
[Federal Register: January 28, 2009 (Volume 74, Number 17)]
[Notices]               
[Page 5009-5014]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28ja09-92]                         


[[Page 5009]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59282; File No. SR-NYSE-2008-119]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval to a Proposed Rule Change, as Modified by Amendment No. 1, To 
Establish Trading Rules for the New York Block Exchange

January 22, 2009.

I. Introduction

    On November 13, 2008, the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt Exchange Rule 1600 
governing the New York Block Exchange (``NYBX''), an electronic 
facility for the posting and trading of undisplayed orders. The 
proposed rule change was published for comment in the Federal Register 
on November 24, 2008.\3\ The Exchange filed Amendment No. 1 on January 
22, 2009. The Commission received no comments on the proposal. This 
notice and order provides notice of filing of Amendment No. 1 and 
grants accelerated approval to the proposed rule change, as modified by 
Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 58969 (November 24, 
2008), 73 FR 71050 (``Notice'').
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II. Background

A. General

    The NYBX facility will offer NYSE members and member organizations 
a means for posting and executing undisplayed orders. It is designed to 
facilitate trading in block-sized orders, although orders submitted to 
NYBX can be as small as one round lot. These orders would not be 
displayed to the public or NYSE members. Only NYSE-listed securities 
will trade in NYBX. All NYSE members and member organizations are 
automatically eligible to access NYBX, although they must complete a 
connectivity authorization process. A non-member who wishes to access 
the NYBX facility may do so as a ``Sponsored Participant'' pursuant to 
NYSE Rule 123B.
    Trading in the facility will occur only when trading is occurring 
on the Exchange.\4\ However, orders submitted to the facility will not 
participate in any openings, re-openings, or closings on the Exchange, 
or in any trades resulting from a liquidity refreshment point or a gap 
quote situation.\5\ Trading on the facility will be halted or suspended 
whenever the NYSE halts or suspends trading in a particular 
security.\6\
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    \4\ NYSE's regular trading hours are 9:30 a.m. Eastern Time 
(``ET'') to 4 p.m. ET. If the Exchange closes for business at a time 
other than 4:00 p.m., NYBX will close at the same time. See proposed 
NYSE Rule 1600(a)(2).
    \5\ See e-mail from Bob Hill, Senior Vice President, NYSE 
Euronext, to Michael Gaw, Assistant Director, Division of Trading 
and Markets, Commission (January 21, 2009).
    \6\ See proposed NYSE Rule 1600(g)(1).
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    In a separate action today, the Commission is also approving a 
proposed rule change by NYSE relating to the corporate governance of 
the NYBX facility.\7\
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    \7\ See Securities Exchange Act Release No. 59281 (January 22, 
2009) (SR-NYSE-2008-120).
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B. Order Entry and Order Parameters

