[Federal Register Volume 69, Number 224 (Monday, November 22, 2004)]
[Notices]
[Pages 67980-67999]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-25771]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50667; File No. SR-NYSE-2004-05]


Self-Regulatory Organizations; Notice of Filing of Amendment Nos. 
2 and 3 to a Proposed Rule Change by the New York Stock Exchange, Inc. 
Relating to Enhancements to the Exchange's Existing Automatic Execution 
Facility Pilot (NYSE Direct+)

November 15, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on November 8, 2004, the New York Stock Exchange, Inc. 
(``NYSE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') Amendment No. 2 \3\ to a proposed rule 
change as described in Items I, II and III below, which Items have been 
prepared by the NYSE. On November 9, 2004, the NYSE filed Amendment No. 
3 to the proposed rule change.\4\ The Commission is publishing this 
notice to solicit comments on the proposed rule change

[[Page 67981]]

as amended by Amendment Nos. 2 and 3 from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Form 19b-4 dated November 8, 2004 (``Amendment No. 2''). 
Amendment No. 2 supplements the description of certain aspects of 
the Exchange's hybrid market and proposes additional amendments to 
the Exchange's rules.
    \4\ See Partial amendment dated November 9, 2004 (``Amendment 
No. 3''). In Amendment No. 3, the NYSE submitted the proposed rule 
changes in the format required in Exhibit 5 to the Form 19b-4, which 
was inadvertently omitted from Amendment No. 2.
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    The proposed rule change was filed on February 9, 2004 and amended 
by Amendment No. 1 on August 2, 2004.\5\ The proposed rule change as 
amended by Amendment No. 1 was published for comment in the Federal 
Register on August 16, 2004.\6\ On August 26, 2004, the Commission 
extended the public comment period with respect to the Notice to 
September 22, 2004.\7\ The Commission received 15 comment letters with 
respect to the Notice.\8\
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    \5\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated July 30, 2004, and accompanying 
Form 19b-4, which replaced the original filing in its entirety 
(``Amendment No. 1'').
    \6\ See Securities Exchange Act Release No. 50173 (August 10, 
2004), 69 FR 50407 (``Notice'').
    \7\ See Securities Exchange Act Release No. 50277 (August 26, 
2004), 69 FR 53759 (September 2, 2004).
    \8\ See letter to William Donaldson, Chairman, Commission, from 
Donald E. Weeden, dated August 31, 2004; letters to the Commission 
from: Kim Bang, President and Chief Executive Officer, Bloomberg 
Tradebook LLC, dated September 22, 2004; and Eric D. Roiter, Senior 
Vice President and General Counsel, Fidelity Management & Research 
Company, dated October 26, 2004; letters to Jonathan G. Katz, 
Secretary, Commission, from: Ari Burstein, Associate Counsel, 
Investment Company Institute, dated September 22, 2004; Donald D. 
Kittell, Executive Vice President, Securities Industry Association, 
dated October 1, 2004; Ellen L.S. Koplow, Executive Vice President 
and General Counsel, Ameritrade, Inc., dated September 22, 2004; 
Bruce Lisman, Bear, Stearns & Co., Inc., dated September 28, 2004; 
Edward J. Nicoll, Chief Executive Officer, Instinet Group 
Incorporated, dated October 25, 2004; Thomas Peterffy and David M. 
Battan, the Interactive Brokers Group, dated September 7, 2004; and 
Lisa M. Utasi, President and Kimberly Unger, Executive Director, the 
Security Traders Association of New York, Inc., dated September 22, 
2004; and letter to Annette L. Nazareth, Director, Division, 
Commission, and Robert L.D. Colby, Deputy Director, Division, 
Commission, from Eric D. Roiter, Senior Vice President and General 
Counsel, Fidelity Management & Research Company, dated August 10, 
2003. See e-mails to Nancy Reich Jenkins, Managing Director, Market 
Surveillance, NYSE, from George W. Mann Jr., Executive Vice 
President and General Counsel, Boston Stock Exchange, Inc., dated 
September 22, 2004; and e-mails to the Commission from: Jose L. 
Marques, Ph.D., Managing Member, Telic Management LLC, dated 
September 21, 2004; Junius W. Peake, Monfort Distinguished Professor 
of Finance, Kenneth W. Monfort College of Business, University of 
Northern Colorado, dated September 22, 2004; and James L. 
Rothenberg, Esq., dated August 30, 2004.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes amendments to its rules governing NYSE 
Direct+[reg] (``Direct+''), which were originally proposed in the 
Notice, supplements the description of certain aspects of the 
Exchange's hybrid market, and proposes additional amendments to the 
Exchange's rules. Below is the text of the proposed rule change, as 
amended by Amendment Nos. 2 and 3. Proposed new language is italicized; 
proposed deletions are in brackets.\9\ Furthermore, examples of trading 
under the proposed rules are attached hereto as Exhibit A.
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    \9\ The rule text as set forth herein includes several minor 
technical revisions that the Exchange has committed to correct by 
filing an amendment. Telephone conversation between Cyndi Rodriguez, 
Special Counsel, Division, Commission, and Jeff Rosenstrock, Senior 
Special Counsel, Market Surveillance, NYSE, on November 15, 2004.
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* * * * *

Definitions of Orders

Rule 13

* * * * *

All or None Order

    A market or limited price order [which] designated all or none is 
to be executed in its entirety or not at all, but, unlike a fill or 
kill order, is not to be treated as cancelled if not executed as soon 
as it is represented in the Trading Crowd or automatically executed in 
accordance with, and to the extent provided by, Exchange Rules 1000-
1004. The making of ``all or none'' bids or offers in stocks is 
prohibited and the making of ``all or none'' bids or offers in bonds is 
subject to the restrictions of Rule 61 and Rule 86.
* * * * *

Auction Limit Order

    An auction limit order is an order that provides an opportunity for 
price improvement.
    The limit price of an auction limit order to buy should be at or 
above the Exchange best offer at the time the order is entered on the 
Exchange. The limit price of an auction limit order to sell should be 
at or below the Exchange best bid at the time the order is entered on 
the Exchange.
    An auction limit order shall be quoted and executed in accordance 
with Exchange Rules 15A.50, 123F and 79A.15.

Auto Ex Order

    An auto ex order is:
    (a) A market order designated for automatic execution or a limit 
order to buy (sell) priced at or above (below) the Exchange best offer 
(bid) at the time such order is routed to the Display Book[reg] or;
    (b) An immediate or cancel order; or
    (c) An elected stop or stop limit order systemically delivered to 
the Display Book; or
    (d) A buy ``minus'', sell ``plus'' or short sale order systemically 
delivered to the Display Book; or
    (e) An all or none order; or
    (f) An elected or converted percentage order that is convertible on 
a destabilizing tick and for which the entering broker has granted 
permission for the specialist to be on parity with the order; or
    (g) A part of round lot order (PRL); or
    (h) Orders initially eligible for automatic execution that have 
been cancelled and replaced in a stock, Investment Company Unit (as 
defined by paragraph 703.16 of the Listed Company Manual), or Trust 
Issued Receipt (as defined in Rule 1200), subject to [a limit order of 
1099 shares or less priced at or above the Exchange's published offer 
(in the case of an order to buy) or at or below the Exchange's 
published bid (in the case of an order to sell), which a member or 
member organization has entered for] automatic execution in accordance 
with, and to the extent provided by, Exchange Rules 1000-1004[5].
    [Pursuant to a pilot program to run until December 23, 2004, orders 
in Investment Company Units (as defined in paragraph 703.16 of the 
Listed Company Manual), or Trust Issued Receipts (as defined in Rule 
1200) may be entered as limit orders in an amount greater than 1099 
shares. The pilot program shall provide for a gradual, phased-in 
raising of order size eligibility, up to a maximum of 10,000 shares. 
Each raising of order size eligibility shall be preceded by a minimum 
of a one-week advance notice to the Exchange's membership.]
* * * * *

Immediate or Cancel Order

    A market or limited price order [which] designated immediate or 
cancel is to be executed [in whole or in part] to the extent possible 
as soon as such order is represented in the Trading Crowd or 
automatically executed in accordance with, and to the extent provided 
by, Exchange Rules 1000-1004, and the portion not so executed is to be 
treated as cancelled. For the purposes of this definition, a ``stop'' 
is considered an execution.
    A ``commitment to trade'' received [on the Floor] through ITS will 
be automatically executable in accordance with, and to the extent 
provided by, Exchange Rules 1000-1004, and shall be treated in the same 
manner, and entitled to the same privileges, as [would] an immediate or 
cancel order that [reaches the Floor] is systemically delivered to the 
Display Book at the same time except as otherwise provided in the Plan 
and except further that such a commitment may not be ``stopped.'' [and 
the commitment shall remain irrevocable for the time period chosen

[[Page 67982]]

by the sender of the commitment.] After trading with the Exchange 
published bid (offer), the unfilled balance of a commitment to trade 
shall be automatically reported to ITS as cancelled.

Limit, Limited Order or Limited Price Order

    An order to buy or sell a stated amount of a security at a 
specified price, or at a better price, if obtainable after the order is 
represented in the Trading Crowd.
    A marketable limit order is an order on the Exchange that can be 
immediately executed; that is, an order to buy priced at or above the 
Exchange best offer or an order to sell priced at or below the Exchange 
best bid. 
    A marketable limit order systemically delivered to the Display Book 
is an auto ex order subject to automatic execution in accordance with, 
and to the extent provided by, Exchange Rules 1000-1004.

Market Order

    An order to buy or sell a stated amount of a security at the most 
advantageous price obtainable after the order is represented in the 
Trading Crowd or systemically delivered to the Display Book.
    A market order is not an auto ex order unless so designated and 
shall be quoted and executed in accordance with Exchange Rules 15A.50, 
123F.
    A market order designated for automatic execution is an auto ex 
order and shall be executed in accordance with, and to the extent 
provided by, Exchange Rules 1000-1004.
* * * * *

Percentage Order

    A limited price order to buy (or sell) 50% of the volume of a 
specified stock after its entry. There are four types of percentage 
orders:
    (a) Straight Limit Percentage Orders--Such an order is elected when 
a transaction has occurred at the limit price or a better price. Unless 
otherwise specified, only volume at or below the limit subsequent to 
the receipt of the order will be applied in determining the elected 
portion of buy orders. Conversely, only volume at or above the limit 
will be calculated in determining the elected portion of sell orders.
    (b) Last Sale Percentage Orders--The elected portion of an order 
designated ``last sale'' shall be executed only at the last sale price 
or at a better price, provided that such price is at or better than the 
limit specified in the order. If the order is further designated ``last 
sale-cumulative volume'', the elected portion shall be placed on the 
book at the price of the electing sale, but if not executed, shall be 
cancelled and re-entered on the book at the price of the subsequent 
transactions on the Exchange, provided the price of such subsequent 
transactions is at or better than the limit specified in the order.
    (c) ``Buy Minus''-``Sell Plus'' Percentage Orders--The elected 
portion of an order to ``buy minus'' shall be executed only on a 
``minus'' or ``zero minus'' tick. Orders of this type must also be 
qualified further by designating a limit price. The elected portion of 
an order to ``sell plus'' shall be executed only on a ``plus'' or 
``zero plus'' tick. Orders so designated are handled in the same manner 
as an order to sell short. (See Rule 123A.71) Orders of this type must 
also be further qualified by designating a limit price.
    If so instructed by the entering broker(s), percentage orders to 
buy will be converted into regular limit orders for transactions 
effected on ``minus'' or ``zero minus'' ticks. Conversely, if so 
instructed by the entering broker(s), percentage orders to sell will be 
converted into regular limit orders for transactions effected on 
``plus'' or ``zero plus'' ticks.
    If further instructed by the entering broker(s), as provided in 
Rule 123A.30, percentage orders to buy may be converted into regular 
limit orders for transactions on ``plus'' or ``zero plus'' ticks. 
Conversely, if so instructed by the entering broker(s), percentage 
orders to sell may be converted into regular limit orders for 
transactions on ``minus'' or ``zero minus'' ticks.
    (See also Rule 123A.30.)
    (d) ``Immediate Execution or Cancel Election'' Percentage Orders--
The elected portion of a percentage order with this designation is to 
be executed immediately in whole or in part at the price of the 
electing transaction. Any elected portion not so executed shall be 
deemed cancelled, and shall revert to its status as an unelected 
percentage order and be subject to subsequent election or conversion.
    The converted portion of such a percentage order that is 
convertible on a destabilizing tick (a ``CAP-DI order'') and which is 
systemically delivered to the Display Book[reg] will be eligible to be 
automatically executed in accordance with, and to the extent provided 
by, Exchange Rules 1000-1004 consistent with the order's instructions.
* * * * *

Sell ``Plus''-Buy ``Minus'' Order

    A market order to sell ``plus'' is a market order to sell a stated 
amount of a stock provided that the price to be obtained is not lower 
than the last sale if the last sale was a ``plus'' or ``zero plus'' 
tick, and is not lower than the last sale plus the minimum fractional 
change in the stock if the last sale was a ``minus'' or ``zero minus'' 
tick. A limited price order to sell ``plus'' would have the additional 
restriction of stating the lowest price at which it could be executed.
    Sell ``plus'' limit orders which are systemically delivered to the 
Display Book[reg] and sell ``plus'' market orders designated for 
automatic execution will be eligible to be automatically executed in 
accordance with, and to the extent provided by, Exchange Rules 1000-
1004 consistent with the order's instructions.
    A market order to buy ``minus'' is a market order to buy a stated 
amount of a stock provided that the price to be obtained is not higher 
than the last sale if the last sale was a ``minus'' or ``zero minus'' 
tick, and is not higher than the last sale minus the minimum fractional 
change in the stock if the last sale was a ``plus'' or ``zero plus'' 
tick. A limited price order to buy ``minus'' would have the additional 
restriction of stating the highest price at which it could be executed.
    Buy ``minus'' limit orders that are systemically delivered to the 
Display Book[reg] and buy ``minus'' market orders designated for 
automatic execution will be eligible to be automatically executed in 
accordance with, and to the extent provided by, Exchange Rules 1000-
1004 consistent with the order's instructions. 

Stop Order

    A stop order to buy becomes a market order when a transaction in 
the security occurs at or above the stop price after the order is 
represented in the Trading Crowd. A stop order to sell becomes a market 
order when a transaction in the security occurs at or below the stop 
price after the order is represented in the Trading Crowd. Stop orders 
that are systemically delivered to the Display Book[reg] will be 
eligible to be automatically executed in accordance with, and to the 
extent provided by, Exchange Rules 1000-1004 consistent with the 
order's instructions.

