

[Federal Register: December 6, 2006 (Volume 71, Number 234)]
[Notices]               
[Page 70824-70831]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06de06-116]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54820; File No. SR-NYSE-2006-65]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Granting Approval of Proposed Rule Change and Amendment Nos. 1, 2, and 
3 Thereto and Notice of Filing and Order Granting Accelerated Approval 
of Amendment No. 5 Thereto Relating to Exchange Rules Governing Certain 
Definitions, Systemic Processing of Certain Orders, and the 
Implementation Schedule of the NYSE Hybrid Market

November 27, 2006.

I. Introduction

    On August 23, 2006, the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder, \2\ a 
proposed rule change to amend certain aspects of its Hybrid Market. On 
September 11, 2006, September 15, 2006, and September 26, 2006, the 
Exchange filed Amendment Nos. 1, 2, and 3 respectively. The proposed 
rule change, as amended, was published for comment in the Federal 
Register on September 29, 2006.\3\ On November 2, 2006, the Exchange 
filed Amendment No. 5 to the proposed rule change.\4\ The Commission 
received three comment letters from two commenters on the proposal.\5\ 
On November 2, 2006, the Exchange filed a response to the comment 
letters.\6\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 54520 (September 27, 
2006), 71 FR 57590. On November 1, 2006, the Exchange filed 
Amendment No. 4 to the proposed rule change and subsequently 
withdrew Amendment No. 4 on November 2, 2006 due to inaccurate 
exhibits.
    \4\ See Partial Amendment dated November 2, 2006 (``Amendment 
No. 5''). In Amendment No. 5, the Exchange: (1) Removed from 
Amendment No. 3 an incorrect exhibit of the proposed rule text; (2) 
reconciled the current rule text of the definition of an IOC Order 
as modified by a prior proposed rule change that designated 
Regulation NMS-compliant IOC orders; (3) corrected typographical 
errors in proposed NYSE Rules 60(e) and NYSE Rule 123F(b)(ii); (4) 
replaced the term ``NYSE Bonds'' with the term ``Automated Bond 
System'' in its rules; and (5) specified in NYSE Rule 1000 that the 
liquidity replenishment point (``LRP'') value would be calculated 
every 30 seconds. See also Securities Exchange Act Release No. 54611 
(October 16, 2006), 71 FR 62143 (October 23, 2006).
    \5\ See Letters from George Rutherfurd, Consultant, dated 
September 10, 2006 (``Rutherfurd Letter I'') and November 16, 2006 
(``Rutherfurd Letter II''), and Junius W. Peake, Monfort 
Distinguished Professor Emeritus of Finance, Greeley, Colorado, 
dated October 3, 2006 (``Peake Letter'').
    \6\ See Letter from Mary Yeager, Secretary, NYSE, to Nancy M. 
Morris, Secretary, Commission, dated November 2, 2006 (``Response to 
Comments'').
---------------------------------------------------------------------------

    This order approves the proposed rule change, as amended by 
Amendment Nos. 1, 2 and 3, and grants accelerated approval to Amendment 
No. 5. The Commission is also providing notice and soliciting comments 
on Amendment No. 5.

II. Description of Proposal

    On March 22, 2006, the Commission approved NYSE's proposal to 
establish a Hybrid Market.\7\ In this proposed rule change, the 
Exchange proposes to amend certain Hybrid Market rules and other NYSE 
rules to reflect their operation in the Hybrid Market.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 53539, 71 FR 16353 
(March 31, 2006) (``Hybrid Market Order'').
---------------------------------------------------------------------------

A. Order Types

1. Auto Ex Order
    The Exchange proposes to amend its definition of Auto Ex Order to 
clarify that an Auto Ex Order is an order that initiates an automatic 
execution immediately upon entry into Exchange systems.\8\ Accordingly, 
the Exchange also proposes to delete elected stop, stop limit orders, 
and CAP-DI orders from the Auto Ex Order definition as these orders do 
not initiate an automatic execution upon their entry on the Exchange. 
Further, the Exchange proposes to clarify that ``non-auto-ex'' orders, 
i.e., those orders that do not initiate an automatic execution 
immediately upon entry into NYSE systems, would participate in 
automatic executions in accordance with the rules governing their 
operation. Finally, the Exchange proposes to amend NYSE Rules 1000-1004 
to replace the term ``auto ex'' with the words ``automatically 
executing'' to reflect that such rules govern all automatic executions, 
not just those involving an Auto Ex Order.
---------------------------------------------------------------------------

    \8\ See proposed NYSE Rule 13 (``Auto Ex Order'').
---------------------------------------------------------------------------

2. Market Orders
    The current definition of an Auto Ex Order in NYSE Rule 13 includes 
a

[[Page 70825]]

``market order designated for automatic execution.'' The Exchange 
proposes to treat all market orders as Auto Ex Orders unless 
specifically designated to be handled in the auction market as Auction 
Market Orders. A market order, therefore, would no longer need to be 
designated for automatic execution.
3. Maximum Size
    In the Hybrid Market, NYSE eliminated the size limitation for Auto 
Ex Orders. NYSE systems, however, have a maximum order capacity of 
3,000,000 shares. Therefore, NYSE proposes to gradually increase the 
size of orders that may be entered for automatic execution to a maximum 
of 3,000,000 shares.\9\ The Exchange proposes to phase in the maximum 
order size eligibility for automatic executions, beginning with a 
maximum size of 1,000,000 shares. The Exchange also proposes to move 
the maximum order size limitation for automatic executions to NYSE Rule 
1000.\10\
---------------------------------------------------------------------------

    \9\ See proposed NYSE Rule 1000.
    \10\ The Exchange had implemented similar language as part of an 
extended auto-ex pilot in Lucent. See Securities Exchange Act 
Release No. 53791 (May 11, 2006), 71 FR 28732 (May 17, 2006) 
(``Lucent Pilot'').
---------------------------------------------------------------------------