    Users may transmit orders to NYBX by means of an electronic 
interface. The facility can be accessed through an electronic FIX 
application or an Internet-based, password-protected order-entry 
application. Orders can be entered, canceled, and replaced from 3:30 
a.m. ET until the close of the regular hours of the Exchange on any day 
that the Exchange is open for business. The facility will support a 
variety of order types--including limit, midpoint, and pegging orders--
but not market orders.\8\ An order may be pegged, for example, to the 
national best bid or best offer (``NBBO'') or to the NBBO plus or minus 
the Exchange's minimum price variation.\9\ The facility will accept day 
orders, which expire at the end of the regular trading session on the 
day of entry, and ``Good til a Specified Time'' orders, which are 
available for execution until a specified time. Unless otherwise 
specified, the facility will treat all incoming orders as day orders.
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    \8\ See proposed NYSE Rules 1600(c)(2) and 1600(c)(3)(A).
    \9\ See NYSE Rule 62 (describing the minimum price variation).
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    For an order priced equal to or greater than $1.00, the minimum 
quoting increment in the facility is one penny ($0.01).\10\ For an 
order priced less than $1.00, the minimum quoting increment is one-
tenth of a penny ($0.001).\11\ When there is an odd-increment spread, a 
midpoint execution on the facility will occur in a smaller increment 
($x.xx5 if above $1.00, $0.xxx5 if below $1.00).\12\ The facility will 
reject any pegging order priced below $1.00.\13\
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    \10\ See proposed NYSE Rule 1600(d)(2)(A).
    \11\ See proposed NYSE Rule 1600(d)(2)(B).
    \12\ See proposed NYSE Rule 1600(d)(3)-(4).
    \13\ See proposed NYSE Rule 1600(d)(2)(C).
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    The facility will accept orders with round lots and partial round 
lots.\14\ Orders that are initially submitted with an odd-lot size 
would be rejected. However, if the execution of an NYBX order results 
in an odd-lot remainder, that remainder would not be canceled and would 
continue to be processed by the facility.
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    \14\ See proposed NYSE Rule 1600(c)(4).
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    Orders submitted to the NYBX facility may include a ``Minimum 
Trading Volume'' (``MTV'') parameter, which is designed to prevent an 
execution unless the resulting fill would be of at least the designated 
size.\15\ The facility would not initiate the execution of an order 
unless the MTV is met at the time the order is evaluated for execution. 
If no MTV is designated, an order would be treated as if the MTV is 
zero. The facility would act upon market information available to it at 
the time an order is entered into the facility, taking a ``snapshot'' 
of the market. Contraside orders resting in the Display Book (whether 
displayed or non-displayed) and contraside orders in the facility would 
automatically be considered for MTV purposes. In addition, the system 
default would be to include protected quotations of automated trading 
centers for MTV purposes, although an MTV could not be met solely by 
protected bids or offers. A user could elect to have protected bids and 
offers of automated trading centers excluded for MTV purposes. 
Therefore, if an NYBX order is marketable against a protected bid or 
offer displayed by an away market but not against any order in the 
facility or on the Display Book, the facility would not route the order 
to the away market to seek an execution (even if the NYBX order's MTV 
were met by the size of the protected bid or offer). Regardless of an 
order's MTV designation, the facility would always route to away 
markets as necessary to comply with Rule 611 of Regulation NMS.\16\ The 
facility would not consider for MTV purposes any marketable interest on 
an away market that is priced inferior to that market's protected 
quotation.
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    \15\ See proposed NYSE Rules 1600(b)(2)(E) and 
1600(c)(3)(B)(ii).
    \16\ 17 CFR 242.611.
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    The MTV designation does not guarantee that a user would receive 
the full size of the MTV from any resulting execution(s). For example, 
when the MTV of an NYBX order is met, the facility might route parts of 
that order to the Display Book or to one or more away markets for 
execution. Those contraside

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orders might be executed or canceled before the NYBX order can access 
them.

