase of more than 50% of the stock offered in the 
market at a price equal to the last trade price [sale] where such last 
trade [transaction] price [would be on a ``zero plus tic'' (i.e., the 
last sale price] was [above the] higher than the last differently 
priced [previous different] regular way sale. [price); and]
    [(C) Failing to reoffer or rebid where necessary after effecting 
transactions described in (A) and (B) above.
    Transactions of these types, may, nevertheless, be effected with 
the approval of a Floor Official or in less active markets where they 
are an essential part of a proper course of dealings and where the 
amount of stock involved and the price change, if any, are normal in 
relation to the market.]
    (c) Prohibited Transactions
    (I) During the last ten minutes prior to the close of trading, a 
specialist with a long position in a security is prohibited from making 
a purchase in such security that results in a new high price on the 
Exchange for the day at the time of the specialist's transaction, 
except as provided in subparagraphs (5)(i)(a)(II)(b)(i) through 
(5)(i)(a)(II)(b)(ii) above.
    (II) During the last ten minutes of trading, a specialist with a 
short position in a security is prohibited from making a sale in such 
security, including securities subject to the Regulation SHO Pilot (17 
CFR 240.202T), that results in a new low price on the Exchange for the 
day at the time of the specialist's transaction, except as provided in 
subparagraphs (5)(i)(a)(II)(b)(i) through (5)(i)(a)(II)(b)(ii) above.
    (ii) [Notwithstanding the provisions of subparagraphs (5)(i)(A) and 
(B) above, w]Whenever a specialist effects a principal purchase of a 
specialty stock, in another [participating] market center [through 
ITS,] at or above the price at which [he] the specialist holds orders 
to sell that stock, such orders which remain unexecuted on the Floor 
must be filled by the specialist buying the stock for [his own] the 
specialist's account[,] at the same price at which [he effected his] 
the principal transaction was effected;[through ITS] above unless[,] 
effecting such a principal transaction on the Floor[,]at that 
price[,]would [(a)] be inconsistent with the maintenance of fair and 
orderly markets[; or (b) result in the election of stop orders].
    (iii) Whenever a specialist effects a principal sale of a specialty 
stock[,] in another [participating] market center [through ITS,] at or 
below the price at which [he] the specialist holds orders to buy that 
stock, such orders which remain unexecuted on the Floor must be filled 
by the specialist [by] selling the stock for [his own] the specialist's 
account[,] at the same price at which [be effected his] the principal 
transaction was effected [through ITS subject to the same conditions as 
set forth in (ii)(a) and (b) above] unless effecting such principal 
transaction on the Floor at that price would be inconsistent with the 
maintenance of fair and orderly markets and provided further that 
effecting such a principal transaction on the Floor, at that price, 
would not be precluded by the short selling rules, or would not result 
in a sale to a stabilizing bid.
    [(iv) Notwithstanding the provisions of (5)(i)(A) and (B) above, a 
specialist may effect a principal purchase of a specialty security to 
establish or increase a position at a price above the last sale in the 
same session at a price that matches the then current national best bid 
or, in the case of a sale, that matches the then current national best 
offer displayed by another market center.]
    (6) Specialist Transactions in Active Securities that Establish or 
Increase the Specialist's Position:
    The provisions of this rule are pursuant to a pilot program set to 
commence following Commission approval and end on June 30, 2007.
    (i) Definition--``active'' securities are:
    (a) Securities comprising the S&P 500[supreg] Stock Index;
    (b) Securities trading on the Exchange during the first five 
trading days following their initial public offering of such 
securities; and
    (c) Securities that have been designated as ``active'' by a Floor 
Official subject to the following provisions:
    (I) A Floor Official may designate a security as ``active'' when 
such security has exhibited substantially greater than normal trading 
volume and is, in the Floor Official's judgment likely to continue to 
sustain such higher volume during the remainder of the current trading 
session.
    (II) A Floor Official's designation of a security as ``active'' 
shall last only for the trading session on the particular day it is 
determined. A new designation may be made on subsequent days based on 
the security's trading characteristics that day.