4. Immediate or Cancel (``IOC'') Order
    In the Hybrid Market, the Exchange created two types of IOC 
orders.\11\ The first type is an IOC order that complies with 
Regulation NMS (``Reg. NMS'').\12\ A Reg. NMS IOC order would not be 
routed during an Exchange execution to satisfy better priced protected 
bids or offers \13\ displayed by other market centers; rather, a Reg. 
NMS IOC order would be cancelled, as soon as its ability to receive an 
execution on the Exchange ends. The second type of IOC order, an NYSE 
IOC order, would route during a sweep to other markets to satisfy 
better priced protected bids or offers and would cancel only when it is 
no longer able to receive an execution.
---------------------------------------------------------------------------

    \11\ See NYSE Rule 13.
    \12\ See Rule 600(b)(3), 17 CFR 242.600(b)(3).
    \13\ A protected bid and offer is defined in Rule 600(b)(57) of 
Reg. NMS. See 17 CFR 242.600(b)(57).
---------------------------------------------------------------------------

    The Exchange proposes to amend the definition of an NYSE IOC order 
to clarify that Exchange systems would accept NYSE IOC orders for 
participation in the re-opening trade after a trading halt.\14\ 
Specifically, NYSE IOC orders received during a trading halt would be 
systemically maintained in order of their receipt for execution upon 
the re-opening of the halted security. If an NYSE IOC order is not 
executed as part of the re-opening trade, the order would be cancelled.
---------------------------------------------------------------------------

    \14\ See proposed NYSE Rule 13.
---------------------------------------------------------------------------

B. Sweeps

    As approved in the Hybrid Market Order, an incoming Auto Ex Order 
of a size larger than the Exchange best bid or offer (``BBO'') would 
receive an execution at two prices--the BBO price and the ``clean-up'' 
price.\15\ The Exchange proposes to allow an automatically executing 
order to trade with all interest in the Display Book system at each 
successive price outside of the Exchange BBO.\16\ As proposed, an 
automatically executing order would trade with the Exchange BBO and at 
each successive price until the order is filled, its limit price (if 
any) is reached, an LRP is reached, or, in the case of a Reg. NMS IOC 
order, trading at a particular price on the Exchange would require 
cancellation because the order cannot be routed to another market 
center.\17\
---------------------------------------------------------------------------

    \15\ The ``clean-up'' price is the best price at which interest 
in the Display Book system can trade with an Auto Ex Order outside 
of the Exchange BBO. See NYSE Rule 1000(d)(iii).
    \16\ See proposed NYSE Rule 1000(d)(iii).
    \17\ See proposed NYSE Rule 1000(d)(ii)(C).
---------------------------------------------------------------------------

    During a sweep, floor broker e-Quotes trade on parity with orders 
in the Book at the clean-up price, but only to the extent of the size 
the floor broker designated as displayable should the price become the 
NYSE BBO.\18\ The size that would have been placed in reserve would 
yield to orders in the Book.\19\ The Exchange proposes to eliminate 
this distinction and allow all floor broker agency interest to trade on 
parity, once the order with priority has been satisfied, with orders in 
the Book at each successive price during a sweep.
---------------------------------------------------------------------------

    \18\ See NYSE Rule 70.20(d)(i).
    \19\ See NYSE Rule 70.20(d)(ii).
---------------------------------------------------------------------------

    The Exchange also proposes to clarify how and when CAP-DI orders 
would participate in sweeps. Specifically, CAP-DI orders on the same 
side as an automatically executing order would be elected at each 
execution price that is part of the sweep.\20\ To the extent that the 
sweeping order has volume remaining to be executed, the elected CAP-DI 
orders would not participate in a transaction and would automatically 
and systemically be unelected.\21\ If, at the last execution price 
during a sweep, the sweeping order is filled or is otherwise unable to 
continue executing, and there is contra side volume remaining on the 
Display Book system or from contra-side elected CAP-DI orders, then the 
same-side CAP-DI orders may participate in the final transaction.\22\
---------------------------------------------------------------------------

    \20\ See proposed NYSE Rule 123A.30(a)(ii).
    \21\ See proposed NYSE Rule 123A.30(a)(ii).
    \22\ See proposed NYSE Rule 123A.30(a)(ii).
---------------------------------------------------------------------------

    CAP-DI orders on the contra side of the sweeping order are also 
elected at each execution price that is part of the sweep and would 
participate at the electing price, if there is volume available from 
the sweeping order on the Display Book system or from CAP-DI orders on 
the same side of the market as the sweeping order.\23\
---------------------------------------------------------------------------

    \23\ See proposed NYSE Rule 123A.30(a)(iv).
---------------------------------------------------------------------------

C. Liquidity Replenishment Points

    The Exchange proposes to delete the two types of LRPs it proposed 
to implement, and replace them with a single LRP. The proposed LRP 
would be calculated by adding and subtracting a value (determined by 
the Exchange) to the last sale price.\24\ The LRP value would not 
change during the day, and the Exchange would disseminate the LRP 
value.\25\ According to the Exchange, the LRP value would be based on 
an examination of trading data and would vary based on the security's 
NYSE average daily volume (``ADV''), price, and volatility. The 
Exchange proposes a range of LRP values for securities with preset 
characteristics of ADV, price, and volatility.\26\ The LRP would not be 
calculated until there is a trade on the Exchange in a particular 
security.\27\ If a security opens on a quote, and there are no trades 
on the Exchange, the LRP value would not be set until there is a trade.
---------------------------------------------------------------------------

    \24\ See proposed NYSE Rule 1000(a)(iv).
    \25\ See proposed NYSE Rule 1000(a)(iv).
    \26\ See proposed NYSE Rule 1000(a)(iv).
    \27\ See proposed NYSE Rule 1000(a)(iv).
---------------------------------------------------------------------------

