
[Federal Register: August 7, 2008 (Volume 73, Number 153)]
[Notices]               
[Page 46124-46126]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07au08-121]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58278; File No. SR-NYSE-2008-61]

 
 Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by New York Stock Exchange LLC Amending NYSE Rule 104(e) 
(Dealings by Specialists) To Modify the Conditions Governing the 
Specialists' Use of the Price Improvement Trading Message Pursuant to 
NYSE Rule 104(b)(i)(H)

July 31, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on July 25, 2008, New York Stock Exchange LLC (``NYSE'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the self-regulatory 
organization. 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 amend Exchange Rule 104(e) (Dealings by 
Specialists) to modify the conditions governing the specialists' use of 
the price improvement trading message pursuant to Rule 104(b)(i)(H). 
The text of the proposed rule change is available at NYSE, 
www.nyse.com, and 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 self-regulatory organization 
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 those 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 parts 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 seeks to modify the conditions that govern the ability 
of specialists to provide price improvement pursuant to Rule 104 
(Dealings by Specialists). Specifically, the Exchange proposes to amend 
Exchange Rule 104(e) to remove the requirement that specialists be 
represented in the quote in a ``meaningful amount'' before they can 
send a trading message that will provide price improvement to arriving 
marketable orders (i.e., those orders capable of trading in the current 
market upon arrival).
    Pursuant to Exchange Rule 104(b)(i), a specialist's algorithm may 
generate and transmit quoting and trading messages in a number of 
specific situations detailed in the rule. Under Rule 104(b)(i)(H), one 
of the permitted algorithmic trading messages allows the specialist to 
provide price improvement to an order subject to the provisions of Rule 
104(e). Rule 104(e)(i) calls for the specialist to be represented in 
the quote for a ``meaningful amount'' in order to provide price 
improvement to an arriving order.\3\ A ``meaningful amount'' is defined 
in Rule 104(e)(ii) as at least ten round lots (usually 1,000 shares) 
for the 100 most active securities (based on average daily volume) on 
the Exchange, and at least five round lots (usually 500 shares) for all 
other securities on the Exchange.
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    \3\ Under Rule 104(e)(i), for an incoming buy order, the 
specialist must be represented in the offer, and for an incoming 
sell order, the specialist must be represented in the bid. The price 
improvement offered must be at least one cent.
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    The price improvement message capability was designed to provide 
trading opportunities for which the specialist's algorithm could 
interact with orders electronically, supplying

[[Page 46125]]

capital and liquidity to the Hybrid Market\SM\as they did in the 
Exchange's auction market. Part of this ability is to be able to offer 
price improvement to other market participants on the Exchange. As 
originally approved in the Exchange's Hybrid Market\SM\ filing,\4\ the 
amount of price improvement to be supplied was also subject to minimums 
based on the quotation spread in the security at the time of the 
proposed trade with the incoming order.\5\ However, in SR-NYSE-2007-81, 
the Exchange removed the minimum price improvement amount based on the 
Exchange's belief that these required minimums were a contributing 
factor to the decline in the level of price improvement offered by 
specialists.\6\
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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) (approving, 
among others, NYSE Rules 104(b)(i)(H) and 104(e)).
    \5\ As first approved in SR-NYSE-2004-05, Rule 104(e) required 
that the price improvement provided by the specialist be (a) at 
least three cents where the quotation spread is more than five 
cents, (b) at least two cents where the quotation spread is three, 
four or five cents, or (c) one cent where the quotation spread is 
two cents.
    \6\ In SR-NYSE-2007-81, the Exchange stated that the rate of 
price improvement offered by specialists had dropped from 1.47% in 
July 2006 to .03% in July 2007.
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    The removal of the required price parameters for specialist price 
improvement has not resulted in an appreciable rise in the level of 
specialist participation in price improvement trading. The Exchange 
believes that this is as a result of the ``meaningful amount'' minimum 
display requirement in Rule 104(e)(ii). As quote sizes continue to drop 
on the Exchange,\7\ the Exchange believes that requiring the ten and 
five round lot minimums serve as a deterrent to price improvement 
participation by specialists since the required minimums potentially 
represent a significant portion of the current average size of bids and 
offers. Consequently, the Exchange proposes to remove these minimums in 
an effort to provide an incentive to specialists to participate more 
fully in the price improvement mechanism.
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    \7\ For example, the average quote size for the top 100 equity 
securities traded on the Exchange in November 2006 was 18,907 shares 
on the bid side, and 20,375 shares on the offer side. By November 
2007 these values were 3,645 shares and 3,230 shares, respectively. 
As of May 2008, they are 5,462 shares bid and 4,875 shares offered. 
For securities beyond the top 100, the averages of bid and offer 
sizes for bids have also declined, but are slightly higher on the 
offer side. As of the end of November 2007, the averages were 
approximately 900 shares bid and 661 shares offered. As of the end 
of May 2008 the averages are 736 shares bid and 678 shares offered.
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    The Exchange notes that Floor brokers have the ability to include 
discretionary instructions with e-Quotes that they have entered (``d-
Quotes'') pursuant to Rule 70.25. One of the features of d-Quotes is 
that the Floor broker can offer a range in which this interest will 
trade. By using such discretionary instructions, Floor brokers are able 
to systemically trade with incoming marketable orders and offer price 
improvement in a like manner to the specialist algorithm. There are, 
however, no minimum size requirements placed on Floor brokers' d-
Quotes. Thus, removing the minimum size requirements for specialists' 
price improvement trading messages will increase competition and 
ultimately lead to increased opportunities for price improvement for 
Exchange market participants.
2. Statutory Basis
    The basis under the Act for this proposed rule change are the 
requirements under Section 6(b)(5) \8\ that the rules of an exchange be 
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 Exchange believes that the instant proposal to 
remove the requirement that a specialist be represented in the NYSE 
quote in order to provide price improvement to an incoming order is 
consistent with the above principles in that it encourages specialists 
to additionally enhance the liquidity in the market and fosters 
increased competition among Exchange market participants, thus 
providing Exchange customers with additional opportunities for price 
improvement.
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    \8\ 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

    No written comments were solicited or received with respect to 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 self-regulatory organization consents, the Commission will:
    (A) By order approve such 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 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-2008-61 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2008-61. 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

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should submit only information that you wish to make publicly 
available. All submissions should refer to File Number SR-NYSE-2008-61 
and should be submitted on or before August 28, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-18158 Filed 8-6-08; 8:45 am]

BILLING CODE 8010-01-P