Stop Limit Order

    A stop limit order to buy becomes a limit order executable at the 
limit price, or at a better price, if obtainable, when a transaction in 
the security occurs at or above the stop price after the order is 
represented in the Trading Crowd. A stop limit order to sell becomes a 
limit order executable at the limit price or at a better price, if 
obtainable, when a transaction in the security occurs at or

[[Page 67983]]

below the stop price after the order is represented in the Trading 
Crowd. Stop limit orders that are systemically delivered to the Display 
Book[reg] will be eligible to be automatically executed in accordance 
with, and to the extent provided by, Exchange Rules 1000-1004 
consistent with the order's instructions.
* * * * *
    (Remainder of rule unchanged)

ITS ``Trade-Throughs'' and ``Locked Markets''

Rule 15A

* * * * *
Supplementary Material
    .10 Nothing in paragraph (d)(2)(B) above is intended to discourage 
a locking member from electing to ship if the complaint requests him to 
do so.
    .20 The fact that a transaction may be cancelled or the price 
thereof may be adjusted pursuant to the provisions of paragraph (b)(2) 
of this Rule 15A, shall not have any effect, under the rules, on other 
transactions or the execution of orders not involved in the original 
transaction.
    .30 The provisions of this Rule 15A shall supersede the provisions 
of any other Exchange Rule which might be construed as being 
inconsistent with Rule 15A.
    .40 For the purposes of this Rule:
    i. The terms ``Exchange trade-through'' and ``Third participating 
market center trade-through'' do not include the situation where a 
member who initiates the purchase (sale) of an ITS security at a price 
which is higher (lower) than the price at which the security is being 
offered (bid) in another ITS participating market, sends 
contemporaneously through ITS to such ITS participating market a 
commitment to trade at such offer (bid) price or better and for at 
least the number of shares displayed with that market center's better-
priced offer (bid); and
    ii. A trade-through complaint sent in these circumstances is not 
valid, even if the commitment sent in satisfaction cancels or expires, 
and even if there is more stock behind the quote in the other market.
    .50 Where a better bid or offer is published by another ITS 
participating market center or centers in which an automatic execution 
is immediately available or such bid or offer is otherwise protected 
from a trade-through by Securities and Exchange Commission rule or ITS 
Plan, and the price associated with such published better bid or offer 
has not been systemically matched by the specialist, the Exchange will 
automatically route to such other market center or centers as a 
commitment to trade any order or portion thereof that satisfies such 
better published bid or offer, unless the member entering the order 
indicates in such manner as required by the Exchange that it is 
contemporaneously satisfying the better published bid or offer.
* * * * *

Dissemination of Quotations

Rule 60

* * * * *
    (e) Autoquoting of highest bid/lowest offer and automated 
adjustment of size of liquidity bid and offer. The Exchange will 
autoquote the NYSE's highest bid or lowest offer whenever a limit order 
is transmitted to the specialist's book at a price higher (lower) than 
the previously disseminated highest (lowest) bid (offer). When the 
NYSE's highest bid or lowest offer has been traded with in its 
entirety, the Exchange will autoquote a new bid or offer reflecting the 
total size of orders on the specialist's book at the next highest (in 
the case of a bid) or lowest (in the case of an offer) price. The size 
of any liquidity bid or offer shall be systemically increased to 
reflect any additional limit orders transmitted to the specialist's 
book at prices ranging from the liquidity bid or offer price to the 
highest bid (lowest offer). The size of any liquidity bid or offer 
shall be systematically decreased to reflect the execution of any limit 
orders on the specialist's book at prices ranging from the liquidity 
bid or offer price to the highest bid (lowest offer). However, de 
minimis increases or decreases in the size of limit orders on the book, 
as determined by the specialist, will not result in automated 
augmenting or decrementing of the size of the liquidity bid or offer 
where such bid or offer continues to reflect the actual size of limit 
orders on the book.
    [In any instance where the specialist disseminates a proprietary 
bid (offer) of 100 shares on one side of the market, the bid or offer 
on that side of the market shall not be autoquoted. In such an 
instance, any better-priced limit orders received by the specialist 
shall be manually displayed, unless they are executed at a better price 
in a transaction being put together in the auction market at the time 
that the order is received.]
    Autoquote will be suspended when the specialist has gapped the 
quotation in accordance with Exchange policies and procedures, a block 
size transaction as defined in Rule 127 that involves orders on the 
book is being reported manually or when a liquidity replenishment point 
(``LRP'') as defined in Exchange Rule 1000 (a)(v)(A) has been reached.
    After the specialist has gapped the quotation, autoquote will 
resume with a manual transaction or the publication of a non-gapped 
quotation.
    Autoquote will resume as soon as possible after a LRP has been 
reached, but in no more than five seconds, where the auto ex order that 
reached the LRP is executed in full, or any unfilled balance of such 
order is not capable of trading at a price above (in the case of a buy 
order) or below (in the case of a sell order) the LRP. Where the 
unfilled balance of an auto ex order is able to trade at a price above 
(below) the LRP, but the price does not create a locked or crossed 
market, autoquote will resume upon a manual transaction or the 
publication of a new quote by the specialist, but in any event in no 
more than 10 seconds. Where the unfilled balance of an auto ex order is 
able to trade at a price above (below) the LRP and the price creates a 
locked or crossed market, autoquote will resume upon a manual 
transaction or the publication of a new quote by the specialist.
    Autoquote will resume as soon as possible after a momentum 
liquidity replenishment point, as defined in Exchange Rule 
1000(a)(v)(B), is reached, but in no more than ten seconds unless a 
locked or crossed market exists. In such case, autoquote will resume 
upon a manual transaction.
    Autoquote will resume immediately after a manual report of a block 
size transaction is reported.
* * * * *

[Below Best] Bids [-] and [Above Best] Offers

Rule 70

    When a bid is clearly established, no bid or offer at a lower price 
shall be made. When an offer is clearly established, no offer or bid at 
a higher price shall be made.
    All bids made and accepted, and all offers made and accepted, in 
accordance with Exchange Rules [45 to 86] shall be binding.
Supplementary Material
    .10 Except for bids and offers made by a specialist pursuant to 
Rule 104 (b) and (c), [A]any bid (offer) systemically delivered to the 
Display Book which is made at the same or higher (lower) price of the 
prevailing offer (bid) shall result in an automatic execution 
[transaction at the offer price in an amount equal to the lesser of the 
bid or offer. The same principle shall apply when an offer is

[[Page 67984]]

made at the same or lower price as the bid.] in accordance with, and to 
the extent provided by, Exchange Rules 1000-1004.
    .20 (a) A Floor broker may place within the Display Book system a 
broker agency interest file at varying prices at or outside the 
Exchange best bid and offer with respect to orders he or she is 
representing on the Floor, except that the agency interest file shall 
not include any ``G'' order interest or customer interest that 
restricts the specialist's ability to be on parity pursuant to Exchange 
Rule 104.10(6)(i)(C).
    (b) All Floor broker agency interest at the same price shall be on 
parity, except agency interest that established the Exchange best bid 
or offer shall be entitled to priority for one trade in accordance with 
Exchange Rule 72. No Floor broker agency interest in the file shall be 
entitled to precedence based on size.
    (c) The Floor broker agency interest file shall become part of the 
quotation when it is at or becomes the Exchange best bid or offer and 
shall be executed in accordance with Exchange Rule 72. Such interest 
will be displayed in its entirety if less than 1,000 shares, and if 
greater than 1,000 shares, will be displayed for 1,000 shares or a 
greater amount chosen by the Floor broker. That portion of the interest 
displayed at the best bid or offer shall be on parity with other 
displayed interest at such best bid or offer. That portion not 
displayed will yield to all other interest on the book, in the Crowd or 
of the specialist eligible to trade at the published bid or offer.
    Once an execution has taken place against the interest represented 
by a Floor broker in the agency interest file, if the remaining 
displayed interest represented by that Floor broker is for less than 
1,000 shares and the Floor broker represents additional interest in the 
Floor broker's agency interest file, such additional interest will be 
automatically displayed in its entirety if less than 1,000 shares or 
for 1,000 shares or a greater amount chosen by the Floor broker.
    Any unfilled portion of an incoming order that was executed 
automatically at the displayed bid or offer shall be executed against 
any undisplayed contra side interest residing in the broker agency 
interest file at the same price in a transaction directly following the 
automatic execution.
    (d) A Floor broker's agency interest not at the Exchange best bid 
or offer shall be on parity with orders on the book, the Crowd and the 
specialist layered interest file if executed as part of a sweep in 
accordance with, and to the extent provided by, Exchange Rules 1000-
1004.
    (e) A Floor broker may have an agency interest file in only one 
Crowd, as determined by the Exchange, at any given time. A Floor broker 
may trade on behalf of his or her orders as part of the Crowd at the 
same price and on the same side of the market as his or her agency 
interest file only to the extent that the volume traded verbally in the 
Crowd is not included in the agency interest file.
    (f) A Floor broker's agency interest file must be cancelled when he 
or she leaves the Crowd. Failure to do so is a violation of Exchange 
rules. If the Floor broker leaves the Crowd without canceling his or 
her agency interest file and one or more executions occur with the 
agency interest, the Floor broker shall be held to such executions.
    (g) A Floor broker has discretion to exclude his or her agency 
interest from the aggregated agency file interest information available 
to the specialist.
    (h) Broker agency interest excluded from the aggregated interest 
information available to the specialist is able to participate in 
automatic executions, but will not participate in a manual execution 
unless the broker representing this interest verbally trades on its 
behalf as part of the Crowd and may trade at a price that is inferior 
to the price of such transaction.
    (i) Nothing in this rule shall be interpreted as modifying or 
relieving the Floor broker from his or her agency obligations and 
required compliance with all Exchange rules, policies and procedures.
    .30 Definition of Crowd A Floor broker will be considered to be in 
a Crowd if he or she is present at any one of five contiguous panels at 
any one post where securities are traded.
* * * * *

Miscellaneous Requirements on Stock and Bond Market Procedures

Rule 79A

Supplementary Material
    .10 Request to make better bid or offer.--When any Floor broker 
does not bid or offer at the limit of an order which is better than the 
currently quoted price in the security and is requested by his 
principal to bid or offer at such limit, he shall do so.
    .15 With respect to limit orders received by specialists, each 
specialist shall publish immediately (i.e., as soon as practicable, 
which under normal market conditions means no later than 30 seconds 
from time of receipt) a bid or offer that reflects;
    (i) The price and full size of each customer limit order that is at 
a price that would improve the specialist's bid or offer in such 
security; and
    (ii) The full size of each limit order that
    (A) Is priced equal to the specialist's bid or offer for such 
security;
    (B) Is priced equal to the national best bid or offer; and
    (C) Represents more than a de minimis change (i.e., more than 10 
percent) in relation to the size associated with the Exchange's bid or 
offer.
    [Each specialist shall keep active at all times the quotation 
processing facilities (known as ``Quote Assist'') provided by the 
Exchange. A specialist may deactivate the quotation processing 
facilities as to a stock or a group of stocks provided that Floor 
Official approval is obtained. Such approval to deactivate Quote Assist 
must be obtained no later than three minutes from the time of 
deactivation.]
    Limit orders received by the specialist that improve the Exchange 
then-current bid or offer or change the size of the Exchange bid or 
offer, other than de minimis increases or decreases, shall be 
autoquoted in accordance with Exchange Rule 60(e). The Exchange shall 
activate the autoquote facility in each specialty stock by initiating a 
liquidity quote. Each specialist shall keep active at all times the 
autoquote facility provided by the Exchange, except that a specialist 
may cause the deactivation of the autoquote facility by gapping the 
quote in accordance with the policies and procedures of the Exchange. 
Autoquoting will also be automatically suspended when a liquidity 
replenishment point, as defined in Exchange Rule 1000(a)(v), is 
reached.
    The requirements with respect to specialists' display of limit 
orders shall not apply to any customer limit order that is[;]:
    (1) Executed upon receipt of the order;
    (2) Placed by a customer who expressly requests, either at the time 
the order is placed or prior thereto pursuant to an individually 
negotiated agreement with respect to such customer's orders, that the 
order not be displayed;
    (3) An odd-lot order;
    (4) Delivered immediately upon receipt to an exchange or 
association-sponsored system or an electronic communications network 
that complies with the requirements of Securities and Exchange 
Commission Rule 11Ac1-1(c)(5)(ii) under the Securities Exchange Act 
with respect to that order;

[[Page 67985]]

    (5) Delivered immediately upon receipt to another exchange member 
or over-the-counter market maker that complies with the requirements of 
Securities and Exchange Commission Rule 11Ac1-4 under the Securities 
Exchange Act with respect to that order;
    (6) An ``all or none'' order;
    (7) A limit order to buy at a price significantly above the current 
offer or a limit order to sell at a price significantly below the 
current bid that is handled in compliance with Exchange procedures 
regarding such orders, (``too marketable limit orders''); or
    (8) An order that is handled in compliance with Exchange procedures 
regarding gap quoting or block crosses at significant premiums or 
discounts from the last sale.
* * * * *
    (Remainder of rule unchanged)

Dealings by Specialists

Rule 104

* * * * *
    (b) Specialists shall have the ability to establish an external 
quote application interface (``Quote API'') which utilizes proprietary 
algorithms that allow the specialist, on behalf of the dealer account, 
to systematically update the Exchange published bid or offer within the 
Display Book system in Investment Company Units (as defined in 
paragraph 703.16 of the Listed Company Manual), or Trust Issued 
Receipts (as defined in Rule 1200). [Nothing in this rule shall be 
interpreted as modifying or relieving the specialist from his or her 
obligations and required compliance with all Exchange rules, policies 
and procedures.]
    (c) Except as otherwise provided in paragraph (b) above, 
specialists shall have the ability to establish an external quote 
application interface (``Quote API'') which utilizes proprietary 
algorithms that allow the specialist, on behalf of the dealer account, 
to systemically:
    (i) When not reacting to an order entering the Display Book[reg], 
establish the best bid or offer on the Exchange;
    (ii) When not reacting to an order entering the Display Book[reg], 
withdraw the specialist interest at the best bid or offer on the 
Exchange;
    (iii) Supplement the size of the existing Exchange published best 
bid or offer;
    (iv) Provide price improvement to automatic executions subject to 
the conditions outlined below;
    (v) Match bids and offers published by other market centers;
    (vi) Facilitate a single-price execution at the Exchange published 
best bid or offer, provided the specialist purchases or sells all of 
the remaining volume on the order being facilitated; or
    (vii) Place within the Display Book[reg] system a specialist 
interest file at varying prices outside the published Exchange 
quotation.
    The specialist Quote API may permit the specialist dealer account 
to systemically participate in a transaction to provide price 
improvement as provided in (iv) only when:
    (A) The quotation spread is .03 or greater;
    (B) The specialist's interest at the Exchange published bid or 
offer in that security is the lesser of 10,000 shares or twenty percent 
of the size of the market on the side which the transaction will take 
place;
    (C) The size of the order to be executed is 2,000 shares or less;
    (D) The specialist satisfies the entire order; and
    (E) The price improvement to be supplied by the specialist's 
participation is at least .02 where the quotation spread at the time of 
the transaction is .03 to .05, is at least .03 where the quotation 
spread at the time of the transaction is .06 to .10, is at least .04 
where the quotation spread at the time of the transaction is .11 to 
.20, and is at least .05 where the quotation spread at the time of the 
transaction is greater than .20.
    (d) Quote API pursuant to paragraphs (b) and (c) above:
    (i) Must not enable the specialist to trade at the best bid or 
offer except as permitted in (c)(vi) above;
    (ii) Must be designed and must operate in such a manner that its 
functionality is based on the consideration of only the order most 
recently accessed by or available to the Quote API at the time the 
Quote API is generating a message;
    (iii) Must identify the order it is reacting to in a manner 
prescribed by the Exchange;
    (iv) Must not be operative during the time a block size trade as 
defined in Rule 127 involving orders on the book is being reported 
pursuant to manual procedures or at any time that autoquoting or 
automatic executions are not available on the Exchange; and
    (v) Must be able to participate in a trade in a manner that 
complies with all Exchange rules, policies and procedures with respect 
to the specialist's ability to establish, increase or liquidate a 
position.
    The identification of a particular order that the Quote API is 
reacting to when it sends a message will not guarantee that the 
specialist will trade with that order or that the specialist will have 
priority in trading with that order. Specialist interest established by 
the Quote API that does not trade with a particular order it identifies 
will be automatically cancelled by the Exchange.
* * * * *
    (Remainder of rule unchanged)

Disclosure of Specialists' Orders

Rule 115

    A member acting as a specialist may disclose any information in 
regard to the order entrusted to the specialist:
    (i) For the purpose of demonstrating the methods of trading to 
visitors to the Floor;
    (ii) To other market centers in order to facilitate the operation 
of ITS or any other Application of the System; and
    (iii) While acting in a market making capacity, to provide 
information about buying or selling interest in the market, including 
aggregated buying or selling interest contained in any broker agency 
interest file other than interest the broker has chosen to exclude from 
the aggregate buying and selling interest in response to an inquiry 
from a member conducting a market probe in the normal course of 
business. Information regarding stop orders may be provided if the 
specialist has a reasonable basis to believe that the member intends to 
trade the security at a price at which stop orders would be relevant. A 
specialist shall make information available in a fair and impartial 
manner to any member while on the Floor. A specialist shall not 
disclose the identity of any buyer or seller represented on his book if 
expressly requested not to do so by the broker who entered the order 
with the specialist.
* * * * *
    (Remainder of rule unchanged)

Orders of Members To Be in Writing

Rule 117

    No member on the Floor shall make any bid, offer or transaction for 
or on behalf of another member except pursuant to a written or 
electronically recorded order. If a member to whom an order has been 
entrusted leaves the Crowd without actually transferring the order to 
another member, the order shall not be represented in the market during 
his or her absence, except with respect to any portion of his or her 
agency interest file that was not cancelled before the member left the 
Crowd, notwithstanding that such failure to cancel an agency interest 
file is a violation of Exchange rules.