    The LRP value would be calculated automatically throughout the day, 
as follows: (1) Every 30 seconds throughout the day; (2) after a manual 
trade by the specialist; and (3) when automatic executions resume after 
an LRP has been reached.\28\
---------------------------------------------------------------------------

    \28\ See proposed NYSE Rule 1000(a)(iv).
---------------------------------------------------------------------------

    Further, the Exchange proposes to change when automatic executions 
and Autoquote would resume after an LRP has been reached. The Exchange 
proposes that automatic executions and Autoquote would resume as soon 
as possible after an LRP has been reached, but in no more than five to 
ten seconds, unless the residual is able to trade at a price beyond the 
LRP, and the price creates a locked or crossed market.\29\ In such 
case, automatic executions would resume with a manual transaction.\30\ 
Finally, the Exchange proposes to make

[[Page 70826]]

conforming changes to other Exchange rules.\31\
---------------------------------------------------------------------------

    \29\ See NYSE Rules 60(e)(ii) and 1000(b).
    \30\ See NYSE Rules 60(e)(ii) and 1000(b).
    \31\ See proposed NYSE Rules 60(e)(C)(iii), 60(e)(C)(iv), 
60(d)(i) and (ii), 72(j)(i) and (j)(ii), and 1000(c).
---------------------------------------------------------------------------

D. Stop Order and Stop Limit Order

    The Exchange proposes to modify how stop orders are handled and 
processed on the Exchange. Specifically, the Exchange proposes that 
specialists would no longer have access to information about stop 
orders. In addition, the Exchange proposes to no longer accept stop 
limit orders.
1. Processing of Stop Orders
    Currently, stop orders are entered on the Exchange primarily 
through SuperDOT \32\ and routed directly to the Display Book system, 
where they reside awaiting election. The specialist assigned to each 
security knows the prices at which stop orders would be elected and 
their sizes. Because the specialist has access to this information that 
is not available to other market participants, NYSE Rule 123A.40 
requires that, in certain circumstances described below, the specialist 
must guarantee the execution of elected stop orders at the electing 
price.
---------------------------------------------------------------------------

    \32\ SuperDot is an electronic order-routing system used by NYSE 
member firms to send market and limit orders to the NYSE.
---------------------------------------------------------------------------

    The Exchange proposes to restrict the ability of specialists and 
their systems employing algorithms (``specialist algorithms'') to view 
information regarding stop orders. Specialists would no longer view the 
electing price and size of stop orders, nor possess any unique 
information regarding stop orders. Stop orders would be maintained in a 
``blind file'' in the sequence of their receipt. When a transaction on 
the Exchange results in the election of a stop order, the elected stop 
order would be sent as a market order to the Display Book system and 
the specialist algorithms, and would be handled in the same way as any 
other market order.
    The Exchange also proposes to modify its opening and closing 
procedures to reflect that specialists would no longer have access to 
stop order volume that would be elected by the opening or closing 
transaction. Currently, the specialist calculates the opening price 
based in part on the stop order volume that would be elected by the 
opening trade.\33\ On the close, the specialist calculates the closing 
price based in part on the stop order volume that would be elected and 
the volume of buy and sell market-at-the-close/limit-at-the-close 
(``MOC/LOC'') \34\ orders that would be executed as a result of the 
closing price.\35\
---------------------------------------------------------------------------

    \33\ See, e.g., NYSE Rule 123D.
    \34\ MOC order is a market order, which is to be executed in its 
entirety at the closing price, on the Exchange, of the stock named 
in the order, and if not so executed, is to be treated as cancelled. 
A LOC order is a limit order, which may or may not receive execution 
on the close depending on the closing price and depth of contra side 
interest. The term ``at the close order'' also includes a limit 
order that is entered for execution at the closing price, on the 
Exchange, of the stock named in the order, pursuant to such 
procedures as the Exchange may from time to time establish.
    \35\ See, e.g., NYSE Rule 116.40.
---------------------------------------------------------------------------

    The Exchange proposes that at the open, the specialist or his or 
her trading assistants would indicate to Exchange system the price at 
which the specialist contemplates opening the stock. The Exchange 
system then would calculate the volume of shares available for 
execution on the open at that price, including stop orders that would 
be elected by an execution at such price. There would be no indication 
what, if any, portion of the total volume accounts for stop orders. 
There would only be one opening print and would include stop orders 
that are elected by the opening trade.
    Similarly, prior to the close, the Exchange proposes that the 
specialist or his or her trading assistants would indicate to Exchange 
system the price at which the specialist is contemplating closing the 
stock. In turn, Exchange system would calculate the volume of shares 
executable on the close at that price, including stop order volume that 
would be elected by an execution at that price. There would be no 
indication what, if any, portion of the total volume accounts for stop 
orders. The unelected stop orders would only be included in the total 
volume of shares available to trade on the close five minutes prior to 
the close.
    The Exchange proposes to add NYSE Rule 115A.10 and NYSE Rule 116.50 
to prohibit specialists, trading assistants, and anyone on their behalf 
from using the opening and closing process in a manner designed to 
inappropriately discover information about unelected stop orders.\36\
---------------------------------------------------------------------------

    \36\ The proposed opening and closing processes for stop order 
handling are not available intraday; therefore, during the trading 
day, it is not possible for these processes to be employed in a 
manner designed to inappropriately discover information about 
unelected stop orders.
---------------------------------------------------------------------------