C. Priority, Execution, and Relationship to the Display Book

    All orders entered into the NYBX facility are prioritized in order 
of price, then time.\17\ In addition, execution is conditioned on all 
applicable MTVs being met.
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    \17\ See proposed NYSE Rule 1600(d)(1)(A).
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    The NYBX facility and the Display Book, the Exchange's principal 
facility for the trading of equity securities, are separate electronic 
systems. When it receives an order, the NYBX facility will check for 
contraside interest on the facility, the Display Book (both displayed 
and undisplayed orders), and away markets to ascertain whether to 
attempt to execute the order.\18\ Where an NYBX order is marketable 
against eligible contraside liquidity and its MTV is met, the facility 
will attempt to execute that order against the eligible contraside 
liquidity at the order's limit price or better. If there is eligible 
contraside liquidity in the facility at a better price than any 
liquidity on the Display Book, the order will attempt to execute in the 
facility until it is exhausted, expired, or canceled back to the user 
pursuant to its time-in-force conditions, or until that contraside 
liquidity in the facility is exhausted.\19\ If eligible contraside 
liquidity is available on the Display Book, an order would be sent to 
the Display Book to attempt to execute against that liquidity. NYBX 
orders that are routed to the Display Book will be prioritized and 
executed pursuant to NYSE Rule 72.
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    \18\ The facility would route orders to the Display Book or to 
away markets as necessary via the NYSE Routing Broker. See NYSE Rule 
17(b) (describing operation of the Routing Broker).
    \19\ If the prices of two NYBX orders are crossed, the execution 
will occur at the price of the order that is nearest to or at the 
midpoint of the NBBO. See proposed NYSE Rule 1600(d)(1)(C)(vi).
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    In all cases, the facility would not effect an execution except as 
permitted by Rule 611 of Regulation NMS. Thus, if the execution of an 
NYBX order would trade through a protected bid or offer of an automated 
trading center, the facility would route the applicable size of the 
order to the automated trading center to attempt to execute against 
that protected bid or offer.
    If an order submitted to the facility cannot immediately be 
executed, it would remain on the NYBX book pursuant to its time-in-
force conditions. As new orders are submitted to the facility or the 
Display Book, or the NBBO changes, the NYBX facility will re-evaluate 
whether the booked order is marketable and whether any applicable MTV 
is met. If so, the facility would attempt to execute the order, routing 
parts of the order to the Display Book or to away markets as necessary.
    Orders in the Display Book, whether displayed or undisplayed, have 
priority over orders in the facility at the same price. Therefore, no 
trade could take place in the facility until all equal- or better-
priced orders in the Display Book had been executed (or canceled), 
subject to any applicable MTV being met. Although, as noted above, the 
NYBX facility will monitor orders resting in the Display Book and route 
orders to the Display Book as appropriate, the Display Book will not 
monitor the undisplayed orders resting in the NYBX facility. Thus, 
marketable orders entered into the Display Book would execute without 
regard to any undisplayed orders that may be resting in the NYBX 
facility. In effect, submitting an order to the NYBX facility is 
equivalent to submitting an undisplayed order to the Exchange with the 
conditions that it not execute against any market or marketable limit 
orders submitted to the Display Book, and that it not execute unless 
any applicable MTV is met.\20\
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    \20\ In addition, as noted above, NYBX orders will not 
participate in any openings, closings, or re-openings, or in any 
trades resulting from a liquidity refreshment point or a gap quote 
situation. NYSE has represented that it will disclose to users of 
the NYBX facility the implied conditions of NYBX orders. See 
Amendment No. 1.
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    Where an NYBX order executes in part but is not exhausted, the 
unfilled portion of the order (the ``residual order'') would be held in 
the facility where it would attempt to execute against later-submitted 
eligible contraside liquidity until the residual order is exhausted, 
expired, or canceled.\21\ If the residual order is larger than the 
original MTV of the order, the original MTV would remain on the order. 
If the residual order is smaller than the original MTV, the facility 
would modify the MTV to equal the size of the residual order. A 
residual order maintains its original time stamp unless it is modified. 
If a user modifies the price, size, side, MTV, or time-in-force 
condition of a residual order, it would be considered a newly submitted 
order and receive a new time stamp.\22\
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    \21\ See proposed NYSE Rules 1600(d)(1)(C) and 1600(d)(1)(D).
    \22\ Similarly, a pegging order that is repriced with a change 
in the NBBO also would lose its original priority and go behind 
previously submitted orders in the NYBX queue at the new price. See 
proposed NYSE Rule 1600(d)(1)(A)(ii).
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D. Clearance and Settlement

    Details of each trade occurring in the facility will be 
automatically compared and matched by the Exchange, and locked-in 
trades will be submitted to the National Securities Clearing 
Corporation (``NSCC'') for clearance and settlement.\23\ NYBX 
transaction reports will not reveal contraparty and clearing firm 
identities, except under the following circumstances: (1) for 
regulatory purposes or to comply with an order of a court or 
arbitrator; and (2) if NSCC will not act on behalf of a member or its 
clearing firm.\24\ The trade reports that NSCC will receive from the 
facility will contain the identities of the parties to the trade--thus 
enabling NSCC to conduct its risk management functions and settle 
trades between the appropriate parties--but will contain an indicator 
noting that the trade is anonymous. On the contract sheets that NSCC 
issues to its participants, NSCC will substitute ``ANON'' for the 
acronym of each counterparty.
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    \23\ See proposed NYSE Rule 1600(e)(1). NYBX executions will be 
compared through the Regional Interface Organization Online process 
(``RIO Online''). RIO Online is NYSE Arca's internal processing 
interface that sends order execution information to DTCC. RIO Online 
gathers the trades that are executed on any given day, places the 
trades into the appropriate message format and sends them to DTCC. 
RIO Online provides a record of all trades that were sent to DTCC. 
RIO Online is also used to manage any approved trade corrections.
    \24\ See proposed NYSE Rule 1600(e)(2)-(3).
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E. Recordkeeping

