
[Federal Register: November 5, 2008 (Volume 73, Number 215)]
[Notices]               
[Page 65904-65912]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05no08-103]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58877; File No. SR-NYSE-2008-108]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
for a Six-Month Pilot Program To Establish a New Class of NYSE Market 
Participants That Will Be Referred to as ``Supplemental Liquidity 
Providers'' (``SLPs'') and Will Be Designated as Exchange Rule 107B

October 29, 2008.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that on October 24, 2008, New York Stock Exchange LLC (``NYSE'' 
or the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I 
and II below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes a six-month pilot program (``Pilot'' or 
``program'') to establish a new class of NYSE market participants that 
will be referred to as ``Supplemental Liquidity Providers'' (``SLPs'') 
and will be designated as Exchange Rule 107B.
    The text of the proposed rule change is available at NYSE, http://
www.nyse.com, and the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in Sections A, B, and C below, of the most 
significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    With this rule filing, the NYSE is proposing a six-month pilot 
program to establish a new class of market participants: Supplemental 
Liquidity Providers (``SLP''). SLPs will supplement the liquidity 
provided by Designated Market Makers (``DMMs'') when the NYSE ``New 
Market Model'' is approved by the SEC. SLPs may only enter orders 
electronically from off the Floor of the Exchange and may only enter 
such orders directly into Exchange systems and facilities designated 
for this purpose. All SLP orders must only be for the proprietary 
account of the SLP member organization. Thus, an SLP will not handle 
orders from public customers or otherwise act on an agency basis. They 
will have a 5% average quoting requirement per assigned security. 
Additionally, if an SLP posts displayed or non-displayed liquidity in 
its assigned securities that results in an execution, the Exchange will 
pay the SLP a financial rebate.
    By establishing this new class of market participant, the NYSE is 
seeking to provide incentives for quoting and to

[[Page 65905]]

add competition to the existing group of liquidity providers. By 
requiring SLPs to quote at the National Best Bid (``NBB'') or the 
National Best Offer (``NBO'') a percentage of the regular trading day 
in their assigned securities, and by paying a rebate when the SLP's 
interest results in an execution, the Exchange is rewarding aggressive 
liquidity providers in the market. The Exchange believes that this 
rebate program will encourage the additional utilization of, and 
interaction with, the NYSE and provide customers with the premier venue 
for price discovery, liquidity, competitive quotes and price 
improvement.
Responsibilities of the Supplemental Liquidity Provider
SLP's 5% Avearge Quoting Requirement
    An SLP is required to maintain a bid or an offer at the NBB or NBO 
(e.g., the ``inside'') averaging at least 5% of the trading day for 
each assigned security in round lots in order to maintain its status as 
an SLP. If an SLP fails to meet the quoting requirement for three 
consecutive months, the Exchange may revoke the SLP status pursuant to 
Section (i)(1)(C)(iii) of the proposed Rule.
SLP's 3% Average or More Quoting Requirement for Rebate Purposes
    If an SLP posts liquidity in its assigned securities that results 
in an execution, the Exchange will pay the SLP a financial rebate of 
$.0015 per share for such executions provided the SLP meets its monthly 
quoting requirement for rebates averaging at least 3% at the NBB or the 
NBO in its assigned securities in round lots (see Section (i) (``Non-
Regulatory Penalties'') and Section (f) (``Calculation of Quoting 
Requirements'') of the proposed Rule). Meeting the 3% average quoting 
requirement for rebates does not satisfy the 5% average quoting 
requirement which SLPs must meet in order to remain in the SLP program. 
The rebate calculation is described in more detail below.
    A member organization that acts as an SLP is not permitted to act 
as a Designated Market Maker (``DMM'') on the Floor of the Exchange in 
the same security. Thus, a member organization that acts as a DMM on 
the Floor may not also act as an SLP in those securities registered to 
the DMM unit.
    Like all other member organizations of the Exchange, an SLP must 
abide by NYSE and SEC rules and regulations and must deal in a manner 
consistent with just and equitable principles of trade. SLPs are 
subject to regulatory oversight by NYSE Regulation and FINRA.
Assigned Securities
    During the proposed SLP Pilot program, the SLP Liaison Committee, 
as defined in Section (d)(1) of the proposed Rule, will initially 
assign a cross section of NYSE-listed securities to each SLP. The SLP 
Liaison Committee will determine which securities will be assigned to 
an SLP and the number of securities assigned to each SLP. The eligible 
securities available to be assigned to SLPs will initially include five 
hundred (500) of the most actively traded NYSE-listed securities. 
Depending upon the success of the SLP program, the Exchange will 
gradually add more NYSE-listed securities to the program, with the 
intent of including all NYSE-listed securities to the program.
    The Exchange believes that the Pilot will provide the Exchange with 
a unique opportunity to monitor the success of the SLP incentives by 
starting with a smaller cross section of securities. By doing so, the 
Exchange will be better equipped to address actual and potential 
administrative and operational problems without unnecessary risk to the 
Exchange and to its customers. The Pilot will also provide the Exchange 
with the opportunity to identify and address any such problems and make 
beneficial changes to the SLP program before expanding the program.
    In addition to its usefulness to the Exchange, the Pilot will 
provide the SLPs with essential practical experience with the new 
program and enable the SLPs to become proficient in the SLP role before 
expanding the assigned securities to all NYSE-listed securities.
    The SLP Liaison Committee, in its discretion, will assign one or 
more SLPs to each security depending upon the trading activity of the 
security. The SLP Liaison Committee will likely assign a greater number 
of SLPs to more actively traded securities.
Qualifications of the Supplemental Liquidity Provider
    A member organization of the Exchange must have the following 
qualifications in order to obtain SLP status:
    (1) Adequate technology to support electronic trading through the 
related systems and facilities of the Exchange and report qualifying 
trading activity to Exchange systems utilizing unique and separate 
mnemonics specifically dedicated to SLP trading activity;
    (2) Adequate trading infrastructure to support SLP trading 
activity, which includes support staff to maintain operational 
efficiencies in the SLP program and adequate administrative staff to 
manage the member organization's SLP program;
    (3) Quoting performance that demonstrates an ability to meet the 5% 
quoting requirement in each assigned security;
    (4) A disciplinary history that is consistent with just and 
equitable business practices; and
    (5) The business unit of the member organization acting as an SLP 
must have in place adequate information barriers between the SLP unit 
and the member organization's customer, research and investment banking 
business.
    Adequate Technology for Trading and Reporting: Because the SLP will 
only be permitted to trade electronically from off the Floor of the 
Exchange, a member organization's off-Floor technology must be fully 
automated to accommodate the Exchange's trading and reporting systems 
that are relevant to operating as an SLP. If a member organization is 
unable to support the relevant electronic trading and reporting systems 
of the Exchange for SLP trading activity, it will not qualify as an 
SLP.
    Adequate Trading Infrastructure: Upon applying for status as an 
SLP, a member organization must have adequate trading infrastructure, 
which includes support staff to maintain operational efficiencies in 
the SLP program and adequate administrative staff to manage the member 
organization's SLP program.
    Disciplinary History: Upon applying for SLP status, a member 
organization's disciplinary history must reflect conduct that is 
consistent with just and equitable business practices.
    Quoting Performance: Upon applying for SLP status, a member 
organization's ability to meet the 5% quoting requirement may be 
demonstrated by past and or current trading activity. If an applicant 
has not demonstrated an ability to meet the 5% quoting requirement to 
the satisfaction of the SLP Liaison Committee, the applicant may not 
qualify as an SLP.
    Information Barriers: The business unit of the SLP that submits 
orders on behalf of the member organization must have in place adequate 
information barriers between the SLP unit and the member organization's 
customer, research and investment banking business.
SLP Application Process
    To become an SLP, a member organization must submit an SLP 
application form with all supporting documentation to the SLP Liaison 
Committee. The SLP Liaison Committee