    (III) The Floor Official shall promptly inform the Market 
Surveillance Division of NYSE Regulation, Inc. (``MKS'') any time she 
or he designates a security as ``active,'' in the time and manner 
prescribed by the Exchange.
    (IV) The Floor Official designating a security as ``active'' and 
the specialist for such security shall prepare and maintain such 
documentation regarding the security as the Exchange shall from time to 
time require.
    (ii) Definition--A ``Conditional Transaction'' is a specialist's 
transaction in an active security that establishes or increases a 
position and reaches across the market to trade as the contra-side to 
the Exchange published bid or offer (``Hit Bid/Take Offer'').
    (iii) The following Conditional Transactions, may be made by a 
specialist without restriction as to price, provided they are followed 
by appropriate re-entry on the opposite side of the market commensurate 
with the size of the specialist's transaction. (``Appropriate'' re-
entry shall mean re-entry on the opposite side of the market at or 
before the price participation point or the ``PPP''.):
    (a) A specialist's purchase from the Exchange published offer that 
is priced above the last differently-priced trade on the Exchange and 
above the last differently-priced published offer on the Exchange; and
    (b) A specialist's sale to the Exchange published bid that is 
priced below the last differently-priced trade on the Exchange and 
below the last differently-priced published bid on the Exchange.
    (iv) Re-entry Obligations for Conditional Transactions:
    (a) ``PPPs''--The Exchange will periodically issue guidelines, 
called price participation points (``PPP''), that identify the price at 
or before which a specialist is expected to re-enter the market after 
effecting a Conditional Transaction. PPPs are only minimum guidelines 
and compliance with them does not guarantee that a specialist is 
meeting its obligations.
    (b) Notwithstanding that a security may not have reached the PPP, 
the specialist may be required to re-enter the market immediately after 
a Conditional Transaction based on the

[[Page 57013]]

price and/or volume of the specialist's trading in reference to the 
market in the security at the time of such trading. In such situations 
specialists may not rely on the fact that there may have been one or 
more independent trades following the specialist's trading to justify a 
failure to re-enter the market.
    (c) Immediate re-entry is required after the following Conditional 
Transactions:
    (I) A purchase that (1) reaches across the market to trade with an 
Exchange published offer that is above the last differently priced 
trade on the Exchange and above the last differently priced published 
offer on the Exchange, (2) is 10,000 shares or more or has a market 
value of $200,000 or more, and (3) exceeds 50% of the published offer 
size.
    (II) A sale that (1) reaches across the market to trade with an 
Exchange published bid that is below the last differently priced trade 
on the Exchange and below the last differently priced published bid on 
the Exchange, (2) is 10,000 shares or more or has a market value of 
$200,000 or more, and (3) exceeds 50% of the published bid size.
    (III) Each trade at a separate price in a Sweep is viewed as a 
transaction with the published bid or offer for the purpose of 
subparagraphs (6)(iv)(c)(I) and (6)(iv)(c)(II) above.
    (v) The following Conditional Transactions may be made without 
restriction as to price:
    (a) A specialist's purchase from the Exchange published offer that 
is priced above the last differently-priced trade on the Exchange or 
above the last differently-priced published offer on the Exchange; and
    (b) A specialist's sale to the Exchange published bid that is 
priced below the last differently-priced trade on the Exchange or below 
the last differently-priced published bid on the Exchange.
    (c) Re-entry obligations following transactions defined in 
subparagraphs (6)(v)(a) and (6)(v)(b) above are the same as for Non-
Conditional Transactions pursuant to subparagraph (5)(i)(a)(II)(c) 
above.