[[Page 67986]]

Supplementary Material
    .10 Absence from Crowd.--When a member keeps an order in his or her 
possession and leaves the Crowd in which dealings in the security are 
conducted, the member is not entitled during his or her absence to have 
any bid, offer or transaction made in such security on his or her 
behalf or to have dealings in the security held up until he or she is 
summoned to the Crowd, except that the member shall be held to any 
executions involving his or her agency interest file. To insure 
representation of an order in the market during his or her absence, a 
member must therefore actually turn the order over to another member 
who will undertake to remain in the Crowd. If a member keeps the order 
in his or her possession and during his or her absence from the Crowd 
the security sells at or through the limit of his or her order, the 
member will be deemed to have missed the market.
* * * * *
    (Remainder of rule unchanged)

Record of Orders

Rule 123

* * * * *

(e) System Entry Required

    Except as provided in paragraph .21 and .22 below, no Floor member 
may represent or execute an order on the Floor of the Exchange or place 
an agency interest file within the Display Book[reg] system unless the 
details of the order and the agency interest file have been first 
recorded in an electronic system on the Floor. Any member organization 
proprietary system used to record the details of the order and agency 
interest file must be capable of transmitting these details to a 
designated Exchange data base within such time frame as the Exchange 
may prescribe.
    The details of each order required to be recorded shall include the 
following data elements, any changes in the terms of the order and 
cancellations, in such form as the Exchange may from time to time 
prescribe:
    1. Symbol;
    2. Clearing member organization;
    3. Order identifier that uniquely identifies the order;
    4. Identification of member or member organization recording order 
details;
    5. Number of shares or quantity of security;
    6. Side of market;
    7. Designation as market, limit, stop, stop limit[;], auction 
limit;
    8. Any limit price and/or stop price;
    9. Time in force;
    10. Designation as held or not held;
    11. Any special conditions;
    12. System-generated time of recording order details, modification 
of terms of order or cancellation of order;
    13. Such other information as the Exchange may from time to time 
require.
    The Floor member must identify which orders or portions thereof are 
being made part of the agency interest file pursuant to such procedures 
as required by the Exchange.
* * * * *
    (Remainder of rule unchanged)

Miscellaneous Requirements

Rule 123A

* * * * *
    .30 A specialist may accept one or more percentage orders.--
* * * * *
    (a) The elected or converted portion of a ``percentage order that 
is convertible on a destabilizing tick and designated immediate 
execution or cancel election'' (``CA-DI order'') may be automatically 
executed and may participate in a sweep.
    (i) An elected or converted CAP-DI order on the same side of the 
market as an automatically executed electing order may participate in a 
transaction at the bid (offer) price if there is volume associated with 
the bid (offer) remaining after the electing order is filled in its 
entirety. An elected or converted CAP-DI order on the same side of the 
market as an automatically executed electing order that sweeps the book 
will participate in a transaction at the sweep clean up price if there 
is volume remaining on the book or from contra-side elected CAP-DI 
orders at that price.
    (ii) An elected or converted CAP-DI order on the contra-side of the 
market as an automatically executed electing order may participate in a 
transaction at the bid (offer) price and the sweep clean up price, if 
any.
* * * * *
    (Remainder of rule unchanged)

Order Handling--Auction Limit Orders and Market Orders

Rule 123F

    (a) Auction Limit Orders
    (1) An auction limit order will be automatically executed or routed 
pursuant to Rule 15A.50 upon entry if there is a minimum variation 
quotation on the Exchange at the time the order reaches the book or the 
national best bid (offer) is displayed by another ITS participating 
market center and such bid (offer) creates a minimum variation market 
compared with the Exchange best offer (bid).
    (2) If not executed upon entry, an auction limit order to buy with 
a limit price that is at or above the Exchange best offer when it 
reaches the book shall be autoquoted the minimum variation better than 
the Exchange best bid at the time and an auction limit order to sell 
with a limit price that is at or below the Exchange best bid when it 
reaches the book shall be autoquoted the minimum variation better than 
the Exchange best offer at that time, thereby becoming the new Exchange 
best bid or offer.
    The size associated with a subsequent auction limit order to buy 
with a limit price that is at or above the Exchange best offer when it 
reaches the book will be added to the bid. The size associated with a 
subsequent auction limit order to sell with a limit price that is at or 
below the Exchange best bid when it reaches the book will be added to 
the offer.
    (3) The arrival of a subsequent order on the same side of the 
market capable of trading at a price better than the auction limit 
order is bidding (offering), the execution of an order on the same 
side, of the market as an auction limit order that exhausts some or all 
of the contra-side volume available in the Exchange quotation, the 
cancellation of some or all of the contra-side volume, or a change in 
the price of the contra-side of the quotation that would enable an 
execution of the auction limit order with price improvement shall cause 
the auction limit order to be automatically executed in accordance 
with, and to the extent provided by, Exchange Rules 1000-1004.
    (4) An auction limit order that has not been executed within 15 
seconds after it reaches the book shall be automatically executed in 
accordance with, and to the extent provided by, Exchange Rules 1000-
1004.
    (5) An auction limit order may be executed at a price inferior to 
the market price prevailing at the time it was entered.
    (6) An auction buy limit order with a limit price that is not at or 
above the Exchange best offer when it reaches the book or an auction 
limit order to sell with a limit price that is not at or below the 
Exchange best bid when it reaches the book shall be displayed on the 
book at its limit price. An auction limit order that is unable to 
automatically execute because of its limit price shall be handled as a 
regular limit order.
    (b) Market Orders
    (1) A market order designated for automatic execution will be 
automatically executed in accordance with and to the extent provided by 
Exchange Rules 1000-1004.

[[Page 67987]]

    (2) A market order not designated for automatic execution but 
delivered systemically to the Display Book[reg] will be automatically 
executed or routed pursuant to Rule 15A.50 upon entry if there is a 
minimum variation quotation on the Exchange at the time the order 
reaches the Display Book[reg] or the national best bid (offer) is 
displayed by another ITS participating market center and such bid 
(offer) creates a minimum variation market compared with the Exchange 
best offer (bid).
    (3) If not executed upon entry, such market order to buy shall be 
autoquoted the minimum variation better than the Exchange best bid and 
such market order to sell shall be quoted the minimum variation better 
than the Exchange best offer at that time, thereby becoming the new 
Exchange best bid or offer.
    (4) The arrival of a subsequent order on the same side of the 
market capable of trading at a better price than such market order is 
bidding (offering), the execution of an order on the same side of the 
market as such market order, that exhausts some or all of the contra-
side volume available in the Exchange quotation, the cancellation of 
some or all of the contra-side volume, or a change in the price of the 
contra-side of the quotation that would enable an execution of such 
market order with price improvement shall cause such market order to be 
automatically executed in accordance with, and to the extent provided 
by, Exchange Rules 1000-1004.
    (5) A market order that has not been executed within 15 seconds 
shall be automatically executed in accordance with, and to the extent 
provided by, Exchange Rules 1000-1004.
    (6) A market order may be executed at a price inferior to the 
market price prevailing at the time it was entered.
* * * * *

Odd-Lot Orders

Rule 124

* * * * *
Supplementary Material
* * * * *
    .50 [The odd-lot portion of PRL (part of round lot) orders will be 
executed at the same price as the round lot portion and will be 
processed through the round lot system.] The round lot portion of a 
part of round lot (PRL) order will be automatically executed in 
accordance with, and to the extent provided by, Exchange Rules 1000-
1004. The odd lot portion will be executed with the specialist as 
contra party.
* * * * *
    (Remainder of rule unchanged)

NYSE Direct+[reg] Automatic Execution of Limit Orders Against Orders 
Reflected in NYSE Published Quotation

Rule 1000

    (a) [Only straight limit orders without tick restrictions are 
eligible for entry as auto ex orders. Auto ex orders to buy shall be 
priced at or above the price of the published NYSE offer. Auto ex 
orders to sell shall be priced at or below the price of the NYSE bid.] 
An auto ex order shall receive an immediate, automatic execution 
against orders reflected in the Exchange['s] published quotation, 
orders on the book, Floor broker agency interest file and specialist 
interest file, in accordance with, and to the extent provided by, 
Exchange Rules 1000-1004 and shall be immediately reported as [NYSE] 
Exchange transactions, unless:
    (i) The [NYSE's] Exchange published quotation is in the non-firm 
quote mode;
    [(ii) The execution price would be more than five cents away from 
the last reported transaction price in the subject security on the 
Exchange];
    [(iii)] (ii) With respect to a single-sided auto ex order, a better 
[price exists] bid or offer is published in another ITS participating 
market center where an automatic execution is immediately available or 
where such better bid or offer is otherwise protected from a trade-
through by Securities and Exchange Commission rule or ITS Plan and such 
better bid or offer has not been systemically matched on the Exchange, 
unless the member entering the order indicates in such manner as 
required by the Exchange that it is contemporaneously satisfying such 
better bid or offer;
    [(iv) With respect to a single-sided auto ex order, the NYSE's 
published bid or offer is 100 shares;]
    [(v) A transaction outside the NYSE's published bid or offer 
pursuant to Rule 127 is in the process of being completed, in which 
case the specialist should publish a bid and/or offer that is more than 
five cents away from the last reported transaction price in the subject 
security on the Exchange];
    [(vi)] (iii) Trading in the subject security has been halted;
    [(vi)] (iv) The specialist has gapped the quotation in accordance 
with the policies and procedures of the Exchange;
    (v) A liquidity replenishment point has been reached. A liquidity 
replenishment point (``LRP'') is reached when:
    (A) The price of an automatic execution would be above (below) a 
minimum of five cents from the Exchange bid (offer), rounded to the 
nearest five-cent increment, or
    (B) An automatic execution reaches a momentum liquidity 
replenishment point (``MLRP'') or an automatic execution would result 
in a transaction at a price on that side of the market outside a MLRP 
range. A MLRP range is calculated based on high and low transaction 
prices on the Exchange in a security within the prior 30 seconds. A 
MLRP is reached when the execution price of a security has moved the 
greater of twenty-five cents or 1% of its price (rounded to the nearest 
cent) on the Exchange within 30 seconds or less;
    (vi) A block size transaction as defined in Rule 127 that involves 
orders on the book is being reported manually; or
    (vii) The order is for a security whose price on the Exchange is 
more than $300.00.
    (b)(i) Auto ex orders to buy shall trade with the Exchange 
published best offer. Auto ex orders to sell shall trade with the 
Exchange published best bid.
    (ii) Where the volume associated with the Exchange published best 
bid (offer) is insufficient to fill an auto ex order in its entirety, 
other than an incoming commitment to trade received through ITS, the 
unfilled balance of such order (the ``residual'') shall ``sweep'' the 
book i.e., trade with orders on the book and any broker agency interest 
file and/or specialist interest file capable of execution in accordance 
with Exchange rules until it is executed in full, its limit price if 
any is reached, or a liquidity replenishment point is reached, 
whichever occurs first. After trading with the Exchange published best 
bid (offer), the unfilled balance of any incoming commitment to trade 
received through ITS shall be automatically cancelled.
    (iii) The residual shall trade with the orders on the book and any 
broker agency interest file and/or specialist interest file capable of 
execution in accordance with Exchange rules at a single price, such 
price being the best price at which such orders and files can trade 
with the residual to the extent possible, or a liquidity replenishment 
point, whichever comes first (``clean up price''). Orders on the book 
and Floor broker agency interest trading with the residual shall be on 
parity and receive the clean up price. If no orders remain on the book 
capable of trading at the clean up price, specialist interest may trade 
and will be on parity to the extent permitted by Exchange rules with 
broker agency interest at that price if any. Any specialist interest 
that remains after the residual has traded at the clean up price

[[Page 67988]]

will be immediately cancelled automatically by the Exchange. Where a 
bid or offer published by another ITS participating market center where 
an automatic execution is immediately available is better than the 
sweep clean up price or where such better bid or offer is otherwise 
protected from a trade-through by Securities and Exchange Commission 
rule or ITS Plan, the portion of the sweeping residual that satisfies 
the size of such better priced bid or offer will be automatically 
routed as a commitment to trade to the ITS participating market center 
publishing such better bid or offer.
    (iv) Any auto ex order residual remaining after the sweep described 
in (ii) above shall be bid (offered) at the order's limit price, if 
any, or the LRP whichever is lower (higher), unless the order is 
designated immediate or cancel, in which case the residual shall be 
automatically cancelled.
    [Auto ex orders that cannot be immediately executed shall be 
displayed as limit orders in the auction market. An auto ex order equal 
to or greater than the size of the NYSE's published bid or offer shall 
trade against the entire published bid or offer, and a new bid or offer 
shall be published pursuant to Rule 60(e). The unfilled balance of the 
auto ex order shall be displayed as a limit order in the auction 
market.]
    [During a pilot program in 2003, NYSE Direct+ shall not be 
available in the following five stocks: American Express (AXP), Pfizer 
(PFE), International Business Machines (IBM), Goldman Sachs (GS), and 
Citigroup (C). The Exchange will announce in advance to its membership 
the time the pilot will run.]
* * * * *