[[Page 65906]]

will determine whether an applicant is qualified to become an SLP based 
on the qualifications described in Section (c) of the proposed Rule 
(``Qualifications of a Supplemental Liquidity Provider''). The 
qualifications focus on the adequacy of the applicant's trading and 
reporting technology and trading infrastructure. The applicant's 
disciplinary history will be considered as well.
    After submission of the SLP application form and supporting 
documentation, the SLP Liaison Committee will notify the applicant 
member organization of its decision. If an applicant is approved by the 
SLP Liaison Committee to receive SLP status, the applicant must 
establish connectivity with relevant Exchange systems and facilities.
    The processing of all applications may be suspended when the SLP 
Liaison Committee has determined that there is a sufficient number of 
SLPs assigned to each eligible security in the SLP program (see Section 
(g)(2) of the proposed Rule).
    If an applicant is disapproved or ``disqualified,'' pursuant to 
Section (i)(2) of the proposed Rule, by the SLP Liaison Committee, such 
applicant may request an appeal of such disapproval or disqualification 
by the SLP Panel as provided in Section (j) (``Appeal of Non-Regulatory 
Penalties'') of this Rule, and/or reapply for SLP status three (3) 
months after the month in which the applicant received a disapproval or 
disqualification notice from the Exchange (see Section (d)(6) of the 
proposed Rule).
Voluntary Withdrawal of SLP Status
    An SLP may withdraw from the status of an SLP at any time by giving 
notice to the SLP Liaison Committee, the Market Surveillance Division 
of NYSE Regulation, Inc. and the NYSE Operations Division (see Section 
(e) (``Voluntary Withdrawal of Supplemental Liquidity Provider Status'' 
of the proposed Rule). However, withdrawal of SLP status will not 
become effective until the withdrawing SLP's assigned securities are 
reassigned to other SLPs. After the notice of withdrawal is received by 
the SLP Liaison Committee, the Market Surveillance Division and the 
NYSE Operations Division, the SLP Liaison Committee will reassign said 
securities as soon as practicable but no later than 30 days of the date 
said notice is received by the SLP Liaison Committee, the Market 
Surveillance Division and the NYSE Operations Division. In the event 
the reassignment of securities takes longer than the 30-day period, the 
withdrawing SLP will have no obligations under this Rule 107B and will 
not be held responsible for any matters concerning its previously 
assigned SLP securities upon termination of the 30-day period.
Quoting Requirements of the Supplemental Liquidity Provider
    In order to maintain SLP status, an SLP is required to maintain a 
bid or an offer at the NBB or NBO on the Exchange averaging at least 5% 
of the trading day in round lots for each assigned security.\4\ While 
the SLP may provide displayed and non-displayed liquidity (e.g., 
reserve and dark orders), the 5% average quoting requirement can only 
be satisfied when an SLP posts displayed liquidity in its assigned 
securities in round lots at the NBB or the NBO. Thus, non-displayed 
liquidity will not be counted as credit towards the 5% quoting 
requirement. Additionally, tick sensitive orders (i.e., ``Sell Plus,'' 
``Buy Minus'' (see Rule 13) and ``Buy Minus Zero Plus'') will not be 
counted as credit towards the 5% quoting requirement.
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    \4\ See Section (a) of the proposed Rule.
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    In order for an SLP to be entitled to a rebate, an SLP must post 
liquidity on the Exchange that executes against incoming orders and 
meet the monthly minimum quoting requirement for rebates averaging at 
least 3% at the NBB or the NBO in round lots in its assigned securities 
(see Section (b) (``Financial Rebates for Executed Transactions'') in 
the proposed Rule). If the SLP does not meet a minimum monthly quoting 
requirement averaging at least 3%, an SLP will not be entitled to a 
rebate on executed volume in that given month in that particular 
affected security (see Section (i) (``Non-Regulatory Penalties'') of 
the proposed Rule).
    The SLP is not subject to any minimum or maximum quoting size 
requirement apart from the requirement that an order be for at least 
one round lot (see Section (f)(2) of the proposed Rule).
    An SLP must use its SLP mnemonic when trading as an SLP in its 
assigned securities in order to obtain credit for their SLP trading 
activity (see Section (f)(2) of the proposed Rule). Quoting and rebate 
credit will be measured only by using the SLP's unique mnemonics 
specifically designated for SLP trading activity.
Calculation of the Quoting Requirements
    The SLP's quoting requirements will not be in effect in the first 
month the SLP operates as an SLP. The Exchange will provide the SLP 
with a one-month grace period to allow preparation time for the SLP. 
Therefore, this quoting requirement will not take effect until the 
second month of an SLP's operation as an SLP.
    Beginning with the second month an SLP is operating as an SLP, an 
SLP must satisfy the 5% quoting requirement for each assigned 
security.\5\ The SLP Liaison Committee will determine whether an SLP 
has met its quoting requirement for the trading days \6\ in a calendar 
month by calculating the following:
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    \5\ The Exchange Strategic Analysis Department will be 
responsible for generating SLP performance data and providing such 
data to the SLP Liaison Committee in order to determine which SLPs 
are meeting their quoting requirements and are eligible for 
financial rebates.
    \6\ For purposes of Section (f)(1) of the proposed rule text 
(Exhibit 5), ``trading day'' shall mean any day on which the 
Exchange is scheduled to be open for business. Days on which the 
Exchange closes prior to 4 p.m. (Eastern Time) for any reason, which 
may include any regulatory halt or trading halt, shall be considered 
a trading day.
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    (1) The ``Daily NBB Quoting Percentage'' by determining the 
percentage of time an SLP has at least one round lot of displayed 
interest in an Exchange bid at the NBB during each trading day for a 
calendar month;
    (2) The ``Daily NBO Quoting Percentage'' by determining the 
percentage of time an SLP has at least one round lot of displayed 
interest in an Exchange offer at the NBO during each trading day for a 
calendar month;
    (3) The ``Average Daily NBBO Quoting Percentage'' for each trading 
day by summing the ``Daily NBB Quoting Percentage'' and the ``Daily NBO 
Quoting Percentage'' in each assigned security then dividing such sum 
by two; and
    (4) The ``Monthly Average NBBO Quoting Percentage'' for each 
assigned security by summing the security's ``Average Daily NBBO 
Quoting Percentages'' for each trading day in a calendar month then 
dividing the resulting sum by the total number of trading days in such 
calendar month.
Example of Quoting Requirement Calculation
    Below is an example of a quoting requirement calculation. For 
purposes of this example, it is assumed that SLP No. 1 has two assigned 
securities, A and B, and that there were 5 trading days in the selected 
calendar month.
    The ``Average Daily NBBO Quoting Percentage'' for SLP No. 1 is 
calculated for each security by summing the daily NBB and NBO of each 
security for that day and dividing that number by two:

[[Page 65907]]



                               Security A
------------------------------------------------------------------------
                                      Calculation of
  Trading      NBB        NBO      ``Average Daily NBBO  ``Average Daily
   days     (percent)  (percent)   Quoting Percentage''    NBBO Quoting
                                      for SLP No. 1        Percentage''
------------------------------------------------------------------------
T1........         4          6   4% + 6% = 10% divided                5
                                   by 2 = 5%.
T2........         3          5   3% + 5% = 8% divided                 4
                                   by 2 = 4%.
T3........         4          4   4% + 4% = 8% divided                 4
                                   by 2 = 4%.
T4........         6          8   6% + 8% = 14% divided                7
                                   by 2 = 7%.
T5........         5          5   5% + 5% = 10% divided                5
                                   by 2 = 5%.
------------------------------------------------------------------------


                               Security B
------------------------------------------------------------------------
                                      Calculation of
  Trading      NBB        NBO      ``Average Daily NBBO  ``Average Daily
   days     (percent)  (percent)   Quoting Percentage''    NBBO Quoting
                                      for SLP No. 1        Percentage''
------------------------------------------------------------------------
T1........         5          7   5% + 7% = 12% divided                6
                                   by 2 = 6%.
T2........         4          6   4% + 6% = 10% divided                5
                                   by 2 = 5%.
T3........         6          8   6% + 8% = 14% divided                7
                                   by 2 = 7%.
T4........         7          9   7% + 9% = 16% divided                8
                                   by 2 = 8%.
T5........         9          9   9% + 9% = 18% divided                9
                                   by 2 = 9%.
------------------------------------------------------------------------

    The ``Monthly Average NBBO Quoting Percentage'' for each security 
is then calculated by summing the security's ``Average Daily NBBO 
Quoting Percentages'' for all five trading days of the calendar month 
and then dividing the resulting total by the number of trading days in 
the calendar month (in this instance 5).