2. Elimination of Specialist's Guarantee and Floor Official Approval
    Currently, NYSE Rule 123A.40 prohibits a specialist from making a 
transaction for his own account in a stock in which he is registered 
that would result in putting into effect any stop orders he may have on 
his book. However, a specialist may be party to the election of a stop 
order only: (i) When his bid or offer has the effect of bettering the 
market, when he guarantees that the stop order will be executed at the 
same price as the electing sale, and with Floor Official approval if 
the transaction is more than 0.10 point away from the prior 
transaction; or (ii) when the specialist purchases or sells stock for 
his own account solely for the purpose of facilitating completion of a 
member's order at a single price, where the depth of the current bid or 
offer is not sufficient to do so. When the specialist is acting in this 
manner, he shall not be required to guarantee that the stop order will 
be executed at the same price as the electing sale. In addition, 
current NYSE Rule 13.30, which applies to stop orders in Investment 
Company units, requires a specialist to obtain Floor Official approval 
prior to making a bid or offer for its proprietary account that would 
elect a stop order and is more than 0.10 point away from the last sale.
    Because specialists will no longer be privy to information about 
stop orders, the Exchange proposes to eliminate the requirement that 
specialists guarantee the execution price of stop orders elected by 
their trades and the requirement that they receive Floor Official 
approval for certain proprietary quotes and trades.
3. Floor Broker Stop Order Processing
    Under the proposal, floor brokers would continue to be permitted to 
represent stop orders. However, the Exchange proposes that stop orders 
represented by floor brokers in the Crowd may not be included in e-
Quote.\37\
---------------------------------------------------------------------------

    \37\ See proposed NYSE Rule 70.20(a)(i).
---------------------------------------------------------------------------

4. Elimination of Stop Limit Orders
    Finally, the Exchange proposes to eliminate stop limit orders as an 
acceptable order type. The Exchange proposes to make conforming changes 
to other Exchange rules to reflect the elimination of stop limit 
orders.\38\
---------------------------------------------------------------------------

    \38\ See proposed NYSE Rules 13, 118(2), 123(e)(7), 123(f), 
132B(a)(9), 132B(b)(9), and 476A.
---------------------------------------------------------------------------

E. Other Changes

1. Autoquote
    Currently, when Autoquote is suspended due to a gap quote, NYSE 
Rule 60(e)(iv)(C) provides that Autoquote would continue to update the 
NYSE BBO in certain situations.\39\ According to the Exchange, however, 
Autoquote does not continue to update

[[Page 70827]]

the BBO when NYSE has a gapped quote. Thus, the Exchange proposes to 
amend its rule to provide that when the NYSE quote is gapped, Autoquote 
would be suspended on both sides of the market.\40\
---------------------------------------------------------------------------

    \39\ See NYSE Rule 60(e)(iv)(c).
    \40\ See proposed NYSE Rule 60(e)(iii)(c).
---------------------------------------------------------------------------

2. Exchange Crossing Rule
    The Exchange proposes to amend its Rule 76 to provide that it would 
not apply to automatic executions.\41\ Currently, when a member has an 
order to buy and an order to sell the same security, NYSE Rule 76 
requires that the member offer such security at a price which is higher 
than his bid by the minimum variation before making a transaction with 
himself to enable the Crowd to trade with the order at such price. 
Since automatic executions cannot accommodate verbal Crowd 
participation, the Exchange proposes to specify that NYSE Rule 76 only 
applies to manual transactions.
---------------------------------------------------------------------------

    \41\ See proposed NYSE Rule 76.
---------------------------------------------------------------------------

3. High Priced Securities
    The Exchange proposes to amend the definition of the price of high-
priced securities, which are not eligible for automatic executions, as 
the closing price of a security, or if the security did not trade, the 
closing bid price of the security on the Exchange on the immediate 
previous trading day, that is $1,000 or more.\42\ Currently, the 
Exchange considers securities with a closing price, or a closing bid 
price if the security did not trade, of $300 or more as high-priced.
---------------------------------------------------------------------------

    \42\ See proposed NYSE Rule 1000(a)(vi).
---------------------------------------------------------------------------

F. Hybrid Market Implementation Schedule

    The Exchange is in the process of implementing Phase 3 of the 
Hybrid Market. The Exchange proposes to amend the Phase 3 
implementation schedule \43\ to add the following additional features:
---------------------------------------------------------------------------

    \43\ See Hybrid Market Order, supra note 7.
---------------------------------------------------------------------------

     Elimination of Direct+ suspension when a better bid or 
offer is displayed by another market center;
     Implementation of sweeps (as redefined herein);
     Implementation of the LRP (as redefined herein); and
     Implementation of new stop order processing (as discussed 
herein).

Exchange Rule 1002 (``Availability of Automatic Execution Feature'') 
would be available for all stocks through the close upon implementation 
of Phase 3 of the Hybrid Market.

IV. Summary of Comments and NYSE's Response

    The Commission received three comment letters from two commenters 
on the proposed rule change,\44\ and the Exchange filed the Response to 
Comments.\45\ One commenter continued to reiterate his objections to 
the NYSE's Hybrid Market,\46\ many of which relate to aspects of the 
Hybrid Market that the Commission has already approved.\47\ In the 
recent letters, the commenter raised objections to two aspects of the 
current proposal--the processing of stop orders and the proposed sweep 
methodology.
---------------------------------------------------------------------------

    \44\ See supra note 5. One commenter raised concerns with 
respect to floor brokers' ability to enter discretionary 
instructions with regard to orders they represent. See Peake Letter. 
The Commission considered the issues raised by the commenter in its 
order approving the floor broker's ability to enter discretionary 
instructions. See Securities Exchange Act Release No. 54577 (October 
5, 2006), 71 FR 60208 (October 12, 2006) (``d-Quote Order'').
    \45\ See supra note 6.
    \46\ See Rutherfurd Letters I and II, supra note 5.
    \47\ For example, the commenter continues to object to 
specialists' ability to trade in the Hybrid Market.
---------------------------------------------------------------------------