    Users of the facility will be required to comply with all relevant 
rules of the Exchange and Commission in relation to reports and records 
of transactions.\25\ Such rules include, but are not limited to, NYSE 
Rules 132B (Order Tracking Requirements), 342 (Supervision), and 440 
(Books and Records), and Section 17 of the Exchange Act \26\ and Rules 
17a-3, 17a-4, and 17a-6 thereunder.\27\ The Exchange will retain the 
identity of each user that executes an anonymous transaction on the 
facility, thus enabling the user to satisfy its recordkeeping 
obligations under Exchange Act Rules 17a-3(a)(1) and 17a-4(a).\28\
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    \25\ See proposed NYSE Rule 1600(i).
    \26\ See 15 U.S.C. 78q.
    \27\ 17 CFR 240.17a-3, 240.17a-4, and 240.17a-6.
    \28\ 17 CFR 240.17a-3(a)(1) and 240.17a-4(a).
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F. Limitations on the Use of the Facility

    Designated Market Maker (``DMMs'') and Registered Competitive 
Market Makers (``RCMMs'') on the floor of the Exchange may not submit 
orders to the NYBX facility.\29\ The off-floor unit of a DMM or RMM may 
submit orders to the facility if it has policies and procedures that 
are designed to prohibit inappropriate sharing of information

[[Page 5011]]

between the floor personnel and the off-floor personnel.\30\
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    \29\ See proposed NYSE Rule 1600(h).
    \30\ See proposed NYSE Rule 1600(h)(A).
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    In addition, NYSE has proposed certain restrictions on entering 
orders into the facility designed to promote compliance with Section 
11(a) of the Exchange Act.\31\ A member may not enter an order into the 
facility from the floor of the Exchange when such order is for its own 
account, the account of an associated person, or an account over which 
it or an associated person exercises investment discretion.\32\ Also, a 
member on the floor may not have an order entered into the facility by 
sending it to an off-floor facility for entry. However, a member may 
submit a proprietary or customer order to the facility from off the 
floor of the Exchange.
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    \31\ 15 U.S.C. 78k(a). Section 11(a) provides that a member of 
an exchange may not trade for its own account on that exchange 
unless an exemption applies.
    \32\ See proposed NYSE Rule 1600(h)(B).
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G. NYBX-Only Trades

    A trade that results from the execution of two NYBX orders (an 
``NYBX-Only Trade'') will print with a special modifier (``N.X'') to 
identify it as occurring outside the Display Book.\33\ The same ``N.X'' 
modifier is also used to identify executions in MatchPoint, which is a 
separate trading facility of the Exchange that matches non-displayed 
orders.\34\ A trade that results from an NYBX order that is routed to 
the Display Book and executes against one or more Display Book orders 
will print as a regular-way NYSE trade (``N'').
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    \33\ See proposed NYSE Rule 1600(f).
    \34\ See NYSE Rule 1500. NYBX orders will not interact with 
MatchPoint orders, and vice versa.
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    The Exchange proposes to amend certain of its rules that apply to 
or take account of executions on the Display Book by carving out NYBX-
Only Trades from their scope. Thus, for example, a trade effected in 
the NYBX facility would not be deemed the ``last different round lot 
price'' for purposes of NYSE Rule 100, which relates to executions of 
odd-lot orders. NYSE believes that a DMM, who takes the contraside for 
all executions of odd-lot orders in its securities, could be 
inappropriately disadvantaged if it were required to execute at last 
different round lot prices that included the prices of NYBX-Only 
Trades. In this situation, the DMM would be bound as the contraside of 
odd-lot orders up to the size of the print in the NYBX facility even 
though it would have no knowledge of the size of the orders that made 
up the print. NYSE also has argued that, because a DMM has market re-
entry obligations for stabilization purposes, such obligations should 
not apply to NYBX-Only Trades, as the DMM will have no information 
about orders within NYBX.

H. Amendment No. 1

    In Amendment No. 1, the Exchange deleted the proposed carve-out 
relating to NYSE Rule 15A (Order Protection Rule). The Exchange 
believes that this carve-out is ``not necessary to ensure the effective 
operation of the NYBX Facility.'' In addition, the Exchange represented 
that it would publish an informational memorandum for its members 
describing the NYBX facility and how orders entered into NYBX will 
interact with orders entered into the Display Book. The memorandum will 
describe, among other things, the implied trading conditions of the 
NYBX trading platform. Finally, the Exchange in Amendment No. 1 made 
certain technical, non-substantive changes to the proposed rule text. 
The text of Amendment No. 1 is available from the Exchange's Web site 
(http://www.nyx.com), the Exchange's principal office, and the 
Commission's Public Reference Room.