                                                   Security A
----------------------------------------------------------------------------------------------------------------
    ``Average Daily NBBO Quoting Percentage''                                                       ``Monthly
-------------------------------------------------     Calculation of ``Monthly Average NBBO       Average NBBO
                                                       Quoting Percentage'' for SLP No. 1            Quoting
   T1        T2        T3        T4        T5                                                     Percentage''
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     5%        4%        4%        7%        5%   5%+4%+4%+7%+5% = 25% divided by 5 = 5%......               5%
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                                                   Security B
----------------------------------------------------------------------------------------------------------------
    ``Average Daily NBBO Quoting Percentage''                                                       ``Monthly
-------------------------------------------------     Calculation of ``Monthly Average NBBO       Average NBBO
                                                       Quoting Percentage'' for SLP No. 1            Quoting
   T1        T2        T3        T4        T5                                                     Percentage''
----------------------------------------------------------------------------------------------------------------
     6%        5%        7%        8%        9%   6%+5%+7%+8%+9% = 35% divided by 5 = 7%......               7%
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Financial Rebates for Executed Transactions
    When an SLP posts liquidity, displayed or non-displayed, on the 
Exchange in its SLP assigned securities and such liquidity executes 
against an incoming order, the SLP will receive a financial rebate for 
that executed transaction provided the SLP has met its rebate quoting 
requirement averaging at least 3% at the NBB or the NBO in each 
assigned security pursuant to Section (i)(1)(A) and (B) (``Non-
Regulatory Penalties''). An SLP will only receive a rebate when it has 
met the monthly 3% or better quoting requirement in its assigned 
securities and the SLP's posted displayed or non-displayed liquidity 
results in an execution.
SLP Rebate Calculation
    The SLP rebate will be $.0015 per share on executed volume when the 
SLP provides liquidity.\7\ The rebate will be paid for displayed and 
non-displayed orders provided that the SLP meets the quoting 
requirement averaging 3% or more at the NBB or NBO in its assigned 
securities for a given month. If an SLP does not meet the average 
quoting requirement described above, such SLP will not be entitled to a 
rebate. As discussed previously, if an SLP does not meet its quoting 
requirement averaging 5% at the NBB or the NBO for each assigned 
security for 3 consecutive months, such SLP may be disqualified from 
SLP status. The Exchange will track the volume and quoting requirement 
of SLPs by their designated SLP mnemonics.
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    \7\ The Exchange will file a separate fee filing with the SEC 
pursuant to the provisions of Section 19b-4 that will outline the 
SLP rebate program described above. Thereafter, the calculation and 
amount of the SLP rebate ($0.0015 per executed share) will be 
published in the NYSE Price List available on the NYSE Web site.
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    Except for the rebate, all other SLP fees are the same as existing 
customer fees on the Exchange (see the NYSE Price List for equities on 
the NYSE Web site).
SLP Parity With Other Market Participants Pursuant to Rule 72
Proposed New Market Model
    In the New Market Model Exchange systems will be responsible for 
share allocation and thus will create interest files for each market 
participant. Individual Floor brokers and the DMM registered in the 
security shall each constitute single participants. All off-Floor 
orders entered in Exchange

[[Page 65908]]

