
[Federal Register: December 7, 2009 (Volume 74, Number 233)]
[Notices]               
[Page 64103-64105]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07de09-932]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61072; File No. SR-NYSE-2009-106]

 
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 
Thereto, Amending Rule 70 in Order To Update d-Quote Functionality and 
Provide for e-Quotes To Peg to the National Best Bid or Offer

November 30, 2009.

I. Introduction

    On October 26, 2009, New York Stock Exchange LLC (``NYSE'' or the 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Rule 70 in order to update d-Quote 
functionality and provide for e-Quotes to peg to the National best bid 
or offer. The proposed rule change was published for comment in the 
Federal Register on November 3, 2009.\3\ NYSE filed Amendment No. 1 to 
the proposed rule change on November 19, 2009.\4\ The Commission 
received no comment letters on the proposed rule change. This notice 
and order provides notice of filing of Amendment No. 1 to the proposed 
rule change, 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\ See Securities Exchange Act Release No. 60888 (October 27, 
2009), 74 FR 56902 (``Notice'').
    \4\ The text of Amendment No. 1 is available on the Exchange's 
Web site (http://www.nyse.com), at the Exchange, and at the 
Commission's Public Reference Room.
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Description of the Proposed Rule, as Modified by Amendment No. 1 
Background \5\
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    \5\ The Notice contains additional discussion and examples 
regarding the current operation of d-Quotes and e-Quotes. See supra 
note 3.
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    Rule 70.25 governs the entry, validation, and execution of bids and 
offers represented electronically by a Floor broker on the Floor of the 
Exchange that include discretionary instructions as to size and/or 
price.\6\ The discretionary instructions that a Floor broker may 
include with an e-Quote can relate to the price range within which the 
e-Quote may trade and the number of shares to which the discretionary 
price instruction applies. D-Quote functionality is available for both 
displayed and reserve interest.
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    \6\ For purposes of these rules, floor broker agency interest 
files (that is, electronic bids or offers from the Floor) are 
referred to as ``e-Quotes.'' E-quotes that include discretionary 
instructions are referred to a ``d-Quotes.''
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    In particular, Rule 70.25(a) provides that d-Quotes are eligible 
for execution only when they are at or join the existing Exchange BBO, 
would establish a new Exchange BBO, or at the opening and closing 
transactions. Under current rules, d-Quotes at or joining the Exchange 
BBO may be displayed or undisplayed interest. In addition, Rule 
70.25(d)(ii) currently provides that, once it has been activated, a d-
Quote will automatically execute against a contra-side order if the 
contra-side order's price is within the discretionary pricing 
instructions and the contra-side order's size meets any minimum or 
maximum size requirements that have been set for the d-Quote.
    Rule 70.26 provides for the entry, validation, and execution of an 
e-Quote that remains available for execution at the Exchange BBO as the 
Exchange BBO moves. Floor brokers are able to designate a range of 
prices within which their e-Quotes and d-Quotes will peg and, as long 
as the Exchange BBO is within that range, the e-Quote and d-Quote will 
be included in the quote.

Proposed Amendments \7\
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    \7\ The Notice contains additional discussion and examples 
regarding the proposed operation of d-Quotes and e-Quotes. See supra 
note 3.
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D-Quotes Active When Their Filed Price is Not at the Exchange BBO
    The Exchange proposes to amend Rule 70.25(a)(ii) to provide that d-
Quotes would be active and available to execute whenever incoming 
interest satisfies the discretionary instructions, without regard to 
whether the d-Quote's filed price is or becomes the Exchange BBO.
    The Exchange also proposes to add clarifying language to Rule 
70.25(a)(i) to provide that d-Quotes that exercise discretion would be 
considered non-displayable interest for purposes of Rule 72, and to 
amend Rule 70.25(d)(i) (as proposed Rule 70.25(e)(i)) to provide that a 
d-Quote with discretionary pricing instructions above the best bid if a 
buy order or below the best offer if a sell order would seek to secure 
the largest execution for the d-Quote using the least amount of price 
discretion to exercise at or above the bid if a buy order or at or 
below the offer if a sell order. The Exchange proposes to further 
clarify that a d-Quote with discretionary pricing instructions equal to 
or less than

[[Page 64104]]

the best bid if a buy order or equal to or greater than the best offer 
if a sell order would extend to its maximum discretion.
    The Exchange states that the proposed d-Quote functionality would 
provide Floor brokers with functionality that is similar to 
functionality that was previously available to Floor brokers, via CAP-
DI orders, when the Exchange operated in a manual auction.\8\ In 
addition, the Exchange notes that the proposed functionality would 
allow d-Quotes to interact with interest (such as fully dark reserve 
interest) that did not exist when d-Quotes were first introduced, and 
which would otherwise be unable to easily interact with under the 
current rules. The Exchange believes that the d-Quote functionality 
proposed in this rule filing therefore would enable d-Quotes to trade 
with all willing contra-side liquidity, including reserve interest. In 
this way, the Exchange believes that the proposed changes will allow 
the brokers' tools to keep pace with the ways in which trading on the 
Exchange has evolved.
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    \8\ The Notice contains a discussion regarding CAP-DI orders. 
See supra note 3.
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Minimum Trade Size (``MTS'') Instruction for d-Quotes