III. Discussion

A. Generally

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Exchange Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\35\ In particular, the Commission believes that the proposed 
rule change is consistent with Section 6(b)(1) of the Exchange Act,\36\ 
which requires a national securities exchange, among other things, to 
be so organized to carry out the purposes of the Exchange Act. The 
Commission further believes that the proposed rule change is consistent 
with Section 6(b)(5) of the Exchange Act,\37\ which requires, among 
other things, that an exchange have rules designed to promote just and 
equitable principles of trade; to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities; to remove impediments to and perfect the mechanism of a 
free and open market and a national market system; and, in general, to 
protect investors and the public interest. Moreover, the Commission 
believes that the proposed rule change is consistent with Section 
11A(a)(1)(C) of the Exchange Act,\38\ in which Congress found that it 
is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure, 
among other things, economically efficient execution of securities 
transactions and the practicability of brokers executing investors' 
orders in the best market. The ability to post undisplayed interest to 
the NYBX facility will provide additional opportunities for block-sized 
orders, in particular, to interact with both displayed interest (on the 
Display Book and away markets) and undisplayed interest (in the 
facility and the Display Book). The MTV designation permits order 
senders to limit information leakage and the resulting market impact. A 
user selecting a large MTV could choose to execute only when 
significant contraside interest can be identified by the NYBX facility. 
A user selecting a smaller MTV could choose to obtain a series of more 
rapid partial executions while accepting a greater risk that market 
participants could infer the existence of the user's order before 
achieving a meaningful amount of executed volume. This functionality 
appears reasonably designed to give brokers additional opportunities to 
execute investors' orders in the best market and to promote the 
efficient execution of securities transactions, particularly 
transactions of block size.
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    \35\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \36\ 15 U.S.C. 78f(b)(1)
    \37\ 15 U.S.C. 78f(b)(5).
    \38\ 15 U.S.C. 78k-1(a)(1)(C).
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B. Relationship of NYBX Facility to the Exchange

    The Commission believes that the Exchange's rules of execution 
priority as they relate to the interaction of orders between the NYBX 
facility and the Display Book, the Exchange's main trading facility, 
are consistent with the Exchange Act. The Commission notes, however, 
that the two facilities do not constitute a completely integrated 
liquidity pool. For example, orders submitted to the NYBX facility 
would not participate in any openings, closings, or re-openings on the 
Exchange, or in any trades resulting from a liquidity refreshment point 
or gap quote. Furthermore, by submitting an order to the NYBX facility 
rather than to the Display Book, the order sender is electing not to 
interact with certain marketable order flow that may be submitted to 
the Display Book. For example, while an order resting in the NYBX 
facility could interact with

[[Page 5012]]

resting orders in the Display Book, it could not interact with 
marketable orders entered into the Display Book or participate in 
openings, closings, re-openings, and certain other discrete events. 
Orders that are marketable against interest in the Display Book when 
they are submitted would interact only with contraside interest in the 
Display Book (or be routed to access one or more protected quotations).
    The Commission believes that the Exchange's manner of operating the 
NYBX facility in relation to the Display Book is consistent with the 
Exchange Act. The NYBX facility appears reasonably designed to permit 
members' orders, particularly large ones, to interact with each other 
and with certain orders in the Display Book, while preserving members' 
ability to limit information leakage and consequent market impact with 
respect to such orders. The Exchange would route these orders to away 
markets as necessary to avoid trade-throughs of protected quotations. 
The Exchange also would route these orders to interact with any 
displayed or undisplayed interest resting in the Display Book so long 
as any applicable MTV is met. Although orders entered into the NYBX 
facility would not interact with marketable orders entered into the 
Display Book, participate in certain discrete NYSE trading events, or 
execute unless any applicable MTV is met, the Commission has previously 
approved the use of discretionary orders that are undisplayed and that 
elect to interact only with certain kinds of order flow or if certain 
conditions are met. The Commission concludes, therefore, that it is 
consistent with the Exchange Act for the Exchange to offer its members 
this discretion over the display and execution of orders submitted to 
the NYBX facility.
    The Exchange also proposes to amend certain NYSE rules to exclude 
transactions that occur solely within the NYBX facility from the 
operation of the traditional NYSE market. For example, certain 
responsibilities of the Exchange's DMMs and RCMMs are keyed off the 
last sale on the Exchange. Under this proposal, an NYBX-Only Trade 
would not be deemed a last sale for purposes of those rules. In 
addition, stop orders and stop-stock provisions of the Exchange rules 
would not be triggered by NYSE-Only Trades. The Commission does not 
believe that the Exchange Act requires NYSE's rules to treat Display 
Book trades and NYBX-Only Trades the same for all purposes, and that 
excluding NYBX-Only Trades as triggering events for certain Exchange 
rules is broadly within the Exchange's discretion. The Commission 
concludes, therefore, that these exclusions for NYBX-Only Trades are 
consistent with the Exchange Act.

