

[Federal Register: November 13, 2007 (Volume 72, Number 218)]
[Notices]               
[Page 63946-63948]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13no07-103]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56747; File No. SR-NYSE-2006-99]

 
 Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change and Amendment Nos. 2 and 3 
Thereto Relating to Rule 104 (Dealings by Specialists)

November 5, 2007.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that on November 9, 2006, the New York Stock Exchange LLC (``NYSE'' or 
the ``Exchange'') filed with the Securities and Exchange Commission the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Exchange filed and 
withdrew Amendment No. 1 to the proposal on October 24, 2007 and 
October 29, 2007, respectively. The Exchange filed Amendment Nos. 2 and 
3 on October 29, 2007 and November 5, 2007, respectively. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 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 NYSE is proposing an amendment to Exchange Rule 104 (Dealings 
by Specialists) to allow the specialist's algorithm systems to generate 
trading messages that provide supplemental specialist volume to 
partially or completely fill an order at a sweep price. The text of the 
proposed rule change is available at the NYSE, the Commission's Public 
Reference Room, and http://www.nyse.com.


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
    The Exchange proposes to allow the specialist proprietary algorithm 
(``Specialist Algorithm'') to generate trading messages that provide 
supplemental specialist volume to partially or completely fill an order 
at a sweep price. Through the NYSE HYBRID MARKETSM (``Hybrid 
Market'') \4\ the Exchange permitted specialists to establish 
electronic connections to the Display Book[supreg] \5\ (``Display 
Book''). Specifically, the Specialist Algorithm generates quote and 
trade messages based on predetermined parameters to electronically 
participate in the Hybrid Market. The Specialist Algorithm is designed 
to communicate with the Display Book system via an Exchange-owned 
external Application Program Interface (``API'').
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    \4\ See Securities Exchange Act Release No. 53539 (March 22, 
2006), 71 FR 16353 (March 31, 2006) (SR-NYSE-2004-05).
    \5\ The Display Book is an order management and execution 
facility. It receives and displays orders to the specialist, 
contains the orders received by the specialist (the ``Book''), and 
provides a mechanism to execute and report transactions to the 
Consolidated Tape.
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    In the Hybrid Market, the Specialist Algorithm is permitted to send 
messages to the Display Book via the API to quote or trade on behalf of 
the specialist's proprietary interest. The Specialist Algorithm may 
generate these quoting or trading messages in reaction to specific 
types of information. This information includes specialist dealer 
position, existing quotes, publicly available information the 
specialist chooses to supply to the algorithm, incoming orders as they 
are entering Exchange systems, and information about orders on the 
Display Book, which include limit orders, and percentage orders. This 
latter information stream is known as ``state of the book'' 
information.
    Based on discussions of Hybrid Market features with members and 
advisory committees the Exchange has effected selective changes to 
certain aspects of the Hybrid Market to produce a trading venue that 
best addresses the various needs of our members and customers.
    The Exchange seeks to amend Rule 104(b)(i)(F) to allow the 
Specialist Algorithm to provide supplemental specialist volume to 
partially or completely fill an order at a sweep price

[[Page 63947]]

as described further below.\6\ Currently, Rule 104(b)(i)(F) permits the 
Specialist Algorithm to generate a trading message to provide 
supplemental specialist volume at the Exchange published best bid or 
offer (``BBO''). This supplemental specialist volume is not displayed 
and is not part of the specialist reserve interest. With respect to 
priority and parity, supplemental specialist volume yields to displayed 
and reserve interest (i.e., supplemental specialist volume will not 
trade before customer limit orders, Floor broker agency interest and 
specialist interest). However, supplemental specialist volume are on 
parity with member organizations' off-Floor proprietary orders entered 
by Floor brokers pursuant to Section 11(a)(1)(G) of the Act,\7\ and 
Rule 11a1-1(T) \8\ thereunder (``G'' orders). Additionally, Exchange 
systems do not permit a trading message to provide supplemental 
specialist volume that would trade-through a protected quotation in 
violation of the Regulation National Market System's Order Protection 
Rule.\9\
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    \6\ The instant filing was initially filed with the Commission 
on November 9, 2006. The Exchange states that the proposed 
functionality inadvertently became operational in Exchange systems 
without Commission approval on or about January 24, 2007. The 
proposed rule change, as amended, is intended to codify the current 
Exchange system functionality.
    \7\ 15 U.S.C. 78k(a)(1)(G).
    \8\ 17 CFR 240.11a-1(T).
    \9\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005), 17 CFR 242.611.
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    This trading message enables specialists, through the use of their 
algorithms, to provide more volume where, technically, there is no 
other interest available to trade with the customer order. For example, 
if 5,000 shares of an automatically executing market order to sell 
remain unfilled after trading with the displayed volume at the Exchange 
best bid and any reserve interest at that price, the Specialist 
Algorithm can send a trading message to buy all or some of the 
remaining 5,000 shares at the same price (i.e., the Exchange best bid). 
If the specialist buys less than the full size remaining, the order 
will sweep the orders on the Display Book including customer limit 
orders, Floor broker agency and specialist interest files to the extent 
permitted, until filled, its limit, if any, is reached or a Liquidity 
Replenishment Point (``LRP'') is triggered, whichever comes first.
    The Exchange seeks to further provide its customers with additional 
opportunities for a better priced execution by allowing the specialist 
to also partially or completely fill an order beyond the Exchange 
published best bid or offer at a sweep price. The Specialist Algorithm 
will generate this trading message in reaction to one order at a time 
and only as that order is entering Exchange systems. Additionally, this 
trading message will only be able to interact with the targeted order 
to add volume at one place, either at the Exchange best bid or offer or 
at a particular sweep price. In other words, the specialist will not 
have two opportunities to provide supplemental specialist volume to the 
incoming order at the Exchange best bid or offer and also at a 
particular price point should the order sweep the Display Book. There 
will be no change with respect to priority and parity. The supplemental 
specialist volume will continue to yield to displayed and reserve 
interest at each price point and will be on parity with G orders. The 
specialist's algorithm will make a determination about where and how 
much supplemental specialist volume to provide based on the state of 
the book information when the order is received by Exchange systems. An 
example of the proposed amendment to permit a trading message to 
provide supplemental specialist volume to partially or completely fill 
an order at a sweep price is set forth below:

    The Exchange best bid is $5.05 and 4,000 shares (2,000 shares 
displayed and 2,000 shares of non-displayed reserved interest) are 
available. The Exchange best offer is $5.10 and 2,000 shares (1,000 
shares displayed and 1,000 shares of non-displayed reserve interest) 
are available.

----------------------------------------------------------------------------------------------------------------
                                      Reserve                                                         Reserve
 Supplemental specialist volume      interest         Buy LMT         100ths         Sell LMT        interest
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                                  ..............  ..............            5.12  ..............  ..............
                                  ..............  ..............            5.11  ..............  ..............
                                  ..............  ..............            5.10           1,000           1,000
                                           2,000           2,000            5.05  ..............  ..............
                                           1,000           1,000            5.04  ..............  ..............
1,000...........................           2,000  ..............            5.03  ..............  ..............
                                           1,000  ..............            5.02  ..............  ..............
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    1. An automatically executing market order to sell for 9,000 
shares is received by Exchange systems.
    2. Based on the state of the book, the Specialist Algorithm has 
determined based on the state of the book, not to provide 
supplemental specialist volume at the bid (i.e., buy all or some of 
the 5,000 shares at the same price, $5.05). However, the Specialist 
Algorithm determines to provide supplemental volume at the price of 
$5.03 and accordingly sends a trading message to provide 1,000 
shares of supplemental specialist volume to interact with the sell 
order at $5.03.
    3. 4,000 shares of the automatically executing sell order will 
execute against the Exchange best bid at a price of $5.05 leaving 
5,000 shares of the sell order unfilled after trading with the 2,000 
shares of displayed volume at the Exchange best bid and the 2,000 
shares of reserve interest at that price.
    4. In the absence of any other available interest at the 
Exchange bid, the order will start to sweep the orders on the 
Display Book and Floor broker agency and specialist interest files 
at each price point beyond the Exchange best bid.
    5. At the price point of $5.04, there is another 1,000 shares of 
displayed and 1,000 shares of reserve buy interest. The sell order 
executes first against the displayed buy interest and then against 
the reserve buy interest. Therefore, 2,000 shares are executed, 
leaving 3,000 shares of the sell order unfilled.
    6. At the price point of $5.03, there is another 2,000 shares of 
reserve buy interest. The sell order executes against that buy 
interest. Therefore, 2,000 shares of the sell order are filled 
leaving a balance of 1,000 shares unfilled. No other customer 
interest exists at this price point.
    7. At the price point of $5.03, the Specialist Algorithm has 
previously determined to provide supplemental volume and sent a 
trading message to provide 1,000 shares of supplemental specialist 
volume to interact with the sell order at the same price point.
    8. Having exhausted all the available displayed and reserve buy 
interest at the price point of $5.03; the sell order now interacts 
with the specialist's trading message to buy the remaining 1,000 
shares of the sell order completing the execution.

    In this example, the supplemental specialist volume provided the 
sell order with an opportunity for a better priced execution and also 
aided in dampening volatility by limiting how far the order swept down 
to lower price

[[Page 63948]]

points before it was fully executed. Thus, if the Specialist Algorithm 
had not determined to provide supplemental specialist volume at the 
price point of $5.03, the sell order would have continued its sweep 
down the Display Book and interacted with the available interest at the 
next price point of $5.02 completing the execution. If the specialist 
trading message did not provide enough supplemental volume to complete 
the order it would have continued to sweep the orders on the Display 
Book to the extent permitted until: (a) Filled; (b) its limit, if any 
was reached; or (c) an LRP was triggered, whichever occurred first.
    It should be noted that the specialist is not required to buy the 
full size remaining of the sell order at the particular sweep price. 
The Exchange states that there is no disadvantage to the customer in 
allowing the specialists to partially fill an order at a particular 
sweep price especially when applicable rules only allow the 
supplemental specialist volume to interact with the order when no other 
interest exists. Under these circumstances, the order is afforded a 
better priced execution that it otherwise would not have.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \10\ that an Exchange have rules that 
are designed to promote just and equitable principles of trade, 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. The proposed rule change is 
consistent with these objectives in that it provides additional trading 
messages to the Specialist Algorithm, which will further enable the 
specialist to meet its obligation of maintaining a fair and orderly 
market.
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    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

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

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Exchange 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 e-mail to rule-comments@sec.gov. Please include File 

Number SR-NYSE-2006-99 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.
    All submissions should refer to File Number SR-NYSE-2006-99. 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 NYSE. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSE-2006-99 and should be 
submitted on or before December 4, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-22066 Filed 11-9-07; 8:45 am]

BILLING CODE 8011-01-P