systems at the Exchange BBO shall together constitute a single 
participant (``Book Participant'') for the purpose of share allocation. 
SLP orders will be in the ``Book Participant'' category pursuant to 
Rule 72 of the proposed New Market Model (see Section (f)(4) of the 
proposed Rule).
Market Data and Trading Information Available to the SLP
    The universe of trading information and market data available to 
the SLP will include market data published by the NYSE and all other 
automated trading centers (as defined in Rule 600 of Regulation NMS), 
trading information published on the Consolidated Tape and on the NYSE 
Open Book[supreg] (``Open Book'').\8\ Thus, the SLP will have the same 
published trading information and market data that all other NYSE 
customers have available to them.
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    \8\ The NYSE Open Book is provided by the NYSE to vendors and 
customers in two modes. The first displays the depth of the market 
refreshed every five seconds. The second displays the depth of the 
market in real time. NYSE Open Book discloses limit order interest 
at the price at the best bid and offer and at prices below the best 
bid and above the best offer.
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Non-Regulatory Penalties
    If an SLP fails to meet the 5% average quoting requirement for any 
assigned security, the SLP may be subject to non-regulatory penalties 
imposed by the SLP Liaison Committee (see Section (i) of the proposed 
Rule). Such non-regulatory penalties include: (1) Denial of the 
financial rebate; (2) removal of one or more assigned securities from 
the SLP; and (3) disqualification. These non-regulatory penalties and 
the conditions under which such penalties are imposed may be appealed 
by an SLP as provided in Section (j) (``Appeal of a Non-Regulatory 
Penalty'') of the proposed Rule and described in more detail below.
Penalties for Quoting Less than 5% in a Given Calendar Month
    In a given calendar month, if an SLP maintains a quote at the NBB 
or NBO averaging 3% of the trading day, but less than the average of 5% 
of the trading day in any assigned security, the SLP will receive a 
financial rebate for that calendar month for executed transactions in 
that particular security as described in Section (b) (``Rebates for 
Executed Transactions'') of the proposed Rule. Failure to meet the 5% 
quoting requirement for each assigned security in that month will be 
counted towards the three-month disqualification period provided in 
paragraph (i)(C) of the proposed Rule.
    In a given calendar month, if an SLP maintains a quote at the NBB 
or the NBO averaging less than 3% of the regular trading day in an 
assigned security, the SLP will not receive the financial rebate for 
that month for transactions executed in that particular assigned 
security. The failure to meet the 5% average quoting requirement for 
any assigned security in that month will also be counted towards the 
three-month disqualification period.
    If an SLP fails to meet the 5% quoting requirement for three 
consecutive calendar months in any assigned security, the SLP Liaison 
Committee may, in its discretion, take the following non-regulatory 
action:
    (1) Revoke the assignment of the affected security(ies);
    (2) Revoke the assignment of an additional, unaffected security 
from an SLP; or
    (3) Disqualify a member organization's status as an SLP.
    Disqualification Determinations:
    In the second consecutive calendar month that an SLP fails to meet 
the 5% quoting requirement, the SLP Liaison Committee's will notify the 
SLP in writing that the SLP may be disqualified if it fails to meet the 
quoting requirement the third consecutive month.\9\ If the SLP fails to 
meet the 5% quoting requirement for a third consecutive month, the SLP 
may be disqualified from SLP status.
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    \9\ The SLP Liaison Committee will be responsible for issuing 
the letter to an SLP that fails to meet its quoting requirement for 
three consecutive months. It will also be responsible for advising 
an SLP of its eligibility or ineligibility to become an SLP.
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    When disqualification determinations are made, the SLP Liaison 
Committee will provide a disqualification notice to the member 
organization informing the member organization of its disqualification 
as an SLP.
    If a member organization is disqualified from its status as an SLP 
pursuant to Section (i)(1)(C)(iii) of the proposed Rule, the member 
organization may appeal the disqualification pursuant to Section (j) 
(``Appeal of a Non-Regulatory Penalties'') of the proposed Rule, or re-
apply for SLP status in accordance with Section (d)(6) (``Re-
application for SLP Status'') of the proposed Rule. However, the re-
application processes may not begin until three calendar months after 
the month in which the member organization received its 
disqualification notice.
Appeal of Non-Regulatory Penalties
    An SLP may request an appeal of the decision to impose a non-
regulatory penalty as provided in Section (j) of the proposed Rule. 
Upon receiving a request for an appeal, a panel of NYSE employees 
referred to as the ``SLP Panel'' will review the decision to impose 
non-regulatory penalties. The SLP Panel shall consist of the NYSE's 
Chief Regulatory Officer (``CRO''), or a designee of the CRO, and two 
(2) officers of the Exchange designated by the Head of the U.S. Markets 
Division.
    The SLP Panel will review the facts of the subject non-regulatory 
penalty and render a decision as to the correctness of the decision to 
impose the penalty. The SLP Panel may overturn or modify an action 
taken by the SLP Liaison Committee, and all determinations by the SLP 
Panel will constitute final action by the Exchange on the disputed 
matter.
Regulatory Oversight of SLPs