Execution of Auto Ex Orders

Rule 1001

    (a) Subject to Rule 1000, auto ex orders shall be executed 
automatically and immediately reported. The contra side of the 
execution shall be [orders reflected in the Exchange's published 
quotation], as follows:
    (i) The first contra side bid or offer at a particular price shall 
be entitled to time priority, but after a trade clears the Floor, all 
bids and offers at such price shall be on parity with each other;
    (ii) All bids or offers on parity shall receive a split of 
executions in accordance with Exchange Rule 72;
    (iii) The [specialist shall be responsible for assigning] 
assignment of the number of shares to each contra side bidder and 
offeror as appropriate, in accordance with Exchange Rule 72, with 
respect to each automatic execution of an auto ex order shall be done 
systemically;
    (iv) The specialist shall be the contra party to any automatic 
execution of an auto ex order where interest reflected in the published 
quotation against which the auto ex order was executed is no longer 
available, except with respect to transactions occurring with the 
broker agency interest file;
    [(v) A universal contra shall be reported as the contra to each 
automatic execution of an auto ex order.]
    [(b) If the depth of the published bid or offer is not sufficient 
to fill an auto ex order in its entirety, the unfilled balance of the 
order shall be routed to the Floor and shall be displayed in the 
auction market.]
    [(c)] (b) No published bid or offer shall be entitled to claim 
precedence based on size with respect to executions against auto ex 
orders.
* * * * *

Availability of Automatic Execution Feature

Rule 1002

    [Orders designated as ``a] Auto ex[''] orders in a particular 
stock, Investment Company Unit (as defined in paragraph 703.16 of the 
Listed Company Manual), or Trust Issued Receipt (as defined in Rule 
1200) shall be eligible to receive an automatic execution if entered 
after the Exchange has disseminated a published bid or offer, until 
3:59 p.m. for stocks and Trust Issued Receipts, or 4:14 p.m. for 
Investment Company Units, or within one minute of any other closing 
time of the Exchange's floor market. [Orders designated as ``a] Auto 
ex[''] orders in a particular stock, Trust Issued Receipt, or 
Investment Company Unit that are entered prior to the dissemination of 
a bid or offer, or after 3:59 p.m. for stocks and Trust Issued 
Receipts, after 4:14 p.m. for Investment Company Units, or within one 
minute of any other closing time, shall be [displayed as limit orders] 
displayed as market or limit orders as applicable [in the auction 
market] unless it is an incoming commitment to trade received through 
ITS or an auto ex order designated as immediate or cancel, in which 
case such order would be cancelled .
* * * * *

Application of Tick Tests

Rule 1003

    If a transaction has been agreed upon in the auction market, and an 
automatic execution involving auto ex orders is reported at a different 
price before the auction market transaction is reported, any tick test 
applicable to such auction market transaction shall be based on the 
last reported trade on the Exchange prior to such execution of auto ex 
orders.
* * * * *

Election of Stop Orders and Percentage Orders

Rule 1004

    Automatic executions of auto ex orders shall elect stop orders, 
stop limit orders and percentage orders electable at the price of such 
executions. Any stop orders so elected shall be automatically executed 
pursuant to [the] Exchange['s auction market procedures] rules, and 
shall not be guaranteed an execution at the same price as subsequent 
automatic executions of auto ex orders.
* * * * *

[Orders May Not Be Broken Into Smaller Amounts]

[Rule 1005

    An auto ex order for any account in which the same person is 
directly or indirectly interested may only be entered at intervals of 
no less than 30 seconds between entry of each such order in a stock, 
Investment Company Unit (as defined in paragraph 703.16 of the Listed 
Company Manual), or Trust Issued Receipt (as defined in Rule 1200), 
unless the orders are entered by means of separate order entry 
terminals, and the member or member organization responsible for entry 
of the orders to the Floor has procedures in place to monitor 
compliance with the separate terminal requirement.]
* * * * *

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 NYSE 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
    In the Notice, the Exchange proposed enhancements to the operation 
of

[[Page 67989]]

Direct+, the Exchange's electronic execution facility, and to other 
Exchange rules. The Exchange believes that, taken together with 
Amendment Nos. 2 and 3, the proposal would create a unique, integrated 
market--a hybrid market--that would improve on the speed and efficiency 
of technology by preserving the advantages of human knowledge and 
expertise that are central to the agency-auction process. The Exchange 
believes that by increasing the array of available trading choices, the 
hybrid market would benefit all customers, from the smallest investors 
to the largest institutions.
    The Exchange believes that the proposed enhancements to Direct+ 
would offer immediate execution at the best bid and offer without 
restrictions on order size or order frequency, as well as anonymity and 
speed to the extent of the displayed volume associated with the bid and 
offer. Under the proposal, any residual would sweep existing orders on 
the Display Book[reg] (``book'') until either the order is filled, its 
limit price (if any) is reached, or a liquidity replenishment point 
(``LRP'') is reached.
    The Exchange describes LRPs as pre-determined price points at which 
electronic trading would briefly convert to auction market trading. 
LRPs could be triggered by an electronic sweep or if electronic trading 
results in rapid price movement over a short period. Because the LRP 
would convert the market solely to an auction market on a temporary 
basis, it would moderate volatility by permitting new orders, as well 
as Crowd and specialist interest, to add liquidity. The Exchange 
believes that this would promote reasonable continuity and foster the 
market quality that is a hallmark of the Exchange.
    The Exchange believes that the hybrid market proposal would 
preserve the best aspects of the agency-auction market. For example, 
customers who want the opportunity for price improvement provided by 
the auction process would still be able to access the full extent of 
the book and liquidity represented by brokers on the Floor. The 
interaction of specialists and brokers in the Crowd would create a 
value proposition by offering opportunities for price improvement that 
are central to the auction market process. For instance, by committing 
capital and adding depth to the market in response to customer demands, 
specialists would continue to stabilize prices and reduce volatility. 
Their ability and commitment to inject liquidity into the market, in 
order to bridge temporary gaps in supply and demand, would keep the 
market fair and orderly, which is in the interest of all customers. 
Floor brokers would also continue to play a critical role in the price 
discovery process. Competition between orders represented by Floor 
brokers in the Crowd would help ensure fair, orderly, and liquid 
markets. Interaction between Floor brokers and specialists would 
provide a flow of information regarding changing market conditions and 
would serve as a catalyst to trading.
    In short, the Exchange believes that the hybrid market would 
combine the benefits of specialist and Floor broker expertise with the 
speed and certainty of electronic execution to create a system offering 
maximum choice to customers without eliminating time-tested trading 
procedures that have proven immensely successful in providing stable, 
liquid, and less volatile markets.
    The manner in which the Exchange's hybrid market would operate has 
been described in the Notice. Amendment Nos. 2 and 3 supplement the 
description of certain aspects of the hybrid market and makes further 
amendments to the Exchange's rules.
    Specifically, the Exchange discusses the following aspects of the 
hybrid market:
    <bullet> Execution of auction limit orders and market orders;
    <bullet> Tick-restricted orders, stop orders, and other orders 
eligible for automatic execution;
    <bullet> The broker agency interest file;
    <bullet> Definition of the Crowd;
    <bullet> The specialist interest file and algorithm;
    <bullet> Sweeps and LRP;
    <bullet> Gap quoting; and
    <bullet> Availability of automatic executions and autoquote.
Auction Limit Orders and Market Orders
    According to the Exchange, proposed Auction Limit (``AL'') orders 
and market orders not designated for automatic execution would provide 
an opportunity for price improvement, thereby preserving a very 
important choice for customers. The objective would be for specialists 
to represent these orders in the auction market, where the Crowd could 
offer an opportunity for execution at a price better than the Exchange 
bid or offer, while retaining as a backup the electronic functionality 
of automatic execution in case the specialist is unable to interact 
with the order immediately. Price improvement could also result from 
the order's participation in an automatic execution. AL and market 
orders could provide price improvement to the contra-side of an 
execution.
    Under the proposal, AL and market orders would be electronically 
executed when they arrive at the book if the Exchange quotation is the 
minimum variation (e.g., 20.45 bid, offered at 20.46). Where the 
national best bid (offer) is published by another market center,\10\ 
and it causes a minimum variation market when compared with the 
Exchange best offer (bid), an AL or market order (or the requisite 
portion thereof) would be automatically routed to such other market 
center for execution unless the specialist matches the price of the 
better away offer (bid) (e.g., Assume that an AL or market order to buy 
arrives, and the Exchange quotation is 20.45 bid, offered at 20.50, and 
a 20.46 offer is published by another market center. The AL or market 
order would be electronically routed to such other market center unless 
the specialist matches the away offer of 20.46).
---------------------------------------------------------------------------

    \10\ The other market center must be an Intermarket Trading 
System (``ITS'') participant in which an automatic execution is 
immediately available or such bid (offer) is otherwise protected 
from a trade-through by a Commission rule or ITS Plan. For the 
purpose of Amendment Nos. 2 and 3, any discussion of another market 
center or an away market refers only to those fitting this 
description.
---------------------------------------------------------------------------

    Under the Exchange's proposal, if not automatically executed or 
routed away upon entry, AL and market orders to buy would be autoquoted 
the minimum variation above the Exchange best bid, and those to sell 
would be autoquoted the minimum variation below the Exchange best 
offer, thereby becoming the Exchange best bid or offer (e.g., If the 
quote is 20.45 bid, offered at 20.50, and a market order to buy or an 
AL buy order with a limit of 20.51 arrives, then the new quote would be 
20.46 bid, offered at 20.50. Similarly, if the quote is 20.45 bid, 
offered at 20.50 and a market order to sell or an AL sell order with a 
limit of 20.45 arrives, the new quote would be 20.45 bid, offered at 
20.49).
    Under the proposal, the fact that the bid (offer) is on behalf of 
an AL or market order would not be shown on NYSE OpenBook. An AL or 
market order would be shown in the quote at the price it is bidding 
(offering). An AL order's limit price would be available to the 
specialist, who would require such information in order to properly 
represent the order.
    Furthermore, the size associated with the bid or offer would be the 
size of the AL or market order. The size of subsequent AL and market 
orders on the same side of the market would be aggregated in the bid 
(offer) and executed based on time priority,

[[Page 67990]]

consistent with AL orders' limit prices.\11\
---------------------------------------------------------------------------

    \11\ See Exhibit A.
---------------------------------------------------------------------------

    Although an AL or market order would risk missing the market in its 
attempt to obtain price improvement, the Exchange believes that 
electronic representation would limit that possibility. Once on the 
book, an AL or market order could participate in any execution, 
including automatic executions and sweeps (e.g., Assume that the quote 
is 20.46 bid, offered at 20.50, 2,500 x 2,000, and the bid is an AL 
order. If a market order designated for automatic execution (an ``NX'' 
market order) to sell 2,500 shares arrives, that order would 
automatically execute against the AL order's bid at 20.46).\12\
---------------------------------------------------------------------------

    \12\ Id.
---------------------------------------------------------------------------

    If an AL or market order has not been executed within 15 seconds of 
being quoted, the order would automatically execute like any other auto 
ex order (e.g., Buy orders would execute against the displayed offer, 
and sell orders would execute against the displayed bid), provided 
autoquote and automatic executions are available. In addition, three 
events would cause automatic execution of an AL or market order before 
15 seconds has elapsed. The three events are: (i) the arrival of a 
subsequent order at a better price on the same side of the market as an 
AL or market order; (ii) the execution of an order on the same side of 
the market as an AL or market order that exhausts some or all of the 
displayed contra-side volume or the cancellation of some or all of the 
displayed contra-side volume; and (iii) the displayed contra-side price 
improves, creating a minimum variation market or allowing execution of 
the AL or market order with price improvement. In these situations, the 
order causing the AL or market order to automatically execute would 
trade first. Where the limit of an AL order would prevent it from 
automatically executing, it would be placed on the book at its limit 
price and handled as a regular limit order.
    The Exchange proposes to renumber proposed NYSE Rules 60(h) and 
60(i), describing AL and market orders, as proposed NYSE Rules 123F(a) 
and 123F(b). The application of (ii) above to market orders would amend 
proposed NYSE Rule 123F(b). Furthermore, the NYSE proposes additional 
amendments to proposed NYSE Rules 13 and 123F to clarify the operation 
of AL and market orders.
Tick-Restricted Orders, Stop Orders, and Other Orders Eligible for 
Automatic Execution
    As proposed, tick-restricted orders on the book would be filed 
electronically and participate in automatic executions and sweeps as 
their ticks and limits, if any, allow. The direction of the sweep 
relative to the automatic execution would be in the correct direction: 
buy sweeps would cause short sales and sell plus orders to be executed 
above the offer, while sell sweeps would cause buy minus orders to be 
executed below the bid. Sell short orders, other than those involving 
Regulation SHO \13\ pilot securities, would not sweep the book after 
automatically executing against bid, as the sweep transaction would 
occur on a minus tick.\14\
---------------------------------------------------------------------------

    \13\ See Securities Exchange Act Release No. 50103 (July 28, 
2004), 69 FR 48008 (August 6, 2004).
    \14\ See Exhibit A.
---------------------------------------------------------------------------

    Under the proposal, stop orders, including stop limit orders 
(``stop orders'') on the book would be electronically elected and 
participate in automatic executions and sweeps by appropriately-priced 
electing manual or automatic execution transactions.\15\ Stop orders 
would be elected by an automatic execution at the bid or offer price 
and would trade after the sweep, if any. The sweep price could also 
elect stop orders. The Exchange proposes amendments to NYSE Rules 13 
and 1004 to reflect this. Stop orders elected on the contra-side of the 
market would trade as part of the sweep because they would add 
liquidity.
---------------------------------------------------------------------------

    \15\ Investment Company Units, as defined in paragraph 703.16 of 
the Exchange Listed Company Manual, and Trust Issued Receipts 
(together, Exchange-Traded Funds) are elected based on bids or 
offers, rather than transactions. See NYSE Rule 13.30.
---------------------------------------------------------------------------

    Furthermore, stop orders and CAP-DI orders (convert and parity 
percentage orders) could be elected at the same time by automatic 
executions and sweeps. If there is insufficient volume to fill the 
elected orders, stop orders could be executed first as they become 
market or marketable limit orders upon their election, whereas the 
elected portion of CAP-DI orders would revert to CAP-DI status if it is 
unable to trade. In addition, CAP-DI orders would trade on parity with 
each other,\16\ which could also affect the sequence in which elected 
stop and CAP-DI orders would trade.
---------------------------------------------------------------------------

    \16\ See NYSE Rule 123A.30.
---------------------------------------------------------------------------

    The Exchange proposes to amend NYSE Rule 13 to clarify the types of 
orders that would be eligible for automatic execution in the hybrid 
market.\17\ These would include auto ex market orders, marketable limit 
orders, incoming ITS commitments, ``all or none'' (AON) orders, CAP-DI 
orders, stop orders, stop limit orders, tick-sensitive orders and part 
of round lot orders.\18\ In addition, orders initially eligible for 
automatic execution that have been cancelled and replaced would remain 
eligible for automatic execution.
---------------------------------------------------------------------------

