
[Federal Register: October 29, 2008 (Volume 73, Number 210)]
[Notices]               
[Page 64379-64392]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29oc08-103]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58845; File No. SR-NYSE-2008-46]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Amendment Nos. 2 and 3 and Order Granting 
Accelerated Approval to a Proposed Rule Change, as Modified by 
Amendment Nos. 1, 2, and 3, To Create a New NYSE Market Model, With 
Certain Components To Operate as a One-Year Pilot, That Would Alter 
NYSE's Priority and Parity Rules, Phase Out Specialists by Creating a 
Designated Market Maker, and Provide Market Participants With 
Additional Abilities To Post Hidden Liquidity

October 24, 2008.

I. Introduction

    On June 12, 2008, the New York Stock Exchange LLC \1\ (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4 
thereunder,\3\ a proposed rule change to establish a new market model 
(``New Model''). The New Model would implement significant changes in 
NYSE's market structure, including, most notably: (i) The phasing out 
of the specialist system and adopting a Designated Market Maker 
(``DMM'') structure; (ii) the alteration of NYSE's priority and parity 
rules, most significantly to allow DMMs to trade on parity with orders 
on NYSE's Display Book[supreg] (``Display Book''); and (iii) the 
introduction of new order functionality, including the DMM Capital 
Commitment Schedule (``CCS'') and hidden orders.\4\
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    \1\ Formerly known as the New York Stock Exchange, Inc.
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ Currently, specialists must yield to customer orders on the 
Display Book. See NYSE Rule 92(a).
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    On July 15, 2008, the Exchange filed Amendment No. 1 to the 
proposed rule change. The proposed rule change, as modified by 
Amendment No. 1, was published for public comment in the Federal 
Register on July 23, 2008.\5\ The Exchange filed Amendment No. 2 to the 
proposed rule change on August 29, 2008. The Exchange filed Amendment 
No. 3 to the proposed rule change on October 7, 2008. The Commission 
received no comment letters regarding proposed rule change. This order 
provides notice of filing of Amendment Nos. 2 and 3 to the proposed 
rule change, and grants accelerated approval to the proposed rule 
change, as modified by Amendment Nos. 1, 2 and 3.
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    \5\ Securities Exchange Act Release No. 58184 (Jul. 17, 2008), 
73 FR 42853 (``Notice'').
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II. Description of the Proposal

A. Background: NYSE's Hybrid Market and the Evolution of Electronic 
Trading

    Section 11(b) of the Act \6\ allows the rules of a national 
securities exchange to permit a member to be registered as a specialist 
and act as both a broker and a dealer. Historically, the NYSE 
specialist was responsible for overseeing the execution of all orders 
coming into the Exchange, for conducting auctions on the Floor, and for 
maintaining an orderly market in assigned securities. Specialists' 
dealer activities are governed, in part, by the negative and 
affirmative trading obligations. Rule 11b-1 under the Act \7\ requires 
exchanges that permit members to register as specialists to have rules 
governing specialists' dealer transactions so that their proprietary 
trades conform to the negative and affirmative obligations. The 
negative obligation as set forth in Rule 11b-1 under the Act requires 
that a specialist's dealings be restricted, so far as practicable, to 
those reasonably necessary to permit the specialist to maintain a fair 
and orderly market.\8\ The affirmative obligation as set forth in Rule 
11b-1 under the Act requires a specialist to engage in a course of 
dealings for its own account to assist in the maintenance, so far as 
practicable, of a fair and orderly market.\9\ NYSE has adopted these 
obligations in its current Rule 104.\10\ In 2006, the Exchange began 
implementation of its NYSE HYBRID MARKETSM (``Hybrid 
Market''),\11\ under which Exchange systems assumed the function of 
matching and executing electronically-entered orders. As part of the 
Hybrid Market, the Exchange programmed its systems to provide 
specialists with an order-by-order advance ``look'' at incoming orders.
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    \6\ 15 U.S.C. 78k(b).
    \7\ 17 CFR 240.11b-1.
    \8\ 17 CFR 240.11b-1(a)(2)(iii).
    \9\ 17 CFR 240.11b-1(a)(2)(ii).
    \10\ NYSE Rule 104(a) reflects NYSE's adoption of the negative 
obligation and states that ``no specialist shall effect on the 
Exchange purchases or sales of any security in which such specialist 
is registered, for any account in which he or his member 
organization * * * is directly or indirectly interested, unless such 
dealings are reasonably necessary to permit such specialist to 
maintain a fair and orderly market * * *.''
    \11\ See Securities Exchange Act Release No. 53539 (March 22, 
2006), 71 FR 16353 (March 31, 2006) (SR-NYSE-2004-05).
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    The rise of the electronic Hybrid Market has fundamentally altered 
NYSE's trading environment. Traditionally, price discovery on the 
Exchange took place almost exclusively on the Floor in the form of 
face-to-face interactions among brokers and specialists. These 
interactions have diminished as electronic trading has become more 
important on the Exchange.
    In addition, information that once was exclusive to the Floor, such 
as the most up-to-date quotes and last sale prices, is now widely 
available off the Floor through electronic means. At the same time, the 
Exchange believes that it is no longer the dominant trading market for 
many NYSE-listed securities, as competition from other market centers 
has increased.
    The increase in electronic executions on the Exchange as well as 
the increase in the use of smart routing engines by market participants 
of all types has reduced the advantages once enjoyed by Floor brokers 
and specialists. Indeed, NYSE has argued that the informational 
advantage has shifted ``upstairs'' where

[[Page 64380]]

orders are now first ``shopped'' within a firm and then to others 
before being sent to the Floor for execution and, even then, orders are 
likely to be sent in pieces to multiple markets.\12\
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    \12\ See Notice, supra note 5, at 42861.
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    Because of these changes, NYSE is proposing to adopt its New Model, 
which the Exchange believes would provide a more robust trading model 
on the Floor while preserving the existing framework for trading and 
some of the key responsibilities of its market participants that NYSE 
believes make it unique. The Exchange believes that the proposed 
changes would improve market quality in the form of tighter spreads, 
greater liquidity, and opportunities for price improvement.

B. Proposed Changes to Exchange Systems

1. Overview of NYSE's Proposed New Model
    The Exchange proposes to eliminate the ``specialist'' category of 
market participants and create a new category of market participants, 
DMMs.\13\ The Exchange intends to implement the New Model in two 
phases: Phase 1, beginning as of the date of this order (``Approval 
Date'') and ending no more than five weeks after the Approval Date, and 
Phase 2, beginning upon completion of the Phase 1 implementation and 
ending no more than ten weeks after the Approval Date.\14\ Though DMMs 
would still be ``specialists'' during Phase 1, once Phase 1 has been 
fully implemented and Phase 2 begins, DMMs would no longer be 
``specialists'' under the Act. Once Phase 2 has been implemented, DMMs 
would no longer serve on the Exchange in the capacity of responsible 
broker-dealer for orders on NYSE's book, and DMM trading activity on 
the Exchange would be limited to proprietary trading.\15\ In addition, 
during Phase 2, the Exchange will eliminate the order-by-order advance 
``look'' specialists currently receive. Because, with the 
implementation of Phase 2, they would no longer be specialists, DMMs 
would not be subject to a specialist's negative obligation not to trade 
for its own account unless reasonably necessary to the maintenance of a 
fair and orderly market.\16\ The Exchange believes this would give the 
DMM greater freedom to manage the trading risks associated with their 
reduced responsibilities to the NYSE market. Like specialists today, 
DMMs would be able to generate orders through an algorithm that 
interacts directly with the Display Book. In addition, in the New 
Model, DMMs would be able to commit additional liquidity in advance to 
fill incoming orders via the Capital Commitment Schedule or CCS. The 
CCS is a liquidity schedule setting forth various price points where 
the DMM is willing to interact with incoming orders.
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    \13\ See infra Section II.B.2.(a) for a more detailed 
description of the Exchange's proposal regarding DMMs.
    \14\ The Exchange proposes to roll out each phase of the New 
Model initially in three or four securities, with progressive 
implementation of the New Model rules for additional securities over 
the duration of each phase. Certain provisions of the proposed rules 
for the New Model would be implemented on a one-year pilot basis. 
See infra Section II.B.5 for a more detailed description of the 
implementation of the proposed New Model.
    \15\ The DMM would also be responsible for effecting manual 
executions in certain circumstances on the Exchange. See infra notes 
38-39 and accompanying text.
    \16\ See supra, notes 8-10 and accompanying text. The Exchange 
has determined to impose certain affirmative obligations on DMMs 
(including an obligation to provide quotes at the National Best Bid 
or Offer (``NBBO'') a minimum percentage of the trading day).
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    As part of the redesign of its market, NYSE proposes to amend the 
rules governing allocation of shares among the participants in a trade 
with an incoming order.\17\ First, NYSE's proposal would amend the 
Exchange's priority rules relating to displayed interest that 
establishes the Exchange's best bid or best offer (collectively 
``Exchange BBO'' \18\), most notably by providing such priority 
interest with the first 15% of any execution and by allowing such 
interest to maintain priority until it is exhausted.\19\ Second, in the 
proposed New Model, all market participants would receive executions on 
an equal basis (``parity'') with other interest available at that 
price.\20\ Similar to the NYSE's current market model, the Exchange 
would classify each individual Floor broker and the DMM registered in a 
security as separate market participants, while all off-Floor orders 
entered in Exchange systems for such security would together constitute 
a single market participant (``Off-Floor Participant'') for the purpose 
of share allocation. The Exchange's proposed parity rule represents a 
significant change from its current requirement that specialists yield 
to all off-Floor orders on the Display Book.
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    \17\ Proposed NYSE Rule 72 (Priority of Bids and Offers and 
Allocation of Executions).
    \18\ The term ``Exchange BBO'' refers to the best bid or the 
best offer on NYSE. It should not be confused with the defined terms 
``national best bid'' and ``national best offer'' as defined in Rule 
600(b)(42) of Regulation NMS Rule 242.600(b)(42) under the Act.
    \19\ See infra Section II.B.3.(b) for a more detailed 
description of the Exchange's proposal regarding priority.
    \20\ See infra Section II.B.3.(b) for a more detailed 
description of the Exchange's proposal regarding parity.
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    The Exchange also proposes to provide all market participants with 
the ability to maintain non-displayed ``hidden interest''--i.e., 
reserve interest without a minimum display requirement.\21\ Along with 
the DMM's CCS interest, the Exchange believes this ability of market 
participants to maintain hidden interest on NYSE's book will contribute 
to the Exchange's liquidity and depth of market.
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    \21\ See infra Section II.B.3.(a) for a more detailed 
description of the Exchange's proposal regarding reserve interest.
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2. Updating the Roles of the Various Exchange Market Participants
    As indicated above, the New Model proposal includes proposed 
changes to the roles of the Exchange's various market participant 
groups to reflect new patterns of trading and new obligations. These 
include the phasing out of NYSE's specialist system and the adoption of 
a Designated Market Maker structure. In addition, the Exchange is 
making changes to the role of, and tools available to, Floor brokers, 
and is giving new tools to off-Floor participants that will enable them 
to participate in the market more directly. These changes are described 
in more detail below.
(a) Designated Market Makers
(1) Overview
    The Exchange believes that its new market model requires a new type 
of market maker \22\--the Designated Market Maker--with the ability 
(and affirmative obligation) to contribute liquidity in a security by 
trading competitively for its dealer account. The Exchange therefore 
proposes to phase out the existing specialist system and to replace 
specialists with Designated Market Makers who would be employees of 
Designated Market Maker Units (``DMM Units'').\23\
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    \22\ The term ``market maker'' shall have the same meaning as 
that term in Section (3)(a)(38) of the Act.
    \23\ As of the implementation of Phase 2, pursuant to proposed 
Rule 104(f)(iv), DMMs will be designated as ``market makers'' on the 
Exchange for purposes of the Act.
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    As described in further detail below, the Exchange proposes to give 
DMM Units tools and opportunities that are not available to specialists 
currently, along with modified obligations, that the Exchange believes 
are more commensurate with trading in electronic markets. At the same 
time, the Exchange would preserve several aspects of the specialist 
system that it believes are beneficial to the market and the investing 
public.

