
[Federal Register: October 14, 2008 (Volume 73, Number 199)]
[Notices]               
[Page 60742-60745]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14oc08-100]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58743; File No. SR-NYSE-2008-102]

 
Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by New York Stock Exchange LLC 
Amending Rule 48 To Permit the Exchange To Declare an Extreme Market 
Volatility Condition and Suspend Certain NYSE Requirements Relating to 
the Closing of Securities at the Exchange

October 7, 2008.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on October 2, 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 
and II 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\ 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 Exchange proposes to amend Rule 48 to permit the Exchange to 
declare an extreme market volatility condition and suspend certain NYSE 
requirements relating to the closing of securities at the Exchange. 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 is proposing to amend NYSE Rule 48 to provide the 
Exchange with the ability to suspend certain requirements at the 
closing when extremely high market volatility could negatively affect 
the ability to ensure a fair and orderly close.
    Based on what the markets have experienced in the past month, and 
in particular, at the close on September 29, 2008, the Exchange 
believes that in addition to the open, an extreme market volatility 
condition can also impact the close at the Exchange. In particular, the 
Exchange believes that in an extreme market volatility condition at the 
close, the Exchange should be able to permit orders to be entered after 
4 p.m. for the purpose of offsetting an imbalance that may exist as of 
that time and to cancel or reduce a market-on-close or limit-on-close 
order that is a legitimate error and would cause significant price 
dislocation at the close.

NYSE Rule 48 Background

    The Exchange adopted NYSE Rule 48 on December 5, 2007 in order to 
provide the Exchange with the ability to suspend the requirement to 
disseminate price indications and obtain Floor Official approval prior 
to the opening when extremely high market volatility could negatively 
impact the operation of the market by causing Floor-wide delays in the 
opening of securities on the Exchange.\4\
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    \4\ See SEC Release No. 34-56920 (Dec. 6, 2007) (SR-NYSE-2007-
111).
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    Under NYSE Rule 48, in the event of extremely high market 
volatility that would have a Floor-wide impact on the ability of 
specialists to arrange for the timely opening of trading at the 
Exchange under the normal rules, a qualified Exchange officer may 
declare an extreme market volatility condition. For purposes of the 
rule, a ``qualified Exchange officer'' means the Chief Executive 
Officer of NYSE Euronext, Inc. or his or her designee, or the Chief 
Executive Officer of NYSE Regulation, Inc., or his or her designee. 
While either may declare the extreme market volatility condition, each 
must make a reasonable effort to consult with the other prior to taking 
such action.
    NYSE Rule 48 is intended to be invoked only in those situations 
where the potential for extreme market volatility would likely impair 
Floor-wide operations at the Exchange by

[[Page 60743]]