    \17\ This revises the descriptions of orders ineligible for 
automatic execution as stated in footnotes 22 and 45 of the Notice 
and the accompanying text. See note 6, supra.
    \18\ A part of round lot (``PRL'') order is an order for one or 
more units of trading plus an amount less than a unit of trading. 
NYSE Rule 55 defines a unit of trading as 100 shares unless 
otherwise designated. Accordingly, an example of a PRL would be an 
order to buy (sell) 517 shares. The specialist is the contra-side of 
the odd-lot portion of a PRL.
---------------------------------------------------------------------------

    Orders that would be ineligible for automatic execution at this 
time include ``opening only'' (OPG), ``fill or kill'' (FOK), ``limit on 
close'' (LOC), ``market on close'' (MOC), ``basis'' (BAS), and odd lot 
orders. In addition, orders in high-priced securities, currently 
defined as securities priced above $300, would be ineligible for 
automatic execution. These would include: Berkshire Hathaway Inc. 
(BRK.A), Berkshire Hathaway Inc. (BRK.B), Wyeth $2 Convertible 
Preferred Stock (WYEPR), Markel Corporation (MKL), Pitney Bowes Inc. 
(PBIPR), The Washington Post Company (WPO), and White Mountains 
Insurance Group, Ltd. (WTM).
Broker Agency Interest File
    The proposed rules provide Floor brokers on the Exchange with the 
ability to express electronically that which they are currently able to 
do in the Crowd--represent customer interest at varying prices at or 
outside the quote with respect to the orders they are handling.
    According to the Exchange, the broker agency interest file would 
serve the public interest by giving customers the benefit of Floor 
broker knowledge and trading expertise in ``working'' their orders, 
while not precluding them from participating in electronic executions 
and sweeps. It would give customers choice and Floor brokers 
flexibility in representing orders over time at the point of sale, 
thereby maximizing their ability to obtain the best execution possible. 
In this way, the hybrid market would meld the value of the agency-
auction with the benefits of automatic execution.
    Under the proposal, the broker agency interest would not be 
displayed publicly unless it is at or becomes the Exchange best bid or 
offer. This is consistent with

[[Page 67991]]

the Commission's Quote Rule.\19\ When a broker's agency interest is at 
or becomes the Exchange best bid or offer, a minimum of 1,000 shares 
per broker would be displayed for agency interest greater than or equal 
to 1,000 shares and would be included in the quote. A broker would have 
the discretion to display more than 1,000 shares of his or her agency 
interest at the best bid or offer. The actual amount of a broker's 
agency interest, if less than 1,000 shares, would be displayed and 
included in the quote. The displayed agency interest at the best bid or 
offer would be entitled to parity with displayed orders at the bid or 
offer price, other than an order or broker interest entitled to 
priority in accordance with NYSE Rule 72. Broker agency interest at the 
best bid or offer that is not displayed (``reserve interest'') would 
yield to displayed interest in the best bid or offer, but would 
participate in automatic executions provided there is sufficient 
contra-side liquidity. An auto ex order would trade against the 
displayed interest in the quote and any reserve at the bid or offer 
price before it would sweep the book. This would amend proposed NYSE 
rules.
---------------------------------------------------------------------------

    \19\ Rule 11Ac1-1, 17 CFR 240.11Ac1-1.
---------------------------------------------------------------------------

    After an execution, if there is less than 1,000 shares of broker 
agency interest displayed at the best bid/offer, but additional amount 
in the reserve, the displayed amount would replenish so that at least 
1,000 shares of agency interest at the best bid/offer would be 
displayed. For example, if there are 1,000 shares of broker agency 
interest displayed at the best bid/offer, and 500 shares of reserve 
(undisplayed at that price), and a 500 share order executes against the 
1,000 share of displayed interest, the remaining 500 shares of reserve 
interest would be added to the 500 shares of remaining broker agency 
interest at the best bid/offer to total 1,000 shares displayed interest 
at the best bid/offer.
    If what is remaining in the displayed broker agency interest and 
the reserve at the best bid/offer do not equal 1,000 shares, all of the 
reserve and remaining displayed broker agency interest at that price 
would be displayed. For example, if there are 1,600 shares of broker 
agency interest displayed at the best bid/offer, and 300 shares of 
reserve interest (undisplayed at that price), and a 1,500 share order 
executes against the 1,600 shares of displayed broker agency interest, 
then the remaining 100 shares of broker agency interest plus the full 
amount of the reserve interest (300 shares), totaling 400 shares, would 
be displayed at the best bid/offer.
    In addition, where there is reserve interest at the best bid 
(offer) and an incoming contra-side auto ex order arrives to trade, 
there would be two separate Tape prints at the bid (offer) price, if 
the amount of the incoming order exceeds the displayed interest at the 
best bid (offer). In such case, the first print would be at the best 
bid (offer) price for the amount of the displayed interest. The second 
print, also at the best bid (offer) price, would include any contra-
side CAP-DI orders \20\ elected by the first print and reserve 
interest. Any residual remaining on the incoming order would then sweep 
the book until executed, its limit price, if any, is reached, or an LRP 
is reached. For example, there are 5,000 shares of broker agency 
interest at the best bid (offer) consisting of 1,000 shares of 
displayed interest, which is the best bid, and 4,000 shares of reserve 
interest. The specialist has a CAP-DI order for 10,000 shares to buy 
with a limit price, which allows it to trade at the best bid (offer). 
If an auto-ex order to sell 5,000 shares arrives, it would be 
automatically executed as follows: 1,000 shares at the best bid prints 
first. This automatically elects 1,000 shares of the CAP-DI order and 
then 4,000 shares print at the best bid price. The 4,000 shares consist 
of 1,000 shares elected from the buy CAP-DI order and 3,000 shares of 
the reserve interest. The incoming order would have traded a total of 
5,000 shares at the bid price. 1,000 shares would remain in the reserve 
interest.
---------------------------------------------------------------------------

    \20\ CAP-DI orders on the same side of the market as the 
incoming order could also be elected by this print, but would not 
trade unless additional interest remains after the incoming order is 
executed at the bid (offer) price.
---------------------------------------------------------------------------

    Furthermore, displayed agency interest in the broker file that 
establishes the Exchange best bid or offer would be entitled to 
priority at that price for one trade, as is the case with any other bid 
or offer. Broker agency interest that is outside the quote would 
participate on parity during sweeps, providing liquidity to the market.
    Floor broker agency interest at the same price would be on parity 
with each other unless the interest was entitled to priority under NYSE 
Rule 72, and no interest would be able to invoke precedence based on 
size.
    In addition, Floor brokers with an agency interest file would be 
required to be in the Crowd, representing those orders. The agency 
interest file would allow Floor brokers to represent their customers as 
they do in the auction market, negotiating execution prices without 
being required to disclose their intentions. The Exchange believes that 
parity is the agency-auction principle designed as an incentive for 
Crowd participation in the price discovery process, to deepen liquidity 
particularly as it relates to the working of orders with potential 
market impact. It has the very positive effect of lowering execution 
costs for customers by providing the opportunity to leverage human 
judgment for price improvement, potentially on both sides of a trade, 
lowering market volatility.
    The broker agency interest file would not be publicly disseminated 
except for the amount of agency interest displayed at the best bid or 
offer. The only information concerning the broker agency interest file 
available to the specialist would be the aggregate amount of agency 
interest at each price. This aggregate information, which would include 
any reserve interest at the Exchange best bid or offer unless excluded 
from the aggregate as described below, could be included in a 
specialist's response to a member's market probe in accordance with 
NYSE Rule 115, as amended.
    Proposed NYSE Rule 70.20 is amended to provide a Floor broker with 
the discretion to remove his or her agency interest, including any 
reserve interest at the best bid (offer), from the aggregate 
information available to the specialist. Broker agency interest removed 
from the aggregate would be displayed as described above when it 
becomes, or is at, the Exchange best bid or offer. If a better bid or 
offer is made on the Exchange, such interest would no longer be 
displayed and would not be included in the aggregate information unless 
the Floor broker chooses otherwise. Broker agency interest removed from 
the aggregate information would participate in automatic executions and 
sweeps. It would be the responsibility of the broker representing 
interest not included in the aggregate information to ensure that such 
interest is properly represented with respect to any manual trade that 
may occur because the specialist would not have any knowledge of such 
interest.
    Furthermore, the broker agency file could not include G order \21\ 
interest or customer interest that prevents the specialist from trading 
on parity with the Crowd pursuant to NYSE Rule 104.10(6)(i)(C).
---------------------------------------------------------------------------

    \21\ ``G'' orders refer to proprietary orders represented 
pursuant to Section 11(a)(1)(G) of the Act, 15 U.S.C. 78k(a)(1)(G).
---------------------------------------------------------------------------

    Proposed NYSE Rule 70.20 has been amended to reflect the matters 
noted above.

[[Page 67992]]

Definition of the Crowd
    Floor brokers would be permitted to have agency interest files in 
only one Crowd at a time. The Exchange proposes an amendment to 
proposed NYSE Rule 70.30 to add that a Crowd would consist of five 
contiguous panels at a single post where securities are traded.
Specialist Interest File and Algorithms
    The Exchange believes that specialists provide value to the market, 
committing capital to add liquidity and stabilize prices. Specialists' 
ability and commitment to absorb short-term fluctuations by bridging 
temporary gaps in supply and demand keeps the Exchange market fair and 
orderly and lowers volatility.
    To assist specialists in this effort and to enable them to more 
readily comply with their market-making responsibilities, the Exchange 
proposes to provide specialists with the ability to implement an 
external quote application interface (Quote API) which would utilize 
proprietary algorithms based on predetermined parameters that would 
enable them to electronically represent their dealer account, 
replicating electronically some of the things specialists are permitted 
to do manually. This would allow specialists to provide value and 
liquidity within the context of an electronic market.
    Based on predetermined parameters, the algorithms could only: (i) 
Generate a bid (offer) that would improve the Exchange best bid (offer) 
price; (ii) withdraw a previously made best bid (offer), provided the 
algorithmic decision to improve or withdraw a bid or offer is not based 
on a particular order entering the book; (iii) supplement the size of 
an existing best bid (offer); (iv) match better bids (offers) published 
by other market centers; (v) facilitate a single-priced execution at 
the Exchange best bid or offer, provided the entire order is filled; 
(vi) layer specialist interest at prices outside the quote, enabling 
the specialist, to the extent permitted by Exchange rules, to 
participate in or price improve a sweep; and (vii) provide meaningful 
price improvement to orders, as described below.
    The algorithms would not be able to hit bids or take offers. All 
specialist trading whether manual or electronically generated by 
algorithms would have to be in accordance with Exchange Rules. Items 
(i)-(vii) above reflect proposed amendments to NYSE Rule 104.
    The algorithms would enable the specialists on behalf of the dealer 
account to electronically provide price improvement to automatic 
executions, provided the following conditions are met: (i) The 
quotation spread is at least three cents; (ii) the specialist is 
represented in the published bid or offer in a meaningful amount: the 
lesser of 10,000 shares or 20% of the respective bid (offer) size; 
(iii) the order receiving price improvement is of ``retail'' order 
size, i.e., 2,000 shares or less and the specialist fills the order; 
and (iv) the price improvement provided by the specialist is (a) at 
least .02 where the quote spread is .03-.05, (b) at least .03 where the 
quote spread is .06-.10, (c) at least .04 where the quote spread is 
.11-.20, and (d) at least .05 where the quote spread is more than .20.
    After a sweep, existing specialist interest below the sweep price, 
in the case of a buy sweep, or above the sweep price, in the case of a 
sell sweep, that was not included in the sweep due to yielding 
requirements, would be immediately cancelled so that this interest 
would not be autoquoted as the Exchange best bid or offer. The 
algorithms could send a separate message in order to bid or offer at a 
price inferior to the sweep price, provided Exchange rules governing 
specialist trading permit bidding or offering at that price.
    Furthermore, the algorithms could be designed to have access to 
public information as well as orders entering the system. As noted 
above, an algorithmic message improving the Exchange best bid (offer) 
or withdrawing a previously established best bid (offer) could not be 
based on an incoming order. Such new bid (offer) could be the minimum 
variation or more than the previous best bid (offer). An algorithmic 
message to provide price improvement to an automatic execution 
generated in reaction to an incoming order would have to comply with 
the conditions noted above, including price improvement of more than 
the minimum variation. Electronic messages could not be generated by 
algorithms while a manual block-size trade is being reported or when 
autoquote and automatic executions are unavailable. Specialists' use of 
algorithms would be subject to review by the Exchange's regulatory 
division.
    The algorithms could also generate messages only in reaction to one 
order at a time and only as that order is entering the system. 
Algorithms would be required to identify, in the manner required by the 
Exchange, the specific order to which they are reacting. The fact that 
algorithms would have generated a message in response to a particular 
order would not guarantee that the specialist interest would be able to 
interact with that order, nor would it give the specialist interest 
priority in trading with that order. Specialist interest that does not 
trade with the order identified by the algorithms, for example, because 
the specialist order did not arrive at the book in time, or the 
specialist has to yield to the book, would be automatically cancelled.
    The Exchange believes that the algorithms and specialist interest 
file would enhance market quality by enabling the specialist to 
interact with orders electronically, providing capital and liquidity to 
the market as they do today. Proposed NYSE Rule 104 has been amended to 
clarify these rules.
Sweeps and Liquidity Replenishment Points
    The Exchange believes that LRPs would protect customers by 
moderating volatility resulting from electronic executions. Where 
specialists and Floor brokers participate in the price discovery 
process, volatility moderators would not be necessary, and auction 
market transactions would not be subject to them. The Exchange 
represents that the LRP parameters have been selected by the Exchange 
after careful evaluation and discussions with market participants. They 
would be designed to impact automatic executions infrequently. When 
reached, LRPs would allow buyers and sellers to react to fast changing 
market conditions and provide an opportunity for orders to interact 
with Crowd interest not encompassed in the broker agency interest file 
and with specialist interest, enabling the auction market to supplement 
liquidity and lower volatility. Consistent with the Exchange's goal of 
expanding customer choice, IOC orders would be cancelled automatically 
when automatic execution is suspended as a result of a LRP.\22\ This 
would provide customers with the opportunity to obtain an automatic 
execution in another market, even if that price is inferior to the 
Exchange best bid or offer consistent with Regulation NMS 
proposals.\23\
---------------------------------------------------------------------------

    \22\ IOC orders would be cancelled in all instances when 
automatic executions are unavailable.
    \23\ See Securities Exchange Act Release No. 49325 (February 26, 
2004), 69 FR 11126 (March 9, 2004). See also Securities Exchange Act 
Release No. 49749 (May 20, 2004), 69 FR 30142 (May 26, 2004).
---------------------------------------------------------------------------

    The Exchange proposes two LRPs: a price-based or sweep LRP and a 
momentum-based LRP.\24\ The Exchange represents that the most 
restrictive LRP would be disseminated via NYSE

[[Page 67993]]

OpenBook[reg] or another data distribution channel.
---------------------------------------------------------------------------

    \24\ In this amendment, the NYSE proposes to eliminate NYSE Rule 
1000(a)(ii), which prohibits automatic executions at a price more 
than five cents away from the last reported transaction price on the 
Exchange in the relevant security.
---------------------------------------------------------------------------

