

[Federal Register: February 19, 2008 (Volume 73, Number 33)]
[Notices]               
[Page 9148-9151]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19fe08-94]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57311; File No. SR-NSX-2008-03]

 
Self-Regulatory Organizations; National Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to the Creation of a Zero Display Reserve Order With a Pegging 
Option

February 12, 2008.
    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 February 5, 2008, the National Stock Exchange, Inc. (``NSX'' 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 has designated the proposed rule change as ``non-
controversial'' under Section 19(b)(3)(A)(iii) \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\ 17CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \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 is proposing to amend its rules in order to establish 
a Zero Display Reserve Order type (``Zero Display Order''). The Zero 
Display Order may have a pegged order option.
    The text of the proposed rule changes is available on the 
Exchange's Web site (http://www.nsx.com), at the principal office of 

the Exchange, 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
    The Exchange proposes to add a new type of Reserve Order, the Zero 
Display Order, to those currently permitted under its Rules. Currently, 
Reserve Orders must consist of a displayed quantity and a reserve 
quantity. The Zero Display Order will allow Users to designate the 
entire quantity of an order as reserve, with zero display quantity.
    Zero Display Orders will be accessed from the Exchange using a 
priority system that the Exchange believes best balances the advantages 
of a Zero Display Order with those of other Reserve Orders and 
displayed orders. Under the Exchange's methodology, the display 
quantity of orders will first be exhausted according to price priority 
and time priority. Next, the reserve quantity of each order will be 
exhausted in rounds according to price and then time priority, with the 
reserve quantity of each order accessed according to its original 
display amount in each round. Zero Display Orders will be assumed to 
have a displayed quantity of one round lot for purposes of the process 
described in the preceding sentence. Zero Display Orders will not be 
eligible to be routed away to another market center.
    For the purposes of demonstrating this methodology, consider the 
following examples:

                          NSX Book at Beginning
------------------------------------------------------------------------
              Book                    ETP Holder       Display   Reserve
------------------------------------------------------------------------
                                  T1................       100      1000
                                  T2................         0      1000
                                  T3................       500       500
                                  T4................       100       100
                                  T5................         0       500
------------------------------------------------------------------------

Trade 1: Contra Order for 100
    Trade 1 comes in with a contra order of 100 shares. Going through 
the process, the Exchange's system will look to all displayed orders 
first and match the contra order with the first order in time reflected 
in its book. Thus, the contra order would be matched to the first 
displayed order in the NSX Book, reflecting the one lot, resulting in 
the following execution:

                               Executions
------------------------------------------------------------------------
                     ETP Holder                        Display   Reserve
------------------------------------------------------------------------
 T1.................................................       100  ........
------------------------------------------------------------------------

    Once that trade is executed, the NSX Book is refreshed. Since a one 
lot was executed against T1 and only T1, the NSX Book is refreshed with 
respect to T1. Thus, T1 now has a new time attributable to its order as 
it is refreshed with a new display of 100 that has floated up from its 
reserve. The new book and the time ranking would be thus:

                                New Book
------------------------------------------------------------------------
              Book                    ETP Holder       Display   Reserve
------------------------------------------------------------------------
                                  T2................         0      1000
                                  T3................       500       500
                                  T4................       100       100
                                  T5................         0       500
                                  T1................       100       900
------------------------------------------------------------------------

Trade 2: Contra Order for 700
     In contrast, a contra order for 1,400 shares with the NSX Book as 
outlined in New book under Trade 1 would show the difference between a 
reserve order and a zero display order. Using the snapshot identified 
under New Book in Trade 1, the 1,400 shares would be matched and 
executed against the display quantity of T3 (the first in time on 
displayed orders after the ``refresh'') first, then the display 
quantity of T4 and finally the display quantity of T1, before being 
matched against the reserve quantity. With 700 shares left to be 
matched, the system will then match 100 against the undisplayed 
quantity of T2 (no displayed quantity, therefore defaulting to 100), 
500 against the undisplayed quantity of T3 (because it previously 
displayed 500) and 100 against the undisplayed quantity of T4 (because 
it previously displayed 100). The new book after these transactions 
would be:

------------------------------------------------------------------------
              Book                    ETP  Holder      Display   Reserve
------------------------------------------------------------------------
                                  T5................         0       500
                                  T1................       100       800
                                  T2................         0       900
                                  T3................         0         0

[[Page 9149]]


                                  T4................         0         0
------------------------------------------------------------------------

    After Trade 1 has been matched and executed, a second contra order 
comes in for 700 shares. The ``snapshot'' for this contra order is 
reflected above.
    Using the snapshot above, the 700 order would be matched and 
executed against the display quantity of T3 (the first in time on 
displayed orders after the ``refresh'') first, then the display 
quantity of T4 and finally the display quantity of T1, reflecting in 
the following executions:

                               Executions
------------------------------------------------------------------------
                     ETP Holder                        Display   Reserve
------------------------------------------------------------------------
T3..................................................       500  ........
T4..................................................       100  ........
T1..................................................       100  ........
------------------------------------------------------------------------

    Once that trade is executed, the NSX Book is refreshed. Since a 
five lot was matched and executed against T3, a one lot against T4 and 
a one lot against T1 (in that order), those orders are refreshed and 
their priority remains in the book in that order as they have a new 
time associated with the refresh. Notice that T2 and T5, neither of 
which were refreshed, now has the time priority over the other 
undisplayed orders. The new book and the time ranking would be thus:

                                New Book
------------------------------------------------------------------------
              Book                    ETP  Holder      Display   Reserve
------------------------------------------------------------------------
                                  T2................         0      1000
                                  T5................         0       500
                                  T3................       500         0
                                  T4................       100         0
                                  T1................       100       800
------------------------------------------------------------------------

Trade 3: Contra order for 1100
    After Trade 2 has been matched and executed, a third contra order 
comes in for 1100 shares. The ``snapshot'' for this contra order is 
reflected above.
    Using the snapshot above, the 1100 order would be matched and 
executed against the display quantity of T3 first, then the display 
quantity of T4 and finally the display quantity of T1 (in the sequence 
of the order in which they were refreshed above). Once the display 
quantity of 700 is exhausted, the remaining 400 shares would be 
executed against the undisplayed orders in the following order. One lot 
against T2 (the first in time, since these orders were not executed and 
not refreshed); one lot against T5 (the second in time, since these 
orders were not executed and not refreshed), one lot against T1, and 
then one lot against T2 again to exhaust the amount of shares. In sum, 
the executions would be as follows:

                                Executions
------------------------------------------------------------------------
                     ETP Holder                        Display   Reserve
------------------------------------------------------------------------
T3..................................................       500  ........
T4..................................................       100  ........
T1..................................................       100       100
T2..................................................  ........       200
T5..................................................  ........       100
------------------------------------------------------------------------

    Once that third trade is executed, the NSX Book is refreshed. Since 
a five lot was executed against T3, a one lot against T4 and a one lot 
against T1 (in that order), those orders are refreshed and their 
priority remains in the book in that order as they have a new time 
associated with the refresh. Similarly, the reserve orders were 
executed against T2, T5 and T1 in one lots and in that order. Since 
there was a remainder, T2 was executed again for a one lot. Given the 
time of execution, the priority of T2, which was the last to be 
executed against, is the last to be refreshed. Thus, it goes to the 
bottom of the queue as the last ETP Holder to be refreshed. Similarly, 
since the undisplayed portion of T1 was matched and executed after the 
undisplayed portion of T5, its time priority is after T5. The 
``refresh'' order is T3, T4, T1, T2, T5, T1 and T2, which would result 
in the NSX Book looking like the following:

                                 New Book
------------------------------------------------------------------------
              Book                    ETP  Holder      Display   Reserve
------------------------------------------------------------------------
                                  T3................         0         0
                                  T4................         0         0
                                  T5................         0       400
                                  T1................       100       600
                                  T2................         0       800
------------------------------------------------------------------------

Trade 4: Contra order for 200
    After Trade 3 has been matched and executed, a fourth contra order 
comes in for 200 shares. The ``snapshot'' for this contra order is 
reflected above.
    Using the snapshot above, the 200 order would be matched and 
executed against the display quantity of T1 first, then the non display 
quantity of T5, who is first in line among the undisplayed, for a one 
lot, reflecting in the following executions:

                                Executions
------------------------------------------------------------------------
                                                       Display   Reserve
------------------------------------------------------------------------
T1..................................................       100  ........
T5..................................................  ........       100
------------------------------------------------------------------------

    Once the fourth trade was executed (in order of T1 and T5, with T2 
not being touched), T2, which was not refreshed becomes the top 
priority in terms of time, so that the new book would look as follows 
(T3 and T4 are no longer reflected since their displayed and non-
displayed portions are exhausted):

                                 New Book
------------------------------------------------------------------------
              Book                    ETP  Holder      Display   Reserve
------------------------------------------------------------------------
                                  T2................         0       800
                                  T1................       100       500
                                  T5................         0       300
------------------------------------------------------------------------

Trade 5: Contra order for 100
    After the fourth trade has been matched and executed, a fifth 
contra order comes in for 100 shares. The ``snapshot'' for this contra 
order is reflected above.
    Using the snapshot above, the 100 order would be executed against 
the display quantity of T1, reflecting in the following executions:

                                Executions
------------------------------------------------------------------------
                     ETP Holder                        Display   Reserve
------------------------------------------------------------------------
T1..................................................       100  ........
------------------------------------------------------------------------

    Once the fifth trade was executed against the displayed portion of 
T1, the quantity of T1's reserve order becomes refreshed. As the only 
order that becomes refreshed, it drops to the bottom of the queue in 
terms of time priority, so that the new book would look as follows:

                                New Book
------------------------------------------------------------------------
              Book                    ETP  Holder      Display   Reserve
------------------------------------------------------------------------
                                  T2................         0       800
                                  T5................         0       300
                                  T1................       100       400
------------------------------------------------------------------------

Trade 6: Contra order for 100
    After the fifth trade has been matched and executed, a sixth contra 
order comes in for 100 shares. The ``snapshot'' for this contra order 
is reflected above.
    Using the snapshot above, the 100 order would be executed against 
the display quantity of T1, reflecting in the following executions:

[[Page 9150]]



                               Executions
------------------------------------------------------------------------
                     ETP Holder                        Display   Reserve
------------------------------------------------------------------------
T1..................................................       100         0
------------------------------------------------------------------------

    Once the sixth trade was executed against the displayed portion of 
T1, the quantity of T1's reserve order becomes refreshed. Please note 
that, despite the fact that T1 has the lowest time priority, the one 
lot is still executed against T1 because it has a display amount and 
the displayed amount takes precedence over the undisplayed amount. The 
new book would look as follows:

                                New Book
------------------------------------------------------------------------
              Book                    ETP  Holder      Display   Reserve
------------------------------------------------------------------------
                                  T2................         0       800
                                  T5................         0       300
                                  T1................       100       300
------------------------------------------------------------------------

    These examples reflect the system of priority for displayed orders, 
reserved orders and zero display orders. Priority is always given to 
the display amount at the time the contra order comes in for 
interaction with the orders in the NSX Book.
    The Exchange also proposes to provide Users with the option of 
pegging Zero Display Orders. These pegged Zero Display Reserve Orders 
(``Pegged Orders'') will allow Users to place limit orders that buy or 
sell stated amounts of a security that will, as directed by the User, 
track one of three different aspects of the Protected NBBO or the NSX 
Top of Book (defined in the proposed amendment to the Definition 
Section of the Exchange's Rules, and referred to hereinafter as the 
``Protected BBO''): (1) The buy-side of the Protected BBO, (2) the 
sell-side of the Protected BBO, or (3) the midpoint of the Protected 
BBO. When a Pegged Order's price is adjusted, its original timestamp 
and time priority will be preserved.
    If a Pegged Order is placed which traces the midpoint of the 
Protected BBO, it will be executed in sub-pennies if necessary to 
obtain a midpoint price. Even if this order type results in an ETP 
Holder executing on its own account for prices that are superior by 
less than a penny to those customer orders that it may be holding, it 
will not result in a violation of Rule 12.6. In addition, the execution 
of a midpoint Pegged Order will not result in a trade-through of a 
protected quotation. A midpoint Pegged Order will execute against 
orders on the NSX Book or against incoming orders, including other 
midpoint Pegged Orders. When the Protected BBO is locked, the midpoint 
pegged order will be executed at the locked market price. When the 
Protected BBO is crossed, the midpoint pegged order will wait for the 
Protected BBO to uncross before becoming eligible to trade again.
    Any Zero Display Order may also be designated as a Post Only Order 
pursuant to NSX Rule 11.11(c)(5). If a Zero Display Order is designated 
as a Post Only Order and is immediately marketable, the order will not 
be executed, but will be posted to the NSX Book, unless the contra-side 
order with which it would interact is a Zero Display Order that has not 
been designated as Post Only, in which case the order will be 
executed.\5-6\ When such a Post Only Zero Display Order is posted to 
the NSX Book and is thereafter matched for execution, if the price of 
the order is better (i.e. higher for a buy order and lower for a sell 
order) than the contra-side of the Protected BBO, such order will be 
deemed to be priced at the price of the contra-side of the Protected 
BBO for purposes of matching and execution.\7\
---------------------------------------------------------------------------