    [(6)(i) Transactions on the Exchange by a specialist for his own 
account in liquidating or decreasing his position in a specialty stock 
are to be effected in a reasonable and orderly manner in relation to 
the condition of the general market, the market in the particular stock 
and the adequacy of the specialist's positions to the immediate and 
reasonably anticipated needs of the round-lot and the odd-lot market 
and in this connection:
    (A) The specialist may liquidate a position by selling stock on a 
direct minus tick or by purchasing stock on a direct plus tick only if 
such transactions are reasonably necessary in relation to the 
specialist's overall position in the stocks in which he is registered; 
and the specialist has obtained the prior approval of a Floor Official;
    (B) The specialist may liquidate a position by selling a security 
on a direct or zero minus tick or by purchasing a security on a direct 
or zero plus tick without the need to obtain Floor Official approval if 
such transaction is effected at a price that matches the then current 
national best bid or offer displayed by another market center;
    (C) The specialist should maintain a fair and orderly market during 
liquidation and, after reliquifying, should re-enter the market to 
offset imbalances between supply and demand. The selling of stock on a 
direct minus tick or a zero minus tick, or the purchasing of stock on a 
direct plus tick or a zero plus tick should be effected in conjunction 
with the specialist's re-entry in the market on the opposite side of 
the market from the liquidating transaction where the imbalance of 
supply and demand indicates that immediately succeeding transactions 
may result in a lower price (following the specialist's sale of stock 
on a direct minus tick or a zero minus tick) or a higher price 
(following the specialist's purchase of stock on a direct plus tick or 
a zero plus tick). During any period of volatile or unusual market 
conditions resulting in a significant price movement in the subject 
security, the specialist's transactions in re-entering the market 
following a liquidating transaction effected by selling stock on a 
direct minus tick or zero minus tick, or purchasing stock on a direct 
plus tick or zero plus tick, should, at a minimum, reflect the 
specialist's usual level of dealer participation in the subject 
security. During such periods of unusual price movement in a security, 
any series of such transactions which may be effected in a brief period 
of time should be accompanied by the specialist's re-entry in the 
market and effecting transactions which reflect a significant degree of 
dealer participation;
    (D) Transactions by a specialist for his or her dealer account in 
liquidating or decreasing a position in a specialty security must yield 
parity to and may not claim precedence based on size over a customer 
order in the Crowd upon the request of the member representing such 
order, where such request has been documented as a term of the order, 
to the extent of the volume of such order that has been included in the 
quote prior to the transaction. However, this provision shall not apply 
to automatic executions involving the specialist dealer account.
    (ii) Notwithstanding the provisions of subparagraph (6)(i)(A) 
above, whenever a specialist effects a principal purchase (sale) of a 
specialty stock, in another participating market center through ITS, at 
or above (at or below) the price at which he holds orders to sell (buy) 
that stock, such orders which remain unexecuted on the Floor must be 
filled by the specialist by buying (selling) the stock for his own 
account, at the same price at which he effected his principal 
transaction through ITS subject to the same conditions as set forth in 
subparagraphs (5)(ii) and (iii) above.
    (7) The requirement to obtain Floor Official approval for 
transactions for a specialist's own account contained in subparagraphs 
(5)(i)(A), (B) and (6)(i)(A) above shall not apply to transactions 
effected in an investment company unit (the ``unit''), as that term is 
defined in Section 703.16 of the Listed Company Manual, or a Trust 
Issued Receipt (the ``receipt'') as that term is defined in Rule 1200. 
Nevertheless such transactions must be effected in a manner that is 
consistent with the maintenance of a fair and orderly market and with 
the other requirements of this rule and the supplementary material 
herein.]
    (7)[(8)] When inquiry is made of a specialist as to the price at 
which a block of stock may be sold, the specialist may advise the 
broker of the ``clean up'' price for the block, after trading with the 
published bid (offer). If, as a result of this inquiry, the block is 
sold and the specialist participates as a dealer at the ``clean up'' 
price, he should also execute at the same price the executable buy 
orders held by him. The same principle applies in the event an inquiry 
is made with respect to an order to purchase a block of stock.
    [(9) If a specialist has limit sell orders on his book at two or 
more different prices, he should not, as a dealer, purchase all of the 
stock from the book at the lowest limit price and then immediately 
purchase stock from the book at a higher limit price. He should in such 
a situation withdraw the offer and cross the entire amount of stock he 
is purchasing as a dealer at one price. The same principle applies in 
the event the specialist sells stock to limit orders on the book at two 
or more different prices.]