[[Page 64381]]

    Current NYSE Rule 104, relating to specialist dealings, will be 
amended and renamed 104T and will be operative and effective through 
the end of Phase 1. The Exchange also proposes a new Rule 104 that will 
be implemented during Phase 2.\24\
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    \24\ See infra Section II.B.5 for a more detailed description of 
the phased implementation of the proposed New Model.
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(2) DMMs and DMM Units Approved by the Exchange
    The Exchange proposes to require that member organizations who want 
to operate a DMM Unit file an application in writing and be approved by 
NYSE Regulation prior to operating a DMM Unit. The application and 
approval requirement would be waived for existing NYSE specialist firms 
that decide to create a DMM Unit.\25\ In deciding whether to approve an 
application, NYSE Regulation will consider, among other things, the 
member organization's market making ability, the capital that the 
member is willing or able to make available for market making and such 
other factors as NYSE Regulation deems appropriate.\26\
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    \25\ See Proposed NYSE Rule 103(b)(ii).
    \26\ See Proposed NYSE Rule 103(b)(i).
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    DMMs employed by DMM Units to work on the Floor of the Exchange 
will be required to be approved and registered with the Exchange. In 
order to obtain such approval, applicants will need to submit an 
application to NYSE Regulation, Inc., which will assess an applicant's 
regulatory fitness, and successfully complete a qualifications 
examination prescribed by the Exchange.\27\
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    \27\ For a full discussion of the DMM registration and approval 
process, including provisions for Relief DMMs and Temporary DMMs, 
see Notice, supra note 5, at 42862.
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(3) DMMs Not Responsible Broker-Dealer
    The Exchange proposes to amend the provision in Exchange rules that 
makes specialists the ``responsible broker-dealer'' for purposes of 
Limit Order Display and other obligations under both the Act and 
regulations promulgated thereunder. Under NYSE Rule 60, specialists are 
currently solely responsible for quoting the highest bids and lowest 
offers on the Exchange for all reported securities.
    The Exchange is of the view that this rule is appropriate in a 
manual trading environment, where the specialist post is the primary 
locus for trading in securities and where the specialist oversees the 
reporting of all executions. The Exchange believes this rule makes less 
sense in an automated market. Market participants who are not 
specialists post their interest electronically in the form of DOT 
orders or e-Quotes (broker agency interest files), and Exchange systems 
process and publish that interest automatically. The Exchange's quote 
today now includes the Floor broker's agency interest, specialist 
interest, and electronically entered interest of off-Floor 
participants, and all interest included in the Exchange's quote is 
identifiable by the Exchange's systems.
    Given the automated processing of participant orders, quotations, 
and executions, the Exchange believes that the notion that the 
specialist is the sole responsible broker-dealer is obsolete. And, 
because various obligations may attach based on whether a participant 
is designated as the responsible broker-dealer, the Exchange believes 
that designating the DMM as the ``responsible broker-dealer'' could 
place these obligations on a nominal participant while relieving the 
logically responsible participant of that same obligation. To address 
these limitations, NYSE is proposing to amend NYSE Rule 60 to reflect 
that the member or member organization entering a bid or offer in a 
security is the ``responsible broker-dealer'' to the extent of such bid 
or offer.\28\
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    \28\ See 17 CFR Sec.  240.602(b)(i).
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(4) DMMs' Affirmative Obligation
    Although the Exchange does not propose to require DMMs to act as 
``responsible broker-dealers,'' the Exchange does propose to impose on 
each DMM affirmative obligations with respect to the quality of the 
markets in securities assigned to it. The Exchange's proposed Rule 104 
sets forth the DMMs' affirmative obligation as follows:

    The function of a member acting as a DMM on the Floor of the 
Exchange includes the maintenance, in so far as reasonably 
practicable, of a fair and orderly market on the Exchange in the 
stocks in which he or she is so acting. The maintenance of a fair 
and orderly market implies the maintenance of price continuity with 
reasonable depth, to the extent possible consistent with the ability 
of participants to use reserve orders, and the minimizing of the 
effects of temporary disparity between supply and demand. In 
connection with the maintenance of a fair and orderly market, it is 
commonly desirable that a member acting as DMM engage to a 
reasonable degree under existing circumstances in dealings for the 
DMM's own account when lack of price continuity, lack of depth, or 
disparity between supply and demand exists or is reasonably to be 
anticipated.\29\
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    \29\ See Proposed NYSE Rule 104(f)(ii).

    In addition, DMM Units would be required to maintain adequate 
minimum capital \30\ based on their registered securities, and would be 
required to use their capital to engage in a course of dealings for 
their own accounts to assist in the maintenance, so far as practicable, 
of a fair and orderly market. Transactions on the Exchange by a DMM for 
the DMM Unit's account are to be effected in a reasonable and orderly 
manner in relation to the condition of the general market and the 
market in the particular stock.\31\ To support this requirement, the 
Exchange would continue to provide depth guidelines \32\ for each 
security, and NYSE Regulation would continue to surveil for and enforce 
DMM compliance with the guidelines.\33\
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    \30\ The proposed capital requirements for DMMs are identical to 
the current capital requirements computed for specialists in 
accordance with Rule 15c3-1 and current NYSE Rule 104. The Exchange 
proposes to move the placement of these requirements into proposed 
NYSE Rule 103.
    \31\ See Proposed NYSE Rule 104(g)(i).
    \32\ Currently, the Exchange provides each security with a daily 
depth guideline and depth sequence size that reflects its individual 
trading characteristics including intra-day price volatility. Depth 
sequence sizes over which depth is calculated and the depth 
guidelines against which the calculated depth movements are compared 
are dynamically updated each day for each symbol based on the 
symbol's recent trading characteristics. These characteristics 
include: its previous NYSE closing price; its NYSE adjusted volume; 
and its intra-day consolidated high/low range. Systemic calculations 
of these values occur each day and are used in the creation of a 
formulaic individualized depth guideline and depth sequence size 
that is unique for each security. The Exchange proposes to provide 
DMMs with the same information pursuant to proposed NYSE Rule 
104(f)(iii).
    \33\ Specialist compliance with the depth guidelines is reviewed 
by the Market Surveillance division of NYSE Regulation on a patterns 
and practices basis. A specialist's failure to comply with the 
guidelines may result in referral to NYSE Regulation's Enforcement 
division for investigation and possible disciplinary action.
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    DMMs would further be required to maintain a bid or offer at the 
National Best Bid or National Best Offer (``inside'') for securities in 
which the DMM is registered for a certain percentage of the trading day 
based on the average daily volume of the security. For securities that 
have a consolidated average daily volume of less than one million 
shares per calendar month, a DMM Unit must maintain a bid or an offer 
at the NBBO for at least 10% of the trading day (calculated as an 
average over the course of a calendar month). For securities that have 
a consolidated average daily volume of equal to or greater than one 
million shares per calendar month, a DMM Unit must maintain a bid or an 
offer at the NBBO for at least 5% or more of the trading day 
(calculated as an average over the courts of a calendar month). Reserve 
or

[[Page 64382]]

