

[Federal Register: March 1, 2007 (Volume 72, Number 40)]
[Notices]               
[Page 9370-9371]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01mr07-118]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55337; File No. SR-NYSE-2006-04]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving Proposed Rule Change as Modified by Amendment Nos. 1 and 2 
Thereto Relating to NYSE Rule 116 (``Stop'' Constitutes Guarantee) and 
NYSE Rule 123B (Exchange Automated Order Routing Systems)

February 23, 2007.

I. Introduction

    On February 9, 2006, the New York Stock Exchange LLC (f/k/a New 
York Stock Exchange, Inc.) (``NYSE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ a proposal to amend NYSE 
Rule 116 (``Stop'' Constitutes Guarantee) and NYSE Rule 123B (Exchange 
Automated Order Routing Systems) regarding a specialist's ability to 
``stop'' stock and report such a transaction. On April 5, 2006, NYSE 
filed Amendment No. 1 to the proposed rule change. On September 8, 
2006, NYSE filed Amendment No. 2 to the proposed rule change. The 
proposed rule change was published for comment in the Federal Register 
on October 18, 2006.\3\ The Commission received one comment regarding 
the proposal.\4\ This order approves the proposed rule change, as 
modified by Amendment Nos. 1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 54592 (October 12, 
2006), 71 FR 61524.
    \4\ See letter from George Rutherfurd, Consultant, dated April 
24, 2006 to Commission's rule-comments e-mail.
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II. Description of the Proposal

    NYSE Rule 116 provides that an agreement by a member to ``stop'' 
stock at a specified price constitutes a guarantee of a purchase or 
sale by the member of the security at that price. Paragraph .30 in the 
Rule's Supplementary Material provides three circumstances in which a 
specialist may stop stock, including: (i) At the opening or reopening 
of trading in a stock; (ii) when a broker in the trading crowd is 
representing another order at the stop price; or (iii) when requested 
to by another member.\5\ The practice of stopping stock by specialists 
on the Exchange refers to a guarantee by a specialist that an order he 
or she receives will be executed at no worse a price than the contra 
side price in the market at the time the order was stopped, with the 
understanding that the order may in fact receive a better price.
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    \5\ A specialist may only stop stock when requested to by 
another member if certain other conditions are met. See Exchange 
Rule 116.30(3).
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    The Exchange proposes to remove the provisions in NYSE Rule 116.30 
that permit a specialist to ``stop'' stock. According to the Exchange, 
the practice of specialists stopping stock makes less sense in the 
Hybrid Market, primarily due to the dynamics of increased speed of 
trading and automated functioning of the market. The Exchange further 
stated that the procedures in NYSE Rule 116.30(3) for granting stops 
are not an efficient mechanism for seeking price improvement an 
automated market due to the time required to perform the current manual 
procedures.

III. Comment Summary

    The Commission received one comment letter on the proposal,\6\ to 
which NYSE has filed a response letter.\7\ In the comment letter, the 
commenter argued the proposal is not in the public interest because the 
Hybrid Market, and specifically NYSE's Auction Market and Auction Limit 
Orders, do not provide investors with the price improvement 
opportunities that the NYSE's auction market did. The commenter stated 
that he believed that specialists in the Hybrid Market have been 
relieved of

[[Page 9371]]

their responsibility to obtain price improvement for orders.
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    \6\ See note 4 supra.
    \7\ See letter from Mary Yeager, Assistant Secretary, NYSE, to 
Nancy M. Morris, Secretary, Commission, dated January 19, 2007.
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    In its response letter, NYSE noted that specialists are not 
currently obligated to stop stock and further noted that, in fact, 
specialists infrequently choose to stop stock. NYSE reiterated its 
belief that there are many opportunities for price improvement in the 
Hybrid Market and stated that specialists were not ``being relieved of 
their responsibility to obtain price improvement.'' The Exchange argued 
that it was eliminating a practice that its data showed was rarely 
used. The Exchange also argued that retaining the manual process for 
the specialist to stop stock would increase specialist risk if used.
    The commenter also asserted that NYSE could easily reprogram its 
systems to replicate electronically the manual practice of stopping 
stock. In response, NYSE disagreed, indicating that there are 
difficulties inherent in maintaining the stopping stock functionality 
amid systems designed to enable increased automatic executions. 
Further, NYSE argued that the decision to remove systemic support for 
stopped orders was based in part on data that showed that specialists 
do not stop stock frequently.

IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange \8\ and, in 
particular, the requirements of Section 6 of the Act.\9\ Specifically, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\10\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, 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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    \8\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
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    According to the Exchange, the practice of stopping stock by 
specialists is rarely used. Therefore, the Exchange decided that it 
would not develop an electronic, systemic process to support this 
little used, voluntary function. The Exchange also argued that 
retaining a manual process to stop stock in the Hybrid Market would be 
inefficient. Accordingly, the Commission finds that eliminating 
specialists' ability to stop stock is reasonable and consistent with 
the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-NYSE-2006-04), as modified 
by Amendment Nos. 1 and 2, be, and it hereby is approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-3556 Filed 2-28-07; 8:45 am]

BILLING CODE 8010-01-P