    (8)[(10)] A specialist's bid or offer in a specialty stock on the 
Exchange may not be inferior to the specialist's market maker bid or 
offer disseminated by an electronic communications network (as that 
term is defined in Securities and Exchange Commission Rule 600(b)(23)

[[Page 57014]]

of Regulation NMS [11Ac1-1(a)(8))] or any other market center. A 
specialist may not disseminate a market maker bid or offer on another 
market center or electronic communications network at a price at which 
Exchange rules would preclude dissemination of such bid or offer on the 
Exchange.
* * * * *
Rule 123. Record of Orders
* * * * *
(g) Requests To Yield
    A request to a specialist to yield to a customer order in 
accordance with Rule 104.10[(6)(i)(C)] (5)(i)(a)(I)(d) is a condition 
of that order and must be documented in accordance with applicable 
books and records requirements.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the NYSE included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The NYSE has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The NYSE Hybrid MarketSM (``Hybrid Market'') \3\ 
combines the benefits of specialist and Floor Broker expertise with the 
speed, certainty, and anonymity of electronic executions to create a 
market center offering maximum choice to customers without eliminating 
time tested trading processes that have proven immensely successful in 
providing stable, liquid, and less volatile markets.
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    \3\ The Hybrid Market was approved on March 22, 2006. See 
Securities Exchange Act Release No. 53539 (March 22, 2006), 71 FR 
16353 (March 31, 2006) (SR-NYSE-2004-05).
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    Specialists will continue to perform their vital functions in the 
Hybrid Market'' committing capital and adding liquidity in order to 
bridge gaps in supply and demand, which keeps the market fair and 
orderly, reducing volatility and encouraging stable prices.
    In order to keep up with the pace of the faster, more 
electronically-oriented Hybrid Market, specialists will use proprietary 
systems that employ algorithms (sometimes referred to in shorthand as 
the ``specialist's API'') to generate quoting and trading messages that 
will interact with the NYSE Display Book[supreg] system. These quoting 
and trading messages, which must comply with NYSE Rule 104, enable 
specialists to place proprietary interest at various prices at and 
outside the Exchange quotation and to interact with Exchange orders.
    Given the increase in the amount and speed of market activity which 
will occur as a result of the Hybrid Market and the Commission's 
adoption of Regulation NMS \4\ (``Reg NMS''), the Exchange believes 
that the stabilization requirements set forth in NYSE Rules 104.10(5) 
and (6), governing specialist proprietary trading, are no longer 
responsive or relevant to the realities of active markets.
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    \4\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
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    Specifically, the institutionalization of the market, increased 
competition, and increased application of computer and communication 
technology has significantly diminished the time and place advantages 
of specialists. As a result, markets have seen increases in the average 
daily trading volume and the movement off the Floor of the decision 
making that affects the direction and extent of movements in the 
specialty stocks. There is a dramatic increase in the transparency of 
the Display Book[supreg] through, among other things, Exchange 
initiatives like NYSE OPENBOOKTM. This increased 
transparency gives all market participants, both on and off the Floor, 
a greater ability to see and react to market changes. In addition, 
prior to the Hybrid Market, all orders were handled by the specialist. 
The Hybrid Market has reduced the situations in which specialists' have 
the ability to see and interact with orders. Furthermore, in the Hybrid 
Market Floor brokers and customers not only have the ability to see 
limit orders above and below the current market price, but may also 
interact with those orders directly without the involvement of the 
specialist. These factors combined significantly reduce the time and 
place advantage enjoyed by specialists.
    Amendments to these rules are required to enable specialists to 
adapt more quickly and flexibly to changing market conditions in an 
environment of rapid quote changes and sub-second executions. The 
amendments also recognize that specialists have fewer opportunities to 
control the price of or dominate the market in a security, particularly 
liquid securities or active trading situations. The amendments also 
reflect the inability to use ``tick'' tests effectively in a fast 
moving market. Increased transparency, improved technology and better 
surveillance have lessened the need for a tick test. The Commission has 
already recognized that `` * * * as trading volume increases, it 
becomes less likely that a trader would be able to cost-effectively 
manipulate the price of a security. Further, the high levels of 
transparency and surveillance for actively-traded securities on 
exchanges and other regulated markets make it more likely that any 
manipulation would be detected and pursued.'' \5\
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    \5\ See Securities Exchange Act Release No. 48709 (October 28, 
2003), 68 FR 62972 (November 6, 2003).