C. Trading Ahead of Customer Orders

    Because orders in the NYBX facility could be executed at the 
midpoint of the NBBO, it is possible that an NYSE member would trade 
ahead of a held customer order by less than $0.01 (i.e., $ 0.005). If 
an NYBX order executes at the midpoint of the NBBO and results in a 
member or member organization's trading ahead of a held customer order 
at the same price, NYSE Rule 92 (Limitations on Member's Trading 
Because of Customers' Orders) may be implicated. Rule 92(a) generally 
restricts a member or member organization from entering a proprietary 
order while in possession of a customer order. Rule 92(b) through (d) 
provides several exceptions to the general restrictions of Rule 
92(a).\39\ The Exchange has stated that all users will be expected to 
comply with Rule 92(a) when trading on the NYBX facility unless such 
trading falls within an applicable exception in NYSE Rule 92(b) through 
(d).
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    \39\ See NYSE Information Memo 2001-33 (October 8, 2001); 
Securities Exchange Act Release No. 44139 (March 30, 2001), 66 FR 
18339 (April 6, 2001) (SR-NYSE-94-34).
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D. Section 11(a) of the Exchange Act

    Section 11(a) of the Exchange Act prohibits a member of a national 
securities exchange from effecting a transaction on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated persons exercises discretion (each a 
``Covered Account'') unless an exemption applies.\40\ Rule 11a2-2(T) 
under the Exchange Act,\41\ known as the ``effect versus execute'' 
rule, provides exchange members with one exemption from the Section 
11(a) prohibition. To comply with Rule 11a2-2(T)'s conditions, a 
member: (1) Must transmit the order from off the exchange floor; (2) 
may not participate in the execution of the transaction once it has 
been transmitted to the member performing the execution; (3) may not be 
affiliated with the executing member; and (4) with respect to an 
account over which the member has investment discretion, neither the 
member not its associated person may retain any compensation in 
connection with effecting the transaction without express written 
consent from the person authorized to transact business for the account 
in accordance with the rule. The Exchange believes that orders entered 
into the NYBX facility from off the floor will comply with these 
provisions of Rule 11a2-2(T).
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    \40\ 15 U.S.C. 78k(a).
    \41\ 17 CFR 240.11a2-2(T).
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    Off-Floor Transmission. The requirement in Rule 11a2-2(T) for 
orders to be transmitted from off the exchange floor reflects Congress' 
intent that Section 11(a) should operate to put member money managers 
and non-member money managers on the same footing for purposes of their 
transactions for Covered Accounts. In considering other automated 
systems, the Commission and the staff have stated that the off-floor 
transmission requirement would be met if a Covered Account order is 
transmitted from off the floor directly to the exchange floor by 
electronic means.\42\ Orders will be electronically entered into the 
NYBX facility from on and off the floor of the Exchange; however, a 
member is not permitted to enter an order into the NYBX facility from 
the floor of the Exchange when such order is for a Covered Account.\43\ 
Similarly, a

[[Page 5013]]