other hidden orders entered by the DMM would not be included in the 
inside quote calculations.\34\
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    \34\ For a more detailed discussion of how DMM compliance with 
the quoting requirement is measured and an example of a quoting 
requirement calculation, see Notice, supra note 5, at 42863-4.
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    The Exchange further proposes that DMMs retain the re-entry 
requirements currently imposed on specialists contained in NYSE Rule 
104. As such, DMMs effecting Neutral, Non-Conditional and Conditional 
transactions would still be required to re-enter liquidity on the 
opposite side of the market depending on the type of transaction 
executed by the DMM.\35\
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    \35\ Pursuant to proposed NYSE Rule 104(g)(i)(A), DMMs would be 
subject to the same requirements currently imposed on specialists in 
current NYSE Rule 104.10(5)-(6). Currently Conditional Transactions 
operate as a separate pilot; through this filing the Exchange seeks 
to incorporate those provisions into the New Model Pilot through 
proposed NYSE Rule 104(g)(i)(A).
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(5) DMMs and Order Information
    Once Phase 2 has been implemented, DMMs would not receive an order-
by-order advance ``look'' at incoming orders.\36\ The DMM Unit's 
trading algorithms would have access to information with respect to 
orders entered on the Exchange, Floor broker agency interest files, or 
reserve interest to the extent such information is made publicly 
available. DMM unit algorithms would receive the same information that 
is disseminated to the public by the Exchange, at the same time that it 
is available to other market participants, with respect to orders 
entered on the Exchange, Floor broker agency interest files, or reserve 
interest.\37\
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    \36\ In SR-NYSE-2008-67, the Exchange modified the order flow 
sent to the Specialist Application Programmed Interface, or 
``SAPI.'' Commencing with two securities (to ultimately apply to all 
Exchange securities), the Exchange's systems will send only copies 
of the following types of orders to the Specialist Algorithm: (i) 
market orders; (ii) buy limit orders priced at the NYSE bid price or 
sell limit orders priced at the NYSE offer price; (iii) limit orders 
priced in between the NYSE bid price and the NYSE offer price; and 
(iv) limit orders that are priced at or through the opposite side 
quote (i.e., below the bid in the case of an order to sell or at or 
above the offer in the case of an order to buy). See Securities 
Exchange Act Release No. 58628 (July 30, 2008), 73 FR 46122 (August 
7, 2008).
    \37\ The Exchange notes that the DMM algorithm would receive 
``Book State'' information, which is the same information that is 
available to other market participants that subscribe to NYSE market 
data feeds, and shows aggregated displayed interest at various price 
points.
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    Although the DMM would no longer receive order by order 
information, there are certain times during which the Exchange believes 
human interaction is essential to market quality and maintaining a fair 
and orderly market; specifically, during opening and re-opening 
transactions, closing transactions, block transactions, gap quote 
situations, and when trading reaches liquidity replenishment points 
(``LRPs'') that would lock or cross the market.\38\ During these 
specific situations, DMMs would be responsible for determining the 
price \39\ and effecting executions of orders at that price.
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    \38\ See Proposed NYSE Rule 104(a)(2)-(5).
    \39\ In an opening and reopening trade, Display Book would 
verify that all interest that must be executed in the opening or 
reopening can be executed at the price chosen by the DMM. If all the 
interest that must be executed in the transaction cannot be executed 
at that price, the Display Book would block the execution. In 
addition, when executing blocks (10,000 shares or more or value of 
$200,000 or more), trading out of a gap quote situation or an LRP 
that locks or crossed the market, the Display Book may adjust the 
execution price if there is enough interest on the Display Book to 
complete the transaction at a better price.
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(6) DMMs Would Not Retain the Specialists' Negative Obligation
    The Exchange believes that due to the transformation of the 
equities markets in the United States, the specialists' negative 
obligation no longer makes sense and should be eliminated. 
Historically, in a manual, floor-based market, specialists often had a 
significant informational advantage from being at the center of 
substantially all of the exchange's activity in a given security. 
Similarly, in the Hybrid Market, the specialist's advance ``look'' at 
incoming orders provided the specialist with a unique and potentially 
significant informational advantage over other market participants.
    Given the real-time availability of market information and 
resultant increase in market transparency in today's markets and the 
Exchange's proposed elimination of the advance ``look'' at incoming 
orders by the DMM, the Exchange believes that the imposition of a 
negative obligation on DMMs is unnecessary. Accordingly, the Exchange 
is proposing that, beginning with the implementation of Phase 2, DMMs 
would no longer be deemed to be ``specialists'' or to be subject to the 
negative obligation.
    DMMs, however, would continue to facilitate manual transactions on 
the Exchange. When DMMs are facilitating manual transactions, Exchange 
systems would provide DMMs the total volume of all orders eligible to 
participate \40\ in the transaction. All eligible orders would be 
aggregated by the Exchange system and shown to DMMs as interest 
available to participate in the manual execution. With this tool, DMMs 
would have the necessary information to appropriately price opening, 
re-opening, and closing transactions and to trade out of gap quote and 
certain LRP situations. DMMs would not have access to such information 
on an order-by-order basis, as Exchange specialists do today.\41\
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    \40\ This information would not include customers' Non-Displayed 
Reserve Orders and Floor broker agency interest that is designated 
``Do Not Display.'' See infra Section II.B.3.(a).(2).
    \41\ Odd-lot orders are a temporary exception to this principle, 
due to limitations of the Exchange's systems that process odd-lot 
orders. See infra notes 57-60 and accompanying text.
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(7) DMMs Interest for Quoting and Trading
    Although DMMs would no longer be restricted by a negative 
obligation, DMMs would have an affirmative obligation to contribute to 
the maintenance of a fair and orderly market by committing capital in 
order to add liquidity to the market when there is little or no 
liquidity, and bridge the gaps in supply and demand by trading for 
their own account. To assist DMMs in meeting these market making 
responsibilities, DMMs would be permitted to maintain systems that 
employ algorithms to make trading and quoting decisions (``DMM 
Interest'') on behalf of each DMM.
    DMM Interest would be permitted to: (i) Supplement the size of the 
existing Exchange BBO; (ii) maintain displayed and non-displayed DMM 
Interest, as described more fully below; \42\ (iii) layer interest at 
varying prices outside the Exchange BBO; (iv) partially or completely 
fill an order at the Exchange BBO or at a sweep price; (v) trade at and 
through the Exchange BBO; (vi) trade in a sweep transaction; (vii) 
provide price improvement; and (viii) match better bids and offers 
published by other market centers where automatic executions are 
immediately available. Exchange systems would prevent DMM Interest from 
executing against itself (i.e., executing wash trades).
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    \42\ See infra Section II.B.3.(a).
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(8) DMM Capital Commitment Schedule
    In addition to DMM Interest, DMMs would be permitted to transmit to 
the Display Book a Capital Commitment Schedule (``CCS'') setting forth 
additional liquidity that the DMM would be willing to provide at 
specific price points. The CCS would inform the Display Book of the 
amount of shares that the DMM is willing to trade at price points 
outside, at, and inside the Exchange BBO. The CCS is separate and 
distinct from the DMM Interest. DMM algorithms would send the Exchange 
this schedule of additional non-displayed trading interest.
    CCS interest would be accessed by the Exchange's systems in two 
ways,

[[Page 64383]]

depending on whether an incoming order is inside, at, or through the 
NYSE BBO. When an order is received that would trade at or through the 
NYSE BBO, the Exchange's system would review all the liquidity 
available on the Display Book, including CCS interest, and determine 
the price at which the full size of the order can be satisfied (the 
``completion price''). When determining the completion price, Exchange 
systems would take into account all eligible displayed and non-
displayed interest available in the Display Book (inside, at, and 
through the NYSE BBO); any protected bids or offers on markets other 
than the Exchange (``away interest''); and the DMM's CCS interest at a 
particular price. Exchange systems would then compare the amount of 
liquidity required from the DMM's CCS at the completion price with the 
number of CCS shares offered at the next price that is one minimum 
price variation (``MPV'') \43\ or more higher (in the case of an order 
to sell) or lower (in the case of an order to buy) (the ``better 
price'').
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    \43\ Pursuant to NYSE Rule 62, the MPV is currently one cent 
($0.01) except that, with respect to equity securities trading on 
the Exchange at a price of $100,000 or greater, the minimum price 
variation shall be ten cents ($0.10).
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    If the number of shares that would be allocated to the CCS interest 
at the better price is greater than the number of shares that would be 
allocated to the CCS interest at the completion price, then the CCS 
interest would participate at the better price (with CCS interest 
yielding to any other interest in Exchange systems at that price). Any 
remaining balance of the incoming order would be executed at the 
completion price against displayable and non-displayable interest 
pursuant to NYSE Rule 72.\44\ If the number of shares that would be 
allocated to the CCS interest at the completion price is equal to or 
greater than the number of shares that would be allocated to the CCS 
interest at the better price, the CCS interest will participate at the 
completion price (with CCS interest yielding to any other interest in 
Exchange systems at that price).\45\
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    \44\ A DMM's CCS interest may only participate once in the 
execution of an incoming order. As such, CCS interest that may exist 
at the completion price is ineligible to trade with any remaining 
balance of the incoming order if the DMM's CCS interest was included 
in the execution of any portion of such order at the better price.
    \45\ For examples of the CCS, see Notice, supra note 5, at 
42866-67.
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    A DMM's CCS interest inside the Exchange BBO would be accessed by 
Exchange systems to provide price improvement to incoming orders and to 
match better-priced bids and offers if available on away market 
centers. DMMs would not be required to be represented in the bid or the 
offer in order to provide CCS interest inside the Exchange BBO.
    Pursuant to proposed NYSE Rule 1000(e), CCS interest priced inside 
the Exchange BBO could trade with interest arriving in the Exchange 
market that: (i) Is eligible to trade at or through the Exchange BBO; 
(ii) is eligible to trade at the price of non-displayable reserve 
interest of Reserve Orders and Floor broker agency interest files 
reserve interest (``hidden interest''); or (iii) is eligible to route 
to away market interest for execution, if the total volume of CCS 
interest, d-Quote interest in Floor broker agency interest files, and 
any other hidden interest would be sufficient to fully execute the 
incoming order at a price inside the Exchange BBO. The Display Book 
would determine the price point inside the Exchange BBO at which the 
maximum volume of CCS interest would trade, taking into account the 
available d-Quotes and hidden interest. The CCS interest would then 
participate at that price, on parity with all other interest at that 
price (i.e., d-Quotes and non-displayed reserve interest). Any reserve 
interest of the DMM that is also eligible to trade at the price inside 
the Exchange BBO at which the CCS interest would participate would be 
aggregated with the DMM's CCS interest at that price when the trade 
execution is allocated. In this manner, an incoming order may be 
executed at multiple price points inside the Exchange BBO against d-
quotes, non-displayable reserve interest of all participants, and CCS 
interest. However, CCS interest may only participate once if more than 
one execution is required to fill the order.
(b) Floor Brokers
(1) Elimination of Percentage Orders
    The Exchange proposes to amend NYSE Rule 13 and to delete NYSE 
Rules 70.25(d)(i)(A), 123A.30 and 1000(d)(2)(D) to eliminate percentage 
orders. As a result of these proposed amendments, Floor brokers would 
no longer be permitted to enter CAP-DI orders. In place of this order 
type, the Exchange intends to provide Floor brokers access to 
algorithmic technology that would replicate the trading strategy 
achieved by the use of CAP-DI orders through the Floor broker's 
handheld electronic device.
    The Exchange believes that this change is necessary to improve the 
efficiency of the Display Book. CAP-DI orders require the system to 
monitor and calculate many variables, and passively converted CAP-DI 
orders impede the specialist's ability to function efficiently in an 
automated market because the specialist must manually complete the 
passive conversion.\46\
---------------------------------------------------------------------------

    \46\ For additional discussion regarding the Exchange's proposed 
elimination of CAP-DI orders, see Notice, supra note 5, at 42868.
---------------------------------------------------------------------------

(2) d-Quote Trading With Non-Marketable IOC Orders and at the Open and 
Close
    The Exchange further proposes to amend NYSE Rule 70 to enhance the 
functionality of the Floor broker d-Quote to increase the liquidity 
available for executions on the Exchange. Specifically, the Exchange 
proposes to allow d-Quotes to partially or completely fill a non-
marketable immediate or cancel order (``IOC''), which includes NYSE 
IOC, Reg NMS IOC, and Intermarket Sweep Orders,\47\ that are within the 
d-Quote's discretionary range.\48\ In allowing the d-Quote to interact 
with a non-marketable IOC, the Exchange seeks to provide the IOC an 
opportunity to receive a partial or complete execution with price 
improvement. In instances where the d-Quote only partially completes 
the order, the remaining portion of the non-marketable IOC will be 
automatically and immediately cancelled.
---------------------------------------------------------------------------

    \47\ See NYSE Rule 13. By their definition, these order types 
are never quoted but must be automatically executed. Any remaining 
unfilled portion is immediately and automatically cancelled. Non-
marketable IOC orders are immediately and automatically cancelled.
    \48\ See Proposed NYSE Rule 70.25(d)(ix).
---------------------------------------------------------------------------

    To further increase the liquidity available at the opening and 
closing transaction, the Exchange proposes to amend NYSE Rule 
70.25(a)(ii) to allow d-Quotes to be active in the opening and closing 
transactions.
(3) Floor Broker Interest Published to OpenBook
    The Exchange proposes to have Floor broker interest published in 
the OpenBook system at every price point (unless designated ``Do Not 
Display'' or ``DND''). The displayable portions of Floor broker 
interest that is designated DND will only be published in OpenBook when 
such interest is at the Exchange BBO. Floor broker agency interest 
employing Non-Displayed Reserve functionality, as described further 
below,\49\ will not be published in OpenBook.
---------------------------------------------------------------------------