    \5-6\ This will not result in a locking or crossing quote, 
because the Zero Display Order will not be displayed and therefore 
will not be a quote.
    \7\ See proposed NSX Rule 11.15(a)(iv).
---------------------------------------------------------------------------

    Orders marked Post Only will always be considered ``liquidity 
providing'' by the Exchange for purposes of application of the 
Exchange's fees and rebate programs. By making a Post Only designation, 
ETP Holders are able to avoid the risk that their orders will be 
considered ``liquidity taking'' for purposes of application of the 
Exchange's fees and rebate programs. If a Zero Display Order is not 
designated as Post Only, however, and the order interacts with a Zero 
Display Order that is designated as Post Only, the non-Post Only Zero 
Display Order will be considered liquidity taking by the Exchange, 
regardless of which order arrives at NSX first. Additionally, a Zero 
Display Order that has not been designated as Post Only for which the 
User has selected the Order Delivery mode of order interaction pursuant 
to Rule 11.13(b)(2) (``Order Delivery'') will be converted to the 
Automatic Execution mode of order interaction pursuant to Rule 
11.13(b)(1) (``AutoEx'') by the Exchange if such order is immediately 
marketable upon its entry into the NSX BLADE\SM\ System.
    The Zero Display Order and its variant, the Pegged Order, will 
provide additional flexibility and functionality to the Exchange's NSX 
BLADE system. The Exchange anticipates that the introduction of this 
new order will result in an increase in liquidity on the Exchange, 
resulting in increased revenues. These increased revenues will be 
included in the Exchange's general operating revenues which are used to 
fund, among other things, the Exchange's regulatory oversight 
functions.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b) of the Act,\8\ in general, and 
Section 6(b)(5),\9\ in particular, which requires, among other things, 
that the rules of an exchange be 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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b).
    \9\ 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 inappropriate burden on competition.

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 proposed rule change does not: (i) Significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (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 \10\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\11\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\12\ 
However, Rule 19b-4(f)(6)(iii) \13\ permits the Commission to

[[Page 9151]]

designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has 
satisfied the five-day prefiling requirement.\14\ In addition, the 
Exchange has requested that the Commission waive the 30-day pre-
operative delay and designate the proposed rule change to become 
operative upon filing.
---------------------------------------------------------------------------

    \12\ 17 CFR 240.19b-4(f)(6)(iii).
    \13\ Id.
    \14\ Id.
---------------------------------------------------------------------------

    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 immediately implement this 
proposal. In addition, the Commission does not believe that the rule 
change presents novel issues since the Zero Display Order type is 
similar to order types that are currently available on other 
markets.\15\ The Commission designates the proposal to become effective 
and operative upon filing.\16\
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    \15\ See Nasdaq Stock Market Rules 4751(e)(3) and (f)(4) and 
NYSE Arca Rules 7.31(h)(4), (5), and 7.31(cc).
    \16\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the impact of the proposed rule on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    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-NSX-2008-03 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-NSX-2008-03. 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 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 NSX. 
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-NSX-2008-03 
and should be submitted on or before March 11, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-2955 Filed 2-15-08; 8:45 am]

BILLING CODE 8011-01-P