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    As such, the amendments, discussed below, provide specialists with 
added flexibility to trade at or between the quote, especially when 
establishing or increasing a position. With respect to specialist 
trading with the Exchange quotation (``hitting bids/taking offers''), 
the proposed amendments reflect the view that more liberal trading 
ability is appropriate for active stocks, such as those comprising the 
S&P 500 Index, while for other securities, the existing rules should 
remain in effect, at least until the Exchange has had an ability to 
assess these rules in the context of Phase 3 of the Hybrid Market.\6\ 
The Exchange believes that the proposed amendments will give 
specialists the tools they require in order to meet their affirmative 
obligation to maintain a fair and orderly market and step in during 
moments of market volatility in the faster more electronic oriented 
Hybrid Market. The proposed amendments will benefit the investing 
public by offering yet another avenue for order execution. Accordingly, 
the Exchange proposes that the amendments set forth in this filing be 
approved. The Exchange further proposes that the amendments to NYSE 
Rule 104.10(6) be approved as a pilot to commence following Commission 
approval and end on June 30, 2007.
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    \6\ Phase 3, which is scheduled to begin on or about October 6, 
2006, will implement most of the provisions approved by the SEC on 
March 22, 2006, including elimination of restrictions on the 
availability of automatic executions.
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Current Stabilization Rules

    NYSE Rule 104.10(5) sets forth the specialist's stabilization 
obligations with respect to trading as dealer in the stocks in which he 
or she is registered. The rule requires that the specialist's trading 
meets the test of reasonable

[[Page 57015]]

necessity and, unless it is to render the specialist's position in a 
stock adequate for current or anticipated needs of the market, a 
specialist should not effect a non-stabilizing transaction (i.e., a 
transaction with the trend of price movement) for the specialist's 
account when acquiring or increasing a position. In this regard, the 
rule restricts specialists from purchasing stock at a price above the 
last sale (in the same trading session) and purchasing more than 50% of 
the stock offered on a ``zero plus tick,'' i.e. at the same price as 
the last sale, when such last sale price was higher than the previous, 
differently priced sale in the stock on the Exchange. Specialists are 
permitted to effect these types of transactions with Floor Official 
approval or in less active markets where they are an essential part of 
a proper course of dealings and where the amount of stock and price 
change (if any) are normal in relation to the market, provided, they 
reoffer or rebid as necessary after effecting such trades.
    NYSE Rule 104.10(6) sets forth the specialist's stabilization 
requirements when liquidating or reducing a position. This rule 
provides that such trades should be effected in a reasonable and 
orderly manner, in relation to the condition of the general market, the 
market in the particular security and the adequacy of the specialist's 
position to meet the immediate and anticipated needs of the market in 
the security. Specialists are permitted to liquidate or reduce a 
position by selling stock on a ``direct minus tick,'' i.e. selling 
stock at a price lower than the price of the last sale on the Exchange 
or by purchasing stock on a ``direct plus tick,'' i.e. at a price 
higher than the price of the last sale on the Exchange, if such 
transaction is reasonably necessary and the specialist has obtained 
Floor Official approval; there are no size limitations to such trades. 
After such transactions (including sales on ``zero minus ticks'' and 
purchases on ``zero plus ticks''), specialists are required to re-enter 
the market on the opposite side in an appropriate amount, where the 
imbalance of supply and demand indicates that immediately succeeding 
transactions may result in lower (following specialist's sale) or 
higher (following specialist's purchase) prices.\7\
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    \7\ The Floor Official approval requirements in NYSE Rules 
104.10(5) and (6) do not apply to trading in securities commonly 
referred to as exchange-traded funds or ETFs. See NYSE Rule 
104.10(7).
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Amended Stabilization Rules

    The proposed changes to the stabilization rules retain the 
requirement that specialist dealings be reasonably necessary for the 
maintenance of a fair and orderly market and that transactions with the 
trend of the market be accompanied by appropriate re-entry on the 
opposite side. However, these changes move away from defining 
stabilization in terms of the last sale to focus on market conditions, 
the type of trade in question and the specialist's existing position.
