
[Federal Register: September 8, 2009 (Volume 74, Number 172)]
[Notices]               
[Page 46261-46264]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08se09-137]                         


[[Page 46261]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60595; File No. SR-NYSE-2009-91]

 
Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by New York Stock Exchange LLC 
Amending NYSE Rules 103B and 104 To Increase the Amount of Time That a 
Designated Market Maker Unit Must Maintain a Bid and an Offer at the 
National Best Bid and National Best Offer for an Aggregate Average 
Period of Time Monthly

August 31, 2009.
    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 August 31, 2009, New York Stock Exchange LLC (``NYSE'' 
or the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I 
and II below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend NYSE Rules 103B and 104 to increase 
the amount of time that a Designated Market Maker unit must maintain a 
bid and an offer at the National Best Bid and National Best Offer for 
an aggregate average period of time monthly. The text of the proposed 
rule change is available at the Exchange, the Commission's Public 
Reference Room, and www.nyse.com.

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

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

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

1. Purpose
    Exchange market participants want a trading venue that encourages 
participants to add liquidity and facilitate their ability to trade 
larger orders more efficiently. The Exchange believes that essential to 
meeting the demands of its market participants and maintaining market 
quality is the availability of liquidity at the National Best Bid 
(``NBB'') and National Best Offer (``NBO'') (collectively herein 
``NBBO'').\4\ The Exchange therefore proposes to amend NYSE Rules 103B 
and 104 to increase the amount of time that a Designated Market Makers 
(``DMM'') unit must maintain a bid and an offer at the NBBO for an 
aggregate average period of time monthly.
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    \4\ In addition, through a separate filing the Exchange proposes 
to adjust DMM units' rebate payments to be based on (i) an increased 
amount of time that DMM units must maintain a bid and an offer at 
the NBBO on a stock by stock basis during a month; and (ii) a 
requirement that the DMM units be 25% of the quoted volume during 
the trading day on a stock by stock basis. See SR-NYSE-2009-90.
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Background
    The NYSE implemented sweeping changes to its market rules and 
execution technology designed to improve execution quality on the 
Exchange.\5\ Among the elements of the enhanced Exchange market model, 
the NYSE eliminated the function of specialists on the Exchange 
creating a new category of market participant, the Designated Market 
Maker or DMM. The DMM, like specialists, have affirmative obligations 
to make an orderly market, including continuous quoting requirements 
and obligations to re-enter the market when reaching across to execute 
against trading interest.
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    \5\ See Securities Exchange Act Release No. 58845 (October 24, 
2008), 73 FR 64379 (October 29, 2008) (SR-NYSE-2008-46) (approving 
certain rules to operate as a pilot scheduled to end October 1, 
2009). The NYSE also recognized that in view of the NYSE's 
electronic execution functionality, the DMM, unlike the specialist, 
would no longer be deemed the agent for every incoming order. The 
NYSE also responded to customer demand to create additional 
undisplayed reserve interest.
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    Moreover, the Exchange's market model was designed to encourage 
DMMs to add liquidity at the NBBO. Specifically, the Exchange 
implemented quoting requirements pursuant to Exchange Rules 103B 
(``Security Allocation and Reallocation'') and 104 (``Dealings and 
Responsibilities of DMMs''). The quoting requirement pursuant to Rule 
103B is the single objective standard to determine DMM unit eligibility 
for participation in the allocation process. NYSE Rule 104 employs the 
same numerical standards as it relates to a DMM unit's affirmative 
obligations to maintain a continuous two-sided quote.
    Under current Rules 103B and 104, for listed securities that have a 
consolidated average daily volume of less than one million shares per 
calendar month (``Less Active'') a DMM unit must maintain a bid and an 
offer at the NBBO for an aggregate average monthly time of 10% or more 
during a calendar month. For listed securities that have a consolidated 
average daily volume equal to or greater than one million shares per 
calendar month (``More Active''), the DMM unit must maintain a bid and 
an offer at the NBBO for an aggregate average monthly time of 5% or 
more during a calendar month. DMM units are required to satisfy the 
quoting requirement for both categories of their assigned 
securities.\6\
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    \6\ Under NYSE Rule 103B, if a DMM unit fails to satisfy the 
quoting requirements during a one-month period, the Exchange issues 
an initial warning letter to the DMM unit, advising it of its 
deficiency. The DMM unit must provide in writing an explanation and 
articulation of corrective action. If the DMM unit fails to meet the 
requirement for a second consecutive month, the DMM unit is 
ineligible to participate in the allocation process for a minimum of 
two months following the second consecutive month of its failure to 
meet its quoting requirement (``Penalty Period''). The DMM unit must 
satisfy the quoting requirement for the two consecutive months of 
the Penalty Period. In the event a DMM unit fails to satisfy its 
quoting requirements for the two consecutive months of the Penalty 
Period, the DMM unit will remain ineligible to participate in the 
allocation process until it has met the quoting requirement for a 
consecutive two calendar month period. Under NYSE Rule 104, failure 
to satisfy the quoting requirement is a violation of the DMM unit's 
affirmative obligation and may subject the DMM unit to regulatory 
action, including formal or informal discipline.
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    Time at the NBBO is calculated as the average of the percentage of 
time the DMM unit has a bid or offer at the NBBO. For example, if a DMM 
unit maintains a quote at the National Best Bid for 6% of the trading 
day and a quote at the National Best Offer for 4% of the trading day, 
then the average of these times is 5%. The Exchange determines whether 
a DMM unit has met its quoting requirements on a month-by-month basis 
by calculating:

    (1) The ``Daily NBB Quoting Percentage'' by determining the 
percentage of time a DMM unit has at least one round lot of 
displayed interest in an Exchange bid at the National Best Bid 
during each Trading Day for a calendar month;
    (2) The ``Daily NBO Quoting Percentage'' by determining the 
percentage of time a DMM unit has at least one round lot of 
displayed interest in an Exchange offer at the

[[Page 46262]]

National Best Offer 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'' then dividing such sum by two;
    (4) The ``Monthly Average NBBO Quoting Percentage'' for each 
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; and
    (5) For the total Less Active Securities (More Active 
Securities) assigned to a DMM unit, the Exchange will determine the 
``Aggregate Monthly Average NBBO Quoting Percentage'' by summing the 
Monthly Average NBBO Quoting Percentages for each Less Active 
Security (More Active Security) assigned to a DMM unit, then 
dividing such sum by the total number of Less Active Securities 
(More Active Securities) assigned to such DMM unit.

    Below is an example of a quoting requirement calculation. For 
purposes of this example, it is assumed that DMM Unit 1 has two 
assigned securities, A and B and that there were 5 trading days in the 
selected calendar month.
    The Average Daily NBBO for DMM Unit 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:

------------------------------------------------------------------------
                                              Calculation
                     NBB          NBO        average daily     Average
  Trading days    (percent)    (percent)     NBBO for DMM     daily NBBO
                                                Unit 1        (percent)
------------------------------------------------------------------------
                               Security A
------------------------------------------------------------------------
T1.............            4            6  4% + 6% = 10%               5
                                            divided by 2 =
                                            5%.
T2.............            3            5  3% + 5% = 8%                4
                                            divided by 2 =
                                            4%.
T3.............            4            4  4% + 4% = 8%                4
                                            divided by 2 =
                                            4%.
T4.............            6            8  6% + 8% = 14%               7
                                            divided by 2 =
                                            7%.
T5.............            5            5  5% + 5% = 10%               5
                                            divided by 2 =
                                            5%.
------------------------------------------------------------------------
                               Security B
------------------------------------------------------------------------
T1.............            5            7  5% + 7% = 12%               6
                                            divided by 2 =
                                            6%.
T2.............            4            6  4% + 6% = 10%               5
                                            divided by 2 =
                                            5%.
T3.............            6            8  6% + 8% = 14%               7
                                            divided by 2 =
                                            7%.
T4.............            7            9  7% + 9% = 16%               8
                                            divided by 2 =
                                            8%.
T5.............            9            9  9% + 9% = 18%               9
                                            divided by 2 =
                                            9%.
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    The monthly average NBBO quoting percentage for DMM Unit 1 for each 
security is then calculated by summing the security's average Daily 
NBBO Quoting Percentages for all the 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).