    With regard to the proposed stop order processing, the commenter 
noted that the proposal to remove a specialist's ability to see stop 
orders minimizes the specialist's ability to improperly elect and then 
trade with stop orders. The commenter, however, believes that 
specialists have an exclusive ability to trade with elected stops in 
the Hybrid Market. The commenter believes that because the specialist 
algorithms will receive information about elected stops, which will be 
routed to the Display Book system as market orders, the specialists 
would also be provided with an opportunity to trade with these orders 
before other market participants. The commenter argues that the 
specialist's ability to algorithmically trade with elected stop orders 
before other market participants would violate the specialist's 
negative obligation. NYSE noted that the commenter's belief was 
erroneous and that specialists do not have an exclusive ability to 
trade with elected stops.
    The commenter also argues that the Exchange needs to discuss the 
proposed stop order processing with the elimination of the specialist 
guarantee in the context of the affirmative and negative obligations of 
the specialists. The commenter argues that the specialist guarantee 
provides a benefit to the market by minimizing price dislocation that 
may result from an influx of elected stop orders into the market. 
Absent the specialist guarantee, the elected stop orders may trade at a 
price away from the last sale that may be precluded under current 
Exchange rules, which could add to market volatility. NYSE responded 
that the reason the specialist is required to guarantee the price of 
execution for certain elected stops is due to its access to information 
about the stop orders that would be executed by its proprietary trade. 
Since the specialists would no longer have access to electing price and 
size information for stop orders, the reason for the price guarantee 
would no longer exist and thus should be eliminated. The Exchange 
argued that eliminating the specialist's knowledge of information about 
these orders would create a more even playing field for market 
participants in the Hybrid Market, and as the commenter has 
acknowledged, would reduce the possibility of the specialists having a 
trading advantage or a conflict of interest.
    With respect to the sweeps, the commenter raises several issues. 
First, the commenter argues that the proposed sweep methodology is 
fundamentally unfair to orders in the Book because they must split 
executions with undisplayed e-Quotes. The commenter states that floor 
brokers are given a competitive advantage because they can enter their 
automated orders with full knowledge of limit orders in the Book, while 
public customers do not have similar knowledge about floor brokers' 
agency interest outside the BBO. The commenter believes that this is 
unfair, as public customers are not provided an opportunity to set 
their limit orders taking into account interest in the floor broker 
agency interest files.
    Second, the commenter argues that the Exchange's parity rules are 
unfair to the Book because the commenter believes that each individual 
order represented in the floor broker agency interest file is entitled 
to a split.\48\ Third, the commenter argues that the Book should be 
executed in price and time priority, and that non-displayed floor 
broker agency interest should be executed after displayed orders in the 
Book. The commenter argues that orders in the Book attract liquidity, 
and they should be executed ahead of non-displayed orders.\49\
---------------------------------------------------------------------------

    \48\ The Commission notes that the commenter is unclear as to 
whether he believes that each individual order that is represented 
by a floor broker and placed in the agency interest file gets a 
split, or if the commenter believes that each individual floor 
broker agency interest file, that may include multiple customers, 
gets a split. Under NYSE's Hybrid Market rules, the latter is the 
correct way parity splits are determined.
    \49\ The Commission notes that the commenter also argued that 
specialist interest should not be able to trade on parity with floor 
broker agency interest. The commenter continues to argue that this 
is inconsistent with Section 11A of the Act and the specialist's 
negative obligation. The Commission approved this aspect of the 
Hybrid Market, and NYSE has not proposed to change the approved 
parity rule in the instant proposed rule change. See Hybrid Market 
Order, supra note 7.

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

[[Page 70828]]

V. Discussion

    After careful review and consideration of the comments, 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.\50\ Specifically, the Commission finds that approval of the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act \51\ in that the proposal is designed to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \50\ 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).
    \51\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The adoption of the Hybrid Market has fundamentally altered NYSE's 
market structure to a predominately electronic market. As the Exchange 
continues to roll out the implementation phases of the Hybrid Market, 
it has also proposed changes to certain aspects of the Hybrid Market 
based on its experience and the various needs of its customers and 
members. As discussed more fully below, the Commission believes that 
the proposed changes to the Hybrid Market are consistent with the Act.

A. Changes to Order Types

    The Exchange proposes to amend the following order types: (1) Auto 
Ex Orders; (2) market orders; (3) Auction Market Orders; and (4) IOC 
Orders. First, with respect to Auto Ex Orders, the Exchange proposes to 
clarify that Auto Ex Orders are orders that initiate automatic 
executions immediately upon arrival into Exchange systems. The 
Commission finds that this change clarifies NYSE's rule by specifying 
how the orders NYSE accepts will be handled. Second, the Exchange 
proposes to consider all market orders as Auto Ex Orders and therefore 
would no longer need to require that they be specifically designated 
for automatic execution. The Commission finds this change could enhance 
automated access to liquidity on the Exchange, and facilitate the 
efficient execution of market orders on the Exchange. As a result of 
the change to market orders, NYSE also proposes to add a definition for 
Auction Market Orders for those market orders that are to be handled in 
the auction market. The Commission finds that this change is consistent 
with the Act because it provides investors with the option to seek 
price improvement through these orders. Third, the Exchange proposes to 
amend the definitions of IOC orders to identify Reg. NMS-compliant IOC 
orders and to amend the definition of an NYSE IOC order to clarify that 
Exchange systems will accept NYSE IOC orders for participation in the 
re-opening trade after a trading halt. The Commission finds that these 
changes are consistent with the Act because they clarify how these 
orders will be handled. Finally, the Exchange proposes to gradually 
increase its order size eligibility for automatic executions to a 
maximum size of 3,000,000 shares. The Commission finds that this 
proposal is consistent with the Act and reflects in NYSE's rules its 
systems limitations.