impeding the fair and orderly opening of securities. Accordingly, the 
rule sets forth a number of factors that the qualified Exchange officer 
would have to consider before declaring such a condition, including: 
volatility during the previous day's trading session; trading in 
foreign markets before the open; substantial activity in the futures 
market before the open; the volume of pre-opening indications of 
interest; evidence of pre-opening significant order imbalances across 
the market; government announcements; news and corporate events; and 
any such other market conditions that could impact Floor-wide trading 
conditions.
    Once the qualified Exchange officer has reviewed such factors and 
determined that an extreme market volatility condition exists, the 
qualified Exchange officer must make reasonable efforts to consult with 
the Commission staff before making such a declaration. The qualified 
Exchange officer must also document the basis for making such a 
declaration. If the qualified Exchange officer is unable to reach the 
Commission staff before the opening, he or she may declare such a 
condition, but must, as promptly as practicable in the circumstances, 
inform the Commission staff of such declaration, and the basis for 
making such declaration.
    Because the declaration of an extreme market volatility condition 
concerns the opening of securities at the Exchange, the rule further 
provides that such condition must be declared before the scheduled 
opening of securities at the Exchange. Moreover, such declaration would 
be in effect only for the opening of that trading session (or 
reopenings during the same trading day following the imposition of a 
mandatory halt pursuant to NYSE Rule 80B). Should market conditions 
that led to the declaration continue on subsequent days, the Exchange 
would have to review on a day-by-day basis the factors necessitating 
such a declaration and on each day make a reasonable effort to consult 
with the Commission staff as described above.
    The Exchange notes that even when the dissemination and Floor 
Official (including Senior Floor Official and above) approval 
requirements are suspended, specialists remain responsible for the fair 
and orderly opening of securities. Exchange rules already provide that 
when Floor Official approval is sought for certain actions, the 
specialist remains ultimately responsible for arranging the opening of 
securities at the Exchange. This obligation remains unchanged. Even in 
the absence of price indications and a Floor Official's independent, 
impartial review of the opening, specialists are still charged with 
ensuring that an opening price reflects market conditions and all 
participants have had a reasonable opportunity to participate.
    The Exchange notes also that when Rule 48 is invoked, it does not 
affect situations where the opening of a security was delayed for 
reasons unrelated to extreme market volatility, such as where there is 
material news pending that justifies a regulatory halt under NYSE Rule 
123D. In such cases, notwithstanding the invocation of Rule 48, the 
specialist in the affected security is expected to follow regular 
procedures for opening the security (that is, as if Rule 48 had not 
been invoked).

Proposed Amendments to Rule 48

Background

    Pursuant to NYSE Rule 52, dealings on the Exchange are limited to 
the hours during which the Exchange is open for business, i.e., 9:30 
a.m. to 4 p.m. Except for certain pre-opening submission of orders, a 
member or member organization may not make bids or offers outside of 
those hours, and cannot enter orders after 4 p.m. (or earlier, in the 
event of an earlier scheduled close).
    In the event a security has an imbalance of market-on-close 
(``MOC'') or limit-on-close (``LOC'') orders or when the closing price 
would elect a significant volume of stop orders, there may be little 
time to attract offsetting orders before 4 p.m. For example, a member, 
member organization, or customer may be willing to offset the 
imbalance, but be unable to enter an order before 4 p.m. Under current 
Exchange rules, specialists are enabled to represent such legitimate 
market interest that was willing to participate in the close, but could 
not enter a timely order. When a specialist has included another 
member's or member organization's interest in offsetting the imbalance 
when setting a closing price, NYSE Rule 902(a)(ii)(B) permits the 
specialist and such member or member organization to enter a coupled 
order into Crossing Session 1. Pursuant to Rule 903(d)(ii), the 
specialist must obtain Floor Official approval in order to enter a 
coupled order pursuant to that rule. Such procedure essentially permits 
the specialist to represent the member's or member organization's 
interest on a riskless principal basis.
    NYSE Rule 123C(1) and (2) govern the entry of MOC and LOC orders at 
the Exchange. MOC and LOC orders must be entered by 3:40 p.m., unless 
entered to offset a published imbalance. Between 3:40 p.m. and 3:50 
p.m., an MOC or LOC order cannot be cancelled or reduced, except in the 
case of a legitimate error. After 3:50 p.m., an MOC or LOC order cannot 
be cancelled for any reason, including in the case of a legitimate 
error.

Suspending Certain Rules During an Extreme Market Volatility Condition 
at the Close