Priced-Based or Sweep LRP
    The sweep LRP would be set at the nearest five-cent increment 
outside the Exchange best bid and offer, that is at least five cents 
away from the Exchange best bid and offer (e.g., If the Exchange quote 
is 20.05 bid, offered at 20.10, then the sweep LRP would be 20.00 and 
20.15. If the Exchange quote is 20.04 bid, offered at 20.11, then the 
sweep LRP would be 19.95 and 20.20). When a LRP is reached, the 
sweeping order would trade at that price to the extent of the volume 
available and then the market would be autoquoted at the LRP if there 
is stock remaining on the order. If not, the next best bid (offer) 
would be autoquoted. Automatic executions and autoquote would be 
suspended, but incoming orders and cancellations would continue to be 
reflected automatically on the book. If the displayed bid (offer) on 
the contra-side cancels, a new bid (offer) would be autoquoted, in 
effect overriding the suspension (partial autoquote).
    Under the proposal, automatic executions and autoquote would resume 
in no more than five seconds where the sweeping order is filled in its 
entirety (e.g., no residual exists), where the residual is cancelled 
(e.g., the sweeping order is IOC), or where the residual's limit price 
is the LRP price, unless the specialist manually trades or quotes the 
market before five seconds have elapsed.
    Similarly, automatic executions and autoquote would resume in no 
more than 10 seconds where a residual exists and its limit price is 
above the LRP price, but it does not create a locked or crossed market, 
unless the specialist has manually traded or quoted the market before 
10 seconds have elapsed. It is expected that the specialist would quote 
or trade before 10 seconds have elapsed, unless an imbalance exists, a 
trade is being put together in the Crowd, or market conditions 
otherwise prevent. In any event, automatic executions and autoquote 
would resume after 10 seconds.
    Finally, where a residual exists limited to a price above the LRP, 
and the limit price creates a locked or crossed market, or when a 
locked or crossed market results from the entry of orders and 
cancellations during the 5 and 10-second periods described above, 
automatic executions and autoquote would resume with a manual trade. If 
the locking or crossing residual order cancels, automatic executions 
and autoquote would resume within the relevant 5 or 10-second timeframe 
described above, unless a manual trade or quote occurs before then.
Sweeps and Price Protection
    The Exchange believes that nothing in this filing or in the 
operation of sweeps would be inconsistent with or undermine the 
fundamental tenet of the trade-through rules (``TTR'')--that betters 
bids and offers published by other market centers are entitled to 
protection. The proposals, including automatic electronic routing of 
orders to the market centers displaying better priced bids and offers, 
would be consistent with the TTR. Best bids (offers) published by away 
markets that are better than a sweep price would be satisfied in their 
entirety.\25\ As is today, best bids and offers in these markets (i.e., 
``top of the book'') would be entitled to price protection. The 
Exchange believes that intermarket price-time priority has been 
extensively debated,\26\ but has not been viewed to be in the best 
interest of the national market system. In any event, Regulation NMS 
proposes to permit customers to sweep multiple markets 
contemporaneously to access better priced liquidity that may be 
available.\27\
---------------------------------------------------------------------------

    \25\ This presumes that the order is not labeled as an 
intermarket sweep consistent with the proposed Regulation NMS 
concept of an intermarket sweep order. Telephone conversation 
between Kelly Riley, Assistant Director, Division, Commission, and 
Jeff Rosenstrock, Senior Special Counsel, Market Surveillance, NYSE, 
on November 15, 2004.
    \26\ See, e.g., Securities Exchange Act Release No. 42450 
(February 23, 2000), 65 FR 10577 (February 28, 2000) (Commission 
request for comment on issues relating to market fragmentation).
    \27\ See note 23, supra.
---------------------------------------------------------------------------

    The ability of the specialist to match a better published bid or 
offer rather than shipping an order to that bid or offer is permitted 
today. According to the Exchange, the proposed rules would simply speed 
the process by permitting the specialist to electronically match or 
ship. During the sweep, a commitment to trade that would satisfy the 
full amount of any better bid or offer that is published as the best 
bid or offer by another market center would be auto-routed to such 
market (if a trade-through would otherwise occur). According to the 
Exchange, this would be similarly consistent with the TTR.
    According to the Exchange, it has been suggested that the proposed 
rules would enable the specialist to avoid complying with the TTR by 
publishing what has been termed a ``preemptive'' 100-share bid or 
offer. The Exchange believes that this is erroneous. For example, 
assume that the Exchange quotation is 19.91 bid, offered at 20.01, 100 
x 500, and that there are offers on the book to sell 100 shares at 
20.04, 500 shares at 20.05, 300 shares at 20.07, 100 shares at 20.08, 
and 1,000 shares at 20.09. If another market center also has published 
an offer to sell for 500 shares at 20.01, and an NX order to buy 2,000 
shares arrives at the Exchange, then 500 shares would automatically 
execute at 20.01 on the Exchange, and 500 shares would be automatically 
routed to the other market center as a commitment to trade at 20.01. 
The remaining 1,000 shares would sweep the Exchange book, trading at 
20.08, providing price improvement to the orders on the book.\28\ 
Alternatively, the specialist algorithms could determine to execute the 
entire order on the Exchange at 20.00. This example presumes that only 
one market center has a better published bid (offer) than the Exchange 
best bid (offer) or sweep price. All market centers that have a better 
published bid (offer) than the price the Exchange would trade at would 
be satisfied.
---------------------------------------------------------------------------

    \28\ Telephone conversation between Cyndi Rodriguez, Special 
Counsel, Division, Commission, and Don Siemer, Director, Market 
Surveillance, NYSE, on November 10, 2004.
---------------------------------------------------------------------------

Momentum LRP (``MLRP'')
    The Exchange believes that excessive volatility could occur in 
situations other than electronic sweeps. For this reason, the Exchange 
proposes a LRP based on price movement over a period of time.
    A MLRP would be reached when the price of a security has moved the 
greater of twenty-five cents or 1% of its price,\29\ within 30 seconds 
or less. For example, a MLRP would be reached in a security that is 
trading at 18.00 when the price moves 0.25 in 30 seconds or less. Also, 
a MLRP would be reached in a security that is trading at 81.00 when the 
price moves 0.81 in 30 seconds or less. Intraday price changes would be 
taken into account and could widen or narrow the MLRP range. (e.g., a 
security could start the day with an MLRP range of twenty-five cents, 
with intraday price changes expanding the MLRP range to 1% of its 
price).
---------------------------------------------------------------------------

    \29\ When calculating 1% of a security's price, the result will 
be rounded to the nearest cent using usual rounding conventions. For 
example, if a security is trading at $26.49, and 1% of its price is 
calculated, this would be rounded down to 0.26. If a security is 
trading at $26.53 and 1% of its price is calculated, this would be 
rounded up to 0.27.
---------------------------------------------------------------------------

    MLRP ranges would be calculated using the high and low trades on 
the Exchange within the prior 30 seconds. The MLRP range could change 
based on an event (e.g., a new trade) or the passage of time.\30\
---------------------------------------------------------------------------

    \30\ See Exhibit A.
---------------------------------------------------------------------------

    After the auto ex order reaching a MLRP price trades at that price 
to the extent possible, automatic executions and autoquote would be 
suspended. The

[[Page 67994]]

book would be automatically updated by incoming orders and 
cancellations. Automatic executions and autoquote would resume in no 
more than 10 seconds unless the specialist has quoted or traded before 
then. As noted above, the specialist would be expected to trade or 
requote the stock in less than 10 seconds unless conditions in the 
stock prevent this. Where incoming orders and cancellations cause a 
locked or crossed market, autoquote and automatic executions would 
resume with a trade.\31\
---------------------------------------------------------------------------

    \31\ Id.
---------------------------------------------------------------------------

    In addition, a MLRP could cause the suspension of automatic 
executions on the side of the market where the bid or offer is at a 
price beyond the MLRP range, as an automatic execution could not occur 
at that price. For example, if the market is 20.05 bid, offered at 
20.10, and the last sale is 20.08, and the MLRP range is 19.80-20.09 
based on high and low trades within the operative 30-second period, a 
trade could take place at the bid price because it would fall within 
the MLRP range, but a trade could not take place at the offer price 
(20.10) because it would fall outside the MLRP range. As a result, 
automatic executions would be suspended on the offer side, but continue 
on the bid side. This would be indicated systemically in the same way 
as any other time an automatic execution is unavailable. Autoquoting 
would continue and orders and cancellations would update the book. 
Automatic executions would resume when a bid or offer within the MLRP 
range is autoquoted or the MLRP range changes as a result of the moving 
30-second timeframe.
Gap Quoting
    Gap quotes \32\ would be used by specialists in response to trading 
scenarios in which price dislocation is expected. Gap quotes would be 
used to signal the potential price movement so as to attract contra-
side liquidity in an attempt to mitigate volatility. Gap quote 
situations would involve clearly large imbalances compared with the 
typical trading volume in a security. The size of an imbalance suitable 
for gapped quoting would be at least 10,000 shares or a quantity of 
stock having a value of $200,000 or more, although depending on the 
trading characteristics of the security, the appropriate conditions for 
gapped quoting could be higher.
---------------------------------------------------------------------------

    \32\ For a complete description of Gap quotes, see footnote 18 
of the Notice, supra note 6.
---------------------------------------------------------------------------

    The specialist determines when to gap the quotation based on 
certain market conditions such as a sudden influx of orders on one side 
of the market, one or more large-size orders with no off-setting 
interest, or when a member proposes to effect a one-sided block 
transaction or a cross at a significant premium or discount to the 
prevailing market. Specialists could only gap the quotation in 
accordance with Exchange procedures. When the quotation is gapped, 
automatic executions and autoquote would be suspended, although 
incoming orders and cancellations would update the book electronically. 
Better priced orders would be taken into account in the transaction 
resulting from the gapped quotation. Floor Officials would oversee the 
gap quote process, including its duration.
Availability of Automatic Executions and Autoquote \33\
---------------------------------------------------------------------------

    \33\ This discussion presumes the Direct+ facility is available. 
NYSE Rule 1002 provides that automatic executions are available if 
entered after the Exchange has disseminated a published bid or offer 
in that stock and until one minute before the closing time of the 
Exchange's Floor market. In the unlikely event of an equipment 
failure preventing automatic executions during a time they would 
otherwise be available, a systemic indication of auto ex 
unavailability would be made.
---------------------------------------------------------------------------

    The Exchange believes that autoquote and automatic executions would 
be suspended infrequently and only in certain, limited circumstances: 
when trading on the Exchange reaches a LRP; when the quote is gapped in 
accordance with Exchange procedures; when trading in a security has 
been halted; or when the quote is not firm. A systemic indication would 
be disseminated when automatic executions are unavailable. Each of 
these circumstances would serve the public interest; the rationale for 
and benefit of LRPs and gap quotes are discussed above. No executions, 
automatic or manual, would be possible when trading has been halted, 
and it would not be in the customer's best interest to automatically 
execute against a bid or offer that is not firm. \34\
---------------------------------------------------------------------------

    \34\ The Exchange believes that trading halts and non-firm 
quotations occur extremely infrequently. For example, during the 
first nine months of 2004, there have been only four non-firm quote 
situations. One or more Floor Governors or senior Floor Officials 
must oversee trading halts and non-firm quotes. See NYSE Rule 60. 
Exchange rules regarding trading halts and non-firm quotes have been 
approved by the Commission and are in accordance with Rule 11Ac1-1 
of the Act, 17 CFR 240.11Ac1-1.
---------------------------------------------------------------------------

    Autoquote, but not automatic executions, would be suspended during 
the extremely brief moment it would take to manually report a block-
sized transaction.\35\ Automatic executions would continue until the 
size of the bid (offer) decrements to 100 shares. Autoquote (and 
automatic executions, where the quote has decremented to 100 shares) 
would resume when the manual reporting is concluded. This would be the 
only instance in which manual reporting would cause the suspension of 
autoquote and could cause the suspension of automatic executions. This 
would protect customer orders on the specialist's book during the 
execution of block transactions pursuant to NYSE Rules 72(b) and 127 
and would facilitate orderly executions in limited ``breakout'' 
situations when liquidity is present but conditions are such that the 
existence of a fair and orderly market would depend on the ability of 
the specialist to quickly and efficiently effect block-size trades that 
could involve multiple parties.
---------------------------------------------------------------------------

    \35\ NYSE Rule 127 defines a ``block'' size as at least 10,000 
shares or a quantity of stock having a market value of $200,000 or 
more, whichever is less.
---------------------------------------------------------------------------

    The Exchange represents that once the hybrid market is implemented, 
all other instances of manual reporting,\36\ autoquote, and automatic 
executions would continue to operate without suspension. The quote 
would automatically update to reflect the entry of better bids and 
offers and cancellations. Automatic executions would continue to take 
place in the manner described in this proposal. This represents a 
change to the operation of autoquote and automatic executions as 
described in Amendment No. 1 of this filing.\37\ Although the Exchange 
expects autoquote and automatic executions to be available at least 
99.7% of the time as originally proposed, the Exchange believes that 
maximizing their availability even more would benefit the Exchange's 
customers.
---------------------------------------------------------------------------

    \36\ Trades occurring within the Crowd or between the Crowd and 
the specialist, as either agent or dealer, are reported manually.
    \37\ See Amendment No. 1, supra note 5.
---------------------------------------------------------------------------

    Furthermore, when autoquote and automatic executions are suspended, 
incoming orders and cancellations would continue to arrive at the book, 
which would be electronically updated to reflect these changes. When 
the Exchange best bid or offer cancels during a time when autoquote is 
suspended, the next best bid (offer) on the book would be autoquoted. 
Auto ex orders, other than IOC orders, would be placed on the book. IOC 
orders would be cancelled automatically, as are incoming ITS 
commitments to trade.\38\
---------------------------------------------------------------------------

    \38\ The Exchange believes that this would be consistent with 
concepts discussed in proposed Regulation NMS. See note 23, supra.
---------------------------------------------------------------------------

    The continuation of automatic executions while a manual trade is 
being reported could result in the manual trade being reported to the 
Tape out of its proper sequence. Out of sequence trades would be 
identified as

[[Page 67995]]

such. If a bid or offer at a better price arrives at the book before a 
manual report is concluded, the system would automatically report the 
trade at such better price (e.g., Assume that the quote is 20.05 bid, 
offered at 20.10, and a broker in the Crowd takes the offer, but before 
the report of the trade is completed, an offer to sell 1,000 shares at 
20.09 arrives at the book. The system would automatically report the 
trade at 20.09, with the seller being the newly-arriving better offer.)
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act \39\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act \40\ in particular, 
because it is 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 Exchange also believes that the 
proposed rule change is designed to support the principles of Section 
11A(a)(1) of the Act \41\ in that it seeks to assure economically 
efficient execution of securities transactions, makes it practicable 
for brokers to execute investors' orders in the best market, and 
provides an opportunity for investors' orders to be executed without 
the participation of a dealer.
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78f(b).
    \40\ 15 U.S.C. 78f(b)(5).
    \41\ 15 U.S.C. 78k-1(a)(1).
---------------------------------------------------------------------------

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

    The Exchange does not believe that the proposed rule change, as 
amended, 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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change as amended by Amendment Nos. 2 and 3 is consistent with the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml!); or
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#4735322b226a24282a2a222933340734222469202831"><span class="__cf_email__" data-cfemail="2351564f460e404c4e4e464d5750635046400d444c55">[email protected]</span></a>. Please include 
File Number SR-NYSE-2004-05 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NYSE-2004-05. 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. 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-2004-05 and should be submitted on or before December 13, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\42\
---------------------------------------------------------------------------

    \42\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.