    \49\ See infra Section II.B.3.(a).(2).
---------------------------------------------------------------------------

3. Changes to NYSE Order Types and Order Processing
(a) Additional Undisplayed Liquidity
    Floor brokers, off-Floor participants, and DMMs would continue to 
have the

[[Page 64384]]

ability to maintain reserve liquidity on the Exchange; however, NYSE 
proposes to modify each market participant's ability to provide reserve 
interest. As a threshold matter, the Exchange proposes to amend NYSE 
Rule 13 to label all undisplayed off-Floor interest ``Reserve Orders.'' 
Within that category, the Exchange proposes to create two types of 
reserve interest, ``Minimum Display'' and ``Non-Displayed Reserve.''
(1) Minimum Display Orders
    Under the proposed rule change, ``Minimum Display Orders'' require 
that a minimum of one round lot of the order be designated for display. 
The Exchange proposes to make permanent NYSE Rule 13 governing Reserve 
Orders, and also proposes to provide Floor brokers and DMMs with 
equivalent functionality via a conforming amendment to proposed NYSE 
Rules 70(e) and 104. Collectively, this minimum display reserve 
functionality is referred to as ``Minimum Display Interest.'' Each time 
a Minimum Display Order is replenished from reserve interest, a new 
time-stamp is created for the replenished portion of that Minimum 
Display Order, while the remaining reserve interest retains the time-
stamp of its original entry. Minimum Display Interest would be eligible 
to participate in manual executions, but would not be identifiable to 
the DMM on an order-by-order basis. Exchange systems would include all 
Minimum Display Interest in the aggregate order information available 
for execution at a price point when the DMM facilitates a manual 
transaction.
    The Exchange further proposes that the aggregate of Minimum Display 
Interest be included in the aggregate interest available to be seen by 
the DMM in order to provide information about orders available in 
Exchange systems for response to a Floor broker's market probe request 
pursuant to NYSE Rule 115. Currently, during a manual execution, Floor 
broker DND reserve interest that has a displayed quantity and Reserve 
Orders pursuant to NYSE Rule 13 are included in the aggregated order 
information displayed to the specialist only during manual executions 
(e.g., the opening and closing trade on the Exchange, resuming trades 
after a LRP is reached, or during a gap quote situation). Pursuant to 
Exchange Rule 70.20(h), access to the Display Book system for 
information on reserve interest is only for the purpose of effecting 
transactions that are reasonably imminent.\50\ The Exchange proposes to 
amend NYSE Rules 13, 70.20 and 115 to specifically state that the 
aggregated Minimum Display Interest will be included in the information 
disseminated in response to a Floor broker's market probe request 
pursuant to NYSE Rule 115.
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    \50\ NYSE Rule 70.20(h)(ii) provides, ``Specialists, trading 
assistant and anyone acting on their behalf are prohibited from 
using the Display Book system to access information about Floor 
broker agency interest excluded from the aggregated agency interest 
other than for the purpose of effecting transactions that are 
reasonably imminent where such Floor broker agency interest 
information is necessary to effect such transaction.''
---------------------------------------------------------------------------

    Pursuant to NYSE Rule 115(iii) a specialist may provide information 
about orders contained in the Display Book, referred to also as a 
market probe, to provide information about buying or selling interest 
in the market. This information can include aggregated buying or 
selling interest contained in Floor broker agency interest files other 
than interest the broker has chosen to exclude from the aggregated 
buying and selling interest in response to an inquiry from a member 
conducting a market probe in the normal course of business.
    The Exchange further proposes to amend NYSE Rule 70.20(h)(ii) to 
remove the prohibition against specialist's ability to provide 
information about Floor broker reserve interest. The Exchange proposes 
that all Floor broker interest not designated DND be included in the 
information eligible for dissemination pursuant to NYSE Rule 115.
(2) Non-Displayed Reserve Orders
    In addition to Minimum Display Interest, the Exchange further 
proposes to provide all market participants with the ability to 
maintain non-displayed interest. This proposed type of reserve interest 
would not require any of the order to be designated for display and 
would be available to all market participants. The Exchange proposes to 
create the ``Non-Displayed Reserve Order'' for off-Floor participants 
and provide Floor brokers and DMMs with equivalent functionality. Non-
Displayed Reserve Orders of off-Floor customers would not be included 
in the information available to the DMM for manual execution.
    Floor brokers would also be able to utilize non-displayed reserve 
functionality to enter reserve interest. If the Floor broker uses this 
functionality, there is no interest displayed in the published 
quotation, but the interest will be eligible for manual executions 
because the DMM has the ability to view the Floor broker agency 
interest in the aggregate. Floor broker agency interest file reserve 
interest may also be designated as Do Not Display or ``DND,'' meaning 
such interest will not be available to the DMM for manual executions. 
As such, Non-Displayed Reserve Orders and Floor broker non-displayed 
reserve interest that is designated DND would not participate at the 
open or the close, during a gap quote situation, or when a manual 
execution is required to trade out of an LRP that locks or crosses the 
market. Therefore, these types of interest may be executed at an 
inferior price, and will not be protected in any manual trade--at the 
choice of the customer. DMM interest employing Non-Displayed Reserve 
functionality would, however, be eligible to participate in a manual 
transaction.
    Off-Floor participants that want to have non-displayed liquidity 
participate in a manual transaction would be required to send a Minimum 
Display Order. Similarly, Floor brokers that choose to have non-
displayed liquidity participate in a manual transaction must not 
designate such interest DND.
(b) Execution of Bids and Offers
    The Exchange proposes to amend NYSE Rule 72 to provide to all 
market participants the ability to receive executions on an equal basis 
with other interest available at that price. As with NYSE's current 
parity rules, individual Floor brokers and the DMM registered in the 
security would each constitute a single market participant, but all 
orders received by the Display Book directly from off-Floor 
participants would together constitute a single market participant, the 
Off-Floor Participant, for the purpose of share allocation. However, 
unlike specialist interest, which under current NYSE rules must yield 
to all off-Floor interest residing on the Display Book, DMM Interest 
would be on parity and would not be required to yield to any off-Floor 
interest.
(1) Priority and Parity for Setting Interest
    Proposed NYSE Rule 72 would modify the concept of priority to 
provide that, where there is more than one bidder (offerer) 
participating in an execution and one of the bids (offers) was 
established as the first at a particular price and such bid or offer is 
the only interest when such price is or becomes the best bid or offer 
published by the Exchange (the ``Setting Interest''), the displayed 
portion of such Setting Interest is entitled to priority. In order to 
qualify as Setting Interest, it must have been the only \51\ interest 
quoted at

[[Page 64385]]

a price. Only the quoted (i.e., displayed) portion of the Setting 
Interest is entitled to priority (``Priority Interest'').
---------------------------------------------------------------------------

    \51\ If, at the time of quoting, Non-Displayed Reserve Orders, 
Floor broker interest or DMM interest employing Non-Displayed 
Reserve Functionality exist at the price point along with a single 
order or quote that has a published quantity, the single order would 
be deemed to be a setting order even if the Hidden Reserve Orders 
and Floor broker and DMM interest employing Hidden Reserve 
Functionality arrived first. In addition, if prior to quoting, there 
are two orders at the price point and one of those orders cancels, 
the remaining order that is the only interest quoted at the price 
would be considered the Setting Interest. See Proposed Rule 
72(a)(ii).
---------------------------------------------------------------------------

    Exchange systems would allocate the first 15% of any execution 
(subject to a minimum of one round lot) \52\ at that price to the 
Priority Interest. For the remainder of that execution, Setting 
Interest would receive executions on parity with other interest 
available at that price. Exchange systems would repeat the allocation 
logic for the Setting Interest until the Priority Interest is 
completely executed. Any remaining non Priority Interest of the Setting 
Interest would be executed on parity.
---------------------------------------------------------------------------

    \52\ All allocations will be done on a round lot basis. If 15% 
would result in the Priority Interest receiving a mixed lot, 
Exchange systems will round up to the nearest round lot.
---------------------------------------------------------------------------

    The Exchange proposes to have Priority Interest retain its standing 
even if the Exchange BBO moves away from the price point. In this case, 
if the Exchange BBO returns to that price point later in the same 
trading session, the remaining portion of the Priority Interest would 
again enjoy priority until it is executed or cancelled, trading in the 
stock is halted, the trading session ends, or the BBO moves away again.
    Partial cancellations would count first against the non-Priority 
Interest of any Setting Interest. All allocations to the Setting 
Interest would be decremented from the Priority Interest first whether 
the allocation is based on priority or parity. Setting Interest may be 
executed on parity with no priority allocation if the quote moves to a 
better price point and thereafter an incoming order exceeds the shares 
available for execution at the newly established Exchange BBO. In those 
instances, the Setting Interest will be executed on parity and the 
Priority Interest will be decremented first.
(2) Priority and Parity in the Absence of Setting Interest
    Where there is no Setting Interest, Exchange systems would divide 
the size of the executing order by the number of participants. The 
total number of shares to be allocated to each participant (i.e., the 
single Off-Floor Participant, the DMM, and each Floor broker) would be 
distributed equally among the market participants, subject to the need 
to allocate in round lots. Within the single Off-Floor Participant, 
shares executed would be allocated in order of time priority of receipt 
of orders from off-Floor customers into Exchange systems. Executions 
would be allocated in round lots. In the event the number of shares to 
be executed at the price point is insufficient to allocate round lots 
to all the participants eligible to receive an execution at the price 
point, the Exchange systems would create an allocation wheel of the 
eligible participants at the price point and the available shares would 
be distributed to the participants in turn.
    On each trading day, the allocation wheel for each security would 
be set to begin with the participant whose interest is entered or 
retained first on a time basis. Thereafter, participants would be added 
to the wheel as their interest joins existing interest at a particular 
price point. If a participant cancels its interest and then rejoins, 
that participant would join as the last position on the wheel at that 
time.
    Non-displayed interest at price points within the Exchange BBO 
would also trade on parity at each price point. Thus, non-displayed 
interest that is priced within the Exchange BBO would be eligible to be 
executed on parity at each price point against incoming orders.
    The Exchange further proposes to modify its overall allocation 
logic to require that, for all executions at or through the Exchange 
BBO, displayable interest trades ahead of non-displayable interest 
available for execution at the same price point. Once all displayable 
interest has been satisfied at a given price point, the remainder of 
the incoming order would execute against non-displayable interest at 
that price point. All categories of non-displayable interest would 
trade on parity, with the exception of the DMM's CCS interest, which 
yields to all other interest at the same price.
4. Additional Proposed Rule Changes
    In addition to the proposed rule changes discussed above, the 
Exchange has proposed numerous minor substantive changes and conforming 
changes throughout the Exchange's rule book in order to conform NYSE's 
rules to the proposed New Model.\53\
---------------------------------------------------------------------------

    \53\ For a full discussion of these additional proposed rule 
changes, see the Notice, supra note 5, at 42870-1.
---------------------------------------------------------------------------