member on the floor may not enter into the facility an order sent to it 
by an affiliated member from off the floor, if the order is for such 
affiliated member's own account, an account of an associated person, or 
an account over which it or an associated person exercises investment 
discretion. Consequently, the Commission believes orders transmitted 
for execution on the NYBX facility satisfy the off-floor transmission 
requirement.
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    \42\ See Securities Exchange Act Release No. 57058 (December 28, 
2007), 73 FR 903 (January 4, 2008) (approving MatchPoint) 
(``MatchPoint Order'') at 908, note 54. See Securities Exchange Act 
Release Nos. 54552 (September 29, 2006), 71 FR 59546 (October 10, 
2006) (order approving proposed rule change of the American Stock 
Exchange (``Amex'') to establish new hybrid market); 29237 (May 31, 
1991) (regarding NYSE's Off-Hours Trading Facility); and 15533 
(January 29, 1979) (``1979 Release''), 44 FR 6084 (January 31, 1979) 
(regarding the Amex Post Execution Reporting System, the Amex 
Switching System, the Intermarket Trading System, the Multiple 
Dealer Trading Facility of the Cincinnati Stock Exchange, the PCX's 
Communications and Execution System, and the Phlx's Automated 
Communications and Execution System). See also letter from Paula R. 
Jensen, Deputy Chief Counsel, Division of Market Regulation, 
Commission, to Angelo Evangelou, Senior Attorney, Chicago Board 
Options Exchange, (``CBOE''), (March 31, 2003) (regarding CBOEdirect 
system); letter from Paula R. Jenson, Deputy Chief Counsel, Division 
of Market Regulation, Commission, to Jeffrey P. Burns, Assistant 
General Counsel, Amex (July 9, 2002) (regarding Amex's auto-ex 
system for options); letter from Paula R. Jenson, Deputy Chief 
Counsel, Division of Market Regulation, Commission, to Richard S. 
Rudolph, Counsel, Philadelphia Stock Exchange (``Phlx'') (April 15, 
2002) (regarding Phlx's AUTOM System and its automatic execution 
feature AUTO-X); letter from Paula R. Jenson, Deputy Chief Counsel, 
Division of Market Regulation, Commission, to Kathryn L. Beck, 
Senior Vice President, Special Counsel and Antitrust Compliance 
Officer, Pacific Exchange (October 25, 2001) (regarding Archipelago 
Exchange); letter from Brandon Becker, Director, Division of Market 
Regulation, Commission, to George T. Simon, Foley & Lardner 
(November 30, 1994) (regarding Chicago Match).
    \43\ See Notice, supra note 3, 73 FR at 71061. The Commission 
notes that proposed NYSE Rule 1600(h) (Limitations on the Use of the 
New York Block Exchange) will prohibit a member from entering an 
order into the NYBX facility from the floor of the Exchange when 
such order is for a Covered Account. Further, the rule also 
prohibits a member from having such order entered into the facility 
by sending it to an off-floor facility for entry. A member with 
authorized access to the facility may enter only customer orders 
into the NYBX facility from the floor of the Exchange.
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    Non-Participation in Order Execution. Rule 11a2-2(T) further 
provides that a member and its associated persons may not participate 
in the execution of an order once it has been transmitted to the 
exchange floor.\44\ This requirement was included to prevent members 
with their own brokers on the exchange floor from using those persons 
to influence or guide their orders' execution. This requirement does 
not preclude a member from canceling or modifying an order, or from 
modifying the instructions for executing the order after it has been 
transmitted to the floor. However, such cancellations or modifications 
must be transmitted from off the exchange floor.\45\
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    \44\ See Securities Exchange Act Release No. 44983 (October 25, 
2001), 66 FR 55225 (November 1, 2001) (approving ArcaEx as the 
equities trading facility of PCX Equities). See also MatchPoint 
Order, supra note 42, 73 FR at 908 note 56 and accompanying text.
    \45\ See MatchPoint Order, supra note 42, 73 FR at 908. See also 
Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR 
11542 (March 17, 1978); see also Securities Exchange Act Release No. 
53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (order 
approving Nasdaq Stock Market LLC's registration as a national 
securities exchange) (``Nasdaq Exchange Order'').
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    The Commission has stated that the non-participation requirement is 
satisfied by an automated system when the member's use of such a system 
entails relinquishing the ability to influence or guide the execution 
of a Covered Account order once transmitted into the system.\46\ Once 
an order is entered into the NYBX facility, a member may not 
participate in, guide, or influence the execution of such order. NYBX 
orders are sent by electronic means directly into the NYBX facility. A 
user may enter and cancel an NYBX order any time during the regular 
trading day of the Exchange. NYSE has represented that matching, 
trading, and routing of orders are effectuated through an algorithm, 
which does not permit a user to affect the order or its execution in 
any way; thus, the member relinquishes all control of an NYBX order 
when trading commences. The Commission believes that, because a member 
relinquishes control of an order upon transmission to the facility and 
will not be able to influence or guide the execution of that order, the 
non-participation requirement is met with respect to orders that are 
executed automatically in the facility.
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    \46\ See 1979 Release, supra note 42; see also, e.g., Securities 
Exchange Act Release Nos. 54422 (September 11, 2006), 71 FR 54537 
(September 15, 2006) (order approving proposed rule change of CBOE 
to establish a screen based trading system for non-option 
securities); 51666 (May 9, 2005), 70 FR 25631, 25633 (May 13, 2005) 
(order approving proposed rule change by International Securities 
Exchange to establish facilitation, block order, and solicited order 
mechanisms).
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    Execution through Unaffiliated Member. Although Rule 11a2-2(T) 
contemplates having an order executed by an exchange member who is 
unaffiliated with the member initiating the order, the Commission has 
recognized that the requirement is not applicable when an automated 
exchange system is used, if the execution of the order is automatic 
once it has been transmitted into the system, and if the design of the 
system ensures that members do not possess any special or unique 
trading advantages in handling their orders after transmitting them to 
the system.\47\ The Commission has stated that, in such instances, 
executions obtained through these systems satisfy the independent 
execution requirement of Rule 11a2-2(T).\48\ NYBX orders are sent by 
electronic means to the NYBX facility. The Exchange has represented 
that the design of the NYBX facility ensures that members do not posses 
any special or unique trading advantages in the handling of the orders.
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    \47\ In considering the operation of an automated execution 
system operated by an exchange, the Commission has noted that, while 
there is no independent executing exchange member, the execution of 
an order is automatic once it has been transmitted into the system. 
The Commission has stated that, because the design of these systems 
ensures that members do not possess any special or unique trading 
advantages in handling their orders after transmitting them to the 
exchange, executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release, supra note 42; see also MatchPoint Order supra note 42, 73 
FR at 908, note 59 and accompanying text; Securities Exchange Act 
Release No. 49068 (January 13, 2004), 69 FR 2775 (January 20, 2004) 
(order approving the Boston Options Exchange as an options trading 
facility of the Boston Stock Exchange).
    \48\ See 1979 Release, supra note 42; see also e.g., MatchPoint 
Order, supra note 42; Securities Exchange Act Release No. 54238 
(July 28, 2005), 71 FR 44758 (August 7, 2006) (order approving 
proposed rule change of NYSE Arca to establish the OX trading 
platform); Nasdaq Exchange Order, supra note 45.
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    Non-Retention of Compensation. The Commission notes that members 
that intend to rely on Rule 11a2-2(T) in connection with orders 
submitted to the NYBX facility must comply with the requirements of 
paragraph (a)(2)(iv) of that rule.
    In reliance on NYSE's representations and for the reasons set forth 
above, the Commission believes that members entering orders into the 
NYBX facility would satisfy the requirements of Rule 11a2-2(T) under 
the Exchange Act.

E. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Exchange Act,\49\ for approving the proposed rule change, as 
modified by Amendment No. 1, prior to the thirtieth day after 
publication of notice of filing of Amendment No. 1 in the Federal 
Register. In Amendment No. 1, the Exchange proposes to delete the 
carve-out relating to NYSE Rule 15A (Order Protection Rule). The 
Exchange has stated that this carve-out is ``not necessary to ensure 
the effective operation of the NYBX Facility,'' and elimination of the 
proposed change to Rule 15A clarifies that the operation of the NYBX 
facility would not affect the Exchange's obligation to comply with Rule 
611 of the Exchange Act. The Exchange also represented that it would 
disclose to NYBX users the implied conditions on NYBX orders. The other 
changes made by Amendment No. 1 are technical corrections to the 
proposed rule text. The rest of the proposed rule text, which has been 
subject to a full comment period, is unaffected. The Commission 
believes, therefore, that good cause exists to approve the proposed 
rule change, as amended, on an accelerated basis.
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    \49\ 15 U.S.C. 78s(b)(2).
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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-2008-119 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2008-119. This file 
number should be included on the

[[Page 5014]]

subject line if e-mail is used. To help the Commission process and 
review your comments more efficiently, please use only one method. The 
Commission will post all comments on the Commission's Internet Web site 
(http://www.sec.gov/rules/sro.shtml). Copies of the submission, all 
subsequent amendments, all written statements with respect to the 
proposed rule change that are filed with the Commission, and all 
written communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room, 100 F Street, NE., Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal office of NYSE. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-NYSE-2008-119 and should be submitted on or before February 18, 
2009.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\50\ that the proposed rule change (SR-NYSE-2008-119), as 
modified by Amendment No. 1, be, and it hereby is, approved on an 
accelerated basis.
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    \50\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\51\
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    \51\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-1805 Filed 1-27-09; 8:45 am]

BILLING CODE 8011-01-P