    Member organizations that act as SLPs will be subject to regulatory 
oversight by NYSE Regulation and FINRA.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\10\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act,\11\ 
in particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest. The Exchange 
believes the proposed Rule is consistent with these principles in that 
it seeks to establish a new class of market participant that will 
provide additional liquidity to the market and add competition to the 
existing group of liquidity providers. The NYSE believes that by 
requiring an SLP to quote at the NBB or the NBO a percentage of the 
regular trading day in their assigned securities, and by paying an SLP 
a rebate when its posted interest results in an execution, the Exchange 
is rewarding aggressive liquidity providers in the market, and by doing 
so, the Exchange will encourage the additional utilization of, and 
interaction with, the NYSE and provide customers with the premier venue 
for price discovery, liquidity, competitive quotes and price 
improvement.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).

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[[Page 65909]]

B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6) thereunder \13\ 
because the foregoing proposed rule change: (1) Does not significantly 
affect the protection of investors or the public interest; (2) does not 
impose any significant burden on competition; and (3) by its terms, 
does not become operative for 30 days after the date of filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    The Exchange states that the Commission recently issued 
interpretative guidance regarding the rule-filing process (the ``Rule 
Streamlining Guidance'').\14\ In that release, the Commission 
recognized the need to expedite the rule-making process for self-
regulatory organizations in order to help the U.S. capital markets 
remain competitive both domestically (with ECNs, ATSs and other less-
regulated venues), and internationally:
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    \14\ See Securities Exchange Commission Release No. 58092 (July 
3, 2008), 73 FR 40144 (July 11, 2008) (``Commission Guidance and 
Amendment to the Rule Relating to Organization and Program 
Management Concerning Proposed Rule Changes by Self-Regulatory 
Organizations'').
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    The national securities exchanges' need to implement quickly new 
trading rules has become increasingly critical, particularly given the 
evolving role of securities exchanges, innovations in U.S. and cross-
border trading, and the increasingly competitive financial 
marketplace.\15\
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    \15\ Id. at page 12 [sic].
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    The Exchange states that, in recognition of the highly competitive 
environment for national securities exchanges today, the Commission 
gave interpretative guidance on Section 19(b)(3)(A) and Rule 19b-4(f), 
which permit SROs to designate proposed rule changes as ``immediately 
effective'' without the formal approval process provided elsewhere in 
the Act. In particular, the Commission ``encourage[d] exchanges to 
consider filing a broader range of proposed rules'' based on the 
standards outlined in Rule 19b-4(f)(6).\16\ These standards generally 
permit immediate effectiveness for trading rule changes that meet 
certain technical requirements \17\ and do not ``significantly affect 
the protection of investors or the public interest,'' or ``impose any 
significant burden on competition.''
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    \16\ 17 CFR 240.19b-4(f)(6)(i) and (ii).
    \17\ Filings must be submitted for pre-clearance at least five 
days prior to filing, and must not become effective, on their terms, 
until the thirtieth day after the filing date.
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    The proposed rule meets the immediate effectiveness criteria in the 
Rule Streamlining Guidance because it is consistent with previously 
approved rules for market makers.
    As explained more fully in the Rule Streamlining Guidance, proposed 
trading rules can be filed for immediate effectiveness if each policy 
issue raised by the proposed trading rule ``(i) has previously been 
considered by the Commission when the Commission approved another 
trading rule (that was subject to notice and comment) pursuant to 
19(b)(2) of the Exchange Act, and (ii) the rule change resolves such 
policy issue in a manner consistent with such prior approval.'' \18\
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    \18\ Id. at page 14 [sic].
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    The Exchange believes that the proposed rule filing meets both the 
statutory standards for filings under Rule 19b-4(f)(6) and the 
standards set out in the Rule Streamlining Guidance. In particular, and 
as explained more fully below, the policies raised in this proposed 
rule:
    (1) Have previously been considered by the Commission when the 
Commission approved other market maker rules after public notice and 
comment under Section 19(b)(2) of the Exchange Act; and
    (2) The rule resolves such policy issues in a manner that is 
consistent with such prior approvals.
    According to the Exchange, the concepts contained in the proposed 
rule are not new. Indeed, the Exchange notes that the Commission has 
had extensive opportunities to consider and hear comment on how market 
makers should interact with markets and the appropriate rewards for 
those services.\19\ As a result, the Exchange believes that each policy 
issue raised by proposed Rule 107B ``has previously been considered by 
the Commission when the Commission approved another trading rule (that 
was subject to notice and comment) pursuant to 19(b)(2) of the Exchange 
Act.''
---------------------------------------------------------------------------