5. Implementation Schedule
    The proposed amendments herein require the Exchange to make 
significant modifications to Exchange systems. The Exchange therefore 
proposes that the proposed rule change be implemented in stages 
pursuant to the schedule outlined below.
(a) Non-Pilot Rules
    The Exchange proposes that the amendments to NYSE Rule 13 regarding 
the establishment of Reserve Order types and the elimination of CAP 
orders would be implemented upon Commission approval as permanent 
changes to the NYSE rulebook. Similarly, all conforming changes to 
other Exchange rules to enable Floor brokers and DMMs to use equivalent 
reserve order functionality would be implemented upon Commission 
approval as permanent changes to the NYSE rulebook. In addition, the 
Exchange proposes that amendments to NYSE Rules 2 and 103 establishing 
the DMMs and DMM units also would be implemented upon Commission 
approval as permanent changes to the NYSE rulebook.
    The Exchange further proposes that the proposed amendments to NYSE 
Rule 70 that: (i) Allow for the publication of Floor broker interest to 
OpenBook; (ii) allow d-Quote instructions to be active during the open 
and close; and (iii) allow d-Quotes to trade with non-marketable IOC 
orders would be implemented upon Commission approval as a permanent 
change to the NYSE rulebook.
(b) Pilot Rules
    The Exchange further proposes to implement certain provisions of 
the New Model proposal on a pilot basis (``New Model Pilot'') upon 
Commission approval of the proposed rule change. The New Model Pilot 
would operate until October 1, 2009.
    During Phase 1 of the New Model Pilot, the Exchange would implement 
proposed NYSE Rule 72 and proposed NYSE Rule 104T.\54\ During the 
operation of Phase 1, pursuant to proposed Rule 72, all market 
participants, including DMMs, would have the ability to receive 
executions on parity with other interest available at that price. In 
addition, during Phase 1, DMMs would still receive the order-by-order 
``look'' that the specialists currently receive. During this period, 
DMMs would still be considered ``specialists'' under the Act, subject 
to applicable affirmative and negative obligations.
---------------------------------------------------------------------------

    \54\ Proposed NYSE Rule 104T is a temporary rule that would 
operate through the end of Phase 1 and cease operation with the 
implementation of Phase 2.
---------------------------------------------------------------------------

    With the implementation of Phase 2, NYSE Rule 104T would cease 
operation and new NYSE Rule 104 would supersede it. Beginning in Phase 
2, the

[[Page 64386]]

DMM would no longer receive any order-by-order information. In 
addition, under proposed Rule 104, DMMs would no longer be subject to a 
negative obligation. Also as of that date, the portion of Rule 1000 
relating to the DMM's CCS interest would be implemented.
    During the operation of the New Model Pilot, the Exchange has 
committed to provide the Commission's Division of Trading and Markets 
and Office of Economic Analysis with statistics related to market 
quality, trading activity, and sample statistics as requested by the 
Commission.

C. Amendment No. 2

    In Amendment No. 2 to the proposed rule change, the Exchange 
proposes to: (i) Clarify how odd-lot information will be transmitted to 
the DMM Unit algorithm prior to the opening; (ii) retain and expand the 
restriction, currently applicable to specialists, trading assistants, 
and anyone acting on their behalf from accessing certain Exchange 
systems and apply it to DMMs, trading assistants, and anyone acting on 
their behalf; (iii) make technical amendments to NYSE Rules 13, 52, 72, 
299A, and 1000; (iv) reconcile the rule language of NYSE Rules 98, 98A, 
99, 104T, 105, 113 and 460 with amendments approved by the Commission 
pursuant to filing SR-NYSE-2008-45 (``2008-45 Amendments''); \55\ (v) 
reconcile the rule language of NYSE Rule 104T with the NYSE's immediate 
effectiveness filing SR-NYSE-2008-73 (``2008-73 Amendments''); \56\ and 
(vi) describe the data that the Exchange will provide the Commission to 
monitor the New Model Pilot.
---------------------------------------------------------------------------

    \55\ See Securities Exchange Act Release No. 58328 (August 7, 
2008), 73 FR 48260 (August 18, 2008) (SR-NYSE-2008-45).
    \56\ See Securities Exchange Act Release No. 58351 (August 13, 
2008), 73 FR 48416 (August 19, 2008) (SR-NYSE-2008-73).
---------------------------------------------------------------------------

    Specifically, Amendment No. 2 proposes to clarify that, while the 
individual DMM would have access only to aggregate order information as 
it pertains to round-lot and odd-lot orders, the DMM Unit algorithm 
would receive odd-lot information on an order-by-order basis prior to 
the opening. Odd-lot orders on the Exchange are processed in a separate 
system from the Exchange systems that execute round-lot orders. Odd-
lots are executed systemically by Exchange systems designated solely 
for odd-lot orders (the ``odd-lot System'').\57\ The odd-lot System 
executes all odd-lot orders against the specialist \58\ as the contra 
party. In order for the DMM Unit algorithm to effectively facilitate an 
opening transaction, the DMM Unit algorithm would also be provided odd-
lot information prior to the opening. Constraints inherent in the odd-
lot System require that odd-lot information be transmitted to the DMM 
Unit algorithm on an order-by-order basis prior to the opening.\59\ As 
such, prior to the opening, Exchange systems will transmit to the DMM 
Unit algorithm odd-lot order information excluding e-Quote odd-lots, 
odd-lot cancellations, Stop odd-lot orders and Good 'til Cancel odd-lot 
orders.\60\ Once the security is opened, Exchange systems would not 
provide any order-by-order odd-lot information to the DMM Unit 
algorithm.
---------------------------------------------------------------------------

    \57\ See NYSE Rule 124(a).
    \58\ Odd-lot orders will continue to be executed against the DMM 
as the contra. See proposed NYSE Rules 104(e) and 124(a).
    \59\ The Exchange is currently working on modifications to its 
odd-lot system that would allow for the transmission of aggregate 
odd-lot information to DMM unit algorithms in the third quarter of 
2009 so that order-by-order transmission would no longer be 
required.
    \60\ See proposed NYSE Rule 104 Supplementary Material .05.
---------------------------------------------------------------------------

    In addition, Amendment No. 2 proposes to clarify that the Exchange 
seeks to retain and expand the restriction, currently applicable to 
specialists, trading assistants, and anyone acting on their behalf from 
accessing certain Exchange systems other than for the purpose of 
effecting transactions that are reasonably imminent, and apply it to 
DMMs, trading assistants, and anyone acting on their behalf.\61\ In 
addition, the Exchange seeks to add information pertaining to Minimum 
Display Reserve Orders to the restriction and move the restriction from 
NYSE Rule 70 to the rules governing DMM requirements.\62\ The proposed 
rule would prohibit DMMs, trading assistants, and anyone acting on 
their behalf from using the Display Book system to access information 
about Floor broker agency interest excluded from the aggregated agency 
interest and Minimum Display Reserve Order information other than for 
the purpose of effecting transactions that are reasonably imminent, and 
where such Floor broker agency and Minimum Display Reserve Order 
interest information is necessary to effect such transaction.
---------------------------------------------------------------------------

    \61\ Specifically, NYSE Rule 70.20(h)(ii) provides in pertinent 
part that:``Specialists, trading assistants and anyone acting on 
their behalf are prohibited from using the Display Book[supreg] 
system to access information about Floor broker agency interest 
excluded from the aggregated agency interest other than for the 
purpose of effecting transactions that are reasonably imminent where 
such Floor broker agency interest information is necessary to effect 
such transaction.''
    \62\ See proposed NYSE Rules 104T(j) and 104(a)(6).
---------------------------------------------------------------------------

    Amendment No. 2 also proposes technical corrections to the rule 
text. Specifically, the Exchange proposes to change the word 
``specialist'' to ``DMM'' in NYSE Rule 13 because during the editing 
process the word specialist was inadvertently left in this rule. The 
Exchange further amended their proposal to remove previously proposed 
changes to NYSE Rule 52 that the Exchange instead intends to be the 
subject of a separate future filing. Also, rule language designating 
proposed Rule 72 as operating in the New Model Pilot was inadvertently 
not underscored. The Exchange proposes to add the required underscoring 
to designate that text as new language pursuant to this filing. In 
addition, Amendment 2 reflects the Exchange's proposal to delete 
subparagraph (b)(2) of the Supplemental Material .10 of NYSE Rule 299A 
because, similarly to specialists under the current NYSE market model, 
DMMs will not be allowed to ``stop'' stock. Further, in order to 
correct lettering errors in NYSE Rule 1000, the Exchange proposes to 
move the language denoting the Rule as operating in the New Model Pilot 
to directly after the name of the rule and retain the original 
lettering.
    On August 7, 2008, the Commission approved the 2008-45 Amendments 
which, among other things, modified the rule text of NYSE Rules 98, 
98A, 99, 104T, 105, 113 and 460. Through Amendment No. 2, the Exchange 
seeks to change the term ``specialist'' to DMM in NYSE Rules 98 and 98A 
to reflect the new language approved in the 2008-45 Amendments.
    In addition, on August 13, 2008, the Exchange filed with the 
Commission for immediate effectiveness a proposal to amend NYSE Rule 
104(b) to provide for an automated opening message that is effectuated 
through the specialist Application Programmed Interface to allow 
specialists to automatically open a security on a transaction. Through 
Amendment No. 2, the Exchange proposes to amend Rule 104T(b)(ii) to 
incorporate the rule language from the 2008-73 Amendments.
    Finally, during the operation of the New Model Pilot, the Exchange 
is committed to providing the Commission's Division of Trading and 
Markets and the Office of Economic Analysis with statistics related to 
market quality, trading activity, and sample statistics. The metrics 
discussed below, along with any other metrics the Exchange may choose 
to provide, will be transmitted to the Commission on a monthly basis. 
The Exchange will maintain average measures for each

[[Page 64387]]

trading day during a particular month \63\ in order to provide such 
information to the Commission upon request.
---------------------------------------------------------------------------

    \63\ The average per security may be provided across volume 
deciles.
---------------------------------------------------------------------------

    On or before the 20th day of the second calendar month following 
the Approval Date,\64\ the Exchange will provide the Commission with 
the data described below, which will include data for all the trades in 
the two months prior to the commencement of the New Model Pilot. The 
data to be provided on such date will include the following:
---------------------------------------------------------------------------

    \64\ The timing of the provision of the market quality, trading 
activity, andother statistics to the Commission was set forth in 
Amendment No. 3.
---------------------------------------------------------------------------

    1. The specialist time at the NBBO by security.
    2. The effective spread by security.
    3. The specialist volume broken out by ``specialist interest type'' 
(e.g., s-Quote and s-Quote employing reserve functionality). The 
Exchange will further provide the total shares traded expressed in 
twice total volume (``TTV'') where both the buy and sell shares are 
counted for each trade to allow the Commission to track the direction 
of the overall specialist participation rate over time.
    4. The average depth at the NBBO for specialists.
    On the 20th day of the month following the initial provision of 
data, the Exchange will provide the Commission with the data described 
below, which will include data for all the trade dates in the months 
directly following the Approval Date through the last trade date of the 
previous month. On the same date, the Exchange will additionally 
provide data related to the average depth at the NBBO for Floor brokers 
and orders represented in the Display Book for the two months prior to 
the commencement of the New Model Pilot.\65\ Thereafter the Exchange 
will provide the data described below on the 20th day \66\ of each 
calendar month until the end of the New Model Pilot. The data will 
reflect the trading activity of the prior calendar month. The specific 
data to be provided until the end of the New Model Pilot is as follows:
---------------------------------------------------------------------------

    \65\ The Exchange represents that it is unable to provide this 
data in therequested format prior to this date.
    \66\ In the event the 20th day of the calendar month is a non-
business day,the Exchange would provide the data on the next 
business day following the 20th day of that month.
---------------------------------------------------------------------------

    1. The DMM time at the NBBO by security.
    2. The effective spread by security.
    3. The DMM volume broken out by ``DMM interest type'' (e.g., CCS, 
s-Quote). The Exchange will further provide the total shares traded 
expressed in TTV where both the buy and sell shares are counted for 
each trade to allow the Commission to track the direction of the 
overall DMM participation rate over time.
    4. The average depth at the NBBO by market participant (DMMs, Floor 
brokers, and orders represented in the Display Book).
    5. The ratio of (i) shares not executed on the Display Book due to 
DMM execution to (ii) the shares executed by the DMM.
    6. Effective spread for: (a) orders that involve DMM liquidity 
provision and (b) orders that are executed without DMM liquidity (for 
similar order size categories).