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                            Average daily NBBO                                Calculation monthly      Monthly
---------------------------------------------------------------------------   average NBBO for DMM     average
          T1                 T2           T3           T4           T5               Unit 1              NBBO
----------------------------------------------------------------------------------------------------------------
                                                   Security A
----------------------------------------------------------------------------------------------------------------
5%....................           4%           4%           7%           5%  5% + 4% + 4% + 7% + 5%            5%
                                                                             = 25% divided by 5 =
                                                                             5%.
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                                                   Security B
----------------------------------------------------------------------------------------------------------------
6%....................           5%           7%           8%           9%  6% + 5% + 7% + 8% + 9%            7%
                                                                             = 35% divided by 5 =
                                                                             7%.
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    The Aggregate Monthly Average NBBO Quoting Percentage for DMM Unit 
1 is determined by summing the Monthly Average NBBO for each security 
and then dividing such sum by the total number of securities.

Aggregate Monthly Average for Specialist Unit 1

Monthly Average NBBO Security A + Monthly Average NBBO Security B 
divided by 2
    5% + 7% = 12% divided by 2 = 6% Aggregate Monthly Average

    The Exchange reviews each DMM unit's trading, as illustrated in the 
example above, on a monthly basis to determine whether the DMM unit has 
satisfied its quoting requirement.\7\ In the example above, assuming 
that Securities A and B were Less Active Securities, then the DMM Unit 
1 would not have met that component of its quoting obligation for the 
month because the 6% aggregate monthly average is 4% less than the 
required 10% monthly average time at the NBBO for its Less Active 
Securities. If however, Securities A and B were More Active Securities, 
then DMM Unit 1 would have met that component of its quoting obligation 
for the month because the 6% aggregate monthly average is 1% higher 
than the 5% monthly average time at the NBBO for More Active 
Securities.
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    \7\ See NYSE Rule 103B, Section II(J)(4).
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Proposed Amendment to NYSE Rules 103B and 104
    The Exchange proposes to increase DMM units' quoting requirement 
for both Less Active and More Active securities in both NYSE Rules 103B 
and 104. For Less Active securities the Exchange seeks to amend NYSE 
Rule 103B Section II(D) and NYSE Rule 104(a)(1)(A) to increase the 
current requirement that DMM units be 10% of the time at the NBBO to 
15%. For More Active securities, the Exchange proposes to amend NYSE 
Rule 103B Section II(E) and NYSE Rule 104(a)(1)(A) to increase the 
current 5% of the time at the NBBO to 10%. Time at the NBBO will 
continue to be calculated on a month-by-month basis as the average of 
the percentage of time DMM units have a bid or offer at the NBBO.
    As proposed, assuming again that DMM Unit 1 has two assigned 
securities, A and B and that there were

[[Page 46263]]

5 trading days in the selected calendar month, then DMM Unit 1 must 
increase its quoting such that for Less Active Securities, it is 10% of 
the time at the NBBO and for More Active Securities it is 15% of time 
at the NBBO as illustrated in the example below.


------------------------------------------------------------------------
                                              Calculation
                     NBB          NBO        average daily     Average
  Trading days    (percent)    (percent)     NBBO for DMM     daily NBBO
                                                Unit 1        (percent)
------------------------------------------------------------------------
                               Security A
------------------------------------------------------------------------
T1.............            8           12  8% + 12% = 20%             10
                                            divided by 2 =
                                            10%.
T2.............            6           10  6% + 10% = 16%              8
                                            divided by 2 =
                                            8%.
T3.............            8            8  8% + 8% =16%                8
                                            divided by 2 =
                                            8%.
T4.............           12           16  12% + 16% = 28%            14
                                            divided by 2 =
                                            14%.
T5.............           10           10  10% + 10% = 20%            10
                                            divided by 2 =
                                            10%.
------------------------------------------------------------------------
                               Security B
------------------------------------------------------------------------
T1.............           10           14  10% + 14% = 24%            12
                                            divided by 2 =
                                            12%.
T2.............            8           12  8% + 12% = 20%             10
                                            divided by 2 =
                                            10%.
T3.............           12           16  12% + 16% = 28%            14
                                            divided by 2 =
                                            14%.
T4.............           14           18  14% + 18% = 32%            16
                                            divided by 2 =
                                            16%.
T5.............           18           18  18% + 18% = 36%            18
                                            divided by 2 =
                                            18%.
------------------------------------------------------------------------

    The monthly average NBBO quoting percentage for DMM Unit 1 for each 
security is then calculated by summing the security's average Daily 
NBBO Quoting Percentages for all the 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).