    \19\ Footnote 44 of the Rule Streamlining Guidance includes 
cites to several SRO market maker rules that were filed ``regular 
way'' pursuant to Section 19(b)(2) of the Act.
---------------------------------------------------------------------------

    While the SLP is not a ``market maker'' per se, the Exchange 
believes that the proposed SLP rule filing shares most, if not all, of 
the same policy issues previously commented upon and resolved in some 
of the market maker rules referred to in the Rule Streamlining Guidance 
at footnote 44 and other rules that were filed ``regular way,'' 
noticed, commented upon and approved by the SEC.\20\ The Exchange 
believe that, by analogy, the market maker policy issues are the same 
or similar to those of the SLP, but to a lesser extent. According to 
the Exchange, a market maker may have more obligations and more trading 
advantages than an SLP, but the quoting requirements of a market maker 
and an SLP are not materially different. The same argument may be made 
for the rebate. A market maker rebate for posting liquidity is not 
materially different in policy or application than the SLP rebate. 
Therefore, the Exchange contends that the resolution and approval of 
market maker policies is analogous to the resolution of SLP policies. 
The policy issues that have been ``resolved'' in prior market maker 
filings include:
---------------------------------------------------------------------------

    \20\ The filings referenced herein include some of those noted 
by the Commission in footnote 44 of the Rule Streamlining Guidance, 
see Securities Exchange Act Release Nos. 53652 (April 13, 2006), 71 
FR 20422 (April 20, 2006) (SR-Amex-2005-100) and 54580 (October 6, 
2006), 71 FR 60781 (October 16, 2006) (SR-ISE-2006-40), as well as 
other filings submitted, reviewed and approved by the Commission 
pursuant to Section 19b-2, See Securities Exchange Act Release Nos. 
43004 (June 30, 2000), 65 FR 43060 (July 12, 2000) (SR-CBOE-1998-
54), 50003 (July 12, 2004), 69 FR 43028 (July 19, 2004) (SR-CBOE-
2004-24) and 53635 (April 12, 2006), 71 FR 20144 (April 19, 2006) 
(SR-Amex-2005-75).
---------------------------------------------------------------------------

     Application process for market maker and SLP status; \21\
---------------------------------------------------------------------------

    \21\ See AMEX Rules 993 and 994-ANTE (concerning Supplemental 
and Remote Registered Options Traders (``SROTs'' and ``RROTs''), 
respectively); ISE Rule 902 (concerning Second Market Competitive 
Market Makers (``SMCMMs'')); CBOE Rules 8.83 and 8.92 (concerning 
Designated Primary Market Makers (``DPMs'') and e-DPMs, 
respectively).
---------------------------------------------------------------------------

     Market maker qualifications for on-Floor or off-Floor 
electronic trading; \22\
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    \22\ See AMEX Rules 993 and 994-ANTE; ISE Rule 902; CBOE Rules 
8.83 and 8.92.
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     Process for voluntary withdrawal from the marker maker 
program; \23\
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    \23\ See AMEX Rules 993 and 994-ANTE; CBOE Rule 8.83.

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[[Page 65910]]

