

[Federal Register: September 6, 2007 (Volume 72, Number 172)]
[Notices]               
[Page 51287-51288]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06se07-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56337; File No. SR-NYSE-2007-78]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Institute a Revised System of Payments to Specialist Firms

August 29, 2007.
    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 August 28, 2007, the New York Stock Exchange LLC (``Exchange'' or 
``NYSE'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially 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 Exchange proposes to change its system of payments to 
specialist firms by aligning specialist firms' compensation with their 
performance. The text of the proposed rule change is available on the 
Exchange's Web site (http://www.nyse.com), at the Exchange's Office of 

the Secretary, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    On December 1, 2006, the Exchange instituted a six-month revenue 
sharing program for specialist firms \3\ in connection with the 
adoption of Exchange Rule 104B, which prohibits specialist firms from 
charging commissions.\4\ The program was subsequently extended for an 
additional three-month period ending August 31, 2007.\5\ The Exchange 
now proposes to replace the revenue sharing program with a system that 
provides variable payments to specialist firms for liquidity provision 
(``Liquidity Provision Payment'' or ``LPP'').
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    \3\ See Securities Exchange Act Release No. 54856 (December 1, 
2006); 71 FR 71215 (December 8, 2006) (SR-NYSE-2006-106).
    \4\ See Securities Exchange Act Release No. 54850 (November 30, 
2006); 71 FR 71217 (December 8, 2006) (SR-NYSE-2006-105).
    \5\ See Securities Exchange Act Release No. 55904 (June 13, 
2007), 72 FR 34054 (June 20, 2007) (SR-NYSE-2007-50).
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    LPPs will be based on two revenue sources in NYSE-listed securities 
(excluding exchange traded funds): (a) The Exchange's share of market 
data revenue derived from its quoting share; and (b) the Exchange's 
transaction fee revenue.
 a. Share of Market Data Revenue Derived From Its Quoting Share
    Pursuant to Regulation NMS,\6\ the Commission revised the formula 
for the distribution by the Consolidated Tape Association (``CTA'') of 
market data quote revenue in NYSE-listed securities (Network A) among 
the various markets (the ``Revenue Allocation Formula''). The Revenue 
Allocation Formula established a ``Quoting Share'' to reward markets 
that quote at the National Best Bid and Offer (``NBBO'').\7\ The 
Exchange proposes to base a portion of its total LPP to specialist 
firms on the actual revenue associated with its market data Quoting 
Share. The Exchange will use the actual CTA-derived results from the 
Revenue Allocation Formula's Security Income Allocation and Quoting 
Share components and determine its revenue associated from the Quoting 
Share on a symbol-by-symbol basis, which is then aggregated by 
specialist firms. The Exchange will then use the results to provide 
each specialist firm with their quoting component of the LPP payment. 
In effect, the Exchange will pass through to the specialist firm for 
each security all of the Quoting Share revenue associated with that 
security. The Exchange believes that this will provide an additional 
incentive to the specialist firms to post quotes more frequently at the 
NBBO and also to increase the size of the quote at the NBBO, as they 
will benefit directly from the related increase in the Exchange's 
Quoting Share revenue. The LPPs are consistent with the goal of the 
Revenue Allocation Formula to reward markets for quoting at the NBBO 
and to provide incentives to specialist firms for displaying 
significant liquidity at the best price.
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    \6\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
    \7\ See Regulation NMS Adopting Release at page 37568. Under 
Regulation NMS, a market's Quoting Share in a particular security is 
equal to: (1) 50% of the Security Income Allocation for the 
security, multiplied by (2) the applicable market's Quote Rating in 
the security. The Security Income Allocation is the method by which 
the total distributable revenues are allocated among the eligible 
securities. Revenues are allocated based on the square root of the 
dollar volume of trading in each security, capped at $4 per 
qualified transaction report to limit disproportionate allocations 
for inactively traded securities. A transaction report with a dollar 
volume of $5,000 or more constitutes one qualified report; 
transaction reports with dollar volumes of less than $5,000 are 
calculated as proportional fractions of qualified transaction 
reports. The Quote Rating represents a market's percentage of all 
best bids and best offers equaling the NBBO price during the year 
(``Quote Credits''). A market earns one Quote Credit for each second 
of time and dollar value of size that the market's automated best 
bid or best offer equals the NBBO price during regular trading hours 
without locking or crossing a previously displayed automated 
quotation. To qualify for credits, the quoted price must be 
displayed for at least one full second, and the relevant size is the 
minimum size that was displayed during the second. Transactions 
executed manually are excluded from the Revenue Allocation Formula 
and, thus, the market's manual quotes will not be entitled to earn 
any Quote Credits.
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 b. Transaction Fee Revenue
    The Exchange further proposes to create a payment pool (the ``LPP 
Pool'') consisting of the Exchange's NYSE-listed stock transaction 
revenue on matched volume (excluding crossing services) in both 
electronic and manually executed transactions to provide LPPs to the 
specialist firms. The LPP Pool size has been set at 25% of the above-
noted Exchange transaction revenue and this percentage may change if 
the Exchange adjusts its pricing and/or based on other conditions such 
as specialist performance, including liquidity-enhancing participation 
levels.\8\ The size of the LPP Pool will vary month-to-month as 
Exchange volume changes. Each individual specialist firm will be 
allocated a

[[Page 51288]]

portion of these revenues based exclusively on its trading performance 
in any month. Specialist firms' trading performance will be measured by 
the liquidity enhancing behavior that each specialist firm provides to 
the Exchange. In order to measure the liquidity enhancing behavior 
provided by the specialist firms, the Exchange will calculate each 
specialist firm's executed volume in four categories: (1) Price 
improvement; (2) size improvement; (3) providing liquidity from posting 
bids or offers on the book; and (4) matching better bids or offers 
published by other market centers to reduce client routing costs. 
Specialist trading activity that does not provide liquidity, for 
example Hit Bid/Take Offer, will not be valued in the allocation 
process. A specialist firm's allocation will increase if its 
performance as a liquidity provider improves relative to the other 
specialist firms. The allocation formula will weight specialist 
liquidity in a given security by a 0.75 exponential calculation and 
will then re-weight the resultant number for each security by 
multiplying it by the percentage representing the Exchange's regular-
hours market share in that security. As with the Commission's use of a 
square root calculation (0.50 exponential) in connection with the 
Revenue Allocation Formula, the 0.75 exponential calculation will 
provide additional weighting to less liquid stocks, but to a lesser 
degree than the square root weighting.
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    \8\ The Exchange states that it would file a rule filing with 
the Commission pursuant to the Act and the rules thereunder in 
relation to any such changes prior to their implementation.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the objectives of section 6 of the Act \9\ in general and furthers 
the objectives of section 6(b)(4) of the Act \10\ in particular, in 
that it is designed to provide for the equitable allocation of 
reasonable dues, fees, and other charges among its members and other 
persons using its facilities.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(4).
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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

    Written comments were neither solicited nor received.

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

    The foregoing proposed rule change is effective upon filing 
pursuant to section 19(b)(3)(A) of the Act \11\ and Rule 19b-4(f)(2) 
\12\ thereunder because it establishes or changes a due, fee, or other 
charge imposed by the Exchange.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 19b-4(f)(2).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

III. 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-2007-78 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-2007-78. 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 Commissions 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, 100 F. Street, NE., Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. 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-2007-78 and should be submitted on 
or before September 27, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-17545 Filed 9-5-07; 8:45 am]

BILLING CODE 8010-01-P