    The proposed rule defines four types of transactions--``Neutral,'' 
``Non-Conditional,'' ``Conditional,'' and ``Prohibited.'' Neutral 
Transactions are discussed in proposed NYSE Rule 104.10(5)(i)(a)(I). 
The rule defines a Neutral transaction as a purchase or sale by which a 
specialist liquidates or decreases a position. Neutral Transactions may 
be made without restriction as to price. This is similar to what the 
current rule permits today, but eliminates the requirement for Floor 
Official approval in situations where the transaction is a sale on a 
direct minus tick or a purchase on a direct plus tick. This recognizes 
that ticks no longer provide useful benchmarks in a rapidly changing 
market while retaining the specialists' obligation to make an 
assessment to ensure the reasonable necessity of such transactions. It 
further acknowledges that added flexibility is justified when 
specialists are liquidating or reducing a position because the 
specialists are adding liquidity to the market.
    Re-entry on the opposite side of the market is not required merely 
as a result of the specialist engaging in one or more Neutral 
Transactions, but may be necessary in order for the specialist to meet 
its affirmative obligation to maintain a fair and orderly market.
    Proposed NYSE Rule 104.10(5)(i)(a)(II) discusses Non-Conditional 
Transactions. Non-Conditional Transactions are defined as certain 
specialist bids or purchases and offers or sales that establish or 
increase a position. Proposed NYSE Rule 104.10(5)(i)(a)(II)(b) sets 
forth seven types of Non-Conditional Transactions (items (i) through 
(vii)). The first two types of Non-Conditional Transactions (items (i) 
and (ii)) are allowed without restriction under the current rule and 
have not been changed. Each of these types of transactions may be 
effected without restriction as to price or the need for Floor Official 
approval:
    (i) Match another market's better bid or offer;
    (ii) Bring the price of a security into parity with an underlying 
or related security or asset;
    (iii) Add size to an independently established bid or offer on the 
Exchange;
    (iv) Purchase at the published bid on the Exchange;
    (v) Sell at the published offer on the Exchange;
    (vi) Purchase or sell at a price between the Exchange published bid 
and published offer; or
    (vii) Purchase below the published bid or sell above the published 
offer on the Exchange (during a ``sweep'' for example).
    As with Neutral Transactions, the amended rule reflects that in 
circumstances where the specialist is not reaching across the market to 
trade with the Exchange bid or offer,\8\ they should have more 
flexibility in the types of transactions they can effect, especially as 
such transactions must be reasonably necessary. Similarly, because in 
most of the instances, an independent source establishes the price of 
the allowable transactions, the concerns that a specialist may be 
``leading the market'' are diminished. In these instances, specialists 
are reacting to a price that is established by market forces beyond the 
specialists' control that is information that is readily available to 
all market participants. In the other instances, the specialist is 
buying at the bid price (selling at the offer price) or trading between 
the quotes that also do not raise significant concerns about price 
control.
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    \8\ The requirements governing specialist trading that reaches 
across the market when establishing or increasing a position are 
discussed below and depend on whether the security in question is 
``active.''
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    Re-entry on the opposite side of the market is not required as a 
result of the specialist engaging in one or more Non-Conditional 
Transactions, but may be required in order for the specialist to meet 
its affirmative obligation to maintain a fair and orderly market. Where 
such re-entry is necessary, it should be commensurate with the size of 
the specialist's transactions and the immediate and anticipated needs 
of the market.
    Whereas the provisions related to Neutral and Non-Conditional 
Transactions discussed above apply to specialist trading in all NYSE 
securities, Conditional Transactions relate only to specialist 
transactions in ``active'' securities.
    Proposed NYSE Rule 104.10(6) governs Conditional Transactions. 
Proposed Rule 104.10(6)(i) defines ``active'' securities as:
    (a) Securities comprising the S&P 500[supreg] Stock Index;
    (b) Securities trading on the Exchange during the first five 
trading days following their initial public offering; and

[[Page 57016]]

    (c) Securities that have been designated as ``active'' by a Floor 
Official.