D. Amendment No. 3

    In Amendment No. 3 to the proposed rule change, the Exchange 
proposes to: (i) Modify the dates that the Exchange is required to 
provide data to the Commission; (ii) amend the operative dates of 
certain rules; (iii) clarify the implementation schedule of the New 
Model Pilot; and (iv) make technical amendments to NYSE Rules 98 and 98 
Former (e.g., changing the term ``specialty stocks'' to ``registered 
security'').
    In Amendment No. 3, the Exchange clarified that the implementation 
of the New Model Pilot would occur in two phases, Phase 1 and Phase 2. 
Each phase of the New Model Pilot would commence initially in three or 
four securities. The Exchange proposes that after a period of 
monitoring the system operation, NYSE would progressively implement 
each phase of the New Model Pilot in additional securities until that 
phase is operative in all securities traded on the Floor. The rules 
applicable to each phase of the New Model Pilot would apply to trading 
in securities as they are added to each phase. Implementation of Phase 
1 will be completed no later than five weeks after the Approval Date, 
and implementation of Phase 2 will be completed no later than ten weeks 
after the Approval Date.

III. Discussion and Commission Findings

    After careful review, we find that the proposed rule change, as 
amended, is consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange. In particular, we find that the proposed rule change, as 
amended, is consistent with Section 6(b)(5) of the Act \67\ which 
requires, among other things, an exchange to 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; and are not designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.\68\ The Commission 
also finds that the proposed rule change is consistent with Section 
6(b)(8) of the Act,\69\ which requires that the rules of an exchange 
not impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \67\ 15 U.S.C. 78f(b)(5).
    \68\ In approving the proposed rule change, the Commission has 
consideredits impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \69\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

A. Redefinition of the Role of the Specialist; Designated Market Makers

    One major element of NYSE's New Model is the elimination of 
specialists and the introduction of Designated Market Makers. DMMs 
would be assigned affirmative obligations, some of which are similar to 
those currently imposed on specialists. Specifically, DMMs would have 
an obligation to use the firm's own capital to contribute to the 
maintenance of a fair and orderly market on the Exchange in its 
assigned securities, would be subject to depth guidelines,\70\ and 
would have an obligation to maintain a bid or an offer at the National 
Best Bid or National Best Offer for a certain percentage of the trading 
day.\71\ In addition, DMMs would be required to facilitate transactions 
in their assigned securities during certain specified periods, namely 
for opening and re-opening transactions, closing transactions, block 
transactions, gap quote situations and when trading reaches LRPs that 
would lock or cross the market. DMMs would be responsible for choosing 
the price and for the executions of the orders at that price during 
those specific situations. The Exchange has also proposed to eliminate 
for DMMs the advance ``look'' at incoming orders that NYSE specialists 
currently receive during Phase 2 of the implementation, which will be

[[Page 64388]]

completed within ten weeks of the Approval Date.\72\
---------------------------------------------------------------------------

    \70\ For more information regarding depth guidelines, see 
Notice, supra note 5, at 42863, n. 115.
    \71\ For securities that have a consolidated average daily 
volume of less thanone million shares per calendar month, a DMM Unit 
would be required to maintain a bid or an offer at the NBBO for at 
least 10% of the trading day (calculated as an average over the 
course of a calendar month). For securities that have a consolidated 
average daily volume of equal to or greater than one million shares 
per calendar month, a DMM Unit would be required to maintain a bid 
or an offer at the NBBO for at least 5% or more of the trading day 
(calculated as an average over the course of a calendar month). See 
supra note 34 and accompanying discussion.
    \72\ For so long as DMMs retain the ``look'' for 
particularsecurities, they would still be considered ``specialists'' 
under the Act in such securities, subject to applicable affirmative 
and negative obligations.
---------------------------------------------------------------------------

    In exchange for these obligations, NYSE has proposed that DMMs be 
permitted to freely trade for their own account on parity with other 
market participants (i.e., the negative obligation and the requirement 
to yield to public customer orders on the Display Book, imposed on 
specialists under NYSE's current market model, would be 
eliminated).\73\ The Exchange would no longer consider DMMs to be the 
``responsible broker-dealer'' with respect to executions on the 
Exchange. In addition, a DMM would be permitted to transmit to the 
Display Book a Capital Commitment Schedule for its assigned securities 
setting forth additional liquidity that the DMM commits to provide at 
specific price points.\74\ This proposed functionality would permit a 
DMM to participate in executions against incoming orders that would 
execute at or through the NYSE BBO, and allow the DMM to participate at 
the incoming order's completion price (or at the price one minimum 
price variation better, depending upon the circumstances). CCS interest 
priced inside the Exchange BBO could also be accessed by Exchange 
systems to provide price improvement to incoming orders and to match 
better-priced bids and offers available on away market centers.
---------------------------------------------------------------------------

    \73\ In addition, the proposed parity and allocation rules would 
provideDMMs with preferential allocations to the extent that there 
are multiple orders of off-Floor customers in the Display Book at 
the execution price. See infra Part III.B.
    \74\ See supra Part II.B.2.a.(8).
---------------------------------------------------------------------------

    Section 6(b)(5) of the Act requires that the rules of a national 
securities exchange protect investors and the public interest.\75\ In 
addition, the Act requires that such rules promote just and equitable 
principles of trade and not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.\76\ Likewise, Section 
11A of the Act emphasizes that the national market system should 
promote the public interest, the protection of investors, and the 
maintenance of fair and orderly markets.\77\ In considering the 
proposed rules of a national securities exchange, we must therefore 
take into account their effect not only on the participants of the 
given market, but their impact on investors and the public interest 
generally.
---------------------------------------------------------------------------

    \75\ 15 U.S.C. 78f(b)(5).
    \76\ Id.
    \77\ 15 U.S.C. 78k-1(a)(2).
---------------------------------------------------------------------------

    We recognize that the participation of market makers in exchange 
markets may benefit public customers by promoting more liquid and 
efficient trading, and that an exchange may legitimately confer 
benefits on market participants willing to accept substantial 
responsibilities to contribute to market quality.\78\ However, while 
the rules of an exchange may confer special or unique benefits to 
certain types of participants, they must ensure, among other things, 
that investors and the public interest are protected.\79\
---------------------------------------------------------------------------

    \78\ See Securities Exchange Act Release No. 58092 (July 3, 
2008), 73 FR 40144 (July 11, 2008) at 40148.
    \79\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    We carefully review trading rule proposals that seek to offer 
special advantages to market makers. Although an exchange may reward 
such participants for the benefits they provide to the exchange's 
market, such rewards must not be disproportionate to the services 
provided.\80\ In considering NYSE's New Model provisions relating to 
DMMs, we have assessed whether the rewards granted to DMMs--including 
granting DMMs parity with respect to orders from off-Floor participants 
and giving DMMs unique hidden interest functionality via the proposed 
CCS--are commensurate with their obligations under the New Model.
---------------------------------------------------------------------------

    \80\ See Securities Exchange Act Release No. 58092 (July 3, 
2008), 73 FR 40144 (July 11, 2008) at 40148 (``Market makers can 
play an important role in providing liquidity to the market, and an 
exchange can appropriately reward them for that as well as the 
services they provide to the exchange's market, so long as the 
rewards are not disproportionate to the services provided.'') 
(citation omitted).
---------------------------------------------------------------------------

    Under NYSE's current market model, specialists are designated as 
the ``responsible broker-dealer'' for orders resting on the Display 
Book. NYSE specialists, by virtue of their advance ``look'' at incoming 
orders and their position on the trading floor, also have an 
informational advantage over other market participants which, if 
unchecked, could permit them to adjust their trading interest to the 
disadvantage of orders residing on the book. Because of this, 
specialists are required to yield to all off-Floor participant orders 
on the Display Book and are subject to the negative obligation not to 
trade for their own account in any security in which the specialist is 
registered ``unless such dealings are reasonably necessary to permit 
such specialist to maintain a fair and orderly market.'' \81\
---------------------------------------------------------------------------

    \81\ See current Rule 104(a).
---------------------------------------------------------------------------

    In support of its proposal to eliminate the negative obligation and 
allow the specialists' successors, DMMs, to trade on parity with public 
customer orders, NYSE argues that the negative obligation is ``an 
outmoded vestige of trading in a wholly different market environment 
and is unnecessary.'' \82\ The Exchange believes that advances in 
technology, including electronic trading and the availability of real-
time market information, make it difficult, if not impossible, for any 
single market participant, including a specialist, to have a time-and-
place advantage over other market participants. In addition, the 
Exchange believes that the fragmentation of liquidity in the 
marketplace has lessened the importance of the specialist's influence 
over its registered securities. Moreover, NYSE proposes to eliminate 
for DMMs, during Phase 2 of the implementation, the advance ``look'' at 
incoming orders that specialists currently receive under the Exchange's 
current rules.
---------------------------------------------------------------------------

    \82\ See Notice, supra note 5, at 42865.
---------------------------------------------------------------------------

    We generally agree that, given the widespread adoption of 
electronic, automated trading, the ability of market participants to 
avail themselves of robust real-time market information, and the 
reduction in NYSE's market share in recent years, the historic time-
and-place advantage of specialists has been reduced in today's market 
environment, though we do not believe that such advantage has been 
completely eliminated.\83\ The Exchange has proposed to fully eliminate 
the advance ``look'' specialists currently receive during Phase 2 of 
the implementation. In doing so, the Exchange has represented that, 
other than for odd-lot orders,\84\ a DMM Unit's algorithm would receive 
the same information with respect to orders entered on the Exchange, 
Floor broker agency interest files, or reserve interest as is 
disseminated to the public by the Exchange, and would receive such 
information no sooner than it is available to other market 
participants.
---------------------------------------------------------------------------