    The Exchange also proposes to add a new subsection to Rule 70.25 to 
provide that a Floor broker may include additional discretionary 
instructions with a d-Quote such that the d-Quote would only execute if 
the designated MTS is met. Currently, d-Quotes may include instructions 
of a minimum size requirement that would trigger discretionary pricing, 
but such requirement would not guarantee a minimum execution size 
(e.g., if there is other interest on the same side as the d-Quote that 
can trade with a contra-side order that meets the d-Quote's minimum 
size requirement). As proposed, if the amount of an execution that 
would be allocated to a d-Quote is less than the MTS quantity, the d-
Quote would not be eligible to participate in the execution and will 
not compete with other same-side interest from other Floor brokers. 
Additionally, MTS instructions would not be active at the open or 
close.
    Rule 70.25(a)(vi) provides that same-side d-Quotes from the same 
Floor broker do not compete with each other for executions allocated to 
that Floor broker, as they would if from different Floor brokers, when 
the d-Quote with the most aggressive price range executes first. The 
Exchange proposes to add new paragraph (d)(ii) to Rule 70.25 such that 
when a Floor broker designates an MTS for a d-Quote, such d-Quote may 
compete with other same-side d-Quotes from the same Floor broker by 
improving the price if necessary to satisfy its MTS.

Pegging to the NBBO

    Currently, a pegging e-Quote or d-Quote is activated at the 
Exchange BBO and, subject to its price range, moves when the Exchange 
BBO moves. Under current rules, pegging e-Quotes and d-Quotes cannot be 
the sole interest at the Exchange BBO, but must peg to other non-
pegging interest at the Exchange BBO. Accordingly, under current rules 
and functionality, pegging e-Quotes are unable to set the Exchange BBO.
    The Exchange proposes that pegging e-Quotes and d-Quotes would peg 
to the NBBO rather than the Exchange BBO. As a result, a pegging e-
Quote or d-Quote may set the Exchange BBO, even if there is no other 
displayed bid or offer at the Exchange at that price. Accordingly, the 
Exchange proposes to amend Rule 70.26(vi) to provide that pegging e-
Quotes or d-Quotes may be entitled to priority pursuant to Rule 72 if 
such e-Quote or d-Quote sets the Exchange BBO. Under the Exchange's 
proposal and similar to its current rule, if the NBBO moves, the 
pegging e-Quote or d-Quote would move to follow the NBBO, provided that 
the NBBO is in the price range of the pegging e-Quote or d-Quote. In 
addition, a pegging e-Quote or d-Quote would never set the NBBO.

III. Discussion and Commission's Findings

    After careful review of the proposed rule change, as amended, the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\9\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\10\ which requires, among other things, 
that exchange rules be 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, protect investors 
and the public interest. The Exchange stated in its filing that it 
believes that the updates to Floor broker functionality meet such goals 
because they should ensure that customer orders eligible to trade will 
execute against willing contra-side liquidity. In particular, d-Quotes 
that are active outside the Exchange BBO provide Floor brokers with 
functionality to replace the now defunct CAP-DI functionality and 
permit d-Quotes to better participate in sweeps or to execute against 
reserve interest. The addition of the MTS instruction provides 
investors with the ability to ensure that an execution will not be 
fragmented and therefore should promote larger-sized executions. In 
addition, the Exchange stated in its filing that it believes that the 
proposed change to provide for e-Quotes and d-Quotes to peg to the NBBO 
should ensure that investors' orders will be executed in the best 
market because more liquidity will be available at the NBBO.
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    \9\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposal to allow d-Quotes to be 
active when their filed price is inferior to the BBO should contribute 
to market depth by making the Floor brokers' d-Quote liquidity 
available for execution in a greater number of situations. The proposal 
to permit minimum trade size instructions for d-Quotes should allow 
Floor brokers additional flexibility in the handling of their orders 
without adversely affecting the executions of other market 
participants, since Floor brokers would remain subject to the existing 
parity allocation rules.\11\ Finally, the proposal to peg d-Quotes to 
the NBBO rather than the BBO should contribute to market quality by 
providing additional liquidity at the NBBO, thus encouraging the 
tightening of spreads to the NBBO on the Exchange. For the foregoing 
reasons, the Commission finds the proposed rule change is consistent 
with the Act.
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    \11\ See NYSE Rule 72.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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 No. SR-NYSE-2009-106 on the subject line.

[[Page 64105]]

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2009-106. 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,\12\ 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, 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 available publicly. All submissions should refer to 
File Number SR-NYSE-2009-106 and should be submitted on or before 
December 28, 2009.
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    \12\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov.
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V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission also finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after publication in the Federal Register. The Commission notes that no 
comments were received during the 21-day comment period allotted for 
the initial proposal. The Commission notes that the Exchange's 
representation that the proposal seeks to replace functionality that 
was previously eliminated. In addition, in this case, accelerated 
approval of the proposed rule change will permit the Exchange to 
implement systems changes related to the proposed rule change in a 
timely fashion.
    In addition, the changes proposed in Amendment No. 1, discussed in 
Part III above, seek to clarify the proposed handling of d-Quotes with 
a filed price outside the BBO. The proposal as modified by Amendment 
No. 1 does not differ materially from the proposal as described in the 
Notice and the Commission believes the revision helps clarify the 
proposed operation of d-Quotes.
    In light of the foregoing, the Commission finds good cause, 
consistent with Section 19(b)(2) of the Act,\13\ to approve the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
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    \13\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-NYSE-2009-106), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-28998 Filed 12-4-09; 8:45 am]

BILLING CODE 8011-01-P