    The proposed rule further describes the process governing Floor 
Official designation of a security as ``active.'' The process includes, 
among other things, the Floor Official's determination that the 
security in question has exhibited substantially greater than normal 
trading volume and is likely to continue to sustain such higher volume 
during the remainder of the trading session. The Floor Official's 
determination that a security should be considered ``active'' lasts 
only for the trading session on the particular day it is determined. 
While the security may be designated ``active'' on subsequent days, 
such determinations must be made based on its trading characteristics 
that day. The rule also requires the Floor Official to notify the 
Market Surveillance Division of NYSE Regulation, Inc. whenever he or 
she designates a security as ``active'' and requires the specialist and 
Floor Official to create and maintain such documentation regarding the 
security as the Exchange may require.
    Conditional Transactions are defined as specialist trades in 
``active'' securities that establish or increase a position by reaching 
across the market to trade with the Exchange published bid (in the case 
of a specialist's sale) or offer (in the case of a specialist's 
purchase) when such bid or offer (as relevant) is priced above the last 
differently-priced trade and the last differently-priced published bid 
or offer (as relevant) on the Exchange.
    Conditional Transactions may be made without restriction as to 
price, provided they are followed by appropriate re-entry on the 
opposite side of the market commensurate with the size of the 
specialist's transaction.
    To help specialists to determine appropriate re-entry points after 
one or more Conditional Transactions, the Exchange will periodically 
issue guidelines, called ``Price Participation Points'' (``PPPs'') that 
identify the price at or before which a specialist is expected to re-
enter the market after effecting one or more Conditional Transactions. 
PPPs are minimum guidelines only and compliance with them does not 
guarantee that a specialist is meeting its obligations.\9\
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    \9\ See proposed NYSE Rule 104.10(6)(iv)(a).
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    Certain situations require immediate re-entry after one or more 
Conditional Transactions, regardless of the PPP; that is, re-entry 
should occur as the specialist's next available quoting or trading 
action. For example, immediate re-entry may be required based on the 
price and/or volume of the specialist's Conditional Transaction(s) in 
reference to the market in the security at the time of such trading. 
The fact that there may have been one or more independent trades 
following the specialist's Conditional Transaction does not, by itself, 
eliminate the need for immediate re-entry, when otherwise appropriate. 
In addition, immediate re-entry is required after a Conditional 
Transaction of: (a) 10,000 shares or more or a quantity of stock with a 
market value of $200,000 or more; and (b) which exceeds 50% of the 
published bid or offer size (as relevant).\10\
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    \10\ See proposed NYSE Rule 104.10(6)(iv)(c)(I) and (II).
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    The Exchange believes that the provisions governing Conditional 
Transactions appropriately balance the need of specialists to have more 
flexibility in trading in fast moving markets with the traditional 
requirements governing their non-stabilizing trading. In addition, 
these provisions recognize that with respect to securities that are 
``active'' as defined in the rule, the specialist has little 
opportunity to drive price movements in the security.
    Specialist transactions in ``inactive'' securities (i.e., 
securities that are not covered by the definition of ``active'' 
securities) that reach across the market to trade with the existing bid 
or offer when the specialist is establishing or increasing a position, 
continue to be governed by the requirements of current NYSE Rule 
104.10(5)(i), and are reflected in the re-numbered NYSE Rule 
104.10(5)(i)(b)(I). Proposed NYSE Rule 104.10(5)(i)(b)(I) reflects the 
current rule text, interpretation and practice on the Floor. While the 
Exchange believes that the structure of Neutral, Non-Conditional, 
Prohibited, and Conditional transactions is suitable for all securities 
with appropriate re-entry requirements, this proposed rule filing does 
not include that broad an amendment. The Exchange intends to review the 
trading in the inactive securities once Phase 3 of the Hybrid Market is 
implemented and will make any necessary filings related to this point 
after the completion of that review.