    \83\ The Commission notes that, while NYSE's overall market 
share in NYSE-listed securities has fallen dramatically in recent 
years, it continues to execute a higher percentage of the volume in 
certain of these securities than any other single exchange. In 
addition, while the move to largely electronic trading has 
substantially reduced the information advantage gained from a 
presence on the Exchange Floor, DMMs retain some informational 
advantage to the extent there continue to be manual negotiations and 
executions on the Floor.
    \84\ See supra Part II.C.
---------------------------------------------------------------------------

    We believe that the proposed elimination of the specialist's 
``look''--when viewed in conjunction with the obligations imposed upon 
DMMs, including a general affirmative obligation on the DMM to use its 
capital to contribute to the maintenance of a fair and orderly market 
in its assigned securities; an obligation to quote at the

[[Page 64389]]

National Best Bid or National Best Offer for a certain percentage of 
time; an obligation to facilitate transactions during specified 
periods; and depth guidelines \85\--reflects an appropriate balance of 
DMM obligations against the benefits provided to DMMs under this 
proposal, including providing DMMs parity with other market 
participants (and preferential allocations to the extent there are 
multiple orders of off-Floor participants in the Display Book at the 
execution price) and providing DMMs unique functionality through the 
CCS. However, given the significant advantage DMMs would receive by 
being on parity with market participants (discussed below in Part 
III.B), we are seeking further evidence that the benefits proposed for 
DMMs are not disproportionate to their obligations.\86\
---------------------------------------------------------------------------

    \85\ The Commission notes that the proposed obligations of DMMs 
would also differ significantly from those imposed on specialists 
currently on the Exchange in that DMMs would no longer be the 
``responsible broker-dealer'' for orders resting on the Display Book 
and the specialists' negative obligation would be eliminated. We 
note that the DMM's duties in connection with order executions on 
Hybrid are substantially reduced under the proposed rules. Whereas 
Rule 60 currently requires the specialist, as ``responsible broker-
dealer,'' to collect, process, and publish quotations, in fact in 
the current automated market, virtually all orders submitted to the 
Display Book are processed, published, and executed automatically, 
with no handling by the specialist. Given the substantially reduced 
duties of the DMM in connection with order executions, the 
Commission believes it is appropriate for the Exchange to no longer 
consider the DMM to be the ``responsible broker-dealer'' for orders 
on the Display Book, and instead consider the broker-dealer that 
submitted the order to the Exchange to be in such a position.
    \86\ For a description of the metrics the Exchange has agreed to 
provide, see supra Part II.C.
---------------------------------------------------------------------------

    In addition, while we believe that the proposed operation of the 
DMM's unique CCS functionality is designed to provide a slightly better 
execution price for a portion of a large incoming order because that 
portion of the order could receive an execution price of a penny better 
than it would have received absent the CCS interest, we note that the 
CCS would provide DMMs the opportunity to obtain its CCS execution at 
an advantageous price with minimal risk, and with no contribution to 
the visible depth of the market.
    Accordingly, we are approving the proposal's provisions with regard 
to the elimination of specialists and the creation of DMMs, but we are 
approving certain key provisions on a pilot basis until October 1, 
2009, as discussed more fully below in Part III.D.

B. Order Allocation

    NYSE proposes to revise the order allocation methodology of Rule 72 
to provide that: (i) All market participants would receive executions 
on parity; (ii) ``Setting Interest'' that establishes the Exchange BBO 
would be entitled to priority and would receive the first 15% of any 
incoming order (subject to a minimum of one round lot) in advance of 
the regular allocation of such order; and (iii) for executions 
occurring outside the Exchange BBO, all displayable interest would be 
executed before any non-displayable interest.
    One of the most significant changes in the Exchange's proposal is 
the elimination of the requirement currently imposed upon specialists 
to yield to off-Floor participant orders on the Display Book. Once the 
specialist's advance ``look'' at incoming orders is fully eliminated, 
and DMMs are no longer subject to the specialist's agency 
responsibilities with respect to orders on the Display Book, we agree 
that it would no longer be necessary to require DMMs to yield to off-
Floor participant orders on the Display Book. However, the Exchange's 
proposal does not merely eliminate the requirement to yield to off-
Floor participants, but rather provides DMMs with a substantial 
advantage over off-Floor orders sent to the Display Book. As the 
Exchange stated in its proposal, it is amending its Rule 72 ``to 
provide to all market participants the ability to receive executions on 
an equal basis (`parity') with other interest available at that 
price.'' \87\ The Exchange's concept of parity hinges on its definition 
of ``market participant.'' According to the Exchange's definition, the 
DMM registered in a given security and each individual Floor broker 
representing orders in such a security would each constitute a single 
market participant. In contrast to the Exchange's DMM and Floor 
brokers, all off-Floor orders would be aggregated together to 
constitute a single market participant, the Off-Floor Participant.\88\ 
Because of the aggregated nature of the Off-Floor Participant, in many 
cases a DMM's interest would be assured of receiving some execution 
while the Off-Floor Participant, even if composed of multiple Display 
Book orders and even if such orders constituted a large volume of 
shares, would receive an allocation equal to that received by the DMM. 
Particularly in instances when there is more than one off-Floor order 
resting in the Display Book at a particular price point at the time of 
execution, the result would likely be that some orders in the Display 
Book would remain unexecuted, despite potentially having been entered 
into the Display Book prior to the DMM's interest having been 
submitted.
---------------------------------------------------------------------------

    \87\ See Notice, supra note 5, at 42869.
    \88\ See id.; see also proposed Rule 72(c)(ii).
---------------------------------------------------------------------------

    In addition, NYSE's proposal would permit an interim period--from 
the approval of this proposed rule change through completion of Phase 
2--when DMMs would have parity with other market participants (i.e., 
including off-Floor orders) while retaining the current specialists' 
advance ``look.'' \89\ This period, albeit short, would provide DMMs 
with a significant informational advantage over other market 
participants, while also providing them parity in executing their 
interest.
---------------------------------------------------------------------------

    \89\ The Exchange will eliminate the ``look'' for a particular 
security upon implementation of Phase 2 for such security. Amendment 
No. 3 to the proposed rule change establishes a deadline of ten 
weeks after the Approval Date for completion of Phase 2. Any 
extension of this deadline would require NYSE to file a proposed 
rule change under Section 19(b) of the Exchange Act for Commission 
review.
---------------------------------------------------------------------------

    For these reasons, we are concerned about the effects the proposed 
parity rule may have on market quality, book depth, and the execution 
rates of public customer orders posted to Display Book. Therefore, we 
have determined to approve proposed Rule 72 on a pilot basis, as 
discussed more fully below in Part III.D.
    With respect to the priority provisions for Setting Interest under 
proposed Rule 72(a), in addition to the proposed 15% priority 
allocation, the Setting Interest would also participate on parity with 
other market participants (as it would even if it were not the Setting 
Interest) in the allocation of the remaining 85% of an incoming 
order.\90\ Moreover, the Setting Interest maintains its priority status 
until the interest is completely executed. Thus, proposed Rule 72(a) is 
designed to reward aggressive quoting by market participants--which 
contributes to market quality--by allowing the price setter to take the 
first portion of an execution at that price. We believe that the 
proposed priority rule constitutes an appropriate approach, consistent 
with the Act, for incentivizing and rewarding market participants who 
quote aggressively to set the Exchange BBO.
---------------------------------------------------------------------------

    \90\ The Commission also notes that there is a requirement that 
the Setting Interest receive a minimum of one round lot, typically 
100 shares. See proposed NYSE Rule 72(c)(iii). Given the reduction 
in average execution sizes on the Exchange recently, the Commission 
notes that the Setting Interest would likely often receive more than 
15% because of the round lot minimum requirement. See, e.g., 
Securities Exchange Act Release No. 56599 (October 2, 2007), 72 FR 
57622 (October 10, 2007) (SR-NYSE-2007-93) at fn. 6 (noting that 
average execution size had declined from 334 shares in November 2006 
to 254 shares in August 2007).
---------------------------------------------------------------------------

    Finally, we believe that the proposed provisions designed to ensure 
that all

[[Page 64390]]

displayable interest trades ahead of any non-displayable interest for 
executions occurring outside the Exchange BBO are consistent with the 
Act. Currently, NYSE rules are designed to ensure that all displayed 
interest at the Exchange BBO is fully executed prior to any execution 
of undisplayed interest at the Exchange BBO. We believe that these 
proposed amendments to Rule 72, which are designed to ensure that the 
same requirement is applied to executions outside the Exchange BBO, are 
consistent with the Act, since preferencing interest that is displayed 
or designated for display over hidden interest should contribute to 
price discovery, and thus is consistent with the requirements of 
Section 6(b)(5) of the Act that exchange rules be designed to perfect 
the mechanism of a free and open market and the national market system 
and not be unfairly discriminatory.

C. Reserve Order Functionality

    In April 2008, the Exchange implemented a pilot program that 
provides reserve order functionality for orders with a minimum display 
quantity of one round lot, now proposed to be called Minimum Display 
Reserve Orders, to off-Floor market participants.\91\ Minimum Display 
Reserve Orders give off-Floor participants a reserve functionality 
substantially similar to the reserve functionality of Floor brokers' d-
Quote and specialists' s-Quotes. The Exchange now proposes to make this 
pilot program permanent. In addition, the Exchange proposes to create 
hidden interest functionality (i.e., with no minimum display 
requirement), known as Non-Displayed Reserve Orders, for off-Floor 
participants. This functionality would also be available to Floor 
brokers and DMMs.
---------------------------------------------------------------------------

    \91\ See Securities Exchange Act Release No. 57688 (April 18, 
2008), 73 FR 22194 (April 24, 2008) (SR-NYSE-2008-30).
---------------------------------------------------------------------------

    We believe that extending the hidden interest functionality of 
Minimum Display and Non-Displayed Reserve Orders to all market 
participants would help level the playing field among NYSE members on 
and off the Floor, and is consistent with the Section 6(b)(5) of the 
Act, because it is designed to promote just and equitable principles of 
trade among Exchange customers and members and is not unfairly 
discriminatory. In addition, we agree that these additional order 
types, by expanding the opportunities for market participants to post 
different types of liquidity on the exchange, should result in deeper 
liquidity and thus may contribute to overall market quality. We note 
that the rules of other national securities exchanges also provide for 
similar order functionality.\92\
---------------------------------------------------------------------------

    \92\ See NYSE Rule 13. See also, e.g., Nasdaq Rules 4756(c)(3) 
and 4757; NYSE Arca Equities Rule 7.31(h)(3); and ISE Rule 
715(g)(1).
---------------------------------------------------------------------------