     Appeal process if disapproved or disqualified; \24\
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    \24\ See AMEX Rule 993-ANTE.
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     Process for allocation of assigned securities; \25\
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    \25\ See AMEX Rules 993 and 994-ANTE; CBOE Rules 8.84 and 8.92.
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     Quoting requirement at the NBB or the NBO a percentage of 
the trading day for proprietary accounts; \26\
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    \26\ See AMEX Rules 993 and 994-ANTE; ISE Rule 904; CBOE Rules 
8.85 and 8.93.
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     Creation of information barriers to prevent prohibited 
sharing of trading information; \27\
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    \27\ See AMEX Rules 993 and 994-ANTE; CBOE Rules 8.91 and 8.93.
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     Imposition of penalties when quoting requirement is not 
met; \28\ and
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    \28\ See AMEX Rules 993 and 994-ANTE; CBOE Rules 8.90 and 8.94.
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     Appeal process when penalties are imposed.\29\
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    \29\ See AMEX Rules 993 and 994-ANTE; CBOE Rules 8.90 and 8.94.
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    The Exchange acknowledges that the cited market maker rules do not 
specifically discuss rebates for executions of quoted liquidity, which 
is offered in the proposed SLP rule. However, the Exchange argues that 
other SRO rule filings relating to pricing incentive programs for 
market makers have been submitted pursuant to Section 19(b)(3)(a)(f)(2) 
and received SEC approval.\30\
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    \30\ See SR-NYSE Arca-2008-36 (approving Market Maker Post 
Liquidity Incentive credits) and SR-NASDAQ-2007-61 (approving 
incentives for market makers for ETFs and ILSs).
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    For example, on NYSE Arca, the exchange pays a rebate to the Lead 
Marker Maker (``LMM'') and customers for executions on posted 
liquidity.\31\ The Exchange itself currently offers ``liquidity 
provision payments'' to specialists, which are similar to rebates, 
based on Exchange revenue and the amount of liquidity posted by each 
specialist unit.\32\ Rebates for liquidity providers have become a 
common industry practice and are utilized by most, if not all, trading 
venues including NASDAQ, BATS, Direct Edge and others.\33\
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    \31\ See NYSE Arca Equities Fee Schedule.
    \32\ See SR-NYSE-2007-78.
    \33\ See the following Web sites for price lists: NASDAQ (http:/
/www.nasdaqtrader.com); BATS (http://www.batstrading.com); Direct 
Edge (http://www.directedge.com).
---------------------------------------------------------------------------

    To the extent that an SLP's quoting requirement is one of the 
services also provided by a market maker, approving a commensurate 
rebate for an SLP is analogous to the rebates previously approved by 
the Commission for one aspect of a market maker's services.
    In view of the analogous precedents established in the market maker 
rules, the Exchange believes that its proposed rule for SLPs presents 
no novel issues and that the compensation scheme is consistent with 
both industry practice and prior approval of market maker rules. 
Accordingly, the Exchange believes that immediate effectiveness would 
be appropriate under the Exchange Act, the Exchange Act rules, and the 
Rule Streamlining Guidance.
    The proposed rule meets the immediate effectiveness criteria in the 
Rule Streamlining Guidance for rules relating to market participants.
    The Exchange believes that the proposed rule also qualifies for 
immediate effectiveness because it is a trading rule that addresses the 
obligations of market participants (e.g., SLPs), would have the effect 
of strengthening the market, and provides a reward to SLPs that is not 
disproportionate to the services they provide to the market.
    At the outset, the Exchange notes that in the Rule Streamlining 
Guidance, the Commission provided examples of proposed rule filings 
that are ``appropriate'' for immediate effectiveness in the rule 
streamlining publication, and specifically included proposed rule 
filings that address market maker obligations:
    The Commission carefully reviews special advantages provided to 
market makers when it considers exchange trading rule proposals. 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, as long as the rewards 
are not disproportionate to the services provided. For example, a 
proposed trading rule change that strengthens the market while 
providing benefits to market makers is eligible for immediate 
effectiveness if the benefits conferred are offset by corresponding 
responsibilities to the market that provide customer trading interest a 
net benefit.\34\
---------------------------------------------------------------------------

    \34\ See Rule Streamlining Guidance, page 16 [sic], paragraph 2, 
``Market Maker Obligations.''
---------------------------------------------------------------------------

    Thus, under Commission precedent, a rule filing involving 
incentives for market makers would be appropriate for immediate 
effectiveness if the reward to market makers is in line with the 
services or benefits that the market maker is providing to the market.
    The proposed rebate to SLPs is not disproportionate to the benefit 
they provide.
    The Exchange asserts that the payment of rebates to market makers 
has long been considered by the SEC to be an appropriate incentive for 
adding liquidity to the market thereby improving the market. As noted 
more fully above, the SEC has previously approved the payment of 
incentives to market makers on Nasdaq,\35\ NYSE Arca,\36\ Direct Edge 
\37\ and BATS,\38\ among others. The Exchange also notes that previous 
NYSE fee filings for rebates have been submitted to the SEC pursuant to 
Section (f)(2), and have become immediately effective. For example, 
Nasdaq submitted a filing that became immediately effective upon 
filing, which had the same effect as the NYSE's proposed SLP filing. In 
particular, SR-NASDAQ-2007-61, which is similar to NYSE Arca's 
Designated Marker Maker filing (see NYSE Arca Equities Rule 7.24(b) 
which refers to DMMs who also act as LMMs),\39\ requires the Designated 
Liquidity Provider (``DLP'') to maintain a ``minimum performance 
standard'' in which the DLP must quote a percentage of the trading day 
at the NBB or the NBO in ETFs and ILSs. If the DLP quotes a certain 
percentage of the trading day, it will receive a 40 cent rebate for 
posting liquidity and a 25 cent fee for taking liquidity. In this fee 
filing, NASDAQ indicated that by allocating pricing benefits to certain 
market makers who have ``tangible commitments to the market,'' the 
program would encourage, among other things, development of new 
financial products. In reviewing Nasdaq's proposal, the Exchange 
believes that the SEC evaluated the balance struck between the rewards 
obtained and services provided by the various market makers.
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    \35\ See SR-Nasdaq-2007-61. See also ``http://
www.nasdaqtrader.com.''
    \36\ See SR-NYSE Arca-2008-36.
    \37\ See Direct Edge Price List at ``http://
www.directedge.com.''
    \38\ See BATS Price List at ``http://www.batstrading.com.''
    \39\ See NYSE Arca Equities Rule 7.24.
---------------------------------------------------------------------------