B. Sweeps

    The Exchange proposes to allow an Auto Ex Order to trade with all 
interest in the Display Book system at each successive price outside of 
the Exchange BBO instead of receiving an execution at the BBO price and 
the clean up price. The Exchange also proposes to allow all floor 
broker agency interest to trade on parity with orders in the Book at 
each successive price during a sweep. Further, the Exchange clarified 
the participation of CAP-DI orders during a sweep.
    One commenter objected to the floor broker's ability to trade on 
parity with the orders in the Book.\52\ Specifically, this commenter 
believed that non-displayed interest, such as the floor broker agency 
interest file, should yield to displayed orders in the Book. The 
commenter also believed that floor brokers have a competitive advantage 
over public customers because they can enter their agency interest with 
knowledge of orders in the Book, while public customers would not be 
aware of floor broker agency interest outside of the BBO.
---------------------------------------------------------------------------

    \52\ See Rutherfurd Letters I and II, supra note 5.
---------------------------------------------------------------------------

    The Commission notes that it has previously approved the Exchange's 
proposal to allow Auto Ex Orders to sweep the Display Book system in 
the Hybrid Market Order. In the Hybrid Market Order, the Commission 
noted that NYSE's proposal to allow Auto Ex Orders to sweep the Display 
Book system was a significant expansion of the availability and speed 
of automatic executions on the Exchange and should facilitate more 
efficient transactions on the Exchange. The Commission continues to 
believe that these execution efficiencies could result in the Hybrid 
Market. The Exchange stated that its customers indicated that they 
would not utilize the sweep functionality as originally approved.\53\ 
Accordingly, NYSE made the decision to amend its rule to allow incoming 
orders to trade at each price in the Display Book system. The 
Commission believes that the decision to make this change is consistent 
with the Act, and within the realm of business judgment typically left 
to individual markets.
---------------------------------------------------------------------------

    \53\ The Commission notes that commenters to the original Hybrid 
Market proposal raised this issue. See Hybrid Market Order, supra 
note 7.
---------------------------------------------------------------------------

    With respect to a floor broker's ability to maintain non-displayed 
interest that is available for execution, the Commission notes that it 
has not required complete disclosure of all trading interest, and that 
it has previously permitted the use of undisplayed order types. For 
example, in the auction market, floor brokers may hold significant 
trading interest that is not broadly disclosed but is available for 
execution and participation in a transaction on the Exchange. The 
Commission found in the Hybrid Market Order that e-Quotes could trade 
on parity with orders in the Book consistent with the requirements of 
the Act.\54\ While the Exchange now proposes, under the amended sweep 
functionality, to permit the full size of an e-Quote to trade on parity 
with orders in the Book at each successive price, the Commission 
continues to believe that NYSE's rules provide floor brokers with 
incentives to place liquidity in the Display Book system and 
effectively represent their customers' orders, and are consistent with 
the Act.\55\
---------------------------------------------------------------------------

    \54\ During a sweep in the current Hybrid Market, only e-Quotes 
that would be displayed if the price becomes the Exchange BBO would 
trade on parity with orders in the Book.
    \55\ Like in the auction market, each floor broker's e-Quote, 
which may reflect several customers' orders, would be considered one 
bidder/offerer, and the Book would likewise be considered one 
bidder/offerer. This aspect of NYSE's parity rule remains unchanged, 
and the Commission believes it continues to be consistent with the 
requirements of the Act.
---------------------------------------------------------------------------

    The commenter believes that e-Quotes should not be entitled to 
parity because floor brokers have the ability to change

[[Page 70829]]

the prices of their e-Quotes in response to information about orders in 
the Book, while public customers are not provided information about the 
floor brokers' interest outside the BBO. The Commission, however, notes 
that NYSE's proposal does not alter the information that is currently 
available to floor brokers or investors. Public customers entering 
limit orders have access to the same information as floor brokers 
regarding the Book, and can change their orders in response to that 
information. Floor brokers have information about their own customers' 
orders, as they always have had, but do not have information about 
other floor broker interest. Accordingly, the Commission does not 
believe that floor brokers have an inappropriate informational 
advantage.
    The Commission believes that exchanges have a certain degree of 
flexibility to determine the methods of order interaction on their 
markets so long as the requirements of the Act are met. Floor brokers 
represent customers that are also providing liquidity for execution. 
Floor brokers' customers often do not want their orders disclosed and 
rely on floor brokers to use their judgment to represent their 
interest. As noted above, the Commission has not required disclosure of 
this liquidity outside the BBO, and, in the auction market, orders 
represented by floor brokers have been entitled to parity with orders 
in the Book. Accordingly, the Commission finds that NYSE's proposal to 
allow floor broker agency interest to trade on parity at each 
successive price with orders in the Book during a sweep is consistent 
with the requirements of the Act.

C. Stop Orders

    Currently, the specialist acts as agent for stop orders and, as 
agent, has exclusive access to information about the election price and 
size of the stop orders. Because the specialist has exclusive access to 
this information, the Exchange requires the specialist, in certain 
situations, to guarantee the price of an elected stop order. The 
Exchange now proposes to modify the manner in which stop orders are 
handled and processed on NYSE by removing the specialist's access to 
information about stop orders, and eliminating the requirement that the 
specialist guarantee the stop order's election price in certain 
situations. In addition, NYSE proposes to eliminate the requirement 
that the specialist receive Floor Official approval of certain 
specialist proprietary trades that would elect stop orders. NYSE also 
proposes to modify its opening and closing procedures and eliminate 
stop limit orders as an order type on the Exchange.
    One commenter believed that, under the proposal, the specialist 
would have an exclusive ability to trade with elected stop orders since 
it would receive information about elected stop orders through the 
specialist algorithm prior to other market participants.\56\ This 
belief is incorrect. Specialists in the Hybrid Market can only trade 
algorithmically in certain specified instances that are set forth in 
NYSE Rule 104. Under the proposal, specialists and the specialist 
algorithm would be restricted from viewing information regarding the 
stop orders. Stop orders would instead be maintained in a ``blind 
file'' in the sequence of their receipt, and, once elected, the elected 
stop order would be sent by the Exchange system as a market order to 
the Display Book system. Information about the market order also would 
be sent to the specialist algorithm. The market order would be handled 
in the same manner as previously approved for market orders in the 
Hybrid Market. Accordingly, in order to trade against an incoming 
market order, the specialist algorithm would have to: (1) Provide 
``additional specialist volume'' to partially or completely fill the 
market order at the Exchange BBO; (2) match better bids and offers 
published by other market centers where automatic executions are 
immediately available; or (3) provide price improvement to the market 
order.\57\
---------------------------------------------------------------------------