    However, the Exchange's proposed treatment of hidden interest is 
not identical among market participants, particularly with respect to 
manual executions.\93\ While all Minimum Display interest is included 
in the manual execution template, the same is not true of hidden 
interest. A DMM's hidden interest would be eligible to participate in 
manual transactions since this interest would always be known to the 
DMM. In contrast, Non-Displayed Reserve Orders of off-Floor 
participants, which would be fully hidden from the DMM, would never be 
eligible for participation in manual transactions. Finally, Floor 
brokers' hidden interest would be included in the manual execution 
template and eligible to participate in manual transactions unless the 
Floor broker, at his or her option, marked the order ``Do Not 
Display.'' \94\
---------------------------------------------------------------------------

    \93\ In the New Model, DMMs would continue to facilitate manual 
transactions on the Exchange in a limited number of situations. See 
supra, Part III.A. Orders eligible for manual execution are 
aggregated by Exchange systems and shown to the DMM in the Display 
Book's manual execution template.
    \94\ In Amendment No. 2, the Exchange proposed to prohibit DMMs, 
their trading assistants, and others acting on their behalf from 
using Display Book to access information about Floor broker agency 
interest excluded from the aggregated agency interest and Minimum 
Display Reserve Order information other than for the purpose of 
effecting transactions that are reasonably imminent where such 
information is necessary to effect the transaction. Because this 
restriction is designed to prevent DMMs from gleaning an 
informational advantage from access to ordinarily hidden information 
on the Display Book that is not necessary to the performance of 
their obligations, we find that the retention and expansion of this 
provision is consistent with the Act, including Section 6(b)(5) 
thereunder, which requires that proposed rules promote just and 
equitable principles of trade, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, and dealers.
---------------------------------------------------------------------------

    Though these functionality differences exist in the proposed 
implementation of hidden interest among different market participants, 
we note that all participants have the ability to ensure that their 
interest participates in manual transactions if they so choose. Floor 
brokers could do so by not designating their hidden interest as ``Do 
Not Display,'' while off-Floor participants could instead send their 
interest to the Exchange as a Minimum Display Reserve Order, which 
requires the display of one round lot and is eligible to participate in 
its entirety in manual transactions. Accordingly, we believe that 
NYSE's proposed rules regarding reserve functionality are not unfairly 
discriminatory and otherwise are consistent with the Act.

D. New Model Pilot Program

    As discussed in Part II.B.5.(b) above, several key provisions of 
the Exchange's New Model proposal are being approved today on a pilot 
basis (collectively, the ``Pilot provisions''). The New Model Pilot 
will include: (i) The changes to NYSE's priority and order allocation 
structure under proposed Rule 72; (ii) the dealings and 
responsibilities of DMMs, including the affirmative obligation to 
market quality, the quoting obligation, the re-entry requirements 
following certain transactions for the DMM's own account, and, 
implicitly, the elimination of the negative obligation, set forth in 
proposed Rule 104; and (iii) the provisions related to DMM CCS interest 
set forth in proposed Rule 1000.
    As discussed above, we have concerns regarding certain aspects of 
the Exchange's proposal and are therefore approving the provisions 
described above on a pilot basis for a period ending October 1, 2009. 
Before we decide what action to take on any NYSE proposal to extend the 
operation of the Pilot provisions or to establish the Pilot provisions 
on a permanent basis, we believe that NYSE must provide data and 
analysis on the impact of the Pilot provisions. Specifically, we 
believe that to be able to take any further action on an NYSE proposal 
with regard to the Pilot, NYSE must provide to us on a regular, ongoing 
basis, statistics relating to market quality and trading activity.\95\ 
The Exchange has committed to providing us with these metrics on a 
monthly basis. The Exchange has also represented that it will maintain 
average measures for each trading day during a particular month in 
order to provide such information to us upon request.\96\ Analysis of 
the requested statistics will assist the Commission, among other 
things, in evaluating the effects of the Pilot provisions on NYSE's 
market quality, and in determining whether the New Model Pilot should 
be permanently approved, if so requested by the Exchange, with or 
without adjustments, consistent with the Act.
---------------------------------------------------------------------------

    \95\ For a description of the metrics the Exchange has agreed to 
provide, see supra Part II.C.
    \96\ The average per security may be provided across volume 
deciles.
---------------------------------------------------------------------------

    The Commission intends to closely examine these statistics and 
other information relating to the impact of the Pilot provisions on 
investors and other market participants. If the Commission

[[Page 64391]]

determines, upon expiration of the Pilot period or at any earlier time, 
that implementation of the New Model Pilot is having a detrimental 
effect on investors or other market participants, the Commission will 
consider what action it should take to address any detrimental effect.

E. Other Proposed Changes

    Several of NYSE's proposed changes, such as the approval procedures 
for DMMs and DMM Units, elimination of Floor broker percentage orders, 
changes to the handling of Floor broker d-Quotes, and inclusion of 
additional Floor broker interest in OpenBook, raise policy issues that 
we have considered previously, and resolve such policy issues in a 
manner consistent with our prior approvals. The remainder of NYSE's 
proposed changes are technical, non-substantive changes intended, for 
example, to update the terminology of NYSE's existing rules to conform 
them to the proposed New Model, or to delete archaic rule provisions or 
provisions that have sunset according to their terms. We believe that 
these proposed changes are consistent with the Act.

IV. Accelerated Approval

    We find good cause, pursuant to Section 19(b)(2) of the Act,\97\ 
for approving the proposed rule change, as modified by Amendment Nos. 
1, 2 and 3, prior to the thirtieth day after publication of notice of 
filing of Amendment Nos. 2 and 3 in the Federal Register.
---------------------------------------------------------------------------

    \97\ 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2) of the 
Act, the Commission may not approve any proposed rule change, or 
amendment thereto, prior to the thirtieth day after the date of 
publication of the notice thereof, unless the Commission finds good 
cause for so doing.
---------------------------------------------------------------------------

    In Amendment No. 2, the Exchange proposes to clarify how odd-lot 
information will be transmitted to the DMM Unit algorithm prior to the 
opening. The Exchange has represented that current technical 
constraints in its odd-lot System require that odd-lot information be 
transmitted to the DMM Unit algorithm on an order-by-order basis prior 
to the opening. The Exchange has represented that it is currently 
working on modifications to its systems that would allow the 
transmission of odd-lot order information on an aggregated basis prior 
to the open. The Exchange has stated that these system changes will be 
effective by the third quarter of 2009, at which time odd-lot 
information on an order-by-order basis would no longer be required for 
the DMM Unit algorithm to effectively facilitate the opening. We find 
that the clarification with respect to the way in which odd-lot 
information would be transmitted to the DMM Unit algorithm is 
consistent with the Act \98\ and note that the Exchange has committed 
to implement the necessary technical changes to its system that will 
obviate the need for the sending of order-by-order odd-lot information 
to the DMM Unit algorithm.
---------------------------------------------------------------------------

    \98\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In Amendment No. 2, the Exchange has also proposed to retain the 
restriction currently applicable to specialists prohibiting them, their 
trading assistants, and others acting on their behalf from using the 
Display Book system to access information about Floor broker agency 
interest excluded from the aggregated agency interest other than for 
the purpose of effecting transactions that are reasonably imminent 
where such Floor broker agency interest information is necessary to 
effect such transaction. The Exchange's proposal would apply this 
restriction to DMMs and include information pertaining to Minimum 
Display Reserve Orders within the restriction. Because this restriction 
is designed to prevent DMMs from gleaning an informational advantage 
from their access to ordinarily hidden information on the Display Book 
that is not necessary to the performance of their obligations, we find 
that the retention and expansion of this provision is consistent with 
the Act, including Section 6(b)(5) thereunder, which requires that 
proposed rules promote just and equitable principles of trade, and not 
be designed to permit unfair discrimination between customers, issuers, 
brokers, and dealers.
    In this amendment, the Exchange has made minor edits to its rule 
text (in particular, in NYSE Rules 13, 52, 72, 299A and 1000) that are 
technical or clarifying in nature. Finally, in Amendment No. 2, the 
Exchange has committed to provide us with specific metrics on an 
ongoing basis that relate to market quality and certain of its rules 
that are subject to the New Model Pilot. We believe that this data will 
be important in helping the Commission analyze the impact of the New 
Model Pilot, and in determining whether to permanently approve or 
modify it, if so requested by the Exchange. Therefore, we find that 
these proposed changes are consistent with the Act.
    In Amendment No. 3, the Exchange modified the dates that the 
Exchange is required to provide data to the Commission, amended the 
implementation dates of certain rules, and clarified the implementation 
schedule of the New Model Pilot. Finally, in Amendment No. 3, the 
Exchange proposed technical changes to Rule 98 and 98 Former to replace 
the term ``specialty stocks'' with ``registered security.''
    The Exchange has requested that the proposed rule change, as 
modified by Amendment Nos. 1, 2, and 3, be approved prior to the 30th 
day after publication of notice of filing of Amendment Nos. 2 and 3 in 
the Federal Register. The changes proposed in Amendment Nos. 2 and 3, 
discussed above, are either technical in nature, raise policy issues 
that we have considered previously (and address them in a manner 
consistent with our prior approvals), do not differ substantively from 
the changes proposed in the original filing as modified by Amendment 
No. 1, notice of which was published for public comment in the Federal 
Register on July 23, 2008, or strengthen the proposal.
    For example, NYSE's commitment in Amendment No. 2 to provide 
certain data to enable us to evaluate the effects of the Pilot 
provisions strengthens the proposal by specifying what data the 
Exchange must provide and when it must be provided. Clarification of 
the Exchange's implementation schedule for the New Model Pilot in 
Amendment No. 3 strengthens the proposal by setting a deadline of ten 
weeks following the date of this order by which the Exchange will fully 
implement the Pilot provisions, and thus eliminate the DMM's advance 
``look'' at incoming orders.
    Accordingly, we find that good cause exists, consistent with 
Sections 6(b)(5) of the Act,\99\ and Section 19(b) of the Act \100\ to 
approve the proposed rule change, as modified by Amendment Nos. 1 2, 
and 3 on an accelerated basis.
---------------------------------------------------------------------------

    \99\ 15 U.S.C. 78f(b)(5).
    \100\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 2 and 3, including whether 
Amendment Nos. 2 and 3 are 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-2008-46 on the subject line.

[[Page 64392]]

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-2008-46. This file 
number should be included on the subject line if e-mail is used. To 
help us process and review your comments more efficiently, please use 
only one method. We will post all comments on the SEC'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 us, and all written 
communications relating to the proposed rule change between us 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 SEC'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; we do 
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-2008-46 and should be 
submitted on or before November 19, 2008.

VI. Conclusion

    For the foregoing reasons, we find that the proposed rule change, 
as amended, is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\101\ that the proposed rule change (SR-NYSE-2008-46), as modified 
by Amendment Nos. 1, 2, and 3 be, and it hereby is,approved on an 
accelerated basis.
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    \101\ 15 U.S.C. 78f(b)(2).

    By the Commission.
Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-25797 Filed 10-28-08; 8:45 am]

BILLING CODE 8011-01-P