    On September 29, 2008, the U.S. markets experienced the largest 
single point drop in the history of the Dow Jones Industrial Average 
(``DJIA'')--777 points. That drop capped a month of volatility and 
significant changes to the financial marketplace, including the federal 
takeovers of Fannie Mae, Freddie Mac, American International Group, 
Inc., and Washington Mutual, the bankruptcy of Lehman Brothers, Inc., 
the acquisition of Merrill Lynch by Bank of America, and the sale of 
Wachovia's banking business to Citigroup.
    Rule 48 has served as an invaluable tool for the Exchange to ensure 
a fair and orderly open in these times of extreme market volatility. 
During the month of September, the Exchange invoked Rule 48 nine times. 
This, in contrast to the four times that the Exchange invoked Rule 48 
in the prior nine-month period, since it was adopted. Given the events 
of September 29, 2008, which included market-wide sell imbalances at 
the close, the Exchange believes that it should have the ability to 
declare an extreme market volatility condition at the close as well so 
that the Exchange can suspend certain rules to ensure a fair and 
orderly close.
    The Exchange therefore proposes to amend Rule 48 to include the 
close of trading as a time when a qualified Exchange officer would be 
permitted to declare an extreme market volatility condition. In such 
event, the Exchange proposes temporarily suspending NYSE Rules 52 
(Hours of Operation) and 123C(1) and (2) (Market on the Close Policy 
and Expiration Policy), provided that certain requirements are met. The 
Exchange also proposes to amend Rule 48 to clarify that the existing 
rule covers not just openings of trading, but also reopening of trading 
following a market-wide halt of securities at the Exchange.
    To enable a qualified Exchange officer to declare a Rule 48 
condition at the close, the Exchange proposes amending Rule 48(c) to 
include that a qualified Exchange officer may consider the volatility 
during that day's trading session and evidence of significant order 
imbalances across the market at the close for purposes of determining 
whether to declare an extreme market volatility condition at the close. 
The

[[Page 60744]]

Exchange also proposes that an extreme market volatility condition at 
the close is a separate event and must be considered in light of the 
facts and circumstances leading to the close. A Rule 48 condition at 
the opening would not extend to the close; as proposed, a qualified 
Exchange officer would need to make an independent determination to 
invoke Rule 48 at the close regardless of whether Rule 48 was invoked 
at the open.
    To ensure a fair and orderly close in an extreme market volatility 
condition, the Exchange proposes to temporarily suspend Rule 52 so that 
interest can be solicited and entered into Exchange systems to offset 
imbalances after the scheduled close of trading. As noted above, while 
interest that has not been entered by 4 p.m. can be included to offset 
imbalances under Exchange rules, the process for including such 
interest in the close requires a specialist to represent the interest 
and then enter a coupled order in Crossing Session I with the member or 
member organization who was willing to include such interest in the 
close. Because of the need for Floor Official approval and the fact 
that such orders are entered manually, processing Rule 902(a)(ii)(B) 
coupled orders, particularly when there are multiple coupled orders per 
stock, can take time.
    The Exchange therefore proposes suspending Rule 52 for the sole 
purpose of bypassing the Rule 902 process in times of extreme market 
volatility. As proposed, during an extreme market volatility condition, 
interest may be solicited--including interest that may not have been 
present prior to 4 p.m.--to offset any imbalance that may exist as of 4 
p.m. (or earlier, in the case of an earlier scheduled close). If 
offsetting interest is received in response to such solicitation, 
rather than have the specialist represent such offsetting interest in 
the close, as proposed, such interest could be entered directly into 
Exchange systems on behalf of the member or member organization 
representing such interest. Because Exchange systems do not allow for 
the electronic entry of orders after 4 p.m., as proposed, such interest 
must be represented manually by a Floor broker in the closing auction 
process and entered into Exchange systems by the specialist by no later 
than 4:30 p.m. The Exchange further proposes that the entry of any 
orders after 4 p.m. pursuant to the proposed rule must be under the 
supervision and approval of a Floor Governor.
    By permitting such offsetting interest to be entered directly into 
Exchange systems, the specialist will be better able to manage the 
order flow that may be entered to offset the imbalance, particularly if 
such offsetting order flow is at multiple limit prices. It will also 
enable a better audit trail of whose interest participated in the 
close. To ensure a complete audit trail, as proposed, any offsetting 
interest entered after 4 p.m. during an extreme market volatility 
condition must also be entered into Front End Systemic Capture database 
(``FESC''), as required by NYSE Rule 123. Because such interest may not 
have been known until after 4 p.m., as proposed, a Floor broker may 
represent such offsetting interest after 4 p.m. without first entering 
the details of the order into a FESC, as required by NYSE Rule 123, so 
long as such orders are entered into FESC on an ``as of'' basis 
immediately following execution of the order.
    The Exchange also proposes providing the ability to temporarily 
suspend the NYSE Rule 123C(1) and (2) requirements that MOC and LOC 
orders that are legitimate errors cannot be cancelled or reduced after 
3:50 p.m. during an extreme market volatility condition at the close. 
As proposed, only an erroneous MOC or LOC that would cause significant 
price dislocation in the close could be considered for cancellation. In 
other words, an MOC or LOC order that is a legitimate error that would 
have no impact on the closing price could not take advantage of the 
proposed temporary suspension, even in an extreme market volatility 
condition. If it is determined that such an MOC/LOC legitimate error 
would dislocate the close, such order can be cancelled or reduced at 
any time up until that particular security has closed. To further 
ensure that the ability to cancel an MOC or LOC order after 3:50 is not 
abused, as proposed, such an order can be cancelled or reduced only 
with the supervision and approval of both an Executive Floor Governor 
and a qualified Exchange officer. In the event an Executive Floor 
Governor is not available, a Floor Governor's approval must be 
obtained.
    The Exchange also proposes adding supplementary material to NYSE 
Rule 48 that provides that the amendments proposed in this rule filing 
to include an extreme market volatility condition at the close and the 
related proposed rule suspensions in such a condition are temporary and 
will end on December 31, 2008.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \5\ 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.
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    \5\ 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