    \56\ See Rutherfurd Letters I and II, supra note 5. In his 
second letter, the commenter stated that floor broker d-Quotes would 
not be able to trade against incoming market orders and that NYSE's 
rules provide that d-Quotes can only trade against published NYSE 
interest. The Commission notes that this statement is erroneous. 
NYSE Rule 70.25(b)(i) specifically states that ``[a] [f]loor broker 
may set a discretionary price range within the Exchange best bid and 
offer that specifies the prices at which they are willing to trade. 
This discretion will be used, as necessary, to initiate or 
participate in a trade with an incoming order capable of trading at 
a price within the discretionary price range'' (emphasis added). 
Accordingly, d-Quotes are capable of trading with incoming market 
orders, and specialists do not maintain an exclusive trading ability 
with incoming market orders.
    \57\ In order to provide price improvement, the specialist would 
have to be represented in the BBO in a significant size and would be 
required to provide a minimum amount of price improvement. See NYSE 
Rule 104(b).
---------------------------------------------------------------------------

    The commenter also argued that eliminating the guarantee implicates 
the specialist's affirmation obligation in that, without the specialist 
guarantee, elected stop orders could trade at a price away from the 
last sale and add to market volatility. The Commission finds it 
reasonable and appropriate that NYSE eliminate the specialist price 
guarantee when the specialist is a party to the election of stop 
orders, since specialists would no longer have information regarding 
the electing price and size of stop orders. With respect to the 
commenter's concern that removing the specialist price guarantee would 
necessarily impact the specialist's affirmative obligations, NYSE 
explained that the specialist price guarantee was a requirement 
originally put in place due to the specialist's ability to view the 
electing price and sizes of all stop orders in a stock, information 
that is not available to other market participants. Requiring the 
specialist to guarantee the price at which these orders are executed 
removed any incentives for the specialist to effect proprietary trades 
that would inappropriately elect stop orders. Accordingly, the Exchange 
believes that, since the specialists would no longer have access to 
electing price and size information for stop orders under this 
proposal, the reason for the price guarantee would no longer exist and 
thus should be eliminated. The Commission notes that a specialist in 
the Hybrid Market remains obligated to comply with NYSE Rule 104.10, 
which includes the maintenance, in so far as reasonably practicable, of 
a fair and orderly market. Under NYSE Rule 104.10(2), in connection 
with the maintenance of a fair and orderly market, a specialist should 
engage to a reasonable degree under existing circumstances in dealings 
for its own account when lack of price continuity, lack of depth, or 
disparity between supply and demand exists or is reasonably to be 
anticipated. The elimination of the specialist guarantee for executing 
certain elected stops at the electing price would not alter this 
affirmation obligation.
    The Commission also believes that eliminating the specialist's 
ability to view the prices at which stop orders would be elected and 
their sizes would minimize the specialist's unique informational 
advantage over other market participants with respect to stop orders. 
The Commission finds that the proposal would create a more level 
playing field for market participants in the Hybrid Market.
    The Exchange has proposed a reasonable method by which specialists 
can continue to effectively open and close the market by allowing 
specialists to query the system, at discrete times, to determine the 
total number of shares available for execution (including stop orders) 
at a proposed opening or closing price. NYSE has proposed to 
specifically prohibit in its rules specialists, trading assistants, and 
anyone on their behalf from using the amended opening and closing 
process

[[Page 70830]]

in a manner designed to inappropriately discover information about 
unelected stop orders. The Commission believes that the Exchange's 
enforcement of this provision and surveillance for its compliance will 
provide investors with additional protection against any remaining 
potential trading abuses related to the election and execution of stop 
orders.
    Similarly, because the specialist would no longer have access to 
information about stop orders, the Commission believes it is 
appropriate for NYSE to remove the requirement that the specialist 
obtain Floor Official approval prior to trading or making a bid or 
offer \58\ for its proprietary account that would elect a stop order 
and is more than 0.10 point away from the last sale.
---------------------------------------------------------------------------

    \58\ Stop orders in ETFs may be elected by a quote. See NYSE 
Rule 13.30.
---------------------------------------------------------------------------

    Finally, the Commission believes it is reasonable for NYSE to no 
longer accept the stop limit order type in Exchange systems given their 
infrequent use. Accordingly, the Commission finds it appropriate for 
NYSE to eliminate the definition and all references to stop limit 
orders from its rules.

D. Liquidity Replenishment Point

    The Exchange proposes to replace the two types of LRPs approved in 
the Hybrid Market Order--the sweep LRP and the momentum LRP--with a 
single LRP that would be calculated by adding and subtracting a value 
to the security's last sale price. NYSE proposes that the value would 
not change intraday and would be disseminated by the Exchange. The 
Exchange also proposes to change when Autoquote and automatic 
executions would resume after an LRP has been reached.
    The Commission believes that the proposed LRP changes are within 
the realm of business judgments generally left to the discretion of 
individual markets. The Commission has previously approved the 
Exchange's use of LRPs in its Hybrid Market model.\59\ The Commission 
believes that the proposal to change the calculation of the LRP is 
consistent with the requirements of the Act. By providing for a single 
LRP and simplifying its calculation, the Commission believes that the 
proposal may assist market participants in determining when automatic 
executions and Autoquote may be halted on the Exchange. The Commission 
also notes that the specific value ranges used to calculate the LRP 
have been incorporated into proposed NYSE Rule 1000(a)(iv) and that the 
LRP values will be disseminated by the Exchange.
---------------------------------------------------------------------------