    Based on the rationale of previous rule filings for market maker 
rebates, the Exchange contends that the proposed SLP rebate for 
executions of posted liquidity is not ``disproportionate to the 
services provided'' by the SLP. It is important to note that the SLP 
rebate \40\ is the only benefit the SLP earns when posted liquidity 
results in an execution. As discussed earlier, the SLP rebate will be 
$.0015 per share on executed volume when the SLP posts liquidity to the 
market provided that the SLP meets the quoting requirement averaging at 
least 3% at the NBB or NBO in its assigned

[[Page 65911]]

securities for a given month.\41\ The rebate will be paid for displayed 
and non-displayed orders. If an SLP does not meet the average quoting 
requirement of at least 3% described above, such SLP will not be 
entitled to a rebate. Further, if an SLP does not meet its monthly 
quoting requirement averaging 5% at the NBB or the NBO for each 
assigned security for 3 consecutive months, such SLP may be 
disqualified from SLP status. Except for the rebate, all other SLP fees 
are the same as existing customer fees on the Exchange.
---------------------------------------------------------------------------

    \40\ The SLP rebate calculation will be provided in a subsequent 
fee filing by the Exchange, and when filed with the SEC, the rebate 
calculation will appear on the Exchange's published Price List.
    \41\ The Exchange will file a separate fee filing pursuant to 
Section 19b-4.
---------------------------------------------------------------------------

    The Exchange notes that the proposed rebate is commensurate with 
the quoting requirements the SLP has for each assigned security as the 
SLP has no informational or trading advantage in the market. SLPs are 
basically customers with quoting requirements that may receive a 
financial incentive when posted SLP liquidity results in an execution. 
Under the proposed Rule, even if an SLP meets its quoting requirement 
averaging 3% or more in a given month, it may not receive a rebate if 
the posted liquidity does not result in an execution. Further, the 
Exchange believes that, while it is likely that when an SLP posts 
liquidity to the market the posted liquidity will result in executions, 
the SLP will not receive a rebate for such executions if it does not 
meet its average monthly quoting requirement of at least 3%.
    The Exchange believes that the SLP rebate is commensurate with 
their limited role in the market. For example, NYSE Arca has tiered 
rebates: the ``Market Maker Post Liquidity Incentive Credit,'' which is 
a fee credit that applies to Market Makers (``MMs'') and LMMs, is 
substantially higher than those fee credits available to customers who 
have no affirmative obligations. Additionally, when posting liquidity 
on Arca, LMMs are entitled to 40 cents per 100 shares, while customer 
rebates, which are tiered, are only 22 cents and 23 cents per 100 
shares.
    Accordingly, the Exchange submits that this proposed filing 
qualifies for immediate effectiveness pursuant to Section 19(b)(3)(A) 
of the Act and Rule 19b-4(f)(6) because the introduction of SLPs to the 
Exchange would strengthen the market while providing benefits to 
customers, the SLP's quoting requirement will increase liquidity in the 
market and enhance trading opportunities for customers and the rebate, 
which is conditioned on executions of posted liquidity, is commensurate 
with the services the SLP will provide to the market. Additionally, as 
discussed above, the Exchange believes that the Commission has already 
approved the introduction of similar classes of market participants on 
various exchanges in the past (e.g., AMEX, CBOE, ISE, NASDAQ, NYSE Arca 
and NYSE) which, while filed regular way, were ultimately approved by 
the Commission. The Exchange therefore proposes that this rule should 
be made immediately effective upon filing in keeping with the policies 
and guidance of the Commission's rule streamlining publication.
    Based on the foregoing, the Exchange submits that this proposed 
filing qualifies for immediate effectiveness pursuant to Section 
19(b)(3)(A) of the Act and Rule 19b-4(f)(6) because it is based on the 
provisions of similar rule filings which, while filed regular way, were 
ultimately approved by the Commission. The Exchange proposes that this 
rule should be made immediately effective upon filing in keeping with 
the policies and guidance enumerated in the Commission's Rule 
Streamlining Guidance.
    A proposed rule change filed under Rule 19b-4(f)(6) normally may 
not become operative prior to 30 days after the date of filing.\42\ 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has asked the 
Commission to waive the 30-day operative delay, as specified in Rule 
19b-4(f)(6)(iii),\43\ which would make the rule change effective and 
operative upon filing. The Commission believes that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest because waiving the operative delay would allow SLPs to 
immediately add liquidity to the market and provide trading 
opportunities that may benefit all market participants. By requiring 
SLPs to quote at the NBB or the NBO a percentage of the regular trading 
day in their assigned securities, and by paying a rebate when the SLP's 
interest results in an execution, the Exchange proposes to reward 
liquidity providers in the market. Further, the Commission believes 
that the proposed quoting requirement and rebate is analogous to some 
of the benefits and obligations of Registered Market Makers \44\ and 
notes that the SLP has no informational or trading advantage in the 
market.
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    \42\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires the self-regulatory organization to give the 
Commission notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. NYSE has satisfied this requirement.
    \43\ 17 CFR 240.19b-4(f)(6)(iii).
    \44\ See Securities Exchange Act Release No. 58845 (October 24, 
2008) (SR-NYSE-2008-46) (approving NYSE's new market model and 
noting that an exchange may reward market makers for benefits they 
provide to the exchange's market, but such rewards must not be 
disproportionate to the services provided by the market maker).
---------------------------------------------------------------------------

    Accordingly, the Commission designates the proposed rule change 
effective and operative upon filing with the Commission.\45\
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    \45\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2008-108 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2008-108. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than

[[Page 65912]]

those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make publicly available. All 
submissions should refer to File Number SR-NYSE-2008-108 and should be 
submitted on or before November 26, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
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    \46\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-26391 Filed 11-4-08; 8:45 am]

BILLING CODE 8011-01-P