    The Exchange has designated the proposed rule change as one that: 
(1) Does not significantly affect the protection of investors or the 
public interest; (2) does not impose any significant burden on 
competition; and (3) does not become operative for 30 days after the 
date of the filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest. Therefore, the foregoing rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \6\ and Rule 19b-4(f)(6) 
thereunder.\7\
    A proposed rule change filed pursuant to Rule 19b-4(f)(6) normally 
does not become operative for 30 days after the date of its filing.\8\ 
However, Rule 19b-4(f)(6)(iii) \9\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. In view of the immediate nature of 
the relief requested, the Exchange seeks to have the proposed 
amendments become operative immediately. The Exchange has requested 
that the Commission waive the 30-day operative delay. Waiver of this 
period will allow the Exchange to

[[Page 60745]]

immediately implement the proposed rule change.
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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4(f)(6).
    \8\ In addition, Rule 19b-4(f)(6)(iii) requires a self-
regulatory organization to give the Commission written notice of its 
intent to file the proposed rule change at least five business days 
prior to the date of filing of the proposed rule change, or such 
shorter time as designated by the Commission. NYSE has satisfied 
this requirement.
    \9\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Exchange believes that given the current market climate, 
immediate implementation of the foregoing proposed rule change is 
necessary in order to avoid significant disruption to the market and to 
ensure investor protection in light of the potential for additional 
volatility in the market as the credit crisis continues. In particular, 
recent and near-term events, including the Emergency Economic 
Stabilization Act of 2008 and the pending expiration of the 
Commission's Emergency Order that prohibits persons from selling short 
the securities of financial institutions,\10\ could cause additional 
volatility in the market in the coming days. Moreover, the Exchange 
proposes suspending only those rules that could impact specialists' 
ability to arrange a fair and orderly close during an extreme market 
volatility condition. Finally, the proposed changes to NYSE Rule 48 are 
temporary and will end on December 31, 2008. The Exchange believes that 
its need to immediately implement the proposed rule change satisfies 
the standards set out in the Exchange Act and related rules.
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    \10\ See Securities Exchange Act Release No. 58592 (September 
18, 2008), 73 FR 55169 (September 24, 2008).
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
The Commission therefore grants the Exchange's request and designates 
the proposal to be operative upon filing.\11\
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    \11\ For purposes only of waiving the 30-day 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 the 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.

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-2008-102 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-2008-102. 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 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-2008-102 and should be 
submitted on or before November 4, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-24236 Filed 10-10-08; 8:45 am]

BILLING CODE 8011-01-P