    Proposed amended NYSE Rule 104.10(5)(i)(b)(I) now covers the 
circumstances discussed in the current NYSE Rule 104.10(6)(i) which is 
proposed for deletion. The Exchange is further proposing to delete the 
following text from NYSE Rule 104.10(5)(i)(C): \11\
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    \11\ Telephone conversation between Deanna Logan, Director, 
NYSE, and Jan Woo, Attorney, Division of Market Regulation, 
Commission, on September 25, 2006 (clarifying the section of the 
NYSE Rules that is being deleted).
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    (C) failing to reoffer or rebid where necessary after effecting 
transactions described in (A) and (B) above.
    Transactions of these types, may, nevertheless, be effected with 
the approval of a Floor Official or in less active markets where they 
are an essential part of a proper course of dealings and where the 
amount of stock involved and the price change, if any, are normal in 
relation to the market.
    The transactions discussed in NYSE Rule 104.10(5)(i)(C) are by 
their nature, transactions in less active securities which make the 
discussion of less active markets redundant.\12\ Furthermore, the 
requirement that the specialist obtain Floor Official approval and 
reoffer or rebid where necessary are now incorporated in the first 
subparagraph of NYSE Rule 104.10(5)(i)(b)(I).
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    \12\ Id.
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    In addition, the proposed rule amendments provide that certain 
transactions are Prohibited: During the last ten minutes of trading, a 
specialist with a long position in a security is prohibited from making 
a purchase in such security that results in a new Exchange high for the 
day at the time of the specialist's transaction, and a specialist with 
a short position in a security is prohibited from making a sale in such 
security, including securities subject to the Regulation SHO Pilot (17 
CFR 240.202T), that results in a new Exchange low for the day at the 
time of the specialist's transaction. However, the specialist is 
permitted to effect such transaction in order to match another market's 
better bid or offer or to bring the price of the security into parity 
with an underlying or related security or asset. This reflects the 
possibility that such trading may unnecessarily influence the price of 
a security. The exemptions recognize that in those situations, an 
independent party, not the specialist, has set the price.
    Moreover, the Exchange seeks to delete current section (9) of 
current NYSE Rule 104.10 because it is no longer applicable given the 
proposed changes to the stabilization rules as described above. 
Further, the deletion of section (9) is consistent with the proposed 
re-definition of a Sweep Transaction.\13\ The proposed amendments 
further make clear that each trade at a separate price in a Sweep is 
viewed as a transaction with the published bid or offer for the 
purposes of the transactions that require

[[Page 57017]]

immediate re-entry pursuant to proposed NYSE Rule 
104.10(6)(iv)(c)(III).
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    \13\ See SR-NYSE-2006-65 (filed on August 23, 2006) including 
Amendment No. 1 thereto superseding the original filing in its 
entirety (filed on September 11, 2006).
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    Lastly, conforming changes to NYSE Rule 104.10 have been made 
consistent with the changes noted above, including necessary numbering 
changes to certain provisions and certain non-substantive language 
changes. For example, current NYSE Rule 104.10(6)(i)(D) which governs 
the ability of the Crowd to prevent the specialist, when liquidating or 
decreasing a position, from trading on parity with the Crowd during a 
manual transaction has been re-numbered NYSE Rule 
104.10(5)(i)(a)(I)(d). NYSE Rules 70 and 123 have been amended to 
reflect this provision's new rule number.
    The proposed amendments are intended to enhance the specialist's 
ability to effect transactions for its dealer account to provide 
support to the Hybrid Market. Under the proposed rule change 
specialists will, to a greater degree, be able to position themselves 
to provide more liquidity against the market trend and thus moderate 
volatility. The proposed amendments provide needed flexibility for 
specialists to better adapt to the new challenges of the Hybrid Market.
2. Statutory Basis
    The Exchange believes that the basis under the Act for this 
proposed rule change is the requirement under Section 6(b)(5) \14\ that 
an exchange have rules that are designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest.
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    \14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the NYSE consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the 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-2006-76 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2006-76. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the NYSE.
    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-2006-76 
and should be submitted on or before October 19, 2006. 

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. 06-8355 Filed 9-26-06; 10:59 am]

BILLING CODE 8010-01-P