----------------------------------------------------------------------------------------------------------------
                            Average daily NBBO                                Calculation monthly      Monthly
---------------------------------------------------------------------------   average NBBO for DMM     average
          T1                 T2           T3           T4           T5               Unit 1              NBBO
----------------------------------------------------------------------------------------------------------------
                                                   Security A
----------------------------------------------------------------------------------------------------------------
10%...................           8%           8%          14%          10%  10% + 8% + 8% + 14% +            10%
                                                                             10% = 50% divided by 5
                                                                             = 10%.
----------------------------------------------------------------------------------------------------------------
                                                   Security B
----------------------------------------------------------------------------------------------------------------
12%...................          10%          14%          16%          18%  12% + 10% + 14% + 16% +          14%
                                                                             18% = 70% divided by 5
                                                                             = 14%.
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    The Aggregate Monthly Average NBBO Quoting Percentage for DMM Unit 
1 is determined by summing the Monthly Average NBBO for each security 
and then dividing such sum by the total number of securities.

Aggregate Monthly Average for Specialist Unit 1

Monthly Average NBBO Security A + Monthly Average NBBO Security B 
divided by 2
    10% + 14% = 24% divided by 2 = 12% Aggregate Monthly Average

    In the example above, assuming Securities A and B were Less Active 
Securities, then DMM Unit 1 would not have met that component of the 
proposed quoting obligation for the month because the 12% aggregate 
monthly average is 3% less than the required 15% monthly average time 
at the NBBO for its Less Active Securities. If, however, Securities A 
and B were More Active Securities, then the DMM Unit 1 would have met 
that component of the proposed quoting obligation for that month 
because the 12% aggregate monthly average is 2% higher than the 
required 10% monthly average time at the NBBO for More Active 
Securities.
    The Exchange will continue to review each DMM unit's trading on a 
monthly basis to determine whether the DMM unit has satisfied its 
quoting requirement for both Less Active and More Active Securities. 
The Exchange's current review of DMM units' trading on a monthly basis 
suggests that the proposed increase would not place an undue burden on 
DMM units. All DMM units currently exceed their quoting requirements on 
a monthly basis. Based on past performance, the Exchange anticipates 
that the changes proposed herein combined with the above referenced 
rebate changes will establish a new baseline for quoting by DMM units 
that will incentivize the DMM units to provide additional liquidity 
above the new proposed minimum standards. Accordingly, the Exchange 
believes that the proposed quoting requirements increase is reasonable, 
since it is anticipated to improve market quality by increasing 
liquidity at the NBBO, without adversely impacting the DMM units' 
ability to meet their market making obligations.
    Moreover, the Exchange believes that increasing the quoting 
requirements pursuant to both NYSE Rules 103B and 104 is consistent 
with the Exchange's commitment to providing its customers with a 
trading venue that has deep liquidity at the NBBO and transparency, the 
hallmark of a fair and efficient market.
2. Statutory Basis
    The basis under the Securities Exchange Act of 1934 (the ``Act'') 
\8\ for these proposed rule changes is the requirement under Section 
6(b)(5) \9\ that an Exchange have rules that are

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designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest. The proposed rule change supports these principles in 
that it serves to increase the liquidity available at the NBBO. The 
Exchange believes that increased liquidity at the NBBO will lead to 
enhanced market quality which ultimately serves to protect investors 
and the public interest.
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    \8\ 15 U.S.C. 78a.
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

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

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \10\ and Rule 19b-
4(f)(6) thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \12\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) \13\ 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 
requested that the Commission waive the 30-day operative delay so that 
the proposal may become operative immediately upon filing. The 
Commission believes that waiving the 30-day operative delay \14\ is 
consistent with the protection of investors and the public interest 
because such waiver will permit the Exchange to immediately apply the 
new enhanced quoting requirements.
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    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ Id.
    \14\ 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).
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    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-2009-91 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-2009-91. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make publicly available. All 
submissions should refer to File Number SR-NYSE-2009-91 and should be 
submitted on or before September 29, 2009.
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    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-21586 Filed 9-4-09; 8:45 am]

BILLING CODE 8010-01-P
