

[Federal Register: September 12, 2007 (Volume 72, Number 176)]
[Notices]               
[Page 52188-52191]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12se07-131]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56370; File No. SR-NYSE-2007-81]

 
Self-Regulatory Organizations; New York Stock Exchange, LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Rule 104 (Dealings by Specialists)

September 6, 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 September 5, 2007, the New York Stock Exchange, LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been substantially prepared by the Exchange. 
The Exchange filed the proposed rule change as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A) \3\ of the Act and 
Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal effective 
upon filing with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Exchange Rule 104(e) to modify the 
conditions that govern the ability of the specialists to provide price 
improvement pursuant to NYSE Rule 104(b)(i)(H).\5\ The text of the 
proposed rule change is available at the Exchange, the Commission's 
Public Reference Room, and http://www.nyse.com.

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    \5\ The Exchange notes that on March 22, 2006, the Commission 
approved a proposed rule change to permit the Exchange to establish 
the NYSE HYBRID MARKETSM (``Hybrid Market''). See 
Securities Exchange Act Release No. 53539 (March 22, 2006), 71 FR 
16353 (March 31, 2006) (SR-NYSE-2004-05). Included in the proposed 
rule change were Exchange rules governing specialist algorithmic 
systems, including Rules 104(b)(i)(H) and 104(e).
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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 and 
discussed any comments it received on the proposed rule change. The 
text of these

[[Page 52189]]

statements may be examined at the places specified in Item IV below. 
NYSE has substantially 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
    In the proposed rule change, the Exchange seeks to amend Exchange 
Rule 104(e) to modify the conditions that govern the ability of the 
specialists to provide price improvement pursuant to NYSE Rule 
104(b)(i)(H). The Exchange seeks to amend Rule 104(e) to allow the 
specialist to provide price improvement to an order when the specialist 
is represented in a meaningful amount in the bid with respect to price 
improvement provided to an incoming sell order and in the offer with 
respect to price improvement provided to an incoming buy order without 
minimum trade price parameters based on the quotation spread.
    Current Price Improvement Conditions. Pursuant to Exchange Rule 
104(b)(i)(H), a specialist trading message to provide price improvement 
to an order is subject to the conditions set forth in paragraph (e) of 
Exchange Rule 104. Currently, Exchange Rule 104(e) sets forth the 
requirements for specialist algorithmic price improvement, which 
include minimum trade price parameters based on the quotation spread, 
as long as the specialist is represented in the Exchange quotation in a 
meaningful amount as defined in the rule.\6\
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    \6\ Exchange Rule 104(e)(ii) defines meaningful amount as at 
least 1,000 shares for the 100 most active securities on the 
Exchange (as the Exchange from time to time shall determine), based 
on average daily volume, and at least 500 shares for all other 
securities on the Exchange.
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    Pursuant to Rule 104(e), specialists may price improve all or part 
of an incoming order, as follows:
    (i) The specialist is represented in the bid if buying and the 
offer if selling; and
    (ii) Where the quotation spread is three-five cents, algorithms 
must provide price improvement of at least two cents; or
    (iii) Where the quotation spread is more than five cents, 
algorithms must provide price improvement of at least three cents; or
    (iv) where the quotation spread is two cents, algorithms must 
provide price improvement of one cent.
    Examples:
    (1) If the Exchange quotation is 20.10-20.15, and the specialist is 
represented in both the bid and offer, the algorithm can provide price 
improvement by buying at 20.12, and selling at 20.13.
    (2) If the Exchange quotation is 20.10-20.16, and the specialist is 
represented in both the bid and the offer, the algorithm can buy at 
20.13 and sell at 20.13.
    (3) If the Exchange quotation is 20.10-20.12, and the specialist is 
represented in both the bid and the offer, the algorithm can buy at 
20.11 and sell at 20.11.
    Proposal to Amend Price Improvement Parameters. The Hybrid Market 
rules, including those identified above, were implemented in a series 
of phases beginning with a pilot on December 14, 2005 through February 
27, 2007. During the implementation process, the Exchange continually 
reviewed the operation of the Hybrid Market and changes in the behavior 
of market participants resulting from the new rules in order to assess 
whether the rules resulted in operations as envisioned by the Hybrid 
Market initiative. As a result of this continual review, NYSE amended 
certain rules to better accomplish the goals intended with the creation 
of the Hybrid Market.\7\
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    \7\ See, Securities Exchange Act Release Nos. 54820 (November 
27, 2006), 71 FR 70824 (December 6, 2006) (SR-NYSE-2006-65) 
(amendment to clarify certain definitions and systematic processing 
of certain orders in the Hybrid Market); 55316 (February 20, 2007), 
72 FR 8825 (February 27, 2007) (SR-NYSE-2007-14) (amendment of 
Exchange Rule 70.30 in order to remove the concept of a Crowd being 
``specific areas on the Floor where Floor brokers are generally able 
to see and hear the business'' conducted at each post/panel to 
``specific identifiable areas where Floor brokers are able to 
conduct business at each post/panel within the Crowd''); 54427 
(September 12, 2006), 71 FR 54862 (September 19, 2006) (SR-NYSE-
2006-58) (amendment of Exchange Rule 70.30 to remove the concept of 
a Crowd as ``any five contiguous panels'' to ``specific identifiable 
areas on the Floor where Floor brokers are generally able to see and 
hear the business conducted at each post/panel within the Crowd''); 
and 54086 (June 30, 2006), 71 FR 38953 (July 10, 2006) (SR-NYSE-
2006-24) (amendment to Exchange Rule 104(d)(i) to conform the 
minimum display requirements for reserve interest for specialists 
and Floor brokers such that specialists, like Floor brokers, only be 
required to provide at least 1,000 shares displayed interest at the 
bid and offer in order to have reserve interest on that side of the 
quote).
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    The Exchange states that it proposed the price improvement 
parameters in an attempt to balance the goals of preserving incentives 
for the limit orders on the Display Book to establish the best price 
and of encouraging price improvement for incoming orders. The Exchange 
believed that the benefit of providing meaningful price improvement to 
incoming orders under such circumstances would outweigh the potential 
disincentives to post aggressive limit orders.
    At the time these parameters were included in Exchange Rule 104, 
the Exchange believed that the stated parameters would discourage the 
specialist from posting a quote that would improve the best bid or 
offer by one cent, thus effectively stepping ahead of other liquidity 
providers to get price priority for execution (i.e., ``Penny-ing'').
    According to NYSE, a review of its Hybrid Market has demonstrated 
that specialists' provision of price improvement has diminished. At the 
same time, other market participants who may have historically competed 
with the specialist to provide price improvement are doing so less 
frequently than before.\8\ As a result, the Exchange's level of price 
improvement is at a historic low.
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    \8\ The Exchange reviewed statistics related to price 
improvement by specialists and other market participants for July 
2006 and July 2007. It showed that the rate of specialist price 
improvement in July 2006 was 1.47% as compared to 0.03% in July 
2007. In addition, the price improvement offered by other market 
participants was 10.66% in July 2006 and 1.39% in July 2007.
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    It is the view of the Exchange that if the frequency of price 
improvement for customers is meaningfully increased and the deployment 
of additional provisional liquidity is sufficiently encouraged, 
enhanced market quality will result. It is also the Exchange's view 
that encouraging specialist firms and their on- and off-Floor 
counterparts to compete at and inside the national best bid or offer 
should result in lower intra-day volatility, further enhancing market 
quality and depth.
    Moreover, according to NYSE, the Exchange's review of its Hybrid 
Market also has demonstrated that, since the inception of the Hybrid 
Market, the NYSE quote spread has narrowed.\9\ As a result, it is the 
Exchange's view that the price improvement parameters by which the 
specialists must abide are no longer warranted, and are in fact 
unnecessarily burdensome and counter-productive.
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    \9\ See NYSE Completes Hybrid Market Phase III Activation 
(January 24, 2007) at http://www.nyse.com/press/1169637018870.html; see 