Exhibit A--Trading Examples

AL Orders and Market Orders

    1. AL and market orders on the same side of the market are 
aggregated in the quote and executed based on time priority:
    The quotation is 20.45 bid, offered at 20.50, 500 x 2,000. An AL 
order to buy 1,000 shares with a limit of 20.55 arrives. The market 
is autoquoted the minimum variation (one cent) better than the 
existing bid, 20.46 bid, offered at 20.50, 1,000 x 2,000. An AL 
order to buy 500 shares at a limit of 20.57 and a market order to 
buy 1,000 shares arrive. The market is autoquoted 20.46 bid, offered 
at 20.50, 2,500 x 2,000, aggregating the volume of the AL and market 
buy orders. An NX \43\ market order to sell 1,500 shares arrives and 
automatically executes against the bid, filled by the first two AL 
orders. The market is autoquoted 20.46 bid, offered at 20.50, 1000 x 
2000.\44\
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    \43\ Automatic execution orders are designated NX.
    \44\ The Commission corrected a typographical error in this 
example. Telephone conversation between Kelly Riley, Assistant 
Director, Division, Commission, and Don Siemer, Director, Market 
Surveillance, NYSE, on November 12, 2004.
---------------------------------------------------------------------------

    2. The execution of an order on the same side of the market that 
exhausts some or all of the displayed contra-side volume will cause 
an AL or market order to automatically execute:
    The quotation is 20.46 bid, offered at 20.50, 1,000 x 500. The 
bid is an AL order limited to 20.52. The next best offer on the book 
is 20.51 for 1,000 shares. An NX market order to buy 500 shares 
arrives. The NX order automatically executes against the offer at 
20.50. The AL buy order automatically executes against the next best 
offer, 20.51. If 1,000 shares had been offered at 20.50 instead of 
500 shares, the AL order automatically executes at 20.50 for 500 
shares and 500 shares at 20.51, presuming the AL order's limit 
permits it to trade at 20.51.
    3. The arrival of an order at a better price on the same side of 
the market as an AL or market order causes the AL or market order to 
automatically execute:
    The quote is 20.46 bid, offered at 20.50. The next best offer on 
the book is at 20.51. The bid is an AL order. An order to buy at 
20.47 arrives. A new bid of 20.47 is autoquoted. The buy AL order 
automatically executes against the 20.50 offer.
    4. A change in the displayed contra-side price that creates a 
minimum variation market or allows execution of the AL or market 
order with price improvement causes the AL or market order to 
automatically execute:
    The quote is 20.46 bid, offered at 20.50. The bid is comprised 
of an AL or market order. A limit order to sell at 20.49 arrives

[[Page 67996]]

on the book. The AL or market order automatically executes against 
this new offer, to the extent of the volume associated with the new 
offer and then sweeps the book until filled, an LRP is reached or, 
in the case of an AL order, its limit price is reached.
    5. Where the limit of an AL order prevents it from trading, the 
AL order will be quoted and handled as a regular limit order on the 
book:
    The quote is 20.05 bid, offered at 20.09, 2,000 x 2,000. An AL 
order arrives to buy 3,000 shares at 20.12, which is autoquoted as 
the best bid, 20.06 for 3,000 shares. Also on the book are the 
following offers: 1,500 shares at 20.10, 1,500 shares at 20.11, 
1,000 shares at 20.12 and 1,000 shares at 20.13. An NX market order 
to buy 6,000 shares arrives, automatically executing 2,000 shares at 
20.09, with 4,000 shares sweeping the book, executing at 20.12. This 
execution depletes the liquidity on the book at 20.12. The original 
AL order is pushed to trade by the NX order, but its limit, 20.12, 
prevents it from trading at the next available offer price, 20.13. 
The AL order goes on the book as a regular limit order and the 
market is autoquoted 20.12 bid, offered at 20.13, 3,000 x 1,000.

Broker Agency Interest File

    6. A minimum of 1,000 shares of broker agency interest per 
broker at the Exchange best bid or offer will be displayed at that 
price and be on parity with other displayed interest, other than 
interest entitled to priority:
    The quote is 20.05 bid, offered at 20.07, 1,500 x 1,000. A Floor 
broker enters interest in the agency interest file to buy 2,000 
shares at 20.04 and to buy 1,000 shares at 20.05. The quote 
automatically updates to show 2,500 shares to buy at 20.05, which 
includes the 1,000 shares of broker agency interest to buy at 20.05 
because it is at the best bid; the amount shown on NYSE 
OpenBook[reg] to buy at 20.04 will not change as broker agency 
interest will not be disseminated. The aggregate broker file 
information available to the specialist will show 2,000 shares to 
buy at 20.04, unless the broker has excluded it from the aggregate 
information. An order arrives on the book to buy 1,500 shares at 
20.06. The market autoquotes 20.06 bid, offered at 20.07, 1,500 x 
1,000. Only 1,500 shares to buy at 20.05 is shown on NYSE 
OpenBook,[reg] which does not include any broker agency interest. 
The aggregate broker information available to the specialist will 
show 1,000 shares to buy at 20.05 and 2,000 shares to buy at 20.04 
unless one or both have been excluded from the aggregate information 
by the broker.
    7. Brokers have discretion to display more than 1,000 shares at 
the best bid or offer. The displayed size is entitled to parity. 
Undisplayed reserve at the best bid or offer yields to displayed 
interest at the best bid or offer.
    The quote is 20.31 bid, offered at 20.36, 1,500 x 7,000. The 
7,000 share offer side consists of 2,000 shares on the book and 
5,000 shares of specialist interest. A Floor broker enters interest 
in the agency interest file to sell 10,000 shares at 20.36. 1,000 of 
the shares are displayed and the reserve interest, 9,000 shares, is 
not displayed. An NX market order to buy 8,000 shares arrives. The 
following automatic executions take place: 2,000 shares from the 
book, 1,000 shares from the displayed interest of the Floor broker, 
and 5,000 shares from the specialist interest trade at 20.36. The 
9,000 shares of reserve broker file sell interest does not 
participate in the trade, since the entire buy order can be filled 
by the displayed interest.
    8. Broker agency interest participates on parity during sweeps:
    (a) The quote is 20.05 bid, offered at 20.07, 1,500 x 1,000. The 
book also shows bids of 1,600 shares to buy at 20.04, 2,000 shares 
to buy at 20.03, and 1,000 shares to buy at 20.02. Broker agency 
interest to buy 2,600 shares at 20.04 arrives. An order to sell 
4,700 shares at 20.03 arrives and automatically executes. 1,500 
shares trade at the bid of 20.05 and the remaining 3,200 shares 
trade at 20.04, with the book receiving 1,600 shares and the broker 
agency interest receiving 1,600 shares. 1,000 shares to buy remain 
in the broker agency interest file at 20.04. The market is 
autoquoted 20.04 bid, offered at 20.07, 1,000 x 1,000. The volume 
associated with the bid is the 1,000 shares remaining in the broker 
agency interest file.
    (b) The quote is 20.05 bid, offered at 20.07, 1,500 x 1,000. 
Also shown on the book is 2,000 shares bid at 20.03 and 1,000 shares 
bid at 20.02. The broker agency interest file has 2,000 shares bid 
at 20.04. An order to sell 5,000 shares at 20.03 arrives and 
automatically executes. 1,500 shares trade at 20.05 (the bid price) 
and the remainder of the sell order, 3,500 shares, trades at 20.03, 
the sweep price. Trading at 20.03 are the 2,000 shares of broker 
agency interest that was in the file to buy at 20.04 and 1,500 
shares on the book to buy at 20.03.

Specialist Interest and Algorithm \45\
---------------------------------------------------------------------------

    \45\ All specialist trading, whether manual or electronically 
generated by algorithms, must be in accordance with Exchange Rules. 
These examples presume compliance with these rules.
---------------------------------------------------------------------------

    9. Specialist interest may automatically supplement the size of 
the Exchange best bid and offer, but always yields to orders on the 
book:
    The quote is 20.05 bid, offered at 20.07, 1,500--1,000. The bid 
is comprised of limit orders on the book. The specialist algorithm 
automatically generates a bid for 1,000 shares at 20.05. The size of 
the bid automatically changes to 2,500. A new limit order to buy 500 
shares at 20.05 arrives and the size associated with the bid 
automatically changes to 3,000 shares. Agency interest to buy 1,500 
shares at 20.05 is entered in the broker agency interest file. 
Assuming the broker displays all 1,500 shares, the bid size 
automatically changes again, to 4,500 shares. The first 1,500 share 
buy limit order on the book has priority, the 500 share buy limit 
order on the book and the 1,500 share broker agency buy interest are 
on parity. The specialist interest must yield to the book. An order 
to sell 3,500 shares at 20.05 arrives and automatically executes at 
20.05. The contra-side consists of the first 1,500 shares to buy, 
the second order to buy 500 shares and the broker agency buy 
interest for 1,500 shares.
    10. The specialist algorithm may automatically facilitate a 
single price execution at the Exchange best bid or offer:
    The quote is 20.05 bid, offered at 20.07, 1,000 x 1,000. The 
next best bid on the book is 2,000 shares at 20.03. An NX market 
order to sell 2,000 shares arrives and the preset parameters of the 
algorithm determine to facilitate an execution of the sell order at 
a single price. The sell order automatically executes against the 
bid and the specialist automatically buys the remaining 1,000 shares 
at the bid price of 20.05. Had the specialist not done so, the sell 
order would have traded at two prices--1,000 shares at 20.05 and 
1,000 shares at 20.03. By facilitating a single price execution, the 
specialist gave price improvement to the sell order.
    11. Specialist algorithm may provide price improvement between 
the bid and offer if certain conditions are met:
    (i) The quotation spread is at least three cents;
    (ii) The specialist is represented in the published bid or 
offer: The lesser of 10,000 shares or 20% of the respective bid/
offer size;
    (iii) The order receiving price improvement is 2,000 shares or 
less and the entire order is filled; and
    (iv) The price improvement provided by the specialist is (a) at 
least .02 where the quote spread is .03-.05, (b) at least .03 where 
the quote spread is .06-.10, (c) at least .04 where the quote spread 
is .11-.20, and (d) at least .05 where the quote spread is more than 
.20.
    The market is 20.31 bid, offered at 20.36, 1,500 x 3,000. The 
offer size includes 1,000 shares on behalf of the specialist. The 
specialist interest represents 33% of the offer size (1,000 shares/
3,000 shares at 20.36). A limit order arrives to buy 2,000 shares at 
20.36. The algorithm determines to provide price improvement to this 
order and 2,000 shares automatically execute at 20.34. The market 
then is autoquoted 20.31 bid, offered at 20.36, 1,500 x 3,000.
    12. Better priced specialist interest yields to the book at a 
worse price during a residual sweep:
    The quotation is 20.05 bid, offered at 20.07, 1,500 x 1,000. 
1,000 shares to buy at 20.04 arrives in the broker agency interest 
file. Specialist interest arrives to buy 1,000 at 20.04. 2,000 
shares to buy are on the book at 20.03. A limit order to sell 3,600 
shares at 20.03 arrives and automatically executes, as follows: 
1,500 trades against the bid at 20.05, with the remaining amount, 
2,100 shares, sweeping the book to trade at 20.03. Orders on the 
book trade 1,100 shares and the broker agency file trades 1,000 
shares. This leaves 900 shares on the book to buy at 20.03. The 
specialist interest to buy at 20.04 does not trade even though it is 
better priced, because orders remain on the book to buy at 20.03 and 
the specialist must yield. If no buy orders on the book capable of 
trading at 20.03 remained and the sell order had not been filled, 
the specialist interest would be able to trade as part of the sweep 
on parity with any broker agency interest at that price.
    13. Specialist interest trades during a sweep, adding liquidity 
and improving a sweep price:

[[Page 67997]]

    The quotation is 20.05 bid, offered at 20.07, 1,500 x 1,000. 
1,000 shares to buy at 20.04 arrived in the broker agency interest 
file. Specialist interest to buy 1,000 shares at 20.04 arrives. 
2,000 shares are on the book to buy at 20.03. A limit order to sell 
3,500 shares at 20.03 arrives and automatically executes as follows: 
1,500 shares trade against the bid at 20.05, with the remaining 
2,000 shares trading with the broker agency buy interest and 
specialist buy interest at 20.04.
    14. During sweeps, specialist interest trades if no orders 
remain on the book at the sweep price:
    The quote is 20.05 bid, offered at 20.07, 1,600 x 1,000. Broker 
agency interest to buy 800 shares at 20.04 arrives. Specialist 
interest to buy 800 shares at 20.04 arrives. The book shows 1,000 
shares to buy at 20.03. A limit order to sell 3,600 shares at 20.03 
arrives. The sell order automatically executes 1,600 shares against 
the bid at 20.05, with the residual, 2,000 shares, sweeping the book 
at 20.03. The book trades 1,000 shares, the broker file trades 800 
shares and the specialist file trades 200 shares.
    15. During a sweep, specialist interest trades on parity with 
broker interest, as long as no orders on the book at the sweep price 
remain:
    The quote is 20.05 bid, offered at 20.07, 1,500 x 1,000. Broker 
agency interest to buy 2,000 shares at 20.03 arrives. Specialist 
interest to buy 2,000 shares at 20.03 arrives. The book shows 1,000 
shares to buy at 20.03. A limit order to sell 5,500 shares at 20.03 
arrives. The sell order automatically executes 1,500 shares against 
the bid at 20.05, with the residual, 4,000 shares, sweeping the book 
to trade at 20.03. The book and the broker file are on parity and 
each trade 1,000 shares. Once the buy order on the book is filled at 
20.03, the specialist interest can trade, on parity with the broker 
file. The remaining 1,000 shares of broker buy interest and 1,000 
shares of specialist buy interest also trade.
    16. During a sweep, the best bid or offer displayed on each ITS 
market center is checked to avoid a trade-through:
    The Exchange quote is 20.05 bid, offered at 20.07, 2,000 x 
1,000. The ITS best offer is also 20.07 for 1,000 shares, published 
by market center B. A third market center, P, displays 500 shares to 
sell; at an inferior offer of 20.08. Also on the book are offers at 
20.08 for 1,000 shares, at 20.09 for 1,000 shares, and at 20.10 for 
3,000 shares. An NX market order arrives on the Exchange to buy 
5,000 shares. 1,000 shares automatically execute against the 
Exchange offer at 20.07. 1,000 shares of the order are auto routed 
as a commitment to buy at 20.07 to market center B. The remainder, 
3,000 shares, sweep the book to 20.10. However, because the sweep 
price, 20.10, is inferior to the best offer displayed by market 
center P (20.08), 500 shares of the buy order residual are auto 
routed as a commitment to buy at 20.08 to market center P and only 
2,500 shares of the buy order trade at 20.10 on the Exchange. If 
both auto routed commitments are satisfied, the executions are as 
follows: 1,000 shares at 20.07 on the Exchange, 1,000 shares at 
20.07 on market center B, 500 shares at 20.08 on market center P, 
and 2,500 shares at 20.10 on the Exchange. If all or part of one or 
both commitments are not satisfied, they will return to the Exchange 
and trade at the prices then available. Under proposed Regulation 
NMS,\46\ had the member entering the order indicated that it was 
contemporaneously satisfying better prices away, none of the order 
would have been auto routed. A new quote is autoquoted, 20.05 bid, 
offered at 20.10, 2,000 x 2,500.
---------------------------------------------------------------------------