    \59\ See Hybrid Market Order, supra note 7.
---------------------------------------------------------------------------

E. Other Changes

    Finally, the Exchange proposes to amend NYSE Rule 60 to indicate 
that Autoquote will not update the BBO when the quote has been gapped 
in accordance with Exchange procedures. The Commission notes that this 
proposed change to NYSE Rule 60 is consistent with NYSE Rule 79A.15 
regarding gapped quotes. The purpose of a gapped quote is to provide 
public notice of an order imbalance and to minimize short-term price 
dislocation associated with such imbalance by allowing for entry of 
offsetting orders or the cancellation of orders on the side of the 
imbalance. The Commission has previously found that NYSE rules do not 
have to require that both sides of its quote be updated to reflect 
better priced limit orders when the quote is gapped.\60\ The Commission 
continues to believe that it is consistent with the Act to disengage 
Autoquote when the quote is gapped to allow the specialist to 
disseminate an order imbalance.
---------------------------------------------------------------------------

    \60\ See Securities Exchange Act Release No. 39129 (September 
25, 1997), 62 FR 51497 (October 1, 1997).
---------------------------------------------------------------------------

    The Exchange also proposes to make clear that the crossing 
requirements in NYSE Rule 76 would only apply to manual transactions. 
The Commission finds it appropriate for NYSE to amend this rule to 
exclude automatic executions since they cannot accommodate verbal Crowd 
participation.
    Finally, the Exchange proposes to increase the dollar threshold for 
high-priced securities, which are not eligible for automatic 
executions, from $300 to $1,000. The Commission believes that 
increasing the dollar threshold for high-priced securities is 
consistent with the Act and could expand the eligibility of orders for 
automatic executions on the Exchange.

F. Hybrid Market Implementation Plan

    The Exchange proposes to alter the Hybrid Market implementation 
plan to add additional features to Phase 3. Specifically, NYSE proposes 
to implement the amended sweeps and LRP, original planned for Phase 4, 
earlier in Phase 3. In addition, the Exchange proposes to implement in 
Phase 3 the new stop order processing and eliminate Direct+ suspension 
when a better bid or offer is displayed by another market center. NYSE 
also proposes that Exchange Rule 1002 be available for all stocks 
through the close upon implementation of Phase 3.
    The Commission finds that the proposed changes to the Hybrid Market 
implementation plan are consistent with the Act. The Commission notes 
that it approved on a pilot basis for a limited number of securities 
the changes to the implementation plan, including the changes to NYSE 
rules proposed herein.\61\ The Exchange has represented that the 
implementation of Phase 3 has not incurred any significant problems to 
date.
---------------------------------------------------------------------------

    \61\See Securities Exchange Act Release Nos. 54578 (October 5, 
2006), 71 FR 60216 (October 12, 2006) and 54675 (October 31, 2006), 
71 FR 65019 (November 6, 2006).
---------------------------------------------------------------------------

VI. Accelerated Approval of Amendment No. 5

    The Commission finds good cause to accelerate approval of the 
changes in Amendment No. 5. prior to the thirtieth day after the 
amendment is published for comment in the Federal Register pursuant to 
Section 19(b)(2) of the Act \62\ for the reasons discussed below. In 
Amendment No. 5, NYSE proposes to: (1) Remove from Amendment No. 3 an 
incorrect exhibit of the proposed rule text; (2) reconcile the current 
rule text of the definition of an IOC Order as modified by a prior 
proposed rule change that designated Reg. NMS-compliant IOC orders; 
\63\ (3) correct typographical errors in proposed NYSE Rules 60(e) and 
123F(b)(ii); (4) correct the term ``NYSE Bonds'' that was used in the 
prior amendments to designate the automated system in which bonds trade 
and replace it with ``Automated Bond System'' in order to reflect the 
current name of the system and existing NYSE rule text; \64\ and (5) 
incorporate in NYSE Rule 1000 that the LRP value would be calculated 
every 30 seconds.
---------------------------------------------------------------------------

    \62\15 U.S.C. 78s(b)(2).
    \63\See Securities Exchange Act Release No. 54611, supra note 4.
    \64\See Securities Exchange Act Release No. 54615 (October 17, 
2006), 71 FR 62338 (October 24, 2006) (pending proposed rule change 
to rename the automated system in which bonds would trade as ``NYSE 
Bonds'').
---------------------------------------------------------------------------

    The Commission finds good cause to accelerate approval of NYSE's 
proposal to correct its exhibit of proposed rule text and the 
definition of an IOC Order, to make technical corrections in proposed 
NYSE Rules 60(e) and 123F(b)(ii), and to replace the term ``NYSE 
Bonds'' with ``Automated Bond System'' prior to the thirtieth day after 
publication in the Federal Register because it would accurately reflect 
NYSE's existing rule text and raises no new regulatory issues. In 
addition, the Commission finds good cause to accelerate approval of 
NYSE's proposal to incorporate in NYSE Rule 1000 the 30-second time 
period in which the LRP

[[Page 70831]]

would be calculated because it would codify into NYSE's rules the 
manner in which the LRP would be determined and provide clarity and 
specificity to its operation.

VII. Solicitation of Comments on Amendment No. 5

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 5, including whether such amendment 
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-2006-65 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-2006-65. 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-2006-65 and should be submitted on or before 
December 27, 2006.

VIII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\65\ that the proposed rule change (SR-NYSE-2006-65) and Amendment 
Nos. 1, 2, and 3, are approved and that Amendment No. 5 thereto is 
approved on an accelerated basis.
---------------------------------------------------------------------------

    \65\15 U.S.C. 78s(b)(2).
    \66\17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\66\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-20619 Filed 12-5-06; 8:45 am]

BILLING CODE 8011-01-P