also, Hybrid Market Performance and Execution Quality Very Positive, 
NYSE Says (November 2, 2006) at http://www.nyse.com/press/1162466220165.html
.

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    The Exchange further believes that the concerns over Penny-ing are 
outdated. Specifically, the average quoted spread of 96% of the daily 
volume in NYSE-listed securities is five cents or less. Price 
improvement in the amount of a penny in these securities is the 
equivalent of 20% price improvement where the spread is five cents to 
as much as 100% price improvement where the spread is one cent. Today,

[[Page 52190]]

several other market centers already provide price improvement in sub-
penny increments to their customers.\10\ Given the current low overall 
price improvement being generated in NYSE-listed securities, the 
Exchange firmly believes that amending Rule 104(e) will lead directly 
to enhanced market quality.
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    \10\ The Exchange states that, included in the market centers 
that currently provide price improvement in sub-penny increments are 
the Boston Stock Exchange, National Stock Exchange, Chicago Stock 
Exchange, NASDAQ, and NYSE Arca.
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    Accordingly, the Exchange proposes to amend Exchange Rule 104 to 
modify the conditions that govern the operation of the specialist's 
algorithmic trading message to allow the specialist to provide price 
improvement, without minimum trade price parameters based on the 
quotation spread, to an order as set forth in paragraph (e) when the 
specialist is represented in a meaningful amount in the bid with 
respect to price improvement provided to an incoming sell order and in 
the offer with respect to price improvement provided to an incoming buy 
order. As such the Exchange seeks to delete subsections (e)(i)(A)-
(e)(i)(D) of the current rule. Pursuant to the proposed rule, the price 
improvement to be supplied by the specialist must be at least one cent.
    The Exchange expects that this proposed rule change will prove 
beneficial for customers sending orders to the Exchange through added 
liquidity, increased price improvement in frequency, and even further 
decreased effective spreads.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\11\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\12\ in particular, in that it 
is 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 facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 would 
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

    Because the Exchange has designated the proposed rule change as one 
that does not: (i) Significantly affect the protection of investors or 
the public interest; (ii) impose any significant burden on competition; 
or (iii) become operative for 30 days after the date of filing (or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest), the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A) of the Act 
\13\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing.\15\ 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay and designate the proposed 
rule change operative upon filing. The Commission believes that waiving 
the 30-day operative delay is consistent with the protection of 
investors and the public interest because it would allow the Exchange 
to encourage price improvement while still requiring specialists to be 
represented in a meaningful amount in the bid or offer. The Commission 
also notes that the proposed elimination of the minimum price 
improvement parameters based on the quotation spread is consistent with 
the rules of other exchanges.\16\ Therefore, the Commission designates 
the proposal operative upon filing.\17\
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    \15\ 17 CFR 240.19b-4(f)(6)(iii). The Exchange has satisfied the 
five-day pre-filing requirement of Rule 19b-4(f)6)(iii).
    \16\ See, e.g., Amex Rule 131-AEMI(q) and NYSE Arca Rule 
7.31(h)(4).
    \17\ For purposes only of waiving the operative delay of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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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 the furtherance of the purposes of the Act.

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-2007-81 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-2007-81. 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, 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 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-2007-81 and should be 
submitted on or before October 3, 2007.


[[Page 52191]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-17947 Filed 9-11-07; 8:45 am]

BILLING CODE 8010-01-P