    \46\ See note 23, supra.
---------------------------------------------------------------------------

    17. Orders are auto routed to multiple away markets publishing 
better bids or offers:
    The Exchange quote is 20.05 bid, offered at 20.08, 2,000 x 
2,500. The national best offer, at 20.07 for 1,000 shares, is 
published by market center B. A third market center, P, also 
displays an offer to sell 500 shares at of 20.07. An NX market order 
to buy 2,500 shares arrives on the Exchange. The specialist would 
have two options: Match the better displayed offers or ship the 
order to market centers B and P:
    (a) If the better priced offers away are not electronically 
matched by the specialist, 1,000 shares of the buy order are auto 
routed as a commitment to buy to market center B and 500 shares of 
the buy order are auto routed as a commitment to buy to market 
center P. The remainder, 1,000 shares to buy, automatically executes 
against the Exchange offer at 20.08.
    (b) If the specialist matches the better price offers away, he 
or she would have to fill the entire buy order of 2,500 shares at 
20.07 before trading at 20.08.\47\
---------------------------------------------------------------------------

    \47\ Telephone conversation between Kelly Riley, Assistant 
Director, Division, Commission, and Jeff Rosenstrock, Senior Special 
Counsel, Market Surveillance, NYSE, on November 15, 2004.
---------------------------------------------------------------------------

    18. Specialist algorithm may automatically match the better 
displayed ITS bid or offer or ship the order:
    The Exchange quotation is 20.05 bid, offered at 20.07, 2,000 x 
1,000. The better displayed ITS offer to sell 400 shares at 20.06 is 
published by another market center. A market order to buy 1,400 
shares arrives and based on predetermined parameters, the specialist 
algorithm decides to match or ship:
    Option 1--The specialist matches the better displayed offer, 
automatically executing 1,400 at 20.06.
    Option 2--The specialist sends 400 shares of the buy order to 
the other market center, satisfying the better displayed offer. The 
remaining 1,000 shares of the buy order is automatically executed 
against the offer at 20.07.

Sweep LRP

    19. Where the order sweeping the book is filled after trading at 
the LRP price or a residual exists limited to the LRP price, 
automatic executions and autoquote automatically resume in no more 
than five seconds:
    The quotation is 20.30 bid, offered at 20.36, 1,500 x 2,000. The 
LRP is 20.45. The next best offer is 20.46 for 14,000 shares. The 
following offers are on the book: 1,000 shares to sell at 20.37, 
4,000 shares to sell at 20.38, 1,500 shares to sell at 20.39, 5,000 
shares to sell at 20.40, 500 shares to sell at 20.41, 2,000 shares 
to sell at 20.42, 8,000 shares to sell at 20.43, 3,000 shares to 
sell at 20.44, 3,000 shares to sell at 20.45, and 14,000 shares to 
sell at 20.46. An IOC order arrives to buy 36,000 shares at 20.45. 
2,000 shares automatically execute against the offer at 20.36. The 
order sweeps the book to the LRP, trading 28,000 shares at 20.45. 
The offers on the book from 20.37 to 20.44 receive price improvement 
at 20.45. The residual, 6,000 shares, automatically cancels. The 
market is autoquoted 20.30 bid, offered at 20.46, 1,500 x 14,000. 
Automatic executions and autoquote resume automatically in five 
seconds if the specialist has not manually traded or re-quoted the 
market before then.
    20. Where the sweeping order is not filled before the LRP is 
reached, and is able to trade above (below) the LRP, but its limit 
price does not create a locked or crossed market--automatic 
executions and autoquote resumes automatically in no later than 10 
seconds.
    The quotation is 20.30 bid, 20.36 offered, 1,500 x 2,000. The 
LRP is 20.45. The next best offers on the book are 1,000 shares to 
sell at 20.37, 4,000 shares to sell at 20.38, 1,500 shares to sell 
at 20.39, 5,000 shares to sell at 20.40, 500 shares to sell at 
20.41, 2,000 shares to sell at 20.42, 8,000 shares to sell at 20.43, 
3,000 shares to sell at 20.44, 3,000 shares to sell at 20.45, and 
5,000 shares to sell at 20.47. An order to buy 36,000 shares at 
20.46 arrives. The first 2,000 automatically executes against the 
offer at 20.36. The remainder sweeps the book to the LRP at 20.45, 
with 28,000 being executed. Offers at 20.37 through 20.45 trade at 
the sweep price of 20.45, receiving price improvement. A residual of 
6,000 shares to buy remains limited at 20.46. The market auto-quotes 
20.45 bid, offered at 20.47, 6,000 x 5,000. Here, since a LRP is 
reached and a residual capable of trading at a price above the LRP 
remains, but the residual does not lock or cross the market, 
automatic executions and autoquote will automatically resume in 10 
seconds unless the specialist manually trades or re-quotes the 
market before then.
    21. Where the order sweeping the book is not filled during the 
sweep, and is able to trade above (below) the LRP, but the limit 
price creates a locked or crossed market, automatic executions and 
autoquote are suspended until a manual trade occurs.
    The quotation is 20.30 bid, offered at 20.36, 1,500 x 2000. The 
LRP is 20.45. Also on the book are the following offers: 1,000 
shares to sell at 20.37, 4,000 shares to sell at 20.38, 1,500 shares 
to sell at 20.39, 5,000 shares to sell at 20.40, 500 shares to sell 
at 20.41, 2,000 shares to sell at 20.42, 8,000 shares to sell at 
20.43, 3,000 shares to sell at 20.44, 3,000 shares to sell at 20.45, 
and 14,000 shares to sell at 20.46. An order to buy 36,000 shares at 
20.46 arrives. 2,000 shares automatically execute against the offer 
at 20.36. The remainder sweeps the book to the LRP at 20.45. Offers 
on the book from 20.37 to 20.45, 28,000 shares, trade at 20.45, 
receiving price improvement. The residual, 6,000 shares to buy 
cannot continue sweeping because the LRP has been reached. The 
market is autoquoted the LRP, 20.45, offered at 20.46, the next 
available offer on the book. Because the residual's limit price, 
20.46, creates a locked market, a manual trade or quote is required 
for automatic execution and autoquote to resume.

[[Page 67998]]

    22. Specialist interest trades during a sweep, adding liquidity 
and improving a sweep price:
    The quotation is 20.30 bid, offered at 20.36, 1,500 x 2,000. The 
sweep LRP is 20.45. Specialist interest to sell 5,000 shares at 
20.37 arrives. The book consists of 1,000 shares offered at 20.37, 
4,000 shares offered at 20.38, 1,500 shares offered at 20.39, 5,000 
shares offered at 20.40, 500 shares offered at 20.41, 2,000 shares 
offered at 20.42, 8,000 shares offered at 20.43, 3,000 shares 
offered at 20.44, and 3,000 shares offered at 20.45. A limit order 
to buy 29,000 shares at 20.45 arrives. 2,000 shares automatically 
execute at 20.36, with the residual of the buy order, 27,000 shares, 
sweeping the book, executing at 20.43. The 5,000 shares of 
specialist sell interest at 20.37 participate in the sweep. Without 
the specialist sell interest, the book would have been swept to 
20.45 (the LRP), a worse price for the buyer.
    23. Momentum Liquidity Replenishment Point (MLRP).
    [GRAPHIC] [TIFF OMITTED] TN22NO04.001
    
    24. MLRP may be reached during an automatic execution, pausing a 
sweep:
    At 10:05:36, the bid is 20.05, offered at 20.09, 1,500 x 1,000. 
The books shows additional offers of 500 shares to sell at 20.13, 
1,000 shares to sell at 20.17, 1,500 shares to sell at 20.21, 1,000 
shares to sell at 20.22, and 2,000 shares to sell at 20.25. The MLRP 
range, based on the high and low trades during the prior 30 seconds 
(20.15 and 19.92 for the purposes of this example) are 19.90 and 
20.17.
    An NX market order to buy 1,500 shares arrives. 1,000 shares 
automatically execute at 20.09 and the residual, 500 shares, sweeps 
the book, trading at 20.13. The quote automatically updates to 20.05 
bid, offered at 20.17, 1,500 x 1,000.
    A second later, at 10:05:37, the high and low trades within the 
new 30-second period are 19.95 and 20.15 and the corresponding new 
MLRP range is 19.90 and 20.20.
    At 10:05:40, a limit order arrives to buy 2,000 shares at 20.21. 
This crosses the market as the offer is at 20.17. The crossing buy 
order automatically executes against the offer (1,000 shares) at 
20.17, creating a new high trade within the operative 30-second MLRP 
time parameter. This new high price causes the MLRP to change from 
19.90 to 19.92 (20.17 less .25) on the low side. The MLRP on the 
high side, 20.20 has remained the same. The residual of the buy 
limit order, 1,000 shares, cannot sweep the book to the next 
available offer at 20.21, because that price is outside the MLRP 
range. The market is autoquoted 20.20 bid (the MLRP) for 1,000 
shares, 1,500 offered at 20.21. Automatic executions and autoquote 
are suspended. As the order to buy is capable of trading at 20.21, 
locking the market, a manual trade clearing the locked condition 
will cause automatic executions and autoquoting to resume and the 
quote automatically updates to 20.05 bid, offered at 20.21, 1,500 x 
500.
    25. MLRP may be reached during a sweep, providing a partial 
sweep:
    At 10:05:36, the bid is 20.05, offered at 20.09, 1,500 x 1,000. 
The book shows additional offers of 500 shares at 20.13, 1,000 
shares at 20.17, 2,000 shares at 20.18, 1,000 shares at 20.19, and 
1,500 shares at 20.22. The MLRP range is 19.90-20.20, based on high 
and low trades within the operative 30-second period (19.92 and 
20.15 in this example).
    An NX market order to buy 1,500 shares arrives and automatically 
executes at 20.09. The residual, 500 shares, sweeps the book, 
trading at the next best offer, 20.13. The quote automatically 
updates to 20.05 bid, offered at 20.17, 1,500 x 1,000.
    At 10:05:40, a limit order to buy 5,000 shares at 20.21 arrives 
crossing the market. 1,000 shares automatically execute at the 
offer, 20.17. This creates a new high price within the operative 30-
second parameter (20.17) causing the MLRP range to change from 19.90 
on the low side to 19.92 (20.17 less .25). The MLRP on the high side 
remains at 20.20. The buy order residual, 4,000 shares, sweeps the 
book to 20.19. 3,000 shares trade at that price, exhausting the 
available liquidity within the MLRP range. The quote automatically 
updates, bidding the remaining size of the residual, 1,000 shares, 
at 20.20, the MLRP, offering 1,500 shares at 20.22, the next best 
offer on the book. An automatic execution cannot occur at 20.22 as 
that price is outside the MLRP range, so automatic executions and 
autoquote are suspended. Cancellations and orders are electronically 
reflected on the book. Electronic executions and autoquote will 
resume automatically in 10 seconds, unless the specialist manually 
trades the security before then, or the MLRP range changes.

[[Page 67999]]

Once autoquote resumes, the bid will automatically change to 20.21 
for 1,000 shares, the limit price and the size of the residual. The 
offer remains 20.22 for 1,500 shares.
    26. Gap Quote.
    The quotation is 20.08 bid, offered at 20.09, 10,000 x 5,000, 
last sale at 20.08. Crowd interest arrives to buy 350,000 shares at 
the market. The specialist executes 5,000 shares at the offer, 
20.09, then gaps the quote, making the bid price ``touch'' the last 
sale price (20.09), showing the size of the imbalance in that bid 
(345,000 shares). On the contra side, the specialist makes the offer 
the price where stock may trade if no other sell interest arrives, 
and the size as 100 shares, to draw in sellers. Thus, e.g., the gap 
quote \48\ is 20.09 bid, offered at 20.30, 345,000 x 100. Automatic 
executions and autoquote are suspended, but incoming orders and 
cancellations are reflected electronically on the book. Crowd, 
specialist interest and other liquidity providers are taken into 
account in determining the price and size of the next transaction. 
Automatic executions and autoquote then resume.
---------------------------------------------------------------------------

    \48\ See Securities Exchange Act Release No. 50237 (August 24, 
2004), 69 FR 53123 (August 31, 2004) (SR-NYSE-2004-37) (Information 
Memo 04-27--June 9, 2004). The gapped quote procedures provide that 
a gapped quotation should remain in place for a reasonable time to 
allow for interested parties to respond to the order imbalance. What 
constitutes a reasonable time is determined by the unique 
circumstances of each gapped quotation situation. However, the 
gapped quotation generally should last at least 30 seconds unless 
offsetting interest is received earlier, and generally should not 
exceed two minutes, unless circumstances require otherwise. The 
duration of a gapped quote is determined with input from a Floor 
Official.
---------------------------------------------------------------------------

    27. Tick-restricted Orders.
    (a) The quotation is 20.05 bid, offered at 20.07, 1,500 x 1,000. 
Other orders on the book to sell include 1,000 at 20.09 (sell 
short), and 1,000 at 20.11 (sell plus). An NX market order to buy 
2,500 shares arrives. 1,000 shares of the buy order are 
automatically executed against the 1,000 shares offered at 20.07. 
The remaining 1,500 shares to buy sweep up to 20.11. The sell short 
and sell plus orders are executable as the sweep occurs on a direct 
plus tick. As a result, the 20.09 sell short offer on the book is 
price improved to 20.11.
    (b) The quotation is 20.05 bid, offered at 20.07, 1,500 x 1,000. 
Also on the book to buy are 1,000 shares (buy minus) at 20.04, 1,000 
shares to buy at 20.03 and 1,500 shares to buy at 20.01. An NX order 
to sell 3,000 shares arrives, automatically executing 1,500 shares 
against the bid at 20.05, sweeping down to 20.03. The 1,000 share 
bid at 20.04 was executable as the sweep occurred on a minus tick.
    (c) The quotation is 20.05 bid, offered at 20.07, 1,500 x 1,000. 
Also on the book to buy are 1,000 shares at 20.04, 1,000 shares to 
buy at 20.03, and 1,500 shares to buy at 20.01. The last sale is at 
20.04. An NX order to sell short 3,000 shares arrives. The security 
in question is not part of the Regulation SHO pilot.\49\ 1,500 
shares automatically execute at 20.05. The residual, 1,500, cannot 
sweep the book because that would violate short sale rules. The 
market is autoquoted 20.04 bid, the next best bid on the book, 
offered at 20.05, the price at which the sell short order can trade, 
1,000 x 1,500.

    \49\ See note 13, supra.
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[FR Doc. 04-25771 Filed 11-19-04; 8:45 am]
BILLING CODE 8010-01-P


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